TBC Bank Group PLC

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TBC Bank is listed on the premium segment of the London Stock Exchange and is a FTSE 250 constituent. It is also a member of the MSCI United Kingdom Small Cap Index. TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 5 1 TBC Bank Group PLC (the Company) is a public limited company registered in England and Wales. It is the parent company of JSC TBC Bank (the Bank) and a group of com- panies that principally operate in Georgia in the financial sector and other closely related fields, together referred as TBC Bank or the Group. Contents 6 - 127 STRATEGIC REPORT Who we are TBC at a glance 6 Group highlights 2021 8 Chairman’s statement 10 Our strategic approach Our main operating environment - Georgia 14 Our business model 18 Our business strategy and key performance indicators 20 Our ESG strategy and climate-related ﬁnancial disclosures 26 Engaging with our stakeholders 38 Section 172 statement 42 Our operating performance and stakeholder engagement Georgian business review Retail banking 44 MSME banking 50 CIB banking 56 Major subsidiaries 62 Our ecosystem 66 International expansion review 68 Our stakeholders 74 Our colleagues 74 Our customers 82 Our community 84 Our environmental management system 88 Our ﬁnancial performance and risk management Financial review 94 Material existing and emerging risks 102 Risk management 112 128 - 203 GOVERNANCE Directors’ governance statement 130 Board biographies 133 The bank’s management board biographies 138 Corporate governance statement 141 Directors’ report 151 Corporate governance and nomination committee report 157 Audit committee report 161 Risk committee report 170 Remuneration committee report 175 202 - 359 FINANCIAL STATEMENTS Independent auditors’ report 204 Consolidated statement of ﬁnancial position 212 Consolidated statement of proﬁt or loss and other comprehensive income 213 Consolidated statement of changes in equity 214 Consolidated statement of cash flows 215 Separate statement of ﬁnancial position 216 Separate statement of changes in equity 217 Separate statement of cash flows 218 Notes to the consolidated and separate ﬁnancial statements 219 360 - 370 ADDITIONAL INFORMATION Glossary 362 Alternative performance measures 363 Changes in KPIs 368 Abbreviations 369 Shareholders information 370 STRATEGIC REPORT 6 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TBC AT A GLANCE BEST-IN-CLASS DIGITAL CHANNELS AND SUPERIOR CUSTOMER EXPERIENCE • Award-winning internet and mobile banking applications; • Space – our scalable ﬁntech platform; • One of the highest customer satisfaction among service companies in Georgia. PRIMARY PAYMENTS PROVIDER IN GEORGIA • 45.1%1 market share by volume of POS transactions in our terminals, up by 1.8 pp YoY; • Traditional payment channels such as e-commerce, POS and self-service terminals; • Innovative payment methods comprising Apple Pay, QR payments and e-wallet. A MARKET DISRUPTOR IN UZBEKISTAN • The ﬁrst fully digital bank in Uzbekistan branded as TBC UZ; • One of the leading payments providers in Uzbekistan, Payme. We are the leading universal banking group in Georgia with diversiﬁed business across all major market segments. Since October 2020, we have ex- panded our banking opera- tions to Uzbekistan, by utilizing our innovative ﬁntech platform, Space, to exploit the exciting growth opportunities offered by the Uzbek market. Who We Are LEADING UNIVERSAL BANKING FRANCHISE IN GEORGIA1 • 38.8% loan market share, down by 0.2 pp YoY; • 40.4% deposit market share, up by 3.2 pp YoY; 7 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TO MAKE LIFE EASIER is deeply embedded in TBC’s culture and deﬁnes everything we do and the way we do it. By combining simplicity with excellence, we strive to create a truly unique experience for our customers. For more information, please refer to our strategy and business model sections. Our Mission Our Strategic Priorities Continue steady growth in Georgia Diversify our income streams Harness the high growth potential of Uzbek market Leverage our advanced digital capabilities Deliver a superior customer experience 1 Based on data published by the National Bank of Georgia as of 31 December 2021 2 Data is for FY 2021, source: www.napr.gov.ge, the National Agency of Public Registry Group Highlights 2021 1 Strong progress in exploiting our growth potential in Uzbekistan Best-in-class digital channels Diversiﬁed earnings streams Robust proﬁtability backed by solid capital Steady growth in Georgia Outstanding employee and customer experience 97%3 + 2 pp YoY RETAIL OFFLOADING RATIO 66% 4 - 2 pp YoY ENPS 24.4% + 12.7pp YoY RETURN ON EQUITY 3.4% + 1.8pp YoY RETURN ON ASSETS 13.7% + 3.3pp YoY CET 1 CAR 5.1% + 0.4pp YoY NIM + 35.7% YoY GROWTH IN NET F&C INCOME GEL 17,047 mln + 12.2% YoY TOTAL LOANS GEL 15,038 mln + 19.6% YoY TOTAL DEPOSITS 38.8%2 - 0.2 pp YoY TOTAL LOANS MARKET SHARE 40.4%2 + 3.2 pp YoY TOTAL DEPOSITS MARKET SHARE GEL 92.8 mln LOAN PORTFOLIO OF TBC UZ GEL 207.5 mln DEPOSIT PORTFOLIO OF TBC UZ 1.1 mln # OF REGISTERED USERS OF TBC UZ 5.2 mln + 79.3% YoY # OF REGISTERED USERS OF PAYME GEL 18.0 mln + 111.7% YoY NET INCOME OF PAYME 44%3 + 3 pp YoY DAU/MAU 1 Definitions and detailed calculation of the APMs are given on pages 363-367 2 Based on data published by the National Bank of Georgia as of 31 December 2021 3 These terms are defined in glossary on page 362 4 The Employee Net Promoter Score (ENPS) was measured for the Bank’s employees by an independent consultant in October 2021 5 The Net Promoter Score (NPS) was measured based on the survey conducted by the independent research company IPM in December 2021 56%5 N/A NPS 10 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CHAIRMAN’S STATEMENT Dear stakeholders, 2021 marked a new chapter in TBC’s history as we successfully expanded our banking operations in Uzbekistan and took ﬁrm steps towards establishing ourselves as a digital innovator in the region. We believe our position as the leading bank in Georgia, coupled with our Uzbek business, will enable continued strong growth, while our digital business model will drive robust proﬁtability going forward. 24.4% (2020: 11.7%) RETURN ON AVERAGE EQUITY GEL 809 mln (2020: GEL 322 mln) NET PROFIT As I write this, the war in Ukraine is ongoing. The Board and its committees, continue to monitor the econom- ic impacts of the situation, as well as its effects on the regional safety and security. We hope for the quick res- olution of the war and most importantly, the preserva- tion of human life. PERFORMANCE OVERVIEW AND STRATEGIC PRIORITIES 2021 was a successful year for the Group. Having overcome the challenges of COVID-19 in 2020, we emerged stronger and returned to our pre-pandemic proﬁtability levels. Our net proﬁt grew by 151% year- on-year to reach GEL 809 million, while our return on equity was 24.4%. Our solid capital base allowed us to resume the payment of dividends, and in September 2021 we paid an interim dividend of GEL 1.5 per share. The decision on the ﬁnal dividend will be taken before the end of May. Our robust performance proves we have chosen the right strategy by focusing on steady growth in Georgia, diversifying our income streams and pursuing strong growth in Uzbekistan. Our ﬁrm leadership position in the Georgian market across all major segments, product lines and sectors, has ensured the stability and resilience of our business, while diverse sources of income have supported our proﬁtability, especially during volatile times. Meanwhile, our entry into the Uz- bek market has unlocked new opportunities for growth and diversiﬁcation. We also continue to prioritise delivering superior cus- tomer experience and further strengthening our ad- vanced digital capabilities. Both are essential ingredi- ents of a successful customer service model, given the rapidly increasing presence of technology in the every- day lives of our clients, who are becoming ever more 11 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 demanding. I am delighted that our efforts have been acknowledged by our customers - evidenced by the high customer satisfaction scores we have achieved, both in Georgia and Uzbekistan - and that our digital banking capabilities have won multiple awards from renowned publications. For more details, please refer to our operating performance and stakeholder en- gagement review on pages 44-92. In 2021, we streamlined our Group structure to better align it with our strategic priorities. As a result, most of our ecosystem companies were merged into a single entity, TBC Net. In addition, we established Space In- ternational as an independent subsidiary company and strengthened its capabilities to support our inter- national expansion strategy. OPERATING ENVIRONMENT The Georgian economy grew by 10.4% in 20211, ex- ceeding the 2019 level by 2.9%. The recovery was broad based, with only a partial contribution from the tourism sector, and was supported by a slightly more contrac- tionary ﬁscal stance than in 2020. This outstanding performance once again highlighted the strong fun- damentals of the Georgian economy. It is important to highlight that the Group’s performance in Uzbekistan was even more promising, supported by the country’s strong economic growth at 7.4% in 2021 after a 1.9% ex- pansion in 20202. This year, the Board undertook scenario planning to model the potential impact of global, and particularly regional, economic shocks. The Group’s macro and micro risk management frameworks were enhanced to place more emphasis on stress testing and risk ap- petite. These capabilities will no doubt be tested in the coming months, given the instability in the region caused by the war in Ukraine. CHANGES TO THE BOARD COMPOSITION In 2021, three Directors left the Board and ﬁve new in- dependent non-executive Directors were appointed. The details of these changes are outlined in the Di- rectors’ governance statement on pages 130-132. This completes the changes announced in our annual re- port for 2020. I am conﬁdent that the renewed Board is equipped with the expertise needed to steer the Group towards its ambitious strategic goals. In addi- tion, I am happy to report that we have achieved the diversity and inclusion targets set by the Hampton-Al- exander Review and the Parker Review. As the Group evolves over the years ahead, I will con- tinue to closely monitor the composition of the Board to ensure that we maintain the right mix of experience. OUR ESG STRATEGY It is important to us to uphold the highest corporate governance standards and responsible business prac- tices towards employees, customers, the community and the environment. We measure our success not only by our ﬁnancial performance but also by our contribu- tion towards the common good. Therefore, this year we have decided to take our environmental, social and governance (ESG) efforts to the next level by develop- ing a comprehensive ESG strategy and setting targets in the areas of sustainable lending, net-zero emissions, social procurement and women’s empowerment. The Board approved the ESG strategy in November 2021 and will closely monitor progress towards achieving our KPIs. To this end, the Board has established a ded- icated ESG and Ethics Committee. For more details, please refer to our ESG strategy on pages 26-37. I am also proud that this year we were awarded a spe- cial prize for our outstanding efforts to champion the UN’s Sustainable Development Goals (SDGs) in the country at the prestigious Corporate Responsibility Award Ceremony 2021, organised by Global Compact Network Georgia. THE FUTURE The remarkable progress that we achieved in 2021 has established a strong foundation for our future aspira- tions and inspires us to reach new heights for the ben- eﬁt of our shareholders and other stakeholders. While the global events of recent months have un- doubtedly made the operating environment much more challenging, the proven resilience of our busi- ness model should help us navigate it successfully. I am very grateful to the Board members, the manage- ment team and every single employee at TBC for their diligent work and commitment. I would also like to thank our customers, investors, regulator and all parties involved for their trust and cooperation during the year. Arne Berggren Chairman 13 April 2022 1 According to Geostat 2 According to UzStat Note: For better presentation purposes, certain financial numbers are rounded the nearest whole number. 12 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CEO LETTER Dear stakeholders, 2021 was a year of strong recovery for TBC, coupled with remarkable progress in Uzbekistan. Having successfully adjusted to the post-COVID reality, we concentrated our efforts on increasing and diversifying our income streams in Georgia, while continuing to invest in our Uzbek banking operations to support future growth. The macroeconomic environment was also supportive throughout the year. As a result, our net income amounted to GEL 809 million and we delivered a record high return on equity of 24.4% in 2021. The past several weeks have been overshadowed by the Russian-Ukrainian war and the adverse implica- tions of the military actions for the Ukrainian people. We hope that this war will come to an end and the parties will arrive at a peaceful solution in the nearest future. We are closely monitoring the developments in Ukraine and are assessing its possible impacts on the Georgian economy and our operations under different scenarios. The resilience of the Georgian economy and our diversiﬁed business model gives me assur - ance that we will be able to steer the company suc- cessfully though these challenging times. A FIRM MACROECONOMIC RECOVERY, BUT CHALLENGES AHEAD The Georgian economy demonstrated a ﬁrm recovery in 2021. For the full year, real GDP growth reached 10.4% according to the National Statistics Ofﬁce of Georgia, which was an exceptional performance. Importantly, this growth was broad-based and was reflected in al- most all sources of inflows as well as in domestic de- mand, only FDI lagged behind, as investment demand takes longer to recover. Domestic demand was fueled by the normalization of saving levels after pandemic related highs and by low US$ deposit rates, while the appreciation of the GEL in the second half of the year led to improved consumer and business sentiment. Furthermore, the 18% expansion in bank lending also provided much needed support to the economic re- covery. While the Georgia economy entered 2022 with strong momentum, the current events in Ukraine and their impact on the global economy are likely to make 2022 a challenging year. STRONG FINANCIAL RESULTS ACROSS THE BOARD BACKED BY THE SOLID CAPITAL In 2021, our operating income amounted to GEL 1,452 million, up by 26% year-on-year, driven by an increase in both net interest income and non-interest income. The increase in the former was related to a higher net interest margin of 5.1%, compared to 4.7% in 2020, as well as 12% year-on-year growth in our loan book. Over the same period, net fee and commission income grew by an impressive 36%. The increase was broad-based and demonstrated the strength of our business model. In addition, other operating income (total non-interest income less net fee and commission income) grew by 47% and made a meaningful contribution to the overall proﬁtability, mainly driven by FX operations and the sale of investment property. Our robust income streams were further supported by strong perfor- mance on the asset side across all segments, with the cost of risk standing at minus 0.3% (i.e. net recoveries) in 2021. This allowed us to continue investing in our Uz- bek business, while keeping our cost to income ratio at 37.6% in 2021, slightly below the 2020 level of 37.9%. As a result, we recorded a return on equity of 24.4% and return on assets of 3.4% for the full year 2021. Strong income generation, coupled with prudent man- agement of our capital, allowed us to maintain strong 13 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 capital positions. Our CET1, Tier 1 and Total Capital ra- tios stood at 13.7%, 16.7% and 20.3%, respectively, and remained comfortably above the minimum regulato- ry requirements by 2.0%, 2.7% and 1.9%, respectively. At the same time, we continued to operate at high li- quidity with the net stable funding (NSFR) and liquidity coverage (LCR) ratios standing at 127.3% and 115.8%, respectively, as of 31 December 2021. A STEADY PROGRESS IN OUR CORE BANKING BUSINESS IN GEORGIA We continue to be market leaders in total loans and deposits. In 2021, our loan book increased by 18% year- on-year in constant currency terms, in line with the overall growth of the banking sector, which translated into a 39% market share. Importantly, the quality of our loan book improved, with the non-performing loan ra- tio decreasing to 2.4% by the end of 2021, compared to 4.7% at the end of 2020. Over the same period, our deposit growth signiﬁcantly outpaced market growth and increased by 25% in constant currency terms. As a result, our market share in total deposits amounted to 40% as of 31 December 2021, up by 3 pp year-on-year. I am also delighted to report that our digitalization lev- els continue to increase. In the fourth quarter of 2021, the number of active retail digital users increased by 14% year-on-year and reached 744,000. In addition, we made signiﬁcant progress in expanding the number of monthly and daily active digital users, which reached 644,000 (up by 16% year-on-year) and 285,000 (up by 24% year-on-year) respectively in December 2021. The proportion of digital sales of our consumer loans amounted to 45%, while the deposit sales offloading ratio stood at 73%. Furthermore, to ensure the maximum safety of our cus- tomers and employees, we ran a wide-scale campaign to encourage our staff to get vaccinated. As a result, around 85% of all our employees were vaccinated, or were scheduled to receive a vaccine, by the end of 2021. STRENGTHENING OUR POSITION ON THE UZBEK MARKET I am very pleased with the progress that our fully digital Uzbek bank, TBC UZ, achieved in its ﬁrst year of op- erations. Since launching our operations from scratch in Tashkent in October 2020, we have been steadily expanding our presence. By the end of 2021, we cov- ered all major regions, representing around 97% of the country’s population, through our 35 customer acqui- sition points and 10 showrooms, while the number of registered and monthly active users of our digital bank- ing app reached 1.1 million and 141,000, respectively. By the end of the year, our customer proposition in Uz- bekistan expanded to unsecured consumer loans, cur - rent accounts and savings deposits as well as various payment solutions such as P2P transfers, bill payments, debit cards and the ability to attach other banks’ cards to our mobile app. In addition, we launched auto loans in a friends and family mode in December 2021 and introduced term deposits and virtual cards to a wider public. In 2021, our retail loan and deposit books grew at a fast pace and reached GEL 93 million and GEL 208 million, respectively, as of 31 December 2021, which translated into retail market shares of 0.5% and 2.0% accordingly, based on data published by the Central Bank of Uzbekistan. I am also delighted that TBC UZ has been named “the Best Digital Bank in Uzbekistan 2021” by Global Economics. In parallel, we continued to expand our Uzbek pay- ments business, Payme, by introducing new products and services as well as increasing our network. In the fourth quarter of 2021, we launched a virtual Visa card and added payments capabilities for railway and plane tickets. In addition, we signed partnership agreements with large international retailers such as Carrefour and Magnum enabling QR payments with the Payme app in these stores. As a result, the number of registered users reached 5.2 million, while the number of monthly active digital users amounted to 1.1 million by the end of 2021. In 2021, the number and volume of transactions increased by 66% and 80%, respectively, year-on-year. In terms of ﬁnancial results, revenues increased by 91% year-on-year and amounted to GEL 29 million, while net proﬁt was GEL 18 million, up by 112% year-on-year. OUTLOOK Our outstanding results for 2021 provide me with much conﬁdence that we are on the right track and that our strategy is working. While our Georgian banking busi- ness will remain core to our strategy, the Uzbek mar- ket should give us a competitive edge by providing a material contribution to our growth and diversiﬁcation over the years to come. We realize that the current events in Ukraine will have a negative impact on Georgian economy and impose challenges on our operations. For more information, please refer to our material existing and emerging risks section on pages 102-111. Nevertheless, I would also like to re-iterate our medi- um-term guidance: ROE of above 20%, a cost to in- come ratio below 35%, a dividend pay-out ratio of 25- 35% and annual loan growth of around 10-15%. THANK YOU I would like to close my letter by thanking our col- leagues for their hard work and dedication and recog- nizing their individual contributions to our success. We have an exciting journey ahead of us and I am eagerly looking forward to it. The strategic report, as detailed on pages 6 to 127, was approved by the Board and signed on behalf of the Board by: Vakhtang Butskhrikidze CEO 13 April 2022 Note: For better presentation purposes, certain financial numbers are rounded the nearest whole number. OUR MAIN OPERATING ENVIRONMENT - GEORGIA Economic Overview Economic growth Starting in the second quarter of 2021, the Georgian economy has been rebounding from the pandemic at a remark- able speed. For the full year 2021, according to Geostat, the Georgian economy expanded by 10.4% year-on-year, surpassing the 2019 GDP level by 2.9%. External sector Although the tourism sector is still suffering from the pandemic-related crisis, external inflows recorded a strong per- formance in 2021. In 2021, exports of goods increased by 26.9% compared to last year and by 11.7% compared to 2019. Notably, despite re-exports having a lower base effect from a year ago, domestic exports still led the recovery with the share of domestic value-added exports in total exports increasing signiﬁcantly, from 61.3% in 4Q 2019 to 76.2% in 4Q 2021. Despite the continuing recovery in tourism-related imports and re-exports, imports of goods also went up by 25.1% year-on-year in 2021 and by 5.8% compared to 2019. Importantly, the rebound of the trade in goods was broad- based, reflecting overall increased external and domestic demand. Remittance inflows, which cushioned the pandemic’s economic blow in 2020, performed solidly in the last year, in- creasing by 24.6% year-on-year and by 35.6% when compared to 2019. Although part of the rebound compared to 2019 can be attributed to border closures and the greater transfer of cash remittances through digital channels, overall growth has still been substantial given that the share of cash inflows is only likely to be around 10.0%-15.0%, according to the NBG’s estimates. Tourism inflows recovered moderately throughout the year. Despite the pace of the initial rebound stalling somewhat in August-September, the recovery continued gradually thereafter, with full year inflows amounting to 38.1% of their 2019 level. Annual growth reached a 129.8% year-on-year increase in 2021 on the back of the low base a year ago. No- tably, this growth was primarily led by the recovery of high-spending countries. FDI inflows are taking longer to recover. While they increased 3.2% year-on-year for the full year 2021, this was on the back of higher reinvested earnings as equity and FDI-related debt ﬁnancing declined sharply in the same period. * Sum of the first three quarters of the year Source: Geostat, NBG Source: Geostat 14 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REAL GDP GROWTH (%) 6.4 2012 3.6 2013 4.4 2014 3.0 2015 2.9 2016 4.8 2017 4.8 2018 5.0 2019 -6.8 2020 10.4 2021 YOY GROWTH OF INFLOWS AND IMPORT (%) 24.6 Remittance inflows 26.9 29.9 129.8 3.2 Exports Exports excl. re-exports Tourism inflows FDI Imports 25.1 Fiscal stimulus The ﬁscal stimulus, although still sizable, negatively affected growth in 2021 as the deﬁcit amounted to around 6.7% of GDP, after an expansionary 9.3% of GDP in 2020. Importantly, the major source of deﬁcit ﬁnancing in 2020-2021 was external, largely compensating for the pandemic-related drop in net inflows. At the same time, government debt, which reached its mandated ceiling of 60% of GDP in 2020, has already normalized at an estimated 51.1% of GDP by the end of 2021. 2017 2018 2019 2.7 2.3 2.1 9.3 6.7 2020 2021E Current spending Capital spending (RHS) Budget deficit 5 10 15 20 25 30 0 6 12 8 10 4 2 0 Credit growth on a constant currency basis By the end of 2021, bank credit growth increased to 18.3% year-on-year, compared to 9.1% year-on-year growth by the end 2020. In terms of segments, corporate and MSME lending growth increased markedly by 8.4 pp and 12.0 pp from 2020 to 2021 and amounted to 15.6% and 22.4% year-on-year, respectively. Expansion in the retail segment was also highly pronounced, up by 4.8 pp to 18.0% year-on-year growth at the end of 2021, though mostly on the back of stronger non-mortgage credit. 15 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 * Sum of the first three quarters of the year Source: Geostat, NBG GROWTH OF INFLOWS AND IMPORTS COMPARED TO 2019 (%) 35.6 Remittance inflows 11.7 34.5 -61.9 -24.3 Exports Exports excl. re-exports Tourism inflows FDI Imports 5.8 BUDGET DEFICIT AND SPENDING BY TYPES (% OF GDP) Source: MoF 6.4 5.7 8.1 8.6 22.6 21.3 26.2 25.2 8.0 21.4 2017 2018 2019 40.8 38.9 40.4 60.2 51.1 2020 2021E GOVERNMENT GROSS DEBT (% OF GDP) Source: MoF OUR MAIN OPERATING ENVIRONMENT - GEORGIA CONTINUED Inflation, monetary policy and the exchange rate Despite challenges such as the unprecedented weakening of the TRY, the GEL gained value in 2021, appreciating by 5.4% against the US$ from 3.28 to 3.10, while the real effective exchange rate appreciated by 20.4%. By the end of 2021, however, annual inflation remained elevated at 13.9%, because of the low base effect a year ago due to the state subsidies on utilities. At the same time, monthly inflation dynamics are already around their target level. However, in December 2021, the NBG increased its policy rate again by 0.5 pp to 10.5%, raising the rate by 2.5 pp in total during the year. Corporate MSME Total loans Retail 5 10 15 20 25 30 0 35 Monetary policy rate (MPR) CPI inflation 2 4 6 8 10 12 14 16 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 YOY GROWTH OF LOANS BY SEGMENTS EXCLUDING FX EFFECT (%) Jan - 20 Feb - 20 Mar - 20 Apr - 20 May - 20 Jun - 20 Jul - 20 Aug - 20 Sep - 20 Oct - 20 Nov - 20 Dec - 20 Jan - 20 Feb - 20 Mar - 21 Apr - 21 May - 21 Jun - 21 Jul - 21 Aug - 21 Sep - 21 Oct - 21 Nov - 21 Dec - 21 22.4 18.3 18.0 15.6 CPI INFLATION AND MPR (%) Jan - 20 Feb - 20 Mar - 20 Apr - 20 May - 20 Jun - 20 Jul - 20 Aug - 20 Sep - 20 Oct - 20 Nov - 20 Dec - 20 Jan - 20 Feb - 20 Mar - 21 Apr - 21 May - 21 Jun - 21 Jul - 21 Aug - 21 Sep - 21 Oct - 21 Nov - 21 Dec - 21 10.5 13.9 Going forward Before the Russian invasion of Ukraine, TBC Capital estimated that the Georgian economy would grow by around 6.0% in 2022, 5.5% in 2023 and 5.0% in 2024 – close to its trend rate of around 5.2%. According to the World Bank’s projections 1 as of January 2022, the Georgian economy was forecast to grow by 5.5% and 5.0% in 2022 and 2023, respectively. The developments in Ukraine and Russia are expected to have adverse implications for the growth outlook of Geor- gia. Please refer to the material existing and emerging risks section on pages 102-111 for more details on the risks arising from the Russian invasion of Ukraine. More information on the Georgian economy and ﬁnancial sector can be found at www.tbccapital.ge. 17 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 World Bank, Global Economic Prospects, January 2022 18 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR BUSINESS MODEL Our Business Model We have a customer-centric business model focused on providing the best customer experience in servicing the everyday needs of our clients. Our strategy is centered on the core principles of sustainable development, digitalization, innovation and efﬁciency, and is designed to create value for all our stakeholders. GEORGIA The leading universal ﬁnancial institution in the country, offering a full suite of ﬁnancial services: • Retail banking • Corporate and investment banking • MSME banking • Insurance • Leasing UZBEKISTAN TBC is a market disrupter, offering innovative digital solutions via: • TBC UZ, a newly established digital bank with a strong focus on innovative digital solutions, currently serving retail custom- ers. • Payme, one of the largest payments pro- viders in the country. OUR MARKETS • Strong focus on digitalization and innovation Our best-in-class digital capabilities, built over many years through continuous in- vestment in new technologies, strength- en our ability to grow efﬁciently. • Advanced data analytical capabilities Our advanced data analytical capabilities, embedded into the development of our value proposition, help us to maximize customer value via personalized offer- ings. • Superior customer experience and strong brand awareness Customer satisfaction lies at the heart of everything we do and helps us build long-standing relationships of trust with our customers. • Excellent corporate governance and strong corporate culture Our exemplary governance standards set the right tone for every employee and foster responsible behavior in all our undertakings. OUR APPROACH 19 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 • Customers Provide tailored solutions and a superior customer experience to our clients. • Colleagues Support our colleagues in their profes- sional development and provide reward- ing career opportunities. • Investors Generate sustainable returns for our shareholders and be a reliable partner for our debt holders. • Community Support business development and fos- ter job creation, as well as take an active part in CSR activities. HOW WE SHARE VALUE WHAT WE DELIVER • Strong business growth Supported by our leading Georgian bank- ing franchise and rapidly expanding Uz- bek operations. • Diversiﬁed income streams Driven by solid net interest margin and different sources of non-interest income. • Sound asset quality As a result of prudent risk management across all segments. • High levels of efﬁciency On the back of the high level of digitiza- tion and automation both in front and back ofﬁces. • Strong liquidity and a solid capital posi- tion Ensuring the stability of our business model and ability to withstand economic headwinds. 20 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS Our strategic priorities serve our mission to make people’s lives easier by expanding our offerings beyond banking and beyond Georgia. Each of these priorities has been carefully selected and thought through to ensure that they are interrelated and complementary to each other so that progress in one of them reinforces progress in the others. In order to achieve growth in Georgia and abroad, we need to develop innovative prod- ucts and services and create an unparalleled customer experience. This in turn requires building strong digital and data analytical capabilities. At the same time, our growth across different segments and products, together with our geographical expansion, supports our income stream diversiﬁcation and strengthens our resilience. High levels of digitalization also allow us to improve our efﬁciency levels and reduce costs. This in turn allows us to concentrate our efforts on customer satisfaction and enhancement of our value proposition. Our Strategic Priorities Our goal is to maintain our leadership position in Geor- gia and grow in line with the market. Despite the in- creased penetration level, the Georgian banking sector still offers attractive growth opportunities, especially in certain underpenetrated sub-segments such as mort- gages and micro loans. Our strong banking franchise in Georgia, underpinned by a superior customer experience, high brand aware- ness and advanced digital capabilities, has enabled us to retain our existing clients as well as attract new customers, which led to loan book growth of 12.2% in 2021 or 18.0% on a constant currency basis. This in- crease was mainly driven by growth in GEL denom- inated loans. In term of segments, the increase was broad based. The CIB and MSME segments grew by 12.3% (or 19.5% on a constant currency basis) and 17.6% (or 23.3% on a constant currency basis) year-on-year, respectively, while retail grew by 8.8% (or 13.2% on a constant currency basis) over the same period. The growth in the CIB segment was related to acquisition of both large and mid-corporate clients, while on the MSME side, we focused on increasing our presence in the small and micro sub-segments. At the same time, our retail book growth was underpinned by both mort- gages and consumer loans. In 2021, our deposit portfolio increased by 19.6% year- on-year, primarily on the back of growth in retail and CIB deposits, reflecting the strong loyalty and trust of our customers. On a constant currency basis, the growth was 25.1%. As a result, we retained our market leadership position in both total loans and total deposits, which amounted to 38.8% and 40.4%, respectively, as of 31 December 2021, according to data published by the National Bank of Georgia. Our business model is diversiﬁed in a number of ways. We serve a wide spectrum of individual and business clients in Georgia, offering them a full suite of ﬁnan- cial solutions as well as supplementary products and services through our ecosystem companies. Our main source of income is net interest income, which repre- sented around 70% of our operating income in 2021 and is primarily driven by our lending operations. Our net fee and commission income is generated through payments, settlement operations, the insurance busi- ness as well as guarantees and letters of credit. As a predominantly cash-based society, Georgia provides an attractive growth opportunity for our payments CONTINUE STEADY GROWTH IN GEORGIA DIVERSIFY OUR INCOME STREAMS 21 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 business, while our digital channels enable us to in- crease the scale and revenue-generating capacity of our operations in an efﬁcient manner. In addition, we have been building a digital ecosystem of various busi- nesses, including e-commerce, housing, auto and life- style, around the bank to support our interest income through lead generation and to provide additional fee income. Furthermore, we have increased our geographical cov- erage since 2019 by entering Uzbekistan to fuel our growth. While our Uzbek banking operations are still at a start-up stage, our Uzbek payment business is al- ready providing a meaningful contribution to our net fee and commission income, accounting for around 12% in 2021. We put customers at the heart of everything we do and strive to develop the most relevant products and ser- vices. This requires active engagement with our clients via various channels in order to receive their feedback about our service quality and value proposition, as well as to understand their preferences. Moreover, we aspire to go one step further, anticipat- ing our customers’ needs and surprising them with tai- lored offerings before they ask for them. This is where our advanced data analytical capabilities come into play, providing an opportunities for creating the right product at the right time and the right price. In our retail business, we rolled out several new projects in this re- gard, including customer life-time value and loan pric- ing, while in the CIB segment, we continued to run a commercial excellence transformation project, which helped us better understand and capture the potential of existing and new clients. During the year, we also strengthened our focus on digital offerings across all segments and created new remote products and services, as well as increased au- tomatization of our internal processes. This not only increased customer satisfaction, but also resulted in improved efﬁciency. DELIVER A SUPERIOR CUSTOMER EXPERIENCE A large part of our transactional business in the retail and MSME segments is conducted via remote chan- nels, resulting in a retail offloading ratio above 97%, which means that less than 3% of all transactions are conducted in branches. Mobile and internet banking remains the preferred channel of communication for our customers, with the number of active retail digital users increasing by 14.1% in 2021 and reaching 744,000. At the same time, the daily engagement of our digital users has also increased and in December 2021, our av- erage daily active users reached 285,000, up by 23.9% year-on-year. In parallel, we have been actively devel- oping our digital sales channels for consumer loans and installments. By the end of 2021, the share of consumer loans issued through remote channels increased by 7 pp year-on-year and amounted to 45%. We continued to automate the approval process for smaller MSME loans in order to reduce “the time to yes”. For corporate borrowers, within the scope of the commercial excel- lence transformation project, we signiﬁcantly sped up the analysis process by utilizing sophisticated IT tools. Our advanced digital infrastructure also allows the vast majority of our back-ofﬁce employees to work remote- ly without any disruption and have safe and real-time access to our IT system. 1 Based on number of registered users Uzbekistan is a highly attractive market, offering signif- icant growth opportunities due to its large population and the low penetration of banking services among retail and MSME customers. In addition, it has a high level of smartphone penetration, which supports our digital strategy. In October 2020, we launched our banking operations in Uzbekistan by creating a completely new and unique digital experience for the Uzbek population. We offer a fully digital, mobile-only banking service to retail cus- tomers via our ﬁntech platform, Space. In just one year, we have achieved impressive results. The number of downloads of the application exceeded 1.5 million in 2021, while the number of registered users reached 1.1 million as of 31 December 2021. As of the same date, our loan book amounted to GEL 92.8 million, while our deposit book reached GEL 207.5 million. In parallel, we have continued to expand our pay- ments business through our local payments subsidiary, Payme. Payme is the second largest payment service provider in Uzbekistan 1 , supplying high-quality pay- ment solutions to its 5.2 million registered users. In 2021, Payme continued its strong growth with the num- ber and volume of transactions increasing by 66.4% and 79.6%, respectively, compared to the previous year. Our digitalization strategy spans the entire company from front to back ofﬁce processes and encompasses both sales and transactional operations. We constantly invest in technology and develop new digital products to keep abreast of global trends. LEVERAGE OUR ADVANCED DIGITAL CAPABILITIES HARNESS THE HIGH GROWTH POTENTIAL OF THE UZBEK MARKET 22 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS CONTINUED We use a broad range of ﬁnancial and non-ﬁnancial measures in order to as- sess our performance and provide a balanced view, taking into account the interests of all our stakeholders. The Board regularly reviews the key perfor- mance indicators (KPIs) in order to en- sure that they continue to show whether our strategy is working and ensures the long-term sustainable growth of the Group. Due consideration is also giv- en to the selection of the most relevant KPIs for the executive management’s re- muneration in order to better align their interests with those of our stakeholders. While certain KPIs changed compared to the previous year, the main strategic priorities remain the same. In addition, we added new KPIs related to Uzbeki- stan Business in line with our strategy. The summary of changes in given on page 368. Key Performance Indicators Robust proﬁtability Diversiﬁed income streams Solid balance sheet The increase in Tier 1 CAR in 2021 was mainly attributable to strong income generation during the year, which was partially offset by loan book growth. As a result, Tier 1 CAR remained comfortably above the minimum regulatory requirement of 11.7%. CET 1 CAPITAL RATIO 2021 13.7% 2020 10.4% 2019 12.0% In 2021, the year-on-year increase in net interest margin was driven by a loan composition change and liability structure optimization. We aim to support our NIM by optimizing our cost of funding struc- ture and loan book composition. 2021 5.1% 2020 4.7% 2019 5.6% NET INTEREST MARGIN 2021 24.4% 2020 11.7% 2019 22.9% RETURN ON EQUITY In 2021, we generated a record high return on equity, driven by ro- bust income generation across the board, as well as a strong perfor- mance on the asset quality side. Our medium-term target is to achieve ROE of above 20%. 1 Definitions and detailed calculation of the APMs are given on pages 363-367 2 Cost to income ratio for 2020 does not correspond to the ra- tio disclosed in 2020 as it reflects the reclassifications made by the management between net impairment of non-financial assets and administrative and other operating expenses 23 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In 2021, our return on assets recovered strongly on the back of robust income generation and a strong improvement on asset quality side. We aim to achieve robust ROA in line with our mid-term ROE target of above 20%. In 2021, due to our strong income generation, we managed to slightly improve our cost to income ratio compared to the 2020 level, despite expanding our operations in Uzbekistan. Our medium-term target is to achieve the cost to income ratio below 35%. FINANCIAL KPIS 1 By the end of 2021, our non-performing ratio improved signiﬁcantly year-on-year, with a strong performance across all segments. Our aim is to remain in the green zone of our risk appetite. In 2021, we utilized the excess liquidity generated in 2020 while en- suring that our liquidity ratio remained above the regulatory mini- mum requirement of 100%. NON-PERFORMING LOANS 2021 2.4% 2020 4.7% 2019 2.7% LIQUIDITY COVERAGE RATIO 2021 115.8% 2020 134.2% 2019 110.1% 2021 35.7% 2020 -2.4% 2019 18.9% GROWTH OF NET F&C INCOME In 2021, our net fee and commission income demonstrated a strong rebound across all major categories. We aim to increase the share of net fee and commission income in our operating income. 2019 3.2% 2021 3.4% 2020 1.6% RETURN ON ASSETS 2019 39.9% 2021 37.6% 2020 2 37.9% COST TO INCOME RATIO 24 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In 2021, our deposit growth outpaced the market growth. As a result, our market share in deposits increased by 3.2 pp and reached 40.4% by the end of the year (based on data published by the National Bank of Georgia). We aim to grow in line with the market, while also take into consid- eration our liquidity needs. Steady growth in Georgia Strong progress in Uzbekistan We started issuing unsecured consumer loans in Uzbekistan in March 2021. By the end of the year, our retail loan market share amounted to 0.5% (based on data published by the Central Bank of Uzbekistan). 2021 GEL 207.5 mln 2020 n/a 2019 n/a TOTAL DEPOSITS The growth of our deposit portfolio outpaced the loan book growth. By the end of 2021, our retail deposit share amounted to 2.0% (based on data published by the Central Bank of Uzbekistan). 2021 GEL 92.8 mln 2020 n/a 2019 n/a TOTAL LOANS 2021 18.0% 2020 8.7% 2019 17.9% LOAN BOOK GROWTH AT CONSTANT CURRENCY In 2021, our loan book grew in line with the market, maintaining our leadership position. Our market share in total loans stood at 38.8% by the end of the year (based on data published by the National Bank of Georgia). Our medium-term target is to grow by around 10-15% annually. 2019 2.9% 2021 25.1% 2020 13.8% DEPOSIT GROWTH AT CONSTANT CURRENCY OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS CONTINUED 25 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The employee net promoter score measures employee loyalty and reflects the likelihood of our colleagues recommending their work- place to their friends and family. In 2021, our employee satisfaction levels remained high. This year, we introduced a new metric to assess our customer satis- faction levels. The Net promoter score (NPS) measures how willing customers are to recommend our products and services to others. NON-FINANCIAL KPIS High employee and customer satisfaction levels NET PROMOTER SCORE 2 2021 56% 2020 n/a 2019 n/a EMPLOYEE NET PROMOTER SCORE 1 2021 66% 2020 68% 2019 41% Strong digital engagement with customers 3 Growing customer base in Uzbekistan DAILY ACTIVE USERS/ MONTHLY ACTIVE USERS (DAU/MAU) The proportion of daily active users over monthly active users (DAU/ MAU) measures our customers’ daily digital engagement with us. In December 2021, the number of daily and monthly active users reached 285,000 (up by 23.9% YoY) and 644,000 (up by 16.0% YoY), respectively. 2021 44% 2020 41% 2019 n/a 2019 93% 2021 97% 2020 95% RETAIL OFFLOADING RATIO The retail offloading ratios measures the share of transactions conducted in our remote channels, that is outside the branches. Our retail offloading ratio continued to grow in 2021, as we further strengthened our digital focus and introduced new digital products and services. 2021 1.1 mln 2020 12,200 2019 n/a # OF REGISTERED USERS OF TBC UZ In 2021, the number of registered users grew signiﬁcantly, reflecting our increased coverage over the country. By the end of 2021, we were represented in all major regions. # OF REGISTERED USERS OF PAYME 2020 2.9 mln 2019 1.8 mln 2021 5.2 mln In 2021, a strong growth in the number of registered users was fol- lowed an increase in the number of monthly active digital users, which reached 1.1 million users compared 0.7 million a year ago. 1 The Employee Net Promoter Score (ENPS) was measured for the Bank’s employees by an independent consultant in October 2021 2 The Net Promoter Score (NPS) was measured based on survey conducted by the independent research company IPM in December 2021 3 These terms are defined in glossary on page 362 26 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES Our aspiration to contribute to sustainable develop- ment comes from our role as a leading ﬁnancial insti- tution in Georgia’s development. We are aware that we have an impact on the country’s economy, busi- ness development, employment and the progress of the society, as a whole. This role is connected to our responsibility to contribute to a better future through innovation and technology in order to increase the ac- cessibility of ﬁnancial services and to enable our cus- tomers to be a part of the globalized economic society. While pursuing our aspirations, we guide our activities in line with international sustainability standards and principles, making them a part of the strategy, culture and day-to-day operations of our company. This year, we took further steps to enhance the Group’s environmental, social and governance (ESG) frame- work through the development of an ESG strategy. The ESG Strategy reafﬁrms our commitment to make a long-term, sustainable contribution to the country and the region. The ESG Strategy deﬁnes several key areas for the coming years: a strong ESG governance structure at the Board and executive level; a focus on sustainable ﬁnancing, services and products; employ- ee diversity, equality and inclusion; green and sustain- able funding; and a system and approach for impact measurement and reporting. VARIOUS INITIATIVES AND PROGRAMMES TO SUPPORT THE TARGETS SET BY THE ESG STRATEGY ESG in TBC’s governance and culture: 2021 was a milestone year in the establishment of the ESG gover- nance structure, which spans different organizational levels. Two ESG-related committees were established – one at the board level, another at the executive man- agement level. The ESG Coordination Department was established in TBC Bank to support and coordi- nate initiatives deﬁned by the ESG strategy. TBC Bank initiated an ESG Ambassadors programme, which aims to strengthen environmental, social and gover- nance structures and increase the involvement of TBC employees as focal points for these areas. Through this initiative, TBC employees will contribute to the quality of sustainability for customers, company, the environ- ment and society as a whole. Employee diversity: In order to expand our focus on diversity, gender and inclusion issues, we have devel- oped a Diversity, Equality and Inclusion Policy (avail- able at www.tbcbankgroup.com), which sets targets and establishes a methodology to advance diversity, equality and inclusion, integrating its approach into the Group’s operations and management processes and focusing on diverse areas including gender, multi- cultural, multigenerational and disability backgrounds. Gender equality and the empowerment of women and girls are important dimensions of the sustainability of the company and its stakeholders, including custom- ers, employees, suppliers, partners and society as a whole. The policy takes into account the United Na- tions Women Empowerment Principles (WEPs) – a set of principles offering guidance to businesses on how to promote gender equality and women’s empower- ment in the workplace, marketplace and community. TBC Bank became a signatory of the UN WEPs in 2021. Sustainable ﬁnancing: TBC strives to increase its pos- itive impact on society and the economy through in- troducing new ﬁnancial products and services that are designed to deliver a speciﬁc social or environmental beneﬁt. The ESG Strategy sets targets for the growth of our total sustainable loan portfolio, including ﬁnanc- ing energy efﬁcient, renewable energy and resource efﬁcient projects, women-led and women-owned business, startups and rural businesses. Responsible procurement: Our responsible purchas- ing practices and relationships with suppliers can have a signiﬁcant impact on the well-being, ﬁnancial sta- bility and development of suppliers, as well as on the economy as a whole. We pay special attention to small local suppliers and promote their inclusion in our sup- ply chain. The ESG Strategy sets targets connected to green procurement initiatives, social enterprises, wom- en-owned companies, startups and local business. Our Environmental, Social and Governance (ESG) Strategy 2022 • Some ESG KPIs linked to senior management remuneration in the medium term to reflect our mid-term strategy; • Target volume of our sustainable loan portfolio 1 - GEL 750 million. 2023 • Measure the Group’s direct performance towards the Paris Agreement targets for reduction of GHG emissions; • Target volume of our sustainable loan portfolio 1 - GEL 1 billion; • Target for women in middle managerial positions at the Bank level - 40%; • Target for social impact procurement - GEL 5 mil- lion. 2025 • Net-zero GHG emissions (direct). OUR ESG TARGETS 27 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Climate-related Financial Disclosures 2021 In line with the UK Government’s initiative to enshrine in law mandatory Task Force for Climate-related Financial Disclosure (TCFD) aligned requirements for premium and standard listed companies in the UK, we set out our ﬁrst disclosure by the Group considering the implementation of TCFD recommendations. In 2020, we informed share- holders that TBC planned to introduce a TCFD framework to demonstrate our commitment towards taking active measures to mitigate climate change, to assess and mitigate climate risks, and identify climate opportunities. This report includes climate-related disclosures to align with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), TCFD published guidance and the Financial Conduct Au- thority Listing Rules. It should be noted, that the data we have used provides the best available approach to making progress, notwith- standing the challenges that exist in the data sets and methodologies required for the Georgian environment, which bears the largest part of our activities. We expect the availability and reliability of required data to improve over time, and we intend to integrate improvements into our reporting as it becomes available. Below is the ﬁrst disclosure prepared by the Group considering the implementation of TCFD recommendations. 1 Our sustainable loan portfolio includes energy efficiency, youth support and women in business loans financed by special purpose funds received from IFIs, as well as loans financing renewable energy, which include all hydro power plants financed by the Bank Recommended disclosure Status Reference Describe the organisation’s governance around climate-related risks and opportunities Disclosed 1.1 Describe management’s role in assessing and managing climate-related risks and opportunities Disclosed 1.2 Describe the climate-related risks and opportunities the organisation has identiﬁed over the short, medium, and long term Disclosed 2.1, 2.2 Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and ﬁnancial planning Disclosed 2.2 Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario Disclosed 2.3 Describe the organisation’s processes for identifying and assessing climate-related risks Disclosed 3 Describe the organisation’s processes for managing climate-related risks Disclosed 3 Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management Disclosed 3 Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process Disclosed 4 Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions and the related risks Disclosed 4 Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets Disclosed 4 28 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED 1. GOVERNANCE 1.1 Board’s oversight of climate-related risks and opportunities In November 2021, the Board of Directors approved the Group ESG Strategy in order to address speciﬁcally the Group’s speciﬁc targets and initiatives related to climate change, its direct and indirect environmental impact and sustainable development across the Group. The ESG Strategy also covers customers, employees, suppliers, wider society, ﬁnancial inclusion, employee relations and talent management, workplace diversity and inclusion. The Board of Directors retains the primary responsibility for overseeing the implementation of the strategy, as part of its com- mitment to having direct oversight over the Group’s climate-related issues. The Board of Directors is supported by the Risk Committee. For example, progress against the reporting metrics such as the volume of the sustainable loan portfolio are overseen by the Risk Committee, which also received updates three times a year through the Chief Risk Ofﬁcers (CRO) report. In 2022, we will incorporate a Climate Risk Appetite Statement in our Risk Appetite Framework (RAF). In January 2022, the Group established an Environmental, Social and Governance (“ESG”) and Ethics Committee at the Board level, as well as at the Supervisory Board level of the Company’s main subsidiary, JSC TBC Bank, in line with the Company’s “mirror boards” policy. This reflects the importance of sustainability in TBC’s corporate governance and allows the Board members to dedicate more time and focus to ESG topics. The role of the Committee is formal- ized to support and advise the Board of Directors in its oversight of the implementation of (i) strategy (ii) policies and (iii) programs of the Company and its subsidiaries in relation to Environmental, Social and Governance matters and ensuring that the ESG strategy is implemented across all relevant businesses of the Group. Furthermore, the ESG and Ethics Committee supports the Board of Directors in promoting its collective vision of values, conduct and culture and overseeing management’s efforts (i) to foster a culture of ethics (ii) appropriate conduct, and (iii) employee ethical engagement within the Group. The Committee will provide strategic guidance on climate-related matters and will report to the Board of Directors, which has overall oversight. The ESG and Ethics Committee will meet at least four times per year. Under the ESG oversight of the ESG and Ethics Committee are: a) periodical review of the Group’s ESG strategy, including climate strategy, as well as implementation plans and monitor its execution; b) oversee Group’s disclosures on ESG matters, including reporting in line with the TCFD principles, in the Annual Report and Accounts. The Board of Directors of TBC Bank Group PLC has established a diverse and comprehensive training agenda, which is reviewed annually. The Group’s Company Secretarial team creates a general training catalogue at the beginning of each year, which covers all relevant areas of Risk, Audit, Remuneration and Governance. In 2020 and 2021, additional attention was paid to ESG and, in particular climate-related matters, regulatory compliance, reporting, shareholder views and impact. The catalogue includes an effective mix of publicly available and client-tailored webinars, ana- lytical materials, and opportunities for live discussion with industry participants. The providers of these training op- portunities include the Big Four accounting ﬁrms, external legal advisors, chartered institutes (such as the Institute of Directors and the Governance Institute), and, where relevant, senior professionals with speciﬁc subject matter exper - tise. Directors use the training catalogue in order to create their bespoke training calendars and exchange knowledge during Board meetings or via the Group’s dedicated Board platform. In 2022, further topic-speciﬁc training sessions on climate-related issues are planned that will equip members of the Board of Directors as well as the executive management of TBC Bank and other relevant employees with detailed knowledge about the TCFD and climate change-related risks and opportunities and the operative tools available to implement the ESG Strategy. 1.2 Executive management’s role in assessing and managing climate-related risks and opportunities At the executive level, responsibility for climate change-related risks and opportunities is assigned to the ESG Com- mittee, which was established by the Management Board in March 2021 and is responsible for implementing the ESG strategy and approving the annual as well as separate, detailed action plans for key projects. At the ﬁrst meeting of the ESG Committee in March 2021, the annual action plan covering various ESG matters for 2021 was approved. For major projects, such as the implementation of the recommendations of the TCFD, a separate action plan has been devel- oped and key implementation steps deﬁned. The progress and implementation status of action plans are monitored at the ESG committee’s meetings. The implementation of the ESG strategy is supported by the various organization- al functions responsible for ESG matters: Environmental and Social Risk Management Team, the ESG Coordinator and the ESG competence center. Among other matters, the ESG Committee’s responsibilities include the review and monitoring of climate-related risks and opportunities as well as the establishment of an effective mitigation and control system to manage identiﬁed (material) climate related risks. The ESG Committee meets on a quarterly basis. Furthermore, the Environmental Committee meets on a quarterly basis and oversees the implementation and oper - ation of the Environmental Management System, which includes implementing an internal environmental manage- ment system and addresses the resource consumption and other environmental impacts of daily operations in TBC Bank. The Environmental and Social Risk Management Team regularly reports on the environmental management plans and results to the Environmental Committee. The Environmental Committee reports directly to the Chief Risk Ofﬁcer. 29 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The ESG governance structure Establish ESG governance framework until the end of 2021 Set-up a system for measuring impacts on sustainability across the Group, customers, employees and society Access to green and other sustainable ﬁnancing sources Increase sustainable loan portfolio Increase customer loyalty and employee motivation 1 1 1 RISK COMMITTEE SUPERVISORY BOARD ESG AND ETHICS COMMITTEE ESG AND ETHICS COMMITTEE RISK COMMITTEE ESG COMMITTEE ENVIRONMENTAL COMMITTEE ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT TEAM ESG COORDINATION DEPARTMENT 1 These terms are defined in the glossary on page 362 2. STRATEGY The Group’s objective is to act responsibly and manage the environmental and social risks associated with its opera- tions in order to minimize negative impacts on the environment. In order to achieve this, the Group has clearly deﬁned processes in place to identify and assess climate-related risks to our business. This approach enables the Group to reduce our ecological footprint by using resources efﬁciently and promoting environmentally friendly measures in order to mitigate climate change. Since banking is not a high-polluting activity, the implementation of an internal En- vironmental Management System to address the Group’s resource consumption might not have a signiﬁcant impact on the surrounding environment. However, TBC Bank has reviewed all of the operational activities, procured items, and outsourced services that it can control (present and planned), and has identiﬁed all of the material environmental aspects relevant to the business. The direct environmental impact of our business activity arises from energy, water, fuel and other resource usage, waste and emissions. The Bank has established a comprehensive internal environ- mental system to manage its GHG emissions and is committed to reducing them by closely monitoring its con- sumption of resources. In order to evaluate the signiﬁcance of impact for each of the categories, we have developed a comprehensive evaluation methodology and applied it to the whole Group. Based on this, annual goals are deﬁned and speciﬁc initiatives and programmes are elaborated to reach them. In 2020, the Bank obtained an ISO 14001:2015 certiﬁcate for its environmental management system; in 2021, the Bank completed the re-certiﬁcation successfully. More information about the environmental management system can be found on pages 88-92. In 2021, the Group took further steps to enhance its ESG framework and to demonstrate its commitment towards taking active measures to mitigate climate change. The ESG strategy was developed and approved by the Board in November 2021, as described above. Below are the ﬁve main pillars of TBC’s ESG strategy. TBC Group’s ambition is to be a leading supporter of ESG principles in Georgia and region. We aspire to make our direct environmental impact net zero by 2025 and continue to develop our plan to enable our indirect environmental impact to also reach net zero as soon as practicable thereafter. The long-term aspirations are supported by different measures outlined in the ESG Strategy. The key components for 2022 and 2023 are listed below: • Increase of the sustainable loan portfolio, which largely consists of renewable energy and energy-efﬁciency loans (please see detailed breakdown of the portfolio on page 92); 30 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED • Implementation of the green loan framework which offers a tailored green ﬁnancing for SMEs; • Approach and system for data collection, segregation and analysis; • Elaboration of a methodology to calculate ﬁnanced emissions; • Measure the Group’s direct performance towards the Paris Agreement targets for the reduction of GHG emis- sions; • Groups’ Policy on Climate Change; • Incorporation of ESG matters in the risk appetite; • Excluding/limiting high-carbon activities (Please see our Exclusion List, available at www.tbcbankgroup.com); and • ESG resource center for employees, customers and wider public in order to increase awareness and knowledge about the risks and opportunities of climate change. Work is continuing to further embed climate-related risks and opportunities within our business. An ESG Compe- tence Center will be established to help the Bank deliver its strategic objectives and bring all of its climate-related work together. 2.1. Climate-related risks An overall climate risk proﬁle was assessed based on the ﬁrst climate risk assessment (please see more about the climate risk assessment in the chapter risk management below). The table below shows a summary of potential tran- sitional and physical risks identiﬁed by the Group for the Georgian environment. The time horizons considered in the assessment are short – up to 3 years, medium – up to 8 years and long – above 8 years, with the levels of a possible impact – low, medium or high. While assessing the impact of climate change risks on a sector, a category – low, me- dium and high - was assigned compared to other sectors, as well as in comparison with other risk categories. Thus, the assessment results are not comparable with the same impact categories in other countries or regions. Transition risks Physical risks Risk sources Policy and Legal Technology Market Reputation Acute Chronic Types of risks • Increased GHG emissions pricing in order to incentivise movement to renewable energy sources • Enhanced regulatory environment and mandated requirements: may introduce minimum standard or expectations on green credentials of product outputs or business operations, enhanced emissions- reporting obligations • Exposure to litigation resulting in the costs related to the compensations • Substitution of existing products and services with lower emissions options, including requirements to replace manufacturing technology to cleaner alternatives • Unsuccessful investment in new technologies • Changing customer behavior including deliberate move to lower carbon footprint products • Uncertainty in market signals • Increased cost of raw materials, increased volatility and costs, sourcing restrictions for carbon heavy raw materials • Shifts in consumer preferences to green products • Stigmatization of sector, resulting in reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention) • Increased stakeholder concern or negative stakeholder feedback • Increased severity of extreme weather events such as floods • Changes in precipitation patterns and extreme variability in weather patterns affecting food production and living environment • Rising mean temperatures affecting working conditions, living conditions and local infrastructure • Rising sea levels affecting local ecosystems, increasing subsidence and flood risks Time horizon Long Long Medium Long Medium Long Level of potential impacts affecting customers and TBC Low Medium Low Low Medium Medium 31 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 Georgia’s 2030 Climate Change Strategy 2 Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change | Bank of England 3 Georgia’s Third National Communication to the UNFCCC The overall assessment of the impact of transitional policy measures The Georgia’s 2030 Climate Change Strategy 1 and Climate Action Plan lays out different policy measures on which TBC Bank based its identiﬁcation of the potential impact of the policy measures on different economic sectors, which are ﬁnanced by TBC. As a summary of the potential impact of the various transition risks and physical risks identiﬁed, the transitional risks in Georgia and on the TBC Bank’s activities are low. The assessment considers, that trade and services dominate the Georgian economy, and the policy measures outlined in the Georgia’s 2030 Cli- mate Change Strategy will have overall low impact on the economic sectors, especially in short and medium term. The Georgia’s 2030 Climate Change Strategy takes into consideration that Georgia is a transitional and growing economy, and therefore the government strategy is not to impede the growth of the GDP with policy measures and rather to support a smooth transition where necessary. It is worth noting, that the economic sectors most affected by transitional risks world-wide such as mining crude petroleum, natural gas and metal ores, manufacturing coke and reﬁned petroleum products 2 are present to the extremely limited extend in Georgia, resulting in a low overall impact of transitional measures on economic growth, if any. The overall assessment of the impact of the physical risks The geographical location and natural conditions of Georgia – a small country with a mountainous landscape, a Black Sea coastal zone, and semi-arid areas in the Southeast – all contribute to the country’s vulnerability to the physical risks of climate change. The sectors that are thought to be most vulnerable to climate change in Georgia include agriculture, forestry, tourism, and healthcare 3 . The impact of physical risks on economic sectors, which are ﬁnanced by the TBC Bank, will become material over the time. For the Group, the risks can materialise through the impairment of asset values and the deteriorating creditwor- thiness of customers, operating in Georgia. Certain geographic areas and economic sectors such as winter resorts, agricultural land are affected partially already and might deteriorate further in the medium time horizon. The overall assessment of the potential impact in Georgia and on the TBC Bank’s activities is medium in long-term perspective. It is understood that climate change risks are largely associated with longer-term impacts; however, those longer-term impacts are unclear, especially considering the shorter-term maturity structure of the Bank’s loan portfolio. 2.2. Climate-related risks and opportunities on the business and ﬁnancial planning We are working to incorporate climate and broader ESG considerations in our ﬁnancial planning process. In 2022, we continue the development of measurement capabilities across the Group’s opportunities and the advancement of the scenario analysis framework. Some qualitative considerations related to climate and ESG matters were incor- porated in the ﬁnancial planning cycle for 2022-2023. In 2022, the Group seeks to include considerations linked to business actions identiﬁed through scenario analysis as well as progress on climate-related opportunities, including the launch of new products and initiatives. To encourage customers to invest in green products and services, the Group offers services, ﬁnancing and funding solutions, as outlined in the table below: Climate-related opportunities Customer Our progress Impact Renewable energy ﬁnancing Corporate TBC bank is the leading bank in the local ﬁnancing of renewable energy project with GEL 554 million Contributing to Georgia's transition to low-carbon economy Green Loan Framework - a standardized approach to sustainable ﬁnance, including energy efﬁciency, renewable energy and resource efﬁciency ﬁnancing MSME In 2021, TBC bank developed the Green Loan Framework with the Green for Growth Fund (GGF) Technical Assistance Facility, represented by Finance in Motion GmbH and ﬁnanced by the European Union under the EU4Energy Initiative. Encourage customers to transition to low carbon activities Long-term business loan for solar panels MSME In 2022, TBC launched a special long- term loan for solar power plants. The product considers different ﬁnancial and non-ﬁnancial beneﬁts. Encourage customers to optimize their costs and to support the transition to low carbon activities Global Climate Fund (GCF) accreditation, enabling the Bank to have direct access to GCF funding GCF accreditation All In 2021, TBC Bank became the ﬁrst commercial bank in the Caucasus region to receive accreditation by the Green Climate Fund (GCF). The accreditation will enable the Bank to ﬁnance projects for adaptation to, and mitigation of, climate change and contribute to combatting climate change in Georgia Energy efﬁciency loans Retail Financing of hybrid/electric cars, mortgages and energy efﬁcient processing. The portfolio volume equals to GEL 15.5 million Encourage customers to transition to low carbon activities 32 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED 2.3. Climate-related scenarios TBC Group is taking signiﬁcant steps to develop sce- nario analysis capabilities to better understand and act on the implications of climate-related risks and oppor- tunities for our business and customers. The develop- ment of climate-related scenario analysis is complex, as climate data and sub-sector information availability, accessibility, and suitability for ﬁnancial risk analysis, as well as climate-related risk modelling capabilities in Georgia are very limited and still evolving. This sec- tion summarises our ﬁrst-time exercise to undertake climate scenario analysis for the Georgian context and the related qualitative results. The starting point for the ﬁrst exercise, which was car - ried out in 2022, are two climate scenarios - the Orderly scenarios of 1.5°C (Net Zero 2050) and below 2°C, de- veloped by the Network of Central Banks and Supervi- sors for Greening the Financial System (NGFS). Orderly scenarios assume that climate policies are introduced early and become gradually more stringent. Both phys- ical and transition risks are relatively subdued 1 . Each of the scenarios includes a trajectory of carbon prices and emissions over time. They are drawn from a set of scenarios published by the NGFS. We used coun- try-level downscaled data for Georgia considering the NGFS 1.5°C (Net Zero 2050) and below 2°C scenarios. While analyzing this data, we identiﬁed that the sce- narios and underlying downscaled data show certain inconsistencies in relation to the local economic envi- ronment; some of the sector level downscaled results were implausible, e.g. hydro energy outputs were fall- ing very heavily. However, we stayed within the NGFS scenario framework, adjusting only a few parameters, where reasonable, and after consulting an external knowledgeable consultant. In particular, we used the GCAM (Global Change Assessment Model) model as the main source of data for the scenario analysis. We used data from the model to project how climate change will affect net revenues of the sector for the period of 2020-2050. Certain modiﬁcations were ap- plied to the model data in order to reflect the speciﬁcs of the country. Third party data was also used to better understand how carbon emissions are allocated to var- ious sectors and subsectors. The major variables used from the model were carbon emissions, carbon price, secondary and ﬁnal energy prices, and demand on the secondary and ﬁnal energy. These were the only vari- ables available on the sectoral level for Georgia from NGFS projections. We examined the impacts of two scenarios on a se- lected sample from our corporate customers in the carbon-intensive sectors (energy and utilities, oil and gas), as well as in metals and mining. We stressed the latest available ﬁnancial statements and projection re- sults (where applicable) for the time horizon covering the remaining maturity of the respective exposure. The selected sample of corporate customers includ- ed several hydro power plants (HPPs), electricity and gas distribution companies, a thermal power plant (the only TPP in the Group’s portfolio) and a company in the metal industry. For the selection, we took companies with different sizes – small, medium and large HPPs and some leading companies in the respective sector. In summary, the results of the ﬁrst stress scenario ex- ercise showed those sectors had different sensitivity levels towards transitional risks. While the transitional risks for few cases might show negative impacts in ac- cordance with two NGFS scenarios - largely due to the negative impact of the incorporated extremely high carbon taxes, it is understood that signiﬁcant amend- ments to the scenario components and analysis need to be performed before the results can be considered in the risk management framework. It is important to consider that the transitional risks in Georgia are low, and policy measures, especially carbon taxes, are not among the measures foreseen by the Georgian gov- ernment. At the same time, we analyzed the existing mitigation measures for those few cases, and identi- ﬁed a satisfactory level of the ﬁnancial resilience, con- sidering the publicly available Georgia’s 2030 Climate Change Strategy and Climate Action Plan, as well. Despite these limitations, the scenario analysis allows us to test a range of possible future climate pathways and understand the nature and magnitude of the risks they present. The purpose of scenario analysis is not to forecast the future but to understand and prepare to manage risks that could arise. In 2022, we continue working on the climate scenario framework in order to include other sectors, as well as the impact of physical risks. Furthermore, in 2022, the focus will be on devel- oping of sectoral guidelines for climate related risks and opportunities, where deemed necessary. For more initiatives planned in 2022, please refer to the para- graph 3. Risk management part (p 33). In addition to exposure sensitivity analysis, the Group has already started work on an aggregated level sen- sitivity analysis. To this end, we analyzed downscaled estimates for Georgia of two NGFS Climate Scenari- os: Net Zero 2050 and below 2°C. The main initial ob- servation appears to be that Georgia is grouped with high-carbon-emission countries under GCAM, MES- SAGEix-GLOBIOM 2 as well as REMIND-MAgPIE 3 mod- els. This implies that the downscaled data for Geor- gia should be used with care. In fact, when looking at downscaled estimates for a number of other countries with economies of a broadly similar structure in the context of climate change, the impact appears to be signiﬁcantly different. In particular, e.g. in GCAM mod- el, Georgia is grouped together with Armenia, Azerbai- jan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turk- menistan, Uzbekistan, while the deviation in the stress scenario from the baseline scenarios is similar for all 33 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 countries in the group. Meanwhile, downscaled estimates for Croatia, which has rather similar characteristics of the economy to Georgia, looks completely different as compared with the group where commodity intensive econo- mies prevail. TBC Group has started to conduct research to estimate more relevant downscaled scenario for Georgia. In this regard, the National Bank of Georgia plans to start working on climate scenarios based on the NGFS framework to estimate the potential aggregated impact on the ﬁnancial sector in Georgia. 3. RISK MANAGEMENT The risks associated with climate change have both a physical impact arising from more frequent and severe weather changes, and a transitional impact that may entail extensive policy, legal and technological changes to reduce the ecological footprint of the households and businesses. For the Group, both of these risks can materialise through the impairment of asset values and the deteriorating creditworthiness of customers, which could result in a reduction of the Group’s proﬁtability. The Group may also become exposed to reputational risks as a result of its lending to or other business operations with customers deemed to be contributing to climate change. In order to identify, assess and manage risks associated with climate change, before the undertaking the climate risk assessment, the Group performed a general analysis in order to understand the maturity level of the ESG framework. The general analysis process covered the assessment of the existing policies and procedures, identiﬁcation of areas for further development and a gap analysis. Furthermore, the gap analysis considered various international standards and concept papers (European Central Bank, European Banking Authority, TCFD, Global Reporting Initiative and the Four accounting ﬁrms), reports about climate change in Georgia, criteria of ESG rating agencies and expectations in relevant expert papers. Based on the analysis, the main focus areas were identiﬁed and reflected in the ESG strategy, considering the business strategy of the Group. As mentioned above, climate risks can materialize, ﬁrst of all, through the impairment of asset values and deteriorating creditworthiness of customers. Therefore, as a ﬁrst step, we looked at the material subsidiaries of the Group by assets, considering the materiality level of the 1% share in assets. The Group has only one subsidiary, which takes above 1% of assets – JSC TBC Bank, the largest ﬁnancial institution in Georgia. In order to increase the understanding of cli- mate-related risks on its loan portfolio, the Bank performed a high-level sectoral risk assessment, as different sectors might be vulnerable to different climate-related risks over different time horizons. The risk assessment process and content is based on TCFD recommendations, climate-related documents published by the Bank of England, the climate change assessments of Georgia performed as part of the IPCC reports, and the targets and strategy 2030 deﬁned by the Georgian government to achieve the National Determined Contribution of Georgia 4 . The risk assess- ment focuses on economic sectors such as: energy, oil and gas, metals and mining, tourism, agriculture, food indus- try, healthcare, construction and real estate. This assessment is the ﬁrst exercise conducted with regards to overall climate change risks. Therefore, the assessment of levels and impacts might change in the future, based on further review of the methodology, deep dive analysis and increased understanding of the impact of climate change risks. To deﬁne the climate-related economic sectors for the sectoral analysis, a key materiality threshold has been agreed above 1% of the loan portfolio. The sectoral assessment was performed with the involvement of the business and credit risk specialists responsible for the respective economic sectors in the Bank. The sectoral distribution of the loan portfolio for standalone Bank as of the year end 2021 is given in the table below. 1 Net Zero 2050 is an ambitious scenario that limits global warming to 1.5 °C through stringent climate policies and innovation, reaching net zero CO 2 emissions around 2050. Some jurisdictions such as the US, EU and Japan reach net zero for all greenhouse gases by this point. This scenario assumes that ambitious climate policies are introduced immediately. Carbon dioxide removal (CDR) is used to accel- erate the de-carbonisation but kept to the minimum possible and broadly in line with sustainable levels of bioenergy production. Net CO 2 emissions reach zero around 2050, giving at least a 50 % chance of limiting global warming to below 1.5 °C by the end of the century, with no or low overshoot (< 0.1 °C) of 1.5 °C in earlier years. Physical risks are relatively low but transition risks are high. Below 2 °C gradually increases the stringency of climate policies, giving a 67 % chance of limiting global warming to below 2 °C. This scenario assumes that climate policies are introduced immediately and become gradually more stringent though not as high as in Net-zero 2050. CDR is deployment is relatively low. Net-zero CO 2 emissions are achieved after 2070. Physical and transition risks are both relatively low. 2 The MESSAGEix-GLOBIOM Integrated Assessment Model is based on the MESSAGEix framework, an open- source energy systems optimization modelling environment including macro-economic feedback using a stylized computable general equilibrium model. 3 REMIND (REgional Model of Investment and Development) is a numerical model that represents the future evolution of the world economies with a special focus on the development of the energy sector and the implications for our world climate. REMIND is used in connection with other models to provide a detailed answer. One such model is MAgPIE (Model of Agricultural Production and its Impacts on the Environment). 4 A nationally determined contribution (NDC) is a national plan highlighting climate change mitigation, including climate-related targets for greenhouse gas emission reductions, policies and measures governments aim to implement in response to climate change and as a contribution to achieve the global targets set out in the Paris Agreement. 34 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Agriculture Healthcare Services Real Estate Energy & Utilities Hospitality & Leisure Individual Construction Food Industry Trade Automotive Oil & Gas Transportation Pawn Shops Financial Services Manufacturing Other Metal & Mining Communicqtion Media & Publishing OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED The maturity of assets are essential for deﬁning the different time horizons for the analysis and for assessing the ma- teriality of climate-related risks for different sectors. The maturity structure of the loan portfolio shows that the major- ity of assets is distributed in much shorter time horizons than the timeframe in which the impacts of climate change, especially of physical risks, may arise in Georgia. Since 2012, TBC Bank has had a process to consider environmental and social risk, which was established in line with industry guidelines that aim to mitigate climate change. TBC Bank has developed E&S risk management pro- cedures to identify, assess, manage and monitor environmental and social risks which are fully compliant with Geor- gian environmental legislation, follow international best practices and incorporate appropriate consideration of IFC Performance Standards, EBRD Performance Requirements (PRs) and ADB’s Safeguard Requirements (SRs). These procedures are fully integrated into the credit risk management process and are routinely applied to SMEs and cor- porate customers. In collaboration with partner IFIs, a clear Environmental and Social (E&S) risk categorization matrix was developed. Projects that are to be ﬁnanced are classiﬁed according to E&S categories (low, medium, high and A category) based on analysis; where necessary, deep dive analysis and due diligence are performed. When categoriz- ing the transaction according to E&S risk category, priority is given to the higher risk. Additionally, external specialized companies are involved in the detailed assessment of E&S risks for A category projects, such as hydroelectric plants. The Environmental Management Policy and Procedure provides TBC with a good description of assessing envi- ronmental risks related to clients. More information about the environmental management system can be found on pages 88-92. It is worth noting that processes related to climate risks will continue to evolve as TBC embeds its ap- proaches further. This process will be supported with the climate-related training to strengthen the Bank’s capacity, knowledge and capabilities for managing climate-related risks across the business. In order to further facilitate the integration of these risk identiﬁcation processes into the Group’s overall risk manage- ment, in 2022, the Group will undertake deep dive analyses to understand the extent to which climate-related risks are to be categorized as principal risks. The Group will develop a Policy on Climate Change, a risk appetite statement and risk appetite measures. The high-level sectoral assessment carried out during 2021 has provided insights into the po- tential impacts on speciﬁc sectors. In 2022, the focus will be on developing of sectoral guidelines for climate related risks and opportunities, where deemed necessary. Key initiatives will include further enhancement of the climate risk management framework and the development of ESG proﬁles for corporate clients covering ESG factors, including relevant climate-related risks and opportunities. Climate risk might impact other, more traditional risk categories for banking such as: market risk, operational risk, liquidity risk and reputational risk. A summary of the assessment is given in the table below. Certain risk factors, which were identiﬁed for operational and reputational risks, are already covered under the existing risk management frame- work. GROSS LOANS BY SECTORS GEL 16.9 BLN TOTAL LOANS FOR STANDALONE BANK 9.4% 8.0% 5.9% 5.1% 4.2% 1.2% 4.9% 2.0% 2.4% 1.3% 6.5% 6.1% 37.7% 1.8% 0.9% 0.7% 0.2% 0.7% 0.5% 0.3% 35 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Banking risk types Impact from Physical Risk Impact from Transition Risk Market risk No material impact expected No material impact expected Liquidity risk No material impact expected No material impact expected Operational risk Extreme events that would cause damages to Group's own sites could affect the ability to provide services to its clients (e.g., lack of electricity supply, inability for employees to work in premises). No material impact expected Reputational risk No material impact expected Financing to high-emitting borrowers could affect brand image, as perceived by stakeholders 4. METRICS AND TARGETS The metrics related to the Group’s own operations are given in the environmental management system section on page 89 and include Scope 1, Scope 2 and Scope 3 GHG emissions. In 2022, key initiatives will include further implementation of the TCFD recommendations, the development of the cli- mate-related scenario analysis framework, the development of ESG proﬁles for corporate clients covering climate-re- lated risks and opportunities and increasing our expertise in climate-related matters. These initiatives will also con- sider sectoral guidelines for climate related risks and opportunities, where necessary and feasible. The climate action initiatives are part of the overall ESG strategy, which was approved by the Board of Directors in November 2021. The ESG strategy sets aspirational targets, such as Net-Zero GHG emissions 1 related to the direct environmental impact by 2025 and an increase in the sustainable loan portfolio, which consists of renewable energy loans, energy efﬁciency loans, and ﬁnancing with social components, etc. As of Q4 2020, the total sustainable port- folio stays at GEL 676.3 million. Please see more details about the sustainable portfolio on page 92. The strategy and targets will be reviewed annually. Starting from 2022, the ESG-related KPIs are included in the long-term incentive plans for executive remuneration. For more details, please see the Remuneration Committee Report, page 184. The following table sets out some key metrics and targets of our ESG strategy. The GHG emissions targets for 2023 will be deﬁned during the annual review of the ESG strategy, as well as the targets of sustainable portfolio for the following years. Metrics / Targets 2022 2023 2025 Total emissions (own operations) Annual increase below 3% Net-zero GHG emissions (direct) Water consumption per employee (m3/pp) Annual increase below 1.5% Sustainable portfolio GEL 750 million – the target volume of the sustainable loan portfolio GEL 1 billion – the target volume of the sustainable loan portfolio Management KPI Long-term incentive plan (LTIP) for management linked to the total portfolio of sustainable assets Long-term incentive plan (LTIP) for management linked to the total portfolio of sustainable assets 1 The Net-Zero GHG commitment refers to the direct impact of Scope 1, Scope 2 and Scope 3, which are defined on the page 90. The ESG strategy of the Group is evolving, therefore, the Group continues to develop additional targets and metrics to measure all identiﬁed risks and opportunities of the Group. The current targets and metrics are disclosed above. TBC Bank has been awarded a special prize for its outstanding efforts to champion Sustainable Development Goals in the country at Corporate Responsibility Award Ceremony 2021 organized by Global Compact Network Georgia. 37 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 38 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ENGAGING WITH OUR STAKEHOLDERS OUR CUSTOMERS TBC’s mission is to make people’s lives easier. Our customers are key stakeholders in everything we do. We make our decisions on strate- gy, products and services with this mission in mind. OUR ENGAGEMENT We engage with our customers every day through the multiple touch points we have developed to deliver our banking and ecosystem products. This year, we have continued to work with leading inde- pendent research companies to carry out a focused analysis of cus- tomer feedback in Georgia. Traditionally, we continue to monitor and respond to customer complaints through our robust framework of branches, award-winning digital channels, social media, and call cen- tres in Georgia. In 2021, we also launched our banking operations in Uzbekistan and made sure to establish effective touchpoints with our consumers there. Our customers in Uzbekistan have appreciated our new Happiness Centres which serve as the main point of contact for our otherwise digital network. For more details please refer to the Our Customers section of the Our Stakeholders chapter on pages 82-83. OUR COLLEAGUES Our colleagues continue to drive our success and our Board makes all strategic decisions with a special emphasis on the Company’s human capital. TBC was early to recognise the changing nature of work during the COVID-19 pandemic. Our colleagues continue to work from home where this is possible. The Bank makes sure that our employ- ees have the resources to remain physically and mentally healthy, motivated and safe. Despite the challenges posed by remote working arrangements, our Board maintained active engagement with the workforce through- out the year. The designated non-executive Director for Workforce Engagement conducted multiple in-person focus groups, as well as targeted online surveys to better identify areas for improvement and to consistently bring the employee voice into the boardroom. Our management board held monthly online meetings with the full workforce on various topics related to delivering strategy and achiev- ing objectives, the importance of vaccination, workplace safety and mental health. We ran a wide-scale campaign to encourage our staff to be vaccinated against COVID-19. As a result, around 85% of all our employees were vaccinated, or were scheduled to receive a vaccine, by the end of 2021. Our colleagues had the opportunity to meet with prominent healthcare experts via Zoom and ask questions directly. TBC also continued to engage with the workforce through tradition- al annual opinion surveys. Through these engagements, we mea- sure the workforce’s happiness index and net promoter score, both of which remain high despite the pandemic-related challenges. For more details, please refer to the Our Colleagues section of the Our Stakeholders chapter on pages 74-81. Stakeholder Engagement and Board Decision Making 39 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 WHAT THEY TELL US OUR RESPONSE AND IMPACT ON BOARD DECISIONS This year, our customers have shown resilience in their ﬁnancial recovery and growth following the challenges of the COVID-19 pandemic. They have also remained welcoming of our expanding digital offerings. They appreciated business services and expertise that our staff provided to them during key moments of recovery and continue to rely support from TBC, as their main business partner. Our Uzbek call centre has been especially effective, receiving the highest customer satisfaction scores in the mar- ket. For more details please refer to the International Expansion Review section on pages 68-73. We maintained sharp focus on customer needs in the board- room. In 2021, TBC created a separate department dedicat- ed to our brand and customer experience, merging the two existing but separate functions. In April 2021 and November 2021, we strengthened our Board with new directors who have speciﬁc and relevant experience to our business and strategy, including banking, risk management, audit, IT expertise, and knowledge of the Georgian market. Our Risk Committee mon- itored the Bank’s portfolio closely during monthly meetings with an emphasis on customer experience and recovery. We maintained our focus on ensuring that our products and ser- vices were available without interruption and we continued to develop new digital offerings. Additionally, we expanded our digital offerings to include an end-to-end online disbursement capability for consumer loans and an open banking offering that allows customers to access information on all their ac- counts from different banks in one app. More information on our offerings is available in the Our Customers section on pag- es 82-83. Our colleagues have appreciated the continued flex- ibility to work from home during the pandemic. They were also interested in development opportunities for career progression. Our employees were partic- ularly engaged with the educational opportunities offered by the Bank. Through our robust Workforce Engagement process, the Board learned that our employees were satisﬁed with the channels and op- portunities available for raising their concerns to the attention of the senior management and the Board. Our workforce felt that employee interests were tak- en into consideration in the way the Board and the senior management made decisions. However, they indicated that more engagement was needed on matters related to the organisational grading system. More information on how the Board engages with the workforce and our approach to addressing their feed- back is available in the Corporate Governance State- ment on pages 141-150. The Board’s decision making maintains a special focus on our employees as key drivers and stakeholders in the Company’s overall success. This year, the Board ensured that strategic de- cisions were supported by the appropriate talent availability, compensation and work arrangements. The Board made sure that a robust human resources strategy was in place at all lev- els of management to recruit, identify, train and promote talent throughout the Group. Additionally, the Board, with support from the Remuneration Committee, ensured that clear and competitive compensation policies and principles were in place for the Group, including in our subsidiary in Uzbekistan. We continued to train our workforce internally through the free digital and in-person TBC Academy programmes, and we ex- panded the selection of modules on offer to our employees. In 2021, the Board also approved the updated Code of Conduct, which incorporated new work-from-home provisions. Our 2020 Sustainability report, published in June 2021 and avail- able at www.tbcbankgroup.com provides detailed information on our diversity policy, and all the opportunities, beneﬁts and protections available to our workforce. Furthermore, the Cor- porate Governance Statement on pages 141-150 provides ad- ditional information on how the Board responded to employee feedback. 40 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ENGAGING WITH OUR STAKEHOLDERS CONTINUED OUR INVESTORS We continue to create value through a strong and diverse business model and generate sustainable returns for our diverse shareholder base. We also work to maintain effective, long-term relationships with our debt inves- tors and partners, as well with our shareholders. OUR ENGAGEMENT We run an extensive investor relations programme, which offers in- vestors various opportunities to engage with senior management through quarterly ﬁnancial results calls, post-results roadshow meet- ings, and regular participation in investor conferences. Given the pan- demic-related travel restrictions, our engagement with investors took place online for most of 2021. However, starting from November 2021, we were able to resume in-person meetings with some of our inves- tors. During 2021, our new Board members actively engaged with the Group’s Investor Relations function to enhance our annual investor relations communications strategy. The Board continues to empha- sise transparency, openness and availability to increase stakeholders’ understanding of our strategy, business direction and how we gener- ate value for our shareholders through our various offerings. We con- tinue to develop our reporting and disclosure actively as a means to achieve these ambitions. As we disclosed in June 2021, four resolutions attracted more than 20% negative votes at our 2021 annual general meeting (AGM). In ac- cordance with provision 4 of the UK Corporate Governance Code (the Code), the Board consulted with those shareholders who voted against to understand and discuss their concerns with respect to each of the Resolutions 2, 15, 16 and 17. More information on the results of this shareholder engagement is available on page 132. OUR COMMUNITY AND ENVIRONMENT Our continued success is placed in the context of the society and environment where our customers and employees live and work. We aspire to have a positive impact by investing in areas that will stimulate sustainable economic growth and prosperity in our community, as well as preserve the environment in which we operate. TBC is an integral part of the communities where it operates. We depend on these communities and understand the positive role we can play in developing them . Strong corporate social responsibility has been in TBC’s DNA since its founding. Ways in which the Board engaged with our community and environment during 2021 included: • Regular updates on the process of developing our Environmen- tal, Social and Governance (ESG) Strategy and setting ESG targets through the active work of the Risk Committee; • Frequent updates from the Bank’s Chief Economist on the mac- roeconomic dynamics in our primary markets of operation with a sustained speciﬁc focus on the impact of COVID-19; • Updates from the Group CEO on bank-wide efforts to manage and respond to the post-pandemic challenges faced by our em- ployees and customers; • Creation of the ESG and Ethics Committee of the Board. More information on this new committee is provided in the Corporate Governance Statement on page 143. 41 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 WHAT THEY TELL US OUR RESPONSE AND IMPACT ON BOARD DECISIONS In 2021, much like the previous year, investors were interested to know that the country, our Bank and customers were recovering from the pandemic. In- vestors’ questions once again focused on asset qual- ity and capital and liquidity positions, and they were pleased to see that our strong capital generation allowed us to distribute interim dividends in 2021. In- vestors were also interested in the progress achieved in terms of our focus on digital capabilities. Our inves- tors asked questions regarding our alignment with the Hampton-Alexander gender diversity targets of 33% female representation on the Board of Directors. Investors were pleased to see that TBC achieved this target in November 2021, with the appointment of the third female non-executive Director, Nino Suknidze. In addition, our robust proﬁtability supported by strong revenue generation and recoveries in provi- sions was noted by investors. Also, the level of interest in our Uzbek expansion in- creased considerably. In many instances, a substan- tial amount of time during meetings was dedicated to discussing our strategy, competitive landscape and achievements. TBC in Uzbekistan has delivered strong results, which are covered in detail in the In- ternational Expansion Review on pages 68-73. The Board, represented by the Company’s Chief Executive Of- ﬁcer (CEO) and the Group Chief Financial Ofﬁcer (CFO), and supported by the Investor Relations function of the Group, has remained actively engaged with our shareholders. Our disclo- sure to the market remains detailed and consistent, providing timely assurance of the strength of our business to our inves- tors. On 16 July 2021, the Board announced that the improved macroeconomic outlook, coupled with a robust ﬁnancial per - formance, placed TBC Group in a strong position to maintain solid capital levels and to continue with its growth strategy in both Georgia and Uzbekistan while, at the same time, provid- ing the opportunity to resume paying dividends to sharehold- ers. The Board also approved the change in the dividend policy to include semi-annual payments (an interim and ﬁnal dividend each ﬁnancial year) and declared the ﬁrst interim dividend pay- ment in August 2021. Communities in Georgia are primarily concerned with access to ﬁnance and education, development opportunities for the youth, and support for small business and entrepreneurship. In November 2021, the Board approved our comprehensive and long-term ESG Strategy to integrate issues related to climate change, sustainable development, and ﬁnancial inclusion into our daily work. In our ESG Strategy, we set ourselves ambitious targets around sustainable lending, net-zero emissions, so- cially responsible procurement and women’s empowerment. While we recognise that this is a live document and will need continuous adjustment and improvement, we believe it is a strong statement of our commitment. This year, we also start- ed reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) requirements. For more details, please refer to our ESG Strategy on pages 26-37. We also continued to work actively with small businesses and entrepreneurs in Georgia. We continued to support young children with monthly ﬁnancial assistance for their education, and we continue to collaborate with the Young Research- ers and Innovators Annual Competition - Leonardo da Vinci, for high school students. We also continued to sponsor vari- ous projects in arts and culture, including our flagship literary award, Saba. Our employee health fund continued to display the inspiring capacity for charity and incredible team spirit of our workforce. More details about these and other initiatives are discussed on pages 82-145 of our 2020 Sustainability Re- port, available at www.tbcbankgroup.com. 42 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 As set out in Section 172 of the Companies Act, the Board understands that its fundamental duty is to act in the way that will be most likely to promote the suc- cess of the company for the beneﬁt of its members. In doing so, the Board continues to have regard, amongst other matters, to the six factors set out in Section 172 (1) (a-f). As it has done in previous years, the Board contin- ues to identify our customers, employees, and inves- tors, as well as the community and the environment we operate in, as our primary stakeholders. The Board recognises that these stakeholder groups can affect the company’s ability to be successful in the long-term and are affected by the company’s activities. So, the Board has undertaken a range of activities to engage with these groups, as described in the sections above, and has incorporated stakeholder considerations into its decision making. During the year, the Chairman, supported by the Company Secretary, ensured that the Board received the necessary information on issues affecting its key stakeholders and had adequate time to discuss these issues at its meetings. In doing so, the Chairman set up the Board’s annual schedule of work and the detailed agenda for each meeting speciﬁcally to incorporate stakeholder considerations when making decisions. The Chairman, together with the Company Secretary, also ensured that all Board members received relevant training on stakeholder-related matters, and that the induction received by new Directors was ﬁt for this purpose. The Chairman provides more insight into the principal decisions taken by the Board during 2021, and Directors’ training and induction, in the Corporate gov- ernance statement on pages 141 to 150 Engagement with key stakeholders: Our customers, community and employees in Georgia The Board continued to address the economic re- covery from challenges, caused by COVID-19, which affected all stakeholders and factored this into its decision making. The Board evaluated principal and emerging risks when making strategic decisions and considered the affect these might have on relevant stakeholder groups. More information on the Compa- ny’s material existing and emerging risks is available on pages 102-111. Section 172 Statement by the Board SECTION 172 STATEMENT In addition to ensuring that stakeholder interests were clearly presented in Board materials and considered during the decision making process, the Board organ- ised and attended meetings in Georgia to engage di- rectly with the Company’s customers and employees on-site. The Board members met the Company’s cli- ents and employee groups and visited communities where our work has the most impact. During the Board’s visit to Georgia, and when using online platforms, the Directors also engaged with and considered the interests of the Company’s oth- er stakeholders including engaging with the National Bank of Georgia, the regulating entity of the Compa- ny’s biggest subsidiary, JSC TBC Bank. Where it was not practical to engage with stakeholder groups directly, the Board relied on information from the management board. The CEO continued to hold monthly meetings with the Bank’s employees using Zoom to discuss the Company’s performance, stra- tegic plans, signiﬁcant new policies, such as the re- quirement to vaccinate against COVID-19, and other important matters affecting our workforce. The CEO reported the results from these meetings to the Board during his monthly Top of Mind updates. The designated non-executive Director for workforce engagement, or our Staff Ambassador, Tsira Kemularia implemented an intensive engagement programme in 2021. She met with employees during in-person fo- cus groups in Georgia, where pandemic-related reg- ulations allowed for such meetings and where these were deemed safe. She also held online focus groups and conducted a wider online survey. Results of this engagement were delivered to the Board and the Re- muneration Committee, in line with the requirements of the Code, and were duly incorporated into the de- cision making process for all relevant matters. More information is provided in the Workforce Engagement section on page 148. Finally, the Board asked Tsira Kemularia to continue in her role as the Staff Ambassador. Given the addition of ﬁve new board members during 2021, the Board believes that the role would beneﬁt from continuity during 2022 as well. The Board will consider rotating for the Staff Ambassador role from 2023. 43 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Engagement with key stakeholders: Our investors As noted above, the Company, represented by the CEO and the CFO of our biggest subsidiary, JSC TBC Bank continued to engage with shareholders through our robust investor relations programme during 2021. In 2021, the Board engaged more actively with the Company’s shareholders who had voted against cer- tain resolutions at the 2021 AGM. This engagement process gave the Board an important opportunity to understand some of our shareholders’ views on issuing additional capital and post-employment pay policies. More details on this engagement with shareholders is available in the Company’s published disclosures at www.tbcbankgroup.com as well as in the Chairman’s Governance Overview on pages 130-132 and the Re- muneration Committee Chair’s report on pages 175- 177. Engagement with key stakeholders: Our environ- ment and climate change The Board has overall responsibility for approving and monitoring the Company’s ESG strategy, which it approved in 2021. In January 2022, the Board created an ESG and Ethics Committee, which will ensure the Company stays focused on the ESG issues that are key for all our stakeholders. The role of the Commit- tee is to support and advise the Board of Directors as it oversees the implementation of the Company’s and its subsidiaries’ (i) strategy (ii) policies and (iii) programmes in relation to ESG matters and ensuring that the ESG Strategy is implemented across all relevant business- es of the Group. The ESG and Ethics Committee also supports the Board of Directors to promote its collec- tive vision of values, conduct and culture, and to over- see management’s efforts (i) to foster a culture of eth- ics, (ii) appropriate conduct, and (iii) ethical employee engagement within the Group. The Committee will provide strategic guidance on climate-related matters and will report to the Board of Directors, which has the overall oversight. Within the scope of ESG oversight of the ESG and Ethics Com- mittee are: a) Periodic reviews of the Group’s ESG Strategy (in- cluding climate strategy) and, its implementation, and monitoring of its execution; b) Overseeing the Group’s disclosures on ESG mat- ters, including reporting in line with the TCFD require- ments, in the annual report and accounts. Our TCFD disclosure is provided on page 27. Our Board invests signiﬁcant time and effort to de- velop the relevant skills and capacity needed among its members to incorporate ESG-related risks and op- portunities into its decision making process in a more comprehensive way. During 2021, the Board consid- ered the following obstacles when addressing cli- mate-related risks and respective decisions: generally, there is low awareness among businesses and the lo- cal society about climate change risks and opportuni- ties, and there is an overall lack of technical knowledge, expertise and required technological resources in cli- mate-related topics. Our ESG Strategy aims to resolve some of these issues over the medium to long-term. More information on the ESG strategy is available on pages 26-37. The Company also established an ESG Committee at the Executive Committee level, which is responsi- ble for implementing the ESG strategy. We also have a dedicated team closely monitoring and managing ESG parameters and strategy implementation on a day-to-day basis. For more details, please refer to our ESG Strategy on pages 26-37. We discuss the Board’s consideration of the interests of our primary stakeholder groups, as well as relevant actions and achievements of the Company in the Stakeholder Engagement section on pages 74-93, as well as in our Sustainability Report 2020, which is avail- able at www.tbcbankgroup.com. Detailed information on our governance framework and the principal deci- sions taken by the Board is provided in Corporate Gov- ernance Statement starting on page 141. 147 (2020: 149) # OF BRANCHES GEORGIAN BUSINESS REVIEW RETAIL BANKING Retail Banking Our goal is to be the ﬁrst choice for individuals living in Georgia and Georgian citizens working aboard, by providing simple, convenient and relevant ﬁnancial services by leveraging our advanced digital capabilities. Tornike Gogichaishvili OVERVIEW TBC Bank has established itself as a leading retail bank in Georgia over the past decade, serving around 1.5 mil- lion active clients. We have a strong presence across different customer segments, including mass retail and affluent customers, thanks to our customer centric approach and best-in-class omni-channel distribution platform. The latter is comprised of leading digital channels, modern branches, best-in-class call centers, as well as the wide-network of ATMs and self-service terminals, which serve as a strong substitute for bank branches. In 2021, we focused our efforts on further reﬁning our customer journey in digital channels by introducing new products and services, increasing the accessibil- ity of our payments options, as well as upgrading our branches to create a more friendly environment for our clients. In addition, we continued to leverage our data analytical capabilities to generate more tailored offer- ings and increase our proﬁtability. We also expanded our offerings to the young generation and started to target the Georgian diaspora. In 2021, our gross retail loan book amounted to GEL 6,358 million, up by 13.2% year-on-year on a constant currency basis, driven by an increase in mortgage and consumer loans, which grew by 13.3% and 13.1% with- out the FX effect, respectively. Over the same period, our deposit portfolio increased by 23.6% year-on-year on a constant currency basis, reaching GEL 5,837 mil- lion. The net proﬁt for the retail segment amounted to GEL 283.2 million. More information about the ﬁnancial performance of the retail segment is provided in the ﬁnancial review section on pages 94 to 101. MULTI-CHANNEL DISTRIBUTION NETWORK 4.2K (2020: 3.9K) # OF SELF-SERVICE TERMINALS 1.6K (2020: 1.6K) # OF ATMs 1 26K (2020: 18K) # OF ACTIVE MERCHANT TERMINALS 2 744K (2020: 652K) ACTIVE DIGITAL USERS OUR DIGITAL PLATFORMS 44% (2020: 41%) DAU/MAU 4.9 MOBILE BANKING APP RATING ON BOTH GOOGLE PLAY STORE AND APPLE APP STORE 44 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 Including partner banks 2 Active merchant terminals include POS terminals and ecommerce with at least one transaction conducted during the month. 3 Based on data published by the National Bank of Georgia as of 31 December 2021; in this context retail refers to individual customers. 4 Based on survey conducted by the independent research company IPM in December 2021. 2021 HIGHLIGHTS RETAIL LOAN MARKET SHARE 3 38.6% (2020: 39.4%) RETAIL DEPOSITS MARKET SHARE 3 40.3% (2020: 39.5%) RETAIL SHARE IN TOTAL LOAN BOOK 37.3% (2020: 38.5%) RETAIL SHARE IN TOTAL DEPOSIT PORTFOLIO 38.8% (2020: 39.6%) RETAIL OFFLOADING RATIO 97% (2020: 95%) NUMBER OF ACTIVE CUSTOMERS 1.5 mln (2020: 1.4 mln) NET PROMOTER SCORE (NPS) 4 56% OUR MAIN STRATEGIC PRIORITIES Continue enhancing our advanced omni-channel platforms During 2021, customer engagement in remote channels remained high, with 97% of transactions conducted via re- mote channels by retail customers, including 59% coming from our internet and mobile banking applications. 45 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RETAIL OFFLOADING RATIO IN 2021 Self-service terminals Internet & mobile bank ATMs Branches 59% 23% 15% 3% +11pp YoY -7pp YoY -3pp YoY -1pp YoY GEORGIAN BUSINESS REVIEW RETAIL BANKING CONTINUED In order to increase the sale of consumer loans via digital sales, in August 2021 we launched an end-to- end lending process in our mobile banking. We also continued to polish our online lending platforms TBC credit (www.tbccredit.ge) and TBC installment plat- form (www.tbcganvadeba.ge). As a result, the share of consumer loans sold via remote channels grew from 38% in 4Q 2020 to 45% in 4Q 2021. Over the same period, the share of time and savings deposits being opened remotely stood at high 73%. In addition, we introduced open banking, which en- ables our customers to add other Georgian bank ac- counts to our mobile banking applications and man- age their banking operations centrally. Furthermore, we enriched our digital banking with more handy features, including an IBAN scanner, which simpliﬁes money transfers, as well as a transaction ﬁlter, which helps customers to quickly sort transactions by different pa- rameters. In recognition of our efforts, we won “Best Integrated Consumer Bank Site in Central and Eastern Europe 2021” award from Global Finance magazine. While we are driving our transactions and sales to- wards digital channels, the branches play an important role in nourishing customer relationships and commu- nicating our vision: “to make life easier”. Therefore, this year we launched a branch redesign project with the aim of simplifying the customer journey in branches. According to the new concept, the branch is divided into several core zones and is tailored to the needs of different customer segments. By the end of the year, we redesigned 13 branches in the capital city and 5 branches in the regions. Making payments simpler than ever After entering Tbilisi’s transport payments network in 2020, in 2021 we expanded our presence in three other large cities of Georgia – Kutaisi, Gori and Poti. In these cities, customers can now pay using any of our debit or credit cards, or by dedicated transport cards issued by TBC. Transport cards are very easy to obtain and use. They are nameless cards, which are not tied to any bank account and have no expiration date. The trans- port card can be purchased in our branches, as well as several store chains. At the end of 2021, the number of our active transport cards amounted to 47,100. Another initiative on the payments side was the intro- duction of a simpliﬁed dispute process for unautho- rized card transactions, which allows us to decrease the review period from 35 to 3 days. Furthermore, we increased the number of cases for which custom- ers could get reimbursement in case of unauthorized card usage. These services are available for all insured cards, TBC Concept and wealth management cus- tomers, and they are also included in certain subscrip- tion options for our mass retail clients. Getting closer to our customers In order to better meet the needs of our customers and allow more flexibility, in the end of 2020 we introduced a subscriptions model for our mass retail. With the help of our advanced analytical capabilities, we have devel- oped carefully selected packages for our customers and are constantly updating them based on customer feedback. We are also actively using various commu- nication channels to explain the beneﬁts of this sub- scription model to our customers and encourage them to subscribe. As a result, our subscription model has attracted 192,000 users by the end of the year, which represents around 13% of total active retail custom- ers. Going forward, our goal is to shift customers from a classic banking service model to the subscription model, which will help us to provide more tailored of- ferings to our customers, increase their loyalty, reduce the churn rate, and generate more stable and long- term fee and commission income for the bank. 46 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 4Q 2020 38% 45% 4Q 2021 CONSUMER LOANS OFFLOADING IN DIGITAL CHANNELS DEPOSITS OFFLOADING IN DIGITAL CHANNELS 72% 73% 4Q 2020 4Q 2021 New Branch Design 47 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GEORGIAN BUSINESS REVIEW RETAIL BANKING CONTINUED Another important initiative during the year was the launch of TBC Z, a new sub-brand of TBC targeting the young generation, in October 2021. Under TBC Z, we offer a set of banking products and services tailored to customers between ages of 6-17 (pupils) and 18-23 (students) via our web platform www.tbcz.ge. Parents of pupils can track their children's accounts via inter- net and mobile banking, set maximum daily limits for their spending and withdrawals, and receive SMS no- tiﬁcations about transactions made by their child. The platform also offers various discounts and activities to cardholders tailored to their interests regarding edu- cation, entertainment, hobbies, transportation and so on. In the last three months of 2021, our youth segment reached 165,000 active customers. Furthermore, this year we took up a new challenge – to become the number one choice for Georgian citizens working abroad – by providing simple, convenient and relevant ﬁnancial services. For this purpose, we set up a dedicated team and started to explore the needs of the diaspora in order to create tailored products and ser- vices, as well as enhance the existing digital platforms to launch dedicated services for them. Today, there are around 1.3 million emigrants living abroad, which trans- lates into 350 thousand potential clients, further sup- porting our growth, according to our estimates. We also continued to run our wide-scale loyalty pro- gramme, Ertguli, which is part of our retail custom- er-centric approach and allows our customers to gath- er loyalty points by paying with TBC cards at more than 300 partner companies as well as access special offers and discounts. Customers gain more points by paying with credit cards compared to debit cards. This pro- gramme both helps us to build customer loyalty and facilitates payment business and card usage. Continue to leverage our advanced data analytical capabilities Within the scope of our three-year data analytical road- map, which was developed in 2018 with the support of a leading global consultancy ﬁrm, we have launched and scaled up the following projects in the retail seg- ment, generating an extra GEL 20 million in 2021. Ongoing projects • Consumer and mortgage loan price optimiza- tion and process automation – this is an on-going project, which is continuously ﬁne-tuned. Based on detailed analysis of clients’ spending behavior, risk proﬁle and other characteristics, we determine the price sensitivity for each customer and devel- op tailored offerings for each individual client. The customer level price calculation process is fully automated and integrated into the loan origination system. • Customer lifetime value – this project is another very important step towards customer centricity, as it envisages assessment of such metrics as: cus- tomer engagement scores, customer churn, and estimating customer lifetime value. Launched and scaled projects: • Subscriptions model for mass retail customers – as described in our sub-section “getting closer to our customers” above. • TBC Concept service model for affluent custom- ers – as described in our TBC concept sub-section below. • Next best product in retail – this project aims to increase conversions by developing tailored offers based on a state-of-art system algorithm, which is available in all our sales channels. The project proved to be very successful in increasing custom- er satisfaction levels and increasing the conversion rate. • Deposit pricing and proﬁtability improvement – this project envisages effective management of our retail deposits via tailored offerings to clients. When opening a term deposit, every single cus- tomer receives an alternative offer, which is the best possible proposition for him/her under the given conditions. In 2021, 32% of all newly opened or renewed term deposits were placed with alter- native terms. Further develop our affluent sub-segment, TBC Con- cept In 2020, TBC’s affluent banking moved from stan- dard banking to an innovative, subscription banking business model, which offers our customers various subscription packages better tailored to their speciﬁc needs. Our “fully digital package” became especial- ly relevant during the pandemic, as it allows our cus- tomers to manage their daily banking operations and 48 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 49 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Further develop our affluent sub-segment, TBC Concept In 2020, TBC’s affluent banking moved from standard banking to an innovative, subscription banking business mod- el, which offers our customers various subscription packages better tailored to their speciﬁc needs. Our “fully digital package” became especially relevant during the pandemic, as it allows our customers to manage their daily banking operations and receive ﬁnancial advice online, while having access to all private banking customer beneﬁts. In 2021, we also launched a new package, which is designed for individuals who need a wider range of ﬁnancial tools and are interested in brokerage services to better manage their funds. In addition, within this package, we offered our clients two new premium cards: Visa Signature and Mastercard World Elite, which offer its holders a wide range of services, privileges, discounts and VIP services all over the world. We also continued to successfully operate our TBC Concept Flagship space, which was opened in 2020 and allows us to seamlessly merge banking with lifestyle. As a conceptual space, it was strategically developed to have 80% lifestyle and 20% banking areas. The areas of the Flagship space include self-service and personal banking zones, exhibitions, library and co-working spaces as well as a cafe. As a result, the Flagship space became a favorite spot for banking, recreational activities and co-working for many of our Concept clients. During 2021, TBC Concept has maintained its strong positioning in lifestyle offerings for its clients. With an increased data-centered approach, TBC Concept has offered its clients over 300 special offers and promotions throughout the year revolving around travel (discovering Georgia during the pandemic), shopping (mainly online), recreational ac- tivities, online platforms and much more. Furthermore, we continue to offer our Concept clients concierge services, which cover trip planning, studying abroad, restaurant reservation, flower delivery, dry cleaning, laundry, car service and much more. We are also proud that our affluent banking services, together with the wealth management service offered by our CIB segment, won several prestigious awards: OUTLOOK Going forward, in line with our aspiration to make life easier for our customers, we will continue to accelerate sales growth in digital channels. Furthermore, our focus is to further strengthen our position in the Georgian regions and increase the number of active clients, as well as increase the non-mortgage share of our total loan portfolio. THE BEST PRIVATE BANK IN GEORGIA 2022 from Global Finance magazine THE BEST PRIVATE BANK IN GEORGIA 2021 from PWM and the Banker magazine Loan Portfolio (GEL million) +7.9% 2020 3,763 4,061 2021 Deposit Portfolio (GEL million) +11.4% 2020 2,804 3,125 2021 # of Customers +7.0% 2020 96,385 103,162 2021 TBC CONCEPT GEORGIAN BUSINESS REVIEW MSME BANKING MSME Banking Our goal is to be a reliable partner and supporter of Georgian businesses from startups to well established enterprises, by providing a full range of convenient products and solutions at every stage of their development. We are also dedicated to developing a strong local business community by fostering various initiatives and programmes. Tornike Gogichaishvili OVERVIEW Over the years, TBC Bank has established itself as a leading partner for micro, small and medium enterprises (MSMEs) by supporting their growth and development. As a result of our continuous efforts, 63% 1 of all newly-registered businesses in Georgia choose TBC. We continue to provide all-round support to business- es by offering them all the necessary tools and services in an environment still widely shaped by the COVID-19 pandemic. Our strategic priorities are expanding to digital and payment solutions, growing our share in the micro sub-segment, and enhancing our renowned business support programme. Our efforts, combined with the revival of business ac- tivities, led to an increase in the MSME loan book of 23.3% to GEL 4,141 million during 2021, on a constant currency basis. Over the same period, the deposit portfolio increased by 18.7% and reached GEL 1,559 million, without the FX effect. In 2021, our net proﬁt in the MSME segment mounted to GEL 164.5 million. More information about the ﬁnancial performance of the MSME segment is provided in the ﬁnancial review section on pages 94-101. 50 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIVERSIFIED MSME PORTFOLIO WITH A STRONG PRESENCE IN THE AGRICULTURE, TRADE AND HOSPITALITY & LEISURE SECTORS Trade Construction Food Industry Real Estate Hospitality & Leisure Transportation Agriculture Healthcare Manufacturing Automotive Oil & Gas Other Pawn Shops Services 13.2% 12.8% 5.2% 5.1% 15.0% 1.2% 3.3% 3.2% 2.6% 2.6% 1.6% 10.8% 8.1% 15.3% 1 Out of which 40,000 are legal entities and 41,000 are individuals with business loans 2 Data is for January-September 2021, source: www.napr.gov.ge, the National Agency of Public Registry 3 Includes business loans up to GEL 1 million OUR MAIN STRATEGIC PRIORITIES Growing our presence in the micro sub-segment, while maintaining leadership in the SME sub-segment As we strive to support MSME businesses of all sizes, this year we focused on increasing our presence among the smallest MSME clients, the micro sub-segment 3 . In order to increase our presence in this sub-segment, we undertook several initiatives: • We continued the automatization of the loan approval process in the micro sub-segment, the implementation of which was hindered last year due to the pandemic. In 2021, we successfully launched fully automatic loan approv- als so that loans up to GEL 100,000 could be approved automatically using pre-determined rules and a scoring model, thus signiﬁcantly decreasing the time-to-yes period. • We also changed the staff motivation system of our front-ofﬁce employees with a higher focus on rewarding loan issuances with smaller ticket sizes. As a result, our micro sub-segment loan portfolio grew by 26.9% in 2021. On the SME side, in order to further streamline our processes, we implemented a ﬁnancial statement automatization tool, which automatically generates a business entity’s ﬁnancial statements based on inputted data. This tool signiﬁ- cantly speeds up the loan approval process, as well as eliminates the possibility of human error. As a result, the time- to-yes decreased by around two days for these loans. 2021 HIGHLIGHTS NUMBER OF ACTIVE CUSTOMERS 1 81K (2020: 73K) OF NEWLY REGISTERED LEGAL ENTITIES CHOSE TBC BANK 2 63% (2020: 59%) MSME SHARE IN TOTAL LOAN BOOK 24.3% (2020: 23.2%) MSME SHARE IN TOTAL DEPOSIT PORTFOLIO 10.4% (2020: 10.9%) OF OUR ACTIVE CUSTOMERS USE BUSINESS INTERNET OR MOBILE BANKING 98% (2020: 98%) 51 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Increasing digitalization In 2021, our digital services remained in high demand, as the trends set by the pandemic largely continued into this year. Around 98% of our active legal custom- ers use business Internet or mobile banking, with DAU/ MAU ratio standing at 26% by the end of 2021. This year, the most notable innovation among our dig- ital offerings was the introduction of open banking in our mobile banking application. Open banking brings together all the accounts of a client at various Georgian banks and allows them to check their accounts in one place. This functionality was particularly useful for our business clients, as around half of them have accounts in more than one bank. Previously, in order to check their balances and transactions, clients had to log into separate banking apps and switch between them. GEORGIAN BUSINESS REVIEW MSME BANKING CONTINUED We are pleased that our consistent efforts towards innovation and digitalization have been recognized internationally with multiple awards from Global Finance: We have also been actively upgrading our business app, which was launched in 2020 to make it more con- venient for our MSME clients. A number of new fea- tures have been added to the app in order to better accommodate our customers’ needs, such as imple- menting a new module for utility payments and auto- matic payments as well as allowing transfers using any foreign currency. Fine-tuning our payments solutions In 2021, we continued to introduce innovative and con- venient payment solutions for our customers: • In e-commerce, we launched an alternative pay- ments method for small businesses, which allows merchants to process e-commerce payments in a simpler and cheaper way than using a tradition- al e-commerce checkout. After receiving an order from a client, merchants are able to generate a pay- ment link through a dedicated platform and send the link to the customer. Upon clicking the link, the client then chooses a suitable payment option: any bank’s mobile or internet banking, QR payment through TBC’s mobile bank, Apple Pay, or payment with our loyalty programme Ertguli points. • Furthermore, in order to facilitate online payments, we launched a new platform, Payments Space (available on www.tbcpayments.ge) for our mer- chants, which allows them to easily control their daily transactions, receive analytical reports and manage their payments products. The platform is free of charge. • On the POS side, we introduced Android POS solu- tion, which is a smarter alternative to the traditional POS, aimed primarily at small & medium business- es. Thanks to its operational system (Android), it is more flexible, allowing to add non-payment func- tionality to POS terminals and offering better cus- tomer experience for merchants and customers. As of 31 December 2021, we already had 100 active Android POS terminals. Enhancing our business support programme We are committed to facilitating the success of our business clients by providing them with a full-scale business support programme, enriched with ex- tensive educational resources and technological tools, which are accessible from a single platform www.tbcbusiness.ge. We have the largest business education programme in Georgia, which has attracted over 30,000 attendees through around 1,000 lectures over the past eight years. The programme has been developed in partnership with the Asian Development Bank and provides free access to live lectures on various relevant topics, such as technology, digital marketing, human resources etc. 52 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Best Corporate/Institutional Online Portal 2021 in the world; Best Corporate/Institutional Online Portal 2021 in Central and Eastern Europe; Best Integrated Corporate/ Institutional Banking Site 2021 in Central and Eastern Europe ; Best Corporate/Institutional Mobile Banking App 2021 in Central and Eastern Europe ; Most Innovative Corporate/ Institutional Digital Bank 2021 in Central and Eastern Europe. In order to help businesses ﬁnd and utilize the most suitable tools and software, we created an online plat- form www.businesstools.ge. This platform connects developers with users and offers a convenient way to ﬁnd, compare and review various programmes created for accounting, IT management, project management and other ﬁelds. We continue to offer our business customers Business Club, a unique subscription model that combines a bundle of ﬁnancial products and services with exten- sive non-ﬁnancial offerings, such as exclusive face-to- face and group meetings, seminars and workshops with market-leading specialists in various areas, as well as special offers from our partners. Around 30% of our MSME legal clients are Business Club members. In order to reward innovation and creativity, as well as encourage entrepreneurs, we have established several renowned annual events: • The Annual Business Award Ceremony, estab- lished back in 2015, aims to identify outstanding businesses in Georgia, help them develop, gain publicity and recognition and inspire other en- trepreneurs. This year, the event was organized in partnership with EFSE and Forbes Georgia and attached 41.3 million views in media, while top of mind awareness reached 70% 1 . Over the years, the ceremony has attracted more than 3,000 business- es from various ﬁelds. • The Annual Apps Challenge, which was ﬁrst es- tablished in 2020. This year, 40 teams entered the competition with unique and innovative app ideas, for the chance to become one of three winners and receive funding to bring their ideas to life. Additional support for startups and rural enterprises Since 2017, we have run Startuperi, a start-up orient- ed project offering full-scale support to companies in an early stage of development. The programme aims to foster entrepreneurship by providing easily acces- sible funding, media & PR support, free educational programmes and conferences, as well as partnerships with large companies in Georgia. The outstanding portfolio of the programme is comprised of 493 active loans, in the total amount of GEL 196.9 million as of 31 December 2021. In order to foster business development in rural areas and help to create new job opportunities, we are ac- tively supporting local businesses by providing afford- able ﬁnance. We partnered with three government pro- grammes, “Produce in Georgia”, “Host in Georgia” and “Preferential Agro Credit”, to support agricultural and hospitality businesses. The programmes offer lowered interest rates through governmental subsidies. In 2021, we disbursed 2,096 loans in the amount of GEL 530.0 million within these programmes. OUTLOOK Going forward, we will stay focused on providing our clients with a superior customer experience, simplify- ing and digitalizing our products, increasing our pres- ence in the small micro sub-segment in the regions, further developing our subscription model, as well as remaining the best business supporter in the country. 1 Based on survey conducted by an independent research company, ACT 53 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 54 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GEORGIAN BUSINESS REVIEW CIB BANKING CIB Banking Our goal is to be the number one trusted strategic partner for large enterprises and high net worth clients by helping them to grow and prosper. We distinguish ourselves by sector speciﬁc, tailor-made solutions as well as strong industry and product expertise, which are the key value drivers for our clients. George Tkhelidze OVERVIEW Over the past decades, TBC Bank’s CIB business has been a leading provider of corporate and investment banking solutions in Georgia, helping businesses to optimize their funding structure and effectively man- age their risks. We hold the number one market posi- tion across all major products including loans, depos- its and trade ﬁnance products. We offer a full suite of lending and transactional products, advisory services in managing and structuring complex transactions, leading trade ﬁnance capabilities, strong sector exper - tise across all major industries of the economy, as well as additional ﬁnancial resources via partnerships with International Financial Institutions and government programmes. Since January 2021, we have integrat- ed our wealth management (WM) business into our CIB business in order to better serve our clients with a combined offering, as the majority of our high net worth individuals are shareholders and C-level execu- tives in our CIB clients. During 2021, we continued to expand our business and attract new large and medium corporate borrowers op- erating in different industries. As a result, our gross loan book amounted to GEL 6,548 million, up by 19.5% year- on-year on a constant currency basis, while the deposit portfolio stood at GEL 7,331 million, up by 33.7% year- on-year without the FX effect. Over the same period, the corporate guarantees and letters of credit portfolio amounted to GEL 1,939 million, broadly stable at con- stant currency basis. In terms of proﬁtability, our net proﬁt in the CIB segment amounted to GEL 380.3 mil- lion. More information about the ﬁnancial performance of the CIB segment is provided in the ﬁnancial review section on pages 94-101. 56 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 A WELL-DIVERSIFIED LOAN PORTFOLIO WITH A STRONG PRESENCE IN ALL MAJOR SECTORS OF GEORGIAN ECONOMY Healthcare Trade Construction Food Industry Energy & Utilities Real Estate Hospitality & Leisure Automotive Financial Services Transportation Oil & Gas Other Agriculture Individual Services 16.4% 12.5% 4.8% 4.2% 5.5% 1.3% 1.4% 3.1% 3.1% 3.0% 2.4% 2.1% 10.1% 9.1% 21.0% 1 Based on data published by the National Bank of Georgia as of 31 December 2021; in this context, corporate refers to legal entities. 2 Out of which 4,340 are corporate clients and 2,660 Wealth Management clients. 2021 HIGHLIGHTS CIB LOAN MARKET SHARE 1 39.1% (2020: 38.6%) CIB DEPOSITS MARKET SHARE 1 40.5% (2020: 34.5%) CIB LOAN SHARE IN TOTAL PORTFOLIO 38.4% (2020: 38.4%) CIB DEPOSIT SHARE IN TOTAL PORTFOLIO 48.7% (2020: 45.5%) CIB GUARANTEE AND LETTER OF CREDITS MARKET SHARE 1 48.0% (2020: 52.4%) NUMBER OF CUSTOMERS2 7K (2020: 6K) OUR MAIN STRATEGIC PRIORITIES IN 2021 Corporate banking Improved client coverage model In 2021, we revised our business model to ensure more focused coverage of our corporate clients and created three separate, dedicated divisions: strategic clients (top 50 groups of related companies), large and medium sized corpo- rates (industry teams) and vulnerable clients. The new structure enabled us to better tailor our offerings to the needs of different customer groups and proactively manage our credit risk. As a result, the share of large and medium sized customers in our CIB portfolio increased by 5.7 pp to 38.1%, while our NPL ratio in CIB improved by 1.0pp and amount- ed to 1.4% by the end of 2021. Increased focus on transaction banking We also set up a new dedicated team to manage non-lending business covering FX transactions, deposits, cash management solutions and other non-lending products, with speciﬁc product expertise and sales capabilities, in order to better serve our CIB customers and diversify our non-interest income streams. One of the initiatives rolled out by this team includes the introduction of new bulk cash deposit machines to our branches, which provide a fast and secure way of depositing large amount of cash to bank accounts. By the end of 2021, we have already installed 38 new machines in our branches and clients’ premises. Going forward, we are planning to add 12 more machines and expect to collect at least GEL 500 million in incremental cash from corporate clients per year. In 2021, the volume of FX transactions from corporate clients amounted to GEL 14,266 million, up by 52% year-on-year, while cash management volumes from corporate clients increased by GEL 934 million or 23.5% year-on-year and amounted to GEL 4,906 million. Commercial Excellence Transformation Programme We achieved good progress in our commercial excellence transformation project, which was launched last year. In 2021, the project resulted in an additional c. GEL 10 million net banking income and reduced time spent on back ofﬁce tasks by 15%. Within the scope of this project, an advanced IT tool was developed that provides a 360 degree view on each client, based on industry benchmarks, publicly available and internal data. It also calculates customer proﬁtability and con- ducts simulation analysis. As a result, our bankers are able to better understand and capture the potential of existing and target clients and use this information in account planning, customer proﬁtability management, decision-mak- ing, and negotiations with clients. 57 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Investment Banking – TBC Capital TBC Capital is a wholly-owned investment banking subsidiary of TBC Bank and a licensed brokerage ﬁrm. TBC Capital was established in 1999 and has been a leader in investment, brokerage and corporate ﬁnance solutions. As a member of TBC Group, the company is uniquely positioned to help clients of all backgrounds meet their ﬁnancial objectives from structuring to executing deals or advising on complex corporate transactions. TBC Capital is also a shareholder in the Georgian Stock Exchange and contributes to the development of its infrastructure and the integra- tion of the domestic capital market into international markets. Staying active on bond markets In 2021, TBC Capital maintained its leadership position in terms of total bonds issued on the Georgian market. As the economy rebounded from the pandemic, we conducted several milestone transactions including acting as a Joint Lead Manager, together with a number of leading international investment banks, on two Eurobond placements: US$ 500 million by Georgian Railway and US$ 75 million Additional Tier-1 Capital Bonds by TBC Bank and as a Co-Man- ager on US$ 500 million Eurobond issued by Government of Georgia. On the local market, TBC Capital acted as Sole Arranger for GEL 35 million bond placement by Nikora Trade and as a Joint Lead Manager on US$ 12 million placement by Lisi Lake Development. TBC Capital was also active in private bond placements and acted as Sole Arranger on US$ 31 million private bond placement for TBC PLC as well as three private bond placements for EBRD and FMO. As a result, the public and private corporate, as well as government bonds issued by TBC Capital during the year accounted for 52% 1 of total bonds issued. In addition, this year, TBC Capital introduced a new real estate advisory service and already closed two deals with the total value of c. US$ 26.4 million. Enhancing our research services TBC Capital’s research division provides access to comprehensive data and analytical insights for large corporate borrowers and investors. Its coverage comprises regular macro, sectoral, equity market, and ﬁxed income updates as well as in-depth analytical reports on signiﬁcant developments and events. This year, the research division con- tinued to provide corporate borrowers and investors with regular updates on the recovery of the Georgian economy through its regular, weekly, monthly and quarterly publications and online events. In addition, it successfully launched LISI US$ 12,000,000 3 YEAR PUBLIC PLACEMENT 6.50 % DECEMBER 2021 PLACEMENT AGENT GEORGIAN RAILWAY US$ 500,000,000 7 YEAR PUBLIC PLACEMENT 4.00 % GREEN NOTES JUNE 2021 JOINT LEAD MANAGER GEORGIA US$ 500,000,000 5 YEAR PUBLIC PLACEMENT 2.75 % APRIL 2021 CO-MANAGER LISI GEL 157,500,000 1.5 YEAR PRIVATE PLACEMENT 3M TIBR JUNE 2021 LEAD MANAGER FMO GEL 34,000,000 5 YEAR PRIVATE PLACEMENT NBG 3M CD MAY 2021 LEAD MANAGER EBRD GEL 87,000,000 3 YEAR PRIVATE PLACEMENT 3M TIBR NOVEMBER 2021 LEAD MANAGER NIKORA GEL 35,000,000 3 YEAR PUBLIC PLACEMENT 3M TIBR + 3.50 % NOVEMBER 2021 PLACEMENT AGENT JSC TBC BANK US$ 75,000,000 ADDITIONAL TIER ONE PERPETUAL BONDS OCTOBER 2021 JOINT LEAD MANAGER TBC BANK GROUP PLC US$ 31,000,000 3 YEAR PRIVATE PLACEMENT AUGUST 2021 PLACEMENT AGENT GEORGIAN BUSINESS REVIEW CIB BANKING CONTINUED 58 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 Based on internal estimates coverage of equity markets and provided the audi- ence with weekly updates on developments in glob- al equity markets. Furthermore, our research division closely monitored the recovery of the tourism and real estate sectors through its monthly sector watch se- ries. Overall, in 2021 TBC Capital published more than 200 publications. The full list of reports is available at www.tbccapital.ge. The coverage of our reports continues to increase both locally and among international investors and analysts. Our macro updates are also broadcast on a regular ba- sis via local business media online channel. Moreover, in 2021 TBC Capital started to produce regular vid- eo updates on some of the most important research ﬁndings and economic developments to diversify its format of content. In addition, throughout the year we organized several large-scale online conferences for our customers, covering challenges and trends in the Georgian economy from a macro as well as a sectoral perspective. In 2021, TBC Capital became research contributor to Bloomberg and Reﬁnitiv, targeting wider international audience interested in Georgia. Private Banking - TBC Wealth Management TBC WM is Georgia’s leading wealth management franchise, serving around 2,700 resident and non-res- ident high net worth clients. We offer a wide range of personalized banking, investment and insurance prod- ucts that are carefully designed to meet the individual ﬁnancial goals of our customers and maximize their wealth. In addition, our clients beneﬁt from exclusive lifestyle offerings for major elite events happening in the country. We also have a representative ofﬁce in Israel, TBC Invest, which acts as an intermediary with high net worth clients from Israel and offers fast and efﬁcient consulting services on the ground. In 2021, we rebranded TBC VIP to TBC Wealth Man- agement and launched a dedicated WM webpage (www.tbcwm.ge) for our existing and potential clients, which provides comprehensive information about our operations. In addition, we introduced a new product – Visa Inﬁnite, Visa’s most elite card, exclusively for WM clients. Considered a symbol of recognition, the prestigious Visa Inﬁnite provides clients with comfort and bespoke beneﬁts, both in Georgia and across the world. 59 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 • Best Treasury and Cash Management Bank in Georgia 2022 • Best Trade Finance Provider in Georgia 2022 • Best Foreign Exchange Provider in Georgia 2022 • Best Private Bank in Georgia 2022 • Best Investment Bank in Georgia 2021 Global Finance • Best Private Bank in Georgia 2021 PWM and the Banker magazines ENTRÉE The Georgian bakery network “Entrée” has been present in the Georgian market since 2008 and has emerged as one of the country’s most suc- cessful fast casual dining concepts in recent years. We became Entrée’s partner in 2011 and have stood by their side since then. In summer 2021, with our support, Entrée opened a new facility in Notting Hill, London and serves cus- tomers with Georgian cuisine along with French dishes. This is our second cooperation with En- trée; the ﬁrst was in 2015, when Entrée success- fully launched its ﬁrst café abroad in Baku. 61 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GEORGIAN BUSINESS REVIEW MAJOR SUBSIDIARIES TBC Insurance Our goal is to be a 5-star retail insurance company, easily accessible to every individual living in Georgia, providing services through our best-in-class client oriented digital channels ance market share stood at 22.2%, up by 1.1 pp year-on- year. Our non-health services cover motor, travel, per- sonal accident, life, property, business property, liability, cargo and agro products. In 2021, we also entered the retail life insurance market. In 2019, we expanded our operations by entering the health insurance market, aiming to target the premium segment through convenient offerings, a best-in-class customer experience as well as a strong focus on dig- italization. In 2021, the number of our health insurance clients reached 29,100, while our market share in the corporate segment amounted to 9.2%, up by 3.9 pp year-on-year. The breakdown of TBC Insurance’s GWP by segments and products is presented below: TBC Insurance is a wholly-owned subsidiary of TBC Bank, which was acquired by the Group in October 2016 and is the main bancassurance partner for the Bank, with a share of around 35.0% in its total gross written premium (GWP) as of 31 December 2021. TBC Insurance serves its customers with a highly digitalized approach, which includes a website and a mobile app for health insurance. The company is rep- resented in both non-health and health insurance seg- ments. In 2021, TBC Insurance was well regarded by its customers with an NPS 2 of 65% - the best score among its peers. TBC Insurance has a strong presence in the non-health insurance market, serving both individual and business clients. We have the leading position in the retail seg- ment of non-health insurance with a market share of 37.3% as of 31 December 2021, stable on year-on-year basis. For the same period, our total non-health insur- 2021 HIGHLIGHTS NON-HEALTH INSURANCE RETAIL MARKET SHARE 1 37.3% (2020: 37.3%) 22.2% (2020: 21.1%) GROSS WRITTEN PREMIUM(GWP) GEL 114 mln (2020: GEL 86 mln) 65% NON-HEALTH INSURANCE MARKET SHARE 1 NPS 2 300K (2020: 260K) NUMBER OF CUSTOMERS 62 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TOTAL GWP IN 2021 BY SEGMENTS Corporate Retail MSME 56.7% 25.7% 17.6% 1 Market share without mandatory border motor third party lia- bility insurance (MTPL). With mandatory border MTPL, retail and total non-health insurance market shares were 33.8% and 21.3% respectively. Source: www.insurance.gov.ge 2 The Net Promoter Score (NPS) was measured in January 2022 by an independent research company, Anova 3 Source: Geostat and www.insurance.gov.ge 4 The number of policies sold via digital channels divided by the total number of voluntary retail policies 5 The number of motor claims regulated distantly (by web & call center) divided by the total number of motor claims 6 The number of health insurance claims resolved distantly (by web & call center) divided by the total number of health insur- ance claims 7 Net insurance claims plus acquisition costs and administra- tive expenses divided by net earned premium Our focus remains to strengthen our non-health and health insurance businesses by leveraging our strong digital capabilities and superior customer experience as well as generating synergies between the two busi- ness lines. The Georgian insurance market has high growth po- tential, as it is under-penetrated compared to the CEE region, with a total GWP to GDP ratio 3 of 1.23% as of 2021. The non-health insurance market represents 60.5% of the total insurance market and has grown by 17.1% year-on-year in 2021. Over the same period, the health insurance market has grown by 14.4%. MAIN ACHIEVEMENTS AND STRATEGY In 2021, we remained committed to further strength- ening our digital presence, as well as diversifying our product offerings. Non-health insurance business As the COVID-19 pandemic carried on into 2021, we continued to serve our customers with an increased focus on digital channels throughout the year. As a re- sult, in 2021, the number of policies sold through digital channels increased by 23% reaching 79,230, leading to a sales offloading ratio of 70.4% 4 , up by 1.6 pp year-on- year. As for motor insurance, the claims reimbursement offloading ratio 5 amounted to 74.4%, up by 5.0 pp year- on-year, while 58.6% of total motor policy renewals were made digitally. In September 2021, we introduced a new voluntary life insurance product in the retail segment. We offer life insurance to our customers through two packages, in- dividual and family. The policies can be purchased on- line, through our web platform. Over the four months to December 2021, we issued up to 767 policies collect- ing GEL 329 thousand in premiums. As for the business segment, we signiﬁcantly in- creased penetration in the untapped MSME market as GWP on our MSME bancassurance platform almost doubled year-on-year and reached GEL 5.4 million. This increase was due to a new staff motivation sys- tem, as well as an upgrade of the platform, which made it more user friendly and improved the sales process. In terms of the corporate segment, we have attracted several large companies operating in the energy and service sectors. Health insurance business We continue to provide our health insurance clients with convenient offerings through sophisticated digi- tal channels. In 2021, based on our customer feedback, we carried out a complete redesign of the health in- surance app in order to make it more user-friendly and intuitive. As a result, our digital users reached 9,600, while downloads of the app amounted to 12,130 by the end of the year. In 2021, we also began expanding into the mid premi- um segment by offering customers tailored policies at a lower cost. Over the year, the number of our health insurance clients reached 29,100, which was mostly due to at- tracting 182 new companies. The digital parameters remained high, with the claims reimbursement off- loading ratio 6 standing as high as 89.4%. Financial Overview In 2021, GWP of our non-health insurance business in- creased by 23.4% and amounted to GEL 95.8 million, while net earned premium increased by 16.7% year-on- year and stood at GEL 74.6 million. Over the same peri- od, the gross written premium of our health insurance business increased by 106.8% and stood at GEL 18.0 million, while net earned premium increased by 73.2% and amounted to GEL 12.8 million. In 2021, our total net combined ratio 7 stood at 85.5%, down by 1.3 pp year-on-year, while respective ratio without health insurance business stood at 79.1%, down by 3.4 pp year-on-year. Overall, our net proﬁt increased by 37.0% and amounted to GEL 13.8 million in 2021. 63 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TOTAL GWP IN 2021 BY PRODUCTS 34.2% 28.2% 14.4% 15.9% 7.3% Life & personal accident Motor Property Other Health GEORGIAN BUSINESS REVIEW MAJOR SUBSIDIARIES CONTINUED TBC Pay We aspire to become the largest payments provider in Georgia by further strengthening our digital capabilities as well as diversifying and ﬁne-tuning our services. Additionally, we plan to become the largest payments aggregator in Georgia by implementing open banking capabilities. TBC Pay is a leading payments provider in Georgia offering individuals and businesses convenient pay- ment solutions. TBC Pay is a wholly owned subsidiary of TBC Bank and has been operating since 2008. TBC Pay offers a wide range of services including utility payments, mobile top-ups, loan repayments and mon- ey transfers through its wide and easily accessible dis- tribution network. TBC Pay mainly services its customers via self-service terminals conveniently distributed across the country. The number of self-service terminals amounted to c. 4,205 at the end of 2021, up by 300 compared to the last year. These terminals allow customers to conduct a range of payments instantly on a 24/7 basis, using both cash and cards. In addition, TBC Pay operates a website (www.tbcpay.ge), along with a mobile app, which of- fers a simple and engaging interface. In 2021, we also added international cards to our digital payments channels. Overall, in 2021, the number of payments conducted through digital channels increased by 49% year-on-year, while number of active digital users reached c. 51,000. For businesses with large cash operations, TBC Pay offers cash management services, in the form of spe- cialized cash boxes. After depositing cash into these boxes, the sum is automatically transferred to the company’s bank account. The cash boxes are secured through a strong authorization process. In order to support the increased scale of business, the company is streamlining its processes and implement- ing new technologies. In 2021, TBC Pay successfully completed agile transformation in its IT department and started to roll it out in other departments as well. In addition, the company began implementing an enter- prise-wide software, which is planned to be launched next year. Over 2021, the volume of transactions conducted through self-service and cash management terminals as well as digital channels grew by 40% to GEL 5,636 million. Over the same period, net commission income reached GEL 38 million, up by 15% year-on-year, while EBITDA amounted to GEL 23 million, up by 8% year- on-year. 2021 HIGHLIGHTS NUMBER OF SELF-SERVICE TERMINALS 4.2K (2020: 3.9K) +40% YoY GEL 5.6 bln VOLUME OF PAYMENT TRANSACTIONS 64 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TBC Leasing Our aspiration is to further strengthen our leading market position via developing tailored solutions, as well as dedicated digital offerings. In addition, our priority is to increase the share of green/ renewable and energy efﬁcient projects. TBC Leasing, a wholly-owned subsidiary of TBC Bank, was established in 2003 and has since become a lead- ing leasing services provider in the Georgian market with a market share 1 of 77% as of 31 December 2021, up by 5 pp year-on-year. TBC Leasing serves both individ- uals and business clients, offering them a full range of leasing solutions and advisory services, including ﬁ- nancial leasing, operating leasing, sale and leasebacks tailored to customers’ needs. TBC Leasing serves its retail customers at its service centers and at partner vendors’ sales points. As for business clients, TBC Leasing actively leverages TBC Bank’s digital channels and branches. As of 31 December 2021, our leasing portfolio stood at GEL 254 million and remained broadly stable on a con- stant currency basis. 88% of the portfolio was related to legal entities, with strong positions in the construction, service and manufacturing sectors. The remaining 12% of the portfolio originated from individual clients and consisted of new and used cars, with respective shares in the total retail portfolio of 51% and 49%. In 2021, net proﬁt of TBC Leasing amounted to GEL 11.6 million. TBC Leasing continues its active engagement in ﬁ- nancing of green, renewable and energy efﬁcient as- sets. Over the past three years, our green leasing port- folio increased by 57% and amounted to GEL 5 million. In 2021, the company launched a PV solar panel grant programme in cooperation with the Green for Growth Fund (GGF), EU4Energy and Finance in Motion, which enables legal entities as well as individuals to signiﬁ- cantly decrease the design and installation costs of solar panels. In January 2021, Fitch credit rating agency maintained TBC Leasing’s existing long term credit rating of BB-, which is the highest credit rating among Georgia’s non-banking institutions, and, in April 2021, revised the outlook of the credit rating from Negative to Stable. This credit rating will increase TBC Leasing’s credit- worthiness and helps us to attract new creditors and lower the cost of funding. During 2021, the company successfully raised additional funding of US$ 30 mil- lion, in the form of senior loans, from Development Financial Institutions as well as International Financial Institutions. Finally, we remain dedicated to raising awareness among the Georgian population regarding the bene- ﬁts of leasing solutions, as the Georgian leasing market is still highly underpenetrated with a leasing to GDP ratio of just 1%1. 2021 HIGHLIGHTS MARKET SHARE 1 77% (2020: 72%) 2,265 (2020: 2,846) NUMBER OF CUSTOMERS GEL 254 mln (2020: GEL 280 mln) LEASING PORTFOLIO 1 Based on internal estimates 65 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GEORGIAN BUSINESS REVIEW OUR ECOSYSTEM Creating a Digital Ecosystem Our goal is to become the largest digital ecosystem in the country and an indispensable part of people’s daily lives by providing a seamless customer experience. 2021 HIGHLIGHTS NUMBER OF UNIQUE VISITORS 1.7 mln NUMBER OF LEADS GENERATED 127,000 HOUSING The housing part of our ecosystem consists of two platforms – Livo.ge 1 and Myhome.ge 2 . In December 2021, together they held a 50% market share 3 among comparable housing platforms based on the number of unique monthly visitors, which amounted to 249,000 and 479,000 for Livo.ge and Myhome.ge, respectively. Livo.ge is a technology driven platform, offering its clients various traditional and innovative housing solutions ranging from basic property listing to real estate valuation via AI module and air pollution indi- cation of the area. This year, Livo.ge launched a new service-housing auction, allowing any bank to sell its repossessed property online. During 2021, 173 auctions were successfully conducted. Myhome.ge has been operating in the Georgian hous- ing market since 2011 and is a leading classiﬁed digital platform, offering real estate listings for purchase and rent. In 2021, Myhome.ge introduced an improved real estate developers’ module, allowing clients to ﬁnd and compare projects with more ease. We seek to expand our value proposition beyond banking by building a digital ecosystem in four major marketplace verticals: e-commerce, auto, housing and lifestyle. This will allow us to capture most of our cli- ents’ daily needs and provide them with comfortable digital solutions supported by a variety of payment or installment options. Our ecosystem is an open plat- form, meaning that our clients are free to choose their preferred payment provider or request installments from the bank of their choice. Our strategic priorities include increasing the ecosys- tem’s gross merchandise value (GMV) and earnings by signiﬁcantly enhancing our existing classiﬁed business model with new products and services, as well as op- erating a big data hub that will help us to increase lead generation and build customer loyalty via tailored of- ferings. At the end of 2021, we merged most of our ecosystem companies into a single entity, TBC Net. While the indi- vidual platforms retained their brand names, operating them under the same entity will help us to achieve cost optimization and synergies. In 2021, we also launched a data hub that aggregates, processes and analyzes data and makes it available to third parties. HOUSING E-COMMERCE AUTO LIFESTYLE travel 66 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 In January 2019, we acquired a 90% share of the real estate platform LLC Allproperty.ge, a local real estate listing compa- ny, for US$ 225,000 including taxes. This platform was used to launch Livo.ge. In November 2021, we acquired the remaining 10% for a consideration of GEL 945,000. Since 2021, Livo.ge has been merged to LLC TBC Net. 2 In August 2019, for a consideration of GEL 19.45 million, TBC Bank acquired a 65% stake in LLC My.ge, the leading classi- fied e-commerce player in Georgia, trading under the My.ge Group (“My Group”) name. My Group operates in three online marketplace verticals: automotive & automotive spare parts (Myauto.ge and Myparts.ge), consumer-to-consumer goods (Myshop.ge and Mymarket.ge) and housing (Myhome.ge). In September 2021, for a consideration of GEL 16.18 million, TBC Bank acquired the remaining 35% stake and became the sole owner of My.ge. Since 2021, LLC My.ge has been merged to LLC TBC Net. 3 Source: Similarweb; Market shares are calculated based on number of unique visitors 4 Vendoo was established in 2018 by TBC Bank. 5 In August 2018, we acquired a 100% stake in Swoop, a well- known Georgian online discount and sales company, for a consideration of US$ 70,000. Since 2021, Swoop JSC has been merged to LLC TBC Net. 6 In May 2019, we increased our share in our associated com- pany LLC Online Tickets (“TKT.ge”) from 26% to 55%. Total investment amounted to GEL 1,700,000, including taxes. 7 In June 2021, we acquired a 100% share LLC Artarea.ge, a par- ent company of LLC Saba, an online e-book platform, for a consideration of GEL 26,000. Our aspiration for the housing platforms is to strength- en our position in the market by offering a full range of housing services for real estate owners and buyers. E-COMMERCE The e-commerce part of our ecosystem consists of two platforms – Vendoo.ge 4 and Mymarket.ge2. To- gether these platforms hold a 62% market share 3 among comparable e-commerce platforms in Geor- gia, based on December data. Vendoo.ge is an online marketplace platform, with 202,000 monthly unique visitors in December, while Mymarket.ge is a well-es- tablished hybrid platform, offering its clients a classi- ﬁed listing service as well as an online marketplace, with 1,012,000 monthly unique visitors over the same period. In 2021, the GMV of both platforms amounted to GEL 10 million. During the year, Mymarket.ge rolled out several new initiatives: • Introduced online installments for the purchase of secondhand items in order to encourage C2C sales; • Launched a dedicated mobile app for Mymarket in Q3 2021. The app has a personalized feed for every user based on his or her interests, and also offers a personal page with favorite items and order history. By the end of the year, the number of downloads reached 130,000. Our aspiration for the e-commerce platforms is to en- rich their value proposition by further diversifying our offerings, and to continue focusing on the online mar- ketplace model for Mymarket.ge. AUTOMOTIVE The automotive part of the ecosystem consists of two platforms – Myauto.ge 2 and Myparts.ge 2 . The platforms are market leaders in Georgia among comparable plat- forms and held a market share 3 of 81% in December 2021, based on monthly unique visitors, which stood at 1,099,000 and 253,000 for Myauto.ge and Myparts.ge, respectively. Throughout 2021, Myauto.ge continued to run auctions, with 68 successful auctions during the year. A dedicat- ed app, which was launched last year also proved to be successful, with the number of downloads reaching 755,000 by the end of 2021. We aspire to enrich our platforms with even more con- venient auto-related services, such as allowing users to participate in auctions taking place abroad. LIFESTYLE The lifestyle part of our ecosystem includes Swoop.ge 5 , TKT.ge 6 , Mytravel.ge 2 and Saba.com.ge 7 . Their market share 3 together amounted to 58% in December 2021. Swoop.ge is a major Georgian couponing platform, offering various lifestyle discount coupons for restau- rants, cinemas, beauty salons, entertainment centers as well as hotels. Number of unique visitors for Swoop reached 126,000 in December 2021. TKT.ge is a leading Georgian online ticketing plat- form, where people can buy tickets for various events such as the cinema, the theatre or concerts as well as transport tickets. Number of unique visitors for TKT.ge reached 334,000 in December 2021. Mytravel.ge was launched in 2021 and enables travelers to rent accommodation as well as car rentals through Myauto.ge. The platform aims to promote domestic travel destinations to Georgian travelers by offering convenient accommodation and transportation ser- vices. Saba.com.ge is a Georgian e-book platform, offering users a wide selection of Georgian and translated liter- ature. The platform is available through web browsers as well as a dedicated smartphone application. We aspire to become even more engaged with our clients’ lifestyles and provide them with more tailored offers and opportunities in the future. 67 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 68 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TBC UZ INTERNATIONAL EXPANSION REVIEW Our international strategy envisages deploying an asset-light and highly digitalized business model for retail and MSME customers in carefully selected markets, based on our scalable and technologically sophisticated ﬁntech platform, Space. Nikoloz Kurdiani Overview of our international strategy At the heart of our international strategy lies our ﬁntech platform Space, a digital banking as a service provid- er. Space was developed back in 2018 with the aim of using its platform in multiple international markets. It was ﬁrst introduced and tested in Georgia, and it was subsequently launched in Uzbekistan in 2020. The platform itself is a cloud-based modular solution with on-premises deployment options. It has a single source code and flexible IT architecture, which sup- ports fast deployment and low-cost adaptation to local regulatory requirements. Operationally, Space is run centrally by a Georgian-based team, which owns the backlog for the development of the global plat- form and its products, while a local team in Uzbekistan is responsible for business operations. This approach ensures the efﬁciency and scalability of our business model and also facilitates entry into new markets. In addition, it simpliﬁes future maintenance and up- grades of the system. Why Uzbekistan? Uzbekistan is the ﬁrst international market that we decided to enter due to its large population size, low banking penetration and high smartphone usage, thus offering us signiﬁcant growth opportunities. The coun- try has a growing population of 34.7 million, while the retail loan penetration ratio 1 was as low as 10.9% in 2021. In addition, around half of the population uses smart- phones, with even higher usage among youth. Further - more, Uzbekistan has been implementing market-ori- ented economic reforms since 2017, turning it into an attractive country for investment. In 2021, Uzbekistan showed a strong post-COVID recovery, with annual real GDP growth at 7.4% after positive 1.9% expansion in 2020, according to the statistics ofﬁce of Uzbekistan. The Russian invasion of Ukraine will likely have an ad- verse impact, particularly given Uzbekistan’s exposure to remittances from Russia. However our expectation is that this will be to large extent mitigated by an increase in the value of commodity exports of Uzbekistan. TBC BANK IN UZBEKISTAN (TBC UZ) – THE FIRST DIGITAL BANK IN THE COUNTRY Overview TBC UZ is the ﬁrst digital bank in the country, with the ambition of transforming traditional daily banking into a much simpler, more transparent and intuitive experi - ence, as well as allowing customers to be in complete control of their ﬁnances through best-in-class payment, savings and loan products that are only a click away. TBC UZ obtained its banking license in April 2020 and in October 2020 launched its retail banking operations to the wider population. TBC UZ serves retail custom- ers through its online banking app, which is based on our ﬁntech platform, Space, while its smart, next-gen- eration showrooms and smaller, more compact cus- tomer acquisition points are meant for client advising and consulting purposes. As of 31 December 2021, TBC UZ had 10 showrooms and 35 customer acquisi- tion points in all major regions of Uzbekistan, covering around 97% of the country. At the end of the year, TBC UZ employed 794 full time employees. TBC UZ runs a Happiness Center to boost customer experience and build loyalty to the Bank. It is an omni- channel service that provides customers with real-time, on-demand 24/7 consultation and welcome calls via chatbots, social media channels and Mobile/SMS tex- ting. In addition, it conducts outbound sales for pre- scored customers. As of 31 December 2021, TBC UZ had 102 Happiness Center operators. Our superior customer service is getting noticed and, after only several months of operations, our call center and online support ser- vices received the highest customer satisfaction score among 27 Uzbek banks according to an independent survey conducted by Bank.uz 2 in July 2021. 69 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GROSS LOAN AND DEPOSIT PORTFOLIO 3 (GEL‘000) REGISTERED USERS AND DOWNLOADS (‘000) 28 98 302 667 1,140 29 103 391 897 Jan 21 Mar 21 Jun 21 Sep 21 Dec 21 1,548 953 1,108 Jan 21 Mar 21 Jun 21 Sep 21 Dec 21 2,839 15,543 91,979 207,510 25,239 52,493 92,825 1 Penetration ratio equals respective retail loans divided by GDP. According to our estimates based on UzStat, CBU preliminary data. 2 An information resource center, which provides information about all banking services in Uzbekistan 3 Loans and deposits in Uzbekistan are disbursed in local currency # of total registered users # of downloads 2021 HIGHLIGHTS LOAN PORTFOLIO GEL 92.8 mln DEPOSIT PORTFOLIO GEL 207.5 mln NUMBER OF REGISTERED USERS 1.1 mln NUMBER OF DOWNLOADS 1.5 mln BEST DIGITAL BANK IN UZBEKISTAN 2021 by The Global Economics By the end of the year, our customer proposition in Uzbekistan expanded to unsecured consumer loans, current ac- counts, savings and term deposits as well as various payments solutions such as P2P transfers, bill payments, physical and virtual debit cards and an ability to attach other banks’ cards to our mobile app. In addition, we offer gamiﬁcation features to increase client engagement. In 2022, we plan to add more products and services including remittances, VISA international cards, car loans & POS loans, legal entity accounts and sole entrepreneur & micro loans, amongst others. TBC UZ is a subsidiary of TBC PLC, which owns 60% of the entity, while the remaining 40% is equally split between the IFC and the EBRD. On 30 September 2021, TBC PLC entered into a partnership agreement with IFC and EBRD, as a result of which IFC and EBRD each invested US$ 9.2 million into TBC UZ in exchange for 20% equity interest each. In addition, IFC and EBRD have agreed, subject to certain conditions, to make additional capital injections of up to US$ 34.3 million, in aggregate, during the period up to 2024 in proportion to their existing holdings. 2021 achievements Throughout 2021, TBC UZ demonstrated impressive results that were above our expectations. The respective num- ber of registered users and downloads reached 1.1 million and 1.5 million at the end of December, while our loan and deposit portfolios amounted to GEL 92.8 million and GEL 207.5 million, respectively. TBC UZ’s payment metrics also showed strong progress, with the number and volume of transactions increasing to 8.2 million and GEL 510.7 million in 2021. Over the same period, the number of TBC UZ cards reached 224,000, while the number of other banks’ cards attached to our mobile app stood at 386,000. deposit portfolio loan portfolio 70 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 71 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 72 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Payme 2021 HIGHLIGHTS NUMBER OF REGISTERED USERS 5.2 mln NUMBER OF MONTHLY ACTIVE USERS 1.1 mln NUMBER OF TRANSACTIONS +66.4% YoY VOLUME OF TRANSACTIONS +79.6% YoY Overview Payme (legal name - LLC Inspired) is the second larg- est payments provider in Uzbekistan 1 , which supplies high-quality payment solutions to its retail and busi- ness customers. In 2019, TBC Bank acquired a 51% stake in Payme, while the founders retained the re- maining 49%. TBC Bank has also entered into a put/call arrangement for the remaining 49% of Payme, which, in normal circumstances, may only be exercised be- tween the fourth and seventh anniversary of the date of completion of the transaction. The exercise price will depend on a set of parameters including Payme’s revenue, EBIT and the number of active customers that Payme achieves. The company handles digital wallet, P2P transfers, utili- ty payments, USSD payments, e-commerce payments, QR payments, invoice payments, cross border money remittances as well as loan repayments. Furthermore, Payme supplies payment solutions to merchants, by offering them e-commerce and QR payment solutions and invoicing services. Additionally, a dedicated app, Payme Business, allows merchants to view and man- age their payment transactions in an easy and con- venient way. As of 31 December 2021, the number of merchants doubled on year-on-year basis and reached 19,300. Payme differentiates itself by a user-friendly interface and superior customer service and constantly works on ﬁne-tuning its offerings. In recognition of its efforts, Payme won several awards in 2021. BRAND OF 2020 AMONG PAYMENTS SYSTEMS IN UZBEKISTAN - awarded by the Antimonopoly Committee of the Republic of Uzbekistan and the Uzbekistan Marketing Center in May 2021. THE MOST WIDESPREAD MOBILE APP - awarded by The Ministry for Development of Infor- mation Technologies and Communications of the Republic of Uzbekistan in June 2021. 2021 achievements In 2021, we continued to expand our Uzbek payments business by introducing new products and services as well as increasing our network. Payme is well represented in Tashkent, although it is less known in the regions. Therefore, in order to increase Payme’s coverage across the country, we launched sales initiatives in several regions to better fa- miliarize the Uzbek population with the beneﬁts of our convenient payments services and attract more users. We plan to expand our efforts to more regions in 2022. As a result, its number of registered users reached 5.2 million, while the number and volume of transactions increased by an impressive 66.4% and 79.6% year-on- year, respectively. Consequently, its revenue and net proﬁt for the year amounted to GEL 28.8 million and GEL 18.0 million, increasing by 91.0% and 111.7% respec- tively, over the same period. INTERNATIONAL EXPANSION REVIEW CONTINUED PAYME AWARDS 73 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 VOLUME OF TRANSACTIONS REVENUE NET INCOME NUMBER OF TRANSACTIONS MONTHLY ACTIVE USERS REGISTERED USERS FY 2020 66,448 110,549 FY 2021 # of transactions FY 2020 15,094 28,826 FY 2021 Revenue Net income FY 2020 8,498 17,989 FY 2021 2020 0.7 1.1 2021 2020 2.9 5.2 2021 1 Based on number of registered users of Payme; internal estimates FY 2020 2,623,151 4,711,939 FY 2021 Volume of transactions (GEL ‘000) +79.6% (GEL ‘000) +91.0% (‘000) +66.4% (GEL ‘000) +111.7% (mln) +57.1% (mln) +79.3% 74 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR STAKEHOLDERS OUR COLLEAGUES Our Colleagues Engaged and happy colleagues are key to our successful and sustainable development. We are committed to providing a safe and inclusive work environment with equal opportunities for learning and career advancement OVERVIEW We aspire to be most desired employer in the coun- try, attracting and developing top talent, nourishing our corporate values and keeping our employees engaged and motivated in order to support the Group in achiev- ing its ambitious strategic goals. We also work closely with each business division in order to better under- stand their needs and assist them in overcoming their individual challenges. In the post-pandemic world, more and more compa- nies are moving towards remote or hybrid working conditions. We were one of the ﬁrst companies in Georgia to allow all our back-ofﬁce employees to work remotely. Our HR campaign “work from where you want” was very well received by our employees and today the vast majority of our back-ofﬁce employees work outside the ofﬁce. Importantly, this initiative not only resulted in improved employee satisfaction levels, but also increased efﬁciency across the Group. In order to maintain close contact with our employees in this new digital reality, our senior management regularly holds online meetings with employees to update them regarding the Group’s achievements and future plans, and address any concerns that they might have. In addition, we continue to expand our agile working practices to the wider organization in order to become even more flexible and efﬁcient in today’s fast chang- ing environment. For more information about our HR practices, please refer to pages 84-109 of our Sustainability Report, which is available at www.tbcbankgroup.com. OUR MAIN STRATEGIC PRIORITIES Talent acquisition and development Our goal is to attract the best talent on the market, with the support of an extensive selection process, tailored to the speciﬁc needs of each position and role. We ac- tively monitor the labour market both in Georgia and abroad, to maintain a pool of prospective qualiﬁed tal- ents for key roles including but not limited to: ﬁnance, business, tech positions and other. This year we launched a talent management pro- gramme, which aims to identify top talent within the company and support their development. Within the 2021 HIGHLIGHTS EMPLOYEE NET PROMOTER SCORE 1 66% (2020: 68%) EMPLOYEE HAPPINESS INDEX 2 85% (2020: 85%) INTERNAL PROMOTIONS 19% (2020: 14%) WOMEN IN MIDDLE MANAGERIAL POSITIONS 3 38% (2020: 33%) 75 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 scope of this programme, we introduced an exten- sive leadership programme for middle management in partnership with a leading international training company. This programme includes four modules: a strategic mindset, managing change, cross-functional trust, and leadership. Going forward, we plan to intro- duce tailored development programmes for selected candidates and offer targeted rotations to expand the required skill sets. In order to support our highly digital business model, we have increased our focus on building strong tech- nical capacity in-house. Currently, around 600 of our workforce at the Bank are IT specialists. Our initiatives in this regard include establishing an IT academy in 2019, which offers courses in front-end and back-end development, Android and iOS mobile development, as well as user experience research and strategy. This programme is free of charge for selected candidates and is run by experienced staff members and leading professionals from relevant ﬁelds. Since its establish- ment, we have trained up to 580 people and recruited 230 people. In addition, we have strengthened our IT team with international expertise by hiring leading spe- cialists from abroad. We also plan to introduce special development programmes and career maps for our IT specialists in order to ensure a high retention rate. For low-level positions, we run a wide-scale internship programme to attract the best students from Geor- gia’s leading universities. After successful completion of a one-year internship, the brightest candidates are offered employment in various departments, includ- ing ﬁnance, risks, corporate, marketing, IT and data analytics. Overall, since its establishment back in 2011, we have recruited up to 500 students within this pro- gramme. We offer competitive remuneration packages to our employees, which are comprised of a ﬁxed salary, performance based bonuses and a beneﬁts package, which includes medical insurance, critical disease and life insurance, paid annual and sick leave, as well as six months of fully paid maternity and paternity leave. Additional beneﬁts include monetary gifts in case of marriage and childbirth, as well as extra day-offs for employees with three and more children. Since 2011, we operate TBC Academy, which pro- vides a wide range of learning programmes to our employees. During 2021, more than 1,000 employees participated in various courses such as business de- velopment, banking, change management, leadership, ﬁnancial analytics and many more. In addition, we provide ﬁnancial support to our employees to attend various external courses and gain international certi- ﬁcations such as MBA, CFA, FRM, ACCA and others. Furthermore, we run mandatory training for all employ- ees of the bank in the areas such as code of conduct and ethics, information security, environmental issues and operational risks. Performance management Through our effective performance management sys- tem, we strive to promote a growth mindset, boost em- ployee productivity and reinforce a feedback culture. Our performance management system is based on three core principles: clarity, fairness and integrity. We make sure that our colleagues have a clear under- standing of their role in the company and are actively engaged in setting their personal goals. Employees are also given appropriate coaching by their supervisors to help them achieve these goals. Regular employee feedback and constructive dialogue are important parts of our performance appraisal system and have been incorporated into middle management’s KPIs starting from 2021. We use different assessment systems for front and back ofﬁce staff, depending on the positions held. We assess our back ofﬁce staff with the manage- ment by-objectives (MBO) system, a personnel man- agement technique where managers and employees work together to set, record and monitor goals for the ﬁnancial year. Goals are written down annually and are continually monitored by managers to check progress, including semi-annual direct feedback from supervi- sors. Rewards are based on the achievement of goals. We have a uniform scoring system for all employees within the MBO, which ensures fairness throughout the organization. For our middle managers, as well as employees who are part of the agile structure, we also run a 360-de- gree feedback system that provides each employee with the opportunity to receive performance feed- back from his/her supervisor, peers and subordinates. 360-degree feedback allows our employees to under- stand how their performance is viewed by others; it also helps them to identify their strengths and weak- nesses and develop new skills. This year, 360-degree feedback was extended to other roles as well. For front-ofﬁce employees we use a target-based per - formance assessment system, wherein performance is linked to speciﬁc KPIs, including quantitative and qual- itative components. Within the target-based system, employees are assessed monthly, quarterly or annually depending on their positions. 1 Employee Net Promoter Score was measured in October 2021 by an independent consultant for the Bank’s employees. 2 The index was measured in July 2021 for the Bank’s employ- ees by an independent consultant. 3 Branch managers, division and department heads, as well as directors of the Group’s subsidiaries. 76 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 77 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 78 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 2019 5 2020 2021 5 6 1 1 1 OUR STAKEHOLDERS OUR COLLEAGUES CONTINUED Employee engagement and motivation Our goal is to create a value driven organization, in which employees share the same values and are led and driven by the common mission “to make life eas- ier” for our customers. We also strive to create a fami- ly-friendly environment, in which employees can bet- ter balance their family and work. Our key initiatives in this regard are as follows: • Our CEO plays an important role in promoting our corporate culture through active, regular communi- cation about our core values in-person and online. • Top management regularly conducts online meet- ings with employees to keep them up-to-date on the Group’s strategy, performance and recent achievements. Staff have an opportunity to ask questions and share feedback. In addition, we con- duct an open dialogue with our staff via a Facebook group, in which we regularly share the Group’s achievements, as well as success stories of individ- ual employees. • We also strive to create a positive and collaborative working environment by offering maximum flexi- bility to back ofﬁce employees in terms of working hours and remote working conditions. In addition, our agile structure supports open communication between various teams and encourages employee empowerment. • We care for our employees’ development and en- courage them to actively participate in internal se- lection process for higher grade positions. In 2021, the promotion rate in the bank was around 19%, up by 5 pp compared to the last year. • To accurately measure our employee satisfaction and engagement levels, we run an annual feedback survey in partnership with leading international uni- versities and research ﬁrms. The results of the sur - vey are thoroughly analyzed and presented to the management board to plan future actions. Equality and diversity We have created a sustainable and successful busi- ness in which all employees are treated equally and fairly and are supported and coached to succeed. We provide a safe work environment free from any kind of discrimination in which each and every employee is valued, respected and treated equally regardless of gender, age, marital status, sexual orientation, race, ethnicity, religious and political beliefs or disability. We take special care of our colleagues with disabilities and strive to improve our workplace to make it more flex- ible for them. Furthermore, we support them to have the same access to learning, development and job op- portunities. We put a special emphasis on promoting and support- ing women in their careers. In 2021, we developed a gender policy, which provides clear guidance for ensuring the proactive and con- sistent integration of gender equality in all aspects of the Group’s work, inside the Group, in the marketplace and in the community at large. The ultimate goal is to achieve gender equality, develop TBC’s own approach to integrating a gender perspective in company’s work and apply gender equality principles when working with stakeholders and partners. The full policy is avail- able at our www.tbcbankgroup.com. We have also developed a KPI and action plan at the Bank level to increase the number of women in middle managerial positions from the current level of 36% to 40% by 2023. In 2022, we will expand our approach to other subsid- iaries of the Group and work on elaboration of separate action plans. To demonstrate our commitment to this course, since August 2021, TBC has become a signatory to the UN Women Empowerment Principles (WEPs) 1 . 1 For more details about these principles please refer to www.weps.org BOARD OF DIRECTORS 2019 2020 2021 6 6 6 3 2 2 Female Male SENIOR MANAGEMENT 79 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 2019 2020 2021 146 MIDDLE MANAGERIAL POSITIONS 1 138 167 268 269 276 2019 2020 2021 4,992 ALL EMPLOYEES 5,325 6,174 2,662 3,688 2,956 AGE DIVERSITY STATISTICS OF 2021 1 Branch managers, division and department heads, as well as directors of the Group’s subsidiaries Female Male We have a good mix of people comprised of employees with extensive work experience and young and bright tal- ents with innovative and fresh ideas who have just graduated from top universities in Georgia and abroad. We believe that age diversity creates a more dynamic and high-performing team that leads to better results. 51% 37% 9% 3% Under 29 years 30-39 years 40-49 years Over 50 GENDER PAY GAP We regularly review our pay levels and make sure that men and women are paid equally for doing the same type of job. 63% of our colleagues are women. As shown in Table 1 below, the average gender pay and bonus gaps are in favour of men. This is mainly due to the higher number of women being employed in junior roles, including customer service positions at front ofﬁce, which is related to our business model (as shown in the gender distribution chart below). We remain committed to achieving a better gender balance and increasing the proportion of women working in senior roles. 80 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GENDER DISTRIBUTION ACROSS DIFFERENT POSITIONS 1 TABLE 1 OUR STAKEHOLDERS OUR COLLEAGUES CONTINUED Full Bank 71% Middle Management Front Office Back Office 29% 65% 35% 77% 23% 36% 64% Female Male Gender pay and bonus gap statistics 2 The gender pay gap is based on data from April 1, 2021 to April 30, 2021. The gender bonus gap is based on data from April 6, 2020 to April 5, 2021. Bank full 2021 2020 mean gender pay gap in hourly pay 43.0% 44.0% median gender pay gap in hourly pay 42.9% 33.0% mean bonus gender pay gap 48.8% 53.3% median bonus gender pay gap 33.6% 41.7% TABLE 2 Middle management 2021 2020 mean gender pay gap in hourly pay -4.3% 10.9% median gender pay gap in hourly pay -14.5% -9.9% mean bonus gender pay gap 12.4% -6.4% median bonus gender pay gap -24.8% -89.1% TABLE 3 Front Ofﬁce Employees 2021 2020 mean gender pay gap in hourly pay 53.9% 43.0% median gender pay gap in hourly pay 50.6% 27.2% mean bonus gender pay gap 62.7% 64.1% median bonus gender pay gap 61.1% 69.4% TABLE 4 Back Ofﬁce Employees 2021 2020 mean gender pay gap in hourly pay 20.7% 24.7% median gender pay gap in hourly pay 15.4% 17.7% mean bonus gender pay gap 25.8% 25.9% median bonus gender pay gap 2.6% 1.2% 81 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 The data in the given table is presented for the Bank only 2 The data on the gender pay gap is presented only for the Bank, which accounts for the 74.0% of the Group’s total number of employees. A negative gap indicates a percentage pay gap in favour of women, while a positive gap indicates a percentage pay gap in favour of men. ETHICAL STANDARDS, RESPONSIBLE CONDUCT AND SAFETY AT WORK TBC Bank is committed to running a business that promotes high ethical standards, values and respect toward hu- man rights, and encourages its employees to act with integrity and responsibility towards each other and other stake- holders. We have in place a set of internal policies and procedures and we closely monitor their execution. These policies lead to greater awareness of unacceptable behavior and promote a ‘speak up’ culture in which all employees feel listened to and protected when reporting any suspected misconduct. These policies and procedures consist of the following: • Code of Ethics; • Code of Conduct; • Anti-Bribery, Anti-Corruption and Prevention of the Facilitation of Tax Evasion Policy; • Incident response policy; • Human rights policy. These policies apply to all employees of the Group and can be found on our IR website at www.tbcbankgroup.com. The Compliance Department regularly conducts employee training sessions in order to raise awareness and high- light the importance of anti-corruption, anti-bribery and ethical and human rights issues. Periodic audits are also conducted by the Internal Audit Department to identify any violations or inappropriate behavior. No such material instances were identiﬁed during 2021. Given that the Group does not have a demonstrable business presence in the UK, TBC Bank is not required to publish a statement under section 54 of the Modern Slavery Act. The Group nonetheless is fully committed to the eradication of all forms of modern slavery and maintains comprehensive policies to prevent modern slavery in its countries of operation. 82 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR STAKEHOLDERS OUR CUSTOMERS Our Customers As a customer-centric company, we strive to provide our customers with a superior experience by offering them relevant, innovative and affordable products and services through our convenient and flexible distribution channels. MEETING THE NEEDS OF OUR CUSTOMERS We operate an advanced omni-channel distribution model, which allows our customers to conduct their banking operations seamlessly and is comprised of a wide network of modern, customer-centric branches, award-winning internet and mobile banking platforms, contemporary payment infrastructure as well as a call center. Our services are available even in remote areas of the country through our online banking, which also en- ables fully digital onboarding for retail and MSME cus- tomers. As Georgia is still largely a cash-based society, especially in the regions, the availability of self-service terminals and ATMs is also essential for fostering ﬁnan- cial inclusion. In the post-COVID world, the demand for digital solu- tions has remained high. Therefore, we have continued to enrich our digital offerings with more innovative products and services. In 2021, we launched an end-to- end fast consumer loans disbursement process in our mobile banking, which allows our customers to receive loans online. In addition, we upgraded our online lend- ing platform www.tbccredit.ge, giving more flexibility to our clients. Furthermore, we implemented “open banking” for both retail and business clients, which en- ables them to check the balances on accounts opened in other Georgian banks, as well as receive analysis of their income and expenses via our online banking. For more information regarding our new digital services, please see the Georgian business review on pages 44- 67. While digitalization remains one of our top priorities, we also make sure to keep our branches as accommo- dating and comfortable as possible. For this reason, in 2021 we began remodeling our branches, creating a more open and inviting atmosphere in order to facil- itate communication with less formality. More infor- mation regarding our new branch concept is given in the retail section of the Georgian business review on pages 44-49. Equally important is the provision of affordable ﬁnanc- ing to our clients. For this purpose, we have run a large- scale start-up support programme since 2017. For more information, please refer to our MSME section on pages 50-55. In addition, since September 2021, we have enrolled into the governmental programme of subsidized mortgages. This programme offers interest payment subsidies on mortgages up to GEL 200,000, issued to families with three or more children, or fam- ilies with a child born between 1 September 2021 and 1 September 2022. As of 31 December 2021, we have disbursed 425 mortgages with a total amount of GEL 49.1 million under this programme. In order to ensure the safety and well-being of our cus- tomers and employees, our branches and ofﬁces are equipped with all the necessary safety measures in line with the recommendations of the World Health Orga- nization and National Center for Disease Control and Public Health of Georgia. In addition, we ran extensive awareness campaigns and introduced various incen- tives to encourage vaccination among our employees. By the end of the year, around 85% of our employees were vaccinated or were scheduled to get a vaccine. CUSTOMER SATISFACTION COMES FIRST Providing an unparalleled customer experience and ensuring the satisfaction of all of our customers is one of our core values. First and foremost, we treat our cus- tomers fairly by providing them with full information regarding our products and services, inform them of signiﬁcant risks and give advice with the client’s best interests in mind. Our Code of Ethics, which is available at www.tbcbankgoup.com, deﬁnes TBC’s expecta- tions in terms of transparency and fairness in our rela- tionships with our customers. 83 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In case our customers are left unsatisﬁed with any as- pect of our service, they may ﬁle a complaint through various channels, including call centers, branches, internet bank or the website www.tbcbank.ge. Com- plaints are discussed and addressed by customer support and complaint management groups, who an- alyze each complaint, prepare recommendations and address the people responsible. Clients are notiﬁed of the outcome of their complaints in due course. In order to evaluate the quality of our services, we con- duct various external surveys and request feedback from our clients on regular basis. Collecting this data allows us to analyze our performance and set goals for continuous improvement. In addition, we conduct internal surveys of different scopes across various di- visions of the Bank. These internal surveys help us to further pinpoint issues on a more detailed level and address them more thoroughly. In 2021, we launched an innovative Customer Experi- ence Appetite and Pain Management project across the Bank. This project envisages three-week work- shops, in which each team selects the metrics to best evaluate its customer service and rates its performance against these metrics in order to assess their current progress and ﬁnd further areas of improvement. Fur - thermore, the project helps to determine problematic or “pain” areas for the customers. Once these problems are identiﬁed, they are assigned to the people respon- sible, who are tasked with resolving them. We believe that this project will bring our customer experience to a new level. WE TAKE CUSTOMER INFORMATION SECURITY AND DATA PRIVACY SERIOUSLY With the rise of digitalization, it is more and more cru- cial for us to ensure that our customers’ personal infor- mation is well-secured. For this reason, we constantly ﬁne-tune our cyber security measures and procedures in order to stay well ahead of any data security threats and risks. Our cyber security procedures are regulated by an Information Security Policy. We operate a dedicated Information Security Depart- ment, which reports to the Chief Risk Ofﬁcer and the Information Security Steering Committee. The latter was established in order to improve information secu- rity and business continuity management processes as well as minimize information security risks. In order to prevent and mitigate various cyber securi- ty risks, we have several dedicated tools and control mechanisms in place: • The Security Operations Center continuously monitors unusual occurrences across the organiza- tion’s network in order to detect potentially nega- tive incidents and respond to them effectively. • The Data Leak Prevention System automatically identiﬁes data leakage, blocks the process and no- tiﬁes a responsible person. • We conduct an annual, full-scale information and cyber security threat assessment against regional and international best practices, and we regularly perform cyber attack readiness exercises among our employees. • To further increase our employees’ awareness of cyber security risks, we annually conduct manda- tory trainings and testing for all employees of the bank. In addition, we run different simulations on regular basis, in order to prepare our employees for various real life situations and threats. • We operate a 24/7 customer hotline, which ad- dresses our clients’ concerns in a timely manner. In addition, we help our customers to develop safe banking habits, by regularly informing them regard- ing the risks of phishing and other fraudulent activi- ties via social media and digital channels. • In addition to our layered defense system, we have cyber insurance policy in place, covering all rele- vant cyber, privacy and multimedia liabilities and expenses of TBC in order to manage contingen- cies and recover from possible serious disruptions. TBC Bank has not experienced any material informa- tion security breach in the last three years. We are fully compliant with the National Bank of Geor- gia’s cyber security requirements, such as the Cyber Security Framework Document, which is based on the National Institute of Standards and Technology (NIST) Cyber Security Framework. In 2021 we also adopt- ed Payment Service (PSD2) Directive (EU) 2012/2366, which further aligned our operations with international and local best practices and enabled us to offer open banking capabilities to our clients. In November 2021, the Bank achieved ISO 27001 cer- tiﬁcation of our Information Security Management System. Furthermore, in December 2021, Ernst & Young Tbilisi ofﬁce conducted two audits, assessment against Cyber Security Management Framework and assessment against SWIFT CSCF for the Bank. As a result, no critical ﬁndings and major non-compliances were identiﬁed during these exercises. Cyber Security Management Framework is deﬁned by National Bank of Georgia. Equally important is protecting our customers’ privacy and data integrity. We only process personal data for speciﬁc business purposes and do so lawfully, fairly and in a transparent manner. Our clients are provid- ed with information regarding the processing of their data and are informed of their rights, which they may exercise through deﬁned communication channels. Our Global Data Protection Policy is in line with ap- plicable laws imposed by Georgian government and also meets certain relevant requirements of EU Gen- eral Data Protection Regulation (GDPR). The full policy is available on our IR website www.tbcbankgroup.com. 84 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR STAKEHOLDERS OUR COMMUNITY Our Community We are committed to creating a better future for our community by rolling out large-scale, high impact projects in the following areas: business development, youth support and the preservation of cultural heritage. ENCOURAGING MSME BUSINESS DEVELOPMENT AND ENTREPRENEURSHIP TBC distinguishes itself through advocacy and sup- port for startups and MSME businesses. In order to address the social and economic challenges in the country, the development of small and medium busi- nesses is vital. It contributes to the reduction of un- employment and boosts economic growth. We assist businesses through the provision of both ﬁnancial and non-ﬁnancial support, including: easing access to cap- ital, sharing knowledge and expertise, and developing products and services specially customized for busi- ness needs. For this reason, in 2021, TBC partnered with international organizations for the following initiatives: • TBC Bank has been a crucial contributor to US- AID’s new initiative of establishing the Grace Hop- per Award, which intends to recognize and inspire more Georgian women in the information and communication technology (ICT) industry. This year, several female startup representatives were recognized for their outstanding performance in the ICT ﬁeld. TBC Bank helped the development of the project via a large scale communications cam- paign, awarded winners in two categories (emerg- ing leader and tech startup), and provided skills and business development opportunities speciﬁcally tailored to the needs of the award winners. • TBC Bank has signed a memorandum with UNDP Georgia to support early-stage social entrepre- neurs, to empower young people and improve access to ﬁnance in the regions. This programme focuses on educating students in the ﬁeld of so- cial entrepreneurship and offers them a ten-month training course to implement their own business ideas. TBC Bank provided monetary awards, as well as media and marketing support. For more information about our business support pro- grammes, please refer to our MSME section on pages 50-55. PRIORITIZING LOCAL BUSINESSES AMONG OUR SUPPLIERS We are committed to responsible purchasing practic- es and work with companies that uphold our values and comply with our procurement standards and code of ethics. Furthermore, we prioritize local suppliers 1 in order to support Georgian businesses. In 2021, around 90% of the Bank’s suppliers were Georgian companies, accounting for around 85% of the total spent during the year. This year, as part of our ESG strategy, we set a speciﬁc target for social impact procurement, which should amount to at least GEL 5 million by the end of 2023. For more details, please refer to our ESG strategy on pages 26-37. For more information about our supply chain manage- ment, please refer to pages 148-151 of our Sustainability Report available at www.tbcbankgroup.com. SUPPORTING THE YOUNG GENERATION We aspire to support our young generation in their pro- fessional development through various initiatives and projects: • “TBC Scholarship” is one of our largest social re- sponsibility projects, which was introduced in 2018 and aims to discover and support young talents. Since the launch of the project, TBC has supported 350 talented youth in receiving proper education and advancing their professional development. This year, 45 more people joined the programme. The project participants include artists, athletes, scientists and inventors. • Since 2019, TBC Bank has sponsored the Tbilisi International Book Festival, the largest event in the country in the book sector bringing together writ- ers, publishers and readers. This year, the 23rd Tbili- si International Book Festival was held. • For the last seven years, TBC Bank has been the main partner of the “Leonardo da Vinci” Young Re- 85 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 searchers and Innovators Annual Competition for high school students. The purpose of the compe- tition is to popularize STEM among students and help them develop creative thinking and practical skills. TBC Bank provides marketing support for the competition, allocates its facilities, and awards the winners. Since the beginning of the partnership, TBC Bank has awarded 24 students. • Furthermore, we run several academies for stu- dents in different ﬁelds, such as IT and Risk, in order to help them master professions that are in high de- mand. All courses are offered free of charge and are run by experienced staff members. We also contin- ue to run TBC Camp, a programme that was estab- lished in 2019 and envisages the conduct of a Stock Pitch Competition for fourth year ﬁnance students. This competition is integrated in the syllabus of the university’s’ curriculum and is comprised of inten- sive online lectures, trainings and the preparation of real investment cases in selected companies, which are presented to a panel of judges. Selected teams are awarded special prizes. • This year, TBC launched a new subscription model “TBC Z”, which is tailored to the speciﬁc needs of the young generation and includes student cards with special beneﬁts, cashbacks and various dis- counts. For more details, please refer to the retail section of our Georgian business review on pages 44-49. PRESERVING CULTURAL HERITAGE TBC has always played an active role in preserving Georgian heritage. Our major current projects include the following: • Since 2003, TBC has been the major sponsor of the Saba Literary award, which is the most import- ant literary event in the country. This year, up to 300 books were reviewed and the winners were revealed in ten categories. We also run www.saba. com.ge, the largest online platform for Georgian electronic and audio books, which was established in 2012 and provides access to over 6,700 audio and electronic books to around 380,000 users. • Our cooperation with the Georgian National Mu- seum and Vani Archeological Museum, one of the ﬁrst archeological museums in the Caucasus re- gion, started in 2019. We support the museums in presenting national treasures in modern and digital formats to the public. This year, the Vani Archeo- logical Museum, together with TBC Bank, hosted a unique archeological exhibition from the Pompeii Archeological Park. • We have been promoting Georgian textile in coop- eration with the Art Palace of Georgia since 2020. The project aims to give new life to the tradition- al and historical textiles of Georgia that were worn centuries ago. This year more than 1,000 items were created by new startups and designers. • This year we supported a new project, which aims to further promote the Georgian textile, as well as support women in the rural communities. Adjarian embroidery is a part of dowry tradition in the re- mote mountainous villages of a Georgian region Adjara. This craft was created and mastered by the local women, who have passed it down to genera- tions for centuries. Within the scope of this project, a documentary ﬁlm was created as well as exhibi- tion and a panel discussion were held to popularize this lesser-known tradition. • The Georgian Fonts Competition “Georgian -A” was launched in 2017 and aims to adapt the Geor- gian alphabet to the modern world in order to spread and popularize it both inside the country and abroad. Within the framework of the competi- tion, the participants are requested to develop new Georgian fonts, with the winning fonts being digi- talized with TBC’s support. Since the launch of the project, about 350 fonts have been developed and 30 have been digitalized. Following our international expansion, we decided to foster arts and culture in Uzbekistan as well, through the following projects: • In 2021, TBC UZ signed a memorandum of coop- eration with the famous Nukus Museum of Art. TBC Bank intends to create new digital content about the history of the museum, including hold- ing events on site, organizing online excursions and much more. • This year, TBC Bank announced a social project called Ornaments. The goal of the project is to create a digital catalog of applied historical arts and folk art ornaments of Uzbekistan and make it accessible for companies and individuals to use these ornaments in branding their future products or projects. SUPPORTING UKRAINIAN PEOPLE We would like to demonstrate our support to the Ukrainian people over the recent events. TBC is in- volved in a number of initiatives in these regards. We have waived the fees on international bank transfers from TBC Bank to Ukraine. We have also set up a local banking account, which allows our customers to make donations to the Ukrainian charity fund. On its part, TBC has allocated GEL 200,000. In addition, we have offered free health and travel insurance to Ukrainian people staying in Georgia as well as facilitate delivery of humanitarian aid to Ukraine. 1 Local suppliers include Georgian resident companies that sell locally produced, as well as imported goods or services. UZBEKISTAN This year, TBC Bank announced a social project called Ornaments. The goal of the project is to create a digital catalog of applied historical arts and folk art ornaments of Uzbekistan and make it accessible for companies and individuals to use these ornaments in branding their future products or projects. 87 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 88 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM Our Environmental Management System As the largest ﬁnancial institution in the country, we believe that we can make a positive contribution towards tackling the climate change and accelerating transition to a low-carbon economy. TBC Bank has a comprehensive Environmental Policy in place, which governs our Environmental Manage- ment System (“EMS”) within the Group and ensures that we comply with applicable environmental, health and safety and labour regulations, use sound environ- mental, health and safety, and labour practices, and take reasonable steps to make sure that our customers also fulﬁll their environmental and social responsibil- ities. Our Environmental Policy is fully compliant with Georgian environmental legislation and follows inter- national best practices (the full policy is available at www.tbcbankgroup.com). Our Environmental and Social Risk Management (ESRM) team is comprised of three full-time employ- ees and is part of the SME and Corporate Business Credit Risk Department, which reports directly to the Chief Risk Ofﬁcer. Our ESRM team is responsible for overseeing the operation of our EMS across the Group. It also provides assistance to our subsidiaries on envi- ronmental and social issues and conducts trainings on a regular basis. The ESRM team reports environmental management plans and results to the Environmental Committee on a quarterly basis. Our EMS is based on four pillars: • Internal environmental activities; • Environmental and social risk management in lend- ing; • Sustainable ﬁnance; and • External communications. Since 2020, the Bank has held ISO 14001:2015 certiﬁca- tion, which serves as testament that our EMS is in full compliance with international standards. In 2021, TBC Bank released its second full-scale Sus- tainability Report, which was prepared in reference to Global Reporting Initiative (GRI) standards and helps the company to understand its role and influence on sustainable development issues such as climate change, human rights and social welfare. CALCULATION OF GREENHOUSE GAS (“GHG”) EMISSIONS Since banking is not a high-polluting activity, the imple- mentation of an internal EMS to address the Group’s consumption of resources is not expected to have a signiﬁcant impact on the surrounding environment. However, TBC Bank has reviewed all the operation- al activities, procured items, and outsourced services that it can control (present and planned), and has iden- tiﬁed all the material environmental aspects relevant to the business. These are sub-categorised into indirect and direct environmental aspects, analyzed based on a comprehensive scorecard, and managed accordingly. TBC Bank has established a comprehensive internal environmental system to manage and report its GHG emissions within the Group and is committed to re- ducing its GHG emissions by closely monitoring its consumption of energy, water and paper. The guide- lines for documenting environmental data were devel- oped and responsible staff was assigned in subsidiary companies to collect and provide the required data. TBC Bank also commissioned G&L Management LTD, an independent Health, Safety, and Environment (HSE) consulting company, to verify the measurements of its GHG emissions. 89 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Total GHG emissions (CO2) (tonnes) and KPIs 2019 2020 2021 2022 KPI (increase) Scope1 Fuel Combustion (heating, vehicles,generators) 3,164 3,272 3,281 Below 4% Scope2 (Electricity consumption) 1,260 1,614 1,712 Below 2% Scope3 (International flights) 697 144 72 - Total emissions (tCO2) 5,121 5,030 5,065 Below 3% Total emission per full time employee (tCO2/pp) 0.69 0.63 0.56 Below 3% Water consumption per employee (m3/pp) 11.90 9.71 9.11 Below 1.5% Printing paper per person in reams 11.11 12.14 12.05 Below 0.4% * Scope 1 : a. 1,581 CO2e emissions in tonnes (from combustion of fuel (NG) from owned operation and facilities of TBC) in 2021 compared to 1,657 tCO2e in 2020 and 1,443 tCO2e in 2019. b. 1,596 CO2e emissions in tonnes (from owned vehicles of TBC Bank) in 2021 compared to 1,538 tCO2e in 2020 and 1,631 tCO2e in 2019. c. 104 CO2e emissions in tonnes (from owned generators of TBC Bank) in 2021 compared to 77 tCO2e in 2020 and 90 tCO2e in 2019. Energy consumption in kWh 2021 The annual quantity of energy consumed from activities for which the Group is responsible, including: • The combustion of fuel 427,933 • The operation of any facility 7,830,694 The annual quantity of energy consumed resulting from the purchase of electricity, heat, steam or cooling by the company for its own use. 15,807,649 Scope 1 - In 2021, this indicator remained broadly stable compared to 2020 on the Group level (versus the 2021 target level of 6% reduction). On standalone basis, the Bank managed to reduce it by 6% (93,000 CO2kge) year-on-year. However, this positive impact was offset by increase of fuel consumption by the vehicles of our subsidiary companies. Scope 2 – In 2021, total electricity consumption of the Group increased by 6% year-on-year (compared to the 2021 target level of 5% reduction), while the Bank managed to reduce it by 7% (around 95,800 CO2kge) over the same pe- riod . The increase is mainly due to business expansion/branch network development in Uzbekistan, which resulted in additional electricity consumption as well as several Georgian subsidiaries. Scope 3 - Due to the COVID-19 pandemic, business flights decreased by around 50% compared to 2020. Overall, total emissions remained broadly stable in 2021 compared to 2020 levels, while total emission per full time employee decreased by 11% over the same period, compared to the 2021 target level of 5% reduction. In 2021, the water consumption per employee decreased by 6% year-on-year compared to the 2021 target level of 5% reduction, while usage of printing paper remained broadly the same. The Group has undertaken the following energy-efﬁcient measuers: • Energy usage is one of the most signiﬁcant sources of our direct environmental impact. It comprises electrici- ty consumption of our premises and equipment, the usage of heating and cooling systems, transportation and more. To reduce our impact on environment, we use energy-efﬁcient approach during renovation and construc- tion of our ofﬁces and branches, as well as consider green and energy-efﬁciency recommendations to the extent possible. • We use energy-efﬁcient LED lighting and operate energy efﬁcient heating and cooling systems in the Bank’s ofﬁces. This has helped us to reduce the consumption of energy in the previous years. Intensity Ratio 2019 2020 2021 Revenue (tCO2/US$) 0.000013 0.000014 0.000011 EBTDA (tCO2/US$) 0.000022 0.000040 0.000016 Net Income (tCO2/US$) 0.000027 0.000049 0.000020 Compared to other companies listed in the United Kingdom, the Group is a low energy user in the United Kingdom and does not consume more than 40,000 kWh of energy. Therefore, it is a voluntary disclosure.. 90 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 2021 2020 • The Bank operates green car fleet, comprised of electric and hybrid vehicles, which positively affects fuel con- sumption and reduces GHG emissions. • The efﬁcient and sustainable usage of water is described in the Environmental Policy and is applied to the whole Group. Our Code of Ethics regulates water consumption as well. • In previous years, the Bank installed water-pressure control devices in several locations, which resulted in water usage reduction. Calculation methodology To calculate the GHG inventory, we took following steps: we set the organizational boundaries, established the oper- ational scope, and developed a structured approach for data collection and the calculation of carbon dioxide (CO2) equivalent. This report describes all emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 (Scope 1 and 2) and, additionally, the emissions under Scope 3 that are applica- ble to the business. In preparing emissions data, the emissions factors from the UK Government’s Greenhouse Gas Conversion Factors for Company Reporting 2017 and National IPCC emission factors for electricity (tCO2/ MWhe) were used. The required data was collected and a report was developed for the TBC Bank’s main activities, as follows: Scope 1 (the combustion of fuel and operation of facilities) includes emissions from the combustion of natural gas, diesel and/or petrol in equipment at TBC Bank’s owned and controlled sites. The combustion of petrol, diesel fuel, natural gas etc. in TBC Bank’s owned transportation vehicles. Scope 2 (purchased electricity for own use (lighting, ofﬁce appliances, cooling, etc.) includes emissions from the use of electricity at TBC Bank’s owned and controlled sites. To calculate the emissions, the conversion factor for National IPCC emission factors for electricity (tCO2/MWhe) was used. Scope 3 includes emissions from air business travels (a short haul, a medium haul, a long haul and an international haul); it should be noted that information on the travel class was considered and an “economy class” conversion factor has been used for the emissions calculation from the following link: www.atmosfair.de. Intensity Ratio - we calculate intensity ratios in line with the Streamlined Energy and Carbon Reporting (SECR) guide- lines, www.secrhub.co.uk ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT IN LENDING We are committed to ensuring that our customers fulﬁll their environmental and social responsibilities. For this pur - pose, we have Environmental and Social Risk Management (ESRM) Procedures in place, which are fully integrat- ed into the credit risk management process and ensure that appropriate, risk-based, sector speciﬁc, environmental and social risk assessment is applied to our commercial lending activities. Our procedures incorporate appropriate consideration of IFC’s Performance Standards and EBRD’s Performance Requirements. This approach enables us to effectively manage credit and reputational risks that could arise from the environmental and social non-compliance by our clients. We closely screen and assess our business portfolio distribution in terms of environmental and social risk categories and strive to reduce the share of impactful industries. In some cases, E&S risk categories differ. When categorizing the transaction according to E&S risk category, priority is given to the higher risk. BUSINESS LOANS PORTFOLIO BREAKDOWN BY E&S CATEGORIES Medium A category Low High 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 58.6% 60.8% 29.1% 30.0% 0.3% 0.3% 9.8% 11.1% OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM CONTINUED 91 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Low Risk – transactions with minimal or no adverse social or environmental impacts, which are not generally subject to further assessment (beyond their identiﬁcation as such), except for the requirement for customer’s [assent/cer - tiﬁcation/disclosure] of compliance/non-compliance with local and national environmental, health and safety and labour laws and regulations. Medium Risk – transactions with limited potential for adverse social or environmental impacts that are few in num- ber, generally site-speciﬁc, largely reversible, clearly evident at the time of the assessment, and readily addressed through mitigation measures, which typically require a limited or focused environmental and/ or social assessment, or straight-forward application of environmental sitting, pollution standards, design criteria, or construction standards. High Risk – transactions with potentially highly signiﬁcant, negative and/or long-term environmental and/or social impacts, the magnitude of which may be difﬁcult to determine at the loan application stage, which typically require analysis of environmental and social risks and impacts in the context of the total area of influence of the customer’s operations. As part of the risk assessment, the client will identify individuals and groups that may be differentially or disproportionately affected by its operations. Category A – transactions with potentially signiﬁcant adverse social or environmental impacts that may be diverse, irreversible or unprecedented, the assessment of which usually requires inputs from independent external experts and may require the involvement of IFI E&S specialists in the due diligence assessment process. In addition, we strive to make a positive contribution to the development of private companies and assist them in proper management of environmental and social risks related to their business activities. In case we identify any non-compliance with local legislative requirements and/or TBC’s standards, we develop an Environmental and Social Action Plans (ESAP) for our clients to assist them in enhancing their environmental performance and closely monitor its implementation. GREEN LENDING DEVELOPMENT We acknowledge the importance of sustainable lending and are actively involved in developing a standardized ap- proach to sustainable ﬁnance, including energy efﬁciency, renewable energy and resource efﬁciency ﬁnancing for our retail and business clients. TBC is a leading partner in Georgia in local renewable energy ﬁnancing, including hydropower stations. In 2021, TBC Bank became the ﬁrst commercial bank in the Caucasus region to receive accreditation by the Green Climate Fund (GCF). The accreditation will enable the Bank to have direct access to GCF funding to ﬁnance projects for adaptation to, and mitigation of, climate change and contribute to combatting climate change in Georgia. This year, we also conducted local market research to determine TBC’s green criteria, which have been adapted to the Georgian reality, and developed Green Lending Procedures. This research was done in cooperation with the Green for Growth Fund (GGF) Technical Assistance Facility, represented by Finance in Motion GmbH, and was ﬁ- nanced by the European Union under the EU4Energy Initiative. These procedures will help the Bank to identify green and environmentally friendly initiatives and encourage private companies to move to sustainable investment in their businesses, thus contributing to climate change mitigation. During 2021, our sustainable portfolio achieved 761,446 CO2kg/a in CO2 savings according to the date provided by our green facility fund providers. Over the same period, our renewable energy portfolio impact (avoided GHG emis- sions) amounted to 9,455 kg/a according to the estimates of the external consultant under the Green for Growth Fund (GGF) Technical Assistance Facility represented by Finance in Motion GmbH ﬁnanced by the European Union under the EU4Energy Initiative. 92 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM CONTINUED Women in Business (WiB) Renewable Energy (RE) Energy Efﬁciency (EE) Youth Support 83% 9% 6% 2% OUR SUSTAINABLE PORTFOLIO BREAKDOWN Note: Our sustainable loan portfolio includes energy efﬁciency, youth support and women in business loans ﬁnanced by special purpose funds re- ceived from IFIs, as well as loans ﬁnancing renewable energy, which include all hydro power plants ﬁnanced by the Bank SUPPLY CHAIN MONITORING As one of the largest purchasers in the country, we acknowledge and understand the social, economic and envi- ronmental impact of our procurement decisions and operations as well as our requirements towards suppliers. In 2019, we developed an Environmental and Social Risk Management Questionnaire in order to screen suppliers. We also regularly assess our long-term contractor companies’ environmental and social risks. In case we identify any non-compliance with our E&S standards, our ESRM team develops implementation Environmental and Social Action Plans (“ESAPs”) for each company and monitors their implementation RAISING ENVIRONMENTAL AWARENESS AMONG TBC EMPLOYEES We believe that raising environmental awareness among our employees is vital for the effective implementation of EMS and to encourage new eco-friendly ideas and initiatives within the organization. For this purpose, we actively run various Environmental and Social training programmes, which include: • “Welcome” training; • Training for new employees; • E&S training for credit staff; • Annual mandatory online EMS e-learning course for all staff, followed by a self-evaluation test; and • Mandatory on-boarding training. In 2021, 95% of all staff, including senior management, successfully passed an online course and a self-evaluation test about TBC’s EMS. To ensure effective communication, video materials were created that briefly describe TBC’s environmental man- agement system. EXTERNAL COMMUNICATION TBC pays signiﬁcant attention to external communication about E&S matters with existing and potential customers and other stakeholders. The feedback and recommendations received from our stakeholders and other interested parties enable us to continuously improve our E&S performance. Our grievance mechanism enables any interested party to provide complaints with regards to E&S issues via our website www.tbcbank.com.ge. All complaints are thoroughly analysed and addressed in a timely manner. In 2021, no such complaints were received. TBC Bank also takes an active part in raising awareness of renewable energy, climate change adaptation and green ﬁnancing opportunities in Georgia. For this purpose, in partnership with the European Bank for Reconstruction and Development (EBRD)’s Green Economy Financing Facility programme (GEFF), we organized a Green Economy forum and also participated in the Annual Sustainable Finance Forum organized by GreenPact, discussing green ﬁnance practices with regional and local banks. 93 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NON-FINANCIAL INFORMATION STATEMENT TBC Bank complies with non-ﬁnancial reporting requirements contained in sections 414 CA and 414 CB of Compa- nies Act 2006. The following table summarises the reference to the non-ﬁnancial matters described in the Strategic Report. NON-FINANCIAL INFORMATION PAGES The entity’s business model Our business model, pages 18 to 19 Environmental matters Our environmental management system, pages 88 to 92 Employees Our colleagues, pages 74 to 81 Social matters Our community, pages 84 to 87 Human rights Ethical standards, responsible conduct and safety at work, page 81 Anti-corruption and anti-bribery Ethical standards, responsible conduct and safety at work, page 81 Non-ﬁnancial key performance indicators relevant to the entity's business Key performance indicators, pages 22 to 25 Description of principal risks and mitigations Material existing and emerging risks, pages 102 to 111 94 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Financial Review FINANCIAL REVIEW OVERVIEW The consolidated ﬁnancial statements of the Group and the separate ﬁnancial statements of TBC Bank Group PLC, together referred as “ﬁnancial statements” has been prepared in accordance with UK-adopted International Ac- counting Standards and with the requirements of the Companies Act 2006 and, for the group, in accordance with international ﬁnancial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the Eu- ropean Union. There were no unendorsed standards effective for the year ended 31 December 2021 affecting these consolidated and separate ﬁnancial statements. TAX STRATEGY TBC is committed to complying with all applicable tax laws in all jurisdictions where TBC Group operates, including in the UK. In particular, we aim to pay the correct amount of tax within applicable time limits. Our objectives are built around the following key principles: • transparency; • responsibility; and • effective interaction with tax authorities. We ensure that the management of tax risk and proper governance around our tax operations is supported by appro- priately trained personnel who have clear responsibilities to identify, analyse, assess and manage tax risks. For more details, please view our tax strategy on our website at www.tbcbankgroup.com under the “ESG” section. FINANCIAL HIGHLIGHTS Income statement highlights In thousands of GEL 2021 2020 (as restated) Change YoY Net interest income 1,002,732 835,433 20.0% Net fee and commission income 248,000 182,767 35.7% Other operating non-interest income 1 201,288 137,391 46.5% Total credit loss recovery/(allowance) 16,900 (358,008) NMF Operating income after expected credit and non-ﬁnancial asset impairment losses 1,468,920 797,583 84.2% Operating expenses (545,834) (437,462) 24.8% Losses from modiﬁcations of ﬁnancial instrument (1,726) (41,015) -95.8% Proﬁt before tax 921,360 319,106 NMF Income tax (expense)/credit (112,361) 3,383 NMF Proﬁt for the period 808,999 322,489 NMF * Certain amounts do not correspond to 2020 Consolidated Statement of Proﬁt or Loss and Other Comprehensive Income as they reflect the re- classiﬁcation made by the management between net impairment of non-ﬁnancial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the ﬁnancial statements. NMF – no meaningful ﬁgures 95 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 Other operating non-interest income includes net insurance premium earned after claims and acquisition costs 2 The detailed information about APMs is given on pages 363-367 Balance sheet and capital highlights In thousands of GEL 31-Dec-21 31-Dec-20 Change YoY Total assets 24,508,561 22,577,805 8.6% Gross loans 17,047,391 15,200,520 12.2% Customer deposits 15,038,172 12,572,728 19.6% Total equity 3,692,229 2,935,934 25.8% CET 1 capital (Basel III) 2,759,894 1,911,233 44.4% Tier 1 capital (Basel III) 3,379,414 2,385,181 41.7% Total capital (Basel III) 4,102,927 3,137,912 30.8% Risk-weighted assets (Basel III) 20,217,629 18,301,477 10.5% Key APMs 2 2021 2020 Change YoY ROE 24.4% 11.7% 12.7 pp Bank’s standalone ROE 27.7% 13.1% 14.6 pp ROA 3.4% 1.6% 1.8 pp Bank’s standalone ROA 3.8% 1.7% 2.1 pp NIM 5.1% 4.7% 0.4 pp Cost to income 37.6% 37.9% -0.3 pp Bank’s standalone cost to income 29.7% 32.7% -3.0 pp Cost of risk -0.3% 2.4% -2.7 pp NPL to gross loans 2.4% 4.7% -2.3 pp NPL provision coverage ratio 99.9% 85.6% 14.3 pp Total NPL coverage ratio 175.3% 159.4% 15.9 pp CET 1 CAR (Basel III) 13.7% 10.4% 3.3 pp Tier 1 CAR (Basel III) 16.7% 13.0% 3.7 pp Total CAR (Basel III) 20.3% 17.1% 3.2 pp Leverage (Times) 6.7x 7.7x -1.0x Net interest income In 2021, net interest income amounted to GEL 1,002.7 million, up by 20.0% YoY, whereby interest income and interest expense increased by 13.1% and 6.8%, respectively. The YoY increase in interest income was primarily related to an increase in interest income from loans, which was related both an increase in the gross loan portfolio of GEL 1,846.9 million, or 12.2%, and a rise in loan yield of 0.2 pp. The upper loan rate was due a shift of the portfolio composition towards GEL loans. The increase in interest expense was primarily related to an increase in interest expense from deposits, which was due to an increase in the respective portfolio of GEL 2,465.4 million, or 19.6%. Over the same period, the cost of depos- its declined by 0.2 pp. In addition, the change in the liability structure towards deposits (from 64% as of 31 December 2020 to 72% as of 31 December 2021) had a positive effect on the cost of funding. As a result, the cost of funding de- creased by 0.3 pp YoY and stood at 4.5% in 2021. In 2021, our NIM stood at 5.1%, up by 0.4 pp YoY. In thousands of GEL 2021 2020 Change YoY Interest income 1,885,856 1,667,999 13.1% Interest expense (911,267) (853,516) 6.8% Net gains from currency swaps 28,143 20,950 34.3% Net interest income 1,002,732 835,433 20.0% NIM 5.1% 4.7% 0.4 pp 96 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 FINANCIAL REVIEW CONTINUED In thousands of GEL 2021 2020 Change YoY Non-interest income Net fee and commission income 248,000 182,767 35.7% Net gains from currency derivatives, foreign currency operations and translation 117,270 98,018 19.6% Net insurance premium earned after claims and acquisition costs 1 23,546 19,485 20.8% Other operating income 60,472 19,888 NMF Total other non-interest income 449,288 320,158 40.3% NMF – no meaningful ﬁgures Credit loss allowance Total credit loss allowance in 2021 amounted to GEL 16.9 million. This signiﬁcant decrease YoY was driven by im- proved performance across all segments in 2021 and by a high base in 2020, due to the reflection of COVID-19 impact on the credit loss allowances. In thousands of GEL 2021 2020 (as restated) Change YoY Credit loss recovery/(allowance) for loans to customers 40,123 (330,811) NMF Credit loss recovery/(allowance) for other transactions (23,223) (27,197) -14.6% Total credit loss recovery/(allowance) 16,900 (358,008) NMF Operating income after expected credit and non-ﬁnancial asset impairment losses * 1,468,920 797,583 84.2% Cost of risk -0.3% 2.4% -2.7 pp * Certain amounts do not correspond to 2020 operating income after expected credit and non-ﬁnancial asset impairment losses as they reflect the reclassiﬁcations made by the management between net impairment of non-ﬁnancial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the ﬁnancial statements. NMF – no meaningful ﬁgures Operating expenses In 2021, our total operating expenses expanded by 24.8% YoY. In 2021, the increase in our operating expenses was mainly driven by staff costs, due to higher performance related costs, including management’s variable compensation, which was forfeited in 2020, as well as to the growing scale of our Uzbek business. At the same time, the increase in administrative and other expenses across the board was due to low base in 2020 and increased business activities. The cost to income ratio stood at 37.6%, down by 0.3 pp YoY, while the Bank’s standalone cost to income was 29.7%, down by 3.0 pp over the same period. In thousands of GEL 2021 2020 (as restated) Change YoY Operating expenses Staff costs (309,302) (244,043) 26.7% Provisions for liabilities and charges 27 (2,706) NMF Depreciation and amortization (79,891) (68,392) 16.8% Administrative & other operating expenses (156,668) (122,321) 28.1% Total operating expenses (545,834) (437,462) 24.8% Cost to income 37.6% 37.9% -0.3 pp Bank’s standalone cost to income 29.7% 32.7% -3.0 pp * Certain amounts do not correspond to 2020 operating expense ﬁgures as they reflect the reclassiﬁcations made by the management between net impairment of non-ﬁnancial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the ﬁnancial statements. Non-interest income Total other non-interest income increased by 40.3% YoY and amounted to GEL 449.3 million in 2021. The YoY growth was driven by a strong rebound across all categories, further ampliﬁed by a gain from sale of one of our investment properties in 2Q 2021 in the amount of GEL 26.3 million (the gain from this transaction is included in other operating income). 97 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Net income In 2021, our record high proﬁtability was driven by strong income generation across all categories, as well as strong performance on asset quality side. As a result, our ROE stood at 24.4%, ROA stood at 3.4%. In thousands of GEL 2021 2020 Change YoY Losses from modiﬁcations of ﬁnancial instruments (1,726) (41,015) -95.8% Proﬁt before tax 921,360 319,106 NMF Income tax (expense)/credit (112,361) 3,383 NMF Proﬁt for the year 808,999 322,489 NMF ROE 24.4% 11.7% 12.7 pp Bank’s standalone ROE 27.7% 13.1% 14.6 pp ROA 3.4% 1.6% 1.8 pp Bank’s standalone ROA 3.8% 1.7% 2.1 pp 1 Net insurance premium earned after claims and acquisition costs can be reconciled to the standalone net insurance profit as follows: net insurance premium earned after claims and acquisition costs less credit loss allowance, administrative expenses and taxes, plus fee and commission income and net interest income Funding and liquidity In 2021, we utilized excess liquidity generated in 2020 and our liquidity coverage ratio, as deﬁned by the NBG was 115.8%, above the 100% limit, while the LCR in GEL and FC stood at 107.7% and 120.8% respectively, above the respec- tive limits of 75% and 100%. As of 31 December 2021, NSFR stood at 127.3%, compared to the regulatory limit of 100%. 31-Dec-21 31-Dec-20 Change YoY Minimum net stable funding ratio, as deﬁned by the NBG 100.0% 100.0% 0.0 pp Net stable funding ratio as deﬁned by the NBG 127.3% 126.0% 1.3 pp Net loans to deposits + IFI funding 100.9% 101.2% -0.3 pp Leverage (Times) 6.7x 7.7x -1.0x Minimum total liquidity coverage ratio, as deﬁned by the NBG 100.0% 100.0% 0.0 pp Minimum LCR in GEL, as deﬁned by the NBG 75% n/a NMF Minimum LCR in FC, as deﬁned by the NBG 100.0% 100.0% 0.0 pp Total liquidity coverage ratio, as deﬁned by the NBG 115.8% 134.2% -18.4 pp LCR in GEL, as deﬁned by the NBG 107.7% 132.2% -24.5 pp LCR in FC, as deﬁned by the NBG 120.8% 134.9% -14.1 pp * In May 2021, NBG restored the NBG GEL LCR limit, which was temporarily removed for one year Regulatory capital On a YoY basis, the Bank’s CET1, Tier 1 and Total capital adequacy ratios increased by 3.3 pp, 3.7 pp and 3.2 pp, respec- tively. This increase was mainly driven by strong net income generation, the issuance of an AT1 Bond in November 2021 in the amount of US$ 75 million, and by local currency appreciation, which was partially offset by an increase in the loan book. 98 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 FINANCIAL REVIEW CONTINUED In thousands of GEL 31-Dec-21 31-Dec-20 Change YoY CET 1 capital 2,759,894 1,911,233 44.4% Tier 1 capital 3,379,414 2,385,181 41.7% Total capital 4,102,927 3,137,912 30.8% Total risk-weighted exposures 20,217,629 18,301,477 10.5% Minimum CET 1 ratio 11.7% 7.4% 4.3 pp CET 1 capital adequacy ratio 13.7% 10.4% 3.3 pp Minimum Tier 1 ratio 14.0% 9.2% 4.8 pp Tier 1 capital adequacy ratio 16.7% 13.0% 3.7 pp Minimum total capital adequacy ratio 18.4% 13.7% 4.7 pp Total capital adequacy ratio 20.3% 17.1% 3.2 pp Loan portfolio As of 31 December 2021, the gross loan portfolio reached GEL 17,047.4 million, up by 12.2% YoY or by 18.0% on a con- stant currency basis. The proportion of gross loans denominated in foreign currency decreased by 5.5 pp YoY and accounted for 53.9% of total loans, while on a constant currency basis the proportion of gross loans denominated in foreign currency was down by 3.2 pp YoY and stood at 56.2%. As of 31 December 2021, our market share in total loans stood at 38.8%, down by 0.2 pp YoY, while our loan market share in legal entities was 39.1%, up by 0.5 pp over the same period, and our loan market share in individuals stood at 38.6%, down by 0.8 pp QoQ. In thousands of GEL 31-Dec-21 31-Dec-20 Change YoY Loans and advances to customers Retail 6,358,345 5,846,274 8.8% – Retail loans GEL 3,580,468 3,007,484 19.1% – Retail loans FC 2,777,877 2,838,790 -2.1% CIB 6,547,741 5,831,871 12.3% – CIB loans GEL 2,188,776 1,599,857 36.8% – CIB loans FC 4,358,965 4,232,014 3.0% MSME 4,141,305 3,522,375 17.6% – MSME loans GEL 2,082,204 1,559,127 33.5% – MSME loans FC 2,059,101 1,963,248 4.9% Total loans and advances to customers 17,047,391 15,200,520 12.2% 2021 2020 Change YoY Loan yields 10.3% 10.1% 0.2 pp Loan yields GEL 15.1% 15.3% -0.2 pp Loan yields FC 6.5% 6.7% -0.2 pp Retail loan yields 11.7% 11.5% 0.2 pp – Retail loan yields GEL 16.1% 16.5% -0.4 pp – Retail loan yields FC 6.1% 6.6% -0.5 pp CIB loan yields 9.0% 8.6% 0.4 pp – CIB loan yields GEL 13.7% 13.2% 0.5 pp – CIB loan yields FC 7.0% 7.0% 0.0 pp MSME loan yields 10.2% 10.2% 0.0 pp – MSME loan yields GEL 14.9% 14.9% 0.0 pp – MSME loan yields FC 6.0% 6.3% -0.3 pp The comparative numbers for 2020 do not correspond with the numbers shown in note 29 of the ﬁnancial statements, since they exclude the effects of standard annual re-segmentation. 99 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Loan portfolio quality On a YoY basis, total par 30 improved by 0.6 pp. The decrease was mainly driven by the Retail segment on the back of write-offs of the unsecured loans and strong performance of the mortgage portfolio. Our NPL ratio improved by 2.3 pp YoY and amounted to 2.4%. The recovery was observed in all segments, mainly driven by resumed repayments on COVID-19 restructured loans. Par 30 31-Dec-21 31-Dec-20 Change YoY Retail 2.2% 3.5% -1.3 pp CIB 0.6% 1.0% -0.4 pp MSME 4.0% 3.7% 0.3 pp Total loans 2.0% 2.6% -0.6 pp Non-performing Loans 31-Dec-21 31-Dec-20 Change YoY Retail 2.4% 5.8% -3.4 pp CIB 1.4% 2.4% -1.0 pp MSME 4.0% 6.5% -2.5 pp Total loans 2.4% 4.7% -2.3 pp NPL coverage 31-Dec-21 31-Dec-20 Provision Coverage Total Coverage Provision Coverage Total Coverage Retail 158.8% 224.6% 102.4% 170.3% CIB 56.8% 126.4% 77.1% 148.0% MSME 68.0% 155.5% 66.4% 150.5% Total 99.9% 175.3% 85.6% 159.4% Cost of risk The total cost of risk for 2021 stood at -0.3%, down by 2.7 pp YoY. This signiﬁcant decrease YoY was driven by im- proved performance across all segments in 2021 and by a high base in 2020 due to the reflection of COVID-19 impact on the credit loss allowances. Cost of risk 2021 2020 Change YoY Retail 0.5% 3.8% -3.3 pp CIB -1.0% 0.6% -1.6 pp MSME -0.2% 3.0% -3.2 pp Total -0.3% 2.4% -2.7 pp Deposit portfolio The total deposits portfolio increased by 19.6% YoY across all segments and amounted to GEL 15,038.2 million, while on a constant currency basis the total deposit portfolio increased by 25.1% over the same period. The proportion of deposits denominated in foreign currency was down by 2.8 pp YoY and accounted for 63.5% of total deposits, while on a constant currency basis the proportion of deposits denominated in foreign currency increased by 1.2 pp YoY and stood at 65.1%. As of 31 December 2021, our market share in deposits amounted to 40.4%, up by 3.2 pp YoY, and our market share in deposits to legal entities stood at 40.5%, up by 6.0 pp over the same period. Our market share in deposits to individ- uals stood at 40.3%, up by 0.8 pp YoY. 100 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 FINANCIAL REVIEW CONTINUED In thousands of GEL 31-Dec-21 31-Dec-20 Change YoY Customer accounts Retail 5,837,333 4,975,661 17.3% – Retail deposits GEL 1,492,325 1,236,594 20.7% – Retail deposits FC 4,345,008 3,739,067 16.2% CIB 7,330,543 5,717,347 28.2% – CIB deposits GEL 2,934,167 1,833,122 60.1% – CIB deposits FC 4,396,376 3,884,225 13.2% MSME 1,558,676 1,368,490 13.9% – MSME deposits GEL 756,135 661,941 14.2% – MSME deposits FC 802,541 706,549 13.6% Total customer accounts 15,038,172 12,572,728 19.6% * Total deposit portfolio includes Ministry of Finance deposits in the amount of GEL 511 million and GEL 312 million as of 31 December 2020 and 31 December 2021, respectively. The comparative numbers for 2020 do not correspond with the numbers shown in note 29 of the ﬁnancial statements, since they exclude the effects of standard annual re-segmentation. 2021 2020 Change YoY Deposit rates 3.4% 3.6% -0.2 pp – Deposit rates GEL 6.7% 6.5% 0.2 pp – Deposit rates FC 1.5% 2.0% -0.5 pp Retail deposit yields 2.4% 2.6% -0.2 pp – Retail deposit rates GEL 4.9% 5.3% -0.4 pp – Retail deposit rates FC 1.3% 1.7% -0.4 pp CIB deposit yields 4.3% 4.4% -0.1 pp – CIB deposit rates GEL 8.5% 8.1% 0.4 pp – CIB deposit rates FC 2.0% 2.5% -0.5 pp MSME deposit yields 0.8% 0.9% -0.1 pp – MSME deposit rates GEL 1.4% 1.6% -0.2 pp – MSME deposit rates FC 0.2% 0.3% -0.1 pp 101 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 APMS APMs (based on monthly averages, where applicable) 2021 2020 Proﬁtability: ROE 24.4% 11.7% Bank’s standalone ROE 27.7% 13.1% ROA 3.4% 1.6% Bank’s standalone ROA 3.8% 1.7% Cost to income 37.6% 37.9% Bank’s standalone cost to income 29.7% 32.7% NIM 5.1% 4.7% Loan yields 10.3% 10.1% Deposit rates 3.4% 3.6% Cost of funding 4.5% 4.8% Asset quality & portfolio concentration: Cost of risk -0.3% 2.4% PAR 90 to gross loans 1.1% 1.5% NPLs to gross loans 2.4% 4.7% NPL provision coverage 99.9% 85.6% Total NPL coverage 175.3% 159.4% Credit loss level to gross loans 2.4% 4.0% Related party loans to gross loans 0.1% 0.0% Top 10 borrowers to total portfolio 6.8% 7.9% Top 20 borrowers to total portfolio 10.5% 12.1% Capital & liquidity positions: Net loans to deposits plus IFI funding 100.9% 101.2% Net stable funding ratio 127.3% 126.0% Liquidity coverage ratio 115.8% 134.2% Leverage 6.7x 7.7x CET 1 CAR (Basel III) 13.7% 10.4% Tier 1 CAR (Basel III) 16.7% 13.0% Total 1 CAR (Basel III) 20.3% 17.1% The Group enters into swap agreements denominated in foreign currencies with a view to decrease cost of funding. Respective interest effect is presented within net interest income, but has not been previously included in the cost of funding ratio calculation. As the contracts reached signiﬁcant volume, the Group revisited the presentation of effects in the cost of funding ratio and decided to include interest effect from swap agreements in the calculation of cost of funding. The change was made retrospectively and ratios of previous periods have also been restated. ** International Financial Institutions The detailed information about APMs is given on pages 363-367. 102 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 MATERIAL EXISTING AND EMERGING RISKS Material Existing and Emerging Risks The emergence of the COVID-19 pandemic has en- hanced the critical importance of risk management to the Group’s strategy. During the COVID-19 era, it is even more essential to identify emerging risks and uncertainties that could adversely impact the Group’s performance, ﬁnancial condition and prospects. This section analyses the material principal and emerging risks and uncertainties the Group faces. However, we cannot exclude the possibility of the Group’s perfor- mance being affected by risks and uncertainties oth- er than those listed below. More details regarding risk management practices can be found on pages 112-127. At the time of writing this report, there is uncertainty around the war in Ukraine, its potential impact is sum- marized in the emerging risks section. The Board has undertaken a robust assessment of both the principal and emerging risks facing the Group and the long-term viability of the Group’s operations, in order to determine whether to adopt the going con- cern basis of accounting. For more information, please see the Going Concern and Viability Statements on page 154-155. In the sections covering material existing and emerg- ing risks, as well as risk management practices, the main focus is on the key subsidiary of the Group – JSC TBC Bank (the Bank), unless otherwise noted. PRINCIPAL RISKS AND UNCERTAINTIES 1. Credit risk is an integral part of the Group’s busi- ness activities Risk description Credit risk is the greatest material risk faced by the Group, given the Group is engaged principally in tra- ditional lending activities. The Group’s customers in- clude legal entities as well as individual borrowers. Due to the high level of dollarization in Georgia’s ﬁ- nancial sector, currency-induced credit risk is a com- ponent of credit risk, which relates to risks arising from foreign currency-denominated loans to unhedged borrowers in the Group’s portfolio. Credit risk also in- cludes concentration risk, which is the risk related to credit portfolio quality deterioration as a result of large exposures to single borrowers or groups of connected borrowers, or loan concentration in certain economic industries. Losses may be further aggravated by unfa- vorable macroeconomic conditions. These risks are de- scribed in more detail as a separate principal risk. COVID-19 has increased uncertainty and caused signif- icant economic disruptions in many sectors, particularly in the hospitality & leisure, real estate management and development sectors. Such economic disruptions run the risk of deteriorating the ﬁnancial standing of bor - rowers and increase the Group’s credit risk. Risk mitigation A comprehensive credit risk assessment framework is in place with a clear division of duties among the par- ties involved in the credit analysis and approval process. The credit assessment process differs by segment, and is further differentiated across various product types to reflect the differing natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an individual basis, whereas the deci- sion-making process for smaller retail and micro loans is largely automated. The rules for manual and automat- ed underwriting are developed by units within the risk function, which are independent from the origination and business development units. The credit scoring and underwriting models are developed by an inde- pendent Credit Modelling team, within the risk function and the developed models are then validated as well by another independent Model Risk Management team, also from the risk function. In the case of corporate and medium-sized business borrowers, the loan review pro- cess is conducted within speciﬁc sectoral teams, which accumulate deep knowledge of the corresponding sectoral developments. The Group uses a robust monitoring system to react promptly to macro and micro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tailored to the speciﬁcs of in- dividual segments, as well as encompassing individual credit exposures, overall portfolio performance and ex- ternal trends that may impact the portfolio’s risk proﬁle. Additionally, the Group uses a comprehensive portfolio supervision system to identify weakened credit expo- sures and take prompt, early remedial actions, when necessary. The Group’s credit portfolio is highly diversiﬁed across customer types, product types and industry segments, 103 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 which minimizes credit risk at the Group level. As of 31 December 2021, the retail segment represented 37.3% of the total portfolio, which was comprised of 64.7% mortgage and 35.3% non-mortgage exposures. No sin- gle business sector represented more than 9.3% of the total portfolio at the end of 2021. Collateral represents the most signiﬁcant credit risk mitigation tool for the Group, making effective col- lateral management one of the key risk management components. Collateral on loans extended by the Group may include, but is not limited to, real estate, cash deposits, vehicles, equipment, inventory, precious metals, securities and third party guarantees. The Group has a largely collateralised portfolio in all its segments, with real estate representing a major share of collateral. As of 31 December 2021, 76.9% of the Group’s portfolio was secured by cash, real estate or gold. A sound collateral management framework en- sures that collateral serves as an adequate mitigating factor for credit risk management purposes. Additionally, the Bank actively performs stress testing and scenario analysis in order to check the resilience of borrowers under various stress conditions. The stress tests entail assumptions about the depreciation of the local currency, GDP growth, sectoral growth, unem- ployment, inflation, changes in real estate and com- modity prices, changes in interest rates, and loan and deposit portfolio developments. The Bank carries out intensive ﬁnancial monitoring to identify borrowers’ weakened ﬁnancial and business prospects in order to offer them a restructuring plan that is tailored to their individual needs. 2. The Group faces currency-induced credit risk due to the high share of loans denominated in foreign currencies in the Group’s portfolio Risk description A potential material GEL depreciation is one of the most signiﬁcant risks that could negatively impact portfolio quality, due to the large presence of foreign currencies on the Group’s balance sheet. As of 31 De- cember 2021, 53.9% of the Group’s total gross loans and advances to customers (before provision for loan impairment) were denominated in foreign currencies. The income of many customers is directly linked to foreign currencies via remittances, tourism or exports. Nevertheless, customers may not be protected against signiﬁcant fluctuations in the GEL exchange rate against the currency of the loan. The US$/GEL rate re- mained volatile throughout 2021, with the average cur- rency exchange rate of GEL weakening by 3.6% year- on-year. The GEL remains in free float and is exposed to many internal and external factors that in some cir- cumstances could result in its depreciation. Risk mitigation Particular attention is paid to currency-induced credit risk, due to the high share of loans denominated in for- eign currencies in the Group’s portfolio. The vulnerabil- ity to exchange rate depreciation is monitored in order to promptly implement an action plan, as and when needed. The ability to withstand a certain amount of exchange rate depreciation is incorporated into the credit underwriting standards, which also include sig- niﬁcant currency depreciation buffers for unhedged borrowers. In addition, the Group holds signiﬁcant cap- ital against currency-induced credit risk. Given the experience and knowledge built through re- cent currency volatility, the Group is in a good position to promptly mitigate exchange rate depreciation risks. In January 2019, government authorities continued their efforts to reduce the economy’s dependence on foreign currency ﬁnancing by increasing the cap to GEL 200,000 under which loans must be disbursed in the local currency. In addition, under the NBG’s responsible lending regulations, unhedged retail borrowers are re- quired to have much conservative Payment-to-Income (PTI) and Loan-to-Value (LTV) thresholds. The Bank has set a strategy to decrease the share of foreign currency loans in total portfolio. Annual tar- gets have been deﬁned in the medium-term strategy, gradually decreasing the foreign currency share. The Assets and Liabilities Committee (ALCO) is closely monitoring the achievement of these targets. 3. The Group’s performance may be compromised by adverse developments in the economic environment Risk description A potential slowdown in economic growth in Georgia will likely have an adverse impact on the repayment capacity of borrowers, restraining their future invest- ment and expansion plans. These occurrences would be reflected in the Group’s portfolio quality and proﬁt- ability, and would also impede portfolio growth rates. Negative macroeconomic developments could com- promise the Group’s performance in various ways, such as exchange rate depreciation, a spike in interest rates, rising unemployment, a decrease in household disposable income, falling property prices, worsening loan collateralization, or falling debt service capabilities of companies as a result of decreasing sales. Potential political and economic instability in neighboring coun- tries and its main trading/economic partners could negatively affect Georgia’s economic outlook through worsening current and ﬁnancial accounts in the bal- ance of payments (e.g. decreased exports, tourism in- flows, remittances and foreign direct investments). The exogenous nature of the COVID-19 shock implies the potential for a quick recovery compared to con- ventional business cycles. While the observed restart 104 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 was certainly expected, the Georgian economy has rebounded at a speed that exceeded initial expecta- tions, with real GDP increasing by 10.4% year-on-year, according to the National Statistics Ofﬁce of Georgia (Geostat), as opposed to 4.7% - estimated at the begin- ning of the year. Economic growth was also up by 2.9% compared to the 2019 level. Importantly, this growth was broad based and was reflected in all sources of inflows as well as in domes- tic demand. The latter was fueled by a reversal of the shock ampliﬁer (low credit and high savings of foreign currency in 2020), pent-up demand coupled with low US$ deposit yields, a stronger GEL, and the impact of eased lockdowns. Stronger domestic demand was also reflected in higher imports of goods. By the end of 2021, annual inflation remained elevated at 13.9%, because of a low base effect a year ago, due to state subsidies on utilities. In 2021, the NBG again intervened signiﬁcantly on the FX market, mostly in the ﬁrst half of the year. Over the course of the year, the NBG increased its policy rate from 8.0% to 10.5%. For more details on the developments in the Georgian economy in 2021, please refer to the economic over- view section on pages 14-17. Risk mitigation To decrease its vulnerability to economic cycles, the Group identiﬁes cyclical industries and proactively manages its underwriting approach and clients with- in its risk appetite framework. The Group has in place a macroeconomic monitoring process that relies on close, recurrent observation of the economic develop- ments in Georgia and neighboring countries to identi- fy early warning signals indicating imminent economic risks. This system allows the Group to promptly assess signiﬁcant economic and political occurrences and analyze their implications for the Group’s performance. These implications are duly translated into speciﬁc action plans with regards to reviewing underwriting standards, risk appetite metrics or limits, including the limits for each of the most vulnerable industries. Ad- ditionally, the stress testing and scenario analysis ap- plied during the credit review and portfolio-monitoring processes enable the Group to evaluate the impact of macroeconomic shocks on its business in advance. Resilience towards a changing macroeconomic en- vironment is incorporated into the Group’s credit un- derwriting standards. As such, borrowers are expected to withstand certain adverse economic developments through prudent ﬁnancials, debt-servicing capabilities and conservative collateral coverage. Taking into account the impact of the COVID-19 crisis on Georgia’s economy, the Group has adjusted its risk management framework leveraging its already exist- ing stress testing practices. This included more thor- ough and frequent monitoring of the portfolio as well as stress testing, to ensure close control of changes in capital, liquidity, and portfolio quality in times of in- creased uncertainty. 4. The Group faces the risk of not meeting the min- imum regulatory requirements under the increasing capital requirement framework, which may com- promise growth and strategic targets. Additionally, adverse changes in FX rates may impact capital ad- equacy ratios Risk description In December 2017, the NBG introduced a new capital adequacy framework. Under the updated regulation, capital requirements consist of a Pillar 1 minimum re- quirement, combined buffers (systemic, countercycli- cal and conservation buffers) and Pillar 2 buffers. The initial regulation included a phase-in schedule that gradually introduced the buffer over a four-year period. In response to the COVID-19 pandemic, the NBG im- plemented certain countercyclical measures related to capital adequacy requirements, temporarily decreas- ing conservation and two-thirds of CICR buffers and postponing the phase-in schedule for pillar 2 buffers. The Bank has restored all released buffers since July 2021, lifting any restrictions on capital distribution. The NBG outlined a new schedule for the gradual in- troduction of pillar 2 buffers, with the phase-in of con- centration risk and Net GRAPE buffers beginning in March 2021 and due to be fully introduced by March 2023. In December 2021, the systemic buffer increased from 2.0% to 2.5%, as previously planned. The Bank’s capital- ization as of December 2021 stood at: • 13.7% for CET 1 with an updated regulatory mini- mum requirement of 11.7%; • 16.7% for Tier 1 with an updated regulatory mini- mum requirement of 14.0%; and • 20.3% for Total capital with an updated regulatory minimum requirement of 18.4%. The ratios were well above the respective regulatory minimums. In 2021, the NBG proposed amendments in the CICR buffer calculation methodology. According to the new methodology, which will be effective from March of 2023, current ﬁxed CICR rate (75%) will be flexible in the range of 40% to 100% depending on the share of foreign currency loans in total portfolio: the lower is the share, the lower will be the CICR buffer requirement. MATERIAL EXISTING AND EMERGING RISKS CONTINUED 105 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GEL volatility has been and remains a signiﬁcant risk to the Bank’s capital adequacy. A 10% GEL depreciation would translate into a 0.8pp, 0.7pp and 0.6 pp drop in the Bank’s CET 1, Tier 1 and Total regulatory capital ad- equacy ratios, respectively. Risk mitigation The Group undertakes stress testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Such analyses indicate that the Group holds sufﬁcient capital to meet the current min- imum regulatory requirements. Capital forecasts, as well as the results of the stress testing and what-if sce- narios, are actively monitored with the involvement of the Bank’s Management Board and Risk Committee to ensure prudent management and timely action, when needed. 5. The Group is exposed to regulatory and enforce- ment action risk Risk description The Bank’s activities are highly regulated and thus face regulatory risk. The NBG can increase prudential re- quirements across the whole sector as well as for spe- ciﬁc institutions within it. Therefore, the Group’s prof- itability and performance may be compromised by an increased regulatory burden. The NBG sets lending limits and other economic ratios (including, inter alia, lending, liquidity and investment ratios) in addition to mandatory capital adequacy ratios. Under Georgian banking regulations, the Bank is re- quired, among other things, to comply with minimum reserve requirements and mandatory ﬁnancial ratios, and to regularly ﬁle periodic reports. The Bank is also regulated by the tax code and other relevant laws in Georgia. Following the Company’s listing on the Lon- don Stock Exchange’s premium segment, the Group became subject to increased regulations from the UK Financial Conduct Authority. In addition to its banking operations, the Group also offers other regulated ﬁ- nancial services products, including leasing, insurance and brokerage services. The Group’s subsidiary was granted a banking license in Uzbekistan and launched operations there in 2020. As a result, the regulatory compliance requirements have increased for the Group. The Group takes all necessary steps with the intention of ensuring compliance with relevant legislation and regulations. The Group is also subject to ﬁnancial cov- enants in its debt agreements. For more information, see pages 337-343 in the Group’s Audited Financial Statements. Risk mitigation The Group has established systems and processes to ensure full regulatory compliance, which are embedded in all levels of the Group’s operations. The dedicated compliance department reports directly to the Chief Executive Ofﬁcer and has a primary role in the manage- ment of regulatory compliance risk. The Group’s Risk Committee is responsible for regulatory compliance at the Board level. In terms of banking regulations and Georgia’s taxation system, the Group is closely engaged with the regulator to ensure that new procedures and requirements are discussed in detail before their imple- mentation. Although the decisions made by regulators are beyond the Group’s control, signiﬁcant regulatory changes are usually preceded by a consultation period that allows all lending institutions to provide feedback and adjust their business practices. 6. The Group is exposed to concentration risk Risk description The Group has large individual exposures to sin- gle-name borrowers whose potential default would entail increased credit losses and higher impairment charges. The Group’s portfolio is well diversiﬁed across sectors, resulting in only a moderate vulnerability to sector concentration risks. However, should exposure to common risk drivers increase, the risks are expected to amplify correspondingly. The Group’s maximum exposure to the single largest industry (Real Estate) stood at 9.3% of the loan portfolio as of 31 December 2021. At the end of 2021, exposure to the 20 largest borrowers stood at 10.5% of the loan portfolio. Risk mitigation The Group constantly monitors the concentrations of its exposure to single counterparties, as well as sectors and common risk drivers, and introduces limits for risk mitigation. As part of its risk appetite framework, the Group limits both single-name and sector concen- trations. Any considerable change in the economic or political environment in Georgia or in neighbouring countries would trigger the Group to review of the risk appetite criteria to mitigate the emerging risk of con- centration. Stringent monitoring tools are in place to ensure compliance with the established limits. Due to the increased uncertainty caused by the COVID-19 pandemic, close monitoring was carried out consis- tently, based on macro expectations, to estimate the performance of our top 20 corporate borrowers. 106 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In addition, the Bank has dedicated restructuring teams to manage borrowers who face ﬁnancial dif- ﬁculties. When deemed necessary, clients are trans- ferred to such teams for more efﬁcient handling and, ultimately, to limit any resulting credit risk losses. The NBG’s new capital framework introduced a concentra- tion buffer under Pillar 2 that helps to ensure that the Group remains adequately capitalised to mitigate con- centration risks. 7. Liquidity risk is inherent in the Group’s operations Risk description While the Group currently has sufﬁcient ﬁnancial re- sources available to meet its obligations as they fall due, liquidity risk is inherent in banking operations and can be heightened by numerous factors. These include an overreliance on, or an inability to access, a particular source of funding, as well as changes in credit ratings or market-wide phenomena, such as the global ﬁnancial crisis that took place in 2007. Access to credit for companies in emerging markets is signiﬁ- cantly influenced by the level of investor conﬁdence and, as such, any factors affecting investor conﬁdence (e.g. a downgrade in credit ratings, central bank or state interventions, or debt restructurings in a relevant indus- try) could influence the price or the availability of fund- ing for companies operating in any of these markets. The Group was in compliance with the minimum li- quidity requirements set by the NBG, which include the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). As of 31 December 2021, the net loan to deposits plus international ﬁnancial institution funding ratio stood at 100.9%, the liquidity coverage ra- tio at 115.8%, and the net stable funding ratio at 127.3%. These ﬁgures are all comfortably above the NBG’s minimum requirements or guidance for such ratios. In May 2021, the NBG restored the NBG GEL LCR limit (>=75%), which had been removed for one year as one of countercyclical measures implemented in relation to liquidity requirements as a result of COVID-19. Risk mitigation To mitigate this risk, the Group holds a solid liquidity position and performs an outflow scenario analysis for both normal and stress circumstances to make sure that it has adequate liquid assets and cash inflows. The Group maintains a diversiﬁed funding structure to manage the respective liquidity risks. There is ad- equate liquidity to withstand signiﬁcant withdrawals of customer deposits, but the unexpected and rapid withdrawal of a substantial amount of deposits could have a material adverse impact on the Group’s busi- ness, ﬁnancial condition, and results of operations and/ or prospects. As part of its liquidity risk management framework, the Group has a liquidity contingency plan in place outlin- ing the risk indicators for different stress scenarios and respective action plans. The liquidity risk position and compliance with internal limits are closely monitored by the Assets and Liabilities Management Committee (ALCO). Due to its high liquidity position in foreign currency, the Bank made prepayments of some IFI resources in the amount of US$ 237.4 million in late 2020 and through- out 2021. In addition, over the same period the Bank performed a cost-optimization process and attracted cheaper resources from FIs. 8. Any decline in the Group’s net interest income or net interest margin (NIM) could lead to a reduction in proﬁtability Risk description Net interest income accounts for the majority of the Group’s total income. Consequently, fluctuations in its NIM affect the results of operations. The new regula- tions as well as high competition could drive interest rates down, compromising the Group’s proﬁtability. At the same time, the cost of funding is largely exogenous to the Group and is derived from both local and inter- national markets. In 2021, the NIM increased by 0.4pp year-on-year to 5.1%, driven by an increase in loan yields, a decrease in the foreign currency (FC) cost of fund and optimi- zations in wholesale funding, further accompanied by increased loan larisation. The Bank manages its exposure to interest rate risk, fol- lowing the NBG IRR regulation introduced in Septem- ber 2020. As of 31 December 2021, GEL 4,148 million in assets (18%) and GEL 2,180 million in liabilities (11%) were floating in GEL currency, whereas GEL 8,054 mil- lion of assets (34%) and GEL 761 million of liabilities (4%) were floating, related to the LIBOR/Euribor/FED/ECB rates. The Bank was in compliance with the Economic Value of Equity (EVE) sensitivity limit set by the NBG at 15% of Tier 1 capital, with the ratio standing at 2.9% by 31 December 2021. Risk mitigation In 2021 the Bank used excess liquidity to redeem costly institutional funding and negotiated the reduction of long-term funding margins, thereby aiding the gains in NIM. The Bank continues to focus on fee and commis- sion income growth to safeguard from possible margin compressions on lending and deposit products in the future. To meet the asset-liability objectives and manage the interest rate risk, the Bank uses the high quality invest- ment securities portfolio, long-term funding and deriv- ative contracts. MATERIAL EXISTING AND EMERGING RISKS CONTINUED 107 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. The threat posed by cyber-attacks has increased in recent years and continues to grow. The risk of po- tential cyber-attacks, which have become more so- phisticated, may lead to signiﬁcant security breach- es. Such risks change rapidly and require continued focus and investment Risk description No cyber-security breaches have happened at the Bank in recent years. Nonetheless, the Group’s rising dependency on IT systems increases its exposure to potential cyber-attacks. Risk mitigation In order to mitigate the risks associated with cyber-at- tacks and ensure clients’ security, the Group continu- ously updates and enhances its in-depth security strat- egy, which covers multiple preventive and detective controls ranging from the data and end-point comput- ers to edge ﬁrewalls. A Security Operations Center has been built, which monitors every possible anomaly that is identiﬁed across the organization’s network in order to detect potential incidents and respond to them effectively. At least once a year, a full information security and cy- ber security threat analysis is performed, taking into consideration the relevant regional and sector speciﬁc perspectives. Also at least once a year, a presentation is given to the Risk Committee of the Board, with a deep dive into the information security matters. At least once every two years, as part of this analysis, an external con- sultant is contracted to assess the efﬁciency of our ca- pabilities against industry best practices and real world cyber-attack scenarios. This analysis gives the Group a broad overview as well as detailed insight, which help to further enhance its information and cyber security systems. In addition, cyber-attack readiness exercises are performed on a regular basis. These exercises eval- uate the actual position of the Group in this area and provide a benchmark against international best prac- tices. Our employees play a crucial role in information secu- rity. As a result, annual mandatory training sessions are conducted for all employees, which are comprised of remote learning courses on security issues, fraud and phishing simulations as well as informative emails to further assist our employees with information security matters. New employees are also given training as part of the onboarding process. These measures ensure that employees are fully aware of their responsibilities and are prepared for various security threats. The Information Security Steering Committee gov- erns information and cyber security to ensure that rel- evant risks are at an acceptable level and that continu- ous improvement of the management processes are achieved. Disaster recovery plans are in place to ensure business continuity in case of need. Since the beginning of the COVID-19 pandemic, the Group has activated secure remote working policies, which ensure that homeworking environments are protected against relevant cyber-threats while the se- curity team provides effective oversight of teleworking channels. Although there has been a noticeable in- crease in phishing attempts against employees, there have been no major incidents. The Security Operation Center and Threat Hunting teams have successfully adopted effective remote collaboration and commu- nication tools and practices. In 2021, the Bank achieved ISO 27001 certiﬁcation of its information security management system. That demonstrates that the Bank is following robust infor- mation security practices effectively, in order to protect its information and information systems from different types of threats. TBC Bank has not experienced any ma- terial information security breach in the last three years. In December 2021, Ernst & Young Tbilisi ofﬁce con- ducted two audits, assessment against Cyber Securi- ty Management Framework and assessment against SWIFT CSCF for the Bank. As a result, no critical ﬁndings and major non-compliances were identiﬁed during these exercises. Cyber Security Management Framework is deﬁned by National Bank of Georgia, which is based on NIST Cyber Security Management Framework. 10. External and internal fraud risks are part of the operational risk inherent in the Group’s business. Considering the increased complexity and diversiﬁ- cation of operations, together with the digitalisation of the banking sector, fraud risks are evolving. Unless proactively managed, fraud events may materially impact the Group’s proﬁtability and reputation Risk description External fraud events may arise from the actions of third parties against the Group, most frequently involv- ing events related to banking cards, loans and client phishing. Internal frauds arise from actions committed by the Group’s employees, and such events happen less frequently. During the reporting period, the Group faced several instances of fraud, none of which had a material impact on the Group’s proﬁt and loss state- ment. As a result of the COVID-19 pandemic, the threat of fraud and the rapid growth in digital crime has been exacerbated and fraudsters are adopting new tech- niques and approaches to exploit various possibilities to illegally obtain funds. Therefore, unless properly monitored and managed, the potential impact can be- come substantial. 108 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Risk mitigation The Group actively monitors, detects and prevents risks arising from fraud events and permanent monitor- ing processes are in place to detect unusual activities in a timely manner. The risk and control self-assess- ment exercise focuses on identifying residual risks in key processes, subject to the respective corrective ac- tions. Given our continuous efforts to monitor and mit- igate fraud risks, together with the high sophistication of our internal processes, the Group ensures the timely identiﬁcation and control of fraud-related activities. 11. The Group remains exposed to some reputational risk Risk Description There are reputational risks to which the Group may be exposed, such as risks related to anti-banking cam- paigns, increased cases of phishing and other cyber- crimes, as well as risks associated with the digitalization process, such as digital service interruptions affecting digital bank, ATM and payment terminal operations. However, none of the aforementioned risks is unique to the Group. Risk Mitigation To mitigate the possibility of reputational risks, the Group works continuously to maintain strong brand recognition among its stakeholders. The Group fol- lows all relevant internal policies and procedures to minimize the impact of direct/indirect reputational risks. The Group monitors its brand value through pub- lic opinion studies/surveys and by receiving feedback from stakeholders on an ongoing basis. Dedicated internal and external marketing and com- munications teams are in place, which actively monitor media coverage on a daily basis. These teams monitor risks, develop scenarios and create respective contin- gency plans. The Group tries to identify early warning signs of potential reputational or brand damage in or- der to both mitigate and elevate it to the attention of the Board before it escalates. The Communications and Cyber Security teams con- duct extensive awareness-raising campaigns on cyber security and ﬁnancial literacy, involving the media, the Banking Association of Georgia and Eduﬁn (TBC’s in- house ﬁnancial education platform) aimed at mitigating and preventing cyber threats and phishing cases. 12. The Group faces the risk that its strategic initia- tives do not translate into long-term sustainable val- ue for its stakeholders Risk Description The Group may face the risk of developing a business strategy that does not safeguard long-term value cre- ation in an environment of changing customer needs, competitive environment and regulatory restrictions. In addition, increased uncertainty together with the major economic and social disruptions caused by the COVID-19 pandemic may hamper the Group’s ability to effectively develop and execute its strategic initia- tives in a timely manner and thereby compromise its capacity for long-term value creation. Please see the Group’s main strategic priorities in our business strategy and key performance indicators sec- tion on pages 20-25. Risk Mitigation The Group conducts annual strategic review sessions involving the Bank’s top and middle management in order to ensure that it remains on the right track and as- sesses business performance from different perspec- tives, concentrating its analysis on key trends and mar- ket practices, both in regional and global markets. In addition, the Bank continuously works with the world’s leading consultants in order to enhance its strategy. Further, the Group conducts quarterly analyses and monitors the metrics used to measure strategy execu- tion, and in case of any signiﬁcant deviations, it takes corrective or mitigation actions. 13. The Group is exposed to risks related to its ability to attract and retain highly qualiﬁed employees Risk Description The Group faces the risk of losing of key personnel or the failure to attract, develop and retain skilled or qual- iﬁed employees. In particular, the strategic decision to transform into a digital company entails increased demands on high calibre IT professionals across the Group. In addition, in order to adapt to the fast chang- ing business environment, the Group needs to foster an “Agile” culture and equip employees with the nec- essary skills. In addition, the COVID-19 pandemic has created additional HR challenges in relation to safe- guarding employees’ health and wellbeing, maintain- ing high efﬁciency levels, strong internal communica- tion and a strong corporate culture. Risk Mitigation The Group pays signiﬁcant attention to human capi- tal management strategies and policies, which include approaches to the recruitment, retention and devel- opment of talent, and offers competitive reward pack- ages to its employees. The Group has also developed and implemented an “Agile” framework that aims to in- crease employee engagement and satisfaction. More- over, the Bank set up an IT and Risk academy to attract and train young professionals. The best students are offered employment at the Bank. In addition, the Bank has an in-house academy that provides a range of courses for employees in different ﬁelds. MATERIAL EXISTING AND EMERGING RISKS CONTINUED 109 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 To ensure the maintenance of an effective internal communication system whilst working from home, we enhanced different digital channels to engage with our employees. Regular management meetings are con- ducted with staff in order to keep them updated with the Group’s strategic initiatives and ﬁnancial position as well as address their concerns during this highly uncertain period. In order to further promote and en- hance our corporate culture, the Bank’s internal Face- book group has become more active by, for example, posting employee proﬁles and sharing success stories. Additionally, the new remote working policy adopted by the Bank gives the possibility to attract new talent from beyond Georgia. EMERGING RISKS Emerging risks are those that have large unknown components and may affect the performance of the Group over a longer time horizon. We believe the fol- lowing risks have the potential to increase in signiﬁ- cance over time and could have a similar impact on the Group as the principal risks. 1. The Group’s performance may be compromised by adverse developments in the region, in particular the war in Ukraine Risk description While inflows to the Georgian economy are quite di- versiﬁed, the country is still vulnerable to geopolitical and economic developments in its neighborhood. In particular, the Russian invasion of Ukraine and the con- sequent sanctions imposed on Russia have an adverse impact on the Georgian economy. As of 2021, Ukraine and Russia’s share of Georgia’s ex- ports, remittances, tourism, and FDI inflows amount- ed to around 21%. Speciﬁcally, Ukraine and Russia accounted for 7% and 14% of exports, 4% and 18% of remittance inflows, and 15% and 12% of total tourism inflows, respectively. Ukraine and Russia’s share of FDI exposure was lower at 1% and 6%, respectively, mainly comprised of reinvested earnings from previous waves of FDI. Importantly, over half of Georgia’s exports to Russia and Ukraine are re-exports, while around 50% of tourism and remittance inflows are spent on imports. These factors decrease the overall net negative impact from lost inflows. At the same time, the adverse spill- over effect from Georgia’s other economic partners should also be taken into account. Before the Russian invasion of Ukraine, TBC Capital estimated that the Georgian economy would grow by around 6.0% in 2022, 5.5% in 2023 and 5.0% in 2024 – close to its trend rate of around 5.2%. According to the World Bank’s projections 1 as of January 2022, the Georgian economy was forecast to grow by 5.5% and 5.0% in 2022 and 2023, respectively. In fact, the January growth data released by Geostat shows a very strong growth momentum. Although the 18.0% real year-on- year expansion was mainly on the back of a low base effect, growth was also strong at 4.4% when compared to January 2020, before the pandemic started, and much higher than in prior months when looking at the same, consistent measurement. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia, there will be adverse implications for the growth outlook, as well as for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risk. The Russian invasion of Ukraine will likely have an ad- verse impact, particularly given Uzbekistan’s exposure to remittances from Russia. However our expectation is that this will be to large extent mitigated by an increase in the value of commodity exports of Uzbekistan. Risk mitigation The Group actively employs the stress testing and oth- er risk measurement and monitoring tools to ensure that early triggers are identiﬁed and translated into speciﬁc action plans to minimize the negative impact on the Bank’s capital adequacy, liquidity, and portfolio quality in times of increased uncertainty. 2. The Group is exposed to the risks inherent in inter- national operations Risk description Our subsidiary, TBC Bank in Uzbekistan, launched its operations in 2020. We have already invested US$ 26 million in the charter capital of the Bank while our partners, EBRD and IFC, have invested a total of US$ 18.4 million. Our plans foresee a minimum 51% share- holding. The international activities are expected to contribute to around 10%-15% of the Group’s loan book over the medium to long-term. TBC Bank Uzbekistan is a digital bank, which operates through digital channels; a disruption of the digital platforms deployed may have a material negative im- pact on the bank’s operations. However, the risk man- agement framework deployed at TBC Bank Uzbeki- stan gives the Group a comfort to manage potential disruptions swiftly. The risk posed by the operating environment in Uz- bekistan may change the Group’s risk proﬁle. This investment exposes the Group to Uzbekistan’s mac- ro-economic, political and regulatory environments, including but not limited to exposure to risks arising from credit, market, operational and capital adequacy risks as well as risks related to the COVID-19 pandemic in Uzbekistan 1 World Bank, Global Economic Prospects, January 2022. 110 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 MATERIAL EXISTING AND EMERGING RISKS CONTINUED The Uzbekistani economy is well diversiﬁed with no major reliance on a particular industry. It has one of the lowest public debts as a percentage of GDP in the region and high international reserves, implying mac- roeconomic stability as well as room for future high growth. The government of Uzbekistan plans to reform the economy and open it up to foreign investment. While the operational environment in Uzbekistan can be assessed as attractive, there are important risks that could materially affect the Group’s performance in the country. Despite the negative impact of the COVID-19 pan- demic, Uzbekistan’s economy grew by 1.9% in 2020. According to the statistics ofﬁce of Uzbekistan, the economy further expanded by 7.4% in 2021. The Rus- sian invasion of Ukraine will likely have an adverse im- pact, particularly given Uzbekistan’s exposure to remit- tances from Russia. However our expectation is that this will be to large extent mitigated by an increase in the value of commodity exports of Uzbekistan. Risk mitigation The Group’s strategy is to follow an asset-light, limit- ed capital investment approach with a strong focus on digital channels and to invest in stages, to make sure that we are comfortable with the results and the op- erating environment before committing additional in- vestment. The digital platform supporting TBC Bank Uzbekistan, has a strong governance and risk manage- ment practices in place, which comforts the Bank to timely identify and resolve problems. The Group partners with international ﬁnancial institu- tions, which intend to take a shareholding in the Uzbek bank in order to ensure the funding of our business plan and sufﬁcient flexibility across our operations in Uzbekistan. Overall, from the Group’s perspective, international expansion will result in the diversiﬁcation of business lines and revenue streams, balancing the overall risk proﬁle of the Group. 3. The Group is exposed to the risks arising from cli- mate change Risk description The risks associated with climate change have a physical impact, arising from more frequent and se- vere weather changes, and a transitional impact that may entail extensive policy, legal and technological changes to reduce the ecological footprint of house- holds and businesses. For the Group, both of these risks could materialize through the impairment of asset values and deteriorating creditworthiness of our cus- tomers, which could result in a reduction of the Group’s proﬁtability. The Group may also become exposed to reputational risks as a result of its lending to, or other business operations with, customers deemed to be contributing to climate change. Risk mitigation The Group’s objective is to act responsibly and man- age the environmental and social risks associated with its operations in order to minimize negative impacts on the environment. This approach enables us to reduce our ecological footprint by using resources efﬁciently and promoting environmentally friendly measures in order to mitigate climate change. The Group has in place an Environmental Policy, which governs its Environmental Management Sys- tem (“EMS”) and ensures that the Group’s operations adhere to the applicable environmental, health and safety and labour regulations and practices. We take all reasonable steps to support our customers in ful- ﬁlling their environmental and social responsibilities. The management of environmental and social risks is embedded in the Group’s lending process through the application of the EMS. The Group has developed risk management procedures to identify, assess, man- age and monitor environmental and social risks. These procedures are fully integrated in the Group’s credit risk management process. Our Environmental Policy is fully compliant with Georgian environmental legis- lation and follows international best practices (the full policy is available at www.tbcbankgroup.com). For the detailed information on the Environmental Manage- ment System, please refer to pages 88-92. To extend the Group’s positive impact on the envi- ronment and climate change mitigation, by the end of 2021, the Bank introduced the Green Lending Frame- work within the organization, which will encourage private companies, as well as individuals to run their businesses energy and resource-efﬁciently and more eco-friendly. In order to increase the understanding of climate-re- lated risks on the TBC Bank’s loan portfolio, which is the largest subsidiary of TBC Bank Group PLC, the Bank performed a high-level sectoral risk assessment, since different sectors might be vulnerable to different climate-related risks over different time horizons. The risk assessment focuses on economic sectors such as energy, oil and gas, metals and mining, tourism, ag- riculture, food industry, healthcare, construction and real estate. According to the maturity structure of the loan portfolio, the largest part of assets is distributed in the time horizons that are much shorter that the im- pacts of climate change, especially of physical risks, can be materialized in Georgia. On the other hand, the understanding of climate related risks, which have longer-term impacts need to be increased in coming years, therefore, if the bank will have a plausible ﬁnd- 111 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ings and conclusions, it will further develop the approach, how to consider climate risks in mitigation. Furthermore, the Group’s portfolio has a strong collateral coverage with around 77% of the loan book, collateralized with cash, real estate or gold. The collateral evaluation procedure covers monitoring approach, therefore, the necessity of changes in collateral values is identiﬁed based on the regular collateral monitoring process. For more details, please see our ESG strategy section on pages 26-37. In June 2021, the Group released its full-scale sustainability report for the year 2020 in reference to Global Reporting Initiative (GRI) standards. The Global Reporting Initiative (GRI) helps the private sector to realize and understand its role and influence on sustainable development issues such as climate change, human rights and governance. The report is designed for all interested parties and groups in Georgia as well as abroad and aims to give them clear, fact-based information about the social, economic and environmental impact of our activities in 2020. It presents our endeavours for creating value for our employees, clients, suppliers, partners and society as a whole. The Sustainability Report 2020 is available at www.tbcbankgroup.com . 4. The Group’s performance may be affected by the LIBOR discontinuation and transition Risk description There are a number of different types of ﬁnancial instruments on the Group’s balance sheet, each of which carries in- terest rates benchmarked to the London Interbank Offered Rate (“LIBOR”). LIBOR is also used by the Group in its risk measurement, accounting and valuation processes. In 2017, the UK’s Financial Conduct Authority (FCA) announced that it has agreed with LIBOR panel banks to sustain LIBOR until the end of 2021 and called upon ﬁnancial sector participants to start working towards a transition to other reference rates. On 5 March 2021, the FCA announced the dates that panel bank submissions for all LIBOR setting will cease, after which representative LIBOR rates will no longer be available: • immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and • immediately after 30 June 2023, in the case of the remaining US dollar settings. The majority of the Bank’s US$ floating portfolio is linked to 6 month US$ LIBOR, while the EUR floating portfolio is linked to the Euro Interbank Offered Rate (Euribor), the discontinuation of which was not declared. The discontinuation of LIBOR and the process of transition exposes the Group to execution, conduct, ﬁnancial and operational risks, and may result in earnings volatility, customer complaints and legal proceedings, or have other ad- verse impact on the Group’s business and operations. Risk mitigation The Group actively monitors international and local transition-related developments to regulate and align the Group’s transition process with market practice. On 29 July, 2021 the Alternative Reference Rates Committee (ARRC) an- nounced its recommendation to use Term SOFR Rates published by CME Group, Inc. (CME). The ARRC recommendation allows loan agreements to use term SOFR in place of LIBOR, either as a replacement for LIBOR (whether pursuant to the operation of a fallback provision or otherwise) or in new deals. The interest rate alternatives to US$ LIBOR recommended previously were backward looking and have met with tepid acceptance. The Group formed a steering committee to ensure a smooth transition away from LIBOR including the efforts to in- troduce forward-looking term rates linked to SOFR. The steering committee raises awareness of the transition, both internally and externally, to ensure that staff have the necessary knowledge and tools to facilitate the transition and that all of the Group’s customers are treated fairly. 112 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Risk Management OVERVIEW The Group operates a strong, independent, business-minded risk management system. Its main objective is to con- tribute to the sustainability of risk-adjusted returns through the implementation of an efﬁcient risk management sys- tem. The Group has adopted four primary risk management principles to better accomplish its major objectives: • Govern risks transparently to obtain understanding and trust. Consistency and transparency in risk-related pro- cesses and policies are preconditions for gaining the trust of multiple stakeholders. Communicating risk goals and strategic priorities to governing bodies and providing a comprehensive follow-up in an accountable manner are key priorities for staff responsible for risk management; • Manage risks prudently to promote sustainable growth and resilience. Risk management acts as a backstop against excessive risk-taking. Capital adequacy management and strong forward-looking tools and deci- sion-making ensure the Group’s sustainability and resilience; • Ensure that risk management underpins the implementation of strategy. Staff responsible for risk management provide assurance on the feasibility of achieving objectives through risk identiﬁcation and management. Iden- tifying and adequately pricing risks, as well as taking risk mitigation actions, supports the generation of desired returns and the achievement of planned targets; • Use risk management to gain a competitive advantage. Comprehensive, transparent and prudent risk governance facilitates understanding and trust from multiple stakeholders, ensuring the sustainability and resilience of the business model and the positioning of risk management as the Group’s competitive advantage and strategic enabler. Risk management framework The Group’s risk management framework incorporates all the necessary components for comprehensive risk gov- ernance and is comprised of enterprise risk management, credit, ﬁnancial and non-ﬁnancial risk management, risk reporting and supporting IT infrastructure, cross-risk analytical tools and techniques such as capital adequacy man- agement and stress testing. The following diagram depicts the risk management framework: RISK MANAGEMENT 113 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CAPITAL ADEQUACY MANAGEMENT AND STRESS TESTING GOVERNANCE The Group conducts its risk management activities within the framework of its uniﬁed risk management system. The involvement of all governance levels in risk management, the clear segregation of authority and effective communi- cation between the different entities facilitate clarity regarding the Group’s strategic and risk objectives, adherence to its established risk appetite and sound risk management. The Group’s governance structure ensures adequate oversight and accountability, as well as a clear segregation of duties. The Board and the Supervisory Board have joint overall responsibility to set the tone at the top of the Group and monitor compliance with the established objectives, while the Management Board governs and directs the Group’s daily activities. 114 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED 1 1 1 RISK COMMITTEE ESG COMMITTEE RISK COMMITTEE OPERATIONAL RISK COMMITTEE The risk governance structure consists of three board levels, comprising the Board of Directors of TBC Bank Group PLC, the Supervisory Board of the Group’s main subsidiary, JSC TBC Bank, and the Management Board of the Bank. The Board and the Supervisory Board each have a Risk Committee that supervises the risk proﬁle and risk gover - nance practices within the Group, as well as an Audit Committee that is responsible for implementing key accounting policies and facilitating internal and external auditor activities. The Board and the Supervisory Board each also have an ESG and Ethics Committee, which supports the Board in its oversight of the strategy, policies, initiatives and pro- grammes of the Group in relation to ESG matters, and a Technology and Data Committee, which supports the Board in its oversight of key enablers of the strategy, data and cyber issues, and the company’s IT resources. The Management Board’s Risk Committee was established to guide Group-wide risk management activities and monitor major risk trends to ensure that the risk proﬁle complies with the established risk appetite. The Management Board’s Operational Risk Committee makes decisions related to operational risk governance, while the Assets and Liabilities Management Committee (ALCO) is responsible for the implementation of asset-liability management pol- icies. The Management Boards’ Information Security Steering Committee governs information and cyber security to ensure that relevant risks are at an acceptable level and that management processes are continuously improved. In addition, the ESG Committee is established at the management board level and takes responsibility for implement- ing the Group’s ESG strategy and approving its action plans, while the Environmental Committee supervises the proper implementation and functioning of the Environmental Management System in the Group. The Board, the Supervisory Board and the Bank’s senior management govern risk objectives through the Risk Ap- petite Statement, which establishes the desired risk proﬁle and risk limits. The statement also sets monitoring and reporting responsibilities and escalation paths for different trigger events, and limits breaches, which prompt risk teams to frame and implement established mitigation actions. To effectively incorporate the Group’s risk appetite into day-to-day operations, Risk Appetite Statement metrics are cascaded into more granular limits at the business unit level, establishing risk allocation across different segments and activities. The process of setting and cascading the risk appetite is undertaken in parallel with the business planning process. The interactive development of business and risk plans aligns the plans by solving risk-return trade-offs in the process and increases the feasibility of achieving targets. Board level oversight, coupled with the permanent involvement of senior management in the Group’s risk management and the exercise of top-down risk allocation by enterprise risk management function, ensures clarity regarding risk objectives, intense monitoring of the risk proﬁle against the risk appetite, the prompt escalation of risk-related concerns and the establishment of remediation actions. The daily management of individual risks is based on the three lines of defence principle. While business lines are the primary owners of risks, risk teams act as the second line of defence by sanctioning transactions, tools and tech- ENVIRONMENTAL COMMITTEE RISK COMMITTEE SUPERVISORY BOARD AUDIT COMMITTEE TECHNOLOGY AND DATA COMMITTEE ESG AND ETHICS COMMITTEE TECHNOLOGY AND DATA COMMITTEE ESG AND ETHICS COMMITTEE AUDIT COMMITTEE BOARD 115 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 These terms are defined in the glossary on page 362 niques for risk identiﬁcation, analysis, measurement, monitoring and reporting. The committees estab- lished at operational levels are charged with making transaction-level decisions as part of a framework comprised of clear and sophisticated delegations of authority, based on the “four-eyes” principle. All new products and projects pass through risk teams to en- sure that the risks are comprehensively analysed. These control arrangements allow the Group to make informed decisions that are adequately priced and not to take any risks exceeding the Group’s established targets. Credit, liquidity, market, operational and other non-ﬁnancial risks are each managed by dedicated teams. The Group’s strong and independent risk-man- agement structure enables the fulﬁlment of all required risk management functions within the second line of defence by highly skilled professionals, with a bal- anced mix of credentials in the banking sector in local and international markets. In addition to the risk teams subordinated to the Chief Risk Ofﬁcer, the compliance department reports directly to the CEO and is specif- ically in charge of anti-money laundering and compli- ance risk management. As a third line of defence, the internal audit department is responsible for providing independent and objective assurance and recommen- dations to the Group to promote the further improve- ment of operations and risk management. ENTERPRISE RISK MANAGEMENT A centralised Enterprise Risk Management (ERM) func- tion is in place to ensure the effective development, communication and implementation of risk strategy and risk appetite across the Group. The ERM function facilitates cross-risk activities such as aggregation, an- alytics and reporting and addresses issues that are not speciﬁc to a single type of risk. Accordingly, the ERM function complements the role of other risk functions to ensure the coverage of key risk activities and re- sponsibilities and builds capabilities in a centralised team. The major ERM functions can be summarised as follows: • Risk appetite development, cascading and moni- toring are essential elements of the Group’s strate- gy. A risk budget is allocated to individual business lines to ensure the achievement of aggregated metrics; • Stress-testing exercises are one of the crucial tools for effective risk identiﬁcation, measurement and mitigation. In that regard, the Group continuously advances its stress-testing capabilities and tools. Various scenario analysis and stress testing meth- ods are conducted by the Bank to ensure that it maintains adequate capital in order to withstand the given stress scenario and remain in a stable ﬁ- nancial condition; • Long term capital planning and continuous work on capital optimisation and analytics are also key aspects of the Bank’s risk management procedures; • Development and update of Internal Capital Ade- quacy Assessment Procedure (ICAAP); • Consistency of risk management practices within the Bank is also an important task of the ERM. A risk management function dedicated to promoting consistency ensures that risks are identiﬁed, mea- sured and governed in an optimal manner within the Bank, and reported and understood on a con- solidated basis; • Estimating expected losses, monitoring and ana- lytics across various segments and products are further key features of our strategy; • All risk metrics are aggregated and analysed to assess the Group’s risk proﬁle on a consolidated basis. Regular reports on the Bank’s risk proﬁle are submitted to the Management Board and to the Supervisory Board’s Risk Committee. CREDIT RISK MANAGEMENT As a provider of banking services, the Group is exposed to the risk of losses due to the failure of a customer or counterparty to meet their obligations to settle out- standing amounts in accordance with agreed terms. Credit risk is the greatest material risk faced by the Group since it is engaged mainly in traditional lending activities. Therefore, the Group dedicates signiﬁcant resources to its management. The major objectives of credit risk management are to put in place a sound credit approval process for informed risk-taking and procedures for effective risk identiﬁcation, monitoring and measurement. The Group adopts segment and product-speciﬁc ap- proaches for prudent and efﬁcient credit risk manage- ment. Therefore, the corporate, MSME and retail port- folios are managed separately to address the speciﬁcs of individual segments. Corporate and MSME (except micro) borrowers have larger exposures and are man- aged on an individual basis, whereas micro and retail borrowers are managed on a portfolio basis. The major credit risk functions can be summarised as follows: Credit approval The Group strives to ensure a sound credit-granting process by establishing well deﬁned lending criteria and building up an efﬁcient process to assess a bor - rower’s risk proﬁle. A comprehensive credit risk assess- ment framework is in place with a clear segregation of duties among parties involved in the credit analysis and approval process. The credit assessment process is distinct across segments, and is further differentiat- 116 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED ed across various product types to reflect the differing natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an indi- vidual basis, whereas the decision making process for smaller retail and micro loans is largely automated. Af- ter a thorough assessment of borrowers’ requirements, credit analysts, in the case of corporate borrowers, and loan ofﬁcers, in the case of SME borrowers, prepare a presentation containing certain key information in rela- tion to the potential borrower and submit it for review to the business underwriting risk management unit. An underwriting risk manager ensures that the project analysis provided by the credit analyst/loan ofﬁcer is complete, that all risks and mitigating factors are iden- tiﬁed and adequately addressed, and that the loan is properly structured. Business underwriting risk manag- ers specialise in a particular sector to be aware of cur- rent industry trends and developments. A multi-tiered system of loan approval committees is in place with different approval levels to consider the borrower’s overall indebtedness and risk proﬁle. These committees are responsible for reviewing credit appli- cations and approving exposures, with different com- mittees based on the size and risk of the loan. At the highest level, the Chief Executive Ofﬁcer, Corporate Business Director and Chief Risk Ofﬁcer are involved. In addition, exposures to the 20 largest borrowers or for amounts exceeding 5% of the Bank’s regulatory capital would require review and approval by the Board Risk Committee. Loan ofﬁcers submit the credit applica- tions for retail and micro exposures to the respective underwriting risk management units. Depending on the amount of the loan, a loan approval committee will review the loan request based on speciﬁed lim- its regarding the risk level of the customer. For the underwriting of unsecured loans, point-of-sale loans and credit cards, an income veriﬁcation process is performed in line with the regulations on responsi- ble lending. For decision-making, internal scorecard models and ratings provided by the credit bureau are utilized. Different scorecard models are developed based on the type of product and the borrowers’ seg- ment, taking into consideration various internal and ex- ternal data. The performance of scorecard models is closely monitored to ensure that decisions are in line with predeﬁned risk limits. The credit scoring and un- derwriting models are developed by an independent Credit Modelling team, within the risk function and the developed models are then validated as well by an in- dependent Model Risk Management team, also from the risk function. Currency-induced credit risk The Group faces currency-induced credit risk, given that a large part of its exposure is denominated in for- eign currency. However, limits have been established within the risk appetite framework to ensure that the Group continues its efforts toward minimising the share of foreign currencies in the portfolio. Various management tools and techniques are applied to mitigate the inherent currency-induced credit risk in the loan book, encompassing all phases of credit risk management. In January 2019, the government contin- ued its efforts to reduce the economy’s dependence on foreign currency ﬁnancing by increasing the cap to GEL 200,000, under which loans must be disbursed in local currency. In addition, the NBG, under its responsi- ble lending initiative, which came into force on 1 Jan- uary 2019, introduced signiﬁcantly more conservative PTI and LTV thresholds for unhedged retail borrowers, further limiting the exposure to currency induced cred- it risk. Whilst the PTI and LTV thresholds remain con- servative for unhedged borrowers, in April 2020, the NBG eased the regulations for hedged borrowers. The Group applies conservative lending standards to unhedged borrowers with exposures denominated in foreign currencies to ensure that they can withstand a certain amount of forex depreciation without cred- it quality deterioration. In addition to the measures in place throughout the underwriting process, the Group actively monitors and assesses the quality of loans de- nominated in foreign currencies through stress testing exercises and holds sufﬁcient capital buffers against unexpected losses. In the event of a material currency depreciation, the Group has tools in place to acceler- ate its monitoring efforts, identify customers with po- tential weaknesses and introduce prompt mitigation. The Bank has set a strategy to decrease the share of foreign currency loans in portfolio. Annual targets have been deﬁned in the medium-term strategy, gradually decreasing the foreign currency share. The Assets and Liabilities Committee (ALCO) is closely monitoring the achievement of these targets. Credit concentration risk The Group is exposed to concentration risk, deﬁned as a potential deterioration in portfolio quality due to large exposures or individual industries. It has established a set of tools to efﬁciently manage concentration risk and, in particular, concentrations of single names and sectors in the portfolio. The Group is subject to con- centration limits on single names and the largest 20 borrowers, and is focused on optimising the structure and quality of the latter portfolio. In addition, the Group imposes limits on individual sectors with more con- servative caps applied for high-risk sectors, which are deﬁned based on comprehensive analysis of industry cycles and outlook. Credit concentrations are moni- tored monthly. Trends in the risk positions are analysed in detail and corrective actions are recommended, should new sources of risk or positive developments emerge. Along with managing concentration levels in the portfolio, the Group estimates unexpected losses 117 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 and the respective economic capital for concentra- tions of both single name borrowers and sectors us- ing the Herﬁndahl-Hirschman Index, thus ensuring that sufﬁcient capital is held against concentration risk. Collateral management policy Collateral represents the most signiﬁcant credit risk mitigation tool for the Group, making effective collater- al management one of the key risk management com- ponents. Collateral on loans extended by the Group may include, but is not limited to, real estate, cash de- posits, vehicles, equipment, inventory, precious metals, securities and third-party guarantees. The collateral accepted against a loan depends on the type of credit product and the borrower’s credit risk. The Group has a largely collateralised portfolio in all segments, with real estate representing a major share of collateral. A centralised unit for collateral management governs the Group’s view and strategy in relation to collateral management, and ensures that collateral serves as an adequate mitigating factor for credit risk management. The collateral management framework consists of a policy-making process, a sound independent valua- tion process, a haircut system throughout the under- writing process, collateral monitoring (including reval- uations and statistical analysis) and collateral portfolio analysis. The Collateral Management and Appraisal Depart- ment (CMAD) deﬁnes Collateral Management Policy & Collateral Management Procedures (approved by the Board), purchases an appraisal service that must be in line with International Valuation Standards (IVS), acting NBG regulations and internal rules (policy/ procedures and etc.), authorizes appraisal reports, and manages the collateral monitoring process (assets with high fair value are revaluated annually, while statistical monitor- ing is used for collaterals with low value). The CMAD uses a mixed quality check scheme for valuation: ap- praisal reports are reviewed internally by its staff and separately by an external company. Almost all activities under collateral management are automated through an in-house web application. The collateral manage- ment function uses market research conducted under the Real Estate Market laboratory (REM lab) project. Credit monitoring The Group’s risk management policies and process- es are designed to identify and analyse risk in a timely manner and to monitor adherence to predeﬁned lim- its by means of reliable and timely data. The Group dedicates considerable resources to gain a clear and accurate understanding of the credit risk faced across various business segments. The Group uses a robust monitoring system to react promptly to macro and mi- cro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tai- lored to the speciﬁcs of individual segments, as well as encompassing individual credit exposure, overall portfolio performance and external trends that may impact on the portfolio’s risk proﬁle. The Risk Commit- tee reviews reports relating to the credit quality of the loan portfolio quarterly. By comparing current data with historical ﬁgures and analysing forecasts, the manage- ment believes that it can identify risks and respond to them by amending its policies in a timely manner. Restructuring and collections The Group uses a comprehensive portfolio supervision system to identify weakened credit exposures and take prompt, early remedial actions when necessary. The collection and recovery processes are initiated when the borrower does not meet the agreed payments or the borrower’s ﬁnancial standing is weakened, poten- tially jeopardizing the repayment of the loan. Dedicat- ed units manage weakened borrowers across all busi- ness segments, with collection and recovery strategies tailored to business segments and individual exposure categories. Apart from standard, business-as-usual restructur- ings that is done across all branches of the bank, the restructuring unit’s primary goal is to rehabilitate bor- rowers and transfer exposures back to the performing category. The sophistication and complexity of the rehabilitation process differs based on the type and size of an exposure. Business loans are transferred to the recovery unit when there is a strong probability that a material portion of the principal amount will not be paid, and the main stream of recovery is no longer the borrower’s cash flow. Loan recovery plans may include all available sources of loan recovery, such as selling the borrower’s assets, realising collateral or payments under guarantees. The Group’s goal in the recovery process is to nego- tiate a loan recovery strategy with the borrower and secure cash recoveries to the extent possible, or to negotiate repayment through the sale or repossession of collateral. Collection functions for retail and micro loans support customers who are experiencing dif- ﬁculties in fulﬁlling their obligations. Such customers may miss payments or notify the Bank about their dif- ﬁculty with loan repayments. A centralised team mon- itors retail borrowers in delinquency, which, coupled with branches’ efforts, aims to maximise collection. Special software from FICO is used for early collection management purposes. Collection strategies are deﬁned based on the size and type of exposure. Speciﬁc strategies are tailored to different subgroups of customers, reflecting their respective risk levels, so that greater effort is dedicat- ed to customers with a higher risk proﬁle. Both secured and unsecured loans are transferred to the internal re- 118 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED covery unit, whereas for unsecured loans the Bank also collaborates with external collection agencies. The forms of collaboration normally include outsourcing of agencies’ collection services - when they act on behalf of the bank while dealing with borrowers, or selling of speciﬁc part of unsecured portfolios to external com- panies in order to secure immediate cash recoveries. To recover collateralized loans, a recovery plan is out- lined that considers the individual borrower’s specif- ics and may involve loan repayments under revised schedules or the sale of collateral. Once the exposure is transferred to the recovery unit, if the Group is un- able to negotiate acceptable terms with the borrower, the Group may initiate collateral repossession, which is usually a standard process with limited legal complica- tions, and may include court, arbitration or notary pro- cedures. Qualiﬁed incumbent lawyers support the re- structuring and recovery units to ensure that litigation and repossession processes are carried out efﬁciently. Measurement of Expected Credit Losses Since January 2018, the Group has been using a pro- visioning methodology that is in line with IFRS 9 re- quirements. The methodology makes it possible to assess loan-loss provisions and allowances accurately with the incorporation of forward-looking information. The methodology, along with a corresponding IT pro- visioning tool, was developed with support from De- loitte and representatives of the Group’s risk, ﬁnance and IT departments. The IFRS 9 models are complex and make it possible to incorporate expectations of macro developments based on predeﬁned scenarios. The expected credit loss (ECL) measurement is based on four components used by the Group: (i) the probability of default (PD); (ii) exposure at default (EAD); (iii) loss given default (LGD); and (iv) discount rate. The Group uses a three-stage model for the ECL measurement and classiﬁes its bor - rowers across three stages: • Stage I – the Group classiﬁes its exposures as Stage I if no signiﬁcant deterioration in credit quali- ty has occurred since the initial recognition, and the instrument was not credit-impaired when initially recognised; • Stage II – the exposure is classiﬁed as Stage II if any signiﬁcant deterioration in credit quality has been identiﬁed since the initial recognition but the ﬁnan- cial instrument is not considered credit-impaired; and • Stage III – the exposures for which the credit-im- paired indicators have been identiﬁed are classi- ﬁed as Stage III instruments. The ECL amount differs depending on exposure allo- cation to one of the three stages: • Stage I instruments – the ECL represents that por- tion of the lifetime ECL that can be attributed to default events occurring within the subsequent 12 months from the reporting date; • Stage II instruments – the ECL represents the life- time ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a ﬁnancial instrument. Generally, lifetime is set equal to the remaining contractual maturity of the ﬁnancial instrument. Factors such as the existence of contractual repayment schedules, options for the extension of repayment maturity and monitor- ing processes held by the Group affect the lifetime determination; • Stage III instruments – a default event has already occurred and the lifetime ECL is estimated based on the expected recoveries. The Group actively reviews and monitors the results produced from the IFRS 9 models to ensure that the respective results adequately capture the expected losses. FINANCIAL RISK MANAGEMENT Liquidity risk management Liquidity risk is the risk that the Group either may not have sufﬁcient ﬁnancial resources available to meet all its obligations and commitments as they fall due, or may only be able to access those resources at a high cost. Both funding and market liquidity risks can emerge from a number of factors that are beyond the Group’s control. Due to ﬁnancial market instability, fac- tors such as a downgrade in credit ratings or other neg- ative developments may affect the price or the ability to access the funding necessary to make payments in respect of the Group’s future indebtedness. Liquidity risk is managed by the Financial Risk Man- agement and Treasury departments and is monitored by the Management Board and the Assets and Liabili- ties Management Committee (ALCO), within their pre- deﬁned functions. The principal objectives of the Group’s Liquidity Risk Management Policy are to: • ensure the availability of funds to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; • recognise any structural mismatch existing within the Group’s statement of ﬁnancial position and set monitoring ratios to manage funding in line with the Group’s well-balanced growth; and • monitor liquidity and funding on an ongoing basis to ensure that approved business targets are met without compromising the Group’s risk proﬁle. 119 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The Management Board reviews the Liquidity Risk Management Policy, which is then presented to the Risk Commit- tee and approved by the Supervisory Board. Liquidity risk is categorised into two risk types: funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that the Group will not be able to efﬁciently meet both expected and unexpected current and future cash flows without affecting either its daily operations or its ﬁnancial condition under both normal conditions and during a crisis. Liquidity risk is measured by the Bank in accordance with NBG requirements. Addition- ally, the Group applies, in accordance with best practice, stress tests and “what if” scenario analyses and monitors the various liquidity risk parameters that the Group has developed internally. To manage funding liquidity risk, in accordance with NBG requirements, the Bank currently monitors the following Basel III based parameters: • For Short-term Liquidity Risk Management, the Bank applies the Liquidity Coverage Ratio (LCR); and • For Long-term Liquidity Risk Management, the Bank applies the Net Stable Funding Ratio (NSFR). In 2017, the NBG introduced its own LCR for liquidity risk management purposes. In addition to the Basel III guide- lines, the ratio applies conservative approaches to the deposit withdrawal rates, depending on the client group’s concentration. Since September 2017, the Bank has also monitored compliance with the NBG’s LCR limits. In addi- tion to the total LCR limit, the NBG has also deﬁned limits per currency for the GEL and foreign currencies (FC). The LCR is calculated by reference to the qualiﬁed liquid assets divided by 30-day cash net outflows. It is used to help manage short-term liquidity risks. To promote larization in the country of Georgia, the NBG deﬁnes a lower limit for the GEL LCR than that for the FC LCR. Since October 2019, FC Mandatory Reserves have been considered at 100% within high quality liquid assets for NBG LCR purposes. In addition, in the same period, NBG lowered FC mandatory reserves requirements from 30% to 25%. Since July 2021, the NBG regulation on mandatory FC reserve requirement has been further adjusted, to reflect the decreased share of FC deposits in total deposits. The FC mandatory reserve requirement will be reduced by 1% for every 2% decrease in the share of FC in total deposits. The initiative will have a positive effect on the capital adequacy position of the Bank. In September 2019, the NBG introduced a Net Stable Funding Ratio (NBG NSFR) for funding liquidity risk manage- ment purposes. The NSFR is calculated by dividing the available stable funding by the required stable funding. It is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating additional incentives for the Bank to rely on more stable sources of funding on a continuing basis. On a monthly basis, the Bank monitors compliance with the set limit for the NBG NSFR. As of 31 December 2021, the ratios were well above the prudential limits set by the NBG, as follows: 31-Dec-21 31-Dec-20 31-Dec-19 Minimum net stable funding ratio, as deﬁned by the NBG 100% 100% 100% Net stable funding ratio as deﬁned by the NBG 127.3% 126.0% 126.7% Minimum total liquidity coverage ratio, as deﬁned by the NBG 100.0% 100.0% 100.0% Minimum LCR in GEL, as deﬁned by the NBG 75% n/a 75.0% Minimum LCR in FC, as deﬁned by the NBG 100.0% 100.0% 100.0% Total liquidity coverage ratio, as deﬁned by the NBG 115.8% 134.2% 110.1% LCR in GEL, as deﬁned by the NBG 107.7% 132.2% 83.7% LCR in FC, as deﬁned by the NBG 120.8% 134.9% 128.2% Market liquidity risk is the risk that the Group cannot easily offset or eliminate a position at the then-current market price because of inadequate market depth or market disruption. To manage market liquidity risk, the Group follows the Basel III guidelines on high-quality liquidity asset eligibility to ensure that the Group’s high-quality liquid assets can be sold without causing a signiﬁcant movement in price, and with minimum loss of value. In addition, the Group has a liquidity contingency plan, which forms part of its overall prudential liquidity policy. The plan is designed to ensure that the Group can meet its funding and liquidity require- ments and maintain its core business operations in any deteriorating liquidity conditions that could arise outside the ordinary course of business. Funding and maturity analysis The Group’s principal sources of liquidity include customer deposits and accounts, borrowings from local and in- ternational banks and ﬁnancial institutions, subordinated loans from international ﬁnancial institution investors, local 120 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED interbank short-duration term deposits and loans, proceeds from sales of investment securities, principal repayments on loans, interest income, and fee and commission income. The Board believes that a strong and diversiﬁed funding structure is one of the Group’s differentiators. The Group relies on relatively stable deposits from Georgia as the main source of funding. The Group also monitors deposit concentration for large deposits and sets limits for deposits by non-Georgian residents in its deposit portfolio. To maintain and further enhance its liability structure, the Group sets targets for deposits and funds received from international ﬁnancial institution investors in its risk appetite via the respective ratios. The loan to deposit and IFI funding ratio (deﬁned as the total value of net loans divided by the sum of total value of deposits and funds received from international ﬁnancial institutions) stood at 100.9%, 101.2% and 104.8%, as at 31 December 2021, 2020 and 2019, respectively. The management believes that, in spite of a substantial portion of customers’ accounts being on demand, the diver- siﬁcation of these deposits by the number and type of depositors, coupled with the Group’s past experience, would indicate that these customer accounts provide a long-term and stable source of funding for the Group. Moreover, the Group’s liquidity risk management includes the estimation of maturities for its current deposits. The estimate is based on statistical methods applied to historic information about the fluctuations of customer account balances. Market risk The Group follows the Basel Committee’s deﬁnition of market risk as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. These risks are principally: (a) risks pertaining to interest rate re- lated instruments and equities in the “trading book” (ﬁnancial instruments or commodities held for trading purposes); and (b) foreign exchange risk and commodities risk throughout the Group. The Group’s strategy is not to be involved in trading ﬁnancial instruments or investments in commodities. Accord- ingly, the Group’s only exposure to market risk is foreign exchange risk in its “structural book”, comprising its regular commercial banking activities which have no trading, arbitrage or speculative intent. Foreign exchange risk The NBG requires the Bank to monitor both balance sheet and total aggregate balance (including off-balance sheet) open currency positions and to maintain the latter within 20% of the Bank’s regulatory capital. For the year ended 31 December 2021, the Bank maintained an aggregate balance open currency position of 0.5%. In addition, the Supervisory Board sets further limits on open currency positions. The ALCO has set limits on the level of exposure by currency and for total aggregate position that are more conservative than those set by the NBG and the Supervisory Board. The heads of the treasury and ﬁnancial risk management departments separately monitor the Bank’s compliance with these limits daily. Compliance with these limits is also reported daily to the Management Board and periodically to the Supervisory Board and its Risk Committee. On a Group-wide level, foreign-exchange risk is monitored and reported monthly. To assess the currency risk, the Bank performs a VAR sensitivity analysis on a quarterly basis. The analysis calculates the effect on the Group’s income determined by the worst possible movements of currency rates against the Georgian Lari, with all other variables held constant. During the years ended 31 December 2021, 2020 and 2019, the sensitivity analysis did not reveal any signiﬁcant potential effect on the Group’s equity: In thousands of GEL 31-Dec-21 31-Dec-20 31-Dec-19 Maximum loss (VAR, 99% conﬁdence level) (1,658) (3,959) (1,749) Maximum loss (VAR, 95% conﬁdence level) (1,141) (2,845) (1,208) Interest rate risk management Interest rate risk arises from potential changes in market interest rates that can adversely affect the value of the Group’s ﬁnancial assets and liabilities. This risk can arise from maturity mismatches between assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities. The major part of deposits, and part of the loans of- fered by the Group, are at ﬁxed interest rates, while a portion of the Group’s borrowing is based on a floating interest rate. The Group’s floating rate borrowings are, to a certain extent, hedged because the NBG pays a floating interest rate on the minimum reserves that the Bank holds with it. Furthermore, many of the Bank’s loans to customers con- 121 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 tain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, there- by limiting exposure to interest rate risk. The manage- ment also believes that the Bank’s interest rate margins provide a reasonable buffer to mitigate the effect of a possible adverse interest rate movement. The Group employs an advanced framework to man- age interest rate risk by establishing appropriate Risk Appetite limits, monitoring compliance with them and preparing forecasts. See details in Interest Rate Risk on pages 331-332 in notes to ﬁnancial statements. The Group measures four types of interest-rate risk based on the source of the risk: (i) re-pricing risk; (ii) yield curve risk; (iii) basis risk; and (iv) optionality (em- bedded option) risk. The Group considers numerous stress scenarios, in- cluding different yield curve shifts and behavioural ad- justments to cash flows (such as deposit withdrawals or loan prepayments), to calculate the impact on one year proﬁtability and enterprise value. Appropriate limits are set within the Risk Appetite framework ap- proved by Supervisory Board. Counterparty risk Through performing banking services such as lending in the interbank money market, settling a transaction in the interbank foreign exchange market, entering into interbank transactions related to trade ﬁnance or in- vesting in securities, the Bank is exposed to the risk of losses due to the failure of a counterparty bank to meet its obligations. To manage counterparty risk, the Bank deﬁnes limits on an individual basis for each counterparty, while on a portfolio basis it limits the expected loss from both treasury and trade ﬁnance exposures. As of 31 Decem- ber 2021, the Bank’s interbank exposure was concen- trated with banks that external agencies, such as Fitch, Moody’s and Standard and Poor’s, have assigned high A-grade credit ratings. CAPITAL RISK MANAGEMENT Capital risk is the risk that the Group may not have a sufﬁcient level of capital to maintain its normal busi- ness activities, and to meet its regulatory capital re- quirements under normal or stressed operating condi- tions. The management’s objectives in terms of capital management are to maintain appropriate levels of cap- ital to support the business strategy, meet regulatory and stress testing-related requirements and safeguard the Group’s ability to continue as a going concern. The Group undertakes stress testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Capital forecasts, as well as the results of the stress testing and what-if scenarios, are actively moni- tored with the involvement of the Bank’s management to ensure prudent capital management and timely ac- tions when needed. In 2021, the Group and the Bank complied with all regulatory capital requirements. In December 2017, the NBG adopted amendments to the regulations relating to capital adequacy require- ments. The changes include amendments to the regu- lation on capital adequacy requirements for commer- cial banks, and the introduction of new requirements (i) on additional capital buffer requirements for commer- cial banks within Pillar 2; (ii) on the determination of the countercyclical buffer rate; and (iii) on the identiﬁcation of systematically important banks and determining systemic buffer requirements. The purpose of these amendments is to improve the quality of banks’ regu- latory capital and achieve better compliance with the Basel III framework. Pillar 1 minimum requirements plus combined buffer requirements. The amendments to the regulation on capital adequacy requirements for commercial banks have made Pillar 1 minimum requirements in Georgia compatible with the framework established by the Ba- sel Committee of Banking Supervision. The amend- ments included: • the separation of the 2.5% conservation buffer, which was previously merged with minimum cap- ital requirements. The updated minimum regula- tory capital requirements are 4.5%, 6.0% and 8.0% for Common Equity Tier 1 capital, Tier 1 capital and Total regulatory capital, respectively; and • the introduction of a requirement that banks hold an additional combined buffer through Common Equity Tier 1 Capital, consisting of conservation, countercyclical and systemic buffers. The rate for the conservation buffer has been set at 2.5% of RWAs, while a 0% rate has been set for the countercyclical buffer. The countercyclical buffer can vary within the range of 0% to 2.5% and will be re- viewed periodically, based on the prevailing ﬁnancial and macroeconomic environment. In addition, the NBG designated certain commercial banks in Geor- gia as domestic systemically important banks (DSIBs) for which individual systemic buffers have been intro- duced, which means that the DSIBs will be required to set aside more Common Equity Tier 1 capital relative to RWAs, with the requirements being phased in from the end of 2018 to the end of 2021. In particular, the fol- lowing systemic buffers and compliance timeframes have been set by the NBG in relation to the Bank: 1.0% for the period from 31 December 2018 to 31 December 2019, 1.5% for the period from 31 December 2019 to 31 December 2020, 2.0% for the period from 31 December 2020 to 31 December 2021, and 2.5% from 31 December 2021 onwards. 122 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED Pillar 2 requirements. In accordance with the Basel III framework, the NBG also introduced additional capital buffer requirements for commercial banks within Pillar 2 that are based on a supervisory review and assessment process and deal with bank-speciﬁc risks that are not sufﬁciently covered under Pillar 1, including an unhedged currency in- duced credit risk buffer and a net General Risk Assessment Programme (GRAPE) buffer. The NBG has also introduced a credit portfolio concentration buffer and a net stress test buffer. The credit portfolio concentration buffer became effective from 1 April 2018, and the need for the net stress buffer will be assessed based on the regulatory stress test- ing results. Although the net stress test buffer has been effective since 1 October 2020, it is currently set at 0%. Under the NBG regulation, 56% of the capital required under Pillar 2 should be held through Common Equity Tier 1 capital, while 75% of the capital should be held through Tier 1 capital and 100% of the capital should be held through Total regulatory capital. Temporary Measures In response to the COVID-19 pandemic, in March 2020, the NBG implemented certain countercyclical measures in relation to capital adequacy requirements, including postponing the phasing-in of Pillar 2 buffers. According to the new schedule communicated by the NBG in October 2020, the phase-in of concentration risk and the Net GRAPE buffers will continue from March 2021 and will be fully introduced by the end of March 2023. In June 2021, the NBG announced its decision to restore the CICR and conservation buffers. Banks are required to fully restore the CICR buffer by the end of 2022 and the conservation buffer by the end of 2023. As of 30 June 2021, TBC Bank was in full compliance with the fully restored minimum requirements and conﬁrmed to the NBG that it would fully restore temporarily released capital buffers by July 2021, which lifted regulatory restrictions on capital distributions. The following table presents the capital adequacy ratios and minimum requirements set by the NBG: In thousands of GEL 31-Dec-21 31-Dec-20 31-Dec-19 CET 1 capital 2,759,894 1,911,233 1,871,892 Tier 1 capital 3,379,414 2,385,181 2,281,706 Tier 2 capital 723,513 752,731 692,323 Total regulatory capital 4,102,927 3,137,912 2,974,029 Risk-weighted exposures Credit Risk-weighted exposures 18,091,753 16,322,524 13,825,677 Risk-weighted exposures for Market Risk 21,981 106,379 15,429 Risk-weighted exposures for Operational Risk 2,103,895 1,872,574 1,749,821 Total Risk-weighted exposures 20,217,629 18,301,477 15,590,927 Minimum CET 1 ratio 11.73% 7.40% 10.40% CET 1 capital adequacy ratio 13.65% 10.40% 12.00% Minimum Tier 1 ratio 13.99% 9.20% 12.50% Tier 1 capital adequacy ratio 16.72% 13.00% 14.60% Minimum total capital adequacy ratio 18.38% 13.70% 17.50% Total capital adequacy ratio 20.29% 17.10% 19.10% NON-FINANCIAL RISK MANAGEMENT Operational risk management One of the main risks that the Group faces is operational risk, which is the risk of loss resulting from internal and exter- nal fraud events, inadequate process or products, business disruptions and systems failures, human error or damages to assets. Operational risk also implies losses driven by legal, reputational, compliance or cyber security risks. The Group is exposed to many types of operational risk, including: fraudulent and other internal and external criminal activities; breakdowns in processes, controls or procedures; and system failures or cyber-attacks from an external party with the intention of making the Group’s services or supporting infrastructure unavailable to its intended users, which in turn may jeopardize sensitive information and the ﬁnancial transactions of the Group, its clients, counterpar - ties or customers. Moreover, the Group is subject to risks that cause disruption to systems performing critical functions or business dis- ruption arising from events wholly or partially beyond its control, such as natural disasters, transport or utility failures 123 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 etc., which may result in losses or reductions in service to customers and/or economic losses to the Group. The operational risks discussed above are also appli- cable where the Group relies on outsourcing services from third parties. Considering the dynamic environ- ment and sophistication of both banking services and possible fraudsters, the importance of constantly im- proving processes, controls, procedures and systems is heightened to ensure risk prevention and reduce the risk of loss to the Group. To oversee and mitigate operational risk, the Group maintains an operational risk management framework, which is an overarching document that outlines the general principles for effective operational risk man- agement and deﬁnes the roles and responsibilities of the various parties involved in the process. Policies and procedures enabling the effective management of operational risks complement the framework. The Management Board ensures a strong internal con- trol culture within the Group, where control activities are an integral part of operations. The Board sets the operational risk appetite and the Operational Risk Committee oversees compliance with the limits. The Operational Risk Committee discusses the Group’s operational risk proﬁle and risk mitigation recommen- dations on a regular basis. The operational risk management department acts as a second line of defence. It is responsible for imple- menting the framework and appropriate policies and procedures to enable the Group to manage operation- al risks, as well as monitoring operational risk events, risk exposures against risk appetite and material con- trol issues. The department is also responsible for the day-to-day management of operational risks, using a range of techniques that include, but are not limited to: • running risk and control self-assessments (RCSA), which are aimed at detecting possible gaps in op- erations and processes with the purpose of sug- gesting appropriate corrective actions; • collecting internal risk events and conducting root- cause analyses for further risk mitigation purposes; • forming a uniﬁed operational loss database for fur - ther quantitative and qualitative analysis; • analyzing internal fraud events and monitoring key risk indicators; • performing new risk assessments and validating the launch of new products, services or procedures; • providing business advisory services regarding non-standard cases; • monitoring IT incident occurrence and overseeing activities targeted at solving identiﬁed problems; and • obtaining insurance policies to transfer the risk of losses from operational risk events. The operational risk management department has re- inforced its risk assessment teams and methodologies to further ﬁne-tune the existing control environment. The same applies to the set of actions directed to homogenise operational risk management process- es throughout the Group’s member companies. The operational risk management department reports to the Chief Risk Ofﬁcer. Various policies, processes and procedures are in place to control and mitigate opera- tional risks, including, but not limited to: • the New Risk Assessment Policy, which enables thorough risk evaluation prior to the adoption of new products, services, or procedures; • the Outsourcing Risk Management Policy, which enables the Group to control outsourcing (vendor) risk arising from adverse events and risk concen- trations due to failures in vendor selection, insufﬁ- cient controls and oversight over a vendor and/or services provided by a vendor, and other impacts on the vendor; • the Risk and Control Self-Assessment (RCSA) Pol- icy, which enables the Group to continuously eval- uate existing and potential risks, establish risk mit- igation strategies and systematically monitor the progress of risk mitigation plans. The completion of these plans is also part of the respective manag- ers’ key performance indicators; • the Operational Risk Event Identiﬁcation Policy, which enables the Group to promptly report on operational risk events, perform systematic root- cause analysis of such events and take corrective measures to prevent the reoccurrence of signiﬁ- cant losses; and • the Special Operational Risk Awareness Pro- gramme, which provides regular training to the Group’s employees and strengthens the Group’s internal risk culture. During the reporting period, one of the key operational risk management focus areas was the Risk and Con- trol Self-Assessment (RCSA) exercise, under which the Bank’s top priority processes were reviewed and areas of improvement were identiﬁed. The Operational Risk Management Framework and its complementing policies were updated to ensure ef- fective execution of the operational risk management programme. Additionally, the Bank has developed a bank-wide operational risk registry. Compliance The ﬁrst line of defence is responsible for compliance risk, strongly supported by the compliance depart- ment as the second line of defense. The Chief Com- pliance Ofﬁcer oversees compliance activities and reports quarterly to the relevant committee of the Su- pervisory Board, with a disciplinary reporting line to the CEO. The Bank’s Compliance Programme provides 124 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED Compliance Policies, trainings, risk-based oversight and ensures compliance with regulatory requirements. The compliance department manages regulatory risk by: • ensuring that applicable changes in laws and regu- lations are implemented by the process owners in a timely manner; • participating in the new product/process risk ap- proval process; • conducting analysis of customer complaints, the operational risk event database, internal audit ﬁnd- ings and litigation cases to proactively reveal pro- cess weaknesses; and • conducting an annual risk and control self-assess- ment (RCSA) of the internal processes. The Compliance Department ensures that all out- comes of the above mentioned analysis and process- es are addressed in a timely and appropriate manner. Anti-money laundering (AML) The Group aims to protect its customers, sharehold- ers and society from ﬁnancial crime and any resulting threat. The Group is fully committed to comply with applicable EU, UK, Georgian laws and regulations re- lated to ﬁnancial crime as well as relevant legislation of other countries where Group member ﬁnancial in- stitutions operate. It also seeks to meet the respective industry best standards. The Group has implemented internal policies, procedures and detailed instructions designed to prevent itself from being used or involved in money laundering, ﬁnancing of terrorism or in oth- er unlawful activities such as bribery, corruption or tax evasion. The Group’s AML/CTF compliance pro- gramme, as implemented, comprises written policies, procedures, internal controls and systems including, but not limited to: policies and procedures to ensure compliance with AML laws and regulations; KYC and customer due diligence procedures; a customer ac- ceptance policy; customer screening against a global list of terrorists and specially designated nationalities relevant ﬁnancial and other sanctions lists; regular staff training and awareness raising; and procedures for monitoring and reporting suspicious activities of the Bank’s customers. As part of the second line of defence, the AML unit seeks to manage risk in accordance with the risk appe- tite deﬁned by the Group and promotes a strong risk culture throughout the organization. The Group has a sophisticated, artiﬁcial intelli- gence-based AML solution in place to enable the AML unit to comply with the Sanctions Policy, monitor clients’ transactions and identify suspicious behavior. The AML unit works on constantly improving the soft- ware to increase operational efﬁciency and decrease false-positive alerts. The Bank performs an enterprise-wide AML Risk As- sessment annually, in line with the approved method- ology. Overall group-wide residual risks for the year 2021 were assessed as medium. The compliance de- partment addresses areas of attention in a timely and proper manner. As part of its ongoing supervision in 2021, the National Bank of Georgia (NBG) conducted a complex inspec- tion of the Bank, covering the period from January 2018 to June 2019. The NBG assessed the Bank’s AML/ CTF measures with regard to client risk classiﬁcation and risk-related due diligence measures; the UBO (Ultimate Beneﬁcial Owner) identiﬁcation process of entities with complex ownership structures; the Bank’s awareness of international transactions; the detection of suspicious transactions and other processes. The NBG’s overall assessment of these processes was ad- equate or mainly adequate and effective. As part of its ﬁndings, the NBG classiﬁed two clients as not properly identiﬁed and applied the relevant regulatory penalty in relation to those two clients. Information Security In order to manage the risks associated with cyber-at- tacks and ensure the security of clients, the Group continuously updates and enhances its in-depth secu- rity strategy, which covers multiple preventive and de- tective controls ranging from the data and end-point computers to edge ﬁrewalls. A newly built Security Operations Center monitors any anomaly that is identiﬁed across the organization’s network in order to detect potential incidents and re- spond to them effectively. At least once a year, a full information security and cy- ber security threat analysis is performed, taking into consideration the relevant regional and sector speciﬁc perspectives. Also at least once a year, a presentation is given to the Risk Committee of the Board, with a deep dive into the information security matters. At least once every two years, as part of this analysis, an external con- sultant is contracted to assess the efﬁciency of our ca- pabilities against industry best practices and real world cyber-attack scenarios. This analysis gives the Group a detailed review and insight, which helps to further enhance the information and cyber security systems. In addition, cyber-attack readiness exercises are per- formed on a regular basis. These exercises evaluate the actual position of the Group in this area and provide a benchmark against international best practices. An Information Security Steering Committee has been established to continuously improve information secu- rity and business continuity management processes and minimise information security risks. The commit- tee has been formed to centralise the information se- curity function, including physical security, HR security, data security, IT security and business continuity. 125 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The Group invests in effective information security risk management, incident management and awareness programmes, which are enhanced with automated tools that ensure acceptable levels of information se- curity risk within the organisation. Whenever preven- tive controls are not applicable, comprehensive busi- ness continuity and incident response plans ensure the Group’s ability to operate on an ongoing basis and limit losses in the event of a severe business disrup- tion. Since employees play a crucial role in informa- tion security, regular mandatory training sessions are conducted for all employees, comprised of remote learning courses on security issues, fraud and phishing simulations, and informative emails to further assist our employees with information security matters. New em- ployees are also given this training as part of the induc- tion process. These measures ensure that employees are fully aware of their responsibilities and are prepared for various security threats. In 2021, the Bank achieved ISO 27001 certiﬁcation of its information security management system. That demonstrates that the Bank is following robust infor- mation security practices effectively, in order to protect its information and information systems from different types of threats. TBC Bank has not experienced any material information security breach in the last three years. In December 2021, Ernst & Young Tbilisi ofﬁce con- ducted two audits, assessment against Cyber Securi- ty Management Framework and assessment against SWIFT CSCF for the Bank. As a result no critical ﬁndings and major non-compliances were identiﬁed during these exercises. Cyber Security Management Framework is deﬁned by National Bank of Georgia, which is based on NIST Cyber Security Management Framework. Model Risk Management In line with the NBG’s requirements, international regu- latory guidance and best practices, TBC Bank deﬁnes a model as a quantitative method, system, or approach that applies statistical, economic, ﬁnancial, or mathe- matical theories, techniques, and assumptions to pro- cess input data into quantitative estimates. A model has three components: an information input compo- nent, an information-processing component and a re- porting component. Model risk is deﬁned as the risk of adverse consequences (e.g., ﬁnancial loss, reputational damage, etc.) arising from decisions based on incor- rect or misused model outputs. TBC Bank’s Model Risk Management (MRM) function, reports directly to Chief Risk Ofﬁcer, and its policy, ap- proved by both Management Board and Board of Direc- tors, deﬁnes the framework within which it operates. Two main components of the framework are governance and validation. MRM acts as a second line of defence and aims to consistently identify, quantify, minimize and mit- igate model related risks across TBC Group. The governance component of the MRM deﬁnes the roles and responsibilities for the entirety of the mod- el lifecycle. It sets standards and procedures that en- compass all phases of the lifecycle, from planning and development through initial validation, model use, monitoring, ongoing validation and model retirement. It is also responsible for managing the model inventory and keeping model risk within the risk appetite. The validation component of the MRM is responsible for technical as well as conceptual evaluation of the model in question, in accordance to the standards and procedures set by governance. The MRM uses a risk- based approach during the initial and ongoing model validation process. Legal Risk The Bank’s legal department manages all legal and re- lated matters concerning the activities of the Bank and the Group. In accomplishing its mission to ensure that such activities fully conform with all applicable laws and regulations, the legal team delivers a wide array of pro- fessional legal services: it (i) interacts with internal and external clients, outside counsels, government and reg- ulatory entities; (ii) issues memos and opinions; (iii) drafts standardized and individual contracts; (iv) prepares corporate resolutions; (v) provides regulatory updates; and (vi) represents the Bank in courts, other dispute resolution venues and before other third parties. The legal team, which comprises lawyers with diverse back- grounds and experience, consists of the following key divisions: regulatory and legal compliance, corporate, dispute resolution, legal support and corporate gover- nance teams. Each division functions within clear and distinct job descriptions corresponding to the relevant knowledge, skill and capabilities of its members. As part of the Bank’s agile transformation effort, several lawyers are working within and/or in close cooperation with teams in charge of speciﬁc commercial projects. The department ensures effective execution of its duties through different processes and procedures. The Bank’s General Counsel manages the legal de- partment. S/he determines key business objectives for all legal teams, introduces the policies and vision, and ensures the effective performance of their duties. The General Counsel reports to the Management Board, the Supervisory Board, and their respective committees on existing legal risks, their mitigation strategies and the vi- sion for their effective management in the future. Sustainability Risks Sustainability risk management is done within a frame- work of established processes for risk management. According to our vision, a sustainable bank is a prof- itable institution that offers adequate, affordable and need-based services to its clients, treats its employees, suppliers and all other stakeholders with a high sense of responsibility, and strongly supports the develop- 126 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK MANAGEMENT CONTINUED ment of society. It is also a technologically advanced and environmentally aware bank that is trusted by so- ciety. The sustainability risks are related to the Group’s different roles as a lender, asset manager, service pro- vider, purchaser and employer. Of particular interest in the area of sustainability are risks related to com- pliance, conduct and digitalization, as well as human rights, working conditions, the environment, climate change, ﬁnancial crime, and information and IT secu- rity. Sustainable development policies and manage- ment structures are represented in various policy doc- uments and management domains. The Group has developed several thematic policies and codes that regulate various social and environ- mental protection issues related to company activity. They include: the Code of Ethics, the Incident Man- agement Policy, the Anti-Corruption Policy, the Per- sonal Data Protection Policy, the Conflict of Interests Management Policy, Green Purchase Recommenda- tions etc. In 2021, the ESG Coordination Department was created in order to support the establishment of an integrated ESG framework synergizing business, social, environmental and governance aims. The de- partment reports to the Chief Risk Ofﬁcer. For more details about sustainability management, please see our ESG strategy section on pages 26-37. Conduct risk Conduct risk is deﬁned as the risk to the delivery of fair outcomes for customers and other stakeholders. The Group’s Code of Ethics serves as a moral compass for all staff and sets high ethical standards that each employee is required to uphold. The Group’s employees undertake and perform their responsibilities with honesty and integrity. They are critical to maintaining trust and conﬁdence in its oper - ations and upholding important values of trust, loyalty, prudence and care. Additionally, the Group’s management understands that it bears responsibility for a diversiﬁed group of domestic and international investors, and needs to embrace the rules and mechanisms of protecting cus- tomers and maintaining the conﬁdence of investors and ﬁnancial markets. The Group’s directors strive to establish the “tone from the top,” which sets out the messages describing and illustrating the core compo- nents of good conduct. In managing conduct risk, the Group entrusts different departments and divisions with carrying out the task of managing, mitigating and eliminating conduct risk across all of the Group’s operations with clients and other stakeholders. The compliance, human capital, and operational risk departments cooperate to create a uniﬁed conduct risk management framework and assist business lines and departments, in the following ways: 1. developing and maintaining policies and proce- dures to ensure that the respective departments and individual employees comply with the provi- sions set out by regulatory provisions, best practic- es, the Code of Conduct and the Code of Ethics; 2. maintaining liaison with the compliance depart- ment regarding the administration of policies and procedures and the investigation of complaints re- garding the conduct of the department, its manag- er and/ or its employees; 3. ensuring that the product information provided to clients by front-line employees is accurate and complete, and is conveyed (both in written and oral form) in a simple and understandable way, regard- less of the level of sophistication of a given client; 4. maintaining records of client conversations and emails that contain sensitive and sales-related in- formation, including information pertaining to the acquisition of new clients and making complex product offers to existing and prospective clients; 5. delivering timely, on-going training for new em- ployees regarding proper conduct and ensuring that all employees stay up to date on evolving compliance standards within the Group through periodic training; 6. developing an open culture that encourages em- ployees to speak up without fear of punishment. Speciﬁcally, this means setting up processes for the prevention and detection of conflicts of inter- est, creating ethical incentives and bonus formulas, and aligning incentives and disciplinary practices to the Group’s risk appetite; and 7. employing qualiﬁed staff and sufﬁcient human and technological resources to investigate, analyse, implement and monitor sales and after-sales activ- ities. This approach ensures that the management of conduct risk is not limited to risk management units, including the compliance department, but is fully embraced by front-line departments and that proper conduct is fully integrated into the required job skills. VIABILITY STATEMENT The assessment of principal risks underpins the Via- bility Statement in the Directors’ Report for 2021 (see pages 154 to 155). The assessment involved consid- eration of the Group’s current ﬁnancial position over three years of coverage ending 1 January 2025, which is relevant to the strategic considerations of the Group. 127 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Governance 130 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIRECTORS’ GOVERNANCE STATEMENT Dear stakeholders, I am pleased to present our corporate governance report for 2021. This report sets out our approach to governance and the work of the Board in this area during 2021. We strive to ensure our governance structure is both ﬁt for purpose and in line with best practice. One of the Board’s main responsibilities is to ensure the Group applies the highest standards of corporate governance embedded in the culture and operations of our business. In this overview I have described the Board’s key corporate governance activities of 2021. Our Corporate governance statement is set out on pages 141-150. Engagement with stakeholders The Board is aware of its responsibility to engage with the Company’s stakeholders regularly and effectively. The Group’s mission, which is to make life easier, un- derpins the Board’s decision making. An overview of the range of matters that the Board considered this year is provided on page 146 and details of how the Board engaged with and considered shareholder and wider stakeholder interests are set out on page 149-150. A diverse and refreshed Board Our Board was refreshed during 2021 and I am hon- oured to chair a new group of Directors that is diverse, well rounded and effective. As reported in our Annual Report and Accounts 2020, Nikoloz Enukidze, Nicholas Haag and Eric Rajendra stepped down from the Board in May 2021, after almost a decade of service at the Group. Additionally, after just over a year of service on the Board, Abhijit Akerkar stepped down in September 2021 to purse a new exec- utive leadership role with a global ﬁnancial institution. To ensure the successful recruitment of new Direc- tors, we have implemented robust succession plan- ning for the Board and its committees as part of our corporate governance framework. We listened to in- vestor feedback and overall market guidance and, as a result, recruited ﬁve new Directors, who have brought fresh thinking and diversity of thought, new perspec- tives, enhanced skills and competencies, and a diverse range of experience and expertise to the Board. In April 2021, we appointed Per Anders Fasth, Thymios Kyria- kopoulos and Eran Klein to the Board as independent, non-executive Directors. In November 2021, two more non-executive Directors, Venera (Nino) Suknidze and Rajeev Sawhney, joined the Board. As well as strength- Chairman’s Governance Overview 131 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ening our Board, the latest appointments have enabled us to achieve the target set by the Hampton-Alexander Review of 33% female representation on our Board of Directors. Furthermore, we continue to comply with the Parker Review requirement of having at least one BAME (black, Asian and minority ethnic) Director on the Board. These changes have equipped our Board with best practice knowledge, skills, and experience in areas that are strategically important to the continued success of our Company, such as risk management, legal and compliance, information security expertise, interna- tional banking, and technology and data. With the new team in place, we were also able to renew the structure and membership of the Board´s committees. The Board formed two new important committees – the Technol- ogy and Data Committee and the ESG and Ethics Com- mittee that will help oversee strategically important areas for our Bank. The current Board roles and commit- tee memberships are provided on page 143. In accordance with the UK Corporate Governance Code (the “Code”), all Directors will offer themselves for re-election - or in the case of Rajeev Sawhney and Nino Suknidze, for election - as Directors at the forth- coming annual general meeting (AGM). Committee Changes To oversee the effective implementation of Group strategy and the management of existing and emerg- ing business risks and opportunities, the Board dele- gates different roles and responsibilities to Board-level committees. The Board has established four principal committees: the Corporate Governance and Nomina- tion Committee, the Audit Committee, the Remuner- ation Committee and the Risk Committee. As men- tioned above, to complement the work of our principal committees, the Board created two new committees – the Technology and Data (T&D) Committee and the ESG and Ethics Committee. Our T&D Committee fo- cuses on key strategic issues in relation to technology, digital systems and platforms, data, analytics, automa- tion and cyber security. Our ESG and Ethics Commit- tee will support the Board in its oversight of strategy, policies, initiatives and programmes in relation to ESG matters. The main roles and responsibilities of Board com- mittees are summarised in the corporate governance statement, on page 142. Board committee reports start on page 157. Group Strategy During 2021, much of the Board’s work was dedicat- ed to reviewing the strategy of the Group. We have ambitious growth and expansion plans and the pri- mary focus for the Board is to ensure that our strate- gy is sustainable and continues to create value for our shareholders. In addition to reviewing Group strategy, the Board also spent time developing the Group sub- sidiary governance framework to ensure that rules and procedures to manage risk and internal controls con- tinue to be robust and that the Group has the resourc- es and processes needed to implement its strategy effectively. Climate Change The Board is acutely aware of issues related to climate change and the effect these have on the Company’s business strategy, our customers, our operating envi- ronment and our wider stakeholders. The Board and its committees actively discussed these issues during the year and as a result, the Company approved its ﬁrst ESG Strategy in November 2021. The Board will con- tinue to monitor the implementation of this strategy during 2022. Our newly formed ESG and Ethics Com- mittee will help the Board to oversee ESG strategy set- ting and implementation, and to oversee the evolution of our TCFD (Task Force on Climate-related Financial Disclosures) reporting. Our TCFD disclosure is provid- ed on page 27 and our annual Sustainability Report for 2020 is available at www.tbcbankgroup.com. Board Development and Evaluation The Board pursued an extensive training programme during the year. The Company Secretary maintains an comprehensive catalogue of training courses, CPD (Continuing Professional Development) events and relevant thematic reports available to all Directors both in live and recorded formats. During 2021, Direc- tors routinely took part in these online seminars, with a special emphasis on remuneration and ESG-related matters. The Company Secretary has monitored atten- dance at these sessions throughout the year. We also engaged Lintstock Ltd, a market-leading provider of board performance evaluation services to FTSE companies. Lintstock Ltd designed a three-year, externally facilitated board evaluation programme for us, which is overseen by the Corporate Governance and Nomination Committee. The results of the evalu- ation for 2021, along with a description of the process and an action plan for 2022, are provided on pages 147- 148. The Board has committed to undertaking another extensive, externally facilitated evaluation process in 2022 and all new Board members have undergone a robust induction programme. Details are provided on page 144. Succession Planning In June 2021, the Board adopted new succession prin- ciples and implemented a robust process to analyse the current skills and competencies of the Board as a whole, as well as that of its individual committees. During 2022, we will be working closely with Lintstock Ltd to carry out an in-depth analysis of the skills and competencies of our new Board. Based on this exer- cise, and an assessment of the experience that will be valuable in the future, the Board plans to develop a new and enhanced Board succession plan, in line with the succession planning principles adopted by the Board in 2021. 132 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Shareholder Consultation following the 2021 Annual General Meeting At the Company’s most recent AGM, held on 14 June 2021, our shareholders passed all presented resolutions with the requisite majority, except for Resolution 17, which related to disapplication of pre-emption rights in connection with the issue of shares for the purpose of an acquisition or speciﬁed capital investment. Fur - thermore, three additional resolutions attracted more than 20% negative votes. These included Resolution 2, an advisory vote on the Directors’ remuneration re- port, and Resolutions 15 and 16 on the allotment of se- curities up to a speciﬁed amount and disapplication of pre-emption rights, which relates to the allotment of securities up to a speciﬁed amount of 5% of share capital. In accordance with provision 4 of the Code, we engaged with shareholders who voted against with re- spect to Resolutions 2, 15, 16 and 17. I, as the Board Chairman, supported by the Senior In- dependent Director and the Chair of the Remunera- tion Committee, conducted a consultation process with the largest shareholders who voted against those resolutions. As we announced on 15 December 2021, this engage- ment helped us better understand the shareholders’ concerns, which are summarised below, along with our planned course of action in relation to each one. Resolution 2 - Directors’ remuneration report We understand that the vote against this resolution was principally related to a speciﬁc, one-off discre- tion exercised by the Remuneration Committee. The dialogue with the shareholders has highlighted that most investors continue to support the Company’s remuneration policy which was approved by 96.17% of shareholders. The Company’s Remuneration Commit- tee has discussed the feedback in detail with the Board and will maintain a dialogue with shareholders on mat- ters related to executive remuneration. The results of this engagement are addressed in more detail in the Remuneration Committee Report by its Chair, Maria Luisa Cicognani, on page 176. Resolution 15 - Allotment of securities up to a speciﬁed amount and Resolution 16 and 17 - Disapplication of pre-emption rights We are aware that certain shareholders from outside the UK are not able to support a general allotment au- thority or can only support a reduced general authority or the disapplication of pre-emption rights as provided in these resolutions due to their governance policies. While the Board understands that some investors are unable to support the current allotment authority, we have noted that Resolution 15 continues to be support- ed by the majority of our shareholders. All three resolu- tions are in line with the Investment Association’s Share Capital Management Guidelines and the Pre-Emption Group’s Statement of Principles respectively, which represent best practice for UK-listed companies. Engagement with our investors is of utmost impor- tance for our Board. We will continue to engage with the shareholders for whom these authorities continue to present a concern and will keep the level of the au- thority sought under review. UK Corporate Governance Code The Code continued to apply to the Company during the year under review. Our statement of compliance with the Code is provided on page 142. Our approach to workforce engagement and details about the work of our designated independent non-executive Direc- tor for workforce engagement are provided on page 158. Arne Berggren Chairman 13 April 2022 DIRECTORS’ GOVERNANCE STATEMENT CONTINUED 133 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 VAKHTANG BUTSKHRIKIDZE CEO Appointed on 29 April 2016 Experience • Leading banker in the Caucasus and Eastern European region • Extensive strategic and ﬁnancial leadership experience of over 25 years • Robust knowledge and expertise of strategic planning and development, startup and ﬁntech management, mergers and acquisitions, and equity and debt capital debt raising and investor relations Vakhtang has more than 30 years of banking and ﬁnancial industry experience. He led the Group from its founding in Georgia in 1992 as a start up to the current market-leading ﬁnancial technologies institution. He joined TBC Bank as a Se- nior Manager in 1993 and became Chairman of the Management Board in 1996. Since 1998, he has held the position of Chief Executive Ofﬁcer of JSC TBC Bank and was appointed as Chief Executive Ofﬁcer of the Company in May 2016. Vakhtang is a prominent banker in the Caucasus and Eastern European region and has received several prestigious awards, including the Best Banker 2011 award from the GUAM Organization for Democracy and Economic Develop- mentand was named CEO of the Year 2014 for Central and Eastern Europe and the CIS by EMEA Finance magazine. In March 2019, he won the Special Award for Responsible Capitalism in Adversity from the prestigious FIRST organisation - a multidisciplinary international affairs organization, which aims to enhance dia- logue between leaders in industry, ﬁnance and government. Current External non-executive appointments • Board member of the Association of Banks of Georgia • Board member of the Business Association of Georgia • Member of the Visa Central & Eastern Europe, Middle East and Africa (CE- MEA) Business Council BOARD BIOGRAPHIES Joined the Group on 13 August 2019; Appointed as Chairman on 1 March 2021 Experience • Experience in international ﬁnancial institutions and advising governments • Board membership and committee chairing experience in other UK-listed banks • Experience in investment banking activities and in leading bank restructur- ings • Deep understanding of strategic planning and implementation Arne has worked in the ﬁnancial services industry for more than 25 years. He has held several senior leadership and advisory roles at prominent ﬁnancial intuitions including the IMF, World Bank, Swedbank, Carnegie Investment Bank AB and the Swedish Ministry of Finance and Bank Support Authority. Arne had a leading role in the handling of the Swedish banking crisis in 1991-93. During the Asian crisis, he assisted the FRA in Thailand and FSC/ KAMCO in South Korea with the han- dling of problem assets. During his career, Arne has also served as the CEO of en- tities outside the ﬁnancial industry and as an independent non-executive director at the Turkish asset management company, LBT Varlik Yonetim and Slovenian bank asset management company, DUBT Ltd. Current External non-executive appointments • Board member of Bank of Cyprus • Board member of Piraeus Bank Committee membership • Chair of the Corporate Governance and Nomination Committee • Member of the Remuneration Committee ARNE BERGGREN Chairman 134 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 MARIA LUISA CICOGNANI Independent Non-Executive Director BOARD BIOGRAPHIES CONTINUED Joined the Group on 10 September 2018 Experience • Extensive experience in international banking, ﬁnancial institutions and cor - porate governance • Deep understanding of the UK Corporate Governance and directors’ remu- neration framework • Strong leadership skills through signiﬁcant board membership and chairing experience • Extensive international strategic advisory experience in emerging and growth economies Maria Luisa has extensive experience in the ﬁeld of banking, ﬁnancial institutions and corporate governance. She worked at the European Bank for Reconstruction and Development (London) between 1993 and 2005. Subsequently, she was a director of Financial Institutions at Merrill Lynch and Head of Financial Institutions at Renaissance Capital in London and Moscow, as well as a Managing Director of Mediobanca (London). During 2014-16, Maria Luisa served as a non-executive member of the board of Azimut Global Counseling Srl (Italy) and Azimut Interna- tional Holding SA (Luxemburg). She has previously served as a Chairperson of Moneta Money Bank (listed on the Prague Stock Exchange), and in 2020-21 she was an independent non-executive director of UBI Banca (Italy). Current External non-executive appointments • Chairperson of Mobius Investment Trust, an LSE-listed company • Chairperson of Arafa Holding, listed on the Cairo Stock Exchange Committee membership • Chair of the Remuneration Committee • Member of the Risk Committee • Member of the Corporate Governance and Nomination Committee ERAN KLEIN Independent Non-Executive Director Joined the Group on 4 May 2021 Experience • Extensive experience in banking, credit, capital markets and legal • Signiﬁcant risk, corporate governance, strategy and structuring experience • Strong Emerging Markets banking and stakeholder management experience • Relevant experience and expertise in information security risk management Eran is an experienced international banker and lawyer who held senior roles over two decades in leading ﬁnancial institutions such as Commerzbank, Citibank, ING Financial Markets and Deutsche Bank across both developed and emerging markets. Eran accumulated valuable knowledge in capital markets, SME ﬁnance, retail lending, corporate governance, liquidity and balance sheet management, as well as in risk management, audit and strategy implementation. Currently, he also serves as a non-executive director and risk committee chair at Privatbank, the largest bank in Ukraine. Current External non-executive appointments • Non-Executive Director and Chair of the Risk Committee at Privatbank, Ukraine. Committee membership • Chair of the ESG and Ethics Committee • Member of the Technology and Data Committee • Member of the Risk Committee 135 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 PER ANDERS FASTH Independent Non-Executive Director Joined the Group on 4 May 2021 Experience • Extensive experience as CEO and senior executive with more than 20 years at leading ﬁnancial institutions • More than 30 years of accumulated experience as an independent non-ex- ecutive director • Strong listed company governance, leadership and strategic advisory skills • Relevant experience in the ﬁnancial information technologies (Fintech) and credit management industries across Europe • Relevant experience and expertise in information security risk management Per Anders served as a senior executive for 20 years at the leading North-Euro- pean bank SEB and as a CEO at SBAB Bank, Hoist Finance and European Res- olution Capital. Per Anders has deep strategic consulting experience from 10 years at top-tier consultancies McKinsey & Company and QVARTZ (now Bain & Company). He has been a non-executive director of several ﬁnancial institutions in Scandinavia and Greece where he was a board member of Piraeus Bank S.A., a leading listed Greek Bank. In addition, he has extensive professional experience from having worked in the Nordic and Baltic countries, Germany, Luxembourg, Slovenia, the UK and Ukraine where he was an advisor to the World Bank and the Ministry of Finance. Current External non-executive appointments • Chairman of Lyra Financial Wealth, a wealth management company • Chairman of Pepins Group, listed on Nordic GM for SMEs • Board member of Atle Investment Management/Services Committee membership • Chair of the Audit Committee • Member of the Risk Committee • Member of the Remuneration Committee RAJEEV SAWHNEY Independent Non-Executive Director Joined the Group on 24 November 2021 Experience • Strong global corporate leadership experience of more than 40 years • Signiﬁcant advisory and executive experience with technology and cyberse- curity companies • Extensive expertise in personnel management • Relevant experience and expertise in information security risk management Rajeev is a corporate growth executive with 40 years’ global experience in digital technologies, serving across various industry sectors in Europe, North America and Asia. Currently, Rajeev serves as Executive Chairman and a non-executive director of OXSIGHT Ltd, a medical equipment developer and an Oxford Uni- versity spin off. He was formerly a senior advisor to the CEO at global IT services ﬁrm Zensar Ltd in the UK and member of the advisory board at Garble Cloud Inc., a cybersecurity company in Silicon Valley, USA. Prior to that, Rajeev gained strong operational experience as President of HCL Technologies and at Mphasis, a Hewlett Packard company. Current External non-executive appointments • Executive Chairman and board member of OXSIGHT Ltd Committee membership • Chair of the Technology and Data Committee • Member of the ESG and Ethics Committee • Member of the Corporate Governance and Nomination Committee 136 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NINO SUKNIDZE Independent Non-Executive Director Joined the Group on 24 November 2021 Experience • Strong ﬁnancial services background • Extensive experience in major ﬁnancial services sector transactions and list- ings as a leading legal counsel • Strong governance, regulatory and risk management experience, including at an LSE-listed company • Experienced at advising companies across a range of sectors, including tele- communications, pharmaceuticals, energy and commerce Nino is a business lawyer, with 19 years experience in the Georgian market and deep expertise in various areas of practice including banking, ﬁnance, corpo- rate, regulatory, competition and capital markets. Currently, Nino is the managing partner of the law ﬁrm Suknidze & Partners LLC. During 2017-20, she served as general counsel at JSC Bank of Georgia. Before joining the bank, she held vari- ous positions at the Georgian ofﬁces of international law ﬁrms Dentons and DLA Piper for more than 11 years. Current External non-executive appointments • Vice President at Georgian Chamber of Commerce and Industry • Board member at Care Caucasus, a charity organisation in Georgia Committee membership • Member of the Audit Committee • Member of the Remuneration Committee • Member of the Corporate Governance and Nomination Committee BOARD BIOGRAPHIES CONTINUED THYMIOS P. KYRIAKOPOULOS Independent Non-Executive Director Joined the Group on 4 May 2021 Experience • Extensive experience as an investor, portfolio manager, risk taker and balance sheet planner • Experience in balance sheet de-risking and deep operational and gover- nance restructuring • Transformation leadership and crisis management spanning across systemic banks and Fintech • Strong ﬁnancial, risk and asset management advisory skills to companies and government entities Thymios is an internationally experienced banking executive specialising in op- erational transformation, balance sheet and risk management, ﬁnancial engineer - ing and portfolio management. He serves on the board of the Hellenic Corpora- tion of Assets and Participations, the Greek sovereign wealth fund, and is Chair of its Investment and Risk Committee. Thymios was an executive general manager and chief risk ofﬁcer of Piraeus Bank S.A, a leading listed Greek Bank, managing director at Goldman Sachs Inc. in the ﬁxed income currencies and commodities trading division, and has held board and executive roles in Insurtech, Fintech, ﬁ- nancial services and management consulting companies. Current External non-executive appointments • Board member of the Hellenic Corporation Of Assets And Participations Committee membership • Chair of the Risk Committee • Member of the Audit Committee • Member of the Technology and Data Committee 137 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Joined the Group on 10 September 2018; Appointed as SID on 15 September 2021 Experience • Deep experience with more than 23 years’ experience across the energy and petrochemicals industries including regulated commodity trading and ﬁnan- cial services • Chartered Director with the Institute of Directors in London, UK • Former member of the British-Georgian Society and former Chair of the Georgian Community in the UK • Relevant experience and expertise in information security risk management Tsira held various roles covering market risk management and commodity trad- ing at companies including Dynegy Inc. in the US and UK and at Shell Interna- tional Trading and Shipping Ltd (STASCO) in London. She served in different managerial roles in M&A and Commercial Finance, Group Treasury and Trading and Supply in the UK, Moscow and Barbados between 2005 and 2016. From 2016 to 2019, Tsira was the Head of Group Pensions Strategy and Standards at Shell International Ltd based in London. Since 2019, Tsira is the Head of Internal Audit and Investigations for Shell’s global Trading and Supply organization, which is the world’s biggest commodity trading and supply business. Current External non-executive appointments • Trustee Director of the British Gas Trustee Solutions Ltd, a closed pension fund (post British Gas acquisition by Shell) • Trustee Director, Shell Trustee Solutions Ltd • Board member of FaRiG ( Friends of Academic Research in Georgia) Committee membership • Member of the Audit Committee • Member of the ESG and Ethics Committee • Senior Independent Director • Designated Non-Executive Director for Workforce Engagement TSIRA KEMULARIA, CDir Senior Independent Non-Executive Director 138 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 THE BANK’S MANAGEMENT BOARD BIOGRAPHIES GIORGI MEGRELISHVILI Deputy CEO Chief Financial Ofﬁcer Giorgi was appointed as Deputy CEO and CFO of JSC TBC Bank in October 2020. He joined the Bank as a Deputy CFO in March 2020. Giorgi has 25 years global leadership experience in ﬁnancial services. Before join- ing TBC, Giorgi was a Director and Head of Capital Risk and Stress Testing at Natwest Markets N.V. in Amsterdam. Prior to that, Giorgi held a number of key leadership positions at Barclays Bank in London between 2008 and 2019, includ- ing as a Director at Barclays Treasury, the Head of Barclays Internal Large Exposure and the Head of Barclays Central Planning. During his work at Barclays, Giorgi also served as Barclays Bank PLC Solo Capital and Leverage Management Lead and the Head of Strategic Planning at Barclaycard UK. In his earlier career, Giorgi held various senior managerial positions at several Georgian organisations. Giorgi holds an MBA from the Judge Business School at the University of Cam- bridge. Vakhtang is also a member of the Board of Directors. His biography is provided on page 133. VAKHTANG BUTSKHRIKIDZE CEO 139 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 TORNIKE GOGICHAISHVILI Deputy CEO Retail & MSME Banking Tornike was appointed to his current role as Deputy CEO of JSC TBC Bank and Head of Retail in January 2020. Additionally, Tornike is leading the MSME bank- ing since January 2021. He joined TBC in 2018 as Chief Operating Ofﬁcer (COO). Tornike has more than 20 years’ ﬁnancial services and operations management experience in Georgia and Central and Eastern Europe. Prior to joining TBC, he has served as a Deputy CEO and Chief Operating Ofﬁcer at the Bank of Georgia Group and served at various other key positions at the same institution before that. During 2008-2010, Tornike held the position of CFO at BG Bank Ukraine (a subsidiary of Bank of Georgia). Earlier in his career, Tornike held the position of the CEO of Aldagi, an insurance company in Georgia, served as the chief ﬁnan- cial ofﬁcer of UEDC PA consulting and held various managerial positions at BCI Insurance. Tornike holds an MBA from the Caucasus School of Business and an executive diploma from Said Business School in Oxford. Nino was appointed to her current role as Chief Risk Ofﬁce of JSC TBC Bank in 2020. Prior to that, Nino held progressively senior positions at TBC after she ﬁrst joined the Bank in 2000. Nino was appointed as Deputy CEO of the Bank in 2006, leading TBC’s retail and MSME businesses at various times. Nino also serves on the supervisory boards of TBC’s key subsidiaries, including TBC Uzbekistan, TBC Leasing, and Space International, TBC’s digital banking platform. Nino has more than 25 years’ ﬁnancial services and banking experience in Geor - gia. In her earlier career, Nino held various leadership and managerial positions at JSC TbilCom Bank and the Barents Group. Nino holds an MBA from the European School of Management in Tbilisi. NINO MASURASHVILI Deputy CEO Chief Risk Ofﬁcer 140 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NIKOLOZ KURDIANI Deputy CEO Brand Experience Marketing & Payments & Head of International Business Nikoloz was appointed to his current role as Deputy CEO of JSC TBC Bank in January 2021, leading Brand Experience, Marketing and Payments, as well as the Group’s International Business. He joined the Bank in 2014 as the Deputy CEO in charge of Marketing and MSME banking. Additionally, Nikoloz has been leading TBC’s digital banking platform, Space, since 2018. Nikoloz also serves as the chair of the supervisory board at TBC Uzbekistan and PayMe in Uzbekistan. Nikoloz has more than 15 years’ experience in the banking industry in Central Asia, CEE and Europe. Prior to joining TBC Bank, Nikoloz was the managing director at Kaspi Bank, a leading retail bank in Kazakhstan. At Bank of Austria, UniCred- it Group, he served as the senior sales support expert in the CEE retail division, responsible for Turkey, Kazakhstan, Ukraine and Serbia. At ATF Bank, UniCred- it Group in Kazakhstan, he was in charge of the retail banking division. Earlier in his career in Georgia, Nikoloz served as the head of the retail banking division of Bank Republic Georgia, Société Générale Group, and held several leadership and managerial positions at Bank of Georgia. Nikoloz holds an MBA from IE Business School in Spain and a masters degree in International Economics from Georgian Technical University. GEORGE TKHELIDZE Deputy CEO Corporate & Investment Banking Wealth Management George was appointed to his current role at the Bank in November 2016, leading the Corporate and Investment Banking businesses. George is also responsible for the Bank’s Wealth Management and leasing businesses since January 2021. George ﬁrst joined TBC in 2014 as Deputy CEO and the Chief Risk Ofﬁcer. George has more than 20 years of experience in global ﬁnancial services. Prior to joining TBC, he worked for Barclays Investment Bank, where he held the position of Vice President in the Financial Institutions Group (FIG), EMEA. Before that, he was an Associate Director in the Barclays Bank Debt Finance and Restructuring teams. During his career at Barclays in London, George worked on and execut- ed multiple M&A, debt and capital markets transactions with European ﬁnancial institutions. In his earlier career in Georgia, George served as the Chief Executive Ofﬁcer at Aldagi, the leading insurance company in Georgia and held progres- sively senior positions at the same company prior to that. George is Stanford Executive Program (SEP) graduate, holds an MBA from the London Business School and a Master of Laws degree (LLM) in International Commercial Law from the University of Nottingham. THE BANK’S MANAGEMENT BOARD BIOGRAPHIES CONTINUED 141 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 AGE GENDER DIVERSITY 6 3 BOARD TENURE 5 3 3 3 3 Male Female 60-69 40-49 50-59 0-2 years 2-4 years 4-6 years 1 CORPORATE GOVERNANCE STATEMENT Corporate Governance Statement OUR BOARD IN 2021 Retail/Commercial banking Financial markets/wholesale banking Insurance Major change programmes Risk management in financial institutions Core technology operations Government/regulatory Strategic thinking Digital impact Relevant financial knowledge and expertise Information security experience Skills and experience 7 out of 9 9 out of 9 3 out of 9 4 out of 9 8 out of 9 5 out of 9 8 out of 9 9 out of 9 5 out of 9 8 out of 9 4 out of 9 The Board meets the recommendation of the Parker Review that at least one of its members should be black, Asian or an ethnic minority (BAME), and the Group intends to continue to meet that recommendation. The Board also meets the recommendation of the Hampton-Alexander Review that at least 33% of Board should be female by 2022. Note: Data as at 13 April 2022 Ethnic diversity 142 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE STATEMENT CONTINUED HOW WE OPERATE Corporate governance framework The Group’s Corporate governance statement provides shareholders with an explanation of how the Company has applied the main principles of the Code - the Group’s approach to governance in practice, and the work of the Board and its Committees. Compliance statement As a premium-listed company on the London Stock Exchange, the Company has complied fully with the Code and applied its principles as issued by the Financial Reporting Council (FRC) in full throughout 2021. The Code can be found on the FRC website www.frc.org.uk. HOW THE BOARD IS SUPPORTED BY ITS COMMITTEES The Board delegates some of its responsibilities to, and is supported by, its Committees, which oversee and make recommendations on the matters delegated to them. Principal Committees The Board has established four principal Board Committees: • The Audit Committee deals with external auditors, internal controls and ﬁnancial reporting, as well as, communi- cation with the market and its regulators. • The Risk Committee focuses on the possible risks and capital issues of the Company. • The Remuneration Committee naturally considers remuneration-related issues, such as recommending levels of compensation that attract and retain talent and are acceptable to our stakeholders; and • The Corporate Governance and Nomination (CGN) Committee is responsible for talent management and nomi- nation and also for succession planning for the Board and the executive team. Audit Committee Risk Committee Remuneration Committee Corporate Governance & Nomination Committee Technology & Data Committee ESG & Ethics Committee Executive Committee SHAREHOLDERS (Annual General Meeting) BOARD OF DIRECTORS The Board’s core role is to promote the long-term success of the Bank for the beneﬁt of its shareholders GROUP CEO 143 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 New Committees Two new Committees provide further support to the Board in three key strategic areas – technology, ESG Strategy and climate change. The Technology and Data (T&D) Committee, established in June 2021, helps the Board oversee key enablers of strategy relating to data and cyber issues, and IT resources. The ESG and Ethics Committee, estab- lished in January 2022, ensures the Company stays focused on the ESG issues that are key for all our stakeholders. Both Committees began operating in 2022 and will report on their activities in the Annual Report and Accounts 2022. Committee membership Board Committee membership and attendance at meetings is recorded below. Each Committee is led by a Chair, and membership consists solely of non-executive Directors. Chairs of each Board Committee report on Committee business at each Board meeting, including matters being recommended by a Committee for Board approval. The process for setting a Committee agenda and running a Committee meeting mirrors that of the Board. Terms of Ref- erence for each Board Committee are available on our website (www.tbcbankgroup.com). Membership of Board Committees on 14 April 2022 is as follows: Member Audit Committee Risk Committee Remuneration Committee CGN Committee Technology & Data (T & D) Committee ESG and Ethics Committee Arne Berggren (Chairman) Tsira Kemularia (SID) Maria Luisa Cicognani Eran Klein Per Anders Fasth Thymois Kyriakopoulos Rajeev Sawhney Nino Suknidze Member Chairperson Board Meetings in 2021 (36) Regularly Scheduled Meeting (6) eligible/ attended Strategy Review (3) eligible/ attended Approval of Financial Statements (6) eligible/ attended Board Changes and Composition (6) eligible/ attended Policy and Miscellaneous (12) eligible/ attended International Expansion (3) eligible/ attended Arne Berggren (C) 1 6/6 3/3 6/6 6/6 12/12 3/3 Tsira Kemularia 6/6 3/3 6/6 6/6 12/12 3/3 Maria Luisa Cicognani 6/6 3/3 6/6 6/6 12/12 3/3 Per Anders Fasth2,4 4/4 3/3 4/4 1/1 9/8 1/0 Eran Klein5 4/4 3/3 4/4 1/1 9/9 1/1 Thymios Kyriakopoulos2,6 4/4 3/3 4/4 1/1 9/8 1/1 Rajeev Sawhney8 2/2 0/0 0/0 0/0 0/0 0/0 Nino Suknidze9 2/2 0/0 0/0 0/0 0/0 0/0 Nikoloz Enukidze10 2/2 0/0 3/3 5/5 5/5 2/2 Nicholas Haag2,11 2/2 0/0 3/3 5/3 5/5 2/2 Eric Rajendra2,12 2/2 0/0 3/3 5/5 5/4 2/2 Abhijit Akerkar13 4/4 2/2 4/4 6/6 8/8 2/2 Vakhtang Butskhrikidze 6/6 3/3 6/6 6/6 12/12 3/3 ATTENDANCE Board and Committee attendance Attendance at the various Board meetings in 2021 was as follows: (C) – Chair 144 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE STATEMENT CONTINUED Attendance at the Board Committee was as follows: 1 Arne Berggren succeeded Nikoloz Enukidze as Chairman of the Board effective from 1 March 2021. 2 Unable to attend due to another pre-existing commitment. 3 Arne Berggren succeeded Tsira Kemularia as Chair of the Corporate Governance and Nomination Committee effective from 15 Sep- tember 2021. 4 Per Anders Fasth joined the Board on 4 May 2021 and the respective Committees on 17 June 2021. 5 Per Anders Fasth succeeded Maria Luisa Cicognani as Chair of the Audit Committee effective from 17 June 2021. 6 Eran Klein joined the Board on 4 May 2021 and the respective Committees on 17 June 2021. 7 Thymios Kyriakopoulos joined the Board on 4 May 2021 and the respective Committees on 17 June 2021 and succeeded Abhijit Akerkar as Chair of the Risk Committee effective from 17 June 2021. 8 Rajeev Sawhney joined the Board on 25 November 2021, but did not join any Committees until January 2022.. 9 Nino Suknidze joined the Board on 25 November 2021, but did not join any Committees until January 2022. 10 Nikoloz Enukidze did not seek re-election by the shareholders at the 2021 AGM and stepped down from the Board on 14 June 2021. 11 Nicholas Haag did not seek re-election by the shareholders at the 2021 AGM and stepped down from the Board on 14 June 2021. 12 Eric Rajendra did not seek re-election by the shareholders at the 2021 AGM and stepped down from the Board on 14 June 2021. 13 Abhijit Akerkar stepped down from the Board on 15 September 2021. Board member Corporate Governance and Nomination Committee eligible/attended Remuneration Committee eligible/attended Audit Committee eligible/attended Risk Committee eligible/attended Arne Berggren (C) 3 6/6 (C) 5/5 1/1 3/3 Tsira Kemularia3 11/11 5/5 10/10 5/5 Maria Luisa Cicognani5 6/6 10/10 (C) 4/4 13/13 Per Anders Fasth 5, 2 0/0 5/5 6/6 (C) 8/7 Eran Klein 6 0/0 0/0 6/6 0/0 Thymios Kyriakopoulos 7 0/0 0/0 6/6 8/8 (C) Rajeev Sawhney 8 0/0 0/0 0/0 0/0 Nino Suknidze 9 0/0 0/0 0/0 0/0 Nikoloz Enukidze 10 4/4 4/4 0/0 0/0 Nicholas Haag 11 4/4 5/5 4/4 5/5 Eric Rajendra 2,12 4/4 5/4 0/0 0/0 Abhijit Akerkar7,13 6/6 0/0 0/0 9/9 (C) – Chair The Executive Committee The Executive Committee assists the CEO of the Company in the performance of his duties. This includes the devel- opment and implementation of strategy and associated operational plans, development of Company policies, mon- itoring of operating and ﬁnancial performance, and assessment and control of risk. The Executive Committee meets regularly and provides an opportunity for the Group CEO to discuss strategic, ﬁnancial, and commercial matters re- lated to the Group companies. The Executive Committee is chaired by the Company CEO and comprises members of senior management, as well as the Head of Human Resources and the Chief Information Ofﬁcer (CIO) of JSC TBC Bank, the Company’s main subsidiary. The CEO reports to the Board on the work of the Executive Committee. Induction and training Formal inductions are arranged for newly appointed Directors based on individual needs, skills and experience. Typi- cally, these include a series of meetings with the Chairman and other Directors and senior executives, as well as local site visits to provide familiarity with the business. During 2021, there were ﬁve new appointments to the Board. The induction process for these new appointments included an online introduction to the business, followed by discus- sions with executives and key business unit managers and an introduction to the operations, risks and governance environment of the Group. In addition, all new Directors received training on their duties as Directors of a listed com- pany with Baker McKenzie LLP, the Company’s external counsel. For Committee members, thematic trainings were organised, including on-boarding sessions with the Company’s external auditor, PricewaterhouseCoopers LLP (PwC) for the Audit Committee, and with Baker McKenzie LLP for the Remuneration Committee. Members of the Board must complete a self-assessment process at the end of the year, which invites them to identify a relevant development programme. 145 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The Board is led by the Chairman and provides con- structive challenge, oversight and advice to ensure the Company’s success. The Chairman ensures there is helpful debate in the boardroom in order to create and maintain an environment in which the Board remains open to different viewpoints and ideas. Moreover, the Chairman takes responsibility to ensure the Board is updated in a timely manner about the Company’s performance, in order to make good de- cisions. The Chairman ensures information exchanges between the Board, the Committees and executives. If there is a need for independent advice, the Board can seek it directly at the Company’s expense. Board operations As we adapted to a post-pandemic working model, the Board made use of a hybrid meeting calendar with a mix of in-person and online meetings. During 2021, the Board met 36 times and two of these meetings were in person. The Board continued to supplement its regular review meetings with video conferencing to discuss strategy, take thematic “deep dives” on busi- ness critical topics, and oversee key issues. A formal schedule of matters for Board approval is in place to ensure it retains control over key decisions. Matters include approval of Group strategy, long-term objectives, risk appetite, annual operating and capital expenditure budgets, changes to the Group’s capital, share buy-backs, major acquisitions and/or mergers, annual reports and accounts. The full schedule is avail- able on the website at www.tbcbankgroup.com. All Board meetings follow a tailored agenda agreed in advance by the Chairman, CEO and Company Sec- retary. The Board and all six Board-level Committees have a detailed schedule of work, which organises the Board’s workload throughout the year in line with the schedule of matters reserved for the Board and the Terms of Reference for each principal Committee. The Board and its Committees rely on management to raise items for approval. The processes of agenda setting and reporting to the Board are reviewed as part of the Board performance evaluation. Directors are expected to attend all meetings of the Board and of the Committees to which they belong.. Board composition In accordance with the Code, the majority of the Board are independent non-executive Directors. At the time of this report’s publication, the Board comprises eight independent non-executive Directors and one exec- utive Director – the CEO. The Board and Committee composition tables, along with the meeting atten- dance information, are provided on pages 143-144. Each non-executive Director is obliged to inform the Board of any circumstances that could impair their in- dependence. Details of the individual Directors and their biographies are on pages 133-137. Diversity policy The Board recognises the importance of ensuring di- versity, and sees signiﬁcant beneﬁts to our business in having a Board and management team drawn from di- verse backgrounds, as this brings a range of expertise, cultural knowledge and different perspectives in dis- cussions and improves the quality of decision making. The Board adopted a Board Diversity Policy in Sep- tember 2020. More information on the Board diversity can be found in the Corporate Governance and Nom- ination Committee report on page 157 and the Board Diversity Policy is available at www.tbcbankgroup.com. Directors’ commitments The Directors must disclose to the Board any external appointments or other signiﬁcant commitments pri- or to their appointment. Should these appointments change during their tenure, Directors must disclose any changes and conflicts that might arise. They will then be considered and approved by the Board. Each non-executive Director must devote such time as is necessary for the effective discharge of their duties. Where current non-executive Directors hold external directorships or other external positions, the Board be- lieves they still have sufﬁcient time to devote to their duties as a Director of the Company, and that the exter- nal roles held provide them with valuable expertise that enhances their ability to act for the Company. No sig- niﬁcant changes to the commitments of the Chairman or non-executive Directors were identiﬁed during 2021. Re-election of Directors All Directors of the Company will seek re-election, or - in case of Rajeev Sawhney and Venera (Nino) Suknidze – election at the next AGM and further information will be set out in the Notice of AGM. Biographical details of the Directors are included on pages 133-137. HOW THE BOARD LEADS THE GROUP The Board is the principal decision making body of the Group and is collectively responsible for promot- ing the Group’s purpose, culture, values and long-term success. The Board ensures the delivery of sustainable value to stakeholders by establishing and overseeing the strategic direction of the Company and its busi- ness. The Board’s role is to provide leadership through the effective oversight and review of Group operations. It sets the Group’s risk appetite, monitors operational and ﬁnancial performance and reporting, ensures the Group is adequately resourced with effective controls and remuneration policies, and checks that there are appropriate succession planning arrangements in place. The Directors are aware of their duties under Section 172 of the Companies Act 2006 and further in- sight into how the Board takes into account the views and interests of our stakeholders can be found on pag- es 42-43. 146 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE STATEMENT CONTINUED Division of responsibilities There is a clear division of responsibilities between the Chairman, the CEO and the Senior Independent Director. As Chairman, Arne Berggren is responsible for ensuring the Board as a whole performs a full and constructive role in the development and determination of the Group’s strategy and overall commercial objectives. He also oversees the Board’s decision making processes. The CEO, Vakhtang Butskhrikidze, is responsible for the Company’s day-to-day management and has the principal responsibility of running the Group’s business. He is responsible for proposing, developing and implementing the Group’s strategy and overall commercial objectives in close consultation with the Chairman and the Board. In addi- tion, the Board has appointed, in line with the requirements of the Code, Tsira Kemularia as the Senior Independent Director, who provides a sounding board for the Chairman. This separation of responsibilities between the Chairman and the CEO ensures no single individual has unfettered powers of decision-making. Full details of the division of responsibilities between the Chairman, the CEO and the Senior Independent Director are available on our website at www.tbcbankgroup.com. WHAT THE BOARD DISCUSSED IN 2021 During the year under review, the Board considered the following matters: Board activities in 2021 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Setting Strategy • Group strategy • Business line/function/country strategy • Technology • Human Capital • ESG Strategy Performance against strategic objectives • Financial performance • Results and accounts • Dividends and interim dividends • Annual budget Risk • Risk function updates • Bank and group risk Appetite • Capital and liquidity Governance • Recruitment and appointment of new Directors • Board composition and structure • Board and Committee effectiveness • Subsidiary governance framework • Management leadership development • Update of Committee Terms of Reference • Review and approval of policies and procedures • Appointments and succession planning Regulatory, macroeconomic and country insights • Macroeconomic regular updates and thematic deep dives • Country updates • Regulatory matters 147 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 HOW THE BOARD MONITORS ITS PERFORMANCE In 2021, TBC Bank engaged Lintstock Ltd to review the Board’s performance. Lintstock Ltd is an advisory ﬁrm special- ising in Board effectiveness reviews, and has no other connection with TBC Bank or any of the Company’s Directors. Lintstock Ltd ﬁrst consulted the Company Secretary in order to determine the scope of the evaluation and tailor sur - vey content for the Board and the business. The ﬁrm then asked members of the Board to evaluate its performance, and that of its Chair and Committees, through online surveys, encouraging candid feedback by guaranteeing that all responses would remain anonymous. Directors were also asked to reflect on their own individual contribution to the Board, and to identify any personal training or development needs. In addition to addressing core areas of governance, the review focused on the following areas, in the context of the ongoing COVID-19 pandemic: • The clarity of the Group’s strategy, and the main challenges facing TBC Bank in delivering the strategy over the coming years; • The Board’s oversight of the Group’s expansion into Uzbekistan, and any lessons that can be drawn for the beneﬁt of future international expansion efforts; • The Board’s engagement with shareholders, customers, regulators and subsidiaries, as well as its awareness of the views and feelings of employees and the culture throughout the Group; • The effectiveness with which ESG considerations are incorporated into Board discussions and decisions, and the Group’s overall commitment to ESG; • The Board’s external focus on digital developments, the competitive landscape, and the potential impact of geo- political events on the Group; • Risk management and internal controls, and lessons that can be drawn from the events of the last year to improve the Group’s risk processes; and • The structure and capacity of the Group at senior levels, and the Board’s oversight of the Company’s processes for developing and retaining talent. PRINCIPAL DECISIONS The principal decisions made by the Board during 2021, and the impact that these had on various stakeholders are detailed below: Strategy and business performance In 2021, the Board held several “deep dive” strategy sessions and approved the Group’s strategy for the next 5 years in December. Among principal decisions taken by the Board in 2021 in this regard was the approval of the joint venture with EBRD and IFC in Uzbekistan. Other matters discussed during strategy deep dive sessions included the Group’s international expansion plans, corporate and investment banking operations, retail and affluent banking operations, ecosystem businesses and their development, IT strategy, ESG Strategy, Group governance structure and subsidiary management principles; and the Group’s HR strategy. Financial decisions During the year, the Board reviewed the Group’s performance against budget and monitored the achievement of Key Performance Indicators. The Board also considered, reviewed and approved of the quarterly, interim and annual ﬁnancial statements, including approval of the going concern basis of preparation and the Group’s viability statement. The Board also approved the Company’s ﬁrst interim dividend payment in September 2021. Risk, regulatory and legal considerations In 2021, the Board, with the support of the Risk Committee, continued to have oversight of post-COVID recovery, ensuring business resilience, monitoring ﬁnancial performance and capital management of the group, restoration of buffers, and mandating vaccines. The Board also considered and approved the Bank’s and the Group's risk appetite statement, resolution and recovery plan and long-term capital planning. Governance During 2021, the Board, with support from the Corporate Governance and Nomination Committee, considered and approved the appointment of ﬁve new Board members and the formation of two new committees. The Board also worked on effective Board succession and composition, as well as management succession and leadership development. During the year, the Board considered and approved various Group-wide policies with the recommendation of relevant Committee, including the Group Code of Conduct and Code of Ethics, the Data Protection Policy, the Gender Policy, the Environmental Policy, the Human Rights Statement, and various risk policies. At the end of the year, the Board reviewed the ﬁndings of the externally facilitated Board evaluation exercise and concluded that the Board and its Committee continued to function effectively. The Board also conducted a detailed analysis of these results and developed annual Board and Committee action plans in March 2022. 148 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE STATEMENT CONTINUED Lintstock Ltd collated the Directors’ feedback and produced narrative reports containing key observations and rec- ommendations for improvement. The reports also provided comparisons with Lintstock Ltd’s Governance Index, which contextualises the results of the Board review with reference to Lintstock Ltd’s wider client base. Feedback on the performance of the Board was positive and Directors felt the Board was discharging its responsibili- ties effectively. The review also identiﬁed a number of areas in which performance could be improved, and the Board has agreed the following action plan: Areas of focus for the Board Planned action for 2022 Group strategy and critical decisions in 2022 The Board will follow up on the Group strategy and monitor its fulﬁlment on a quarterly basis Development in areas of importance for strategy and stakeholders The Board will focus on further enhancing its understanding of ESG matters, as well as the critical enablers of Group strategy, such as Data, IT and cyber security, talent management, optimal composition and succession planning for the Executive Committee and other critical roles. Increased complexity of the Group The Board will maintain a focus on further enhancing subsidiary governance and implications of the ambitious international strategy in this regard. Internal control and improvement of control functions in light of increased complexity The Board will focus on further enhancing the Group’s internal control and the continued effectiveness of its policies and procedures. Board decision-making The Board will focus on further improving the effectiveness of its decision-making, team dynamics and stakeholder engagement. The performance of the Board’s Committees was assessed via surveys tailored to the speciﬁc requirements of each Committee. Directors felt that all Committees were effective and that performance had improved throughout 2021. The individual Committee reports in this annual report summarise their committee-speciﬁc performance plan for the forthcoming year. HOW THE BOARD MONITORS CULTURE AND ENGAGES WITH STAFF The Group’s strategic review on pages 78–81 details the policies in place to ensure all colleagues are supported by the business and enabled to develop satisfying and appropriate careers with the organisation. The Board conducts regular reviews to ensure progress and see that the processes in place are in line with the Group’s culture. The Board receives frequent updates from the Head of Human Resources and the Board’s Remuneration Committee reviews the pay and beneﬁts structure across the whole Group to ensure pay levels are appropriate. The Board has appointed one independent non-executive Director, Tsira Kemularia, to act as a Staff Ambassador re- sponsible for employee engagement. The Staff Ambassador established a comprehensive engagement programme for 2021 and 2022 to bring the employee voice into the boardroom and understand if and how executive remuneration aligns with wider Company pay policy, incentives and culture. The Remuneration Committee is able to take this feed- back into account when setting the policy for executive Director remuneration. In line with FRC Guidance on Board Effectiveness, the goal of an employee ambassador is to: • Bring a workforce view to the boardroom; • Deliver insights into the culture of the Company and employee concerns to the Board; • Provide feedback about the Company’s business practices to the Board from those delivering them.; and • Follow up on the employee engagement survey to understand the issues that have emerged, and to establish a feedback loop with transparency around actions taken to address those issues. 149 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The Staff Ambassador undertook the following programme during 2021: 1. Deﬁned what we mean by “workforce” and how we select colleagues for engagement activities. In 2021, we en- gaged with the full-time workforce based in Georgia. Our colleagues from the Group subsidiaries will be included in the Staff Ambassador’s engagement in 2022. 2. Ensured wide outreach with an online questionnaire that sought insights on the following matters: – Is there a forum for the workforce to share ideas and concerns? – Does the Board listen to the ideas and concerns from the workforce? – Does management provide feedback on how complaints and concerns have been dealt with? – How comfortable do our people feel about challenging and reporting issues of concern, and is there any evi- dence that they are doing this? – Does the workforce think leaders and managers exemplify the Company’s values? – Does the workforce see the Company’s values being displayed in the way the business is run and decisions are made, as well as in leadership behaviour? 3. Held focus-group meetings with employees from different functions based on the insights gained from the on- line questionnaires. 4. Gave regular updates to the Board on insights gained throughout the engagement programme. The Staff Ambassador reported to the Board on her engagement programme with the workforce, which included on- line surveys and focus groups, both in person and via teleconference. The Board also received regular updates from the Group CEO and the Head of Human Resources of JSC TBC bank on employee views and sentiment, including insights from the annual staff surveys. These different engagement opportunities brought employee perspectives to the Board decision-making process. For further details of how the Board considered results from its engagement with employees and other stakeholders, see the Section 172 statement on page 42. The Board looks forward to continuing its workforce engagement programme with support from the Staff Ambassador in 2022. HOW PRINCIPAL RISKS ARE MONITORED AND CONSIDERED BY THE BOARD The Board has considered an appropriate risk appetite for the Group, and an associated risk management framework. As explained on pages 154, the Risk Committee monitors the effectiveness of the Group’s risk management frame- work, practice and internal control mechanisms on behalf of the Board and reports any areas of concern. TCFD-RELATED DISCLOSURES The Board has overall responsibility for ESG and climate-related risk management; the Risk Committee has reviewed and recommended the ESG strategy and this was approved by the Board in November 2021. The Board created a dedicated ESG and Ethics Committee in January 2022, responsible for supporting the Board in its oversight of ESG strategy implementation. There is also an ESG Committee at management board level in JSC TBC Bank, which mon- itors ESG and climate-related risks on a daily basis and provides quarterly reports to the ESG and Ethics Committee. In 2021, the Board also approved the 2020 Sustainability Report, which was compliant with Global Reporting Initia- tive (GRI) guidelines. The Board is happy to start reporting in line with the TCFD recommendations from 2021, and considering the fact that the Company is just embarking on its journey to implement the ESG Strategy it considers the Company’s climate-related reporting to be fair, balanced and understandable at this stage. More detail on the information that helps the board understand the Company’s climate risk proﬁle are available in the TCFD disclosure section starting on page 27. REMUNERATION COMMITTEE Information on the Remuneration Committee is included in the Directors’ Remuneration Report on pages 178-202. ENGAGEMENT WITH SHAREHOLDERS Effective communication with shareholders remains a priority for the Board. The Company’s investor relations pro- gramme offers investors various opportunities to engage with senior management via quarterly ﬁnancial results calls, post-results roadshow meetings, and regular participation in investor conferences. Due to pandemic-related travel restrictions, most of our investor engagement took place online in 2021. However, starting from November 2021, we were able to resume in-person meetings with some of our investors. The Company has a dedicated Investor Relations (IR) team, which is the ﬁrst port of call for investors and analysts. The team answers queries in a timely manner and prepares comprehensive IR materials, including results presenta- 150 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE STATEMENT CONTINUED tions and annual reports that are available on our IR website: www.tbcbankgroup.com. The website also records all announcements issued to the London School of Economics (LSE). Shareholders, potential investors and analysts are able to ask questions about the Group through the Company’s permanent representative in London, who is always available to offer investor meetings and updates on investor re- lations and international media on behalf of the senior management team. The CEO, Chairman and Senior Indepen- dent Director are available to discuss the concerns of shareholders at any point during the year. Committee chairs are also available to answer shareholder questions at the AGM of the Company or at any time during the year. Details of our engagement with the shareholders can be found on pages 40-43 and pages 149-150. ANNUAL GENERAL MEETING The last AGM of the Company was held at 3 pm on 14 June 2021 at the ofﬁces of Baker McKenzie LLP, 100 New Bridge Street, London EC4V 6JA. All resolutions presented at the AGM were put to the meeting via a poll and, except for Resolution 17, all were passed with the requisite majority. See page 132 for information on the shareholder consulta- tion held as a result of the 2021 AGM. The Notice of Annual General Meeting for 2022 will be circulated to all the shareholders at least 21 working days be- fore the AGM and it will also be made available on our investor relations website www.tbcbankgroup.com. The voting on the resolutions will be announced via the Regulatory News Service and made available on our investor relations website www.tbcbankgroup.com. 151 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIRECTORS’ REPORT Directors’ Report The Directors present their Annual Report together with the audited consolidated accounts for the year ended 31 December 2021, on pages 212-358. The Strategic Report on pages 6-127 was approved by the Board on 13 April 2022 and signed on its behalf by Vakhtang Butskhrikidze, the Company’s CEO. The Management Report together with the Strategic Report on pages 6-127 form the Management Report for the purposes of DTR 4.1.5. R. Other information relevant to the Directors’ Report and incorporated by reference into this report can be found on these pages: Contents Page Directors’ Governance Statement 130 Corporate Governance and Nomination Committee Report 157 Audit Committee Report 161 Risk Committee Report 170 Remuneration Committee Report 175 Viability statement 154 Going concern statement 154 Greenhouse gas emissions 88 Risk management 112 Material existing and emerging risks 102 Board of Directors 133 Employee matters 74 Environmental matters 88 Share capital 152 Future developments in the business 20 Section 172 statement 42 Employee engagement 42 Stakeholder engagement on key decisions 42 Disclosures required under Listing Rule 9.8.4: Details of long-term incentive schemes 193 Agreements with controlling shareholders 152 Information on the Group’s ﬁnancial risk management and its exposure to credit risk, liquidity risk, interest rate risk and foreign currency risk 118 Events after reporting period 358 DIRECTORS’ CONFLICTS OF INTERESTS The Company, in accordance with the requirements of the Companies Act 2006 and the Company’s articles of as- sociation (the “Articles of Association”), requires Directors to declare actual or potential conflicts of interest that could interfere with the interests of the Company. The Directors are required, prior to the Board meetings, to declare any conflict of interest they may have in relation to the matters under consideration and, if so, abstain from voting and decision-making on those matters. Directors have a continuing duty to notify the Chairman and Company Secretary as soon as they become aware of any potential or actual conflicts. 152 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIRECTORS’ REPORT CONTINUED DIRECTORS’ INDEMNITIES AND INSURANCE The Group maintains Directors’ and ofﬁcers’ liability insurance, which provides appropriate cover for legal action brought against its Directors. The Company has also granted indemnities to each of its Directors to the extent permitted by law. Neither the indemnity nor insurance cover provides cover in the event that a Di- rector, ofﬁcer or Company Secretary is proven to have acted fraudulently or dishonestly. The above referred liability insurance and indemnities were in force during the course of the ﬁnancial year ended 31 December 2021 and remain in force as at the time of this Report’s publication. POLITICAL DONATIONS The Group did not make any political donations or in- cur any political expenditure during 2021. RELATIONSHIP AGREEMENT On 31 May 2016, the Company entered into a relation- ship agreement with certain major shareholders (the Relationship Agreement). The Company understands that those major shareholders no longer control, in ag- gregate, 20% or more of the Company’s voting rights, and so the Relationship Agreement is no longer in full force and effect. SHARE CAPITAL As of 31 December 2021, the Company’s issued or- dinary share capital comprised 55,155,896 ordinary shares (2020: 55,155,896) at a nominal price of £0.01 each and carrying one vote per ordinary share at gen- eral meetings of the Company. There were no shares held in treasury. The Company has in issue one class of ordinary shares, all of which are fully paid up, and it does not have preference shares in issue. The rights and obligations attaching to the Company’s ordinary shares are set out in the Articles of Association. There are no voting restrictions on the issued ordinary shares and each ordinary share carries one vote. Details of the movements in share capital during the year are provided in Note 26 to the consolidated ﬁnan- cial statements on page 305 of this Annual Report. PROFIT AND DIVIDENDS The proﬁt for the ﬁnancial year ending 31 December 2021 attributable to the Company’s shareholders, after taxation, was GEL 809 million (2020: GEL 318 million) The Board declared an interim dividend of GEL 1.5 per TBC Bank Group PLC share on 12 August 2021, which was paid by the Company on 17 September 2021. The decision on the ﬁnal dividend will be taken before the end of May 2022. POWERS OF DIRECTORS The Directors may exercise all powers of the Company subject to applicable laws and regulations and the Ar- ticles of Association. SPECIAL RIGHTS AND TRANSFER RESTRICTIONS None of the ordinary shares in the capital of the Com- pany carry special rights with regard to the control of the Company. There are no speciﬁc restrictions on transfers of shares in the Company, which is governed by its Articles of Association and prevailing legislation, other than: • Certain restrictions which may from time to time be imposed by laws or regulations such as those relat- ing to insider dealing; • Pursuant to the Group’s Share Dealing Code, whereby the Directors and designated employees require approval to deal in the Company’s shares; • Where a person with an interest in the Company’s shares has been served with a disclosure notice and has failed to provide the Company with infor- mation concerning interests in those shares; and • Pursuant to the Group’s Remuneration Policy, whereby Participants (as deﬁned therein) may be granted restricted share awards, which vest over a certain period of time from the award date and are subject to malus and clawback provisions. All employees (including Directors) deemed by the Company to be insiders have complied with the Group’s Share Dealing Code. There are no restrictions on exercising voting rights save in situations where the Company is legally entitled to impose such a re- striction (for example, under the Articles of Associa- tion where amounts remain unpaid in the shares after request, or the holder is otherwise in default of an ob- ligation to the Company). The Company is not aware of any arrangements between shareholders that may result in restrictions on the transfer of securities or vot- ing rights. MAJOR SHAREHOLDERS As at 31 December 2021, the Company had been no- tiﬁed under Rule 5 of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (the “DTRs”) of the following interests in its total voting rights of 3% or more. 153 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 As of 31 December 2021 Shareholder % of voting rights # of voting rights Founders * 14.61% 8,058,373 Dunross & Co. 7.45% 4,108,029 European Bank for Reconstruction and Development 5.05% 2,786,406 Allan Gray Proprietary Limited 4.89% 2,698,492 Schroder Investment Management 3.18% 1,754,936 JPMorgan Asset Management 3.15% 1,737,482 Fidelity International 3.13% 1,725,228 Creation Investments Capital Management 3.12% 1,718,792 Subsequent to the year end, Allan Gray Proprietary Limited have notiﬁed the Company in accordance with DTR5 of a purchase of additional shares on behalf of its clients, bringing the total holdings of Allan Gray Proprietary Limited to 3,403,194 shares and 6.17% of Company’s issued share capital. Future regulatory ﬁlings by shareholders will be avail- able on the Group’s website at www.tbcbankgroup.com and the LSE website at www.londonstockexchange.com. POWERS OF DIRECTORS TO ISSUE AND/OR BUY BACK COMPANY SHARES The Companies Act 2006 and the Articles of Association determine the powers of Directors, in relation to share issues and buy backs of shares in the Company. The Directors are authorised to issue and allot shares subject to approval at a general meeting of shareholders. Such authorities were granted to the Directors by shareholders at the AGM of the Company, held on 14 June 2021, authorising the Directors to allot ordinary shares in the capital of the Company up to an aggregate nominal value of £ 183,853. This authority will apply until the conclusion of the 2022 AGM. Shareholders will be requested to renew these author- ities at the 2022 AGM. APPOINTMENT / REPLACEMENT OF DIRECTORS AND AMENDMENT OF ARTICLES OF ASSOCIATION The appointment and retirement of Directors is governed by the Articles of Association, the Code and the Compa- nies Act 2006 and related legislation. Shareholders are authorised to appoint/replace the Directors and propose amendments to the Articles of Association by resolution at a general meeting of the Company with the latter being required to be passed as a special resolution. All Directors of the Company will seek re-election at the next AGM. As already mentioned, Rajeev Sawhney and Nino Suknidze were appointed to the Board as a non-executive Director in November 2021 and will stand for election by the shareholders at the AGM. Vakhtang Butskhrikidze has service contract with the Company, which came into effect on 10 August 2016 and will continue until terminated by either party to such contracts, giving the other not less than seven months written notice. Biographical details and reasons for the reappointment for the Directors will be given in the Notice of AGM. CHANGE OF CONTROL There are no signiﬁcant agreements to which the Company is a party of that take effect, alter or terminate upon a change of control of the Company. In addition, there are no agreements between the Company and its employees and the Directors that contain compensation clauses for loss of ofﬁce or employment that occurs because of a take- over bid, resulting in a case of change of control. EMPLOYEE DISCLOSURES The Company’s disclosures relating to employee engagement and policies, as well as human rights, are included in the Our Colleagues section on pages 74-81 of this Annual Report. * Founders’ shareholding was disclosed separately in the 2020 Annual Report as Mamuka Khazaradze Holding 8.64% of voting rights and Badri Japaridze Holding 6.00% of voting rights as of 31 December 2020 154 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIRECTORS’ REPORT CONTINUED DISCLOSURE OF INFORMATION TO THE AUDITOR The Directors, who held ofﬁce at the date of approval of this Annual Report, conﬁrm that, so far as they are aware, there is no relevant audit information of which the Group’s auditors are unaware, and that each Direc- tor has taken all steps that he/she reasonably should have taken as a Director in order to make him/herself aware of any relevant audit information and to estab- lish that the Company’s statutory auditors are aware of such information. This conﬁrmation is given and should be interpreted in accordance with the provi- sions of section 418 of the Companies Act 2006. GOING CONCERN STATEMENT The Board has fully reviewed the available information pertaining to the principal existing and emerging risks (as set out on pages 102-111), strategy (as set out on pages 20-21), ﬁnancial health, liquidity and solvency of the Group, and determined that the Group’s business remains a going concern. The Directors have not iden- tiﬁed any material uncertainties that could threaten the going concern assumption and have a reasonable expectation that the Company and the Group have adequate resources to remain operational and solvent for the foreseeable future (which is, for this purpose, a period of 12 months from the date of approval of these ﬁnancial statements). In reaching this assessment, the Directors have specif- ically considered projected funding and capital posi- tion, and they have also taken into account the impact of further stress scenarios. In this regard, key matters and principal decisions considered by the Board and the Risk Committee during the year are provided on pages 146-147 and pages 172 and 174, respectively. Ac- cordingly, the accompanying ﬁnancial statements are prepared in line with the going concern basis of ac- counting. VIABILITY STATEMENT In compliance with the Code, the Directors assessed the prospects of the Group and its viability over a three-year period beginning on 1 January 2022. The Di- rectors determined the three-year period ending on 1 January 2025 to be appropriate, as it is consistent with the Group’s standard planning cycle, covering ﬁnan- cial forecasts and the strategic considerations of the Group. While assessing the viability of the Group and its operations, the Directors carried out a robust and thorough assessment of the Group’s risk proﬁle, in- cluding material existing and emerging risks that could cause a deviation in the Group’s ﬁnancial condition, operations and prospects from the expectations over the period of assessment. In assessing the Group’s viability, the Directors mainly focused on JSC TBC Bank, since it represents the largest asset of the Group (96.6% share in the Group’s assets, as of 31 December 2021) and it is the key income-generating subsidiary (106.9% of the Group’s net income, as of the year ended 31 December 2021). As part of their strategic planning, the Directors looked beyond this period and took into consideration, as far as possible, information from a variety of sources re- lating to local, regional and other, broader macro-eco- nomic, political, technological, social and environmen- tal changes that could affect the Group’s business and development. At this point, the Directors have no rea- son to believe the Group will not stay viable over the longer-term. In addition, the Directors analysed the Group’s ability to meet all regulatory requirements. The Directors’ as- sessment considered all of the principal and emerging risks of the Group and the effectiveness of current and proposed mitigating actions. The key areas of focus were: • the risk of economic and political instability and its impact on the Group’s future performance; • the risk of not meeting regulatory requirements, with a key focus on minimum capital adequacy; • the performance of borrowers from sectors vulner- able due to the COVID-19 pandemic; • foreign exchange rate risk, which is signiﬁcant due to the high share of foreign currency in the Group’s portfolio; and • the risk of decreasing net interest income and net interest margin as a result of increased competition and changing funding structure. A summary of all of the Material Existing and Emerging Risks to which the Group is exposed and the mitigat- ing actions taken by the Group are set out on pages 102 to 111. The Group’s strategic plans While reviewing and analysing the Group’s strategic plans, the Directors assessed all potential risks relat- ed to the strategic plans and the achievement of the Group’s strategic objective, and ensured those risks were properly managed. The key focus areas were: • The current business position and future prospects of the Group; • The capital, funding and liquidity proﬁle of the Group; and • The availability and efﬁcient use of respective hu- man and technical resources. Effectiveness of the Group’s risk management frame- work, practice and internal control mechanisms The Directors ensure that the Group’s governance structure enables adequate oversight and accountabil- 155 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ity, as well as a clear segregation of duties. The involve- ment of all governance levels in risk management, the clear segregation of authority, and effective commu- nications between different entities facilitate clarity regarding the Group’s strategic and risk objectives, adherence to the established risk appetite, risk bud- get and sound risk management. The centralised ERM function ensures effective development, communica- tion and implementation of the risk strategy and risk appetite across the Group. The Directors have deter- mined that the Group’s risk management framework is adequate for managing the principal and emerging risks set out in the Annual Report and reducing their likelihood and impact, wherever possible. Having re- viewed and analysed the information presented in this Annual Report, the Directors can conﬁrm that they have a reasonable expectation that the Group will re- main viable over the next three years up to 1 January 2025, and that the Group will be able to continue its operations and meet its liabilities as they fall due over the three-year period from 1 January 2022 to 1 January 2025. Stress testing In 2021, the Bank enhanced its regular stress-testing framework and performed a number of additional stress tests. The primary purpose of the stress testing was to assess the vulnerability of the Bank’s capital ad- equacy, liquidity and portfolio quality to different mac- ro scenarios. The Bank conducts multiple stress tests every year. The stress scenarios are designed to reflect the devel- opments relevant to that year and to assess the Bank’s resilience in the prevailing risk environment. In 2021, stress tests were conducted within ICAAP and Re- covery Plan frameworks. Under ICAAP stress scenario the impact of the stress for the capital adequacy is as- sessed, while the Recovery Plan stresses both, capital and liquidity positions For ICAAP, stress scenarios are severe but plausible, and covers the Bank’s expectations of major macro- economic parameters of the Georgian economy. In 2021, the scenario included the effects of a prolonged COVID-19, worsening of economic prospects that re- flected in a sharp currency depreciation, a decline of external inflows, a fall in real estate prices, among other factors. According to the scenario, in 2022 GDP growth drops to -4% as opposed to the initial baseline of 6%. GEL/US$ rate in 2022 was assumed at 4.1 as opposed to the baseline of 3.15. The employment rate drops by 5.0% and the real estate prices - by 16% in US$, both compared to the respective 2019 levels. According to the stress test, the Bank has sufﬁcient capital to meet the minimum capital requirements under stress condi- tions. As for the Recovery Plan, the Bank performs idiosyn- cratic and market-wide reverse stress test exercises, to identify potential extreme conditions that would make the business model nonviable. In light of the developments in Ukraine since February 2022, The Group’s chief economist and the macro-ﬁ- nancial analysis division have prepared a macro stress analysis on the potential impact of the war in Ukraine on the Georgian economy. The analysis provides two potential scenarios. The more severe one, assumes the 2022 annual GDP growth to be -1.5%, as opposed to the initial baseline of 6%, the GEL/US$ rate to go up to 3.5, as opposed to the initial baseline scenario of 3.0. The employment rate drops by 3.1% and the real estate prices increase by 4.0% 1 , both compared to the respec- tive 2019 levels. The assumptions for the ICAAP stress scenario were more severe than the ones estimated under the Ukraine war severe case. As for the liquidi- ty, considering the Bank’s strong position and funding pipeline, at the time of writing this report, no material risk is expected to jeopardize the viability of the Bank. Since the Directors consider the stress scenarios and the associated results to be appropriate, no urgent mit- igation has therefore been required. The Bank will continue to use stress-testing exercises as one of the key tools in its risk management frame- work. DIRECTORS’ RESPONSIBILITIES The following statement, which should be read to- gether with the Auditors’ report set out on pages 204- 358, is required by the Companies Act 2006 (the “Act”). The Directors are required to prepare the Company’s and the Group’s ﬁnancial statements for each ﬁnan- cial year. The consolidated ﬁnancial statements of the Group and the separate ﬁnancial statements of TBC Bank Group PLC, together referred to as “ﬁnan- cial statements”, need to be prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 and, for the Group, in accordance with international ﬁ- nancial reporting standards adopted pursuant to Reg- ulation (EC) No 1606/2002 as it applies in the European Union and the Directors have elected to prepare the Company’s ﬁnancial statements on the same basis. The ﬁnancial statements are required by the Act and the IFRS to present fairly the ﬁnancial position and performance of the Company and the Group for that 1 The price increase in February 2022 was already at 11% and also there is evidence of strong demand from visitors from Russia and Belarus, willing to stay in Georgia during the crisis period. Furthermore, prices for construction materials have increased significantly. GEL depreciation and slower GDP growth are also taken into account. 156 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 DIRECTORS’ REPORT CONTINUED period. The Directors must not approve the ﬁnancial statements, unless they are satisﬁed that they give a true and fair view of the state of affairs and the proﬁt or loss of the Company and the Group for that period. The Directors consider that in preparing the ﬁnancial statements they have used appropriate accounting policies, supported by reasonable judgments and estimates, and that all accounting standards which they consider to be applicable have been followed. The Directors also believe that the ﬁnancial statements have been prepared on the going concern basis, which is detailed in the Going concern statement on page 154 of this Annual Report. In addition, the Group has an effective internal control system in place in order to ensure accurate and reliable ﬁnan- cial reporting. The Group has a well-deﬁned framework of accountability and delegation of authority, as well as pol- icies and procedures that include ﬁnancial planning and reporting; preparation of monthly management accounts; project governance; information security; and review of the disclosures within the annual report and accounts from the respective leads, to appropriately disclose all relevant developments within the Group in the year and to meet the requirements of a true and fair presentation. The Directors have a responsibility that the Company and the Group keep accounting records, which disclose with reasonable accuracy the ﬁnancial position of the Company and the Group and enable the Directors to ensure that the accounts comply with the Act. The Directors are also responsible for safeguarding the assets of the Company and the Group and for taking reason- able steps for the prevention and detection of fraud and other irregularities. In addition, the Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the UK, governing the preparation and dissemination of ﬁnancial statements, may differ from legislation in other jurisdictions. COMPANY SECRETARY On 17 June 2021, the Board appointed an in-house Company Secretary, Keti Khukhunashvili, with immediate effect. In accordance with the UK Companies Act, Keti is a Chartered Secretary and an Associated member of the Corporate Governance Institute of UK and Ireland. Prior to Keti’s appointment on 17 June 2021, the appointed Company Secre- tary was Prism CoSec Ltd to include for the period 1 January 2021 to 17 June 2021. DIRECTORS’ RESPONSIBILITY STATEMENT The Directors, whose names and functions are listed on pages 133-140 of this Annual Report, conﬁrm that to the best of their knowledge: • The Group’s ﬁnancial statements, which have been prepared in accordance with the IFRS standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole; the • The Strategic Report and Directors’ Report contained in this Annual Report include a fair review of the devel- opment and performance of the business and of the position of the Company and the Group, together with a description of the principal risks and uncertainties they face; and • The Annual Report and ﬁnancial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for the shareholders to assess the Company’s position, performance, business and strategy. This responsibility statement was approved by the Board and is signed on its behalf by the Chairman. Arne Berggren Chairman 13 April 2022 157 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Dear stakeholders, The Corporate Governance and Nomination (CGN) Committee was very active during 2021, as we refreshed our Board and recommended the formation of two new Board level Committees. This report provides an overview of the Committee’s work and its activities during the year. I was appointed as Chair of the CGN Committee in September 2021, and therefore would like to thank Tsira Kemularia for her work as the previous chair of the Committee. Chair’s Letter CORPORATE GOVERNANCE AND NOMINATION COMMITTEE REPORT Priorities during 2021 Recruitment of New Non-executive Directors Board succession planning and recruitment were the critical focus for the Committee, in line with its respon- sibilities. We appointed ﬁve new independent non-ex- ecutive Directors during the year. Details of skills and experience that the new non-executive Directors bring to the Board, are set out in Board Biographies on pages 133 - 137. The steps the Committee took to recruit its new mem- bers during 2021 are provided in the table below: Search, assessment and appointment process for selecting new Directors Step 1 Step 2 Step 3 Step 4 Step 5 The Committee agreed what they were looking for in the candidates for appointment to the Board and developed a job description to recruit candidates with particular skill sets in law, local and regional knowledge, technology and information security. The Committee considered a long list of candidates, who were either recommended by Board members or were sourced from the Committee’s previous candidate lists as part of its succession planning arrangements. Relevant candidates were approached by the CGN Committee chair at the time, Tsira Kemularia. The Company Secretary supported the process by arranging meetings between members of the Committee and the short-listed non-executive Director candidates. Feedback from the non-executive Directors was discussed alongside consideration of potential conflicts and other matters identiﬁed through due diligence. The Committee recommended its chosen candidates to the Board for approval, subject to completion of outstanding due diligence and clearance by the National Bank of Georgia, due to the “mirror boards” policy of the Company. Outstanding due diligence and associated procedures were completed prior to announcement of appointments. Induction packs were issued and new non- executive Directors undertook a rigorous on-boarding process, led by the Company Secretary. 158 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE & NOMINATION COMMITTEE REPORT CONTINUED Diversity and Inclusion The Committee also regularly reviews the Board’s skills matrices, and monitors its diversity and inclusion tar- gets, as well as those of the Group overall. During 2021, we made sure the Company met the expectations of stakeholders and market best practice for diversity and inclusion. As the Chairman of the Board and the CGN Committee, I am happy to report that our Company meets the requirements of the Hampton Alexander Review and the Parker Review. Board Committee Structure The Committee reviewed the current structure of Board-level Committees and respective scope of delegated responsibilities and decided to create two new Committees. These are the Technology and Data Committee, established in June 2021, which will sup- port the Board in its oversight of the Company’s digi- tal strategy and cyber security, and the ESG and Ethics Committee, established in January 2022, which will help the Board oversee the ESG Strategy implemen- tation, including climate strategy, sustainability and TCFD reporting. More detailed information on the Board committees is provided in the Corporate Gov- ernance Statement on page 141. Subsidiary and Group Governance Subsidiary governance has also been a focus for the Committee, and we have made signiﬁcant progress in this regard. We reviewed and recommended amend- ments to policies and procedures that enable effective management of an increasingly complex Group. The Committee also carried out a thorough review of all Board-level Committee Terms of Reference, including for this Committee. The new versions were approved by the Board on 2 March 2022 and are available on our website at www.tbcbankgroup.com. Independence of non-executive Directors The Committee has delegated authority from the Board to assess the independence of non-executive Directors. In accordance with the Code, the Commit- tee has reviewed and conﬁrmed that all non-executive Directors who have submitted themselves for election and re-election at the AGM are considered indepen- dent. This conclusion was reached after consideration of all circumstances that are likely to impair, or could appear to impair, independence. Workforce Engagement In line with the Code, the Company has appointed a designated non-executive Director for workforce en- gagement. This role of Staff Ambassador has been undertaken by our Senior Independent Director, Tsira Kemularia, since 2018. The Committee reviewed the Board’s choice of an alternative mechanism to engage with and understand the views of the wider workforce regarding developing market practice. During 2021, the Committee remained conﬁdent that its preferred mechanism of ‘alternative arrangements’ remained ef- fective and appropriate for an organisation of our scale and geographical diversity. Engagement with the workforce will continue to be a priority for the Board in 2022. Further details on our plans to facilitate workforce engagement can be found on pages 148-149. BOARD CHANGES During 2021, the Board underwent a number of chang- es. Three long-serving Directors did not stand for re-election at the AGM, and in May 2021 we recruited three new, independent, non-executive Directors to the Board: Thymios Kyriakopoulos, Per Anders Fasth and Eran Klein. In September 2021, Abhijit Akerkar stepped down from the Board to pursue a senior ex- ecutive position in another ﬁnancial services compa- ny, and in November 2021, with the nomination and recommendation of the CGN Committee, the Board appointed two more non-executive Directors, Nino Suknidze and Rajeev Sawhney, to the Board. In light of the new appointments, Committee mem- bership and Board roles – namely that of the Senior Independent Director (SID) and the dedicated Inde- pendent Non-Executive Director (INED) for workforce engagement – were reviewed by the CGN Committee on three occasions in 2021. The current Committee composition was approved on 28 January 2022 and the Committee believes it provides the right balance of skills, knowledge and experience to enable each Board-level Committee to operate effectively. The cur- rent committee composition is set out on page 143. The Committee is happy to see that the new Board members have brought considerable relevant experi- ence and expertise to the Board. Their contributions are recognised in the Chairman’s governance overview on pages 130 and 132, and their biographies on pages 133 and 137. Arne Berggren Chairman 13 April 2022 159 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 WHO IS ON THE COMMITTEE As at 13 April 2022 the Committee is chaired by Arne Berggren and comprised Maria Luisa Cicognani, Rajeev Sawh- ney and Nino Suknidze. On 31 December 2021, the Committee was chaired by Arne Berggren, and comprised Tsira Kemularia and Maria Luisa Cicognani. Full information on Committee composition and attendance throughout 2021 is provided on pages 143 to 144. Only Committee members have the right to attend meetings, but the Committee may invite other independent Board members, as well as the CEO, the Head of Human Resources and members of the senior management, as well as external advisers, to attend all or part of any meeting if appropriate or necessary. The Committee meets annually and the Board approved updated Terms of Reference for all Board-level Committees on 2 March 2022. WHAT IS THE COMMITTEE’S ROLE? The Committee’s role and responsibilities are set out in its Terms of Reference, which are available on the Group’s website: www.tbcbankgroup.com and reviewed annually. The main responsibilities of the Committee, in relation to corporate governance within the Group, are: • Advising the Board of signiﬁcant developments in the law and practice of corporate governance; • Approving changes to corporate governance guidelines, monitoring the Group’s compliance with such guide- lines and applicable legal and regulatory requirements and recommending to the Board such changes or addi- tional actions as it deems necessary; • Reviewing the independence standards for Board members; • Monitoring and evaluating the process for assessing the performance and effectiveness of the Board and its Committees (including the annual Effectiveness Self-Review of this Committee); and • Reviewing the structures and procedures of the Board and its relationship with management to ensure it can function independently. The main responsibilities of the Committee, in relation to nominations, are: • Regularly reviewing the Board’s structure, size and composition, including evaluating its current balance of skills, experience, independence and knowledge; and considering diversity and gender balance; • Identifying suitable candidates from a wide range of backgrounds, via open advertising and external advisers; • Considering and making recommendations to the Board on its composition; • Advising the Board on succession planning for the roles of Chairman, Senior Independent Director, CEO and all other Board appointments; • Working with Human Resources, to set diversity objectives and strategies for the Company as a whole and mon- itoring the impact and outcome of diversity initiatives; • Considering and making recommendations, as necessary, regarding the removal and resignation of Board mem- bers; • Assisting the Chairman of the Board and the Senior Independent Director with the implementation of an annual evaluation process to assess the overall and individual performance and effectiveness of the Board and its com- mittees; and • Making recommendations to the Board on its long-term succession planning. WHAT THE COMMITTEE DID IN 2021 During 2021, the Committee met 11 times and considered the following matters. Attendance of Committee members is provided on page 144. 160 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CORPORATE GOVERNANCE & NOMINATION COMMITTEE REPORT CONTINUED WAS THE COMMITTEE EFFECTIVE? The Committee supervised the search process, implemented by the Company Secretary, for an independent con- sultant to conduct an external assessment of the Board in 2021. On the Committee’s recommendation, the Board engaged Lintstock Ltd to run an assessment programme over the next three years, starting in 2021. The survey-based approach that the Board undertook in 2021 was completed in December 2021 and the Board agreed an action plan at a meeting in March 2022. More information on the results of the 2021 assessment is provided on pages 147-148. The performance of the Board’s Committees was also assessed as part of this Board Review,. Members were invited to complete surveys tailored to the speciﬁc requirements of each Committee. In addition to addressing core aspects of Committee governance, the Reviews had a particular focus on oversight in the following areas: • Corporate governance developments, and the Group’s compliance with relevant standards; • The composition of the Board, and the succession and appointment processes for Non-Executive Directors; • Executive succession, and the visibility of potential internal successors for key positions; and • The development of a diverse pipeline of talent throughout the Group. While Directors felt that the CGN Committee was discharging its responsibilities effectively, the Review also identi- ﬁed a number of areas where performance could be improved, such as ensuring that the Committee has sufﬁcient opportunities to discuss important topics such as senior executive succession and development. The results of the Committee evaluation have been reported to the Board and the Committee will track progress on the recommen- dations during 2022. WHAT ARE THE PRIORITIES FOR 2022? In addition to its regular duties , the Committee’s priorities for 2022 will be: • Continuing our engagement with Lintstock Ltd and facilitating an effective external Board performance assess- ment during 2022; • Ensuring the continued, effective training and on-boarding of the Directors appointed in November 2021; and • Facilitating an effective leadership development and succession planning program. Jan Feb Apr Jun Jul Sep Oct Nov Dec Board composition and succession Board composition, including recruitment of new Board members and roles (including the SID and designated INED for workforce engagement), Committee structure and composition, succession planning and skills matrices Approval of diversity policy Design and oversight of an effective induction programme Approval of Board succession planning principles Executive talent and development Search and selection process for an independent consultant, Egon Zehnder, working on management leadership development and succession planning Talent programmes Governance Board and Committee evaluation Subsidiary governance, including approving the Group Manual of Authorities and the review and approval of organisational structure at principal and strategic subsidiaries Subsidiary and executive appointments Supporting the Board in the review and update of all Board-level Committee terms of reference Board effectiveness evaluation Search and selection process for an independent, external provider of board performance assessment (3-year engagement with Lintstock Ltd) Board development plan 161 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Dear stakeholders, I am pleased to share the Audit Committee Report for 2021. Maria Luisa Cicognani led the Audit Committee’s work from February 2021 until my appointment on 17 June 2021. On behalf of the Committee, I would like to thank Maria Luisa for her invaluable work leading the Committee during the transition period at the start of the year and the robust handover process in June. During 2021, the Committee membership was strength- ened by the skills and experience of new members. Thymios Kyriakopoulos, who joined the Committee in June 2021, and Tsira Kemularia, who has served on the Committee since 2018, bring to the Committee exten- sive and relevant ﬁnancial and audit expertise and ex- perience. Since January 2022, the Committee has also beneﬁtted from the presence of another new member, Nino Suknidze. Nino brings to the Committee a depth of legal and regulatory knowledge and extensive expe- rience of the Georgian market. I would like to take this opportunity and thank all current and former Commit- tee members for their contributions in 2021. The Audit Committee helps the Board of Directors to oversee and carry out supervisory responsibilities in relation to: internal control, accounting and ﬁnancial reporting, external ﬁnancial reporting and investor re- lations, compliance with regulatory and legal require- ments, internal audit, external audit, and non-audit ser- vices of the Bank and its subsidiaries. Over the past year, the Committee has maintained a hybrid meeting schedule due to ongoing COVID-re- lated restrictions. A signiﬁcant component of the work of Internal Audit, the Bank’s ﬁnance function and its in- teraction with the external auditors was conducted in Chair’s Letter AUDIT COMMITTEE REPORT the hybrid mode as well, but the Committee is satisﬁed that this did not impair the quality and effectiveness of the work in any way. The performance of the Committee was assessed internally through a formal annual effectiveness eval- uation. The results conﬁrmed that the Committee was operating effectively with sufﬁcient resources to en- able it to carry out its duties. In 2021, the Committee focused on the Company’s ﬁnancial statements and reporting process and the published external reports and presentations to sup- port the CEO and the management team in their com- munication with our shareholders and other stakehold- ers. The Committee also received regular reports from the Internal Audit function including on the ongoing co-sourcing project with Ernst & Young LLP (EY) in IT-related audit work, to continue a thorough audit of the cyber risk management function of the Bank. The Committee also held several joint sessions with the Risk Committee to review and discuss the Group’s governance of and activities to prevent anti-money laundering and terrorist ﬁnancing. Assessing the role and effectiveness of external audi- tors is one the Audit Committee’s key responsibilities. The Committee held an extensive and competitive tender process to select a new external auditor since the term for our current one, PricewaterhouseCoopers LLP (PwC), must end owing to Georgian banking reg- ulations. As announced on 20 December 2021, our in- tention is to appoint EY as the external auditors for the ﬁnancial year starting January 2023, subject to share- holder approval at the 2022 AGM. More information about the tender process that we held in 2021 is provided on page 167. Given this deci- 162 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 AUDIT COMMITTEE REPORT CONTINUED sion, EY will no longer continue the IT co-sourcing ar- rangement with Internal Audit, and the team is in the process of selecting a new partner for this project. An important part of the Committee’s work during 2022, following shareholder approval, will be to closely su- pervise the handover process to the new external au- ditor. The Committee continues to provide oversight and assurance on the performance and independence of the internal audit function. During 2021, I led the recruit- ment process in Georgia and internationally for the new Head of Internal Audit and I was happy to see a pool of well-qualiﬁed internal and external candidates. We are at an advanced stage of recruitment now. In December 2021, the Financial Reporting Council’s (FRC) wrote to the Group to conﬁrm an ordinary course review of the Annual Report and Accounts to 31 De- cember 2020 and to provide an advance notiﬁcation of a review of the Annual Report and Accounts to 31 December 2021. We have reflected on the FRC’s com- ments and further enhanced disclosure on the dis- cussed matters in this annual report. Ongoing co-operation with the Risk Committee has been essential in assuring the Group’s long-term vi- ability. The fact that I serve as a member of the Risk Committee, while the Chair of the Risk Committee serves as a member of the Audit Committee has been instrumental in ensuring the smooth coordination of the oversight function delegated by the Board to these Committees. The viability statement required by the Code can be found at page 154. This has been assessed and challenged by both the Audit and Risk Committees. Per Anders Fasth Chair of the Audit Committee 13 April 2022 WHO IS ON THE COMMITTEE As at 13 April 2022, the Committee was chaired by Per Anders Fasth and comprised the following members: Tsira Kemularia, Nino Suknidze and Thymios Kyriako- poulos. Full information on Committee composition and attendance throughout 2021 is provided on pages 143 and 144 Only members of the Committee have the right to attend meetings, but the Committee regularly invites other independent Board members, as well as the CEO, the CFO of JSC TBC Bank, the Chief Risk Ofﬁce (CRO) of JSC TBC Bank, Internal Audit, External Audit and external advisers, to attend all or part of any meet- ing if the Committee believes it is appropriate or nec- essary. The Committee meets at least quarterly and schedules additional meetings when appropriate. The Company Secretary is the secretary of the Committee meetings. WHAT IS THE COMMITTEE’S ROLE? The Committee acts independently of management to fulﬁl its ﬁduciary duty to shareholders and ensure their interests are properly protected by effective inter- nal controls, ﬁnancial reporting, compliance with reg- ulatory requirements and an appropriate relationship with external auditors. The Committee’s Terms of Reference, revised on 2 March 2022, have been adopted by the Board and are available on the Company’s website, www.tbcbank- group.com. The Committee has several responsibili- ties, which are, primarily, as follows: • To review the Company’s internal ﬁnancial controls and other internal controls to ensure the effective- ness of the internal control structure and to review any recommendations on changes to them, and, in conjunction with the Company’s Risk Committee, to assess, manage and monitor the Group’s internal control, risk management, compliance and gover- nance functions; • To monitor the integrity of the Group’s ﬁnancial statements to ensure they meet all statutory re- quirements and appropriate International Financial Reporting Standards and that all areas of judge- ment are fully considered before recommending to the Board that they give a fair, balanced and un- derstandable position of the Company; • To provide oversight to the Group’s compliance and anti-money laundering functions • To consider the effectiveness and independence of the Group’s internal audit activities and its rela- tionship with the external auditors; and • To make recommendations to the Board regarding the appointment, re-appointment and removal of the Group’s external auditors, and the approval of their remuneration and terms of engagement. 163 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Committee activities in 2021 Feb Apr May Jul Aug Sep Oct Nov Dec Financial reporting Approval of ﬁnancial results announcements, including interim and year-end results Review of ﬁnancial statements, ensuring that disclosures are fair, balanced and understandable, signiﬁcant accounting judgements, going concern assumptions and the viability statement Focus on streamlining external reporting Deep dive on drivers of ﬁnancial results Assessment of the process and reports, consideration of APM, going concern, approval of the viability statement Internal audit and internal control Review of the 2021 Internal Audit reports, and any remedial action plans Review of deﬁciencies and effectiveness of internal ﬁnancial controls Evaluation of the effectiveness of the Internal control systems Recruitment of a new Head of Internal Audit Review of the Internal Audit Charter Review and approval of the 2022 Internal Audit Plan and budget Evaluation of the effectiveness and independence of the internal Audit function IT engagements with co-sourcing arrangement with EY External audit 2021-2022 External Audit Plan, engagement terms and fees Terms of engagement for the half-year review External auditors’ half-year review ﬁndings 2020 full-year external auditors’ report and ﬁndings Appointment, remuneration, non-audit services and effectivenes Governance Review of the Committee terms of reference Committee evaluation Committee schedule of work WAS THE COMMITTEE EFFECTIVE? In 2021, the Board decided to work with Lintstock Ltd within the framework of its three-year Board Development Pro- gramme. Committee performance assessment was undertaken as part of the broader evaluation of the effectiveness of the Board and its Committees via a tailored questionnaire for Committee members. Directors felt that the perfor- mance of the Committee continues to be effective. The speciﬁc conclusions of the evaluation were discussed in the Committee and we will explore opportunities for incremental enhancements to the way the Committee operates during the 2022 ﬁnancial year. In addition to addressing core aspects of Committee governance, the Reviews had a particular focus on oversight in the following areas: • The performance of the Group’s internal and external auditors; • The integrity of the Group’s internal controls and ﬁnancial reporting; and • The Group’s ﬁnancial health and accounting treatment. Feedback on the performance of the Audit Committee was positive overall, and Directors felt that the Committee is discharging its responsibilities effectively. The Review also identiﬁed a number of areas where performance could be improved, such as further enhancing the effectiveness of the Company’s reporting. The results of evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2022. WHAT THE COMMITTEE DID IN 2021 During the year under review the Committee met 10 times and considered the following matters. Attendance of Committee members is shown on page 144. 164 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 AUDIT COMMITTEE REPORT CONTINUED HOW THE GROUP’S RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM WORKS Internal Control The Board has delegated to the Committee responsibility for reviewing the effectiveness of the system of internal control. This covers all material controls including ﬁnancial, operational and compliance controls, as well as the ﬁnan- cial reporting process. A sound system of internal control helps safeguard the best interests of all stakeholders and the Group’s assets and liabilities. While management is responsible for establishing and maintaining adequate internal controls over the capturing, processing and reporting of ﬁnancial information, the Committee is responsible for ensuring the effective- ness of these controls and conﬁrming they are sufﬁciently robust to cope with changing economic conditions and continued strong growth in the Group. The Internal Audit function reports on control weaknesses and breakdowns providing robust root cause analysis and recommendations for improvements, along with clear ownership/account- ability and deadlines for remediation. The Committee regularly reviews the progress of this vital function and alerts the CEO, CFO, CRO and divisional heads as well as, if necessary, the full Board if it sees intractable problems and insufﬁcient commitment to continuous process improvement. Group management regularly reviews the accounting and presentation practices applied by the reporting team to ensure the approach is aligned with the accepted framework, corresponds to industry best practice and responds to readers’ requirements of Group ﬁnancial statements. Once management decides on any changes (including any need for restatements in prior year accounts), the important updates are discussed with the Audit Committee to obtain their clearance. The external audit ﬁrm is kept informed in order to collect their views and reach an agreement on the ﬁnal approach. As a result of the aforementioned process, certain updates have been applied to the 2021 annual accounts, restating prior year amounts where appropriate. These restatements are summarised in Note 2 to the ﬁnancial statements. The Committee is aware of increased regulatory and stakeholder focus on Internal Control Over Financial Reporting (ICFR) issues and the need for proactive responses from companies and audit committees. Much of the ﬁnance func- tion involves data gathering, the vast majority of which is system generated. The Group is increasing its automation of remaining manual controls, which reduces the risks of human error or malpractice (operational risk) and also delivers cost-saving beneﬁts. The Group’s ﬁnance function is also considering how both data analytics and artiﬁcial intelli- gence can deliver improved predictive insights relevant to the Group’s reporting system and provisioning schedule. The Committee will continue to monitor the Group’s Finance function during its transformation strategy, considering the risk of change inherent in the process. The Committee is also monitoring the effect on the Group of the planned international expansion and diversiﬁcation, and is taking steps to ensure the ﬁnance function as well as internal control functions have sufﬁcient resources in place to cope with the extra workload involved. The Committee has reviewed the opinion of the Internal Audit team on the robustness of the Group’s internal controls, risk management and governance systems. The Committee considers that there is a proper system and allocation of responsibilities for day-to-day monitoring of ﬁnancial and other controls within the Group, with no signiﬁcant systemic failings or weaknesses. It has also consid- ered the risk of executive override of controls, and discussed with PwC its assessment of this mandatory signiﬁcant audit risk. The Committee reviewed PwC’s management letter from the 2020 audit and discussed the management’s respons- es to it. The Committee is satisﬁed that there are no major issues raised in it. We are also content with PwC’s request- ed management representation letter (signed by the CEO and CFO) in relation to the 2021 audit. Internal Control and Risk Management effectiveness Following the Committee’s review and recommendation, the Board agreed that the system of internal control (includ- ing risk management) continues to be effective. During the year, Internal Audit has conducted several engagements in the Risk Management functions. Having con- sidered the actions taken, the Committee also conﬁrms that no signiﬁcant failings or weaknesses have been identi- ﬁed during 2021 or up to the date of this report’s publication. Processes are in place to ensure that necessary action is taken, and progress is monitored where areas for improvement have been identiﬁed. 165 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Regulatory compliance The Committee oversaw the Group’s compliance with: • All necessary regulatory requirements, including those regarding he performance of internal audits of certain pro- cesses within the Group; and • All necessary regulatory reporting. HOW THE AUDIT COMMITTEE REVIEWED THE FINANCIAL STATEMENTS The Committee, in line with the powers delegated to it under its Terms of Reference, has reviewed the annual report and ﬁnancial statements with the intention of providing advice to the Board on whether, as required by the UK Cor - porate Code, “the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy”. To make this assessment, the Committee considered the annual report and ﬁnancial statements in detail to ensure the key messages of the report were aligned with the Group’s performance and the strategy being pursued. The sig- niﬁcant issues relating to the ﬁnancial statements were consistent with those identiﬁed by the Independent Auditors’ report on pages 204 to 211. Before the audit, the Committee considered the audit coverage levels and underlying audit materiality levels and agreed them with the external auditor, PwC. The Committee ensured that the materiality levels agreed were sufﬁcient to obtain appropriate audit evidence and that key risk areas were adequately addressed. Details of the materiality levels agreed are disclosed in the Independent Auditor’s report on page 209. The Committee has also considered Alternative Performance Measures (APMs) used by the Group. APMs are used in accordance with European Securities and Markets Authority (ESMA) guidelines and the Management highlights any impact on APMs as a result of changes to accounting methods. In conjunction with the work undertaken by the Company’s Risk Committee, the Committee was satisﬁed the impact of the COVID-19 global pandemic has been reflected in the analysis of the Group’s ﬁnancial position. This gave the Board conﬁdence to agree the preparation of accounts on a Going Concern basis, and approve the Viability statement prepared in accordance with the UK Cor- porate Governance Code. The Audit Committee also undertook a robust review of the ﬁnancial statements published at the half year and the two quarterly statements. The Committee has reviewed the various actions the Company has taken to ensure that all decisions have been taken in accordance with Section 172 of the UK Companies Act 2006, and that all stakeholder considerations have been taken into account when making key decisions. This has enabled the Board to approve the Stakeholder Engagement disclosure on pages 38 to 41 of the Strategic Report. THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS To prepare for the 2021 audit the Committee held planning meetings with PwC. The Committee suggested priority areas for PwC to consider, highlighting any concerns. The Committee carried out a formal External Auditor Assessment Review for 2021, which conﬁrmed its view that PwC continues to perform satisfactorily. A series of relationship meetings were held with PwC to discuss potential improvements in their delivery to the Group, including introductory and hand-over meetings when a new Committee chair was appointed in July 2021. The Committee, with the agreement of the Board, concluded that it had reached a satisfactory understanding with PwC both as to the level of fees to be charged in 2022 and the resources to be made available. At present, the Com- mittee considers that it continues to offer an independent, professional and cost-effective service, and is satisﬁed that PwC has a robust process for maintaining independence and monitoring compliance in accordance with the FRC’s Revised Ethical Standard 2019 and the 2019 International Code of Ethics for Professional Accountants (includ- ing International Independence Standards) issued by the International Ethics Standards Board for Accountants (IES- BA Code), to which Georgian law also refers. Given the structure of the Group, both the UK and Georgia practices of PwC are involved in the external audit process. PwC Georgia is part of PwC’s Central and Eastern Europe network. In the opinion of the Committee, this ‘double coverage’ works well and provides added reassurance in terms of scrutiny. The cooperation and communication between the two practices is well coordinated and draws, as required, on the wider international subject knowledge of the ﬁrm’s experts, for example in insurance. The UK team coordinates the audit, issuing instructions and putting processes in place to monitor PwC Georgia’s work. 166 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 AUDIT COMMITTEE REPORT CONTINUED Signiﬁcant issues considered during 2021 Areas of focus Key issues Conclusions and actions Financial and Regulatory Reporting Key ﬁnancial metrics and reporting materials The Audit Committee considered the key judgements in relation to external reporting to investors Regulatory and other reporting The Committee reviewed the required regu- latory reporting, such as the Company’s Pillar 3 disclosures, and reviewed the Company’s Sustainability Report. In exercising its oversight, the Committee assessed management's assurance and preparation of external ﬁnancial reporting. The Committee reviewed the draft external reporting disclosures and provided feedback and challenge on the top sensitive disclosures and key ﬁnancial metrics to ensure that the Company was effec- tive, consistent and transparent in its messaging. As mandated by the local regulations in Georgia, the Au- dit Committee reviewed and recommended the Bank’s regular Pillar 3 reporting, as requested by the Board. Signiﬁcant accounting judgements Key signiﬁcant accounting matters raised by the external auditors The Committee engaged with the external auditors during regular reports throughout the year and held detailed discussions on matters raised during the audit process. Expected Credit Losses (ECLs) are a measure of the probability-weighted estimate of credit losses, which the management needs to estimate every year. Certain- ly, the COVID-19 pandemic continued to have impact, but economic recovery has been promising in this re- gard. The Committee has noted that government re- strictions imposed due to the pandemic had been lift- ed during 2021 and 2022, which has allowed the most affected sectors (such as those related to tourism and hospitality) to recover. The Committee discussed with PwC the current pro- visioning methodology for ECLs and the key manage- ment judgements and assumptions used in the ECL estimation process, including: the staging criteria, up- dates in assumptions as a result of the model monitor- ing (‘backtesting’) procedure, post-model adjustment (PMAs), changes in ECL provision levels, forward-look- ing information, business-segment speciﬁc ﬁndings, write-offs and recoveries, and the external auditor’s ob- servations on improvements going forward. Other judgements and matters The founders’ litigation case and IT-related observations The Committee carefully considered various matters and external events that might affect the reporting pro- cess, such as the founders’ litigation and IT-related ob- servations. The Committee was satisﬁed that the issues were appropriately considered and did not result in a material impact to the Companys ﬁnancial reporting. Matters raised in the letter from the FRC Matters raised: Explanation was requested regarding Ex- pected Credit Losses (ECL), Alternative Per- formance Measures (APMs), and a number of items from the ﬁnancial statements of the Group. The Committee received a letter from the FRC in De- cember 2021. The Committee discussed each matter raised by the FRC at its February 2022 meeting. In addi- tion to questions regarding ECL and APM disclosures, the FRC requested additional clariﬁcation in our Annual Report and Accounts 2021 about our compliance with certain disclosure requirements under International Ac- counting Standard (IAS) 1, IAS 7, IFRS 16, as well as dis- closures concerning greenhouse gas emissions, energy consumption and energy efﬁciency action. The Group’s responses were scrutinised and reviewed by Commit- tee members, while management assured the FRC the requested feedback letter will be delivered within the provided deadline. All recommendations and requests for additional explanation from the FRC have been re- flected in our Annual Financial statements starting on page 204 and in the other relevant sections of the report. SIGNIFICANT ISSUES CONSIDERED IN RELATION TO THE FINANCIAL STATEMENTS AND HOW THEY WERE ADDRESSED 167 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 INDEPENDENCE OF OUR EXTERNAL AUDITOR In line with its Terms of Reference the Committee is re- quired to consider: the reappointment of the auditors; the suitability of the lead engagement partner and the wider audit team; their remuneration; and the terms of engagement. PwC has been the auditor of JSC TBC Bank since 2008, and became auditor of TBC Bank Group Plc in 2016 following the Company’s premium listing on the London Stock Exchange. Under the UK implementation of the EU Audit Regulations for Pub- lic Interest Entities, the audit rotation rules set the date for the 10-year mandatory tendering of the Group au- dit in 2016; therefore a mandatory audit tender is not required until 2026. The Committee, however, noted that new regulations from the National Bank of Georgia required a shorter period for rotation of the Bank’s au- ditor to another ﬁrm, which is necessary starting from 2023. In 2021, the Committee therefore conducted a tender process for the whole Group audit, in line with those regulations. On 20 December 2021, we announced our intention to appoint EY as our external auditor for the ﬁnancial year starting 1 January 2023, subject to shareholder approval at the 2022 AGM. This followed an extensive competi- tive tender process, overseen by the Audit Committee and conducted in compliance with the Competition and Markets Authority’s Order, after which EY was rec- ommended, and approved by the Board of Directors, as external auditor for the next three years. PwC, our current external auditor, will undertake the TBC Bank Group PLC audit for the ﬁnancial year ending 31 De- cember 2022. The tender process was initiated and ﬁnalised in 2021, led by the Committee chair and supported by the CFO of JSC TBC Bank and the Bank’s Finance function. The Committee chair invited all Big Four companies to tender, considering their local market presence and experience. PwC was not eligible to submit a proposal, because of the aforementioned local banking regula- tions. After initial discussions, Deloitte and KPMG did not tender, owing to a lack of local resources to sup- port a banking audit of the scale and scope required. EY offered a strong local presence and local banking audit experience and was therefore recommended as auditor for the Group. The Group re-tendered the audit of some smaller sub- sidiaries and invited non-Big Four companies to par- ticipate. BDO was considered to offer the best match of price and experience and was selected as external auditor of these subsidiaries for two years. The PwC partner leading the audit across the Group is Allan McGrath, who was rotated into this position in 2019. The engagement leader of the Bank’s audit was rotated to Thomas Magill in 2020. The Committee considers that the Company has complied for the ﬁnancial year under review, and to the date of this report, with the requirements of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Or- der 2014 relating to the frequency and governance of tenders for the appointment of external auditors, and to the scrutiny of a policy on the provision of non-audit services (see below). In addition to the annual review of effectiveness, the Committee considered the independence and objec- tivity of PwC through a combination of: • Assurances provided by the External Auditor on the safeguards in place to maintain independence; and • Oversight of the non-audit services policy and fees paid. In their annual independence letter and annual audit plan update to the Audit Committee, PwC has con- ﬁrmed in writing both its independence and that only permitted non-audit services were provided in 2021. Reviewing and ensuring the continuing independence and objectivity of PwC as our external statutory audi- tor was an important factor in fulﬁlling our governance as a Committee, and was equally monitored by PwC through its own procedures for pre-approving any non-audit services. The Group’s non-audit services policy governs the en- gagement of PwC to provide non-audit services. The policy requires the Committee to approve all non-au- dit services in advance, following a recommendation by the Group Chief Financial Ofﬁcer, and only permits the use of PwC for non-audit services where there is a clear synergy with its audit role (that is, an immediate ‘by product’ of the audit process), or when required by legislation. The Group monitors all tracking procure- ment and tendering for all non-audit fees. Amounts approved under the policy are reported at Committee meetings. In 2021, the Group spent US$ 1.81 million (net of VAT) (2020 US$ 1.28 million) on work undertaken by various accounting-based professional services ﬁrms for both audit and non-audit services. Group contractual fees to PwC were US$ 1.35 million (net of VAT), of which US$ 1.06 million (net of VAT) was for audit services. This was predominantly for the Company’s and the Bank’s audit, but included audits of the subsidiaries of both the Bank and the Company, notably that of TBC Bank Uzbekistan, TBC Leasing and TBC Insurance. PwC’s proposed fees were benchmarked against similar ser- vices provided by other auditors. Non-audit fees of US$ 289.4 thousand (net of VAT) were paid to PwC in 2021, with US$ 282.4 thousand of that sum spent on the issuance of AT1 Notes in October 2021. The ﬁgure rep- resents 32% of the average fees paid to PwC for Group 168 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 AUDIT COMMITTEE REPORT CONTINUED audit services over the preceding three years and is still well within the 70% cap required by Group policy on non-audit services. In 2020, the respective ratio was 1% due to the immateriality of the amounts spent on non-audit services with PwC. The Group has a policy of sharing business between suitable audit ﬁrms to provide diversiﬁcation, promote competition and build relationships. In 2021, excluding the above, non-audit work was allocated to six differ- ent accounting-based ﬁrms, including non-Big Four companies. The largest single non-audit contractual spend in 2021 was US$ 62.5 thousand (net of VAT) paid to KPMG for the valuation of options. The largest to- tal non-audit contractual spend in 2021 was US$ 98.4 thousand (net of VAT) paid to EY for multiple projects performed for the Bank and subsidiaries. The largest contract with EY was US$ 43.9 thousand (net of VAT) for the audit of IT systems, which is not in conflict with their upcoming 2023 audit year for the Group. INTERNAL AUDIT Internal Audit provides an objective and professionally challenging review of how the Group handles both key ﬁnancial and non-ﬁnancial reporting and data man- agement tasks to protect the assets, reputation and sustainability of the organisation. While primary responsibility to manage risk under the Group’s risk model resides with the Management, In- ternal Audit’s role, as the “third line of defence”, is to identify potential problems and recommend ways of improving risk management and internal controls. In- ternal Audit has unrestricted access and scope for re- view across the whole organisation. The Head of Internal Audit attends all Committee meetings, as well as Risk Committee meetings. The Committee meets regularly with the Head of Internal Audit (Chief Audit Executive) with no management present. On 1 November 2021, the Head of Internal Au- dit left to take an executive leadership role at one of the Company’s subsidiaries. The Audit Committee com- menced a comprehensive search process for a new Head of Internal Audit, while the previous deputy Head of Internal Audit now serves as an interim Head. Internal Audit regularly undertakes audits of all the Group’s key operating units, with a rolling audit plan agreed in advance with the Committee. In 2021, 99% of all pre-agreed internal audit assignments were com- pleted. The Head of Internal Audit reports the outcome of all audits and identiﬁes any deﬁciencies to the Com- mittee, which then considers the issue both in terms of severity and underlying trends, noting management’s proposed remediation. Appropriate follow-up is then monitored by the Committee. Operational units of the Group that have shown continuing weaknesses are routinely re-inspected to conﬁrm that improvements have been made as the Committee advised. Despite the further improvement in the rate and speed of re- mediation of deﬁciencies, the CEO has conﬁrmed that all deﬁciencies will be addressed and will be prioritised according to the potential systemic risk they represent. Internal Audit delivers an annual assurance statement to the Committee, which sets out the Head of Internal Audit’s opinion, together with summarised reports of the internal audit work performed in comparison to the plan during the year, and an assessment of compliance with auditing standards. The hiring and retention of lo- cal Georgian internal auditors remains a challenge and, whilst attracting new talent, the Group also embraces alternative and more flexible stafﬁng models. The Committee is, nevertheless, satisﬁed that Internal Audit has sufﬁcient human and ﬁnancial resources to perform its role and the Committee has the correct training and tools (for example, specialist software) to ensure that team members can function effectively. All managerial Internal Audit executives are currently training to achieve the internationally recognised qual- iﬁcation of Certiﬁed Internal Auditor. The Committee considers, with corroboration from an External Quality Assessment (EQA), that Internal Audit has established its arms-length independence from the management and is free from any interference in determining the scope and performance of its work and the communication of its results. The Committee is overseeing an ongoing project to move the Internal Audit function towards a more ‘agile’ and risk-based approach. The Committee agreed that work conduct- ed by the Internal Audit in 2021 already effectively ap- plied a risk-based approach to designing its annual work for the year. Internal Audit is seeking to use robust root cause analysis to develop more themed reports, prioritising the higher risk areas of the Group and re- sponding rapidly to emerging issues, undertaking spe- cial deep-dive investigations (particularly arising from situations where the Group may have heightened vul- nerability or has been the victim of fraud) and ensuring that Internal Audit is able to add more strategic value. During 2021, the aim of Internal Audit work was to pro- vide risk-based assurance and insightful, proactive and future-focused advice. The annual work program was designed to focus on the most signiﬁcant risks for the Group and focus was split between branch and head ofﬁce processes. In addition, Internal Audit maintained its focus on identiﬁcation and reporting processes in- volved in capturing and disclosing related party lend- ing and anti-money laundering procedures within the Group, in line with regulatory requirements in Geor- gia. Internal Audit provided a deep-dive review of the processes and procedures for annual performance assessment and implementation of the Company’s executive Directors’ remuneration policy, and contin- ued to audit the cyber risk management function of the Bank. 169 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 There is a shortage of IT internal auditors in Georgia. Given the importance of mitigating IT risk, the Committee continued to co-source these skills from EY during 2021 and, at the same time, educate our own audit staff. However, the co-sourcing arrangement with EY has not continued into 2022 so the Committee has begun the search for new co-sourcing partners, while Internal Audit continues to recruit qualiﬁed IT internal auditors for development in this area. Internal Audit’s Charter was reviewed and approved in February 2022 as appropriate for the Group. The Committee routinely reviews Internal Audit’s remit and the annual and rolling ﬁve-year plan of audits in place. The plan allows for some flexibility so that urgent matters or emerging risks can be reviewed. The Committee undertakes a formal assessment of Internal Audit to ensure that it is effective and suitably embedded in the organisation. The Head of Internal Audit attends all monthly Management Board meetings to identify developments in the business that might need review. The Committee determines both the Internal Audit budget for the Group and compensation, including variable bonus payments, for the staff. The Committee is also responsible for supervising the annual personal perfor- mance assessment of the Head of Internal Audit, drawing on input from peers, direct reports and senior management, including the CEO and CFO. FOCUS FOR THE COMMITTEE IN 2022 At the beginning of each year, the Committee discusses its key priorities for the year ahead in addition to its manda- tory responsibilities. In 2022, the Committee will continue to incorporate its newly assigned oversight responsibility for the Compliance and AML functions of the Group. The Committee will ﬁnalise the recruitment of the new Head of Internal Audit and ensure a proper handover and on-boarding process. As noted earlier, the Committee will also closely oversee plans for a robust handover process for the new external auditors, who take over in January 2023, subject to shareholder approval at the AGM 2022. Finally, the Committee will ensure continued effective cooperation with the Risk Committee. We will also maintain a high level of engagement with the ESG and Ethics Committee as it takes up the oversight of ESG strategy setting, implementation and sustainability reporting of the Company to Task Force on Climate-related Financial Disclosures (TCFD) requirements. 170 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Dear stakeholders, On behalf of the Board Risk Committee (the Committee), I am pleased to report on activities and accomplishments for the ﬁnancial year ended 31 December 2021. The role of the chair of the Committee was handed over to me on the 17 June 2021 from Abhijit Akerkar, who served as interim chair from 1 March 2021. Prior to that, the Committee was chaired by Arne Berggren, who stepped down upon assuming his current Chairmanship of the Board of Directors. I would like to thank both Arne and Abhijit for their valuable insight and contributions to the Committee during the year. Chair’s Letter RISK COMMITTEE REPORT In its new synthesis, the Committee displays the right balance of skills, knowledge, and experience in risk management. The Committee has strengthened its capacity in information data and security, capital and liquidity management, regulatory compliance and in- ternational expansion. All new Committee members beneﬁtted from a comprehensive induction process which enabled a seamless handover and immediate operational effectiveness. The renewed Committee is proving to be an incubator of new ideas and a guardian of judicious and risk based thinking. During 2021, the Committee worked on the enterprise wide risk management framework and better articu- lated the risk appetite appropriate for each individual business area. The Committee monitored the align- ment of the risk framework to the Group’s growth strat- egy while fostering a culture of risk taking within the principles of sound risk governance. The Committee organised its work around four main pillars: capital, liquidity/funding, asset quality, and earn- ings capacity. One focus was NPL (Non-Performing Loans) reduction and the effectiveness of moratoria and other remedial actions intended to cure clients who faced ﬁnancial distress during the global pan- demic. Another focus was provisioning and prudence in the governance of the credit underwriting process. We continued to examine the Group’s capability to support and strengthen its client base with effective products and services for post-COVID recovery pro- cesses. Macroeconomic and environmental headwinds faced the Group and were addressed by ensuring robust scenario stress testing, including our ﬁrst full execu- tion of an Internal Capital Adequacy Assessment Plan (ICAAP), despite this not being a regulatory require- 171 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ment. The Committee also oversaw the development of the Group’s recovery and resolution capabilities develop- ment in line with the expectations of the National Bank of Georgia. TBC Bank PLC resumed its payment of dividends in 2021 and distributed its ﬁrst interim dividend in September of 2021. The Committee focused on the appropriateness of capital structure and liquidity proﬁle projections over the medium and long term to support the Company’s strategic objectives within the boundaries of the risk appetite framework while delivering to shareholders the returns they deserve. Looking forward to 2022, we aim to collectively monitor emerging risks arising from our expansive business model, the impact of the global pandemic, and geopolitical risks unfolding in the region. The following section provides detail on how the Committee discharged its responsibilities during 2021 alongside principal activities and priorities. Thymios Kyriakopoulos Chair of the Risk Committee 13 April 2022 WHAT IS THE COMMITTEE’S ROLE? The primary purpose of the Committee is to help the Board fulﬁl its risk governance and oversight roles and respon- sibilities. The Committee is also responsible for ensuring the risk culture is embedded into the culture of the Company as a whole and supports the Group’s risk appetite by deﬁning the extent and categories of risk the Board considers ac- ceptable. In seeking to achieve this, the Committee is responsible for reviewing and reporting its conclusions to the Board on the Group’s risk management framework, which embraces risk principles, policies, methodologies, systems, process- es, procedures and people. It also reviews new or material amendments to risk principles and policies, and oversees any action resulting from material breaches of such policy. The Committee works closely with the Audit Committee and schedules joint meetings on common topics. More details on the Group’s wider approach to risk management can be found in the Risk Management section on pages 112 to 126. The Risk Committee advises the Board on strategic transactions, focusing on risk aspects and implications for the risk appetite and tolerance of the Group, and ensures robust assessment of the emerging and principal risks faced by the Group, including those that would threaten the business model, future performance, solvency and liquidity. More information on the Company’s Material Existing and Emerging Risks is provided on page 102. The Risk Committee also reviewed and approved the statement concerning internal risk management and the Group’s viability statement included in this Annual Report. Full details of the Committee’s responsibilities are set out in its Terms of Reference, which can be found on TBC’s website at www.tbcbankgroup.com. The terms were updated on 2 March 2022 and now reflect the Board’s decision to hand the responsibility for overseeing the Company’s Compliance Function to the Audit Committee. The new Risk Committee Terms of Reference also reflect the Board’s decision to assign the responsibility to support the Board in overseeing the ESG strategy and climate-related risk to the ESG and Ethics Committee. 172 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK COMMITTEE REPORT CONTINUED Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Risk Governance Considering and approving the risk appetite statements Risk function deep dives on thematic topics Risk division action plan Risk culture annual assessment Review and make recommendations on the Group’s risk- related policies, procedures, frameworks and principles for the approval of the Board Subsidiary risk governance, including review of the Group Subsidiary Governance Framework Financial and non-ﬁnancial risk Long-term capital plan Monitoring post-COVID-19 recovery and reviewing and approving Recovery and resolution planning Liquidity, funding and market risk Asset quality and NPL reduction, provisioning and prudence of the overall process Governance of the credit underwriting process Investment risk assessment framework Regulatory and legal updates Compliance and regular AML reports Model risk management ESG Strategy People, reputation, cyber, operational and other non- ﬁnancial risk deep dives Lending activities Review of lending activities and portfolio management per segment (corporate, SME, retail) Approval of top 20 borrower credit applications Committee governance Updating the Committee terms of reference Committee schedule of work and annual meeting calendar Committee performance assessment and design of the Committee action plan WHAT THE COMMITTEE DID IN 2021 During the year under review, the Committee met 13 times and considered the following matters. Attendance of Committee members is provided on page 144. 173 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 WHO IS ON THE COMMITTEE As of 17 June 2021, the Committee has been chaired by Thymios Kyriakopoulos and as at 13 April 2022, comprised Eran Klein, Maria Luisa Cicognani and Per Anders Fasth. A record of Committee composition changes and atten- dance throughout 2021 is provided on page 144. Arne Berggren chaired the Committee until 1 March 2021 when he was appointed as Chairman of the Board, and Abhijit Akerkar was appointed as interim chair until 17 June 2021. Abhijit Akerkar stepped down from the Board on 15 September 2021, as announced on that date by the Company, in order to pursue other career opportunities. Only members of the Committee have the right to attend meetings but the Committee may invite other indepen- dent Board members, as well as the Chief Executive Ofﬁcer, the CRO and external advisers, to attend all or part of any meeting. The Committee meets at least on a quarterly basis and schedules additional meetings when appro- priate. The number of meetings was higher during 2021 owing to the increased pandemic-related workload and hy- brid-working arrangements, during which meetings were shorter but more frequent. The Company Secretary attends all meetings of the Committee and serves as the Secretary of the Committee. WAS THE COMMITTEE EFFECTIVE? In 2021, the Board decided to work with Lintstock Ltd within the framework of their three-year Board Development Programme, which the Board found to be better aligned with the time horizon of our Board. The externally facilitated survey-based approach the Board undertook in 2021 was completed in December 2021. The performance of the Board’s Committees was also assessed as part of the review via surveys tailored for each Committee. In addition to addressing core aspects of Committee governance, the reviews had a particular focus on oversight in the following areas: - The Group’s risk management framework and systems; - The Group’s procedures for complying with regulation; - The extent to which a culture of risk management and compliance has been embedded throughout the Group. Feedback on the performance of the Risk Committee was positive overall, and Directors felt that the Committee was discharging its responsibilities effectively. The Review also identiﬁed a number of areas where performance could be improved, such as rebalancing the length and the focus of the Committee’s schedule of work during the year. The results of the Committee evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2022. WHAT ARE THE PRIORITIES FOR 2022? In addition to the regular duties detailed in the responsibilities section on page 171, the Committee will have the fol- lowing priorities for 2022. It will: • Continue to organise around its three main pillars of work - capital, liquidity and funding, and asset quality; • Maintain focus on risk appetite, reporting on the principal subsidiaries based on the approved Subsidiary Gov- ernance Framework, implementation of the investment assessment framework, international expansion and re- spective risks, and the provisioning principles; • Continue deep discussions on risk-adjusted returns and effective capital consumption; • Monitor the completion of the Recovery Planning process in line with the regulatory deadlines; and • Continue monitoring the implementation of the Risk Division action plan, led by the CRO. PRINCIPAL ACTIVITIES AND SIGNIFICANT ISSUES CONSIDERED DURING 2021 During 2021, the Risk Committee continued to concentrate on its key responsibilities: monitoring the Group’s risk management processes, promoting progress in risk management tools and techniques, and implementing actions to mitigate against prevailing risks. The table below summarises signiﬁcant issues considered during 2021 and ac- tions taken by the Committee. Information on the key risks and uncertainties facing the Company is provided in the Material Existing and Emerging Risks chapter on pages 102 to 111. 174 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 RISK COMMITTEE REPORT CONTINUED Principal activities and signiﬁcant issues considered during 2021 Areas of focus Key issues Description of actions Risk appetite Reviewing and approving the Group risk appetite and the JSC TBC Bank risk appetite statements The Group risk appetite statement deﬁnes our risk appetite and tolerance thresholds, based on which the Company’s manages risk, our capacity and capabilities to support our customers, and the pursuit of the Group’s strategic goals. The Risk Committee received and reviewed risk appetite compliance reports at quarterly meetings. In addition, the Committee reviewed and recommended the approval of the Group-wide risk appetite statement to the Board in February 2022. Financial Risk Financial risk management Close monitoring in light of the macro- economic outlook, and other dynamic risks and opportunities facing the Group. Credit Risk and credit quality Oversight of risks related to retail, MSME and corporate lending. The Risk Committee continued monitoring the Company’s ﬁnancial risk position and provided assurance to the Board on the Company’s capability to deliver on its strategic ob- jectives.The Risk Committee actively monitored the perfor- mance of the Group’s credit portfolio throughout the year and received regular updates on the overall portfolio quality, changes in non-performing loans and the cost of risk. The Committee was satisﬁed that appropriate lending controls and monitoring were in place to control risks across lending portfolios. Operational resilience Managing the Company’s operational risk across different areas Including oversight of people, conduct and culture, ESG and climate, cyber, infor- mation security and data, macroeconom- ic environment, and reputation risk. The Committee maintains speciﬁc focus on the Group’s op- erational resilience and receives valuable insight from the discussions with the management team throughout the year. As part of this work, the Committee continued to closely monitor the Risk and Control Self-Assessment (RCSA) re- sults, together with progress on the mitigation action plan. The Committee also approved the Company’s ESG Strategy in November 2021. The Board’s ESG and Ethics Committee will take over the responsibility for overseeing the ESG Strat- egy implementation and all relevant reporting to the Board from January 2022. The Risk Committee receives a deep dive report on infor- mation and cyber security every year. Additionally, the Risk Committee receives thematic updates at least twice a year, as well as case by case updates, as needed, every month in the CRO report to the Committee. Risk Committee ﬁndings and reports are regularly delivered to the Board, at least on a quarterly basis. Capital and liquidity risk including ICAAP Development of ICAAP, continued capital and liquidity risk management oversight The Risk Committee continued to closely monitor the Bank’s capital position, including reviewing the stress test results conducted by the management. The Risk Committee provided oversight of the ICAAP devel- opment process. It also assessed the Bank’s long-term cap- ital adequacy position based on its four-year ﬁnancial plan to ensure that the Bank holds sufﬁcient capital to stay within risk appetite limits and regulatory requirements. For more de- tails, please see the Risk Management section on pages 112 to 126. Recovery Plan Recovery planning in line with regulatory requirements The Risk Committee oversaw for the Bank’s recovery plan- ning process, and recommended for approval to the Board its submissions to the National Bank of Georgia over a 4-stage process, due to complete in June 2022. Compliance and regulatory and legal risk Continued oversight of compliance, regulatory and legal risk The Committee places signiﬁcant focus on understanding and providing assurance on the implementation of regula- tory changes, as well as ensuring effective horizon scanning of upcoming trends and evolving risks. Throughout the year, the Risk Committee received regular updates on signiﬁ- cant pieces of legislation that were introduced in 2021. Fur- thermore, the Risk Committee also assessed and approved updated group-wide compliance policies such as the AML Policy, Whistleblowing Policy, Financial Crime Risk Appetite and other documents subject to annual update. 175 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Dear stakeholders, On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2021. This report is divided into two sections: the Annual Report on Remuneration and the Directors’ Remuneration Policy (Policy). Our Policy was last approved by shareholders at our 14 June 2021 Annual General Meeting (AGM), along with the new maximum ﬁxed- to-variable ratio. The Policy is effective from 1 January 2022 and the Policy table is reproduced in full on pages 190 to 202 to provide context for the decisions taken by the Remuneration Committee. Chair’s Statement REMUNERATION COMMITTEE REPORT This was another challenging year as the pandemic continued to spread around the world and the emer- gence of new virus variants slowed the return to nor- mality. Change is, however, in sight helped by effective vaccination campaigns and new medical treatments. We have maintained a clear focus on making balanced decisions while facing challenges posed by the on-go- ing economic realities, rewarding our people for per- formance while ensuring equitable outcomes for the entire workforce, and driving effective engagement with our stakeholders. The Committee considers sustainable performance as one of the main principles for rewarding our workforce. During 2021, the Georgian economy rebounded from the pandemic at remarkable speed. Our colleagues have done outstanding work throughout the year de- livering robust results for our Group. Record levels of proﬁtability have been recorded with a net proﬁt of GEL 809 million resulting in a Group Return on Equi- ty (ROE) of 24.4%. This robust proﬁtability was driven by strong income generation across all business areas, improvements in asset quality and effective manage- ment of our capital and liquidity levels. We continued to maintain market-leading positions in total loans and deposits in Georgia and further in- creased our digital footprint. The Group also contin- ued to move closer to its medium-term cost-efﬁciency targets, achieving a cost-to-income ratio of 37.6% in 2021, while continuing to invest in our Uzbek business. People continue to be one of our main and most im- portant assets, and at the core of our success and abil- ity to continue delivering outstanding results. In these challenging times, we will continue to focus on ensur- ing that our colleagues are supported as they are our key drivers for sustainable performance. 176 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED THE DIRECTORS’ REMUNERATION POLICY The Committee has set out in the Policy approved at the 2021 AGM the underlying principles that have guid- ed its remuneration decision-making. These are clarity and simplicity, risk alignment, predictability, propor- tionality and alignment with culture - as required by the 2018 UK Corporate Governance Code. Following the approval of the Policy at the 2021 AGM, the Committee has put in place procedures for its poli- cy’s implementation. In particular, the Committee clar- iﬁed the parameters and metrics for setting short-term and long-term key performance indicators (KPIs), and for the deﬁnition of grant levels for long-term variable compensation - in line with the new guidelines of the National Bank of Georgia. The new long-term incentive plan (LTIP) cycle, starting in 2022 and granted annual- ly to the Chief Executive Ofﬁcer (CEO) and the senior management of JSC TBC Bank, incorporates ex-ante gateway KPIs as well as a set of ex-post medium-term KPIs linked to our new mid-term strategy, including en- vironmental, social and governance (ESG) metrics as per our ESG strategy described on page 26. The ex-ante gateway KPIs - to be agreed with the Board Risk Committee annually - need to be met, in order for an LTIP grant to occur; the grant will then be awarded if the medium-term KPIs are achieved. For the 2022-2024 cycle, the ex-ante gateway KPIs were met in relation to CET1 ratio, liquidity and proﬁtability so con- ﬁrming senior management eligibility for an LTIP grant. KEY REMUNERATION DECISIONS FOR DIRECTORS The 2021 strategic corporate ﬁnancial, non-ﬁnancial and personal KPIs for the CEO’s annual bonus assess- ment are set out in the table on page 181, together with, as part of the main report, a full assessment of per- formance against these KPIs and a description of all remuneration components. With respect to the 2021 bonus, the KPIs were met at 98.7% compared to a max- imum possible achievement of 140% - as such, 70.5% of the maximum award was achieved. The CEO’s max- imum bonus potential is 135% of salary; so, applying the 70.5% KPI achievement against this, would give an award of 95% of salary. The Committee then imple- mented a discretionary adjustment of -12.25% to the bonus calculated by the KPI-based formula to make sure the ﬁnal payment was aligned to the performance achieved and the shareholder and broader stakehold- er experience. Based on this discretionary adjustment, the ﬁnal value of the CEO bonus award is US$ 805,392 (that being 62% of the maximum award) and is award- ed fully in deferred shares. The Committee is satisﬁed that the annual bonus outcome for 2021 is based on the results and value delivered by performance during the year, and is fair, reasonable and proportionate. Following the end of the three-year performance pe- riod 2019-2021, applicable to the 2019 LTIP award, the Committee assessed outcomes against the LTIP per- formance targets. The Group’s performance against the LTIP performance targets was signiﬁcantly im- pacted by the external environment in 2020 due to the COVID-19 pandemic and, consequently, the Commit- tee assessed the performance outcome was 60% of the target opportunity granted in 2019 (that being 43% of the maximum). Speciﬁcally, achievement against total shareholder return (TSR) targets was below the thresholds set, while achievement against ROE and Loan Market Share KPIs was at the maximum perfor- mance level (see details on page 183). This applies to the CEO but also to the senior management team of JSC TBC Bank. In total, 26,821 shares performance vested to the CEO in 2022, although these remain sub- ject to a two-year holding period and clawback. The CEO and the senior management team of JSC TBC Bank did not receive a 2020 LTIP award. Details of the 2021 LTIP award granted to the CEO are set out below on page 183. Considering the 2021 performance year achievements that met the gateway KPIs, and given a maximum LTIP opportunity of 161% of salary, the Board approved a 2022 LTIP grant of US$ 1,489,949 to the CEO. This rep- resented 96% of the maximum opportunity and 155% of the salary as set out on page 190. The 2022 grant will be subject to performance conditions related to ROE, TSR and ESG KPIs (Volume of Sustainable Assets at the end of the 2024), which will be assessed after the 2024 annual results close. Full details of the targets, in- cluding in the KPIs for the LTIP, are set out on page 184. In line with the Directors’ Remuneration Policy ap- proved at the 2021 AGM, a salary increase of 2.0% has been agreed for the CEO effective 1 May 2022, which is aligned to the general workforce salary increase of 2.94%. This increase reflects the continued develop- ment and growth in Vakhtang Butskhrikidze’s role and it is the ﬁrst increase since 2019. No change is proposed to non-executive directors’ fees. More details on non-executive compensation are on page 190. WIDER WORKFORCE REMUNERATION The Bank continued to provide support to our em- ployees as they work through the on-going challenges and economic recovery. Our main subsidiary in Geor- gia, JSC TBC Bank, maintained its flexible work-from- home policies for all non-client-facing staff. The Bank has not introduced any redundancy programs and ap- plied no reductions in the overall variable pay levels in 2021. We continue to have an active talent retention, training, promotion and recruitment approach as our business grows at a fast pace and we seek to acquire new skills. 177 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 We engaged with our workforce through our annual employee surveys - see more on pages 148-149. Additionally, as part of her wider mandate, our designated non-executive Director for workforce engagement, Tsira Kemularia, facil- itated feedback from workforce stakeholders on the Bank’s compensation structure and its alignment to company values and strategy. With support from the Group Human Capital Management Function, the Committee reviewed the compensation structure, including ﬁxed and variable pay levels, for the entire Group. We are also reviewing the incentive structure of the executive management of our operations in Uzbekistan to ensure consistency with pay principles across the Group. The employee engagement results regarding compensation levels and policies are discussed more on pages 148- 149, while additional information on how our Bank supports its workforce is provided on page 42. SHAREHOLDER ENGAGEMENT At the 2021 AGM, a supporting advisory vote of 76.1% was received for the Directors’ Remuneration Report. Togeth- er with the Chairman, Arne Berggren, and the Senior Independent Director, Tsira Kemularia, I held discussions with several shareholders to understand their concerns. We found these were primarily around the discretion exercised by the Committee in allowing the departing CFO to retain his unvested share awards - see more details in the Directors’ Remuneration Report on page 189. To address this, the Committee approved at Board level a new Post-Employment Policy for Share Awards, which consolidates the principles underpinning the treatment of share awards upon cessa- tion of employment by any member of the senior management team within TBC Group. This, and other steps taken following our consultation with shareholders are discussed on page 132. The Committee welcomes open engagement with shareholders and, as described above, we reached out to share- holders with respect to their concerns on the previous Directors’ Remuneration Report. I look forward to engaging with shareholders during 2022, as we continue to implement the new Policy ahead of the 2022 AGM. SUMMARY The aim of this report is to communicate the basis for the CEO’s remuneration outcomes and how this is clearly linked to performance. We are committed to maintaining an open and transparent dialogue with shareholders and I wel- come any comments you may have. I very much hope you will support the resolutions to approve the Annual Report on Remuneration at the upcoming AGM. Maria Luisa Cicognani Chair of the Remuneration Committee 13 April 2022 178 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Directors’ Remuneration Report This part of the report has been prepared in accordance with Part 3 of the revised Schedule 8 set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and with Listing Rule 9.8.6R. The Annual Report on Remuneration will be put to an advisory shareholder vote at the upcoming AGM. Remuneration principles The 2018 UK Corporate Governance Code sets out principles against which the Remuneration Committee should determine the Policy for executives. A summary of the principles and how the Company’s Remuneration Policy re- flects these is set out here: • Clarity and simplicity - the Committee strives to ensure that performance measures are clear and straightfor- ward. Executive Directors’ performance is measured against their KPIs, both ﬁnancial and non-ﬁnancial. • Risk - the Committee has the discretion to reduce an executive Director’s variable remuneration if speciﬁc KPIs have not been met and every element of executive Directors’ variable compensation is subject to the relevant malus and clawback provisions. Malus applies before vesting of awards and clawback applies for up to three years after the vesting of awards. Triggers include, material misstatement, material downturn in ﬁnancial performance and misconduct that causes serious reputational harm. In addition, the Committee has the discretion under the LTIP and deferred annual bonus to reduce awards if it considers that either the underlying ﬁnancial performance of the Company or the performance of the individual is such that the level of vesting cannot be justiﬁed. • Predictability - the maximum possible value of the executive Directors’ remuneration has been detailed in the new Remuneration Policy and is operating the 1:2 ﬁxed to variable remuneration cap. • Proportionality/alignment with culture – the Committee strives to make sure that performance measures are aligned with the corporate culture of the Group. This is intended to foster the right behaviour and deliver remu- neration that is proportional in the circumstances, by measuring executive Directors’ remuneration against a mix of ﬁnancial, non-ﬁnancial and personal KPIs. Also, by delivering a large proportion of executive Directors’ salary in shares, this intrinsically aligns the executive Directors’ pay to the long-term success of the Group and fosters a culture of sustainable long-term growth. Committee structure and meetings Committee members’ details are set out on page 143. All members of the Remuneration Committee are indepen- dent non-executive Directors. Nikoloz Enukidze stepped down as a member of the Committee on 6 April 2021. Arne Berggren joined as a member of the Committee on 6 April 2021. Nicholas Haag and Eric Rajendra stepped down as members of the Committee on 14 June 2021, and Per Anders Fasth and Tsira Kemularia joined the Committee with effect from 17 June 2021. Tsira Kemularia stepped down as a member of the Committee on 28 January 2022. The Committee met formally 10 times during the year. Details of attendees at these meeting for the current members of the Committee, as at 13 April 2022, are shown in the next table: Committee member Eligible/ Attended Maria Luisa Cicognani 10/10 Per Anders Fasth (appointed on 17 June 2021) 5/5 Arne Berggren (appointed on 6 April 2021) 5/5 Nino Suknidze (appointed on 28 January 2022) 0/0 Note to the table: Full list of Committee members for the year 2021, including those members who have left the Committee and their respective atten- dance, are shown in the Corporate Governance Statement on page 144. Meetings of the Committee normally take place shortly before Board meetings, and the Chair reports the activities of the Committee to the Board as a separate agenda item. All Committee meetings are formally minuted by the Com- pany Secretary, with copies circulated to the members. 179 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Responsibilities of the Committee The Committee is responsible for establishing and overseeing the Group’s Remuneration Policy principles and con- sidering and approving the remuneration arrangements of executive Directors. Full details of the Committee’s re- sponsibilities are set out in the Remuneration Committee terms of reference, which are available on our website at www.tbcbankgroup.com. Terms of reference for the TBC Bank Group PLC were reviewed and approved on 2 March 2022. Committee Effectiveness As mentioned on pages 147-148, the Board commissioned an externally facilitated survey-based review of the ef- fectiveness of the Board and each Board committee, which was completed in December 2021. Overall, the review concluded that the Remuneration Committee operates effectively. The Committee has considered and discussed the outcomes of the review and accepts the ﬁndings with a number of actions suggested already in progress. In particular, the feedback highlighted areas of improvement regarding the processes in setting senior management remuneration KPIs and the interaction with other Board Committees and management. The areas of improvement highlighted in the review have been discussed with the Board and the Committee will monitor progress on address- ing them during the year. Advisors Members of the Remuneration Committee provide valuable input in updating the Committee on the recent devel- opments in remuneration. However, when there is a need, the Committee receives external advisory services. During 2021 the new Committee members received an induction training session on remuneration policy gover- nance and structure from Baker McKenzie LLP. The fees were charged as part of their ongoing retainer. As disclosed in the 2020 Annual Report and Accounts, Aon provided advisory services to the Committee for the period up to the AGM. The advice was in relation to drafting the remuneration policy that was approved by the AGM in June 2021 , and to regulatory advice with fees of £57,257 (excluding VAT). The fees were charged on a time and materials basis. The Board is satisﬁed that the Aon’s advice was objective and independent and that Aon team giving the advice did not have any connection with the Group that may impair its independence. Aon was selected by the Committee from four ﬁrms invited to submit both a technical and a ﬁnancial proposal. Aon was considered to have the best offer for the scope of work the Committee had agreed and was seeking to be completed within set deadlines. The Board reviewed the potential for conflicts of interest and decided that Aon had appropriate safeguards in place. Directors’ single total ﬁgure of remuneration for 2021 (audited) The next table provides a breakdown of the various elements of Directors’ pay for the year ended 31 December 2021 and for the prior year. This comprises the total remuneration earned in respect of the period from 1 January 2021 to 31 December 2021, and the prior period from 1 January 2020 to 31 December 2020. 180 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Salary/ Fees Taxable beneﬁts 2 Total Fixed Deferred share bonus award 3 LTIP 2019-20214 Total Variable Total US$’000 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Vakhtang Butskhrikidze 1 964 964 17 18 981 982 805 - 445 - 1,250 - 2,231 982 Nikoloz Enukidze 5 99 350 - - 99 350 - - - - - - 99 350 Nicholas Haag 5 73 175 - - 73 175 - - - - - - 73 175 Eric Rajendra 5 65 142 - - 65 142 - - - - - - 65 142 Tsira Kemularia 164 157 - - 164 157 - - - - - - 164 157 Maria Luisa Cicognani 156 154 - - 156 154 - - - - - - 156 154 Arne Berggren 7 315 148 - - 315 148 - - - - - - 315 148 Nino Suknidze 8 12 - - - 12 - - - - - - - 12 - Eran Klein 9 96 - - - 96 - - - - - - - 96 - Per Anders Fasth 10 97 - - - 97 - - - - - - - 97 - Thymios P. Kyriakopoulos 11 97 - - - 97 - - - - - - - 97 - Rajeev Sawhney 8 12 - - - 12 - - - - - - - 12 - Abhijit Muralidhar Akerkar 6 104 54 - - 104 54 - - - - - - 104 54 Notes to table All of above compensation is denominated in US$, except taxable beneﬁts, for which, average period exchange rate is used. Non-ex- ecutive Directors have not received any other payments or beneﬁts from the Group in 2021 and 2020. Non-executive and executive Directors also do not receive any pension contributions. 1. Vakhtang Butskhrikidze’s (the CEO) salary was delivered as US$ 454,000 in cash and US$ 510,000 in shares in both 2021 and 2020. He did not receive any remuneration other than that disclosed in the table. 2. Taxable beneﬁts for the CEO includes security allowances and insurance. 3. As reported last year, top management forfeited their right to receive a bonus for 2020, so there was no deferred share bonus for 2020. See below for details of the deferred share bonus award for 2021. 4. The ﬁrst LTIP award was granted in 2019 for the performance period 2019 to 2021 and vested on 10 March 2022. The 2019 LTIP performance achieved an outcome of 43% of the maximum available 2019 award, equalling 33,951 shares (on a gross basis). However, after deducting applicable taxes for Georgia and the UK, 26,891 shares were transferred to the CEO. The Single Total Figure table above reflects the value of the award on a gross basis, calculated using the share price at the vesting date of GBP 9.96 and the foreign exchange rate on that date of 1.3171 US$:GBP. The CEO and the senior management team at JSC TBC Bank did not receive a 2020 LTIP grant., 5. Nikoloz Enukidze, Nicholas Haag and Eric Rajendra did not stand for re-election at the AGM of 14 June 2021. 6. Abhijit Akerkar stepped down as a Board member on 15 September 2021. 7. Arne Berggren was appointed as Chairman of the Board on 1 March 2021. 8. Nino Suknidze and Rajeev Sawhney were appointed to the Board on 24 November 2021. 9. Eran Klein joined the Group on 4 May 2021. 10. Per Anders Fasth joined the Group on 4 May 2021. 11. Thymios P. Kyriakopoulos joined the Group on 4 May 2021. 181 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 A Overall total KPI Score (see table below) 98.70% B Maximum KPI Score 140.00% C KPI Score as a % of Maximum Score (A)/(B) 70.50% D Maximum Bonus as % of Salary 135.00% E Bonus Payout based on KPI Score as a % of Salary (C)X(D) 95.18% F Salary US$'000 US$ 964 G Bonus Award as per KPIs (F)X(E) US$ 918 H Remuneration Committee discretionary Adjustment (-12.25%) US$ -113 I Final Deferred Share Bonus Award (G)+(H), an outcome of 62% of the maximum bonus (I)/((D)X((F)) US$ 805 DETAILS OF VARIABLE PAY EARNED IN THE YEAR (AUDITED) Vakhtang Butskhrikidze, Chief Executive Ofﬁcer Determining the CEO’s performance Awards made to the CEO reflected the Committee’s assessment of performance against corporate and individual objectives, which were developed with consideration for the Group’s strategic priorities and risk appetite. For non-ﬁ- nancial objectives, the performance assessment involved considering targets set in line with our survey results for employee experience and customer satisfaction measures, as detailed in the non-ﬁnancial performance assessment table. Performance achieved against each measure was applied to the weighting of each objective to determine the out- come percentage. As part of this assessment, the Committee consulted the Group Risk Committee and took into consideration its feedback in determining outcomes for the CEO’s risk and compliance measures. It also considered whether any discretion should be exercised with respect to the risk and compliance targets of the Group Risk Appe- tite Framework (RAF). As set out in the KPI assessment table on page 182, the target KPIs were mostly met. The exceptions were the corpo- rate KPI related to Customers: Best Service Company, which was not met, and the CEO’s individual KPI related to IT system stability. Several of the KPIs were exceeded. Overall, this level of performance resulted in a score against KPIs of 98.7%, with the maximum score being 140%. Based on this, the calculation was that 70.5% of the maximum award was achieved. The CEO’s maximum bonus potential is 135% of salary, in line with the Remuneration Policy approved for 2021. So, applying the 70.5% KPI achievement against this gives an award of 95% of salary. The Committee reviewed these outcomes in the context of several internal and external considerations to determine whether it should exercise discretion to reduce the outcome, including: • Overall share price performance in the year and dividend payments; • The change in the average per employee compensation for our wider workforce; • Proﬁt before tax and ROE; and • The positive actions taken by the Board to support our customers, colleagues and communities in these difﬁcult and uncertain times. As a result of this, the Committee implemented a discretionary adjustment of -12.25% to the bonus that was calculat- ed by formula from the performance versus KPIs, to make sure the ﬁnal payment was proportionate. The ﬁnal bonus award amount, therefore, is US$ 805,392 (that being 61.9% of the maximum award). The outcome is shown in the next table: Following the adjustment, the Committee determined that the ﬁnal bonus amount for 2021 appropriately rewards the CEO for his performance within the context of overall company performance and stakeholder experience. The award is 100% deferred in shares and is subject to continuous employment and malus and clawback provisions. The continuous employment condition is applied as follows: 50% of the award vests the ﬁrst anniversary from the award date and 50% of the award vests on the second anniversary from the award date. The KPI outcomes are set out below with the CEO’s individual KPI outcome to show the overall outcome: 182 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Main KPI category (weight) Subcategory: measurement Below Target (60%) Target (100%) 1 Above Target (140%) Actual Result 2021 KPI Weighting Achieved KPI Performance Weighted KPI Performance Corporate KPIs (70%) Profitability: ROE 17.9% - 20.2% 20.2% - 24.6% > 24.6% 24.4% 16% 100% 16% Efficiency: Cost to Income 45.6% - 41.8% 41.8% - 34.2% < 34.2% 37.6% 16% 100% 16% Asset Quality: Non-Performing Loans (NPLs) 6.0% - 4.5% 4.5% - 3.5% 3.5% - 2.0% 2.4% 15% 140% 21% HR – Employee Net Promoter Score (ENPS) The ENPS measures employee loyalty and reflects the likelihood of our colleagues recommending their workplace to their friends and family. The ENPS was measured for the Bank’s employees by an independent consultant in October 2021 10.5% 140% 14.7% Customers: Best Service Company (gap with number 2) Based on the survey conducted by the independent research company IPM in December 2021, the “Best Service Company in Georgia in Retail” was identified among the following industries: banking, telecommunications, insurance, pharmaceuticals as well as the Public Service Hall. 12.5% 0% 0% Corporate KPIs Total outcome 70% 67.7% Individual KPIs (30%) Non-JSC Subsidiaries Uzbek Bank: Gross Loans Uzbek Bank: Deposits 24.6 - 27.7 m US$ 27.7 - 33.9 m US$ > 33.9 m US$ 33.6 m US$ 5% 100% 5% 6.2 - 6.9 m US$ 6.9 - 8.5 m US$ > 8.5 m US$ 66.8 m US$ 5% 140% 7% Net Income for non-JSC subsidiaries (excluding the Uzbek Bank) (9.2) - (8.5) m GEL (8.5) - (6.9) m GEL < (6.9) m GEL (7.98) m GEL 5% 100% 5% IT initiatives IT system stability number Ensuring IT system stability by minimising the number and duration of IT incidents A technological transformation project which spans the whole organisation and covers areas such as upgrading our existing IT systems, channels and infrastructure, as well as IT talent development 2.5% 60% 1.5% Duration of major incidents 2.5% 100% 2.5% Project Interstellar 5% 100% 5% Leadership During the year, we split the leadership KPI to make it more precise; we gave more weighting to the IT responsibility of the CEO since the Committee wanted to place specific emphasis on his role in leading the IT transformation in the Group. Therefore, we split the leadership weighting between IT and overall leadership, because it was important to reflect the element of leading the IT transformation in the weighting, given that IT reports to the CEO. 5% 100% 5% Individual KPIs Total outcome 30% 31% Overall total KPIs 100% 98.7% Notes to table 1. Target is aligned to the budget 183 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 LONG-TERM INCENTIVE PLAN AWARDS (LTIP) a) Vesting of the 2019 LTIP award (audited) The 2019 grant performance was achieved with a 60% outcome (that being 43% of the maximum). The same level of award applied to the entire management team of our main subsidiary. The performance outcome is set out below: KPI (with weighting) Below Target (60%) Target (100% ) Above Target (140%) Actual Result 2021 KPI Weighting Achieved KPI Perfor- mance Weighted KPI Perfor- mance Total Shareholders Return for a period of 3 years (2019-2021) 15-17% 17-20% 20% + 4.22% 40% 0.00% 0.00% Average ROE for 3 years (2019-2021) 15-18% 18-21% 21% + 19.5% 40% 100.0% 40.00% Loan Market Share at the end of (2019-2021) 34-36% 36-40% 40% + 38.84% 20% 100.0% 20.00% Total KPIs 100% 60.00% Notes to table 1. The Average result of total shareholder return (TSR) is calculated based on the changes of share prices for the following period: January 2022 vs January 2019 divided by 3. Calculations consider dividends paid during the performance period. 2. Loan market share measured in Georgia. b) LTIP grant in 2021 for the performance period 2021 to 2023 (audited) Due to COVID-19, there was no LTIP grant in the previous ﬁnancial year, 2020. The following LTIP award was granted to the CEO during the 2021 ﬁnancial year: Performance conditions and targets together with corresponding weightings for the CEO for LTIP awards granted in 2021 in respect of the forward-looking performance period 2021-2023, are as follows: KPI weight Threshold (60%) Target (inclusive) (100%) Above Target (140%) TSR for a period of 3 years (2021-2023) 40% Below 15% 17-20% Above 20% Average ROE for 3 years (2021-2023) 40% Below 15% 18-21% Above 21% Loan market share at the end of (2021-2023) 20% Below 34% 36-40% Above 40% c) LTIP granted in 2022 for the performance period 2022 to 2024 Following the approval of the new Remuneration Policy in 2021 and in line with the new National Bank of Georgia Governance Code requirements on executive remuneration, a new process for granting LTIP has been adopted to incorporate ex-ante risk adjustments to the LTIP award process. Whether or not an LTIP is granted to the CEO and the senior management of JSC TBC Bank is subject to whether certain ex-ante gateway KPIs are met. For the 2022-2024 cycle the following gateway KPIs were met as at the end of 2021, conﬁrming senior management eligibility for an LTIP grant in 2022: • CET1 ratio: The lower end of the amber zone of the Risk Appetite Framework (RAF) at 31 December each year as approved by the Risk Committee. This was 60 basis points above the regulatory ratio as per the existing risk appetite at the year-end 2021. Type of award Award Size Face Value Number of shares1 Grant Date Performance Period Performance Targets Vakhtang Butskhrikidze (CEO) LTIP 161% salary US$ 1,554,240 100,284 11/03/21 2021 to 2023 See next table Notes to table 1. Gross number of shares is provided in the table. The net number of shares awarded, which was 80,227, is calculated from the gross amount, at the time of award, by deducting the applicable taxes in Georgia and UK, in line with the requirements of the Georgian tax legislation. The share price used to determine the number of shares is the average share price over the ten day period following the preliminary announcement of results for the ﬁnancial year ended 31 December 2020 of GBP 11.06 and US$: GBP exchange rate of 1.4, in line with the approved policy 184 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED As the per the Remuneration Policy approved for 2022, the maximum LTIP grant value is 161% of the executive Direc- tor’s salary. As the gateway performance against KPIs have been met, this allows the grant of an LTIP award. With re- spect to the amount of the grant, and as per the new NBG regulation which came into effect from 1 January 2022 and will be applied going forward, the Remuneration Committee considers the achievement of Corporate KPIs for 2021, which was at 96% (67.7% of a total of 70% as set out in the Corporate KPIs table on page 182). Based on this, the Com- mittee approved a grant of US$ 1,489,949 for the CEO. This represents 96% of the maximum opportunity and 155% of the CEO’s salary. The Remuneration Committee has considered share price movement during the year and, given the current volatility in the market, decided not to adjust the LTIP grant at this time. However, it will use its discretion to review the overall position at the time of vesting to determine the appropriate vesting outcome. The 2022 grant will be subject to performance conditions for the period 2022 to 2024 as set out in the next table, and will be assessed after the closing of the 2024 annual results. These goals include those related to the volume of TBC’s sustainable loan portfolio in line with TBC’s Environmental, Social and Governance (ESG) strategy stated on page 26 of this report. LTIP KPI 2022-2024 Measures (with weighting) Minimum (25% pay-out) Target (Straight-line calculation) Above target (100% pay-out) KPI Weighting Average ROE 1 15% - 19% 19% - 22% 22% + 40% Absolute Target for Total Shareholder Return (TSR) 2 15% - 17% 17% - 20% Above 20% 40% ESG KPI - Volume of Sustainable Assets at the end of 2024 3 GEL 900mln -1bln GEL 1 bln – 1.1bln > GEL 1.1bln 20% Notes to table 1. Exceptional one-offs caused by regulatory changes (taxation, NBG lending rules, etc.) to be excluded from ROE calculations; exclusion will be subject to Committee discussion and approval. 2. TSR is calculated based on the assumption that dividends are re-invested at the share price on the ex-dividend date. It rep- resents average TSR over the three year period. For calculations, the average share prices for February will be used. 3. The volume of sustainable, performing assets that went through the standard credit underwriting process: such as sustainable loans, including those loans which will be originated at TBC and could be syndicated within the KPI performance period ,and bonds issued by TBC Capital.. Subject to the performance conditions above being met over the 3-year period (2022 – 2024), the LTIP awards would crystallize and remain unvested for further 2 year period and be subject to continued employment requirements be- fore being released to the employee at the end of 5 years. No dividend equivalents will be paid on 2022 LTIP award until shares fully vest. This award remains fully subject to the 2022 Directors’ Remuneration Policy as approved by shareholders in 2021, including features related to malus, clawback and Remuneration Committee discretion. CET1 ratio NBG CET 1 Reg Requirement 11.73% Min Range of Amber Zone, regulatory +0.6% 12.3% Actual CET1 Capital Ratio 13.65% Buffer above min range of Amber Zone 1.35% Liquidity (NSFR ratio) NBG NSFR Reg Requirement 100.00% Risk Appetite Amber Zone 103.00% Actual NSFR 127.29% Buffer above min range of Amber Zone 24.29% (IFRS Group Net Profit) Group IFRS Net Profit in FY 2021 GEL 809mln Top Management Variable Comp in 2021 & 2022-2024 LTIP at grant gateway target GEL 27.2mln • Liquidity (NSFR ratio): The lower end of the amber zone of the RAF at 31 December each year as approved by the Risk Committee. This was currently 3 basis points above the regulatory ratio as per the existing risk appetite at the year-end 2021. • Proﬁtability (IFRS Group Net Income): The Group shall not make a loss after incurring LTIP and bonus expenses. As shown in the next table, the status against the KPIs set with respect to the LTIP grant gateway was well above the respective targets as at the end of 2021: 185 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Year of Grant Interest at 01/01/2021 Granted in year Vested in year Interest at 31/12/2021 Grant date Share used for calculation3 Vesting date 1,2 Vakhtang Butskhrikidze 2021 1 - 23,752 - 23,752 11/03 /2021 £12.435 11/03/2023 2020 1 24,072 - 12,036 12,036 19/02/2020 £12.936 19/02/2022 2019 2 15,860 - 1,762 14,098 21/03/2019 $11.00 21/03/2022 2018 2 14,098 - 14,098 - 09/03/2018 $11.00 09/03/2021 Total 54,030 23,752 27,896 49,886 Notes to table 1. Refers to the policy approved at the 21 May 2018 AGM. Subject to a condition of continuous employment for 2 years and malus and clawback provisions. The continuous employment condition is lifted as follows: 50% of the award on the ﬁrst anniversary from the award date and the other 50% on the second anniversary from the award date. 2. Refers to the policy approved at the 19 May 2015 AGM. Subject to continuous employment and malus and clawback provisions. The continuous employment condition is lifted as follows: 10% of the award on the ﬁrst anniversary from the award date, another 10% on the second anniversary from the award date and the ﬁnal 80% of the on the third anniversary from the award date. 3. This table provides share prices used in calculation instead of previously reported grant date share price (which was reported in the 2020 Annual report), as the latter was only presented for informational purposes and had not been used in calculations. 4. All share interests are presented net of all applicable taxes for Georgia and the UK. 5. Applicable FX rate for US$:GBP used for the 2020 award was 1.2977. 6. Applicable FX rate for US$:GBP used for the 2021 award was 1.3780. b) Bonus deferral5 Year of Grant Interest at 01/01/2021 Granted in year Vested in year Interest at 31/12/2021 Grant date Share used for calculation4 Vesting date 1,2 Vakhtang Butskhrikidze 2021 3 - - - - - - - 2020 1 42,571 - 21,285 21,286 19/02/2020 £12.936 19/02/2022 2019 2 80,479 - 8,942 71,537 21/03/2019 $11.00 21/03/2022 2018 2 74,678 - 74,678 - 09/03/2018 $11.00 09/03/2021 Total 197,728 - 104,905 92,823 Notes to table 1. Refers to the policy approved at the 21 May 2018 AGM. Subject to a condition of continuous employment for 2 years and malus and clawback provisions. The continuous employment condition is lifted as follows: 50% of the award on the ﬁrst anniversary from the award date and the other 50% on the second anniversary from the award date. 2. Refers to the policy approved at the 19 May 2015 AGM. Subject to continuous employment and malus and clawback provisions. The continuous employment condition is lifted as follows: 10% of the award on the ﬁrst anniversary from the award date, a further 10% on the second anniversary from the award date and the ﬁnal 80% of the on the third anniversary from the award date. 3. As a result of COVID-19 a decision was taken not to make bonus awards for 2020, so there are no grants in 2021 for the executive Directors. 4. This table provides share prices used in calculation instead of previously reported grant date share price (which was reported in the 2020 Annual report), as the latter was only presented for informational purposes and had not been used in calculations. 5. All share interests are presented net of all applicable taxes for Georgia and the UK. 6. Applicable FX rate for US$:GBP used for the 2020 award was 1.2977. c) LTIP DIRECTORS’ OUTSTANDING INCENTIVE SCHEME INTERESTS (AUDITED) The following tables summarise the outstanding awards made to Executive Directors: a) Salary in shares4 Year of Grant Interest at 01/01/20212 Granted in year2 Vested in year Lapsed in year Exercised in year Interest at 31/12/20212 Grant date End of perfor- mance period Vesting date Holding date2 Vakhtang Butskhrikidze 2021 - 100,284 - - - 100,284 11/03/2021 31/12/2023 03/2024 03/2027 2020 - - - - - - - - - - 20191 79,217 - - - - 79,217 19/02/2020 31/12/2021 10/03/2022 03/2024 Total 79,217 100,284 - - - 179,501 - - - - Notes to table 1. Performance conditions and targets, together with corresponding weightings, are set out in the earlier LTIP section above. 2. To comply with the requirements of the National Bank of Georgia, the holding period for 2021 LTIP grant was increased to 3 years from the previously approved 2 years. The holding period in relation to the 2019 LTIP grant remained unchanged. 186 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Notes to table 1. This ﬁgure includes all shares held that are no longer subject to any performance conditions restrictions. Some of these shares may still be subject to clawback requirements. 2. This ﬁgure includes shares that are still subject to transfer restrictions, a continuous employment condition and malus and clawback provision. The ﬁgure includes shares granted as a deferred share bonus each year and deferred share salary up to and including the performance year 2020. 3. This ﬁgure includes awards granted, but not vested, under the LTIP that are subject to performance conditions. Details of these interests are described on page 185. 4. The shares as a percentage of salary has been calculated based on a share price of GBP 16.50 as at 31 December 2021 con- verted into US$ using the cross rate of the ofﬁcial exchange rates published by the NBG of 3.0976 for GEL/US$ and of 4.1737 for GEL/GBP for the same date. 5. Nikoloz Enukidze, who did not stand for re-election at the 14 June 2021 AGM holds 10,000 shares which were acquired before premium listing in August 2016. 6. On 22 February 2022, Maria Luisa Cicognani purchased 1,428 shares at an average share price of £13.80. 7. On 8 March 2022, Thymios P. Kyriakopoulos purchased 5,000 shares at an average share price of £9.65. 8. Abhijit Akerkar stepped down from the Board on 15 September 2021. 9. Nicholas Haag did not seek re-election by the shareholders at the 14 June 2021 AGM and stepped down from the Board on 14 June 2021. 10. Eric Rajendra did not seek re-election by the shareholders at the 14 June 2021 AGM and stepped down from the Board on 14 June 2021.. Shareholding guidelines (% of salary) Shareholding at 31 Dec 2021 not subject to either continuing employment requirements or performance conditions 1 (A) Shareholding at 31 Dec 2021 subject only to continuing employment requirements 2 (B) Total number of shares held (C = A+B) Shares as a percentage of salary (D) 4 Number of shares subject to the performance conditions in relation to LTIP (E) 3 Total interests in shares still subject to conditions (B+E) Total interests in shares (A+B+E) Vakhtang Butskhrikidze (CEO) 200% 883,556 142,707 1,026,263 2,367% 179,501 322,208 1,205,764 Nikoloz Enukidze 5 - - 10,000 - - - - 10,000 Arne Berggren - - - - - - - - Maria Luisa Cicognani 6 - - - - - - - - Thymios Kyriakopoulos 7 - - - - - - - - Eran Klein - - - - - - - - Per Anders Fasth - - - - - - - - Tsira Kemularia - - - - - - - - Nino Suknidze - - - - - - - - Rajeev Sawhney - - - - - - - - Abhijit Akerkar 8 - - - - - - - - Nicholas Haag 9 - - - - - - - - Eric Rajendra 10 - - - - - - - - Directors Shareholdings (audited) The following table sets out a summary of the Directors’ interests in shares, including any interests held by connected persons. Vakhtang Butskhrikidze’s shareholding of 2,367% of salary at 31 December 2021 exceeds the share ownership requirement of 200% of salary.. 187 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 US$000 2021 2020 % change Remuneration paid to or receivable by all employees 1 96,034 78,478 22% Distributions to shareholders by way of dividends 26,223 - 100% Other signiﬁcant distributions and payments - - NA Notes to table 1. Total spend on pay includes total staff costs per Group’s IFRS consolidated ﬁnancial statements and is converted into US$ using the average US$/GEL exchange rate 3.22 for 2021 and of 3.11 for 2020 respectively. Dividends paid to shareholders in 2021 were gross amounts converted into US$ using ofﬁcial exchange rate prevailing at the date of payment of the dividends, GEL 3.1183. The dividend amount included both cash and scrip dividend. No dividends were distributed in 2020. No share buy-back was carried out either in 2020 or in 2021. Year-on-year change for Directors compared to global average for employees The next table shows the percentage change in salary, beneﬁts and bonus earned between 31 December 2019 and 31 December 2021 for the Directors compared to the average for other employees. In accordance with the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, which apply to ﬁnancial years commencing on or after 10 June 2019 this analysis has been expanded to cover each Executive and Non-executive Director. The table will be built up over time to display a ﬁve-year history. In the next table, as per the requirements of the Companies (Directors’ Remuneration Policy and Directors’ Remuner- ation Report) Regulations 2019, changes to the base pay (or fees), taxable beneﬁts and annual bonus of Directors are compared to employees over the same period (2020 to 2021 and 2019 to 2020). Payments to past Directors (audited) As disclosed in the 2020 Annual Report and Accounts, Giorgi Shagidze stepped down from his positions as Deputy CEO of the Bank and Group CFO and as a member of the TBC PLC Board on 28 October 2020. He remained at the Company in an advisory role until 31 December 2020. Giorgi Shagidze was classiﬁed as a Good Leaver and part of his outstanding LTIP award granted in 2019 and subject to performance conditions until the end of 2021, vested on the normal vesting date of 10 March 2022. This award vest- ed on a pro-rata basis for services performed up to 28 October 2020 and subject to the performance outcome of 43% as set out above. The 2019 LTIP vesting (based on the performance outcome and pro-rata stated) had an award value of US$ 203,531 gross of tax (which net of taxes was then allocated as 8,238 shares). This reflects a reduction from the 39,609 shares granted to Giorgi Shagidze in 2019, as reported in the 2020 Annual Report on page 191. These shares are subject to a two-year post-vesting holding period and remain subject to clawback for three years after vesting. No other payments have been made to past Directors during the year. Payments for loss of ofﬁce (audited) No payments have been made for loss of ofﬁce in the year. Relative importance of the expenditure on pay The next table shows the Group’s expenditure on pay compared with distributions to shareholders. 188 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Performance graph and total remuneration history for Chief Executive Ofﬁcer The next graph shows the Company’s performance, measured by TSR, compared with the performance of the FTSE 250 Index and the FTSE All-Share Index from 10 August 2016- when the shares were listed on the premium segment of the London Stock Exchange to 31 December 2021. These market indexes were selected because they are most comparable to the Company in terms of listing and relevant governance and transparency standards. Further, the Company is included in the FTSE All-Share Index and FTSE 250 Index. 31 Dec - 16 31 Dec - 17 31 Dec - 18 31 Dec - 19 31 Dec - 20 31 Dec - 21 FTSE 250 TSR FTSE All-Share TSR TBC Bank TSR 20% 40% 60% 80% 100% 120% 0% 140% 160% Change in 2021 against 2020 (%) Change in 2020 against 2019 (%) Salary/ fees Taxable Beneﬁts Bonus Salary/ fees Taxable Beneﬁts Bonus Executive Directors Vakhtang Butskhrikidze 0% -4% 100% 6 0% -14% -100% 6 Non-executive Directors Nikoloz Enukidze 1 -72% - - 41% - - Nicholas Haag 1 -59% - - 11% - - Eric Rajendra 1 -54% - - 109% - - Arne Berggren 3 113% - - 190% - - Tsira Kemularia 5% - - 9% - - Maria Luisa Cicognani 1% - - 3% - - Eran Klein 5 - - - - - - Per Anders Fasth 5 - - - - - - Thymios P. Kyriakopoulos 5 - - - - - - Nino Suknidze 5 - - - - - - Rajeev Sawhney 5 - - - - - - Abhijit Muralidhar Akerkar 2 91% - - - - - Average employee 4,7 2% 63% 11% 18% -25% -61% Notes to table 1. Nikoloz Enukidze, Nicholas Haag and Eric Rajendra stepped down from the Board at the AGM on 14 June 2021. 2. Abhijit Akerkar joined the Board as an independent non-executive Director on 27 July 2020 and was appointed as a member of JSC TBC Bank Supervisory Board on the same date. He stepped down as a Board member on 15 September 2021. 3. Arne Berggren was appointed as the Chairman of the Board on 1 March, 2021. He joined the Board as an independent non-exec- utive Director on 13 August 2019 and was appointed as a member of JSC TBC Bank Supervisory Board on 18 July 2019. 4. These numbers include employees of the Group, except for the executive and non-executive Directors’ remuneration provided in the given table. 5. These non-executive directors were appointed during the 2021 year. 6. The management forfeited their right to receive a bonus for 2020 and so no deferred share bonus award was granted for 2020. 7. Percentage change for the workforce salary, beneﬁts and bonus, where applicable, is provided in GEL However, the annual per - chance change in the salary in US$ for the average employee in 2021 was 2.94% as reported in the Chair’s statement on page 175. 8. Percentage change for the Board members’ salary, beneﬁts and bonus is provided in US$. 189 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Resolution on the Directors’ remuneration report A supporting vote of 76.1% was received for the Directors’ Remuneration Report Resolution at the AGM and was included in the Investment Association’s Public Register. The Company’s Remuneration Committee Chair, togeth- er with the Chairman and Senior Independent Director held discussions with a number of shareholders that voted against this resolution to understand their concerns. The Directors appreciate the shareholders sharing their views and understand that the voting outcome was principal- ly related to a speciﬁc, one-off discretion exercised by the Committee for the departing CFO. The dialogue with the shareholders has highlighted that there remains strong support for the Company’s remuneration policy which was approved by 96.17% of shareholders. A number of investors expressed concerns regarding the discretion exercised by the Committee on the award of unvested shares for variable compensation to the departing CFO and the precedent that this may set for future cases if applicable. Some shareholders also expressed the view that ﬁxed management compensation should be paid in cash given the already high percentage of shares held by the Director as a proportion of salary (see page 186), which has also led to executives frequently selling shares in the market to cash-in their salary. Finally, some shareholders expressed the view that non-executive Directors should be also compensated with shares of the Company in lieu of fees. The Committee has implemented a series of actions to address investors’ concerns. In particular, a new Post-Employ- ment Policy for Share Awards has been drafted to consolidate the principles underpinning how the Committee will evaluate the exercise of discretion going forward. For the Executive Director, it has been decided to move ﬁxed salary to a 70% to 30% cash-to-share delivery as set out on page 190. All variable compensation continues to be delivered in deferred shares as described on page 192. IMPLEMENTATION OF REMUNERATION POLICY FOR 2022 Remuneration Policy Summary – Executive Director This section summarises how the Remuneration Policy will be implemented in 2022 for executive and non-executive Directors. The Policy was approved at the AGM on 14 June 2021 to be effective from 1 January 2022 and is intended to apply for three performance years until 31 December 2024. Financial Year Single Total ﬁgure of remuneration (US$’000) Deferred share bonus as a percentage of maximum bonus opportunity (%) LTIP vesting as a percentage of the maximum opportunity of shares that could have vested (%) 2021 2,231 62% 43% 2020 982 N/A N/A 2019 1,887 69% N/A 2018 3,356 85% N/A 2017 4,084 88% N/A 2016 3,017 85% N/A 2015 1,809 87% N/A Statement of voting on remuneration at 2021 AGM The next table shows the most recent voting outcomes on the remuneration-related resolutions: Resolution Votes For % of votes cast For Votes Against % of votes cast Against Total votes % of issued share capital voted Votes Withheld To approve the directors' remuneration Report 29,034,558 76.10% 9,116,452 23.90% 38,151,010 69.17% 1,919,485 To approve the directors' remuneration policy. 38,535,269 96.17% 1,533,490 3.83% 40,068,759 72.65% 1,736 To approve the management's variable remuneration ratio 40,070,492 100.00% 3 0.00% 40,070,495 72.65% 0 The total remuneration ﬁgures for the CEO for 2015 to 2021 are shown in the next table. The annual bonus and long- term incentive award vesting level as a percentage of the maximum opportunity are also disclosed: 190 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Salaries for Executive Directors Salary for the Executive Director: Chief Executive Ofﬁcer (CEO) - remained unchanged for the period of 1 January 2022 – 30 April 2022 at US$963,994. Starting from 1 May 2022, 70% of the CEO’s salary will be delivered in cash and 30% in shares. Furthermore, his salary will increase by 2% and will be delivered in GEL. 2022 Bonus Consistent with the Policy requiring at least 60% of performance to be measured on ﬁnancial KPIs, the 2022 bonuses will be based on 70% corporate and 30% individual objectives. Corporate performance will be assessed on a number of measures including ROE, (Non-Performing Loans) NPL, portfolio larisation 1 , digitalization and employee NPS). Individual non-ﬁnancial KPIs are linked to the CEO leadership assessment and in particular to his continuing responsibilities to implement important IT and digital transformation projects across the group. The performance targets for 2022 are deemed to be commercially sensitive and will be disclosed in next year’s Annual Report on Remuneration. In accordance with the Remuneration Policy, the maximum bonus opportunity for the CEO ofﬁcer will be 135% of salary. 2022 LTIP LTIP awards granted to the CEO will be over shares worth a maximum of 161% of salary. The 2022 LTIP grant will be measured over the three years to 31 December 2024 and subject to the conditions set out below. The shares crystallise at the third anniversary of the grant and remain unvested for further 2 years. Further information on these is provided at page 184 above. Additionally, following the approval of the new Remuneration Policy at the 14 June 2021 AGM, and in line with the new National Bank of Georgia Governance Code requirements on executive remuneration, a new process for granting LTIP has been adopted to incorporate ex-ante risk adjustments to the LTIP award process. Further information on these is provided on page 183 above. LTIP KPI Weighting Average ROE (subject to CET1 Ratio) 40% Absolute TSR 40% ESG KPI – Volume of sustainable assets at the end of 2024 20% Chairman and Non-executive Director fees The fees for the Chairman and Non-executive Directors are: US$’000 Chairman (eligible for committee fees) 338 Non-executive Director (other than Chairman) 130 Senior independent director 15 Committee Chairmanship 12 Committee membership 6 Designated Employee engagement independent Board member role 3 DIRECTORS’ REMUNERATION POLICY The rest of this section of the report sets out the Policy approved by shareholders at the 14 June 2021 AGM and that came into effect from then. While no formal changes are being proposed this year, following discussion with inves- tors the Committee has decided to pay 70% of Vakhtang Butskhrikidze’s salary in cash. This is to reduce the frequen- cy with which he sells his shareholding to realise cash. The Policy promotes the delivery of sustainable long-term performance through the long-term nature of the incen- tive plans (bonus deferral and LTIP), the variety of performance measures used (aligning with the business strategy and supporting a rounded assessment of performance), and the balanced approach to target setting and perfor- mance assessment. The Directors’ Remuneration Policy is effective from 1 January 2022 and will apply for three years to 31 December 2024. Full details of this can be found in the 2020 Annual Report, which is available at our website at www.tbcbank- group.com. Notes to table 1. The Board has taken a strategic decision to further increase focus on both loan and deposit Larisation, which is the increase of the GEL share in total loans and deposits, in order to optimise regulatory requirements for capital and reserve allocation. 191 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 POLICY TABLE: EXECUTIVE DIRECTORS FIXED PAY Salary – delivered as cash and shares Purposes and link to the strategy of the Group Salaries are determined based on market practice and provide each executive director with a competitive ﬁxed income to efﬁciently retain and reward the director, based upon each director's roles and responsibilities within the Group and relative skills and experience. Salary in cash The cash part of the salary is aimed to provide ﬁxed cash remuneration. Salary in shares Part of the salary is delivered in the form of shares to align executive directors' and shareholders' interests. Operation An executive director may be paid separate salaries for roles and responsibilities at different entities within the TBC Group as set out in a separate service contract with any relevant entity. Currently the Executive Director receives a salary from JSC TBC Bank and TBC Bank Group PLC. The aggregate is disclosed in the Remuneration Report. Salaries are reviewed annually by the Remuneration Committee. Salaries will be reviewed against relevant bank peers and other companies of a similar size and complexity. Delivery of shares Shares are usually delivered during the ﬁrst quarter of the second year (i.e. the year after the work is performed) and the exact date is determined by the Remuneration Committee. All shares must be held for one year and 50% of the shares must be held for a second year. They are registered in the trustees name as nominee for the participants. The participants are entitled to receive dividends and have voting rights from the delivery date. Maximum Opportunity Salary is set and reviewed annually to ensure that the Directors receive a fair compensation which is competitive for the role the individual is asked to play within the Group and is commensurate with experience. Salary for the executive Director is determined by the Remuneration Committee, taking account his skills, performance and experience. The maximum salary level will be determined by the Board in line with the principles outlined. Whilst there is absolute no maximum salary level, any increase will normally be in line with those awarded to the workforce. Where an increase is to be awarded above those granted to the workforce, we will engage with our shareholders and maintain the objective that the total reward potentially available is not excessive from the standpoint of relevant employment data. Any changes to salary must be recommended by the Remuneration Committee and approved by the Board. For the element of salary paid in shares, the number of shares is calculated based on the average share price of the last 10 days preceding the Remuneration Committee decision date. However, the maximum value is ﬁxed by reference to a cash amount on that date. Performance Measures Not performance based Malus / clawback Malus and clawback provisions are not applicable to salary delivered in cash or shares. Pension Purposes and link to the strategy of the Group To assist our employees in providing for their retirement and to maintain a market competitive beneﬁts package to attract and retain executive directors1. Operation The Georgian government has a mandatory pension scheme, under this scheme 2% of total employee compensation is to be contributed to a national pension fund. At the time of the pension reform in 2019, in line with the Georgian government’s regulations, the CEO was given the opportunity to opt out of the pension scheme and he decided to choose this option. Maximum Opportunity In line with the workforce, the maximum employer contribution will not exceed 2% of total compensation. Performance Measures Not performance measures apply to the contribution level. Malus / clawback Malus and clawback provisions are not applicable. 1 At the time of the pension reform in 2019, in line with the transitional provisions of the Law on Pensions of Georgia, individuals above certain age were given a one-time opportunity to opt out of the pension scheme and the CEO decided to opt out from the Georgian state pension scheme. 192 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Beneﬁts Purposes and link to the strategy of the Group Beneﬁts are in line with Georgian market practice and are designed to be sufﬁcient to attract and retain high calibre talent. Operation Beneﬁts available to executive directors consist of insurance (such as medical, life and disability insurance), physical examinations, Directors’ and ofﬁcers’ liability insurance, a car service, personal security arrangements and assistance with ﬁlling out tax returns, where required. The Remuneration Committee retains the discretion to provide additional beneﬁts, where necessary or relevant in the context of the Director’s location. Executive directors are reimbursed for reasonable business expenses incurred in the course of carrying out duties under their service contracts, on provision of valid receipts. Maximum Opportunity The maximum amount payable depends on the cost of providing the beneﬁts that the Remuneration Committee is willing to provide to an employee in the location at which the executive director is based. Shareholders should note that the cost of providing comparable beneﬁts in different jurisdictions may vary widely. Disclosure of amounts paid will be provided in the implementation report and will be explained where the cost of beneﬁts is signiﬁcant. Performance Measures Not performance based Malus / clawback Malus and clawback provisions are not applicable. VARIABLE PAY Annual bonus delivered in shares Purposes and link to the strategy of the Group To provide a strong motivational tool to achieve the annual KPIs and to provide rewards to the extent those KPIs are achieved. The annual KPIs are chosen to align our executive directors’ interests with the short-term strategic objectives of the Group. Operation Determination of annual bonus KPIs are set at the beginning of each year in relation to that year (see more detail below). The nature of the KPIs will be disclosed in the annual report published in the performance year. The precise weightings and targets may be considered by the Remuneration Committee to be commercially sensitive and in that case will be disclosed retrospectively, which is generally expected to be in the following annual report. Delivery structure Annual bonus is delivered entirely in shares, which are subject to a holding period. Once shares are delivered, 50% of the shares will be subject to a holding period for 1 year and the other 50% for 2 years from the delivery date. The shares are registered in the trustees’ name as the nominee for the participants and the participants are entitled to receive dividends. Shares are usually delivered during the ﬁrst quarter of the second year (i.e. the year after the work is performed) and the exact date is determined by the Remuneration Committee. Administration Key discretions the Remuneration Committee has with respect to the plan are summarised further on in this Remuneration Policy. Maximum Opportunity The maximum value of the annual bonus for the Chief Executive Director, under the annual short-term incentive arrangements, is 135% of ﬁxed salary. For achieving target performance, no more than 50% of the maximum bonus opportunity is payable. The number of shares is calculated based on the average share price of the last 10 days preceding the Remuneration Committee decision date. 193 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Performance Measures The KPIs consist of corporate and individual performance measures. Corporate KPIs include ﬁnancial measures, and non-ﬁnancial measures with long term focus. At least 60% of annual bonus will be earned against a challenging set of ﬁnancial KPIs with the targets set with reference to the bank’s planning for the year. Individual performance measures may include individual strategic objectives which vary per person. The performance period is one year. To the extent that the KPIs are achieved, the Remuneration Committee may decide whether an award may be made and the amount of such award. The Remuneration Committee may also adjust KPIs during the year to take account of material events, such as (without limitation): material corporate events, changes in responsibilities of an individual and/or currency exchange rates. Malus / clawback Awards are subject to the operation of malus at any time before the end of the holding period and clawback at any time before the third anniversary of the end of the holding period. The precise powers of the Remuneration Committee to operate malus and clawback are set out in the terms and conditions governing the awards. In summary, for awards granted whilst this Policy is in effect, if the Board determines (based on the recommendation of the Remuneration Committee) that: – the Director deliberately mislead the Company or the Bank in relation to ﬁnancial perfor- mance; – there has been a material misstatement or material error in the ﬁnancial statements of the Company or the Bank; – the Director participated in or was responsible for conduct which resulted in signiﬁcant losses to the Company or the Bank; – the Director failed to meet the relevant ﬁt and proper criteria set by the NBG; – there is evidence of misconduct or serious errors by the Director, including (without limita- tion) a breach of any code of ethics or any other material breach of internal company rules; – the Company, the Bank and/or a relevant business unit suffers a signiﬁcant downturn in its ﬁnancial performance (e.g. speciﬁc business indicators) (for malus purposes), or the Director has caused the Company, the Bank and/or a business unit to suffer a signiﬁcant downturn in its ﬁnancial performance (for clawback purposes); – the Company, the Bank and/or a business unit in which the Director works suffers a signiﬁ- cant failure of risk management (for malus purposes), or the Director has caused the Com- pany, the Bank and/or the business unit in which the Director works to suffer a signiﬁcant failure of risk management (for clawback purposes); – there is signiﬁcant increase in the Company’s and or Bank’s or relevant business unit’s economic or regulatory capital base (for malus purposes), or the Director’s participation caused signiﬁcant increase in the Company’s and or Bank’s or relevant business unit’s economic or regulatory capital base (for clawback purposes); or – the conduct of the Director contributed to the imposition of regulatory sanctions on the Company or the Bank. the Board has the right to cause some or all of the award for that year or any subsequent ﬁnancial year that is unvested (or unpaid) to lapse (or not be paid) (i.e., operate malus), and/ or to require the return of shares and/or cash value received by the Director pursuant to the award (i.e., operate clawback), may be as determined by the Board in its absolute discretion. Further, malus may be operated if it is considered that the underlying ﬁnancial performance of the Company or the performance of the Director during the holding period is such that the number of shares cannot be justiﬁed. For awards granted prior to the effective date of this Policy, the awards are subject to the Company’s previous malus and clawback policy as summarised in the Policy in effect from 1 January 2019. Long Term Incentive Plan (LTIP) Purposes and link to the strategy of the Group To provide a strong motivational tool to achieve long-term performance conditions and to provide rewards to the extent those performance conditions are achieved. Performance conditions are chosen to align our executive directors’ interests with strategic objectives of the Group over multi-year periods and encourage a long-term view. 194 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Operation Determination of award Awards are discretionary and are granted if the Remuneration Committee considers that there has been satisfactory performance over the prior base year. Delivery structure Awards may be granted in the form of conditional share awards, options or restricted share awards. Awards are structured so that when combined with the annual bonus no less than 60% of variable pay is delivered as LTIP in any one year. For each award, forward-looking performance conditions are set by the Remuneration Committee for a period of 3-years. (see more detail below). The Remuneration Committee determines the level of award at the end of the performance period, based on the extent to which the performance conditions have been met. The performance conditions and respective targets will be disclosed in the annual report published in the year of the award. Timing of receipt For the shares to be delivered, the performance conditions need to be met over the 3-year performance period. To the extent that performance conditions have been met, the LTIP awards remain subject to 2 years vesting period and continued employment requirements before vesting at the end of 5 years. Awards may beneﬁt from dividend equivalents. No dividend equivalents will be paid on any awards (or part thereof) that lapse on or before vesting. Dilution For newly issued and treasury shares, the LTIP is limited to using 10% in 10 years for employee plans and 5% in 10 years for discretionary plans. These limits will exclude shares under awards that have been renounced, forfeited, released, lapsed or cancelled or awards that were granted prior to the Company’s IPO or awards that the Remuneration Committee decide will be satisﬁed by existing shares. Administration The plan will be administered by the Remuneration Committee. Key discretions the Remuneration Committee has with respect to the plan are summarised further on in this Remuneration Policy. Maximum Opportunity The maximum value of the award for the Chief Executive Director in any given year, under the long-term incentive arrangements, to be awarded is 161% of salary. The number of shares is calculated based on the average share price during the 10 days after the preliminary annual results of the year preceding the year of each grant is announced. Performance Measures Forward-looking performance measures will be based on ﬁnancial performance, appropriate risk taking, and other long-term strategic measures and set by the Remuneration Committee each year. Measures and weightings will be set out in advance of each grant to reflect the Company’s strategy. At threshold level of performance, for each measure, 25% of the award opportunity for that measure will vest, 100% of the award will vest for achieving the maximum performance set for each measure. The Remuneration Committee has the discretion, any time after an award has been granted, to reduce (including to zero) an award if the Remuneration Committee considers that either the underlying ﬁnancial performance of the Company or the performance of the individual is such that the level of vesting cannot be justiﬁed. The performance period is three years, commencing no earlier than the beginning of the ﬁnancial year during which the Award is granted. The Remuneration Committee may adjust performance conditions during the performance period to take account of material events, such as (without limitation): material corporate events, changes in responsibilities of an individual and/or currency exchange rates, provided that the altered KPIs will, in the reasonable opinion of the Remuneration Committee (acting fairly and reasonably), be not materially less difﬁcult to satisfy. 195 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Malus / clawback Awards are subject to the operation of malus until two years after the shares have been delivered and to clawback until three years after the shares have been vested. The precise powers of the Remuneration Committee to operate malus and clawback are set out in the terms and conditions governing the awards. In summary, for awards granted whilst this Policy is in effect, if the Board determines (based on the recommendation of the Remuneration Committee) that: – the Director deliberately mislead the Company or the Bank in relation to ﬁnancial perfor- mance; – there has been a material misstatement or material error in the ﬁnancial statements of the Company or the Bank; – the Director participated in or was responsible for conduct which resulted in signiﬁcant losses to the Company or the Bank; – the Director failed to meet the relevant ﬁt and proper criteria set by the NBG; – there is evidence of misconduct or serious errors by the Director, including (without limita- tion) a breach of any code of ethics or any other material breach of internal company rules; – the Company, the Bank and/or a relevant business unit suffers a signiﬁcant downturn in its ﬁnancial performance (e.g. speciﬁc business indicators) (for malus purposes), or the Director has caused the Company, the Bank and/or a business unit to suffer a signiﬁcant downturn in its ﬁnancial performance (for clawback purposes); – the Company, the Bank and/or a business unit in which the Director works suffers a signiﬁ- cant failure of risk management (for malus purposes), or the Director has caused the Com- pany, the Bank and/or the business unit in which the Director works to suffer a signiﬁcant failure of risk management (for clawback purposes); – there is signiﬁcant increase in the Company’s and or Bank’s or relevant business unit’s economic or regulatory capital base (for malus purposes), or the Director’s participation caused signiﬁcant increase in the Company’s and or Bank’s or relevant business unit’s economic or regulatory capital base (for clawback purposes); or – the conduct of the Director contributed to the imposition of regulatory sanctions on the Company or the Bank. the Board has the right to cause some or all of the award for that year or any subsequent ﬁnancial year that is unvested (or unpaid) to lapse (or not be paid) (i.e., operate malus), and/ or to require the return of shares and/or cash value received by the Director pursuant to the award (i.e., operate clawback), as determined by the Board in its absolute discretion. Further, the Board has the discretion to operate malus if it considers that the underlying ﬁnancial performance of the Company or the performance of the Director during the performance period is such that the number of shares cannot be justiﬁed. In addition, if it is discovered during the three years after cessation of employment that a good leaver is in fact a bad leaver according to the rules of the plan, the provisions of the plan applicable to bad leavers will apply and the individual will be required to return all shares acquired pursuant to awards that vested on or after the cessation of employment. For awards granted prior to the effective date of this Policy, the awards are subject to the Company’s previous malus and clawback policy as summarised in the Policy in effect from 1 January 2019. Shareholding Requirement Purposes and link to the strategy of the Group To further enhance the alignment of shareholders’ and Executive Directors’ interests in long- term value creation Operation The Company has a minimum shareholding requirement of 200% base salary, built up within ﬁve years of appointment. Until it is met, executive directors are expected to retain 50% of shares (net of tax). Shares counted for this purpose include any deferred annual bonus and any vested awards from the LTIP (notwithstanding that holding / continued employment conditions may still apply). Unvested awards from the LTIP will not be counted. After employment the lower of the executive director’s shareholding at termination or 50% of the minimum shareholding requirement are required to be held for two years post-cessation. Maximum Opportunity Minimum shareholding requirement of 200% of base salary to be built up within ﬁve years of appointment. For two years post-cessation, the lower of the executive director's shareholding at termination or 50% of the minimum shareholding requirement Performance Measures Not performance based 196 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Pre-existing obligations It is a provision of this Policy that the Group will uphold all pre-existing obligations and commitments that were agreed prior to this Policy taking effect. The terms of those pre-existing obligations and commitments may differ from the terms of the Policy and may include (without limitation) obligations and commitments under service con- tracts, deferred share compensation schemes and pension and beneﬁt plans. We believe, the new policy meets the best and regional practices, is competitive and aligns executives’ long-term interests with those of the Group and its shareholders. Performance measures and targets Annual Bonus Annual share bonuses are awarded to reward past performance over the year. At the end of the performance year, the shares will be delivered to the extent that annual KPIs have been met (as determined by the Remuneration Com- mittee). Once shares are delivered, the shares will be subject to a 2-year post performance holding period (with 50% released each year). The Remuneration Committee’s goal for each KPI is to establish a level of performance that is not certain to be at- tained, so that achieving or exceeding the targets requires diligent efforts by the executive director. KPIs for the annual share bonus, consist of corporate, ﬁnancial (such as ROE, cost to income ratio, Cost of Risk) and non-ﬁnancial KPIs (such as strategic, people and customer satisfaction levels) and individual KPIs (such as leader - ship and/or performance of speciﬁc function) and which reflect the executive Directors’ required contribution to the Group’s overall key strategic and ﬁnancial objectives for that ﬁnancial year. At least 60% of the annual bonus will be determined by ﬁnancial performance KPIs. The actual weighting on ﬁnancial performance may exceed this. The nature of the KPIs will be disclosed in the annual report published in the performance year. Speciﬁc weightings and targets for each KPI may be considered by the Remuneration Committee to be commercially sensitive as a mea- sure to the Group’s business; in that case, these details will be disclosed retrospectively, which is generally expected to be in the following annual report. Each KPI will have a threshold, target and maximum level and conditions to meet these levels. Targets for each corpo- rate KPI will be determined by the Remuneration Committee and will be approved by the Board. Individual KPIs will be approved by the Remuneration Committee, based on the recommendations of the CEO. Target annual bonus will not exceed 50% of the maximum policy limit. LTIP The award grant will be based on an assessment of the base i.e. prior year performance (i.e. for the LTIPs grant in early 2022, the base year is 2021). Awards granted will then be subject to 3-year LTIP forward-looking performance conditions. After three years, the shares will be delivered to the extent the performance conditions have been met (as determined by the Remuneration Committee). Once shares are delivered, the shares will be subject to 2 years of vesting period subject to continued employment and Malus and Clawback. The Remuneration Committee’s goal for each performance condition is to establish a level of performance that is not certain to be attained, so that achieving or exceeding the targets requires diligent efforts by our executive directors. The Remuneration Committee’s current view is that performance condition will include three categories of objec- tives: • Maintain a strong value creation incentive (such as absolute TSR); • Focus on long-term sustainability (ratios such as ROE, NIM, Cost/Income; individually or in combination); and • Appropriate risk framework (such as Non-Performing Loans (NPL) ratio, Common Equity Tier 1 (CET1) ratio, Loan Loss Provision (LLP) ratio, individually or in combination). One of the LTIP KPIs will continue to be the absolute TSR. The Committee considered that it is difﬁcult to ﬁnd a peer group against which to benchmark TBC TSR relative performance. The Group is listed on a major stock exchange (LSE) which reflects in its high standard of governance, it is a systemic bank in Georgia with a diversiﬁed business model, it is rapidly expanding its digital offering while continuing to offer traditional banking services and it is ex- panding in a high growth country. Finding a suitable peer group has been considered sub-optimal with the above considerations. Any measure selected, will be closely aligned with the group strategy at the time of grant. 197 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The performance conditions for each three-year performance period will be set at the start of each performance peri- od. The performance conditions and targets will be disclosed in the annual report published in the year of the award. The Remuneration Committee has discretion to amend the agreed performance conditions in exceptional circum- stances if, in the opinion of the Remuneration Committee, the original performance conditions are no longer appro- priate; provided that the amended conditions will, in the reasonable opinion of the Remuneration Committee, be not materially less difﬁcult to satisfy. Performance conditions are not capable of being re-tested. Each performance condition will have a threshold, target and maximum level and conditions to meet these levels. Tar- gets for each corporate performance condition are determined by the Remuneration Committee and are approved by the Board. Remuneration throughout the Group Remuneration of other top management members of JSC TBC Bank is similar to that of the executive members of the Company. Other senior and middle management across the Group including material risk takers, employees who are part of the agile structure, as well as some other key employees receive their entire salary in cash and are also eli- gible for cash and share bonus variable compensation. The share bonuses granted are subject to 3 years of continued employment condition and holding period gradually lifting the conditions. The long-term incentive plan applies only to top management. All other employees within the Group receive cash salaries and may be eligible to receive cash bonuses. Executive Director and employee pay is reviewed based on role and experience and determined through the application of appropriate market data usually with input from a compensation consultant. All employees receive a competitive beneﬁt package in line with Georgian market practice and participate in the mandatory state pension scheme effective from 1 January 2019. According to the scheme, the company pays 2% of the employee’s total remuneration as pension contribution to the State. Discretions retained by the Committee The Committee operates the Company’s incentive plans according to their respective rules and (where applicable) in accordance with relevant legislation. In order to ensure efﬁcient administration of these plans, certain operational discretions are reserved to the Committee. These include but are not limited to: • determining who may participate in the plans; • determining the timing of grants of awards and/or payments under the plans; • determining the quantum of any awards and/or payments (within the limits set out in the policy table above); • determining the performance measures and targets applicable to an award (in accordance with the statements made in the policy table above); • discretion to override formulaic outcomes; • where a participant ceases to be employed by the Company, determining whether ‘good leaver’ status shall apply; • determining the extent of vesting or payment of an award based on assessment of the performance conditions and the overall performance of the Company, including discretion as to the basis on which performance is to be measured if an award vests in advance of normal timetable (on cessation of employment as a ‘good leaver’ or on the occurrence of corporate events); • whether, and to what extent, pro-ratio shall apply in the event of cessation of employment as a ‘good leaver’ or on the occurrence of corporate events; • discretion to vary shareholding and post-cessation holding requirements in exceptional circumstances; • whether malus and/or clawback shall be applied to any award and, if so, the extent to which they shall apply; • making appropriate adjustments to awards on account of certain events, such as major changes in the Compa- ny’s capital structure. Policy table: Non-Executive Directors In the same way as the executives, the non-executive Directors receive their compensation both from the Company and the main subsidiary, JSC TBC Bank, proportionate to the time spent working on the respective entity’s Boards and committees. 198 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Fees Purposes and link to the strategy of the Group To provide appropriate compensation for a non-executive director of the Group, sufﬁcient to attract, retain and motivate high calibre individuals with the relevant skills, knowledge and experience to further the Group’s strategy. Operation The Group pays fees to non-executive Directors. The fees are determined by the Board. The Chairman is paid an all-inclusive fee for all Board responsibilities. The other non-executive directors receive a basic Board fee, with additional fees where individuals serve as the Senior Independent Director, member or Chairman of a Committee of the Board. The Board (excluding the non-executive directors) reserves the right to structure the non-executive directors’ fees differently in its absolute discretion. The Board's (excluding the non-executive directors) discretion will be exercised fairly and reasonably and with regard to appropriate comparable market practice and business strategy. Fees are generally paid monthly in cash. However, the Board reserves the right to pay the fees on a different basis. Fees are periodically reviewed and adjusted by the Board, having regard to external comparators such as the Group's peer group, the chair or committee roles and responsibilities and other market factors. Maximum Opportunity The Board will review the amount of each component of fees periodically to assess whether, individually and in aggregate, they remain competitive and appropriate in light of changes in roles, responsibilities and/or time commitment of the non-executive Directors, and to ensure that individuals of the appropriate calibre are retained or appointed. Current fee levels are set out in the Annual Report of Remuneration. Performance measures Not performance based. Malus / clawback Malus and clawback provisions are not applicable. Beneﬁts and Expenses Purposes and link to the strategy of the Group To compensate non-executive directors for expenses incurred in connection with the performance of their non-executive director duties and to ensure the Group has the appropriate non-executive director input as and when required. Operation The Group may reimburse non-executive directors for their expenses incurred in connection with the performance of their duties including attending Board and committee meetings (such as, for example, travel, accommodation, other subsistence expenses and personal security arrangements), Board/committee dinners and functions, Board training sessions, director’s and ofﬁcers’ liability insurance, advice in respect of professional duties and corporate hospitality events (or the Group may pay such expenses directly). Maximum Opportunity The maximum amount payable depends on the cost of providing such expenses in the location at which the non-executive director is based. Shareholders should note that the cost of providing comparable expenses in different jurisdictions may vary widely. Performance measure N/A Malus / clawback N/A 199 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Non-executive Directors are not employees and do not receive compensation or beneﬁts. The non-executive Di- rectors are not eligible for performance-based share awards. Awards with performance conditions are not part of the non-executive remuneration package as we do not wish the non-executive Directors to be driven by short-term Group performance so as to maintain their independence accountable for oversight of the Group. The non-executive Directors are entitled to broad indemniﬁcation by the Group and are covered by the Group’s Di- rectors & Ofﬁcers’ Liability Insurance Policy. Recruitment policy The Remuneration Committee intends that the components of remuneration set out in the above policy tables, and the approach to those components as set out in the policy tables, will (subject to the remainder of this recruitment policy) be equally applicable to the annual package provided to new recruits, i.e. for executive Directors, salary (with cash and share components), discretionary deferred share bonuses (up to 135% of salary), LTIP (up to 161% of salary), pension (up to 2% of salary) and employee beneﬁts; for non-executive Directors, fees and relevant expenses and beneﬁts. For an internal appointment of an executive or non-executive Director, any pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment, as appropriate. In the year of promotion for an internal appointment, additional awards pro-rated for the time served in the new role may be made to the individual within the maximums set out in the policy tables above. The Remuneration Committee has a preference not to provide a “buy out” arrangement and/or to establish additional or particular arrangements speciﬁcally to facilitate the recruitment of the individual. However, where an individual would be forfeiting remuneration or employment terms in order to join the Group, the Remuneration Committee may award appropriate compensation. The Remuneration Committee would require reasonable evidence of the nature and value of any forfeited arrangements and would, to the extent practicable, ensure any compensation was of com- parable commercial value and capped as appropriate, taking into account the terms of the previous arrangement be- ing forfeited (for example the form and structure of award, timeframe, performance criteria and likelihood of vesting). Where appropriate, the Remuneration Committee would have a preference for buy-outs to be delivered in the form of shares in the Company. All such awards will be appropriately discounted to ensure that the Group does not, in the view of the Remuneration Committee, over-pay. The Remuneration Committee will also consider the application of performance conditions and/or clawback provisions, as appropriate. Details of any “buy out” awards will be appropri- ately disclosed, and any arrangements would be made within the context of minimising the cost to the Group. In any case, total value of “buy out” award, should not exceed 100% of the salary (including cash and share salary) paid for the comparable executive position the year immediately preceding to the recruitment. The Group may make a contribution towards legal fees in connection with agreeing employment terms. The Group may also agree to pay certain expenses and taxes should an executive director be asked to relocate to a different country, such that the executive director pays no more than would have been required in the home location. Policy on payments for loss of ofﬁce The following paragraphs describe the Group’s general policy on payments for loss of ofﬁce. Any compensation payable in the event that the employment of an executive director is terminated will be deter- mined in accordance with the terms of any service contract between the Group and the executive, as well as the relevant rules governing outstanding deferred share awards, bonus shares, awards under the LTIP and this Policy. The Remuneration Committee will take all relevant factors into account when considering whether or not the Direc- tor is a good leaver (as set out in their service contract or other applicable plan document). The Remuneration Com- mittee will exercise its absolute discretion to determine whether such terms should be included in any new service contract. In addition to any payment referred to above, the Remuneration Committee reserves discretion as it considers appro- priate to continue beneﬁts beyond the date of termination, pay for relocation to previous location, where applicable, make payments in lieu of notice, accelerate the vesting of equity awards, and/or pay for out placement services and/ or legal fees. In certain circumstances, the Committee may approve new contractual arrangements with departing executive Directors, potentially including (but not limited to) settlement, conﬁdentiality, restrictive covenants and/or consultancy arrangements; these arrangements would only be entered into where the Committee believes that it is in the best interests of the Company and its shareholders to do so. 200 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REMUNERATION COMMITTEE REPORT CONTINUED Generally, the Group would require a non-compete and conﬁdentiality agreement from the departing executive Di- rector to protect the interests of the Group. Vesting and lapse of awards If an executive Director ceases to be employed by any Group company at his/her sole decision before the service contract expires or if the executive Director leaves for a bad leaver reason, the executive Director must return all bonus shares awarded for which applicable holding period requirement has not been met (or as directed by the Company) and/or any nil cost options awarded will lapse and any unvested awards under the LTIP will lapse. Depending on the circumstances, the Remuneration Committee may, at its sole discretion and with regard to any recommendation made by the CEO of the Company (as applicable), allow the executive Director to partially or fully retain such bonus shares and/or LTIP awards. If the executive Director is determined by the Remuneration Committee to be a good leaver, the executive Director is entitled to receive an award of deferred salary and deferred bonus shares pro-rated for both time and performance during the performance year. All outstanding awards of deferred salary and deferred bonus will continue to vest on their initial terms. Subject to the achievement of the relevant performance criteria, a portion of any outstanding awards under the LTIP may vest, subject to a reduction pro rata to reflect shortened period of employment between grant and the end of the holding period. In general, the original performance period will continue to apply. However, where, in the opinion of the Remuneration Committee, early vesting is appropriate, or where it is otherwise necessary, awards will vest by reference to performance criteria achieved over the period of employment. If, during the three years after the dismissal of the executive Director as a good leaver, it is established that the execu- tive Director was a bad leaver, the provisions applicable to bad leavers will apply. Executive Directors - Notice periods Notice periods are set out in the executive Director’s service contract. Generally speaking, either party may terminate the service contract by giving the other party not more than one year and not less than seven months’ notice and the Group will reserve the right to terminate without notice in certain circumstances. Notice periods will be reviewed by the Board and the Remuneration Committee when contracts are due for renewal with consideration given to busi- ness continuity and potential candidates in the market, amongst other factors. Service contracts and letters of appointment The service contracts of executive Directors do not have a ﬁxed duration and may be terminated by either party (see further details above under “Notice Periods”). They may contain tailored terms which allow for termination payments to be paid if the executive Director’s employment is terminated under certain circumstances, such as following a corporate change, a change in control, involuntary termination, termination without cause, for “good leaver” reasons (including) death or disability, each as deﬁned in the applicable executive Director’s service contract1. Details of such terms contained in the current executive Directors’ service contract are described below (the executive Directors’ service contracts and non-executive Directors’ letters of appointment are available for inspection at TBC PLC’s reg- istered ofﬁce): (a) Service contracts of the Group’s current executive director Service contracts with TBC PLC On 12 May 2016, TBC PLC entered into a service agreement with Vakhtang Butskhrikidze. The service agreement can be terminated by either party giving to the other party not less than seven months’ written notice. In addition, TBC PLC may terminate the service agreement without notice or pay in lieu of notice for cause (as deﬁned in the service contract). The service contract contains non-compete and conﬁdentiality provisions and is governed by English law. Service contracts with TBC JSC Vakhtang Butskhrikidze also serves as CEO of TBC JSC. Although it is not strictly required under UK law, we have described the service contract that the Group’s executive director has with TBC JSC below for completeness. The current service agreement provides for Mr Butskhrikidze to act as CEO of TBC JSC. The service agreement con- tains non-compete and conﬁdentiality provisions and is governed by Georgian law. 1 This is not to be construed as severance payment as the Director, in each case defined in this paragraph, is not entitled to any extra payment other than what he would have ordinarily received, provided those events did not occur. 201 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 (b) Letters of appointment – non-executive directors Each non-executive director is required to submit himself or herself for annual re-election at the Annual General Meeting. The letters of appointment with the Group for each non-executive director are effective from [2016]. The letters of appointment provide for a one month notice period although the Group may terminate the appointment with immediate effect without notice or pay in lieu of notice if the non-executive director has committed any serious breach or non-observance of his or her obligations to the Group, is guilty of fraud or dishonesty, brings the Group or him/herself into disrepute or is disqualiﬁed as acting as a non-executive director, among other circumstances. Upon termination, the only remuneration a non-executive director is entitled to is accrued fees as at the date of termination, together with reimbursement of documented incurred expenses incurred prior to the termination date. Legacy arrangements The Remuneration Committee reserves the right to make any remuneration payments and payments for loss of ofﬁce notwithstanding that they are not in line with the Policy set out above, where the terms of that payment were agreed before the Policy came into effect (including, without limitation, pursuant to awards granted before the Policy came into effect), or before the individual became a Director of the Group (provided the payment was not in consideration for the individual becoming a Director). This includes the exercise of any discretion available to the Remuneration Committee in connection with such payments. Consideration of employment conditions within the Group The Company recognises the importance of employee engagement in setting remuneration for the executive Di- rectors, NEDs and senior management. To this end, in 2019, the Board appointed Tsira Kemularia as the designated non-executive Director to enhance the dialogue between the workforce and the Board and to further strength em- ployee engagement on the topic of executive remuneration. In accordance with prevailing commercial practice, the Remuneration Committee evaluates the compensation and conditions of employees of the Group in determining the Policy with respect to executive directors. The Remuner- ation Committee may engage external advisors to assist in analysing remuneration in the Group. Consistent with practice in the industry in which the Group operates, it is not the Group’s policy to consult with staff on the pay of its directors. Minor changes The Remuneration Committee may make, without the need for shareholder approval, minor amendments to the Policy for administrative purposes or to take account of changes in legislation. FINANCIAL STATEMENTS 204 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF TBC BANK GROUP PLC Report on the Audit of the Financial Statements OPINION In our opinion, TBC Bank Group PLC’s group ﬁnancial statements and company ﬁnancial statements (the “ﬁnancial statements”): • give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2021 and of the group’s proﬁt and the group’s and company’s cash flows for the year then ended; • have been properly prepared in accordance with UK-adopted international accounting standards; and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the ﬁnancial statements, included within the Annual Report, which comprise: Consolidated and Separate Statements of Financial Position as at 31 December 2021; Consolidated Statement of Proﬁt or Loss and Other Comprehensive Income, Consolidated and Separate Statement of Changes in Equity and Consolidated and Separate Statements of Cash Flow for the year then ended; and the notes to the ﬁnancial statements, which include a description of the signiﬁcant accounting policies. Our opinion is consistent with our reporting to the audit committee. SEPARATE OPINION IN RELATION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTED PURSUANT TO REGULATION (EC) NO 1606/2002 AS IT APPLIES IN THE EUROPEAN UNION As explained in note 2 to the ﬁnancial statements, the group, in addition to applying UK-adopted international ac- counting standards, has also applied international ﬁnancial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In our opinion, the group ﬁnancial statements have been properly prepared in accordance with international ﬁnancial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the ﬁnancial statements section of our report. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided. Other than those disclosed in Note 34, we have provided no non-audit services to the company or its controlled un- dertakings in the period under audit. OUR AUDIT APPROACH Overview Audit scope • The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the ﬁnancial signiﬁcance of components and other qualitative factors (including history of misstatement through fraud or error). 205 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 • Our scoping was primarily driven by legal entity contribution to proﬁt before tax and other key ﬁnancial metrics. This approach also ensures that we align our resources with the location of the key ﬁnancial reporting functions and material operations of the group. We also considered overall coverage in assessing the appropriateness of our scoping. Key audit matters • Expected credit loss allowance on loans and advances to customers (group) Materiality • Overall group materiality: GEL46.1m (2020: GEL23.5m) based on 5% of proﬁt before tax (2020: 5% average proﬁt before tax for the last three years). • Overall company materiality: GEL17.0m (2020: GEL16.2m) based on 1% of total assets. • Performance materiality: GEL34.6m (2020: GEL17.6m) (group) and GEL12.8m (2020: GEL12.2m) (company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the ﬁnancial statements. Climate change Climate change risk is expected to have a signiﬁcant impact on the ﬁnancial services industry. As explained in the Strategic Report and Risk Review, the group is mindful of its responsibilities as a responsible lender and is focused on ways to meet the objectives of the Paris Agreement on climate change and to support the Georgian market’s tran- sition to a climate-resilient, net-zero economy. The group has set out its own commitments to be a net zero bank by 2025. Further information on this commitment is provided in the Task Force on Climate-Related Financial Disclosures (“TCFD”) on page 27. In planning and executing our audit, we considered the group’s governance framework and preliminary risk assess- ment processes as outlined in the Governance and Risk Management sections of the TCFD disclosures. This, to- gether with our risk assessment procedures, has provided us with an understanding of the potential impact of climate change on the ﬁnancial statements. We speciﬁcally considered managements’ assessment as regards the potential impacts of climate change on the Groups loan portfolios. We assessed that the key ﬁnancial statement line items and estimates which are more likely to be materially impacted by climate risks are those associated with expected credit losses and future cash flows to those loan portfolios. In the current reporting period, the group have concluded that there is no material impact on those line items and the more notable impacts of climate change on the business are expected to arise in the medium to long term. We discussed with management and the Audit Committee that the estimated ﬁnancial impacts of climate change will need to be frequently reassessed and our expectation is that climate change disclosures will continue to evolve as greater understanding of the actual and potential impacts on the group’s future operations are obtained. Whilst the group is targeting net zero carbon emissions by 2025, they are continuing to reﬁne their plans to achieve this. The group is starting to quantify some of the impacts that may arise; however, the future ﬁnancial impacts are clearly uncertain given the medium to long term time horizon. We discussed with management and the Audit Com- mittee that the estimated ﬁnancial impacts of climate change will need to be frequently reassessed and our expec- tation is that climate change disclosures will continue to evolve as greater understanding of the actual and potential impacts on the group’s future operations are obtained Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most signiﬁcance in the audit of the ﬁnancial statements of the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) identiﬁed by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identiﬁed by our audit. Impact of COVID-19, which was a key audit matter last year, is no longer included because of the limited impact on the company’s operations, the markets in which it trades and the risk of material misstatement. Otherwise, the key audit matters below are consistent with last year. 206 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF TBC BANK GROUP PLC CONTINUED Key audit matter How our audit addressed the key audit matter Expected credit loss allowance on loans and advances to customers (group) We focused on this area as the management estimates regarding the expected credit loss (‘ECL’) allowance are complex and require a signiﬁcant degree of judgement. Under IFRS 9 management is required to determine the credit loss allowance expected to occur over either a 12 month period or the remaining life of an asset, depending on the categorisation of the individual asset. This categorisation is determined by assessing whether or not there has been a signiﬁcant increase in credit risk (‘SICR’) or default of the borrower since loan origination. Some of the criteria applied by management for such an assessment are highly judgemental and involve qualitative assessment of borrowers’ creditworthiness. It is also necessary to consider the impact of different future macroeconomic conditions in the determination of ECLs. There is an increased level of uncertainty in the macroeconomic forecasts due to the ongoing impact of COVID-19 on the economy. Management has designed and implemented a number of models to achieve compliance with the requirements of IFRS 9. Among others, management has applied judgement to the models in situations where past experience was not considered to be reflective of future outcomes due to limited or incomplete data. We consider the appropriateness of the model methodologies and the following judgements used in the determination of the modelled ECL allowance to be signiﬁcant: – Highly judgemental criteria applied for identiﬁcation of SICR, involving qualitative assessment of borrow- ers’ creditworthiness; – Critical assumptions applied in the determination of loss given default (‘LGD’) and probability of default (‘PD’); – Assessment of model limitations and use of post model adjustments (‘PMAs’) if required to address such risks; and – Assessment of the key assumptions related to for- ward-looking information (‘FLI’) including the appro- priateness of scenario weightings and macroeco- nomic variables Refer to pages 161 to 169 (Audit Committee Chair’s report), pages 222 to 240 (Signiﬁcant Accounting Policies), page 240 to 245 (Critical accounting estimates and judgements in applying accounting policies), and pages 253 to 276 (note 9. Loans and advances to customers). How we addressed our KAM We understood and evaluated the design of the key controls over the determination of ECL allowance and tested their operating effectiveness. These controls included among others: – Controls over model performance monitoring, including pe- riodic reviews of the policy and models, testing model esti- mates against actual outcomes and approval of model meth- odology changes; – Review and approval of the key judgements and assumptions used for determining LGDs, PDs and FLI; – Controls over key parameters calculation by the calculation engine; – Controls over regular monitoring of the ﬁnancial standing of the borrowers; – Controls over ECL calculation and analysis of results; and – The Management Risk Committee’s review and approval of judgemental assumptions and assessment of ECL modelled outputs. We noted no exceptions in the design or operating effectiveness of the above controls. In addition we performed the substantive procedures described below. We assessed whether the IFRS 9 ECL model methodologies developed by management are appropriate, engaging our credit risk modelling specialists and our industry knowledge. This included an evaluation of the judgemental criteria set by management for determining whether there had been a SICR (applicable to corporate and SME portfolios), and the critical judgements and assumptions applied in determination of LGDs, PDs and FLI. We concluded that management’s judgements in deriving SICR, LGDs, PDs and FLI were reasonable. We independently veriﬁed the calculation of ECL and assessed whether the ECL calculations were consistent with the approved model methodologies. We critically evaluated key aspects of model monitoring and validation (“backtesting” of projected ECL) performed by management relating to model performance and stability and critically assessed the monitoring results. The results were interpreted in the context of COVID-19 circumstances and explanations were obtained for deviations from the expectation. Where relevant, particular assumptions made in the ECL estimation process were updated to address the results of backtesting. We challenged management in respect of the appropriateness of the macroeconomic models as well as weightings applied to each macroeconomic scenario. We are satisﬁed that macroeconomic assumptions and scenario weightings used by the Bank are reasonable. We challenged management in respect of the completeness and ongoing appropriateness of PMAs recognised. We assessed the PMAs applied including judgements and assumptions used and calculations involved. As a result, we deem that the PMAs were appropriately recognised where existing models were not able to capture the emerging risks, and management’s judgements are reasonable. 207 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the ﬁnancial statements as a whole, taking into account the structure of the group and the company, the accounting pro- cesses and controls, and the industry in which they operate. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the ﬁnancial statements as a whole, taking into account the structure of the group and the company, the accounting pro- cesses and controls, and the industry in which they operate. TBC Bank Group’s banking and insurance activities are primarily carried out in Georgia, with small subsidiary oper- ations in four other countries. The Group’s business activities comprise of four segments for which it manages and reports its operating results and ﬁnancial position, namely Retail Banking, Corporate and Investment Banking, Micro Small and Medium Enterprises (‘MSME’) and Corporate Centre. JSC TBC Bank is the largest subsidiary of the group. Its main operations are Retail and Commercial banking, with all signiﬁcant operations based in Georgia. Georgian operations account for 96% of the groups assets and 92% of the revenue. We performed audit procedures over this component which is considered ﬁnancially signiﬁcant in the context of the group, using a materiality of GEL 43.8m (2020: GEL 22m). Our audit approach and team was designed to reflect the structure of the group, and we therefore used component auditors from PwC Georgia, whom are familiar with the relevant businesses in their geographical locations, to audit the relevant component that was in scope for the group audit. As part of the planning and execution of the audit, the UK audit team held meetings with the signiﬁcant component auditors in Georgia on several occasions and reviewed selected workpapers and conclusions, in order to ensure that the procedures performed to support the group audit were sufﬁcient for our purposes. Speciﬁc audit procedures were also performed at the UK parent company, mainly re- lated to the presentation of the group ﬁnancial statements, the consolidation process, taxation and elements of laws and regulations speciﬁc to the UK. Based on the procedures we performed our audit scoping/coverage accounted for 96% of revenue and 98% of total assets of the group. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual ﬁnancial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the ﬁnancial statements as a whole. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows: Financial statements - group Financial statements - company Overall materiality GEL 46.1m (2020: GEL 23.5m). GEL 17.0m (2020: GEL 16.2m). How we determined it 5% of proﬁt before tax (2020: 5% average proﬁt before tax for the last three years) 1% of total assets Rationale for benchmark applied The group is a proﬁt oriented entity with publicly traded debt and therefore it is appropriate to use a proﬁt oriented benchmark for the calculation of materiality. In the prior year this was based on the average of three years to eliminated the impact of the COVID 19 pandemic. The parent company is a holding company with investments in the subsidiaries within the Group. The parent company’s performance is measured primarily on the value of these investments, and therefore total assets is considered an appropriate materiality benchmark For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was GEL 43.8m to GEL 46.1m. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncor- rected and undetected misstatements exceeds overall materiality. Speciﬁcally, we use performance materiality in de- termining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2020: 75%) of overall materiality, amounting to GEL 34.6m (2020: GEL 17.6m) for the group ﬁnancial statements and GEL 12.8m (2020: GEL 12.2m) for the company ﬁnancial statements. 208 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF TBC BANK GROUP PLC CONTINUED In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate. We agreed with the audit committee that we would report to them misstatements identiﬁed during our audit above GEL 2.3m (group audit) (2020: GEL 1.1m) and GEL 0.9m (company audit) (2020: GEL 0.8m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. CONCLUSIONS RELATING TO GOING CONCERN Our evaluation of the directors’ assessment of the group’s and the company’s ability to continue to adopt the going concern basis of accounting included: • A risk assessment to identify factors that could impact the going concern basis of accounting, including the cur- rent and forecast ﬁnancial performance, regulatory metrics and the sector in which the group operates; • Evaluation of the reasonableness of the group’s forecasts, including their assessment of macro scenarios, budget planning, recovery planning, stress testing and estimated ﬁnancing pipeline; • Review of the group’s regulatory correspondence and reports provided to governance forums such as audit com- mittee; and • Reviewing the appropriateness of the disclosures in the Annual report. Based on the work we have performed, we have not identiﬁed any material uncertainties relating to events or condi- tions that, individually or collectively, may cast signiﬁcant doubt on the group’s and the company’s ability to continue as a going concern for a period of at least twelve months from when the ﬁnancial statements are authorised for issue. In auditing the ﬁnancial statements, we have concluded that the directors’ use of the going concern basis of account- ing in the preparation of the ﬁnancial statements is appropriate. However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group’s and the company’s ability to continue as a going concern. In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the ﬁnancial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the rele- vant sections of this report. REPORTING ON OTHER INFORMATION The other information comprises all of the information in the Annual Report other than the ﬁnancial statements and our auditors’ report thereon. The directors are responsible for the other information, which includes reporting based on the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Our opinion on the ﬁnancial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the ﬁnancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁnancial statements or our knowl- edge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material incon- sistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the ﬁnancial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. 209 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Strategic report and Directors’ report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report for the year ended 31 December 2021 is consistent with the ﬁnancial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ report. Directors’ Remuneration In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accor- dance with the Companies Act 2006. CORPORATE GOVERNANCE STATEMENT The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code speciﬁed for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the ﬁnancial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: • The directors’ conﬁrmation that they have carried out a robust assessment of the emerging and principal risks; • The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; • The directors’ statement in the ﬁnancial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identiﬁcation of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from the date of ap- proval of the ﬁnancial statements; • The directors’ explanation as to their assessment of the group’s and company’s prospects, the period this assess- ment covers and why the period is appropriate; and • The directors’ statement as to whether they have a reasonable expectation that the company will be able to con- tinue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualiﬁcations or assumptions. Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their state- ment; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the ﬁnancial statements and our knowledge and understanding of the group and company and their environment obtained in the course of the audit. In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the ﬁnancial statements and our knowledge obtained during the audit: • The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understand- able, and provides the information necessary for the members to assess the group’s and company’s position, performance, business model and strategy; • The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and • The section of the Annual Report describing the work of the audit committee. We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code speciﬁed under the Listing Rules for review by the auditors. 210 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF TBC BANK GROUP PLC CONTINUED RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT Responsibilities of the directors for the ﬁnancial statements As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the ﬁnancial statements in accordance with the applicable framework and for being satisﬁed that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁnancial statements, the directors are responsible for assessing the group’s and the company’s abil- ity to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the ﬁnancial statements Our objectives are to obtain reasonable assurance about whether the ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Rea- sonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these ﬁnancial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. Based on our understanding of the group and industry, we identiﬁed that the principal risks of non-compliance with laws and regulations related to National Bank of Georgia, and we considered the extent to which non-compliance might have a material effect on the ﬁnancial statements. We also considered those laws and regulations that have a direct impact on the ﬁnancial statements such as Companies Act 2006 and UK tax legislation. We evaluated man- agement’s incentives and opportunities for fraudulent manipulation of the ﬁnancial statements (including the risk of override of controls), and determined that the principal risks were related to management bias through judgements and assumptions in signiﬁcant accounting estimates.. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included: • Enquiries of management, including the group’s Chief Legal Counsel, and Internal Audit, in relation to known or suspected instances of non-compliance with laws and regulations and fraud. • Evaluation and testing of the operating effectiveness of management’s controls designed to prevent and detect fraud and errors in ﬁnancial reporting. • Assessment of matters reported on the group’s whistleblowing helpline and the results of management’s inves- tigation of such matters. • Attendance at and inquiry of selected key committees including audit committee, risk committee and reviewing management information presented at these meetings. • Reading key correspondence with regulatory authorities and legal advisors. • Challenging assumptions and judgements made by management in their signiﬁcant accounting estimates, in particular in relation to the expected credit loss allowance on loans and advances to customers. • Identifying and testing journal entries meeting speciﬁc risk criteria. • Incorporated unpredictability into the nature, timing and/or extent of our testing. There are inherent limitations in the audit procedures described above. We are less likely to become aware of in- stances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the ﬁnancial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk char- 211 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 acteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the ﬁnancial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accor- dance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. OTHER REQUIRED REPORTING Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not obtained all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration speciﬁed by law are not made; or • the company ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • a corporate governance statement has not been prepared by the company. We have no exceptions to report arising from this responsibility. Appointment Following the recommendation of the audit committee, we were appointed by the members on 11 August 2016 to audit the ﬁnancial statements for the year ended 31 December 2016 and subsequent ﬁnancial periods. The period of total uninterrupted engagement is 6 years, covering the years ended 31 December 2016 to 31 December 2021. OTHER MATTER In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these ﬁnancial statements will form part of the ESEF-prepared annual ﬁnancial report ﬁled on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether the annual ﬁnancial report will be prepared using the single electronic format speciﬁed in the ESEF RTS. Allan McGrath (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 13 April 2022 212 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL Note 31 December 2021 31 December 2020 (restated) 31 December 2019 (restated) ASSETS Cash and cash equivalents 6 1,722,137 1,635,405 1,003,583 Due from other banks 7 79,142 50,805 33,605 Mandatory cash balances with National Bank of Georgia and Uzbekistan 8 2,087,141 2,098,506 1,591,829 Loans and advances to customers 9 16,637,145 14,594,274 12,349,399 Investment securities measured at fair value through other comprehensive income 10 1,938,196 1,527,268 985,293 Bonds carried at amortised cost 11 49,582 1,089,801 1,022,684 Finance lease receivables 13 262,046 271,660 256,660 Investment properties 17 22,892 68,689 72,667 Current income tax prepayment 37 194 69,888 25,695 Deferred income tax asset 37 12,357 2,787 2,173 Other ﬁnancial assets 12 453,115 171,302 133,736 Other assets 14 397,079 266,960 255,712 Premises and equipment 15 392,506 372,956 334,728 Right of use assets 16 70,513 53,927 59,693 Intangible assets 15 319,963 239,523 167,597 Goodwill 18 59,964 59,964 61,558 Investments in associates 4,589 4,090 2,654 TOTAL ASSETS 24,508,561 22,577,805 18,359,266 LIABILITIES Due to credit institutions 19 2,984,176 4,486,373 3,593,901 Customer accounts 20 15,038,172 12,572,728 10,049,324 Other ﬁnancial liabilities 23 139,811 227,432 113,608 Current income tax liability 37 86,762 853 1,634 Deferred income tax liability 37 10,979 13,088 18,888 Debt securities in issue 21 1,710,288 1,496,497 1,213,598 Provision for liabilities and charges 22 25,358 25,335 23,128 Other liabilities 24 130,972 87,842 95,162 Lease liabilities 38 66,167 58,983 59,898 Subordinated debt 25 623,647 672,740 591,035 TOTAL LIABILITIES 20,816,332 19,641,871 15,760,176 EQUITY Share capital 26 1,682 1,682 1,682 Shares held by trust 26 (25,489) (33,413) (27,516) Share premium 283,430 283,430 283,430 Retained earnings 3,007,132 2,281,428 1,961,231 Merger reserve 2 402,862 402,862 402,862 Share based payment reserve 27 (5,135) (20,568) (17,803) Fair value reserve for investment securities measured at fair value through other comprehensive income (10,862) 11,158 (6,476) Cumulative currency translation reserve (9,450) (2,124) (6,850) Net assets attributable to owners 3,644,170 2,924,455 2,590,560 Non-controlling interest 41 48,059 11,479 8,530 TOTAL EQUITY 3,692,229 2,935,934 2,599,090 TOTAL LIABILITIES AND EQUITY 24,508,561 22,577,805 18,359,266 CONSOLIDATED STATEMENT OF FINANCIAL POSITION * Mandatory cash balances with National Bank of Uzbekistan was added in 2021. Previously, only balances with National Bank of Georgia were included. ** Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the certain restatements as de- scribed in Note 2. The consolidated and the separate ﬁnancial statements on pages 212 to 359 were approved by the Board of Directors on 13 April 2022 and signed on its behalf by: Vakhtang Butskhrikidze Chief Executive Ofﬁcer The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial statements. 213 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME in thousands of GEL Note 31 December 2021 31 December 2020 (restated) 31 December 2019 (restated) Interest income 30 1,885,856 1,667,999 1,436,843 Interest income calculated using effective interest rate method 30 1,827,418 1,614,916 1,388,909 Other interest income 30 58,438 53,083 47,934 Interest expense 30 (911,267) (853,516) (663,860) Net interest gains on currency swaps 30 28,143 20,950 28,556 Net interest income 1,002,732 835,433 801,539 Fee and commission income 31 412,032 306,177 289,621 Fee and commission expense 31 (164,032) (123,410) (102,331) Net fee and commission income 248,000 182,767 187,290 Insurance premiums earned 34 80,712 65,689 57,910 Reinsurer’s share in Insurance premiums earned 34 (14,722) (12,330) (19,711) Insurance claims incurred and agents’ commissions 34 (53,745) (41,409) (37,544) Reinsurer’s share in claims incurred 34 11,301 7,535 17,855 Insurance proﬁt 23,546 19,485 18,510 Net gains from currency derivatives, foreign currency operations and translation 33 117,270 98,018 101,187 Net gains/(losses) from disposal of investment securities measured at fair value through other comprehensive income 11,156 (624) 169 Other operating income 32 48,479 20,512 18,916 Share of proﬁt of associates 837 – 632 Other operating non-interest income 177,742 117,906 120,904 Credit loss recovery/(allowance) for loans to customers 9 40,123 (330,811) (82,030) Credit loss (allowance)/recovery for ﬁnance lease receivables 13 (321) (8,398) 582 Credit loss recovery/(allowance) for performance guarantees and credit related commitments 22 1,204 3,238 (2,156) Credit loss allowance for other ﬁnancial assets 12 (14,726) (14,067) (8,098) Credit loss recovery/(allowance) for ﬁnancial assets measured at fair value through other comprehensive income 2,602 (1,809) (290) Net impairment of non-ﬁnancial assets (11,982) (6,161) (2,743) Operating income after expected credit and non-ﬁnancial asset impairment losses 1,468,920 797,583 1,033,508 Staff costs 35 (309,302) (244,043) (247,803) Depreciation and amortization 15,16,17 (79,891) (68,392) (59,478) Recovery of provision/(allowance of provision) for liabilities and charges 22 27 (2,706) (1,264) Administrative and other operating expenses 36 (156,668) (122,321) (139,438) Operating expenses (545,834) (437,462) (447,983) Losses from modiﬁcations of ﬁnancial instruments (1,726) (41,015) – Proﬁt before tax 921,360 319,106 585,525 Income tax (expense)/credit 37 (112,361) 3,383 (45,184) Proﬁt for the year 808,999 322,489 540,341 Other comprehensive (expense)/income for the year Items that may be reclassiﬁed subsequently to proﬁt or loss: Movement in fair value reserve for investment securities measured at fair value through other comprehensive income 10 (22,020) 17,633 (15,156) Exchange differences on translation to presentation currency (7,326) 4,707 85 Other comprehensive (expense)/income for the year (29,346) 22,340 (15,071) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 779,653 344,829 525,270 Proﬁt is attributable to: – Shareholders of TBCG 800,782 317,752 537,895 – Non-controlling interest 8,217 4,737 2,446 Proﬁt for the year 808,999 322,489 540,341 Total comprehensive income is attributable to: – Shareholders of TBCG 771,436 340,092 522,843 – Non-controlling interest 8,217 4,737 2,427 Total comprehensive income for the year 779,653 344,829 525,270 Earnings per share for proﬁt attributable to the owners of the Group: – Basic earnings per share (in GEL) 28 14.7 5.8 9.8 – Diluted earnings per share (in GEL) 28 14.3 5.8 9.8 * Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the certain restatements as described in Note 2. The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial statements. 214 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 * Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the certain restatements as de- scribed in Note 2. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY in thousands of GEL Note Share Capital Shares held by trust Share premium (restated) Group reorganiza- tion reserve (restated) Merger reserve (restated) Share based payments reserve Fair value reserve for inves- tment securi- ties at FVTOCI Cumulative currency translation reserve Retained earnings Total equity excluding non-con- trolling interest Non- con- trolling interest Total Equity Balance as of 1 January 2019 (as originally presented) 1,650 – 796,854 (162,167) - (16,294) 8,680 (6,937) 1,531,562 2,153,348 3,062 2,156,410 Restatement effect 2 – – (565,029) 162,167 402,862 – – – – – – – Balance as of 1 Janu- ary 2019 (restated) 1,650 – 231,825 – 402,862 (16,294) 8,680 (6,937) 1,531,562 2,153,348 3,062 2,156,410 Proﬁt for the year – – – – – – – – 537,895 537,895 2,446 540,341 Other comprehen- sive loss – – – – – – (15,156) 85 – (15,071) – (15,071) Total comprehen- sive income for 2019 – – – – – – (15,156) 85 537,895 522,824 2,446 525,270 Business combi- nation 47 – – – – – – – 2 2 4 3,134 3,138 Share issue 26 32 – 51,605 – – (35,306) – – – 16,331 – 16,331 Purchase of shares by employee beneﬁt trust – (27,516) – – – – – – – (27,516) – (27,516) Share based pay- ment expense 27 – – – – – 33,797 – – – 33,797 (35) 33,762 Purchase of addition- al interest from NCI – – – – – – – – – – (19) (19) Dividends declared – – – – – – – – (108,622) (108,622) – (108,622) Other movements – – – – – – – – 394 394 (58) 336 Balance as of 31 December 2019 (restated) 1,682 (27,516) 283,430 – 402,862 (17,803) (6,476) (6,850) 1,961,231 2,590,560 8,530 2,599,090 Proﬁt for the year – – – – – – - - 317,752 317,752 4,737 322,489 Other comprehen- sive income – – – – – – 17,633 4,707 - 22,340 - 22,340 Total comprehen- sive income for 2020 – – – – – – 17,633 4,707 317,752 340,092 4,737 344,829 Share based pay- ment expense 27 – – – – – 18,342 – – – 18,342 13 18,355 Delivery of SBP shares to employees – 19,596 – – – (21,107) – – – (1,511) – (1,511) Purchase of shares by employee beneﬁt trust – (25,493) – – – – – – – (25,493) – (25,493) Other movements – – – – – – 1 19 2,445 2,465 (1,801) 664 Balance as of 31 December 2020 (restated) 1,682 (33,413) 283,430 – 402,862 (20,568) 11,158 (2,124) 2,281,428 2,924,455 11,479 2,935,934 Proﬁt for the year – – – – – – – – 800,782 800,782 8,217 808,999 Other comprehen- sive loss for 2021: – – – – – – (22,020) (7,326) – (29,346) – (29,346) Effect of change in business model 2 – – – – – – 26,062 – – 26,062 - 26,062 Other effects during the period – – – – – – (48,082) (7,326) – (55,408) – (55,408) Total comprehen- sive income for 2021 – – – – – – (22,020) (7,326) 800,782 771,436 8,217 779,653 Share based pay- ment expense 27 – – – – – 24,991 – – – 24,991 – 24,991 Dividends declared – – – – – – – – (81,772) (81,772) (5,951) (87,723) Delivery of SBP shares to employees – 7,924 – – – (9,558) – – – (1,634) – (1,634) Purchase of addition- al interest from NCI – – – – – – – – (13,241) (13,241) (2,975) (16,216) Sale of investment to NCI 41 – – – – – – – – 19,125 19,125 37,914 57,039 Other movements – – – – – – – – 810 810 (625) 185 Balance as of 31 December 2021 1,682 (25,489) 283,430 – 402,862 (5,135) (10,862) (9,450) 3,007,132 3,644,170 48,059 3,692,229 The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial statements. 215 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CONSOLIDATED STATEMENT OF CASH FLOWS in thousands of GEL Note 31 December 2021 31 December 2020 31 December 2019 Cash flows from/(used in) operating activities Interest received 1,981,768 1,462,815 1,360,296 Interest received on currency swaps 30 28,143 20,950 28,556 Interest paid (867,209) (839,258) (647,427) Fees and commissions received 414,505 297,024 282,715 Fees and commissions paid (188,214) (133,385) (106,526) Insurance and reinsurance received 96,601 86,447 76,101 Insurance claims paid (36,806) (27,139) (21,787) Cash received/(paid) from trading in foreign currencies 33 113,043 (92,191) 79,287 Other operating income received 75,378 48,402 44,248 Staff costs paid (307,633) (238,577) (216,465) Administrative and other operating expenses paid (195,188) (134,348) (169,582) Income tax paid (13,756) (46,268) (70,413) Cash flows from operating activities before changes in operating assets and liabilities 1,100,632 404,472 639,003 Net change in operating assets Due from other banks and mandatory cash balances with National Bank of Georgia and Uzbekistan 393,174 (353,975) (22,009) Loans and advances to customers (3,085,488) (1,059,684) (2,013,577) Finance lease receivables (499) (2,902) (43,719) Other ﬁnancial assets (213,126) (41,774) 47,128 Other assets 5,077 33,109 1,577 Net change in operating liabilities Due to other banks 132,826 (32,294) (1,938) Customer accounts 2,821,952 1,432,051 272,023 Other ﬁnancial liabilities (144,867) 115,370 (8,267) Other liabilities and provision for liabilities and charges 36,791 (8,153) 5,816 Net cash flows from/(used in) operating activities 1,046,472 486,220 (1,123,963) Cash flows from/(used in) investing activities Acquisition of investment securities measured at fair value through other comprehensive income 10 (797,285) (763,531) (1,781,816) Proceeds from disposal of investment securities measured at fair value through other comprehensive income 10 1,025,775 287,917 240,603 Proceeds from redemption at maturity of investment securities measured at fair value through other comprehensive income 10 412,204 165,632 1,598,536 Dividend received – 694 – Acquisition of subsidiaries, net of cash acquired – – (36,301) Acquisition of bonds carried at amortised cost 11 (47,784) (668,477) (613,383) Proceeds from redemption of bonds carried at amortised cost 11 26,296 413,038 216,871 Acquisition of premises, equipment and intangible assets 15 (163,222) (164,379) (120,333) Proceeds from disposal of premises, equipment and intangible assets 20,826 3,627 13,225 Proceeds from disposal of investment properties 23,639 13,513 13,338 Purchase of additional interest from minority shareholders (17,215) – – Proceeds from sale of investment to NCI 41 57,039 – – Net cash flows from/(used in) investing activities 540,273 (711,966) (469,260) Cash flows (used in) /from ﬁnancing activities Proceeds from other borrowed funds 38 1,750,443 4,036,810 1,819,899 Redemption of other borrowed funds 38 (3,338,139) (3,324,230) (1,392,897) Repayment of principal of lease liabilities 38 (12,825) (13,251) (6,453) Redemption of subordinated debt 38 (12,562) – (104,079) Cash paid for purchase of shares by employee beneﬁt trust – (25,493) (27,516) Proceeds from debt securities in issue 38 295,457 104,838 1,176,049 Redemption of debt securities in issue 38 – – (14,296) Dividends paid (87,723) (1,344) (91,928) Net cash (used in)/from ﬁnancing activities (1,405,349) 777,330 1,358,779 Effect of exchange rate changes on cash and cash equivalents (94,664) 80,238 71,116 Net increase/(decrease) in cash and cash equivalents 86,732 631,822 (163,328) Cash and cash equivalents at the beginning of the year 6 1,635,405 1,003,583 1,166,911 Cash and cash equivalents at the end of the year 6 1,722,137 1,635,405 1,003,583 The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial statements. * Mandatory cash balances with National Bank of Uzbekistan was added in 2021. Previously, only balances with National Bank of Georgia were included 216 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 SEPARATE STATEMENT OF FINANCIAL POSITION in thousands of GEL Note 31 December 2021 31 December 2020 (restated) 31 December 2019 (restated) ASSETS Cash and cash equivalents 15,391 10,444 5,546 Due from other banks - 27,700 40,815 Loans issued 10,862 - - Other ﬁnancial assets - 108 278 Investments in subsidiaries: Investments in subsidiaries’ equity 1,652,825 1,585,839 1,509,293 Contributions for subsidiaries’ compensation scheme 22,781 2,823 10,629 Other assets 463 478 465 TOTAL ASSETS 1,702,322 1,627,392 1,567,026 LIABILITIES Other ﬁnancial liabilities 18,096 5,095 1,751 Debt securities in issue 21 126,930 76,985 – TOTAL LIABILITIES 145,026 82,080 1,751 EQUITY Share capital 26 1,682 1,682 1,682 Shares held by trust 26 (25,489) (33,413) (27,516) Share premium 2 283,430 283,430 283,430 Merger reserve 2 565,029 565,029 565,029 Retained earnings 687,436 781,678 681,048 Proﬁt/(loss) for the year 72,030 (12,476) 100,630 Share based payment reserve 27 (26,822) (40,618) (39,028) TOTAL EQUITY 1,557,296 1,545,312 1,565,275 TOTAL LIABILITIES AND EQUITY 1,702,322 1,627,392 1,567,026 * To further foster clarity and understandability of ﬁnancial statements the Group has separated investment in subsidiaries’ equity and contribu- tions for subsidiaries’ compensation scheme from investment in subsidiaries and presented separately. ** Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the certain restatements as de- scribed in Note 2. The consolidated and the separate ﬁnancial statements on pages 212 to 359 were approved by the board of directors on 13 April and signed on its behalf by: Vakhtang Butskhrikidze Chief Executive Ofﬁcer The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial state- ments. 217 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 SEPARATE STATEMENT OF CHANGES IN EQUITY in thousands of GEL Note Share Capital Shares held by trust Share premium (restated) Merger reserve (restated) Share based payment reserve Retained earnings Total Balance as of 1 January 2019 (as originally pre- sented) 1,650 – 796,854 - (35,828) 789,670 1,552,346 Restatement effect 2 – – (565,029) 565,029 – – – Balance as of 1 January 2019 (restated) 1,650 – 231,825 565,029 (35,828) 789,670 1,552,346 Proﬁt for the year – – – – – 100,630 100,630 Total comprehensive income for 2019 – – – – – 100,630 100,630 Share issue 26 32 – 51,605 – (34,941) – 16,696 Purchase of shares by employee beneﬁt trust 26 – (27,516) – – – – (27,516) Dividends declared 26 – – – – – (108,622) (108,622) Share based payment expense 27 – – – – 31,741 – 31,741 Balance as of 31 December 2019 (restated) 1,682 (27,516) 283,430 565,029 (39,028) 781,678 1,565,275 Loss for the year – – – – – (12,476) (12,476) Total comprehensive loss for 2020 – – – – – (12,476) (12,476) Purchase of shares by employee beneﬁt trust 26 – (25,493) – – – – (25,493) Shares award to employees under share based payment scheme – 19,596 – – (19,596) – – Share based payment expense 27 – – – – 18,006 – 18,006 Balance as of 31 December 2020 (restated) 1,682 (33,413) 283,430 565,029 (40,618) 769,202 1,545,312 Proﬁt for the year – – – – – 72,030 72,030 Total comprehensive income for 2021 – – – – – 72,030 72,030 Dividends declared – – – – – (81,766) (81,766) Shares award to employees under share based payment scheme – 7,924 – – (9,558) – (1,634) Share based payment expense 27 – – – – 23,354 – 23,354 Balance as of 31 December 2021 1,682 (25,489) 283,430 565,029 (26,822) 759,466 1,557,296 * Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the certain restatements as de- scribed in Note 2. The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial state- ments. 218 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 SEPARATE STATEMENT OF CASH FLOWS in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 (restated) Cash flows from/(used in) operating activities Interest received 2,329 3,179 9,933 Interest paid (7,207) (447) (42) Fees and commissions paid (11) (11) (17) Staff costs paid (3,916) (3,738) (4,520) Administrative and other operating expenses paid (4,725) (5,582) (10,439) Other operating income received – 256 215 Cash flows used in operating activities before changes in operating as- sets and liabilities (13,530) (6,343) (4,870) Net change in operating assets Other ﬁnancial assets 8 161 (10) Other assets 7 (16) (101) Net change in operating liabilities Other ﬁnancial liabilities (31) 2,274 360 Loans issued (10,841) – – Net cash used in operating activities (24,387) (3,924) (4,621) Cash flows from/(used in) investing activities Acquisition of subsidiaries, net of cash acquired – – (40,162) Investments in subsidiaries (65,466) (76,546) (8,857) Dividends received 94,615 6,155 99,662 Inflow from recharge agreement – 25,749 43,521 Placement of deposits – (85,369) (153,369) Withdrawal of deposits 26,995 99,066 187,376 Net cash flows (used in)/ from investing activities 56,144 (30,945) 128,171 Cash flows from/(used) in ﬁnancing activities Dividends paid (81,766) – (91,925) Cash paid for purchase of shares by employee beneﬁt trust – (25,493) (27,516) Proceeds from debt securities in issue 55,107 73,237 – Net cash (used in)/from ﬁnancing activities (26,659) 47,744 (119,441) Effect of exchange rate changes on cash and cash equivalents (151) (7,977) (767) Net increase in cash and cash equivalents 4,947 4,898 3,342 Cash and cash equivalents at the beginning of the year 10,444 5,546 2,204 Cash and cash equivalents at the end of the year 15,391 10,444 5,546 * Certain amounts do not correspond to the 2019 consolidated ﬁnancial statement as they reflect the certain restatements as described in Note 2. The notes set out on pages 219 to 359 form an integral part of these consolidated and separate ﬁnancial state- ments. 219 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1. INTRODUCTION Principal activity. TBC Bank Group PLC is a public limited liability company, incorporated in England and Wales. TBC Bank Group PLC held 99.88% of the share capital of JSC TBC Bank (hereafter the “Bank”) as at 31 December 2021 (2020: 99.88%, 2019: 99.88%), thus representing the Bank’s ultimate parent company. The Bank is a parent of a group of companies incorporated in mainly in Georgia, Uzbekistan and Azerbaijan, their primary business activities include providing banking, leasing, brokerage and card processing services to corporate and individual customers. TBC Bank Group PLC and its subsidiaries is referred as “TBCG” or “Group”. The Group’s list of subsidiaries is provided in below. The shares of TBCG (“TBCG Shares”) were admitted to the Premium Listing segment of the Ofﬁcial List of the UK Listing Authority and admitted to trading on the London Stock Exchange PLC’s Main Market for listed securities effective on 10 August 2016 (the “Admission”). TBC Bank Group PLC’s registered legal address is Highdown House, Yeoman Way, Worthing, West Sussex, United Kingdom, BN99 3HH. Registered number of TBC Bank Group PLC is 10029943. The Bank is the Group’s main operating unit and it accounts for most of the Group’s activities. JSC TBC Bank was incorporated on 17 December 1992 and is domiciled in Georgia. The Bank is a joint stock com- pany limited by shares and was set up in accordance with Georgian regulations. The Bank’s registered address and place of business is 7 Marjanishvili Street, 0102 Tbilisi, Georgia. The Bank’s principal business activity is universal banking operations that include corporate, small and medium en- terprises, retail and micro operations within Georgia. The Bank has been operating since 20 January 1993 under a general banking license issued by the National Bank of the Georgia (“NBG”). In 2018, the Bank launched fully-digital bank, Space. The Bank has 147 (2020:149; 2019:148) branches within Georgia. As of 31 December 2021, 31 December 2020 and 31 December 2019, the following shareholders directly owned more than 3% of the total outstanding shares of the Group. Other shareholders individually owned less than 3% of the outstanding shares. As of 31 December 2021, 31 December 2020 and 31 December 2019 the Group had no ultimate controlling party. NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS % of ownership interest held as of 31 December Shareholders 2021 2020 2019 Dunross & Co. 7.45% 7.42% 6.61% European Bank for Reconstruction and Development 5.05% 5.05% 8.04% Allan Gray Investment Management 4.89% 4.26% 2.03% Schroder Investment Management 3.18% 3.12% 6.48% JPMorgan Asset Management 3.15% 4.56% 6.22% Fidelity International 3.13% 1.84% N/A Creation Investments Capital Management 3.12% 3.22% 3.00% Founders* 14.61% 14.63% 16.26% Other 55.42% 55.90% 51.36% Total 100.00% 100.00% 100.00% * Founders include direct and indirect ownerships of Mamuka Khazaradze, Badri Japaridze. ** Other includes individual as well as corporate shareholders. 220 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Proportion of voting rights and ordinary share capital held as of 31 December Subsidiary name 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion Principal activities JSC TBC Bank 99.88% 99.88% 99.88% Tbilisi, Georgia 1992 Banking United Financial Corporation JSC 99.53% 99.53% 99.53% Tbilisi, Georgia 1997 Card processing TBC Capital LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 1999 Brokerage TBC Leasing JSC 100.00% 100.00% 100.00% Tbilisi, Georgia 2003 Leasing TBC Kredit LLC 100.00% 100.00% 100.00% Baku, Azerbaijan 1999 Non-banking credit institution TBC Pay LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2009 Processing TBC Invest LLC 100.00% 100.00% 100.00% Ramat Gan,Israel 2011 PR and marketing Index LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2011 Real estate management TBC Capital Asset Management LLC 100.00% N/A N/A Tbilisi, Georgia 2021 Asset Management JSC TBC Insurance 100.00% 100.00% 100.00% Tbilisi, Georgia 2014 Insurance Redmed LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2019 Insurance TBC Net LLC 1 100.00% 100.00% 100.00% Tbilisi, Georgia 2019 Asset management Swoop JSC 2 N/A 100.00% 100.00% Tbilisi, Georgia 2010 Retail Trade Online Tickets LLC 55.00% 55.00% 55.00% Tbilisi, Georgia 2015 Computer and Software Services TKT UZ 75.00% 75.00% 75.00% Tashkent, Uzbekistan 2019 Retail Trade My.Ge LLC 2 N/A 65.00% 65.00% Tbilisi, Georgia 2019 E-Commerce Mypost LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2019 Postal Service Billing Solutions LLC 51.00% 51.00% 51.00% Tbilisi, Georgia 2019 Software Services Vendoo LLC (Geo) 100.00% 100.00% 100.00% Tbilisi, Georgia 2019 Retail Leasing Allproperty.ge LLC 2 N/A 90.00% 90.00% Tbilisi, Georgia 2013 Real estate management F Solutions LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2019 Software Services TBC Connect 2 N/A 100.00% N/A Tbilisi, Georgia 2020 Software Services Inspired LLC 51.00% 51.00% 51.00% Tashkent, Uzbekistan 2011 Processing Vendoo LLC (UZ Leasing) 100.00% 100.00% 100.00% Tashkent, Uzbekistan 2019 Retail Leasing Marjanishvili 7 LLC 100.00% 100.00% N/A Tbilisi, Georgia 2020 Food and Beverage TBC Bank JSC UZ 60.24% 100.00% N/A Tashkent, Uzbekistan 2020 Banking TBC Group Support LLC 100.00% 100.00% N/A Tbilisi, Georgia 2020 Risk Monitoring SABA LLC 85.00% - - Tbilisi, Georgia 2012 Education Artarea.ge LLC 100.00% - - Tbilisi, Georgia 2012 PR and marketing TBC Art Gallery LLC 100.00% - - Tbilisi, Georgia 2012 PR and marketing Space JSC 100.00% N/A N/A Tbilisi, Georgia 2021 Software services Space International JSC 100.00% N/A N/A Tbilisi, Georgia 2021 Software services Subsidiaries and associates. The TBC Bank Group PLC holds 99.88% of the Bank as of 31 December 2021. The con- solidated ﬁnancial statements include the following principal subsidiaries: 1. INTRODUCTION CONTINUED 221 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The country of registration or incorporation is also the principal area of operation of each of the above subsidiaries. The Group’s corporate structure consists of a number of related undertakings, comprising subsidiaries and associ- ates, which are not consolidated or equity accounted due to immateriality. A full list of these undertakings, the country of incorporation and the ownership of each share class is set out below. The Group has investments in the following associates: Proportion of voting rights and ordinary share capital held as of 31 December Associate name 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion Principal activities CreditInfo Georgia JSC 21.08% 21.08% 21.08% Tbilisi, Georgia 2005 Financial intermediation Tbilisi Stock Exchange JSC 28.87% 28.87% 28.87% Tbilisi, Georgia 2019 Finance, Service Georgian Central Securities Depository JSC 22.87% 22.87% 27.70% Tbilisi, Georgia 2019 Finance, Service Georgian Stock Exchange JSC 3 17.33% 17.33% 17.33% Tbilisi, Georgia 2019 Finance, Service Kavkasreestri JSC 3 10.03% 10.03% 10.03% Tbilisi, Georgia 2019 Finance, Service Proportion of voting rights and ordinary share capital held as of 31 December Company name 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion Principal activities TBC Invest International Ltd 4 100.00% 100.00% 100.00% Tbilisi, Georgia 2016 Investment Vehicle University Development Fund 4 33.33% 33.33% 33.33% Tbilisi, Georgia 2007 Education Natural Products of Georgia LLC 4 25.00% 25.00% 25.00% Tbilisi, Georgia 2001 Trade, Service TBC Trade LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2008 Trade, Service Georgia Large Cap Diversiﬁed Credit Portfolio JSC 100.00% N/A N/A Tbilisi, Georgia 2021 Asset Management Freeshop.ge LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2010 Retail Trade The.ge LLC 100.00% 100.00% 100.00% Tbilisi, Georgia 2010 Retail Trade 1 The company was renamed from TBC Ecosystem companies LLC to TBC Net LLC during 2021. 2 The companies were merged with TBC Net LLC during 2021. 3 The Group has a significant influence on Georgian Stock Exchange JSC and Kavkasreestri JSC held as an investment in associates. 4 Dormant. 1. INTRODUCTION CONTINUED Operating environment of the Group. Georgia, where Group’s most activities are located, displays certain charac- teristics of an emerging market. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations (Note 37). In 2021 the Georgian economy rebounded at 10.4%. While the restart was certainly expected, the Georgian economy has rebounded at a speed exceeding even the most op- timistic scenarios. Importantly, the growth was broad based and has been reflected in all sources of inflows, as well as in domestic demand. The latter was fuelled by the reversal of the excess pandemic period related savings in an affluent segment being supported by the low USD deposit rates. The credit growth was also strong, while, the ﬁscal stance was slightly contractionary on the back of still large, however, much lower deﬁcit than a year ago. At the same time, Georgia continues to face downside risks to economic growth due to prolongation of the pandemic, internal and external political tensions, possible military conflicts in the region, as well as undesirable side effects of the Fed’s sooner-than-expected rate hike. 222 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED COVID-19 new cases continue to surge at an unprecedented speed. However, a much less severity of Omicron now appears to be well conﬁrmed. At the same time, Georgia, among some other region countries, faces vaccination pro- cess challenges, lagging behind the world average. In 2022, compared with 2021, the growth will much more depend on the continued recovery in tourism inflows and therefore, the materialization of pandemic related and other risks could severely restrict economic activity in Georgia, negatively impacting business environment and clients of the Group. Management is taking necessary measures to ensure sustainability of the Group’s operations and support its cus- tomers and employees. There is continuous work on stress testing to better understand possible implications for the group of certain adverse scenarios. In addition, the Management took additional measures to identify inefﬁcient processes and further supported the ﬁnancial condition of the Group through optimisation. The future effects of the current economic situation and the above measures are difﬁcult to predict and manage- ment’s current expectations and estimates could differ from actual results. For the purpose of measurement of expected credit losses (“ECL”) the Group uses supportable forward-looking in- formation, including forecasts of macroeconomic variables. As with any economic forecast, however, the projections and likelihoods of their occurrence are subject to a high degree of inherent uncertainty and therefore the actual out- comes may be signiﬁcantly different from those projected. Note 39 provides more information of how the Group incorporated forward-looking information in the ECL models. Since February 2022 ongoing political tension in the region escalated as a result of Russian invasion in Ukraine. This have negatively impacted commodity and ﬁnancial markets, and increased volatility, particularly with regard to for - eign exchange rates. As a result of sanctions imposed from a number of countries, many companies left Russian market and as a result ceased providing services and products to Russian Market. There is an expectation of further sanctions and limitations on business activity of companies operating in Russia. To avoid the severe effects on Geor- gian economy the Georgian Government has not joined on all sanctions, but the full nature and possible effects of the imposed restrictions against Russia and Ukrainian economy downturn are yet unknown. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia and economic links with this countries, there will be adverse implications for the growth outlook, as well as, for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risks. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation. The consolidated ﬁnancial statements of the Group and the separate ﬁnancial statements of TBC Bank Group PLC, together referred as “ﬁnancial statements” has been prepared in accordance with UK-adopt- ed International Accounting Standards and with the requirements of the Companies Act 2006 and, for the group, in accordance with international ﬁnancial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The consolidated and separate ﬁnancial statements have been prepared in line with the valuation methods described in the accounting policies below. The principal accounting policies applied in the preparation of the consolidated and separate ﬁnancial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated below. In accordance with the exemption permitted under section 408 of the Companies Act 2006, the standalone state- ment of comprehensive income of TBCG is not presented as part of these separate ﬁnancial statements. TBCG’s income for the year is disclosed within the separate statement of ﬁnancial position and the separate statement of changes in equity . Climate Change. TBC Bank Group PLC as a responsible lender continues to develop its assessment of the poten- tial impacts that climate change and the transition to a low carbon economy may have on the assets and liabilities recognised and presented in its ﬁnancial statements. During the year the Group has performed a high level sectoral risk assessment as different sectors might be vulnerable to different climate-related risks over different time horizons. On the other hand, the understanding of climate related risks, which have longer-term impacts need to be increased in coming years. At 31 December 2021, management speciﬁcally considered the potential impact of climate change and the transition to a low carbon economy on at a high level sectoral risk assessment. See more details outlined in risk management disclosures in note 39. 1. INTRODUCTION CONTINUED 223 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In thousands of GEL 31 December 2020 (as originally presented) Reclassification 31 December 2020 (as restated) Net impairment of non-ﬁnancial assets - (6,161) (6,161) Administrative and other operating expenses (128,482) 6,161 (122,321) In thousands of GEL 31 December 2020 (as originally presented) Reclassification 31 December 2020 (as restated) Fee and commission income 314,177 (8,000) 306,177 Fee and commission expense (131,410) 8,000 (123,410) In thousands of GEL 31 December 2019 (as originally presented) Reclassification 31 December 2019 (as restated) Net impairment of non-ﬁnancial assets - (2,743) (2,743) Administrative and other operating expenses (142,181) 2,743 (139,438) In thousands of GEL 31 December 2019 (as originally presented) Reclassification 31 December 2019 (as restated) Fee and commission income 293,431 (3,810) 289,621 Fee and commission expense (106,141) 3,810 (102,331) Going Concern. The Board of Directors of TBC Bank Group PLC has prepared these ﬁnancial statements on a going concern basis. In making this judgement, management considered the Group’s ﬁnancial position, current intentions, proﬁtability of operations and access to ﬁnancial resources. Management is not aware of any material uncertainties that may cast signiﬁcant doubt upon the Group’s ability to continue as a going concern. Presentation currency. These consolidated ﬁnancial statements are presented in thousands of Georgian Lari (“GEL thousands”), except per-share amounts and unless otherwise indicated. Changes in presentation of the net impairment of non-ﬁnancial assets. During 2021, the Group reclassiﬁed impair - ment/recovery of non-ﬁnancial assets from “Administrative and other operating expenses” to “Net impairment of non-ﬁnancial assets”. Signiﬁcant part of any impairment/recoveries recorded are related to repossessed assets and investment properties. Management believes, that those type of assets are not actively used in daily operations, but are primarily targeted for sale in future. Considering nature of those expenses/recovery such presentation is more appropriate and would increase understandability and clarity of the Group’s audited consolidated annual ﬁnancial statements. The presentation of comparative ﬁgures has been adjusted to conﬁrm to the presentation of the current period amounts: Restatement of cashbacks and incentive payments received for card operations. To further foster clarity of the consolidated statement of comprehensive income, the Group has re-considered the presentation of cash backs and incentive payments received from Visa and Mastercard for card operations. The amount of cash backs and in- centive payments receivable depend on the scale of Groups operations with Visa and Mastercard cards and related commission expenses paid to them. Management believes, presenting commission expenses made to Visa and Mastercard net of cash backs and incentive payments received from them, will increase clarity and understandability of the ﬁnancial statements and related accounting treatments. As a result of reclassiﬁcation, Management has moved cashbacks and incentive payments from Visa and Mastercard from “Fee and commission income” to “Fee and com- mission expense”. The presentation of comparative ﬁgures has been adjusted to conﬁrm to the presentation of the current period amounts: Changes in presentation of the merger reserve. Group has re-considered the presentation of the reorganisation reserve, recognised in respect of the reorganisation which occurred back in 2016, when TBC Bank PLC (TBCG), as a parent entity has been established and the shares of JSC TBC Bank has been exchanged for shares of TBC Bank Group PLC. The re-presentation includes a correction of an error in the recognition of share premium, which impacts both the separate and consolidated statements of ﬁnancial position and statements of changes in equity, and a vol- untary change of presentation for the group merger reserve, which impacts the consolidated statements only. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 224 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Effect on separate statement of ﬁnancial position In thousands of GEL 31 December 2020 (as originally presented) Reclassification 31 December 2020 (as restated) Share premium 848,459 (565,029) 283,430 Merger reserve - 565,029 565,029 Effect on consolidated statement of ﬁnancial position In thousands of GEL 31 December 2020 (as originally presented) Reclassification 31 December 2020 (as restated) Share premium 848,459 (565,029) 283,430 Group reorganization reserve (162,167) 162,167 - Merger reserve - 402,862 402,862 In thousands of GEL 31 December 2019 (as originally presented) Reclassification 31 December 2019 (as restated) Share premium 848,459 (565,029) 283,430 Merger reserve - 565,029 565,029 Voluntary re-presentation of the group merger reserve. Following the admission to the premium listing, TBCG’s Man- agement undertook a reduction of capital in order to create distributable reserves for TBCG. The capital cut was made as follows: Each TBCG share had an original (Tender Offer) nominal value of GBP 5.00. Following the capital reduction, the nom- inal value of TBCG shares was reduced to GBP 0.01. The capital reduction created a distributable reserve on the statement of TBCG’s ﬁnancial position amounting to GEL 745,637 thousand (being the difference between original nominal value of GBP 5.00 and the reduced nominal value of GBP 0.01 per share, multiplied for each outstanding number of shares). This additional reserve was included the offsetting carrying value of the acquired carrying values of GEL 907,804 so that the total reorganization reserve was a negative GEL 162,167 thousand. Group has voluntarily opted to combine “Group reorganisation reserve” and share premium at the reorganization date, the latter previously recognized in “share premium”, under one ﬁnancial statement line item “Merger reserve”. Management believes, that such presentation will allow the Group to present the results of the reorganisation clear- ly and allow the users to better understand the nature of the Group’s equity line items. Effect of a reclassiﬁcation on consolidated ﬁnancial statements is GEL 162,167 thousand moving from the group reorganization reserve to the merger reserve, being the net movement of the capital reduction of GEL 745,637 and the acquired carrying values of GEL 907,804. The net impact of this voluntary restatement with the correction of the error above is the creation of the merger reserve of GEL 402,862 thousand. The presentation of comparative ﬁgures has been adjusted to conﬁrm to the presentation of the current period amounts: 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Correction of error. Following a group restructuring occurred in 2016, TBC Bank Group PLC was established as a parent entity of JSC TBC Bank Group, and was successfully listed on the London Stock Exchange on 10 August 2016. For the reorganisation in the consolidated statements, share capital and share premium were recognised with the same amounts, as recognised in the TBCG standalone ﬁnancial statements, whilst retained earnings were set at an amount equal to the retained earnings of JSC TBC Bank Group at the moment of reorganisation. The balancing ﬁgure, to arrive at the total equity amount of the reorganised entity, was credited to the share premium and amounted to GEL 565,029. However, upon reorganisation merger relief should have been applied according to Companies Act 2006 section 612, and the amounts previously recognized under share premium in the separate and consolidated statements, should have been recognised as a merger reserve instead. As a result, management has corrected the previous classiﬁcation by moving GEL 565,029 under the correct caption. 225 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Changes in presentation of the separate statement of cash flows of TBC Bank Group PLC from investing to ﬁ- nancing activities. To further foster classiﬁcation and understandability of the separate statements of cash flows of TBC Bank Group Plc, the management has revisited the classiﬁcation of dividend paid from cash flow from investing to cash flow from ﬁnancing activities. Under previous classiﬁcation, the Group has reflected the dividend paid in the investing activities from the perspec- tive, that the dividend received from TBC Bank JSC as a subsidiary, has in turn been fully paid to the shareholders of TBC Bank Group PLC. Management thinks, that previously disclosed amounts were misclassiﬁed. As a result, revisit- ed the existing classiﬁcation of dividends paid for 2019 by disclosing it into ﬁnancing activities. Effect on separate statement of cash flows In thousands of GEL 31 December 2019 (as originally presented) Reclassification 31 December 2019 (as restated) Cash flows from investing activities: dividends paid (91,925) 91,925 - Cash flows used in ﬁnancing activities: dividends paid - (91,925) (91,925) Business model change. The Group historically used Ministry of Finance (MoF) securities to invest the excess mon- etary resources and receive interest charges in return of the investment. In majority of the cases the securities were held till their maturity and the Group has not been engaged in trading activities for proﬁt making purposes. As a result, according to their business model such securities were classiﬁed under hold to collect category and were recorded as “Bonds carried at amortised cost” in the consolidated and separate statements of ﬁnancial position. Towards the end of 2020 Ministry of Finance launched a new primary dealer platform to increase liquidity of the se- curities, to further encourage the trading of Government notes and develop Georgian securities market. Third party dealers were established for trading between the Ministry of Finance and investors. The platform was to expand investor data base and enhance liquidity of secondary market. JSC TBC Bank was given primary dealer status in the platform that enabled to act as an intermediary between investors and the Ministry of Finance by executing an order on behalf of investors. As secondary market became more active, the Group began to monitor beneﬁcial market opportunities and started selling Ministry of Finance securities in beneﬁcial cases, provided the sale wouldn’t impact signiﬁcantly the liquidity position of the Group and would generate strong proﬁt compared to collecting principal and interest till their maturi- ty. As a result, practices for managing treasury securities changed by the end of 2020. Respective change in Management’s processes caused changes in existing business model from hold to collect to hold to collect and sell. Accordingly MoF securities had been re-classiﬁed from “Bonds carried at amortised cost” to “Investment securities measured at fair value through other comprehensive income” in the consolidated and separate statements of ﬁnancial position, with respective effects also accounted in the audited consolidated annual ﬁnancial statement of proﬁt or loss and other comprehensive income. According to IFRS 9 requirement the change has been accounted for prospectively from the reclassiﬁcation date. The reclassiﬁcation date represents the ﬁrst day of the ﬁrst reporting period following the change in business model that results in an entity reclassifying ﬁnancial assets, which is 1 January 2021. Management believes that such presentation is more appropriate for the nature of the transactions. Based on business model assessment performed, Management considered respective securities should have been carried at fair value through other comprehensive income (FVTOCI). Internally performed test of solely payment of principal and interest (‘SPPI’) had shown, that those securities were held for collection of contractual cash flows and for selling, where those cash flows represented SPPI, and they were not designated at fair value through proﬁt and loss (FVTPL). Subsequent period sales recorded during 2021 has also demonstrated respective changes in business operations of the Group. In thousands of GEL 31 December 2019 (as originally presented) Reclassification 31 December 2019 (as restated) Share premium 848,459 (565,029) 283,430 Group reorganization reserve (162,167) 162,167 - Merger reserve - 402,862 402,862 226 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Effects on respective periods are disclosed below: In thousands of GEL Balance as at 31 December 2020 Change in business model Balance as at 1 January 2021 Fair value reserve 11,158 26,062 37,220 Bonds carried at amortised cost 1,089,801 (1,059,946) 29,855 Investment securities measured at fair value through other comprehensive income 1,527,268 1,086,008 2,613,276 Consolidated ﬁnancial statements. Subsidiaries are those investees, including structured entities, that the Group controls because it (i) has power to direct relevant activities of the investees that signiﬁcantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over an- other entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than the majority of voting power in it. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of in- vestee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date on which control ceases. Business combinations and goodwill accounting. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration, including contingent consid- eration, given at the acquisition date. Acquisition-related costs are recognised as an expense in the proﬁt or loss in the period in which they are incurred. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures the non-controlling interest that represents the current ownership’s interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquired entity. Non-con- trolling interests that are not present ownership interests are measured at fair value. Goodwill is measured by deducting the acquiree’s net assets from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in proﬁt or loss, af- ter the management reassesses whether it identiﬁed all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement. The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration ar- rangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from the equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Bank and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests that are not owned, directly or indirectly, by the Bank. Non-controlling interest forms a separate component of the Group’s equity. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 227 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Associates. Associates are entities over which the Group has signiﬁcant influence (directly or indirectly), but not con- trol, generally accompanying a shareholding of between 20 and 50 per cent of the voting rights. Investments in as- sociates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identiﬁed on acquisition less accumulated impairment losses, if any. Divi- dends received from associates reduce the carrying value of the investments in associates. Other post-acquisition changes in Group’s share of net assets of an associate are recognised as follows: (i) the Group’s share of proﬁts or losses of associates is recorded in the consolidated proﬁt or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented sepa- rately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates are recognised in proﬁt or loss within the share of result of associates. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impair- ment of the asset transferred. Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the statement of changes in equity. Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or signiﬁcant influ- ence, any retained interest in the entity is re-measured to its fair value, with the change in carrying amount recognised in proﬁt or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the re- tained interest as an associate, joint venture or ﬁnancial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to proﬁt or loss. If the ownership interest in an associate is reduced but signiﬁcant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassiﬁed to proﬁt or loss where appropri- ate. Financial instruments – key measurement terms. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is the price in an active market. An active market is one in which transactions for the asset or the liability take place with sufﬁcient frequency and volume to provide pricing information on an ongoing basis. The fair value of ﬁnancial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity owned by the entity. This is the case even if a market’s normal daily trading volume is not sufﬁcient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. A portfolio of ﬁnancial derivatives or other ﬁnancial assets and liabilities that are not traded in an active market is measured at the fair value of a group of ﬁnancial assets and ﬁnancial liabilities on the basis of the price that would be received to sell a net long position (ie an asset) for a particular risk exposure or paid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of ﬁnancial data of the investees are used to measure the fair value of certain ﬁnancial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three mea- surements are valuations not solely based on observable market data (that is, the measurement requires signiﬁcant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 228 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition and includes transaction costs Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a ﬁnancial instrument. An incremental cost is one that would not have incurred if the transaction had not taken place. Transac- tion costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, bro- kers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, ﬁnancing costs or internal administrative or holding costs. Amortised cost (“AC”) is the amount at which the ﬁnancial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for ﬁnancial assets less any write-down for expected credit losses. Accrued interest includes the amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated state- ment of ﬁnancial position. Repayments for loans are accounted for penalties in the ﬁrst place, then accrued interest and after that principal amount. The effective interest method is a method of allocating interest income or interest expense over the term of the ﬁ- nancial instrument so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the ﬁnancial instrument or a shorter period, if appropriate, to the net carrying amount of the ﬁnancial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate speciﬁed in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate (refer to income and expense recognition policy). For assets that are purchased or originated defaulted (“POCI”) at initial rec- ognition, the effective interest rate is adjusted for credit risk, i.e. it is calculated based on the expected cash flows on initial recognition instead of contractual payments. Initial recognition of ﬁnancial instruments. Financial instruments at FVTPL are initially recorded at fair value. All other ﬁnancial instruments are initially recorded at fair value adjusted for transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. After the initial recognition, an ECL (expected credit loss) allowance is recognised for ﬁnancial assets measured at AC and investments in debt instruments measured at FVOCI, resulting in an immediate accounting loss. All purchases and sales of ﬁnancial assets that require delivery within the time frame set by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a ﬁnancial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Financial assets – classiﬁcation and subsequent measurement – measurement categories. The Group classiﬁes ﬁnancial assets in the following measurement categories: FVTPL, FVOCI and AC. The classiﬁcation and subsequent measurement of debt ﬁnancial assets depends on: (i) the Group’s business model for managing the related assets portfolio and (ii) the cash flow characteristics of the asset. Financial assets – classiﬁcation and subsequent measurement – business model. The business model drives clas- siﬁcation of ﬁnancial assets. Management applied judgement in determining the level of aggregation and portfolios of ﬁnancial instruments when performing the business model assessment. When assessing sales transactions, the Group considers their historical frequency, timing and value, reasons for the sales and expectations about future sales activity. Sales transactions aimed at minimising potential losses due to credit deterioration are considered consistent with the “hold to collect” business model. Other sales before maturity, not related to credit risk management activ- ities, are also consistent with the “hold to collect” business model, provided that they are infrequent or insigniﬁcant in value, both individually and in aggregate. The Group assesses signiﬁcance of sales transactions by comparing the value of the sales to the value of the portfolio subject to the business model assessment over the average life of the 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 229 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 portfolio. In addition, sales of ﬁnancial asset expected only in stress case scenario, or in response to an isolated event that is beyond the Group’s control, is not recurring and could not have been anticipated by the Group, are regarded as incidental to the business model objective and do not impact the classiﬁcation of the respective ﬁnancial assets. The “hold to collect and sell” business model means that assets are held to collect the cash flows, but selling is also integral to achieving the business model’s objective, such as, managing liquidity needs, achieving a particular yield, or matching the duration of the ﬁnancial assets to the duration of the liabilities that fund those assets. The residual category includes those portfolios of ﬁnancial assets, which are managed with the objective of realising cash flows primarily through sale, such as where a pattern of trading exists. Collecting contractual cash flow is often incidental for this business model. Financial assets – classiﬁcation and subsequent measurement – cash flow characteristics. Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assess- es whether the cash flows represent solely payments of principal and interest (“SPPI”). Financial assets with embed- ded derivatives are considered in their entirety when determining whether their cash flows are consistent with the SPPI feature. In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement, i.e. interest includes only consideration for credit risk, time value of money, other basic lending risks and proﬁt margin. Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrange- ment, the ﬁnancial asset is classiﬁed and measured at FVTPL. The SPPI assessment is performed on initial recogni- tion of an asset and it is not subsequently reassessed. The judgements applied by the Group in performing the SPPI test for its ﬁnancial assets is discussed below: The time value of money element may be modiﬁed, for example, if a contractual interest rate is periodically reset but the frequency of that reset does not match the tenor of the debt instrument’s underlying base interest rate, for exam- ple a loan pays three months interbank rate but the rate is reset every month. The effect of the modiﬁed time value of money was assessed by comparing relevant instrument’s cash flows against a benchmark debt instrument with SPPI cash flows, in each period and cumulatively over the life of the instrument. The Group applied a threshold of 10% to determine whether differences against a benchmark instruments are signiﬁcantly different. In case of a scenario with cash flows that signiﬁcantly differ from the benchmark, the assessed instrument’s cash flows are not SPPI and the instrument is then carried at FVTPL. The Group identiﬁed and considered contractual terms that change the timing or amount of contractual cash flows. The SPPI criterion is met if a loan allows early settlement and the prepayment amount substantially represents prin- cipal and accrued interest, plus a reasonable additional compensation for the early termination of the contract. The asset’s principal is the fair value at initial recognition less subsequent principal repayments, ie instalments net of in- terest determined using the effective interest method. As an exception to this principle, the standard also allows instruments with prepayment features that meet the following condition to meet SPPI: (i) the asset is originated at a premium or discount, (ii) the prepayment amount represents contractual amount and accrued interest and a reason- able additional compensation for the early termination of the contract, and (iii) the fair value of the prepayment feature is immaterial at initial recognition. Financial assets – reclassiﬁcation. Financial instruments are reclassiﬁed only when the business model for manag- ing the portfolio as a whole changes. The reclassiﬁcation has a prospective effect and takes place from the beginning of the ﬁrst reporting period that follows after the change in the business model. The Group changed its business model in 2020 in relation to the securities held at amortised cost, which took effect from 1 January 2021 in these ﬁnan- cial statements as required by IFRS 9. Details and subsequent measurement are discussed in Note 2. Financial assets impairment - expected credit loss (ECL) allowance. The Group assesses, on a forward-looking ba- sis, the ECL for debt instruments measured at AC and FVOCI and for the exposures arising from loan commitments and ﬁnancial guarantee contracts. The Group measures ECL and recognises credit loss allowance at each reporting date. The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by eval- uating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 230 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The Group applies a three stage model for impairment, based on changes in credit quality since initial recognition: • Stage 1: A ﬁnancial instrument that is not defaulted on initial recognition is classiﬁed in Stage 1. Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 Months ECL”); • Stage 2: If the Group identiﬁes a signiﬁcant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis (“Lifetime ECL”). If a SICR is no longer observed, instrument will move back to Stage 1. Financial instrument moves back from stage 2 to stage 1 with 6 month cure period in case of loans previously having default flag, while restructured loans remain in stage 2 until the restructured status is removed. In order to remove restructured status, borrower should make at least 12 consecutive payments, unless ﬁnancial monitoring is performed. Refer to Note 39 for a description of how the Group determines, on a forward-looking basis, when a SICR has occurred; • Stage 3: Defaulted assets are transferred to Stage 3 and allowance for Lifetime ECL is recognized. The Group’s deﬁnition of defaulted assets and deﬁnition of default is based on the occurrence of one or more loss events, described further in Note 39. Change in ECL is recognized in the statement of proﬁt or loss with a corresponding allowance reported as a decrease in carrying value of the ﬁnancial asset on the statement of ﬁnancial position. For ﬁnancial guarantees and credit com- mitments, provision for ECL is reported as a liability in Provisions for Liabilities and Charges. Gross carrying amount and write offs. Gross carrying amount of a ﬁnancial asset is the amortised cost of a ﬁnancial asset, before adjusting for any loss allowance. The Group directly reduces the gross carrying amount of a ﬁnancial asset when the entity has no reasonable expectations of recovering a ﬁnancial asset in its entirety or a portion thereof. The latter includes penalties under the local regulation requirements. The loans are collectively assessed for write off based on overdue days criteria or are individually evaluated, depending on the loan segment and product type. Financial assets- derecognition and modiﬁcation. The Group derecognises ﬁnancial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the ﬁnancial assets or entered into a qualifying pass-through arrangement while (i) also transfer - ring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. The Group sometimes renegotiates or otherwise modiﬁes the contractual terms of the ﬁnancial assets. The Group assesses whether the modiﬁcation of contractual cash flows is substantial, in which it considers certain factors. Based on below shown internally developed methodology there are certain qualitative triggers which lead to asset derecognition with no further quantitative testing required. These qualitative criteria are included in the list below: • Change in contract currency; • Consolidation of two or more loans into one new loan; • Change in counterparty; • Loan with no predetermined payment schedule is changed with loan with schedule or vice versa; • Change in contractual interest rate due to market environment changes. The Group compares the original and revised expected cash flows to assets whether the risks and rewards of the asset are substantially different as a result of the contractual modiﬁcation. It should be assessed whether change in contractual cash flow is signiﬁcant (signiﬁcance deﬁned as 10% change). If the test result is above 10% threshold, loan should be derecognized, whereas if the test is passed and result is below or equal to 10%, ﬁnancial asset can be assessed as modiﬁed. If the risks and rewards do not change, the modiﬁed asset will not be substantially different (exceed 10% test) from the original asset and the modiﬁcation does not result in derecognition. The Group recalculates the gross carrying amount by discounting the modiﬁed contractual cash flows by the original effective interest rate or, when applicable, the revised effective interest rate and recognises a modiﬁcation gain or loss in proﬁt or loss. Any costs or fees incurred adjust the carrying amount of the modiﬁed ﬁnancial asset and are amortised over the remaining term of the modiﬁed ﬁnancial asset. Payment holidays granted by the Group in response to COVID-19 pandemic are treated as contractual modiﬁcations of the respective loans and advances if they do not lead to derecognition as guided by the policy stated above. Their 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 231 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 impact of modiﬁcations on the gross carrying amount (net modiﬁcation loss) is presented in proﬁt or loss within losses from modiﬁcations of ﬁnancial instruments. The implication of COVID-19 impact on ECL methodology is de- scribed in Note 39. Financial liabilities – measurement categories. Financial liabilities are classiﬁed as subsequently measured at AC, except for (i) ﬁnancial liabilities at FVTPL: this classiﬁcation is applied to derivatives, ﬁnancial liabilities held for trading (e.g. short positions in securities), contingent consideration recognised by an acquirer in a business combination and other ﬁnancial liabilities designated as such at initial recognition and (ii) ﬁnancial guarantee contracts and loan commitments. Financial liabilities – derecognition and modiﬁcation. Financial liabilities are derecognised when they are extin- guished (i.e. when the obligation speciﬁed in the contract is discharged, cancelled or expires). An exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modiﬁcations of the terms and conditions of existing ﬁnancial liabilities, are accounted for as an extinguishment of the original ﬁnancial liability and the recognition of a new ﬁnancial liability. The terms are sub- stantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original ﬁnancial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new con- version features attached to the instrument are also considered. If an exchange of debt instruments or modiﬁcation of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modiﬁcation is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modiﬁed liability. Modiﬁcations of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, with any gain or loss recognised in proﬁt or loss, unless the economic substance of the difference in carrying values is attributed to a capital transaction with owners. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and are subject to an insigniﬁcant risk of changes in value. Cash and cash equivalents include cash on hand, amounts due from the National Bank of Georgia (NBG), excluding mandatory reserves, and all interbank placements and interbank receivables with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at AC because: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. Features mandated solely by legislation, such as the bail-in legislation in certain coun- tries, do not have an impact on the SPPI test, unless they are included in contractual terms such that the feature would apply even if the legislation is subsequently changed. The payments or receipts presented in the statement of cash flows represent the Group’s transfers of cash and cash equivalents, including amounts charged or credited to current accounts of the Group’s counterparties held with the Group, such as loan interest income or principal collected by charging the customer’s current account or interest pay- ments or disbursement of loans credited to the customer’s current account, which represent cash or cash equivalent from the customer’s perspective. Mandatory cash balances with National Bank of Georgia and Uzbekistan. Mandatory cash balances with National Bank of Georgia and National Bank of Uzbekistan are carried at AC and represent mandatory reserve deposits that are not available to ﬁnance the Group’s day to day operations. Hence they are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows. Due from other banks. Amounts due from other banks are recorded when the Group advances money to counter- party banks. Amounts due from other banks are carried at AC when: (i) they are held for the purposes of collecting contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at fair value through proﬁt or loss (FVTPL). Otherwise they are carried at fair value (FV). Investments in debt securities. Based on the business model and the cash flow characteristics, the Group classiﬁes investments in debt securities as carried at AC, fair value through other comprehensive income (FVOCI) or FVTPL. Debt securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI, and if they are not voluntarily designated at FVTPL in order to signiﬁcantly reduce an accounting mismatch. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 232 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Debt securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where those cash flows represent SPPI, and if they are not designated at FVTPL. Interest income from these assets is calcu- lated using the effective interest method and recognised in proﬁt or loss. An impairment allowance estimated using the expected credit loss model is recognised in proﬁt or loss for the year. All other changes in the carrying value are recognised in OCI. When the debt security is derecognised, the cumulative gain or loss previously recognised in OCI is reclassiﬁed from OCI to proﬁt or loss. Investments in debt securities are carried at FVTPL if they do not meet the criteria for AC or FVOCI. The Group may also irrevocably designate investments in debt securities at FVTPL on initial recognition if applying this option signiﬁcantly reduces an accounting mismatch between ﬁnancial assets and liabilities being recognised or measured on different accounting bases. Investments in equity securities. Financial assets that meet the deﬁnition of equity from the issuer’s perspective, i.e. instruments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer’s net assets, are considered as investments in equity securities by the Group. Investments in equity securities are measured at FVTPL, except where the Group elects at initial recognition to irrevocably designate an equity invest- ments at FVOCI. The Group’s policy is to designate equity investments as FVOCI when those investments are held for strategic purposes other than solely to generate investment returns. When the FVOCI election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassiﬁed to proﬁt or loss, including on disposal. Impairment losses and their reversals, if any, are not measured separately from other changes in fair value. Dividends continue to be recognised in proﬁt or loss when the Group’s right to receive payments is established except when they represent a recovery of an investment rather than a return on such investment. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances mon- ey to purchase or originate a loan due from a customer. Based on the business model and the cash flow characteris- tics, the Group classiﬁes loans and advances to customers into one of the following measurement categories: (i) AC: loans that are held for collection of contractual cash flows and those cash flows represent SPPI and loans that are not voluntarily designated at FVTPL, and (ii) FVTPL: loans that do not meet the SPPI test or other criteria for AC or FVOCI are measured at FVTPL. Impairment allowances are determined based on the forward-looking ECL models. Note 39 provides information about inputs, assumptions and estimation techniques used in measuring ECL, including an explanation of how the Group incorporates forward-looking information in the ECL models. Repossessed collateral. Repossessed collateral represents non-ﬁnancial assets acquired by the Group to settle overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equip- ment, investment property or repossessed collateral within other assets depending on their nature and the Group’s intention in respect of recovery of these assets and are subsequently re-measured and accounted for in accordance with the accounting policies for these categories of assets. Repossessed assets are recorded at the lower of cost or net realisable value. Loan commitments. The Group issues commitments to provide loans. These commitments are irrevocable or re- vocable only in response to a material adverse change. Such commitments are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a speciﬁc lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at (i) the remaining unamortised balance of the amount at initial recognition, plus (ii) the amount of the loss allowance determined based on the expected credit loss model, unless the commitment is to provide a loan at a below market interest rate, in which case the measurement is at the higher of these two amounts. The carrying amount of the loan commitments represents a liability. Financial guarantees. Financial guarantees require the Group to make speciﬁed payments to reimburse the holder of the guarantee for a loss it incurs because a speciﬁed debtor fails to make payment when due in accordance with the original or modiﬁed terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the guarantee. At the end of each reporting period, the guarantees are measured at the higher of (i) the amount of the loss allowance for the guaranteed exposure determined based on the expected loss model and (ii) the remaining unamortised balance of the amount at initial recognition. In addition, an ECL loss allowance is recognised for fees receivable that are recognised in the statement of ﬁnancial position as an asset. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 233 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Performance guarantees. Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts transfer non-ﬁnancial performance risk in addition to credit risk. Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the contract. At the end of each report- ing period, the performance guarantee contracts are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the contract at the end of each reporting period, discounted to present value. Where the Group has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts, such amounts will be recognised as an asset upon transfer of the loss compensation to the guarantee’s beneﬁciary. These fees are recognised within fee and commission income in proﬁt or loss. Sale and repurchase agreements. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured ﬁnancing transactions. The lender provides funds to the borrower and receives security as collateral. Securities sold under such sale and repurchase agreements are not derecognized. The securities are not reclassiﬁed in the statement of ﬁnancial position unless the transferee has, by contract, the right or custom to sell or repledge the securities, in which case they are reclassiﬁed as repurchase receiv- ables. The corresponding liability is presented within amounts due to credit institutions. The repurchase agreements are short-term in nature. Investment securities at fair value through other comprehensive income or bonds carried at amortised cost reclassiﬁed to repurchase receivables continue to be carried at fair value or amortised cost respec- tively in accordance with the accounting policies for these categories of assets. Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Group, are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method. Securities lent to counterparties for a ﬁxed fee are retained in the consolidated ﬁnancial statements in their original category in the statement of ﬁnancial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassiﬁed and presented separately. Securities borrowed for a ﬁxed fee are not recorded in the consolidated ﬁnancial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in proﬁt or loss for the year within gains less losses arising from trading securities. The obligation to return the securities is recorded at fair value in other borrowed funds. Based on classiﬁcation of securities sold under the sale and repurchase agreements, the Group classiﬁes repurchase receivables into one of the following measurement categories: AC, FVOCI, and FVTPL. Finance lease receivables. Where the Group is a lessor in a lease that substantially transfers all risks and rewards incidental to ownership to the lessee, the assets leased out are presented as ﬁnance lease receivables and carried at the present value of the future lease payments. Finance lease receivables are initially recognised at commencement (when the lease term begins) using a discount rate determined at inception (the early date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease). The difference between the gross receivable and the present value represents unearned ﬁnance income. This in- come is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly attributable to negotiating and arranging the lease are included in the initial measurement of the ﬁnance lease receivables and reduce the amount of income recognised over the lease term. Finance income from leases is recorded within interest income in the proﬁt or loss. The ECL is determined in the same way as for loans and advances measured at AC and recognised through an allowance account to write down the receivables’ net carrying amount to the present value of expected cash flows discounted at the interest rates implicit in the lease investments. There is a ‘three stage’ approach which is based on the change in credit quality of ﬁnancial lease receivables since initial recognition. Immediate loss that is equal to the 12-month ECL is recorded on initial recognition of ﬁnancial leases that are not defaulted. In case of a signiﬁcant in- crease in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The estimated future cash flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease. The Group normally structures its ﬁnance lease contracts so that the lessee makes a minimum prepayment of 20% of the equipment purchase price at the inception of the lease term. The Group holds title to the leased assets during the lease term. The title to the asset under the ﬁnance lease contract is transferred to the lessees at the end of the contracts terms, including full repayment of lease payments. Generally the lease terms are up to ﬁve years. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 234 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The main types of collateral obtained are: • Leased assets (inventory and equipment); • Down payment; • Real estate properties; • Third party guarantees. The ﬁnancial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets’ carrying value(“over-collateralised as- sets”) and (ii) those assets where collateral and other credit enhancements are less than the assets’ carrying value (“under-collateralised assets”). The Group classiﬁes its portfolio into three stages: • Stage 1 – assets for which no signiﬁcant increase of credit risk since initial recognition is identiﬁed; • Stage 2 – assets for which signiﬁcant increase in credit risk since initial recognition is identiﬁed; • Stage 3 – defaulted exposures. For stage 1 exposures the Group creates 12 months expected credit losses, whereas for stage 2 and stage 3 lifetime expected credit losses are created. For the Stage 2 classiﬁcation purposes the Group applies both quantitative and the qualitative criteria including, but not limited to: • 30 days past due (DPD) overdue; • Downgrade of the risk category of the borrower since initial recognition; Default deﬁnition includes criteria such as: (i) 90 DPD overdue (ii) distressed restructuring and (iii) other criteria indicat- ing the borrower’s unlikeness to repay the liabilities. The Group incorporates forward looking information (FLI) for both individual and collective assessment. For FLI pur- poses the Group deﬁnes three scenarios, which are: • Baseline (most likely); • Upside (better than most likely); • Downside (worse than most likely). The Group derives the baseline macro scenario and takes into account projections from various external sources – the National Bank of Georgia, Ministry of Finance, IMF as well as other IFIs - to ensure the alignment to the consensus market expectations. Refer to Note 39 for the description of how the Group incorporates FLI in ECL calculations. Upside and downside scenarios are deﬁned based on the framework developed by the Bank’s macroeconomic unit. The Group calculates expected impairment losses for each scenario. In order to come up with the ﬁnal expected credit loss ﬁgures the bank applies probability weighted average approach where probabilities of each scenario are used as weights. In relation to COVID-19, payment holidays are accounted on the same basis as disclosed above within paragraph of ﬁnancial assets- derecognition and modiﬁcation. Receivables from terminated leases. The Group recognizes receivables from terminated contracts at the moment of lease contract termination. These receivables are recognized at amount comprising difference between fair value of repossessed assets and outstanding balance of ﬁnance lease receivables. Receivables are accounted for at AC less ECL. Prepayment for purchase of leasing assets. Prepayment for purchase of leasing assets comprises of advance pay- ments made to purchase assets for transfer into leases. Such advances are accounted for as non-ﬁnancial assets. On commencement of the leases, advances towards lease contracts are transferred into Finance lease receivables. Due to credit institutions. Amount due to credit institutions are recorded when counterparty banks advance money or other assets to the Group. The non-derivative liability is carried at AC. If the Group purchases its own debt, it is re- moved from the consolidated statement of ﬁnancial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from retirement of debt. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 235 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at AC. Subordinated debt. Subordinated debt can only be paid in the event of a liquidation after the claims of other higher priority creditors have been met and is included in the Bank’s “tier 2” capital. Subordinated debt is carried at AC. Debt securities in issue. Debt securities in issue include promissory notes, bonds, certiﬁcates of deposit and deben- tures issued by the Group. Debt securities are stated at AC. If the Group purchases its own debt securities in issue, they are removed from the consolidated statement of ﬁnancial position and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from retirement of debt. Derivative ﬁnancial instruments. Derivative ﬁnancial instruments, including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options are recognized at their fair value. The Group also enters into offsetting deposits with its counterparty banks to exchange currencies. Such deposits, while legally separate, are aggregated and accounted for as a single derivative ﬁnancial instrument (currency swap) on a net basis where (i) the deposits are entered into at the same time and in contemplation of one another, (ii) they have the same counterparty, (iii) they relate to the same risk and (iv) there is no apparent business pur- pose for structuring the transactions separately that could not also have been accomplished in a single transaction. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in proﬁt or loss. The Group does not apply hedge ac- counting. Certain derivative instruments embedded in other ﬁnancial instruments are treated as separate derivative instruments when their risks and characteristics are not closely related to those of the host contract. When derivative instruments are entered into with a view to decrease cost of funding, respective interest effect is presented as a separate line of statement of comprehensive income, within net interest income. Goodwill. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for im- pairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to beneﬁt from the synergies of the business combination. Such units or group of units represent the lowest level at which the Group monitors goodwill, and are not larger than an operating segment. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the disposed operation. This is generally measured on the basis of the relative values of the disposed operation and the portion of the cash-generating unit which is retained. Premises and equipment. Premises and equipment are stated at cost, less accumulated depreciation and provision for impairment, where required. Cost of premises and equipment of acquired subsidiaries is the estimated fair value at the date of acquisition. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recover- able amount and the impairment loss is recognised in proﬁt or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in proﬁt or loss for the year (within other operating income or expenses).If impaired, premises and equipment are written down to the higher of their value in use and fair value less costs to sell. The decrease in carrying amount is charged to proﬁt or loss. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the esti- mates used to determine the asset’s value in use or fair value less costs to sell. Depreciation. Land and construction in progress are not depreciated. Depreciation on other items of premises and equipment and right-of-use assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows: 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 236 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Asset Useful life Premises 30 – 110 years; Furniture and fixtures 5 – 8 years; Computers and office equipment 3 – 8 years; Motor vehicles 4 – 5 years; Other equipment 2 – 10 years; Right-of-use assets term of the underlying lease; Leasehold improvements term of the underlying lease or if not deﬁned, not more than 7 years. Intangible assets 1 – 20 years; The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Investment property. Investment property is property that the Groups owns to earn rental income or for capital ap- preciation, or both, and that it does not occupy. Investment property is stated at cost less accumulated depreciation and provision for impairment, where required. It is amortised on a straight line basis over an expected useful lives of 30 to 50 years. In case of any indication that the investment properties may be impaired, the Group estimates the recoverable amount as the higher of value in use and fair value less costs to sell. The carrying amount of an investment property is written down to its recoverable amount through a charge to proﬁt or loss for the year. An impairment loss recognised in prior years is reversed if there has been a subsequent change in the estimates used to determine the asset’s recoverable amount. Land included in investment property is not depreciated. Depreciation on other items of investment properties is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives of 30 to 50 years. Residual values of investment properties are estimated to be nil. Earned rental income is recorded in proﬁt or loss for the year within other operating income. Subsequent expenditure is capitalised to the asset’s carrying amount only when it is probable that future economic beneﬁts associated with the expenditure will flow to the Group and the cost can be measured reliably. All other re- pairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassiﬁed to premises and equipment. Intangible assets. The Group’s intangible assets other than goodwill have deﬁnite useful lives and primarily include capitalised computer software. Acquired computer software licences are capitalised on the basis of the costs in- curred to acquire and bring to use the speciﬁc software. Development costs that are directly associated with iden- tiﬁable and unique software controlled by the Group are recorded as intangible assets if the inflow of incremental economic beneﬁts exceeding costs is probable. Capitalised costs include staff costs and direct overheads of the software development team. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 20 years. Accounting for leases by the Group as a lessee. The Group leases ofﬁce, branches and service centre premises. Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and ﬁnance cost. The ﬁnance cost is charged to proﬁt or loss over the lease period so as to produce a constant periodic rate of interest on the re- maining balance of the liability for each period. The right-of-use asset is recognised at cost and depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. 237 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • ﬁxed payments (including in-substance ﬁxed payments), less any lease incentives receivable; • variable lease payment that are based on an index or a rate; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs, and • restoration costs. As an exception to the above, the Group accounts for short-term leases and leases of low value assets by recognising the lease payments as an operating expense on a straight line basis. In determining the lease term, management of the Group considers all facts and circumstances that create an eco- nomic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The Group applied the Amendment to IFRS 16 to COVID-19 related rent concessions granted by lessors 2020 and ex- tension of this amendment in 2021, respectively. These concessions were recorded as a reduction in the lease liability and variable rent in the period in which they were granted. The amount was not material to the ﬁnancial statements. Accounting for operating leases by the Group as a lessor. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Insurance and reinsurance receivables. Insurance and reinsurance receivables are recognised based on insurance policy terms and measured at cost. The carrying value of insurance and reinsurance receivables is reviewed for im- pairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with any impairment loss recorded in the consolidated statement of income. Reinsurance receivables primarily include bal- ances due from both insurance and reinsurance companies for ceded insurance liabilities. Insurance premiums are recognised as revenue (earned premiums) proportionally over the period of coverage of respective insurance con- tracts. Premiums are shown before deduction of commission and are gross of any taxes or duties levied on premi- ums. Amounts due to reinsurers are estimated in a manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims reimbursed are presented on a gross basis. An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance receivables are impaired only if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract that this can be measured reliably. Liability adequacy test. Liability adequacy tests are performed at each balance sheet date to ensure the adequa- cy of recognised insurance liabilities net of related deferred acquisition costs. In performing the tests, current best estimates of future contractual cash flows, claims handling and administration costs in respect of claims, as well as investment income from assets backing such liabilities, are used. Where tests highlight a deﬁciency, insurance liabil- ities are increased with any deﬁciency being recognised in the consolidated statement of comprehensive income. Income taxes. Income taxes are provided in the consolidated ﬁnancial statements in accordance with the legislation enacted or substantively enacted by the end of reporting period in the respective territories that the Bank and its subsidiaries operate. The income tax charge/credit comprises of current tax and deferred tax and is recognised in proﬁt or loss except if it is recognised directly in other comprehensive income because it relates to transactions that are also recognised, in the same or a different period, directly in other comprehensive income. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 238 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Current tax is the amount expected-to-be-paid to or recovered from the tax authorities in respect of taxable proﬁts or losses for the current and prior periods. Taxable proﬁts or losses are based on estimates if consolidated ﬁnancial statements are authorised prior to ﬁling relevant tax returns. Taxes, other than on income, are recorded within admin- istrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for ﬁnancial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differ- ences on initial recognition of an asset or a liability in a transaction other than a business combination if the transac- tion, when initially recorded, affects neither accounting nor taxable proﬁt. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill that is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of reporting period that are expected to apply to the extent of time when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable proﬁt will be available against which the deductions can be utilised. Deferred income tax is provided on post-acquisition retained earnings of subsidiaries, except where the Group con- trols the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or oth- erwise in the foreseeable future. Uncertain tax positions. The Group’s uncertain tax positions are reassessed by the management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by the management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of reporting period and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on the management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. Provisions for liabilities and charges. Provisions for liabilities and charges are non-ﬁnancial liabilities of uncertain timing or amount. They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic beneﬁts will be required to settle the obli- gation, and a reliable estimate of the amount of the obligation can be made. Material provisions include provision for performance guarantees, credit related commitments. Share capital. Ordinary shares with discretionary dividends are classiﬁed as equity. Incremental costs directly attrib- utable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividends declared after the end of the reporting period and before the consolidated ﬁnancial statements are authorised for issue, are dis- closed in the subsequent events note. Income and expense recognition. Interest income and expense are recorded for all debt instruments, other than those at FVTPL, using the effective interest method. As part of interest income or expense this method defers all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The group does not have Interest income on debt instruments at FVTPL. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a ﬁnancial asset or issuance of a ﬁnancial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing trans- action documents. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a speciﬁc lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as ﬁnancial liabilities at FVTPL. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 239 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Interest income is calculated by applying the effective interest rate to the gross carrying amount of ﬁnancial assets, except for (i) ﬁnancial assets that have become defaulted (Stage 3), for which interest income is calculated by apply- ing the effective interest rate to their AC, net of the ECL provision, and (ii) ﬁnancial assets that are purchased or origi- nated defaulted, for which the original credit-adjusted effective interest rate is applied to the AC. All other fees, commissions and other income and expense items are generally recorded when earned by reference to completion of the speciﬁc transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Fee and commission income. Fee and commission income is recognised over time on a straight line basis as the ser- vices are rendered, when the customer simultaneously receives and consumes the beneﬁts provided by the Group’s performance. Such income includes recurring fees for account maintenance, account servicing fees, account sub- scription fees, annual plastic card fees etc. Variable fees are recognised only to the extent that management deter- mines that it is highly probable that a signiﬁcant reversal will not occur. Other fee and commission income is recognised at a point in time when the Group satisﬁes its performance obliga- tion, usually upon execution of the underlying transaction. The amount of fee or commission received or receivable represents the transaction price for the services identiﬁed as distinct performance obligations. Such income includes fees for arranging a sale or purchase of foreign currencies on behalf of a customer, fees for processing payment trans- actions, plastic card transactions, merchant fees, fees for cash settlements, collection or cash disbursements, etc. Foreign currency translation. The Group’s presentation currency is the Georgian Lari. TBCG’s and the Bank’s func- tional currency is the Georgian Lari. The functional currency of each of the Group’s consolidated entities is the curren- cy of the primary economic environment in which the entity operates. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities are translated into each entity’s functional currency at the ofﬁcial exchange rate of the territories where the Bank and its subsidiaries operate, at the respective reporting period. Foreign exchange gains and losses resulting from the settlement of transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end ofﬁcial exchange rates are recognised in proﬁt or loss. Translation at year-end rates does not apply to non-monetary items, including equity investments. The effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss. The results and ﬁnancial position of each group entity (the functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as follows: i. Assets and liabilities for each statement of ﬁnancial position presented are translated at the closing rate at the end of the respective reporting period; ii. Income and expenses are translated at average exchange rates (unless this average is not a reasonable approxi- mation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expens- es are translated at the dates of the transactions); iii. Components of equity are translated at the historic rate; and iv. All resulting exchange differences are recognised in other comprehensive income. After losing control over a foreign operation, the exchange differences previously recognised in other comprehen- sive income are reclassiﬁed to proﬁt or loss for the year as part of the gain or loss on disposal. On partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassiﬁed to non-controlling interest within equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. At 31 December 2021 the closing rate of exchange used for translating foreign currency balances was GBP 1 = 4.1737 (2020: GBP 1 = GEL 4.4529; 2019: GBP 1 = GEL 3.7593); USD 1 = 3.0976 (2020: USD 1 = GEL 3.2766; 2019: USD 1 = GEL 2.8677); EUR 1 = 3.5040 (2020: EUR 1 = GEL 4.0233; 2019: EUR 1 = GEL 3.2095); UZS 1,000 = 0. 2861 (2020: UZS 1,000 = GEL 0.3127; 2019: UZS 1,000 = GEL 0.3013). Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of ﬁnancial position only when there is a legally enforceable right to offset the recognised amounts, and there is an in- tention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 240 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Staff costs and related contributions. Wages, salaries, paid annual leave and sick leave, bonuses, and non-monetary beneﬁts as well as the cash settled part of the share based payment schemes are accrued in the year in which the associated services are rendered by the Group’s employees. Earnings per share. Earnings per share (“EPS”) are determined by dividing the proﬁt or loss attributable to owners of the Group by the weighted average number of participating shares outstanding during the reporting period. Diluted earnings per share. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. In calculating diluted EPS, non-vested ordinary shares are treated as outstanding on the grant date. Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately. Share based payments. A share-based payment arrangement is an agreement between the entity and another party (including an employee) that entitles the other party to receive cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares) of the entity or another group entity, or equity instruments (including shares or share options) of the entity or another group entity, provided the speciﬁed vesting conditions, if any, are met. Under the share-based compensation plan the Group receives services from the man- agement as consideration for equity instruments of the Group. The fair value of the employee services received in exchange for the grant of the equity instruments is recognised as an expense. The total amount to be expensed is de- termined by the reference to the fair value of the equity instruments granted, excluding the impact of any non-market service and performance vesting conditions. Non-market vesting conditions are included in the assumptions about the number of equity instruments that are expected to vest. The total amount expensed is recognised over the vest- ing period, which is the period over which all of the speciﬁed vesting conditions are to be satisﬁed. At each balance sheet date, the Group revises its estimates of the number of equity instruments that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision of original estimates, if any, in proﬁt or loss, with a corresponding adjustment to equity. Increase in equity on accrued shares resulting from the equity set- tled scheme is accounted for under share based payment reserve. Upon award of shares to the scheme participants, respective share based payment reserve is transferred to share capital and share premium in case shares are issued on the market. When shares are repurchased from market initially and held via employee beneﬁt trust, these shares are presented as treasury shares under shares held by trust category in the Statement of Financial Position until they are awarded to participants. When award takes place, treasury shares amount are credited with corresponding debit recognized in share based payment reserve. When portions of a single grant vest on two or more dates the entity applies graded vesting for accounting of share based payment arrangement. Vesting period of each tranche of the grant ends when the employee owns the shares with no further service restrictions. Under graded vesting scheme the expense for earlier years is higher than for later years. Each tranche is expensed over its own service period with a credit entry being equity. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Critical Judgements and Estimates The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on the Management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements and estimates that have the most signiﬁcant effect on the amounts recognised in the consolidated ﬁnancial statements and estimates that can cause a signiﬁcant adjustment to the carrying amount of assets and liabilities include following: Judgements and estimates related to ECL measurement Measurement of ECLs is a signiﬁcant estimate that involves determination of methodology, development of models and preparation of data inputs (details of ECL measurement methodology are disclosed in Note 39). Expert manage- ment judgement is an also an essential part of calculating expected credit losses. 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 241 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Management considers the signiﬁcant management judgements and estimates in calculating ECL as follows: Judgements used to deﬁne criteria used in deﬁnition of default. The Bank deﬁnes default using both quantitative and qualitative criteria. Borrower is classiﬁed as defaulted if: • any amount of contractual repayments is past due more than 90 days; or • factors indicating the borrower’s unlikeliness-to-pay. In addition, default exit criteria is deﬁned using judgement as well as whether default should be applied on a borrower or exposure level. For more details on the methodology please see Note 39. Judgements used to deﬁne criteria for assessing, if there has been a signiﬁcant increase in credit risk (SICR) which is deﬁned using both quantitative and qualitative criteria. Qualitative factors usually include judgements around delinquency period of more than 30 days on contractual re- payments; exposure is restructured, but is not defaulted; borrower is classiﬁed as “watch”. On a quantitative basis the Bank assess change in probability of default parameter for each particular exposure since initial recognition and compares it to the predeﬁned threshold. When absolute change in probability of default ex- ceeds the applicable threshold, SICR is deemed to have occurred and exposure is transferred to Stage 2. Quantitative indicator of SICR is applied to retail and micro segments, where the Bank has sufﬁcient number of observations. The table below represents the sensitivity analysis of (i) 20% decrease of SICR thresholds (quantitative criteria applied for retail and micro exposures described above. (ii) 10% increase in total number of stage 2 borrowers. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED In thousands of GEL 2021 2020 2019 20% decrease in SICR thresholds Increase credit loss allowance on loans and advances by GEL 2,470. Increase credit loss allowance on loans and advances by GEL 2,543. Increase credit loss allowance on loans and advances by GEL 1,954. Change of the Bank’s cost of credit risk ratio by 2 basis points. Change of the Bank’s cost of credit risk ratio by 2 basis points. Change of the Bank’s cost of credit risk ratio by 2 basis points. 10% increase in number of Stage 2 contracts Increase credit loss allowance on loans and advances by GEL 2,511. Increase credit loss allowance on loans and advances by GEL 3,311. Increase credit loss allowance on loans and advances by GEL 2,380. Change of the Bank’s cost of credit risk ratio by 2 basis points. Change of the Bank’s cost of credit risk ratio by 2 basis points. Change of the Bank’s cost of credit risk ratio by 2 basis points. Judgements used for calculation of credit risk parameters namely exposure at default (EAD), probability of default (PD) and loss given default (LGD). The judgements includes and are not limited by: (i) deﬁnition of the segmentation for risk parameters estimation purposes, (ii) decision whether simpliﬁed or more complex models can be used, (iii) time since default date after which no material recoveries are expected, (iv) collateral haircuts from market value as well as the average workout period for collateral discounting. 242 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The table below describes sensitivity on 10% increase of PD and LGD estimates: 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED In thousands of GEL 2021 2020 2019 10% increase (decrease) in PD estimates Increase (decrease) credit loss allowance on loans and advances by GEL 25,043 (GEL 18,905). Increase (decrease) credit loss allowance on loans and advances by GEL 24,901 (GEL 26,013). Increase (decrease) credit loss allowance on loans and advances by GEL 17,427 (GEL 17,547). Change of the Bank’s cost of credit risk ratio by 16 (12) basis points Change of the Bank’s cost of credit risk ratio by 18 (19) basis points. Change of the Bank’s cost of credit risk ratio by 16 (16) basis points. 10% increase (de- crease) in LGD esti- mates Increase (decrease) credit loss allowance on loans and advances by GEL 39,900 (GEL 35,129). Increase (decrease) credit loss allowance on loans and advances by GEL 50,719 (GEL 53,813). Increase (decrease) credit loss allowance on loans and advances by GEL 24,758 (GEL 26,604). Change of the Bank’s cost of credit risk ratio by 26 (22) basis points. Change of the Bank’s cost of credit risk ratio by 37 (39) basis points. Change of the Bank’s cost of credit risk ratio by 22 (24) basis points. Estimates used for forward-looking macroeconomic scenarios and judgements made for their probability weight- ings. For forward-looking information purposes the Bank deﬁnes three macro scenarios. The scenarios are deﬁned as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy. Estimates applied in differentiating between these three scenarios represent GDP, USD/GEL rate, RE price, employ- ment levels, monetary policy rate and other macro variables. Under usual conditions, the scenario weights applied are 50%, 25% and 25% for the base case, upside and downside scenarios respectively. As at 31 December 2021 the weights applied are 50%, 25% and 25% for the base, upside and downside scenarios respectively, (31 December 2020: 60%, 10% and 30% and 31 December 2019: 50%, 25% and 25%). Based on the changes of the macro environment the Bank modiﬁes the weightings based on expert judgement. The table below describes the unweighted ECL for each economic scenario as at 31 December 2021: In thousands of GEL Baseline Upside Downside Weighted Corporate 48,220 46,752 59,640 50,731 MSME 112,592 104,856 122,768 113,101 Consumer 182,881 179,516 186,478 182,928 Mortgage 63,080 59,464 68,491 63,486 Total 406,773 390,588 437,377 410,246 The table below describes the unweighted ECL for each economic scenario as at 31 December 2020: In thousands of GEL Baseline Upside Downside Weighted Corporate 96,039 94,607 135,188 107,641 MSME 155,709 149,480 166,582 159,910 Consumer 240,827 238,427 245,072 241,825 Mortgage 96,351 95,496 98,329 96,870 Total 588,926 578,010 645,171 606,246 243 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The following table describes the key macroeconomic variables under each scenario for future 3-year period as at 31 December 2020: 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED Baseline Upside Downside Growth rates YoY, % 2021 2022 2023 2021 2022 2023 2021 2022 2023 GDP 4.2% 7.4% 5.3% 4.9% 8.3% 6.5% 2.7% 5.2% 2.6% USD/GEL rate (EOP) 3.2 3.1 3.0 3.0 2.8 2.7 3.5 3.4 3.3 RE Price (in USD) -3.5% 5.2% 7.5% -2.1% 4.6% 6.9% -5.7% 6.3% 4.2% Employment 2.6% 1.0% 1.0% 2.8% 1.3% 1.3% 2.4% 0.7% 0.6% Monetary policy rate (EOP, Level) 7.5% 7.0% 6.5% 7.3% 6.7% 6.1% 8.4% 8.3% 8.1% The Bank assessed the impact of changes in GDP growth, unemployment and monetary policy rate variables on ECL as a most critical estimates applied in ECL assessment. The sensitivity analysis was performed separately for each of the variable to show their signiﬁcant in ECL assess- ment, but changes in those variables may not happen in isolation as various economic factors tend to be correlated across the scenarios. The variables were adjusted in all three macroeconomic scenarios and the staging has been maintained unchanged. From the assessment of forward looking scenarios, management is comfortable with the scenarios capturing the non-linearity of the losses. The table below shows the impact of +/-20% change in GDP growth, unemployment and monetary policy variables across all scenarios on the Bank’s ECL as at 31 December 2021: Change in GDP growth Change in unemployment Change in Monetary Policy in thousands of GEL 20% increase 20% decrease 20% increase 20% decrease 20% increase 20% decrease Impact on ECL (9,036) 10,359 4,805 (4,541) 4,045 (3,493) Change in GDP growth Change in unemployment Change in Monetary Policy in thousands of GEL 20% increase 20% decrease 20% increase 20% decrease 20% increase 20% decrease Impact on ECL (6,973) 7,323 3,899 (3,083) 4,136 (3,234) The table below shows the impact of +/-20% change in GDP growth, unemployment and monetary policy variables across all scenarios on the Bank’s ECL as at 31 December 2020: Baseline Upside Downside Growth rates YoY, % 2022 2023 2024 2022 2023 2024 2022 2023 2024 GDP 6.0% 5.5% 5.0% 7.8% 8.2% 8.3% 4.1% 2.8% 1.7% USD/GEL rate (EOP) 3.30 3.25 3.20 2.95 2.87 2.80 3.55 3.55 3.52 RE Price (in USD) 1.6% 2.1% 2.6% 4.6% 6.3% 7.7% -1.6% -2.5% -3.5% Employment 1.0% 1.0% 0.5% 1.5% 1.7% 1.3% 0.6% 0.4% -0.2% Monetary policy rate (EOP, Level) 8.5% 7.5% 7.0% 8.0% 6.8% 6.1% 9.4% 8.7% 8.4% The following table describes the key macroeconomic variables under each scenario for future 3-year period as at 31 December 2021: 244 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED Individual assessment: Individual assessment is mainly used for stage 2 and stage 3 individually signiﬁcant borrowers. For selecting individually signiﬁcant exposures, the management uses the following estimated thresholds above which exposures 1 are selected for individual review: for stage 2 - to GEL 10 million and for stage 3 - GEL 4 million. Additionally, the Bank may arbitrarily designate selected exposures to individual measurement of ECL based on the Bank’s credit risk management or underwriting departments’ decision. The individual assessment takes into account latest available information in order to deﬁne ECL under baseline, upside and downside scenarios. Use of post model overlays and adjustments Below we deﬁne what we call post model adjustments or overlays for ECL estimation purposes. Post Model Adjustments We call PMAs speciﬁc set of management adjustments to address known model limitations, either in model meth- odology or model inputs. PMAs are made based on analysis of model inputs and parameters to determine the re- quired modiﬁcations in order to improve model accuracy. Post model overlays Post model overlays (PMOs) reflect management judgement that mainly rely on expert judgement and are applied directly to expected credit losses at an aggregated level. Once implemented, Post Model overlays and adjustments are re-assessed at each reporting date to determine the validity of the adjustments. The appropriateness of PMAs and PMOs is subject to rigorous review and challenge. Post model overlays and adjustments review and approval process goes through same phases as made for ECL pro- cess governance that is described in note: 39 - under risk governance section. As a result of Covid-19 pandemic, the Bank applied expert judgement to the measurement of the expected credit losses in the form of post model adjustments (PMAs). The adjustments made were all in model adjustments, which means that we made adjustments either to model inputs or its parameters and run the models based on the updated adjustments. No post model overlays has been processed during the year (2020 nil). Below, are summarized in model PMAs applied as of YE 2020 and 2021. Total effect of all PMAs amounted to GEL 16,107 thousand and GEL 105,502 thousand for YE 2021 and YE 2020 respectively: • Default deﬁnition: The Bank applied additional default criteria to exposures particularly impacted by the pan- demic-related restrictions. This included exposures that were granted several phases of covid-19 related grace periods or restructurings. The criteria included lower days past due threshold and deterioration in debt coverage ratios for those exposures to facilitate the early identiﬁcation of impaired exposures. PMA was applicable as of YE 2020 and is no longer valid as of YE 2021 as covid-19 related grace periods or restructing are no longer in place. • Stage 2 deﬁnition: As a result of Covid-19 pandemic, the Bank applied certain PMAs to SICR criteria (signiﬁcant increase in credit risk) to facilitate the early identiﬁcation of increased risk exposures. The criteria is based on the repayment history of the exposures after the second stage grace period and availability of the recent ﬁnancial monitoring information for the vulnerable business borrowers. PMA was applicable as of YE 2020 and is no longer valid as of YE 2021 as Covid-19 pandemic related grace periods are no longer in place. • Loss given default (LGD) – Recovery rate: For YE 2020, in the LGD modelling the Bank reduced the recovery rates for retail (mortgage, secured consumer & unsecured) and micro exposures in stage 3 to reflect the expect- ed impact of the pandemic-related restrictions. In 2021, the Bank re-assessed the adjustment and based on the analysis of recoveries, made certain modiﬁcations to PMAs applied as of YE 2020. Mortgage portfolio – recov- ery rate downward adjustment was totally removed, as based on the analysis observed recoveries managed to reach pre-pandemic level. Unsecured consumer portfolio, recoveries were improved, however it was still lower compared to the pre-pandemic level, therefore, recovery rate downward adjustment was maintained, but it was decreased compared to YE 2020. Adjustments for other portfolios, namely, secured consumer and micro seg- ments - remained unchanged compared to YE 2020, as material improvement in recoveries were not observed • Loss given default (LGD) – Collateral haircut/AWT 2 : In order to capture an impact of expected real estate price drop on ECL, downward adjustment to the collateral values was applied for stage 3 SME and stage 3 non-signif- icant corporate exposures, as of YE 2020. As of YE 2021 the adjustment is no longer incorporated in line with the updated macro assumptions for real estate price. However, for that particular portfolios (SME, non-signiﬁcant cor - 245 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS The following amended standards became effective from during 2021: Covid-19-Related Rent Concessions – Amendments to IFRS 16 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021). In May 2020 an amendment to IFRS 16 was issued that provided an optional practical expedient for lessees from as- sessing whether a rent concession related to COVID-19, resulting in a reduction in lease payments due on or before 30 June 2021, was a lease modiﬁcation. An amendment issued on 31 March 2021 extended the date of the practical expedient from 30 June 2021 to 30 June 2022. The application of the amendment did not have any impact on the right-of-use asset and no material effect on lease liabilities and income statement. Interest rate benchmark (IBOR) reform – phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 August 2020 and effective for annual periods beginning on or after 1 January 2021). The Phase 2 amendments address issues that arise from the implementation of the reforms, including the replace- ment of one benchmark with an alternative one. The amendments cover the following areas: • Accounting for changes in the basis for determining contractual cash flows as a result of IBOR reform: For instru- ments to which the amortised cost measurement applies, the amendments require entities, as a practical expe- dient, to account for a change in the basis for determining the contractual cash flows as a result of IBOR reform by updating the effective interest rate using the guidance in paragraph B5.4.5 of IFRS 9. As a result, no immediate gain or loss is recognised. This practical expedient applies only to such a change and only to the extent it is neces- sary as a direct consequence of IBOR reform, and the new basis is economically equivalent to the previous basis. In thousands of GEL 2021 2020 Default definition - 34,304 Stage 2 definition - 2,906 Loss given default (LGD) – Recovery rate 12,835 45,578 Loss given default (LGD) – Collateral haircut/AWT 4 2,754 3,116 Full prepayment ratio (FPR): 512 2,166 Credit Bureau scores - 17,708 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED 1 Total exposure of the bank toward the borrower or group of interconnected borrowers 2 AWT- Average Workout Period 3 AWT is set to 1 year according to the ECL methodology. As of YE 2020, no changes to the methodology was applied in terms of AWT. 4 As described above, collateral haircuts were applied as of YE 2020. As for the AWT, it was only applicable as of YE 2021. porate) the Bank extended AWT (average workout period) from 1 Year 3 to 2 years in 2021, in order to reflect delayed recoveries, observed in 2021, mainly driven by covid-19 pandemic. An adjustment was applied across all stages. • Full prepayment ratio (FPR): As of YE 2020, the Bank applied downward adjustment to FPR ratio which is used for exposure at default modeling (EAD). The adjustment was made based on the expectations that full prepayments will be lower compared to the pre-pandemic levels. In 2021 the Bank analyzed actual prepayments and based on the analytics either maintained the adjustment or decreased/totally removed it. • Credit Bureau scores: In December 2020, the Bank has adjusted CB-Score/risk grade as available score did not reflect respective period creditworthiness of particular exposure due to the Covid-19 related grace periods. As of December 2021, CB-Score approximation was already removed and the Bank directly uses the CB-Scores pro- vided by the external credit bureau. Following Table presents effects of PMAs on ECL. Some of the effects are dependent on each other, therefore the sum of individual effects of PMAs do not equal to the total effect posted on ECL as a result of PMAs: 246 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Insurers applying the temporary exemption from IFRS 9 are also required to apply the same practical expedient. IFRS 16 was also amended to require lessees to use a similar practical expedient when accounting for lease mod- iﬁcations that change the basis for determining future lease payments as a result of IBOR reform. • End date for Phase 1 relief for non-contractually speciﬁed risk components in hedging relationships: The Phase 2 amendments require an entity to prospectively cease to apply the Phase 1 reliefs to a non-contractually speciﬁed risk component at the earlier of when changes are made to the non-contractually speciﬁed risk component, or when the hedging relationship is discontinued. No end date was provided in the Phase 1 amendments for risk components. • Additional temporary exceptions from applying speciﬁc hedge accounting requirements: The Phase 2 amend- ments provide some additional temporary reliefs from applying speciﬁc IAS 39 and IFRS 9 hedge accounting requirements to hedging relationships directly affected by IBOR reform. • Additional IFRS 7 disclosures related to IBOR reform: The amendments require disclosure of: (i) how the entity is managing the transition to alternative benchmark rates, its progress and the risks arising from the transition; (ii) quantitative information about derivatives and non-derivatives that have yet to transition, disaggregated by sig- niﬁcant interest rate benchmark; and (iii) a description of any changes to the risk management strategy as a result of IBOR reform. Libor is the most frequently used floating rate within the Group, as a result, below analysis is primarily concentrated on Libor change. Libor Change On 5 March 2021, the IBA conﬁrmed its intention to cease the publication of GBP, CHF, EUR, and JPY LIBOR (all ten- ors) and USD LIBOR (one week and two-month tenors) at the end of 2021. The remaining USD LIBOR tenors will be published by IBA until the end of June 2023. The Bank has not yet re-negotiated existing contracts in LIBOR and will follow extended timeline. Most Libor benchmarks are expected to transition to respective near risk-free rate (RFR) benchmarks. Under these amendments, the changes to the basis for determining the contractual cash flows are reflected by ad- justing the effective interest rate, as allowed by practical expedient. No immediate gain or loss is recognised. These revisions of effective interest rate are only applicable when the change is necessary as a direct consequence of inter- est rate benchmark reform, and the new basis for determining the contractual cash flows is economically equivalent to the previous basis. The Group does not have any exposure to GBP, CHF, EUR or JPY LIBOR contracts and has no impact of the cessation. Generally for EUR floating assets and liabilities, EURIBOR is used as the default benchmark in the Group (no expo- sures presented as of 31 December 2021). For all new contracts, the rate fallback provisions are in place to avoid future complications in case there will be changes to EURIBOR benchmark. In USD, the Group has exposure to Libor, predominantly in contracts with 6 Month USD Libor benchmark. For the new customer contracts, the plan is to move fully from USD LIBOR to the RFRs in 2022. In the table below is the breakdown by ﬁnancial statement components yet to transition to the alternative benchmark: 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS CONTINUED In thousands of GEL Non derivative ﬁnancial assets Non derivative ﬁnancial liabilities Contingencies and commitments Derivatives Index Currency Cessation Date Loans and advances to customers Subordinated debt Due to credit institutions Letters of credit Undrawn credit lines Derivatives 6M Euribor EUR TBD - - 88,761 - - - 1M Libor USD TBD 24,831 - - - 1,032 - 3M Libor USD 30-Jun-23 26,139 - 2,858 - 11 3,613 6M Libor USD 30-Jun-23 5,432,142 281,604 361,360 4,771 909,315 - 12M Libor USD 30-Jun-23 1,460 - 30,992 - - - Total 5,484,572 281,604 483,971 4,771 910,358 3,613 247 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Financial risks resulting from the cessation of LIBOR and the development of market liquidity in new Benchmarks will also affect the Group throughout transition. The differences in Libor and the new benchmark rates will create a basis risk that we may need to actively manage through appropriate ﬁnancial hedging. Basis risk in may arise out of the asymmetric adoption of RFRs across assets and liabilities and across currencies and products. In addition, this may limit the ability to hedge effectively. Where appropriate, portfolio immunization or cash flow matching strategies will be used during the transition for risk minimization purposes. The hedging is expected to be done via available interest rate derivatives for respective RFRs. The continued orderly transition from LIBOR has been the Group’s key objective through 2021 and were grouped into two work streams: 1. The development of alternative rate and RFR product capabilities. 2. The transition of legacy Libor contracts. The Groups initiatives in connection with LIBOR transition include: a. Impementing rate fall back provisions, where appropriate; b. The Group continues to engage with market participants and the regulator to address market-wide challenges associated with USD LIBOR transition, including the efforts to introduce forward-looking term rates linked to SOFR; c. To educate and inform clients on LIBOR transition and the necessity to prepare for the cessation of LIBOR; 5. NEW ACCOUNTING PRONOUNCEMENTS The Group has not early adopted any of the amendments effective after 31 December 2021 and it expects they will have an insigniﬁcant effect, when adopted, or assessing the scale of impact on the consolidated ﬁnancial statements of the Group and the separate ﬁnancial statements of TBC Bank Group PLC. IFRS 17 “Insurance Contracts” (issued on 18 May 2017 and effective for annual periods beginning on or after 1 Jan- uary 2021 , deferred to 1 January 2023 by the amendments to IFRS 17). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difﬁcult for investors to compare and contrast the ﬁnancial per - formance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulﬁlment cash flows) that incorporates all of the available information about the fulﬁlment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned proﬁt in the group of contracts (the contractual service margin). Insurers will be recognising the proﬁt from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). The amendments include a number of clariﬁcations intended to ease implementation of IFRS 17, simplify some re- quirements of the standard and transition. The amendments relate to eight areas of IFRS 17, and they are not intended to change the fundamental principles of the standard. The following amendments to IFRS 17 were made: • Effective date: The effective date of IFRS 17 (incorporating the amendments) has been deferred by two years to annual reporting periods beginning on or after 1 January 2023; and the ﬁxed expiry date of the temporary exemp- tion from applying IFRS 9 in IFRS 4 has also been deferred to annual reporting periods beginning on or after 1 January 2023. • Expected recovery of insurance acquisition cash flows: An entity is required to allocate part of the acquisition costs to related expected contract renewals, and to recognise those costs as an asset until the entity recognises the contract renewals. Entities are required to assess the recoverability of the asset at each reporting date, and to provide speciﬁc information about the asset in the notes to the ﬁnancial statements. 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS CONTINUED 248 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 5. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED • Contractual service margin attributable to investment services: Coverage units should be identiﬁed, considering the quantity of beneﬁts and expected period of both insurance coverage and investment services, for contracts under the variable fee approach and for other contracts with an ‘investment-return service’ under the general model. Costs related to investment activities should be included as cash flows within the boundary of an insur- ance contract, to the extent that the entity performs such activities to enhance beneﬁts from insurance coverage for the policyholder. • Reinsurance contracts held – recovery of losses: When an entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts, or on addition of onerous underlying contracts to a group, an entity should adjust the contractual service margin of a related group of reinsurance contracts held and recognise a gain on the reinsurance contracts held. The amount of the loss recovered from a reinsurance contract held is determined by multiplying the loss recognised on underlying insurance contracts and the percentage of claims on underlying insurance contracts that the entity expects to recover from the reinsurance contract held. This re- quirement would apply only when the reinsurance contract held is recognised before or at the same time as the loss is recognised on the underlying insurance contracts. • Other amendments: Other amendments include scope exclusions for some credit card (or similar) contracts, and some loan contracts; presentation of insurance contract assets and liabilities in the statement of ﬁnancial position in portfolios instead of groups; applicability of the risk mitigation option when mitigating ﬁnancial risks using rein- surance contracts held and non-derivative ﬁnancial instruments at fair value through proﬁt or loss; an accounting policy choice to change the estimates made in previous interim ﬁnancial statements when applying IFRS 17; in- clusion of income tax payments and receipts that are speciﬁcally chargeable to the policyholder under the terms of an insurance contract in the fulﬁlment cash flows; and selected transition reliefs and other minor amendments. Transition option to insurers applying IFRS 17 – Amendments to IFRS 17 (issued on 9 December 2021 and effective for annual periods beginning on or after 1 January 2023). The amendment to the transition requirements in IFRS 17 provides insurers with an option aimed at improving the usefulness of information to investors on initial application of IFRS 17. The amendment relates to insurers’ transition to IFRS 17 only and does not affect any other requirements in IFRS 17. The transition requirements in IFRS 17 and IFRS 9 apply at different dates and will result in the following one-time classiﬁcation differences in the comparative informa- tion presented on initial application of IFRS 17: accounting mismatches between insurance contract liabilities mea- sured at current value and any related ﬁnancial assets measured at amortised cost; and if an entity chooses to restate comparative information for IFRS 9, classiﬁcation differences between ﬁnancial assets derecognised in the compar - ative period (to which IFRS 9 will not apply) and other ﬁnancial assets (to which IFRS 9 will apply). The amendment will help insurers to avoid these temporary accounting mismatches and, therefore, will improve the usefulness of com- parative information for investors. It does this by providing insurers with an option for the presentation of compara- tive information about ﬁnancial assets. When initially applying IFRS 17, entities would, for the purpose of presenting comparative information, be permitted to apply a classiﬁcation overlay to a ﬁnancial asset for which the entity does not restate IFRS 9 comparative information. The transition option would be available, on an instrument-by-instrument basis; allow an entity to present comparative information as if the classiﬁcation and measurement requirements of IFRS 9 had been applied to that ﬁnancial asset, but not require an entity to apply the impairment requirements of IFRS 9; and require an entity that applies the classiﬁcation overlay to a ﬁnancial asset to use reasonable and supportable information available at the transition date to determine how the entity expects that ﬁnancial asset to be classiﬁed applying IFRS 9. Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). IAS 1 was amended to require companies to disclose their material accounting policy information rather than their signiﬁcant accounting policies. The amendment provided the deﬁnition of material accounting policy information. The amendment also clariﬁed that accounting policy information is expected to be material if, without it, the users of the ﬁnancial statements would be unable to understand other material information in the ﬁnancial statements. The amendment provided illustrative examples of accounting policy information that is likely to be considered material to the entity’s ﬁnancial statements. Further, the amendment to IAS 1 clariﬁed that immaterial accounting policy informa- tion need not be disclosed. However, if it is disclosed, it should not obscure material accounting policy information. To support this amendment, IFRS Practice Statement 2, ‘Making Materiality Judgements’ was also amended to pro- vide guidance on how to apply the concept of materiality to accounting policy disclosures. 249 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Deferred tax related to assets and liabilities arising from a single transaction – Amendments to IAS 12 (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023). The amendments to IAS 12 specify how to account for deferred tax on transactions such as leases and decommis- sioning obligations. In speciﬁed circumstances, entities are exempt from recognising deferred tax when they recog- nise assets or liabilities for the ﬁrst time. Previously, there had been some uncertainty about whether the exemption applied to transactions such as leases and decommissioning obligations – transactions for which both an asset and a liability are recognised. The amendments clarify that the exemption does not apply and that entities are required to recognise deferred tax on such transactions. The amendments require companies to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. Proceeds before intended use, Onerous contracts – cost of fulﬁlling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018- 2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022). The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of PPE any proceeds received from selling items produced while the entity is preparing the asset for its intended use. The proceeds from selling such items, together with the costs of producing them, are now recognised in proﬁt or loss. An entity will use IAS 2 to measure the cost of those items. Cost will not include depreciation of the asset being tested because it is not ready for its intended use. The amendment to IAS 16 also clariﬁes that an entity is ‘testing whether the asset is functioning properly’ when it assesses the technical and physical performance of the asset. The ﬁnancial performance of the as- set is not relevant to this assessment. An asset might therefore be capable of operating as intended by management and subject to depreciation before it has achieved the level of operating performance expected by management. The amendment to IAS 37 clariﬁes the meaning of ‘costs to fulﬁl a contract’. The amendment explains that the direct cost of fulﬁlling a contract comprises the incremental costs of fulﬁlling that contract; and an allocation of other costs that relate directly to fulﬁlling. The amendment also clariﬁes that, before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulﬁlling the contract, rather than on assets dedicated to that contract. IFRS 3 was amended to refer to the 2018 Conceptual Framework for Financial Reporting, in order to determine what constitutes an asset or a liability in a business combination. Prior to the amendment, IFRS 3 referred to the 2001 Conceptual Framework for Financial Reporting. In addition, a new exception in IFRS 3 was added for liabilities and contingent liabilities. The exception speciﬁes that, for some types of liabilities and contingent liabilities, an entity applying IFRS 3 should instead refer to IAS 37 or IFRIC 21, rather than the 2018 Conceptual Framework. Without this new exception, an entity would have recognised some liabilities in a business combination that it would not recognise under IAS 37. Therefore, immediately after the acquisition, the en- tity would have had to derecognise such liabilities and recognise a gain that did not depict an economic gain. It was also clariﬁed that the acquirer should not recognise contingent assets, as deﬁned in IAS 37, at the acquisition date. The amendment to IFRS 9 addresses which fees should be included in the 10% test for derecognition of ﬁnancial liabilities. Costs or fees could be paid to either third parties or the lender. Under the amendment, costs or fees paid to third parties will not be included in the 10% test. Illustrative Example 13 that accompanies IFRS 16 was amended to remove the illustration of payments from the lessor relating to leasehold improvements. The reason for the amendment is to remove any potential confusion about the treatment of lease incentives. IFRS 1 allows an exemption if a subsidiary adopts IFRS at a later date than its parent. The subsidiary can measure its assets and liabilities at the carrying amounts that would be included in its parent’s consolidated ﬁnancial statements, based on the parent’s date of transition to IFRS, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. IFRS 1 was amended to allow entities that have taken this IFRS 1 exemption to also measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to IFRS. The amendment to IFRS 1 extends the above exemption to cumulative translation differences, in order to reduce costs for ﬁrst-time adopters. This amendment will also apply to associates and joint ventures that have taken the same IFRS 1 exemption. The requirement for entities to exclude cash flows for taxation when measuring fair value under IAS 41 was removed. This amendment is intended to align with the requirement in the standard to discount cash flows on a post-tax basis. 5. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED 250 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Classiﬁcation of liabilities as current or non-current – Amendments to IAS 1 (issued on 23 January 2020 and effec- tive for annual periods beginning on or after 1 January 2022). These narrow scope amendments clarify that liabilities are classiﬁed as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities are non-current if the entity has a substantive right, at the end of the reporting period, to defer settlement for at least twelve months. The guidance no longer requires such a right to be unconditional. Management’s expectations whether they will subsequently exercise the right to defer settlement do not affect classiﬁcation of liabilities. The right to defer only exists if the entity complies with any relevant conditions as of the end of the reporting period. A liability is classiﬁed as current if a condition is breached at or before the reporting date even if a waiver of that condition is obtained from the lender after the end of the reporting period. Conversely, a loan is classiﬁed as non-current if a loan covenant is breached only after the reporting date. In addition, the amendments include clarifying the classiﬁcation requirements for debt a company might settle by con- verting it into equity. ‘Settlement’ is deﬁned as the extinguishment of a liability with cash, other resources embodying economic beneﬁts or an entity’s own equity instruments. There is an exception for convertible instruments that might be converted into equity, but only for those instruments where the conversion option is classiﬁed as an equity instru- ment as a separate component of a compound ﬁnancial instrument. Amendment to IFRS 4 – deferral of IFRS 9 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). The amendments to IFRS 4 addressed the temporary accounting consequences of the different effective dates of IFRS 9 and the forthcoming IFRS 17. The amendments to IFRS 4 extended the expiry date of the temporary exemp- tion from applying IFRS 9 until 2023 in order to align the effective date of IFRS 9 with the new IFRS 17. The ﬁxed ex- piry date of the temporary exemption from applying IFRS 9 in IFRS 4 has been deferred to annual reporting periods beginning on or after 1 January 2023. Classiﬁcation of liabilities as current or non-current, deferral of effective date – Amendments to IAS 1 (issued on 15 July 2020 and effective for annual periods beginning on or after 1 January 2023). The amendment to IAS 1 on classiﬁcation of liabilities as current or non-current was issued in January 2020 with an original effective date 1 January 2022. However, in response to the Covid-19 pandemic, the effective date was deferred by one year to provide companies with more time to implement classiﬁcation changes resulting from the amended guidance. Amendments to IAS 8: Deﬁnition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). The amendment to IAS 8 clariﬁed how companies should distinguish changes in accounting policies from changes in accounting estimates. 5. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED 251 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 In thousands of GEL 2021 2020 2019 Cash on hand 839,821 755,687 650,700 Cash balances with National Bank of Georgia and Uzbekistan (other than mandatory reserve deposits) 244,303 102,522 35,132 Correspondent accounts and overnight placements with other banks 632,376 588,409 191,420 Placements with and receivables from other banks with original maturities of less than three months 5,767 188,867 126,360 Total gross amount of cash and cash equivalents 1,722,267 1,635,485 1,003,612 Less: credit loss allowance by stages (130) (80) (29) Stage 1 (130) (80) (29) Stage 2 - - - Stage 3 - - - Total cash and cash equivalents 1,722,137 1,635,405 1,003,583 94% of the correspondent accounts and overnight placements with other banks are placed with OECD (The Orga- nization for Economic Co-operation and Development) banking institutions (31 December 2020: 89%; 31 December 2019: 85%). As at 31 December 2021 GEL 5,767 thousand was placed on interbank term deposits with two non-OECD banks and none with OECD bank (2020: GEL 25,030 thousand with one non-OECD bank and GEL 163,838 thousand with one OECD bank; 2019: GEL 11,348 thousand with one non-OECD bank and GEL 115,012 thousand with two OECD banks). Interest rate analysis of cash and cash equivalents is disclosed in Note 39. The credit-rating of correspondent accounts and overnight placements with other banks is as follows: In thousands of GEL 2021 2020 2019 AA 69,943 – – AA- 2,117 1,891 – A+ 425,553 417,938 66,805 A 1,795 1,896 13,816 A- 23,766 35,753 – BBB+ 70,886 – 20,286 BBB 7 64,985 69,302 BBB- 12,569 897 – BB+ 367 – 733 BB 1,524 1,858 3,680 BB- 13,376 9,088 12,346 B+ 8,343 53,688 4,452 B 2,130 15 – Not rated – 400 – Total correspondent accounts and overnight placements with other banks 632,376 588,409 191,420 6. CASH AND CASH EQUIVALENTS 252 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The credit rating of placements with and receivables from other banks with original maturities of less than three months stands as follows: 6. CASH AND CASH EQUIVALENTS CONTINUED In thousands of GEL 2021 2020 2019 A- – – 115,012 BBB+ – 163,838 – BB – – 1,719 BB- 5,722 25,016 – B+ – – 9,629 Not rated 45 13 – Total placements with and receivables from other banks with original maturities of less than three months 5,767 188,867 126,360 The table illustrates the ratings by international agencies Standard & Poor’s and Fitch Ratings. When different credit ratings are designated by the agencies, the highest designated rating for this asset is used, for those ﬁnancial insti- tutions which are not assigned credit ratings country ratings are used. As at 31 December 2021 there were no invest- ment securities held as collateral against placements with other banks under the reverse repo agreements (2020: nil; 2019: nil). 7. DUE FROM OTHER BANKS Amounts due from other banks include placements with original maturities of more than three months that are not collateralised and represent neither past due nor impaired amounts at the end of 2021, 2020 and 2019. Credit ratings of placements with other banks with original maturities of more than three months were as follows: In thousands of GEL 2021 2020 2019 AA- – 31 – A+ 13,099 10,908 9,549 BBB+ 21 98 – BBB – – 2,493 BBB- 2,943 2,011 – BB 5,652 10,972 9,045 BB- 19,828 12,041 5,323 B+ 37,599 14,744 7,195 Total placements with other banks with original maturities of more than three months 79,142 50,805 33,605 As at 31 December 2021 the Group had ﬁve placements, with original maturities of more than three months and with aggregated amounts above GEL 5,000 thousand amounting GEL 54,526 thousand (2020: nil; 2019: nil). The total ag- gregated amount of placements with other banks with original maturities of more than three months was GEL 65,333 thousand (2020: GEL 39,069 thousand; 2019: GEL 21,778) or 82.6% of the total amount due from other banks. (2020: 76.9%; 2019: 64.8 %). As at 31 December 2021 GEL 13,819 thousand, (2020: GEL 11,744 thousand; 2019: GEL 11,836 thousand) were kept on de- posits as restricted cash under an arrangement with a credit card company or credit card related services with other banks. Refer to Note 44 for the estimated fair value of amounts due from other banks. Interest rate analysis of due from other banks is disclosed in Note 39. For the purpose of ECL measurement due from other banks balances are included in Stage 1. The ECL for these bal- ances as at 31 December 2021 is GEL 9.9 thousand (2020: GEL 8 thousand; 2019: GEL 9 thousand). 253 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 8. MANDATORY CASH BALANCES WITH NATIONAL BANK OF GEORGIA AND UZBEKISTAN Mandatory cash balances with National Bank of Georgia (“NBG”) and National Bank of Uzbekistan (“NBU”) represent amounts deposited with the NBG and NBU. Out of total amount, GEL 2,086,113 thousand is deposited with NBG and GEL 1,028 thousand is deposited with NBU. Resident ﬁnancial institutions are required to maintain an interest-earn- ing obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by the ﬁnancial institutions. The Group earned up to 10.5%, (0.25%) and (0.7%) annual interest in GEL, USD and EUR respectively on mandatory reserves with NBG in 2021 (2020: 8.0%, (0.25%) and (0.7%) in GEL, USD and EUR respectively; 2019: 9.0%, 1.25% and (0.7%) in GEL, USD and EUR respectively). In August 2021, Fitch Ratings has afﬁrmed Georgia’s Long-Term Foreign and Local Currency Issuer Default Rating (IDRs) at ‘BB’. The Outlook was revised to stable from negative; The issue ratings on long-term senior unsecured bonds were afﬁrmed at ‘BB’. The Country Ceiling Rating was afﬁrmed at ‘BBB-’, short-term foreign and local-currency IDRs at ‘B’. 9. LOANS AND ADVANCES TO CUSTOMERS In thousands of GEL 2021 2020 2019 Corporate loans 6,547,741 5,690,749 4,660,473 Consumer loans 2,245,904 2,011,585 1,884,006 Mortgage loans 4,112,441 3,942,102 3,169,197 Loans to micro, small and medium enterprises 4,141,305 3,556,084 2,948,279 Total gross loans and advances to customers at AC 17,047,391 15,200,520 12,661,955 Less: credit loss allowance (410,246) (606,246) (312,556) Stage 1 (104,058) (130,228) (95,689) Stage 2 (120,832) (142,915) (82,687) Stage 3 (185,356) (333,103) (134,180) Total loans and advances to customers at AC 16,637,145 14,594,274 12,349,399 As at 31 December 2021 loans and advances to customers carried at GEL 843,006 thousand have been pledged to local banks or other ﬁnancial institutions as collateral with respect to other borrowed funds (2020: GEL 889,353 thou- sand; 2019: GEL 474,480 thousand). Total credit loss allowance includes PMAs amounted to GEL 16,107 thousand and GEL 105,502 thousand for YE 2021 and YE 2020, respectively. The following tables disclose the changes in the credit loss allowance and gross carrying amount for loans and ad- vances to customers carried at amortised cost between the beginning and the end of the reporting period. Below main movements in the table are described: • Transfers occur between Stage 1, 2 and 3, due to signiﬁcant increases (or decreases) of credit risk or exposures becoming defaulted in the period, and the consequent “step up” (or “step down”) between 12-month and Lifetime ECL. It should be noted, that: • For loans, which existed at the beginning of the period, opening exposures are disclosed as transfer amounts; • For newly issued loans, exposures upon issuance are disclosed as transfer amounts; • New originated or purchased gives us information regarding gross loans issued and corresponding credit loss allowance created during the period (however, exposures which were issued and repaid during the period and issued to reﬁnance existing loans are excluded); • Derecognised during the period refers to the balance of loans and credit loss allowance at the beginning of the period, which were repaid during the period. Exposures which were issued and repaid during the period, written off or reﬁnanced by other loans, are excluded; • Net repayments refers to the net changes in gross carrying amounts, which is loan disbursements less repay- ments; • Write-offs refer to write off of loans during the period; • Foreign exchange movements refers to the translation of assets denominated in foreign currencies and effect to translation in presentational currency for foreign subsidiary; • Net re-measurement due to stage transfers and risk parameters changes refers to the movements in ECL as a result of transfer of exposure between stages or changes in risk parameters and forward looking expectations; 254 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED • Re-segmentation refers to the transfer of loans from one reporting segment to another. For presentation purpos- es, amounts are rounded to the nearest thousands of GEL, which in certain cases is disclosed as nil. In 2021, the Group has reassessed its deﬁnition of segments as disclosed in Note 29. Wealth Management business with high net worth individuals has been transferred from retail to corporate segment and space segment has been fully transferred from MSME to retail segment due to changes in segment deﬁnitions. Other transfers between seg- ments were primarily due to changes in client size and speciﬁcations compared to prior period. All tables with comparatives below are prepared by the segmentation that was relevant during each prior year. Gross carrying amount Credit loss allowance Total loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 11,860,559 2,448,126 891,835 15,200,520 130,228 142,915 333,103 606,246 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (1,737,251) 2,102,702 (365,451) - (66,517) 163,161 (96,644) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (367,693) (262,234) 629,927 - (84,339) (39,902) 124,241 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 1,950,513 (1,780,706) (169,807) - 143,565 (93,518) (50,047) - New originated or purchased 7,471,638 - - 7,471,638 118,272 - - 118,272 Derecognised during the period (2,161,851) (162,437) (192,679) (2,516,967) 22,759 (16,651) (50,522) (44,414) Net repayments (1,818,506) (268,428) (66,236) (2,153,170) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments 1 - - - - (158,517) (33,483) 122,661 (69,339) Movements without impact on credit loss allowance charge for the period: Write-offs - - (193,678) (193,678) - - (193,678) (193,678) Changes in accrued interest 11,271 (3,229) 1,870 9,912 - - - - Modiﬁcation 5,346 1,930 2,466 9,742 - - - - Foreign exchange movements (611,624) (140,354) (28,628) (780,606) (1,393) (1,690) (3,758) (6,841) At 31 December 2021 14,602,402 1,935,370 509,619 17,047,391 104,058 120,832 185,356 410,246 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED 255 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 Movements with impact on credit loss allowance charge for the period differs from statement of profit or loss with amount of recoveries GEL 44,642 thousands in 2021 (2020: GEL 21,136 thousands, 2019: GEL 33,801 thousands) The amount of recoveries include recoveries from sale of written off portfolio in the amount of GEL 11.6 million sold In August 2021. 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Total loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 11,551,934 757,094 352,927 12,661,955 95,689 82,687 134,180 312,556 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (1,834,720) 1,871,883 (37,163) – (10,824) 23,099 (12,275) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (456,349) (195,488) 651,837 – (53,436) (27,314) 80,750 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 116,479 (115,394) (1,085) – 15,269 (14,677) (592) – New originated or purchased 3,361,543 – – 3,361,543 110,226 – – 110,226 Derecognised during the period (922,671) (83,851) (23,487) (1,030,009) 12,225 789 (13,151) (137) Net repayments (982,755) (60,770) (42,984) (1,086,509) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (45,959) 70,894 186,167 211,102 Movements without impact on credit loss allowance charge for the period: Write-offs – – (66,028) (66,028) – – (66,028) (66,028) Foreign exchange movements 1,042,872 280,445 59,792 1,383,109 7,038 7,437 24,052 38,527 Modiﬁcations (15,774) (5,793) (1,974) (23,541) – – – – At 31 December 2020 11,860,559 2,448,126 891,835 15,200,520 130,228 142,915 333,103 606,246 256 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Total loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 9,226,512 791,969 354,101 10,372,582 96,812 95,784 141,534 334,130 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (646,985) 682,879 (35,894) – (22,811) 34,649 (11,838) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (151,728) (138,204) 289,932 – (11,259) (24,668) 35,927 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 269,543 (264,141) (5,402) – 28,411 (26,682) (1,729) – New originated or purchased 4,403,046 – – 4,403,046 72,517 – – 72,517 Derecognised during the period (535,371) (165,034) (183,020) (883,425) (1,331) (16,526) (23,859) (41,716) Net repayments (1,293,956) (177,292) 56,480 (1,414,768) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (67,845) 19,033 128,776 79,964 Movements without impact on credit loss allowance charge for the period: Write-offs – – (140,161) (140,161) – – (140,161) (140,161) Foreign exchange movements 280,873 26,917 16,891 324,681 1,195 1,097 5,530 7,822 At 31 December 2019 11,551,934 757,094 352,927 12,661,955 95,689 82,687 134,180 312,556 257 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 4,574,134 955,187 161,428 5,690,749 53,995 8,194 45,452 107,641 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (260,069) 331,488 (71,419) - (6,701) 12,127 (5,426) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (93,919) (25,017) 118,936 - (30,508) (391) 30,899 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 461,963 (405,275) (56,688) - 27,590 (8,265) (19,325) - New originated or purchased 2,604,204 - - 2,604,204 39,357 - - 39,357 Derecognised during the period (1,034,926) (10,074) (35,273) (1,080,273) (3,172) 102 (16,258) (19,328) Net repayments (414,977) (82,387) (32,038) (529,402) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (55,960) (10,378) (12,081) (78,419) Movements without impact on credit loss allowance charge for the period: Re-segmentation 213,296 29,590 6,401 249,287 476 314 2,897 3,687 Write-offs - - (340) (340) - - (340) (340) Changes in accrued interest 1,988 (3,035) 3,917 2,870 - - - - Modiﬁcation 719 608 996 2,323 - - - - Foreign Exchange movements (308,969) (78,537) (4,171) (391,677) (673) (393) (801) (1,867) At 31 December 2021 5,743,444 712,548 91,749 6,547,741 24,404 1,310 25,017 50,731 258 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 4,434,685 104,409 121,379 4,660,473 39,153 1,969 39,628 80,750 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (750,779) 750,779 – – (7,395) 7,395 – – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (57,281) (14,021) 71,302 – (1,394) (1,307) 2,701 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 20,142 (20,142) – – 227 (227) – – New originated or purchased 854,821 – – 854,821 14,830 – – 14,830 Derecognised during the period (285,949) (20,839) (7,919) (314,707) (3,328) (1,915) (3,800) (9,043) Net repayments (145,390) 16,644 (32,056) (160,802) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – 6,388 1,006 1,974 9,368 Movements without impact on credit loss allowance charge for the period: Re-segmentation 21,785 – – 21,785 76 – – 76 Write-offs – – (5,380) (5,380) – – (5,380) (5,380) Modiﬁcations (2,541) (1,758) (864) (5,163) – – – – Foreign exchange movements 484,641 140,115 14,966 639,722 5,438 1,273 10,329 17,040 At 31 December 2020 4,574,134 955,187 161,428 5,690,749 53,995 8,194 45,452 107,641 259 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,903,313 138,715 135,261 3,177,289 32,940 4,994 43,571 81,505 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (126,154) 137,126 (10,972) – (2,876) 5,184 (2,308) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (27,531) (5,261) 32,792 – (2,914) (192) 3,106 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 72,484 (71,151) (1,333) – 2,806 (2,806) – – New originated or purchased 1,638,709 – – 1,638,709 25,355 – – 25,355 Derecognised during the period 1,988 (31,192) (13,862) (43,066) (2,544) (1,064) (9,094) (12,702) Net repayments (186,958) (70,285) (27,812) (285,055) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (14,698) (4,398) 1,621 (17,475) Movements without impact on credit loss allowance charge for the period: Re-segmentation 55,356 711 – 56,067 176 76 – 252 Write-offs – – – – – – - - Foreign exchange movements 103,478 5,746 7,305 116,529 908 175 2,732 3,815 At 31 December 2019 4,434,685 104,409 121,379 4,660,473 39,153 1,969 39,628 80,750 260 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 2,661,786 631,347 262,951 3,556,084 24,490 46,853 88,567 159,910 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (466,965) 534,711 (67,746) - (10,917) 29,516 (18,599) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (71,234) (94,868) 166,102 - (14,450) (10,455) 24,905 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 570,554 (537,576) (32,978) - 36,444 (28,030) (8,414) - New originated or purchased 2,023,430 - - 2,023,430 16,667 - - 16,667 Derecognised during the period (522,685) (44,334) (33,607) (600,626) (688) (1,613) (11,988) (14,289) Net repayments (475,809) (61,832) (30,299) (567,940) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (26,678) (3,534) 32,293 2,081 Movements without impact on credit loss allowance charge for the period: Re-segmentation (80,868) 6,542 (4,803) (79,129) (3,824) 78 (4,898) (8,644) Write-offs - - (40,086) (40,086) - - (40,086) (40,086) Changes in accrued interest 14,130 1,126 1,449 16,705 - - - - Modiﬁcations 1,208 369 424 2,001 - - - - Foreign exchange movements (133,705) (22,146) (13,283) (169,134) (557) (581) (1,400) (2,538) At 31 December 2021 3,519,842 413,339 208,124 4,141,305 20,487 32,234 60,380 113,101 261 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 2,650,261 204,699 93,319 2,948,279 18,341 18,593 29,211 66,145 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (539,299) 546,322 (7,023) – (6,860) 8,580 (1,720) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (103,564) (83,981) 187,545 – (8,258) (9,097) 17,355 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 31,201 (30,770) (431) – 3,130 (2,954) (176) – New originated or purchased 1,033,189 – – 1,033,189 23,407 – – 23,407 Derecognised during the period (303,253) (33,879) (5,525) (342,657) (1,314) (157) (1,759) (3,230) Net repayments (290,204) (26,683) (11,097) (327,984) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (5,102) 29,155 55,752 79,805 Movements without impact on credit loss allowance charge for the period: Re-segmentation (22,888) – – (22,888) (76) – – (76) Write-offs – – (15,696) (15,696) – – (15,696) (15,696) Foreign exchange movements 209,565 57,071 22,183 288,819 1,222 2,733 5,600 9,555 Modiﬁcations (3,222) (1,432) (324) (4,978) – – – – At 31 December 2020 2,661,786 631,347 262,951 3,556,084 24,490 46,853 88,567 159,910 262 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,210,617 193,157 92,820 2,496,594 19,273 22,379 29,362 71,014 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (181,576) 186,581 (5,005) – (3,097) 5,142 (2,045) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (51,354) (42,338) 93,692 – (2,568) (6,711) 9,279 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 49,093 (48,292) (801) – 6,191 (5,872) (319) – New originated or purchased 1,312,100 – – 1,312,100 11,981 – – 11,981 Derecognised during the period (354,274) (47,777) (48,874) (450,925) (2,356) (2,582) (6,102) (11,040) Net repayments (333,112) (42,333) (14,348) (389,793) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (11,134) 6,047 26,965 21,878 Movements without impact on credit loss allowance charge for the period: Re-segmentation (55,356) (786) – (56,142) (176) (78) – (254) Write-offs – – (28,963) (28,963) – – (28,963) (28,963) Foreign exchange movements 54,123 6,487 4,798 65,408 227 268 1,034 1,529 At 31 December 2019 2,650,261 204,699 93,319 2,948,279 18,341 18,593 29,211 66,145 263 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 1,556,559 267,296 187,730 2,011,585 48,372 66,352 127,101 241,825 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (407,063) 471,869 (64,806) - (46,449) 83,450 (37,001) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (108,020) (99,591) 207,611 - (22,882) (25,955) 48,837 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 319,163 (287,805) (31,358) - 57,187 (45,306) (11,881) - New originated or purchased 1,513,078 - - 1,513,078 60,443 - - 60,443 Derecognised during the period (408,992) (55,937) (87,562) (552,491) 23,943 (14,452) (11,487) (1,996) Net repayments (500,500) (54,128) 29,507 (525,121) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (67,672) 541 94,612 27,481 Movements without impact on credit loss allowance charge for the period: Re-segmentation (30,782) 491 2,390 (27,901) 3,400 348 2,861 6,609 Write-offs - - (151,635) (151,635) - - (151,635) (151,635) Changes in accrued interest (1,447) (1,248) (4,446) (7,141) - - - - Modiﬁcation 2,098 437 828 3,363 - - - - Foreign exchange movements (13,949) (2,144) (1,740) (17,833) 23 230 (52) 201 At 31 December 2021 1,920,145 239,240 86,519 2,245,904 56,365 65,208 61,355 182,928 264 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 1,593,262 216,817 73,927 1,884,006 36,724 52,439 44,793 133,956 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (165,248) 178,014 (12,766) – (3,846) 9,861 (6,015) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (114,928) (58,650) 173,578 – (24,678) (14,790) 39,468 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 40,086 (39,544) (542) – 11,333 (10,945) (388) – New originated or purchased 669,973 – – 669,973 62,912 – – 62,912 Derecognised during the period (219,243) (14,197) (9,175) (242,615) 11,426 220 (4,949) 6,697 Net repayments (287,650) (19,815) 3,789 (303,676) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (45,618) 29,130 96,489 80,001 Movements without impact on credit loss allowance charge for the period: Re-segmentation 831 – – 831 – – – – Write-offs – – (44,356) (44,356) – – (44,356) (44,356) Foreign exchange movements 45,457 6,440 4,033 55,930 119 437 2,059 2,615 Modiﬁcations (5,981) (1,769) (758) (8,508) – – – – At 31 December 2020 1,556,559 267,296 187,730 2,011,585 48,372 66,352 127,101 241,825 265 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 1,641,978 265,687 81,851 1,989,516 42,903 59,245 54,575 156,723 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (166,459) 176,428 (9,969) – (16,454) 21,029 (4,575) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (60,362) (67,012) 127,374 – (5,682) (16,168) 21,850 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 81,453 (80,023) (1,430) – 16,851 (16,013) (838) – New originated or purchased 641,207 – – 641,207 34,363 – – 34,363 Derecognised during the period (101,437) (39,416) (125,004) (265,857) 3,706 (11,085) (7,972) (15,351) Net repayments (460,554) (42,061) 109,208 (393,407) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (38,995) 15,212 91,149 67,366 Movements without impact on credit loss allowance charge for the period: Re-segmentation 2,583 1,092 572 4,247 15 97 184 296 Write-offs – – (110,243) (110,243) – – (110,243) (110,243) Foreign exchange movements 14,853 2,122 1,568 18,543 17 122 663 802 At 31 December 2019 1,593,262 216,817 73,927 1,884,006 36,724 52,439 44,793 133,956 266 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 3,068,080 594,296 279,726 3,942,102 3,371 21,516 71,983 96,870 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (603,154) 764,634 (161,480) - (2,450) 38,068 (35,618) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (94,520) (42,758) 137,278 - (16,499) (3,101) 19,600 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 598,833 (550,050) (48,783) - 22,344 (11,917) (10,427) - New originated or purchased 1,330,926 - - 1,330,926 1,805 - - 1,805 Derecognised during the period (195,248) (52,092) (36,237) (283,577) 2,676 (688) (10,789) (8,801) Net repayments (427,220) (70,081) (33,406) (530,707) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (8,207) (20,112) 7,837 (20,482) Movements without impact on credit loss allowance charge for the period: Re-segmentation (101,646) (36,623) (3,988) (142,257) (52) (740) (860) (1,652) Write-offs - - (1,617) (1,617) - - (1,617) (1,617) Changes in accrued interest (3,400) (72) 950 (2,522) - - - - Modiﬁcation 1,321 516 218 2,055 - - - - Foreign exchange movements (155,001) (37,527) (9,434) (201,962) (186) (946) (1,505) (2,637) At 31 December 2021 3,418,971 570,243 123,227 4,112,441 2,802 22,080 38,604 63,486 267 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 2,873,726 231,169 64,302 3,169,197 1,471 9,686 20,548 31,705 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (379,394) 396,768 (17,374) – 7,277 (2,737) (4,540) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (180,576) (38,836) 219,412 – (19,106) (2,120) 21,226 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 25,050 (24,938) (112) – 579 (551) (28) – New originated or purchased 803,560 – – 803,560 9,077 – – 9,077 Derecognised during the period (114,226) (14,936) (868) (130,030) 5,441 2,641 (2,643) 5,439 Net repayments (259,511) (30,916) (3,620) (294,047) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (1,627) 11,603 31,952 41,928 Movements without impact on credit loss allowance charge for the period: Re-segmentation 272 – – 272 – – – – Write-offs – – (596) (596) – – (596) (596) Foreign exchange movements 303,209 76,819 18,610 398,638 259 2,994 6,064 9,317 Modiﬁcations (4,030) (834) (28) (4,892) – – – – At 31 December 2020 3,068,080 594,296 279,726 3,942,102 3,371 21,516 71,983 96,870 268 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,470,604 194,410 44,169 2,709,183 1,696 9,166 14,026 24,888 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (172,796) 182,744 (9,948) – (384) 3,294 (2,910) – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (12,481) (23,593) 36,074 – (95) (1,597) 1,692 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 66,513 (64,675) (1,838) – 2,563 (1,991) (572) – New originated or purchased 811,030 – – 811,030 818 – – 818 Derecognised during the period (81,648) (46,649) 4,720 (123,577) (137) (1,795) (691) (2,623) Net repayments (313,332) (22,613) (10,568) (346,513) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (3,018) 2,172 9,041 8,195 Movements without impact on credit loss allowance charge for the period: Re-segmentation (2,583) (1,017) (572) (4,172) (15) (95) (184) (294) Write-offs – – (955) (955) – – (955) (955) Foreign exchange movements 108,419 12,562 3,220 124,201 43 532 1,101 1,676 At 31 December 2019 2,873,726 231,169 64,302 3,169,197 1,471 9,686 20,548 31,705 269 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED 31 December 2021 in thousands of GEL Stage 1 (12months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Corporate loans risk category – Very low 5,491,018 4,275 – 5,495,293 – Low 246,591 598,209 – 844,800 – Moderate 5,835 110,064 – 115,899 – Default – – 91,749 91,749 Gross carrying amount 5,743,444 712,548 91,749 6,547,741 Credit loss allowance (24,404) (1,310) (25,017) (50,731) Carrying amount 5,719,040 711,238 66,732 6,497,010 Consumer loans risk category – Very low 1,270,400 16,310 – 1,286,710 – Low 542,853 57,392 – 600,245 – Moderate 106,892 138,339 – 245,231 – High – 27,199 – 27,199 – Default – – 86,519 86,519 Gross carrying amount 1,920,145 239,240 86,519 2,245,904 Credit loss allowance (56,365) (65,208) (61,355) (182,928) Carrying amount 1,863,780 174,032 25,164 2,062,976 Mortgage loans risk category – Very low 3,069,543 78,659 – 3,148,202 – Low 328,538 353,765 – 682,303 – Moderate 20,890 122,855 – 143,745 – High – 14,964 – 14,964 – Default – – 123,227 123,227 Gross carrying amount 3,418,971 570,243 123,227 4,112,441 Credit loss allowance (2,802) (22,080) (38,604) (63,486) Carrying amount 3,416,169 548,163 84,623 4,048,955 Loans to MSME risk category – Very low 2,836,336 41,741 – 2,878,077 – Low 673,872 250,173 – 924,045 – Moderate 9,634 86,859 – 96,493 – High – 34,566 – 34,566 – Default – – 208,124 208,124 Gross carrying amount 3,519,842 413,339 208,124 4,141,305 Credit loss allowance (20,487) (32,234) (60,380) (113,101) Carrying amount 3,499,355 381,105 147,744 4,028,204 The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2021: 270 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED 31 December 2020 in thousands of GEL Stage 1 (12months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Corporate loans risk category – Very low 4,324,191 6,178 – 4,330,369 – Low 248,246 913,832 – 1,162,078 – Moderate 1,697 35,177 – 36,874 – Default – – 161,428 161,428 Gross carrying amount 4,574,134 955,187 161,428 5,690,749 Credit loss allowance (53,995) (8,194) (45,452) (107,641) Carrying amount 4,520,139 946,993 115,976 5,583,108 Consumer loans risk category – Very low 1,010,723 20,041 – 1,030,764 – Low 453,899 64,950 – 518,849 – Moderate 91,937 159,726 – 251,663 – High – 22,579 – 22,579 – Default – – 187,730 187,730 Gross carrying amount 1,556,559 267,296 187,730 2,011,585 Credit loss allowance (48,372) (66,352) (127,101) (241,825) Carrying amount 1,508,187 200,944 60,629 1,769,760 Mortgage loans risk category – Very low 2,852,661 97,936 – 2,950,597 – Low 186,597 334,579 – 521,176 – Moderate 28,822 154,372 – 183,194 – High – 7,409 – 7,409 – Default – – 279,726 279,726 Gross carrying amount 3,068,080 594,296 279,726 3,942,102 Credit loss allowance (3,371) (21,516) (71,983) (96,870) Carrying amount 3,064,709 572,780 207,743 3,845,232 Loans to MSME risk category – Very low 2,252,448 145,445 – 2,397,893 – Low 395,733 348,147 – 743,880 – Moderate 13,605 121,925 – 135,530 – High – 15,830 – 15,830 – Default – – 262,951 262,951 Gross carrying amount 2,661,786 631,347 262,951 3,556,084 Credit loss allowance (24,490) (46,853) (88,567) (159,910) Carrying amount 2,637,296 584,494 174,384 3,396,174 The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2020: 271 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2019: 31 December 2019 in thousands of GEL Stage 1 (12months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Corporate loans risk category – Very low 4,094,403 7,882 – 4,102,285 – Low 339,960 75,872 – 415,832 – Moderate 322 19,827 – 20,149 – High – 828 – 828 – Default – – 121,379 121,379 Gross carrying amount 4,434,685 104,409 121,379 4,660,473 Credit loss allowance (39,153) (1,969) (39,628) (80,750) Carrying amount 4,395,532 102,440 81,751 4,579,723 Consumer loans risk category – Very low 1,107,490 5,436 – 1,112,926 – Low 330,361 17,620 – 347,981 – Moderate 155,411 176,815 – 332,226 – High – 16,946 – 16,946 – Default – – 73,927 73,927 Gross carrying amount 1,593,262 216,817 73,927 1,884,006 Credit loss allowance (36,724) (52,439) (44,793) (133,956) Carrying amount 1,556,538 164,378 29,134 1,750,050 Mortgage loans risk category – Very low 2,668,691 17,970 – 2,686,661 – Low 182,049 80,289 – 262,338 – Moderate 22,986 121,743 – 144,729 – High – 11,167 – 11,167 – Default – – 64,302 64,302 Gross carrying amount 2,873,726 231,169 64,302 3,169,197 Credit loss allowance (1,471) (9,686) (20,548) (31,705) Carrying amount 2,872,255 221,483 43,754 3,137,492 Loans to MSME risk category – Very low 2,223,262 23,114 – 2,246,376 – Low 407,106 87,244 – 494,350 – Moderate 19,893 80,947 – 100,840 – High – 13,394 – 13,394 – Default – – 93,319 93,319 Gross carrying amount 2,650,261 204,699 93,319 2,948,279 Credit loss allowance (18,341) (18,593) (29,211) (66,145) Carrying amount 2,631,920 186,106 64,108 2,882,134 272 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The contractual amounts outstanding on loans to customers that have been written off partially or fully, but are still subject to enforcement activity was principal amount GEL 19,238 thousand (31 December 2020: GEL 47,933 thousand; 31 December 2019: 109,719 Thousand GEL), accrued interest GEL 4,963 thousand (31 December 2020: GEL 10,584 thousand; 31 December 2019: GEL 27,998 thousand) and accrued off balance sheet penalty GEL 115,371 thousand (31 December 2020: GEL 135,418 thousand; 31 December 2019: GEL 113,855 thousand). Economic sector risk concentrations within the customer loan portfolio are as follows: As of 31 December 2021 the Group had 188 borrowers (2020: 157 borrowers; 2019: 125 borrowers) with aggregated gross loan amounts above GEL 10,000 thousand. The total aggregated amount of these loans was GEL 5,017,758 thousand (2020: GEL 4,562,506 thousand; 2019: GEL 3,669,817 thousand) or 29.4% of the gross loan portfolio (2020: 30.0%; 2019: 29.0%). The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. There are three key types of collateral: • Real estate; • Movable property including ﬁxed assets, inventory and precious metals; • Financial assets including deposits, shares, and third party guarantees. The ﬁnancial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets’ carrying value (“over-collateralised as- sets”) and (ii) those assets where collateral and other credit enhancements are less than the assets’ carrying value (“under-collateralised assets”). 2021 2020 2019 in thousands of GEL Amount % Amount % Amount % Individual 6,500,009 38% 5,948,346 39% 5,046,804 40% Real Estate 1,591,277 9% 1,460,821 10% 1,076,102 8% Hospitality,Restaurants & Leisure 1,350,184 8% 1,368,887 9% 988,467 8% Energy & Utilities 1,095,387 7% 1,078,504 7% 1,089,643 9% Construction 1,041,416 6% 667,904 4% 576,923 5% Food Industry 994,780 6% 898,597 6% 785,539 6% Trade 860,286 5% 708,559 5% 616,475 5% Agriculture 838,719 5% 642,024 4% 498,783 4% Healthcare 406,608 2% 369,645 2% 305,152 2% Services 348,738 2% 268,982 2% 212,661 2% Automotive 309,043 2% 263,276 2% 183,912 1% Transportation 224,066 1% 159,857 1% 134,223 1% Pawn Shops 159,851 1% 168,571 1% 203,633 2% Financial Services 112,937 1% 78,923 1% 96,430 1% Metals and Mining 43,132 0% 229,368 2% 99,321 1% Communication 41,191 0% 46,406 0% 43,329 0% Other 1,129,767 7% 841,850 5% 704,558 5% Total gross loans and advances to customers 17,047,391 100% 15,200,520 100% 12,661,955 100% 273 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The effect of collateral as at 31 December 2021: 31 December 2021 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Corporate loans 3,929,725 8,578,057 2,618,016 878,667 Consumer loans 648,355 3,117,799 1,597,549 23,910 Mortgage loans 3,672,323 9,877,124 440,118 156,248 Loans to micro, small and mediumenterprises 3,098,087 7,035,782 1,043,218 419,978 Total 11,348,490 28,608,762 5,698,901 1,478,803 31 December 2020 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Corporate loans 4,603,143 9,630,768 1,087,606 477,701 Consumer loans 869,317 2,231,778 1,142,268 20,474 Mortgage loans 3,703,164 7,915,172 238,938 158,292 Loans to micro, small and medium enterprises 3,114,829 7,102,534 441,255 157,047 Total 12,290,453 26,880,252 2,910,067 813,514 31 December 2019 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Corporate loans 3,682,456 8,481,849 978,017 310,419 Consumer loans 950,847 2,232,728 933,159 37,658 Mortgage loans 2,949,426 6,171,802 219,771 107,183 Loans to micro, small and medium enterprises 2,579,002 5,983,285 369,277 164,979 Total 10,161,731 22,869,664 2,500,224 620,239 The effect of collateral as at 31 December 2020: The effect of collateral as at 31 December 2019: As at 31 December 2021 loans and advances to customers which were 1, over-collateralised and 2. credit loss allow- ance was 0, amounted to GEL 1,576,220 thousand (2020: GEL 1,694,328 thousand, 2019: GEL 965,978 thousand). 274 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The effect of collateral by classes as at 31 December 2021 1 : 31 December 2021 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Cash Cover 271,396 310,681 207,788 147,871 Gold 91,525 115,404 15,917 15,657 Inventory 331,047 1,313,628 253,934 138,523 Real Estate 10,654,522 26,869,049 1,861,299 1,176,752 Unsecured and secured solely by third party guarantees - - 3,359,963 - Total 11,348,490 28,608,762 5,698,901 1,478,803 31 December 2020 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Cash Cover 332,438 358,847 12,937 39,109 Gold 115,139 158,008 37,856 37,946 Inventory 753,658 2,149,849 24,536 24,498 Other 137,749 849,249 7,960 20,313 Real Estate 10,697,040 23,217,956 428,092 395,398 Unsecured and secured solely by third party guarantees 254,429 146,343 2,398,686 296,250 Total 12,290,453 26,880,252 2,910,067 813,514 31 December 2019 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral Cash Cover 309,228 333,329 25,299 35,507 Gold 140,627 174,531 49,118 66,943 Inventory 794,209 2,221,293 33,916 33,740 Other 146,762 1,256,843 8,558 11,361 Real Estate 8,435,227 18,547,991 225,511 212,902 Unsecured and secured solely by third party guarantees 335,678 335,677 2,157,822 259,786 Total 10,161,731 22,869,664 2,500,224 620,239 The effect of collateral by classes as at 31 December 2020: The effect of collateral by classes as at 31 December 2019: 275 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 1 In 2020 and 2019 annual financial statements third party guarantees and unsecured loans were separately presented. 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The ﬁnancial effect of collateral is determined by comparing the fair value of collateral to outstanding gross loans and advances in the reporting date. Stage 3 loans presented by segments and collateral classes as at 31 December 2021 are the following: 31 December 2021 in thousands of GEL Corporate Consumer Mortgage Loans to micro, small and medium enterprises Cash Cover 19 6 13 267 Gold - - - 294 Inventory 8,359 - - 527 Real Estate 62,463 32,281 117,443 189,533 Unsecured and secured solely by third party guarantees 20,908 54,232 5,771 17,503 Total 91,749 86,519 123,227 208,124 31 December 2020 in thousands of GEL Corporate Consumer Mortgage Loans to micro, small and medium enterprises Cash Cover 21 36 38 47 Gold - 1,717 - 430 Inventory 15,991 8,909 185 4,250 Other - - - 54 Real Estate 97,824 65,645 273,577 231,925 Unsecured and secured solely by third party guarantees 47,592 111,423 5,926 26,245 Total 161,428 187,730 279,726 262,951 31 December 2019 in thousands of GEL Corporate Consumer Mortgage Loans to micro, small and medium enterprises Cash Cover 18 89 78 724 Gold - 1,289 - 400 Inventory 9,675 4,819 13 1,702 Other 1,245 - - 50 Real Estate 92,652 29,084 61,918 82,511 Unsecured and secured solely by third party guarantees 17,789 38,646 2,293 7,932 Total 121,379 73,927 64,302 93,319 Stage 3 loans presented by segments and collateral classes as at 31 December 2020 are the following: Stage 3 loans presented by segments and collateral classes as at 31 December 2019 are the following: 276 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The gross carrying amount of loans by stages that have been modiﬁed since initial recognition at a time when the loss allowance was measured at an amount equal to lifetime expected credit losses and for which the loss allowance has changed during the reporting period to an amount equal to 12-month expected credit losses loans are the following: At the central level a speciﬁc unit manages collateral to ensure that they serve as an adequate mitigation for credit risk management purposes. In line with the Group’s internal policies, collateral provided to loans are evaluated by the Internal Appraisal Group (external reviewers are used in case of loans to related parties or speciﬁc cases when complex objects are appraised). The Internal Appraisal Group is part of the collateral management unit and, in order to ensure adequate and objective appraisal procedures, it is independent from the loan granting process. Real estate collateral of signiﬁcant value is re-evaluated annually by internal appraisers. Statistical methods are used to monitor the value of real estate collateral that are of non-signiﬁcant value and other types of collateral such as movable assets and precious metals. In some instances, where the discounted recovery from the liquidation of collateral (adjusted for the liquidity haircut and discounted for the period of expected workout time) is larger than the estimated exposure at default, no credit loss allowance is recognised. Collateral values include the contractual price of third-party guarantees, which, due to their nature, are capped at the loan’s carrying value. The values of third-party guarantees in the tables above amount- ed to GEL 857,891 thousand, GEL 564,701 thousand and GEL 595,464 thousand as of 31 December 2021, 2020 and 2019, respectively. These third-party guarantees are not taken into consideration when assessing the impairment allowance. Refer to Note 44 for the estimated fair value of each class of loans and advances to customers. Interest rate analysis of loans and advances to customers is disclosed in Note 39. Information on related party balances is disclosed in Note 46. For the year ended 31 December 2021 amortised cost of loans with lifetime ECL immediately before contractual mod- iﬁcation that was not a derecognition event was GEL 2,110,117 thousand (31 December 2020: GEL 2,805,274 thousand; 31 December 2019: GEL 520,916 thousand). During 2021, gains less losses recognised in proﬁt or loss on modiﬁcations of loans with lifetime ECL that did not lead to derecognition was GEL 205 thousand (2020: GEL 10,411 thousand, 2019: GEL 978 thousand). For the year ended 31 December 2021 gross carrying amount of loans that were contractually modiﬁed (without derecognition) in the past when measured at lifetime ECL and which were reclassiﬁed to Stage 1 (12 months ECL) during the current year was GEL 994,526 thousand (31 December 2020: GEL 2,219,539 thousand; 31 December 2019: GEL 384,174 thousand). in thousands of GEL 2021 2020 2019 Stage 1 487,742 737,197 119,637 Stage 2 431,160 1,602,759 82,754 Stage 3 50,792 293,205 25,513 Total 969,694 2,633,161 227,904 277 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL 2021 2020 2019 Corporate bonds 707,253 666,133 611,694 Ministry of Finance of Georgia treasury bills 1,231,024 839,839 330,096 Ministry of Finance of Uzbekistan treasury bills 1,683 1,951 1,596 Certiﬁcates of deposit of the National Bank of Georgia - 21,687 40,346 Less: credit loss allowance by stages (2,818) (3,258) (1,438) Stage 1 (2,818) (3,258) (1,438) Stage 2 - - - Stage 3 - - - Total investment securities measured at fair value through other comprehensive income before corporate shares 1,937,142 1,526,352 982,294 Corporate shares – unquoted 1,054 916 2,999 Total investment securities measured at fair value through other comprehensive income 1,938,196 1,527,268 985,293 in thousands of GEL Nature of business Country of registration 2021 2020 2019 GRDC Property development Netherlands Antilles 365 365 365 Georgian Stock Exchange Stock exchange Georgia – – 2,111 Other Various Various 689 551 523 Total corporate shares 1,054 916 2,999 10. INVESTMENT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME All debt securities in 2021, 2020 and 2019 except for corporate bonds and Uzbekistan treasury bills are issued by the Government of Georgia and National Bank of Georgia. Country rating for Georgia stands at BB with stable outlook (as assigned by Fitch rating agency in August 2021). Latest country rating for Uzbekistan stands at BB-. 70.2% of corporate bonds are issued by triple A rated international ﬁnancial institutions, 0.4% of corporate bonds are issued by BB- rated international ﬁnancial institutions, 13.2% of corporate bond are issued at B+ rating, 15.0% of corporate bonds are issued by B and 1.2% by B- rated corporations. The investees have not published recent ﬁnancial information about their operations, their shares are not quoted and recent trade prices are not publicly accessible. The Group designated investments in corporate shares disclosed in the above table as equity securities at FVOCI. The FVOCI designation was made because the investments are expected to be held for strategic purposes rather than with a view to proﬁt on a subsequent sale, and there are no plans to dispose of these investments in the short or medium term. As at 31 December 2021 investment securities measured at fair value through other comprehensive income carried at GEL 383,790 thousand have been pledged with local banks or ﬁnancial institutions as a collateral with respect to other borrowed funds (2020: GEL 699,483 thousand; 2019: GEL 696,961 thousand). Refer to Note 19. As at 31 December 2021 the principal equity investment securities measured at fair value through other comprehen- sive income are as follows: 278 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The movements in investment securities measured at fair value through other comprehensive income are as follows: All debt securities except for corporate bonds are issued National Bank of Uzbekistan as at 31 December 2021. Latest country rating for Uzbekistan stands at BB-. in thousands of GEL 2021 2020 2019 Ministry of Finance of Georgia treasury bills - 1,062,110 1,023,459 Uzbekistan Government notes - 19,335 – Certiﬁcates of deposit of National Bank of Uzbekistan 48,045 9,405 – Corporate bonds 1,537 1,118 1,131 Total gross amount of bonds carried at amortised cost 49,582 1,091,968 1,024,590 Less: credit loss allowance by stages - (2,167) (1,906) Stage 1 - (2,167) (1,906) Stage 2 - – – Stage 3 - – – Total bonds carried at amortised cost 49,582 1,089,801 1,022,684 in thousands of GEL 2021 2020 2019 Carrying amount as of 31 December 2020 1,527,268 - - Transfer from investment securities measured at amortised cost due to changes in business model 1 1,059,946 - - Revaluation at transfer date 26,062 - - Carrying amount as of 1 January 2,613,276 985,293 1,005,239 Purchases 797,285 763,530 1,781,817 Disposals (1,025,775) (92,103) (213,362) Redemption at maturity (412,204) (165,632) (1,598,534) Revaluation (45,696) 17,633 (15,156) Interest income accrued 185,424 103,516 74,043 Interest income received (169,068) (93,493) (58,539) Effect of translation to presentation currency (5,486) 11,825 10,087 Transfer to investment in associate - (1,481) – Changes in credit loss allowance 440 (1,820) (302) Carrying amount as of 31 December 1,938,196 1,527,268 985,293 10. INVESTMENT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME CONTINUED 11. BONDS CARRIED AT AMORTISED COST 279 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL 2021 2020 2019 Carrying amount as of 31 December 2020 1,089,801 - - Transfer from investment securities measured at amortised cost due to changes in business model (1,062,113) - - Movement in credit loss allowance due to changes in business model 1 2,167 - - Carrying amount at 1 January 29,855 1,022,684 654,203 Transfers to investment securities at FVOCI - (195,815) (27,241) Purchases 54,124 667,805 614,000 Redemption at maturity (32,906) (413,038) (216,667) Interest income accrual 2,224 97,122 58,682 Interest income received (2,073) (89,368) (59,316) Effect of translation to presentation currency (1,642) 672 14 Changes in credit loss allowance - (261) (991) Carrying amount as of 31 December 49,582 1,089,801 1,022,684 in thousands of GEL 2021 2020 2019 Derivative ﬁnancial assets 185,710 28,915 5,849 Receivables from sales of non-ﬁnancial assets 72,650 19,962 32,844 Receivables on credit card services and money transfers 62,881 25,227 21,895 Receivable on terminated leases 46,346 23,207 21,837 Insurance and reinsurance receivables 32,474 21,831 26,177 Advance to promotional service provider 17,681 15,766 14,055 Receivables from plastic card service providers 14,472 - - Investment held at fair value through proﬁt or loss 11,125 17,239 – Receivables on guarantees / letters of credit 9,766 1,943 1,695 Trade receivable 7,715 4,203 4,921 Leasing assets receivables 2,073 2,266 3,866 Rental income receivables 1,349 3,243 2,833 Other 40,680 48,528 28,633 Total gross amount of other ﬁnancial assets 504,922 212,330 164,605 Less: credit loss allowance (51,807) (41,028) (30,869) Total other ﬁnancial assets 453,115 171,302 133,736 11. BONDS CARRIED AT AMORTISED COST CONTINUED 12. OTHER FINANCIAL ASSETS For the disclosure of bonds’ fair value carried at amortised cost refer to Note 44. An analysis on interest rate for bonds carried at amortised cost is disclosed in Note 39. As at 31 December 2021 none of the bonds carried at amortised cost have been pledged to local banks or ﬁnancial institutions as collateral with respect to other borrowed funds (2020: GEL 843,303 thousand; 2019: GEL 579,142 thou- sand). Refer to Note 19. None of the bonds carried at amortised cost as at 31 December 2021, 2020 and 2019 were either overdue or defaulted. The movements in bonds carried at amortised cost are as follows: 1 Refer to note 2 for detailed explanation of changes in business model 280 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12. OTHER FINANCIAL ASSETS CONTINUED As at 31 December 2021, 2020 and 2019, presentation of other ﬁnancial assets gross carrying amount, except insur - ance and reinsurance receivables and credit loss allowance by IFRS 9 stages is as follows: Gross carrying amount Credit loss allowance Other ﬁnancial assets in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 172,709 635 17,155 190,499 28,860 – 12,168 41,028 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (2,913) 3,125 (212) - (1,609) 1,609 - - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (56,547) - 56,547 - (32,325) - 32,325 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 118 (10) (108) - - - - - New originated or purchased 278,550 - - 278,550 13,197 - - 13,197 Derecognised during the period (27,988) (196) (2,148) (30,332) (305) - (2,867) (3,172) Net repayments 31,838 306 3,135 35,279 - - - - Foreign exchange movements (646) (130) (772) (1,548) (31) (37) (3,470) (3,538) Changes to ECL measurement model assumptions - - - - (3,832) 134 7,990 4,292 At 31 December 2021 395,121 3,730 73,597 472,448 3,955 1,706 46,146 51,807 281 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Gross carrying amount Credit loss allowance Other ﬁnancial assets in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 121,889 25 16,514 138,428 18,207 6 12,656 30,869 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (751) 751 – – (1) 1 – – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (484) – 484 – (4) – 4 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 60 (10) (50) – 5 (4) (1) – New originated or purchased 141,297 – – 141,297 10,106 – – 10,106 Derecognised during the period (97,574) (6) (1,988) (99,568) (401) (1) (1,848) (2,250) Net repayments 7,747 (110) 1,936 9,573 – – – – Foreign exchange movements 525 (15) 259 769 103 – 153 256 Changes to ECL measurement model assumptions – – – – 845 (2) 1,204 2,047 At 31 December 2020 172,709 635 17,155 190,499 28,860 – 12,168 41,028 12. OTHER FINANCIAL ASSETS CONTINUED * Management has re-visited the logic for disclosing the movement between stages for 2020 and corrected any discrepancies identiﬁed. As a result, amounts disclosed in net repayments, foreign exchange movements and changes to ECL measurement model assumptions were amended to reflect more accurate results. 282 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Gross carrying amount Credit loss allowance Other ﬁnancial assets in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 126,785 74 47,302 174,161 13,144 14 14,936 28,094 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (21) 23 (2) – (4) 4 – – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (55) (15) 70 – (1) (15) 16 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 47 (47) – – 4 (4) – – New originated or purchased 106,839 – – 106,839 21,675 – – 21,675 Derecognised during the period (115,851) (11) (30,852) (146,714) (16,642) 13 (2,255) (18,884) Net repayments 4,022 – 355 4,377 – – – – Net Write-offs – – (1,489) (1,489) – – (1,489) (1,489) Foreign exchange movements 123 1 1,130 1,254 – – – – Changes to ECL measurement model assumptions – – – – 31 (6) 1,448 1,473 At 31 December 2019 121,889 25 16,514 138,428 18,207 6 12,656 30,869 12. OTHER FINANCIAL ASSETS CONTINUED The credit quality of Other Financial Assets is as follows at 31 December 2021: 31 December 2021 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Other Financial Assets risk category – Very low 394,744 - - 394,744 – Low 280 3,583 - 3,863 – Moderate 97 147 - 244 – Default - - 73,597 73,597 Gross carrying amount 395,121 3,730 73,597 472,448 Credit loss allowance (3,955) (1,706) (46,146) (51,807) Carrying amount 391,166 2,024 27,451 420,641 283 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 12. OTHER FINANCIAL ASSETS CONTINUED The credit quality of Other Financial Assets is as follows at 31 December 2020: The credit quality of Other Financial Assets is as follows at 31 December 2019: Impaired receivables include receivables on terminated leases and other receivables for which credit loss allowance was assessed individually. Receivable’s overdue status is a primary factor for the Group to consider a receivable as impaired. 31 December 2020 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Other Financial Assets risk category – Very low 172,362 – – 172,362 – Low 261 11 – 272 – Moderate 86 624 – 710 – Default – – 17,155 17,155 Gross carrying amount 172,709 635 17,155 190,499 Credit loss allowance (28,860) – (12,168) (41,028) Carrying amount 143,849 635 4,987 149,471 31 December 2019 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Other Financial Assets risk category – Very low 121,589 1 – 121,590 – Low 219 1 – 220 – Moderate 81 23 – 104 – Default – – 16,514 16,514 Gross carrying amount 121,889 25 16,514 138,428 Credit loss allowance (18,207) (6) (12,656) (30,869) Carrying amount 103,682 19 3,858 107,559 284 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 13. FINANCE LEASE RECEIVABLES As at 31 December 2021 ﬁnance lease receivables of GEL 262,046 thousand (2020: GEL 271,660 thousand; 2019: GEL 256,660 thousand) are represented by leases of ﬁxed assets excluding land and buildings. Finance lease payments receivable (gross investment in the leases) and their present values are as follows: The table below illustrates the movements in the credit loss allowance of ﬁnance lease receivables: For fair values refer to Note 44. in thousands of GEL Due in 1 year Due between 1 and 2 year Due between 2 and 3 year Due between 3 and 4 year Due between 4 and 5 year Due in 5 year or more Total Lease payments receivable at the end of 2021 141,346 101,270 55,545 28,065 11,848 6,868 344,942 Unearned ﬁnance income (34,834) (20,518) (9,778) (4,332) (1,460) (1,078) (72,000) Credit loss allowance (4,731) (3,224) (1,769) (699) (304) (169) (10,896) Present value of lease payments receivable as at 31 December 2021 101,781 77,528 43,998 23,034 10,084 5,621 262,046 Lease payments receivable at the end of 2020 134,310 102,136 65,085 31,307 13,922 7,662 354,422 Unearned ﬁnance income (32,917) (20,745) (10,904) (4,656) (1,712) (986) (71,920) Credit loss allowance (5,439) (1,829) (1,886) (928) (425) (335) (10,842) Present value of lease payments receivable as at 31 December 2020 95,954 79,562 52,295 25,723 11,785 6,341 271,660 Lease payments receivable at the end of 2019 147,959 97,959 55,978 25,236 9,333 4,637 341,102 Unearned ﬁnance income (41,969) (23,467) (10,470) (3,914) (1,089) (748) (81,657) Credit loss allowance (1,430) (492) (475) (222) (86) (80) (2,785) Present value of lease payments receivable as at 31 December 2019 104,560 74,000 45,033 21,100 8,158 3,809 256,660 in thousands of GEL 2021 2020 2019 Credit loss allowance at the beginning of the year 10,842 2,785 3,602 Amounts written off during the year as uncollectible (267) (341) (235) Credit loss allowance/(reversal of loss allowance) during the year 321 8,398 (582) Credit loss allowance at the end of the year 10,896 10,842 2,785 285 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Gross carrying amount Credit loss allowance in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 171,649 60,841 50,012 282,502 3,013 3,457 4,372 10,842 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (29,446) 31,607 (2,161) - (406) 419 (13) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (9,135) (2,629) 11,764 - (83) (320) 403 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 47,278 (38,439) (8,839) - 1,318 (1,042) (276) - New originated or purchased 121,657 9,178 2,456 133,291 2,156 2,374 559 5,089 Derecognised during the period (58,767) (11,429) (21,386) (91,582) (1,054) (597) (3,398) (5,049) Net repayments (37,623) (4,853) (5,540) (48,016) - (42) (61) (103) Foreign exchange movements (3,110) (1,353) (1,096) (5,559) - - - - Other movements (1,832) 977 3,161 2,306 - (42) (54) (96) Changes due to change in credit quality - - - - (1,843) (738) 2,794 213 At 31 December 2021 200,671 43,900 28,371 272,942 3,101 3,469 4,326 10,896 13. FINANCE LEASE RECEIVABLES CONTINUED The following table discloses the changes in the credit loss allowance and gross carrying amount for ﬁnance lease receivables between the beginning and the end of the reporting period: 286 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED As restated Gross carrying amount Credit loss allowance in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 205,615 23,799 30,031 259,445 1,999 96 690 2,785 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (44,598) 46,890 (2,292) - (934) 1,020 (86) - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (26,393) (3,740) 30,133 - (625) (585) 1,210 - – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 5,615 (4,946) (669) - 14 (14) - - New originated or purchased 89,402 18,654 10,101 118,157 1,967 509 433 2,909 Derecognised during the period (40,360) (13,560) (11,171) (65,091) (331) (63) (323) (717) Net repayments (23,588) (9,704) (9,816) (43,108) (4) (4) (56) (64) Foreign exchange movements 7,392 3,405 3,559 14,356 3 22 348 373 Other movements (1,436) 43 136 (1,257) (83) 59 (4) (28) Changes due to change in credit quality - - - - 1,007 2,417 2,160 5,584 At 31 December 2020 171,649 60,841 50,012 282,502 3,013 3,457 4,372 10,842 13. FINANCE LEASE RECEIVABLES CONTINUED * Management has re-visited the logic for disclosing the movement between stages for 2020 and corrected any discrepancies identiﬁed. As a result, amounts disclosed in transfers between stages were amended to reflect more accurate results. As previously reported Gross carrying amount Credit loss allowance in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 205,615 23,799 30,031 259,445 1,999 96 690 2,785 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) 3,315 (2,645) (670) - (592) 592 - - – to defaulted (from Stage 1 and Stage 2 to Stage 3) (41,908) 42,491 (193) 390 (121) (148) 477 208 – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) (26,117) (1,642) 28,035 276 (472) (23) 647 152 New originated or purchased 89,402 18,654 10,101 118,157 1,967 509 433 2,909 Derecognised during the period (40,360) (13,560) (11,171) (65,091) (331) (63) (323) (717) Net repayments - - - - (4) (4) (56) (64) Foreign exchange movements 6,726 3,405 3,559 13,690 (357) 22 348 13 Other movements (1,436) 43 136 (1,257) (83) 59 (4) (28) Changes due to change in credit quality - - - - 1,007 2,417 2,160 5,584 Partial repayment (23,588) (9,704) (9,816) (43,108) - - - - At 31 December 2020 171,649 60,841 50,012 282,502 3,013 3,457 4,372 10,842 287 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 31 December 2021 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Finance lease receivables risk category – Very low 170,782 4,397 - 175,179 – Low 29,889 8,993 - 38,882 – Moderate - 15,900 - 15,900 – High - 14,610 - 14,610 – Default - - 28,371 28,371 Gross carrying amount 200,671 43,900 28,371 272,942 Credit loss allowance (3,101) (3,469) (4,326) (10,896) Carrying amount 197,570 40,431 24,045 262,046 Gross carrying amount Credit loss allowance in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 178,171 10,861 18,372 207,404 2,045 205 1,352 3,602 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (5,951) 6,598 (647) – (14) 14 – – – to defaulted (from Stage 1 and Stage 2 to Stage 3) (22,099) (2,941) 25,040 – (27) (65) 92 – – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) 4,968 (2,972) (1,996) – 1 (1) – – New originated or purchased 138,634 18,663 5,836 163,133 1,319 89 81 1,489 Derecognised during the period (55,562) (4,849) (10,407) (70,818) (858) (154) (1,536) (2,548) Net repayments (38,828) (2,253) (9,448) (50,529) (467) 8 701 242 Foreign exchange movements 2,622 170 1,022 3,814 – – – – Other movements 3,660 522 2,259 6,441 – – – – At 31 December 2019 205,615 23,799 30,031 259,445 1,999 96 690 2,785 13. FINANCE LEASE RECEIVABLES CONTINUED All clients from Covid-19 affected sectors, which is in turn determined by TBC Leasing’s credit risk department, using sector forecasts derived by Group’s macro economists’ team, where these sectors show signiﬁcant declines, are moved to stage 2 unless obviously they fall in stage 3. Also restructurings that where categorized as good before grace period, are not removed from stage 2 pool because of application of grace period. Compared to 2020 year end, the need for overlays decreased. The group has more clarity related to the repayment capacity of it’s borrowers as and majority of the borrowers resumed payments after graces. As at 31 December 2021, credit quality of ﬁnance lease receivables is analysed below: 288 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 31 December 2020 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Finance lease receivables risk category – Very low 153,156 423 – 153,579 – Low 18,493 55,259 – 73,752 – Moderate – 4,810 – 4,810 – High – 349 – 349 – Default – – 50,012 50,012 Gross carrying amount 171,649 60,841 50,012 282,502 Credit loss allowance (3,013) (3,457) (4,372) (10,842) Carrying amount 168,636 57,384 45,640 271,660 31 December 2019 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for de- faulted) Total Finance lease receivables risk category – Very low 175,468 – – 175,468 – Low 30,147 13,688 – 43,835 – Moderate – 6,361 – 6,361 – High – 3,750 – 3,750 – Default – – 30,031 30,031 Gross carrying amount 205,615 23,799 30,031 259,445 Credit loss allowance (1,999) (96) (690) (2,785) Carrying amount 203,616 23,703 29,341 256,660 13. FINANCE LEASE RECEIVABLES CONTINUED As at 31 December 2020, credit quality of ﬁnance lease receivables is analysed below: As at 31 December 2019, credit quality of ﬁnance lease receivables is analysed below: The effect of collateral as at 31 December 2021: The effect of collateral as at 31 December 2020: 31 December 2021 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral Finance lease receivables 221,676 366,792 51,266 42,661 Total 221,676 366,792 51,266 42,661 31 December 2020 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral Finance lease receivables 219,599 363,753 62,903 51,783 Total 219,599 363,753 62,903 51,783 289 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL 2021 2020 2019 Current other assets Repossessed collateral 255,766 174,197 152,109 Prepayments for other assets 62,724 41,917 33,664 Prepayments for purchase of leasing assets 28,829 11,450 31,426 Other inventories 10,849 8,725 6,965 Prepaid taxes other than income tax 6,634 2,412 2,890 Total current other assets 364,802 238,701 227,054 Non-current other assets Assets repossessed from terminated leases 10,224 8,619 6,321 Prepayments for construction in progress 5,757 7,625 10,401 Reinsurance share in insurance reserves 8,834 7,559 6,968 Prepaid insurance of leasing assets 2,038 2,805 2,876 Other 5,424 1,651 2,092 Total non-current other assets 32,277 28,259 28,658 Total other assets 397,079 266,960 255,712 13. FINANCE LEASE RECEIVABLES CONTINUED 14. OTHER ASSETS The effect of collateral as at 31 December 2019: 31 December 2019 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral Finance lease receivables 228,651 365,934 30,794 22,292 Total 228,651 365,934 30,794 22,292 Repossessed collateral represents real estate assets acquired by the Group in settlement of overdue loans. The Group expects to dispose of the assets in the foreseeable future. The assets do not meet the deﬁnition of non-current assets held for sale and are classiﬁed as inventories in accordance with IAS 2 “Inventories”. The assets were initially recognised at fair value when acquired. In 2021, collateral repossessed for settlement of impaired loans amounted to GEL 131,917 thousand (2020: GEL 51,043 thousand; 2019: GEL 78,945 thousand). With regards to certain repossessed collateral, the Group has granted previous owners a right to repurchase the re- possessed collateral at prices equal to or higher than the carrying value of the loan at the date of repossession. This right is usually effective for a period of 6 to 24 months from the repossession date, during this time the repossessed collateral may not be disposed to third parties. In some cases prolongation of repurchase right is offered to the own- ers of the property. As at 31 December 2021, the carrying value of the repossessed collateral subjected to the repur- chase agreement was GEL 124,687 thousand (2020: GEL 26,309 thousand; 2019: GEL 62,578 thousand). 290 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 15. PREMISES, EQUIPMENT AND INTANGIBLE ASSETS in thousands of GEL Land, premises and leasehold improvements Ofﬁce and other equipment Construction in progress Total premises and equipment Intangible assets Total Carrying amount as of 1 January 2019 163,003 88,781 63,718 315,502 109,220 424,722 Cost as at 1 January 2019 202,542 215,741 63,718 482,001 165,766 647,767 Accumulated depreciation/amortisation including accumulated impairment loss (39,539) (126,960) - (166,499) (56,546) (223,045) Additions 4,359 27,862 24,946 57,167 70,319 127,486 Business combination 1,027 857 - 1,884 4,782 6,666 Transfers within premises and equipment 3,597 36 (3,633) - - - Transfers from investment property - - 1,817 1,817 - 1,817 Transfer to ﬁnancial leases or repossessed assets - (1,439) - (1,439) - (1,439) Disposals (5,571) (11,805) (4,641) (22,017) (753) (22,770) Effect of translation to presentation currency - cost 48 75 - 123 23 146 Effect of translation to presentation currency - accumulated depreciation (48) (45) - (93) (25) (118) Impairment reversal/(charge) - 44 (6) 38 - 38 Depreciation/amortisation charge (5,761) (22,869) - (28,630) (16,604) (45,234) Elimination of accumulated depreciation/ amortisation on disposals 1,983 8,393 - 10,376 635 11,011 Carrying amount as of 31 December 2019 162,637 89,890 82,201 334,728 167,597 502,325 Cost as at 31 December 2019 206,125 232,072 82,201 520,398 240,452 760,850 Accumulated depreciation/amortisation including accumulated impairment loss (43,488) (142,182) - (185,670) (72,855) (258,525) Additions 9,649 38,756 27,020 75,425 97,243 172,668 Transfers within premises and equipment 5,365 - (5,365) - - - Transfer to right of use assets (2,842) (310) - (3,152) - (3,152) Disposals (3,658) (5,455) (100) (9,213) (263) (9,476) Effect of translation to presentation currency - cost 170 169 - 339 48 387 Effect of translation to presentation currency - accumulated depreciation (155) (97) - (252) (314) (566) Impairment charge (2,016) (1,204) - (3,220) (676) (3,896) Depreciation/amortisation charge (5,466) (22,026) - (27,492) (24,149) (51,641) Elimination of accumulated depreciation/ amortisation on disposals 458 5,769 - 6,227 37 6,264 Transfer to Inventory (395) (39) - (434) - (434) Carrying amount as of 31 December 2020 163,747 105,453 103,756 372,956 239,523 612,479 Cost as at 31 December 2020 212,398 263,989 103,756 580,143 336,804 916,947 Accumulated depreciation/amortisation including accumulated impairment loss (48,651) (158,536) - (207,187) (97,281) (304,468) Additions 10,837 43,374 11,806 66,017 144,492 210,509 Transfers within premises and equipment 2,888 - (2,888) - - - Disposals (12,371) (12,646) (1,694) (26,711) (30,124) (56,835) Effect of translation to presentation currency - cost (73) (503) - (576) (291) (867) Effect of translation to presentation currency - accumulated depreciation 52 112 - 164 64 228 291 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 15. PREMISES, EQUIPMENT AND INTANGIBLE ASSETS CONTINUED in thousands of GEL Land, premises and leasehold improvements Ofﬁce and other equipment Construction in progress Total premises and equipment Intangible assets Total Impairment (charge)/reversal (7,787) 354 (491) (7,924) (399) (8,323) Depreciation/amortisation charge (5,725) (22,390) - (28,115) (34,874) (62,989) Elimination of accumulated depreciation/ amortisation on disposals 8,180 8,515 - 16,695 1,572 18,267 Carrying amount as of 31 December 2021 159,748 122,269 110,489 392,506 319,963 712,469 Cost as at 31 December 2021 205,892 294,568 110,489 610,949 450,482 1,061,431 Accumulated depreciation/amortisation including accumulated impairment loss (46,144) (172,299) - (218,443) (130,519) (348,962) Ofﬁce and other equipment include furniture and ﬁxtures, computer and ofﬁce equipment, motor vehicles as well as other equipment. On 18 June 2021, the Group sold land and buildings, where some of its back ofﬁce functions is currently located, for cash consideration of USD 25 million. USD 5 million (GEL 16.5 million) has already been received, while the remaining USD 20 million (GEL 63.2 million) will be received until 30 April 2022. Selling of those assets was part of the Group’s plan to gradually prepare for relocation to new headquarter, which is in the process of construction. Under the ex- isting plan the Group will gradually discharge the occupied part of the buildings up until 30 April 2022 and staff will be distributed to existing ofﬁces before the new headquarter will be completed. During this period the property is being leased back using IFRS 16 exemption for short term leases. Net carrying amount of disposed properties was GEL 37,416 thousand, out of which net balance disposed from premises and equipment were GEL 5,442 thousand, while the remaining part was disposed from investment property (Note 17). Net gain on disposal from the sale was recognised as part of other operating income in the audited consolidated annual ﬁnancial statements of proﬁt or loss in the amount of GEL 26,294 thousand. The depreciation and amortisation charge presented on the face of the statement of proﬁt or loss and other compre- hensive income include depreciation and amortisation charge of premises and equipment, investment properties and intangible assets. Construction in progress consists of construction and refurbishment of branch premises and the Bank’s new head- quarters. Upon completion, assets are to be transferred to premises. 16. RIGHT OF USE ASSETS The Group leases ofﬁces, branches and service centres. Rental contracts are typically made for ﬁxed periods of 1 to 15 years. Leases are recognised as a right-of-use asset and a corresponding liability from the date when the leased asset be- comes available for use by the Group. The right of use assets by class of underlying items is analysed as follows: in thousands of GEL 2021 Premises 2020 Premises 2019 Premises Carrying amount at 1 January 53,927 59,693 61,043 Additions of new contracts 16,424 - 20,437 Increases in value from substantial changes in contractual terms 17,549 11,011 - Disposals (1,234) (955) (8,476) Depreciation charge (16,153) (15,822) (13,311) Carrying amount at 31 December 70,513 53,927 59,693 The lease agreements do not impose any covenants, other than the security interests in the leased assets that are held by the lessor. Leased assets cannot be used as collateral for borrowings. Extension and termination options are included in a number of property leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of ex- 292 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 16. RIGHT OF USE ASSETS CONTINUED in thousands of GEL 2021 2020 2019 Expense relating to short-term leases 6,757 6,830 7,388 Expense relating to leases of low-value assets 7,125 7,023 6,154 tension and termination options held are exercisable only by the Group and not by the respective lessor. Expenses relating to short-term leases and to leases of low-value assets that are not classiﬁed as short-term leases are included in administrative and other operating expenses: 17. INVESTMENT PROPERTIES in thousands of GEL Note 2021 2020 2019 Cost as of 1 January 73,876 76,521 86,884 Accumulated depreciation and impairment as of 1 January (5,187) (3,854) (2,588) Carrying amount as of 1 January 68,689 72,667 84,296 Transfer to premises and equipment 15 - - (1,817) Transfer from repossessed collateral 1,874 10,367 4,914 Addition from foreclosure - - 47 Disposals (42,524) (13,012) (13,507) Depreciation charge (749) (929) (933) Elimination of depreciation on disposal 1,022 159 717 Impairment charge (5,420) (563) (1,050) Cost as of 31 December 33,226 73,876 76,521 Accumulated depreciation and impairment as of 31 December (10,334) (5,187) (3,854) Carrying amount of investment properties as of 31 December 22,892 68,689 72,667 In 2021, the Group disposed its certain investment properties, out of which most part accounted to the single sale described in Note 15. As of 31 December 2021, investment properties comprised of 44 lots (2020: 58 lots; 2019: 63 lots) of land and 102 build- ings (2020: 111 buildings; 2019: 111 buildings) located in Tbilisi and other regions of Georgia with the fair value amount- ing to GEL 29,493 thousand (2020: GEL 120,959 thousand; 2019: GEL 123,325 thousand). For disclosure purposes a latest fair valuation exercise was carried out for investment properties as of 31 December 2021. The valuation was carried out by external valuators who hold a recognised and relevant professional qualiﬁca- tion and who have recent experience in valuation of assets of similar location and category. In the process of compar- ison, they have used three comparative analogues (registered sale and/or offer for sale), in which prices were applied adjustments based on the difference between subject assets and analogues. The fair value of assets have been estimated by using the market and cost approaches due to the market situation, particularly based on a sufﬁcient number of registered sales and proposals by the date of valuation. In thousands of GEL (except for range of inputs) Fair value as of 31 December 2021 (valuation date) Valuation technique Unobservable inputs Range of unobser-vable inputs (weighted average) Land 6,214 Sales comparison approach Price per square meter 0.23 – 1,736 (93) Buildings 23,279 Sales comparison approach Price per square meter 1.1 – 7,738 (971) Sensitivity of the input to fair value – increase/(decrease) in the price per square metre by 20% would result in in- crease/(decrease) in fair value by GEL 2,448 thousand/ (GEL 2,705 thousand). 293 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 17. INVESTMENT PROPERTIES CONTINUED 18. GOODWILL in thousands of GEL 2021 2020 2019 Not later than 1 year 29 82 207 Later than 1 year and not later than 2 years – – 230 Later than 2 years and not later than 3 years – – – Later than 3 years and not later than 4 years – – – Later than 4 years and not later than 5 years – – – Later than 5 years – – – Total operating lease payments receivable 29 82 437 in thousands of GEL 2021 2020 2019 Carrying amount as of 1 January 59,964 61,558 31,286 Acquisition of subsidiaries – – 30,272 Impairment loss – (1,594) – Carrying amount as of 31 December 59,964 59,964 61,558 in thousands of GEL 2021 2020 2019 JSC Bank Republic 24,166 24,166 24,166 Bank Republic Retail 11,088 11,088 11,088 Bank Republic Corporate 7,491 7,491 7,491 Bank Republic MSME 4,791 4,791 4,791 Bank Republic Other 796 796 796 LLC My.ge 15,812 15,812 15,812 LLC Inspired 14,015 14,015 14,015 LLC Bonaco 2,567 2,567 2,567 JSC TBC Insurance 1,766 1,766 1,766 CGU Micro / JSC Bank Constanta 769 769 769 JSC United Financial Corporation 695 695 695 LLC TKT.ge 174 174 175 JSC Swoop – – 61 LLC TBC Kredit – – 1,262 LLC F Solution – – 270 Total carrying amount of goodwill 59,964 59,964 61,558 Where the Group is the lessor, the future minimum lease payments receivable under non-cancellable operating leas- es, were as follows: Movements in goodwill arising on the acquisition of subsidiaries are: Goodwill Impairment Test Goodwill is allocated to cash-generating units (CGUs, which represent the lowest level within the Group at which the goodwill is monitored by Management and which are not larger than a segment) as follows: 294 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 18. GOODWILL CONTINUED The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on ﬁnancial budgets approved by the management covering a ﬁve-year period. Cash flows beyond the ﬁve-year period are extrapolated using the estimated growth rates stated below. While assessing the Goodwill for potential impairment in 2020 the Group has identiﬁed goodwill generated from JSC Swoop, LLC TBC Kredit and LLC F Solution to be impaired. Assumptions used for value-in-use calculations is following: in thousands of GEL 2021 2020 2019 JSC Bank Republic Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a 5.2% p.a. 4.6% p.a. Pre-tax discount rate 17.1% p.a. 24.6% p.a. 16.5% p.a. CGU Micro / JSC Bank Constanta Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a. 5.2% p.a. 4.6% p.a. Pre-tax discount rate 12.3% p.a. 19.7% p.a. 10.4% p.a. JSC United Financial Corporation Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a. 5.2% p.a. 4.6% p.a. Pre-tax discount rate 12.1% p.a. 15.1% p.a. 15.5% p.a. JSC TBC Insurance Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a. 5.2% p.a. 4.6% p.a. Pre-tax discount rate 24.8% p.a. 26.8% p.a. 17.5% p.a. LLC Bonaco Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a. 5.2% p.a. 4.6% p.a. Pre-tax discount rate 12.4% p.a. 11.4% p.a. 10.2% p.a. LLC My.ge Growth rate beyond ﬁve years of free cash flow to equity 5.2% p.a. 5.2% p.a. 4.6% p.a. Pre-tax discount rate 19.2% p.a. 17.9% p.a. 17.5% p.a. LLC Inspired Growth rate beyond ﬁve years of free cash flow to equity 5.5% p.a. 5.5% p.a. 5.5% p.a. Pre-tax discount rate 17.3% p.a. 15.5% p.a. 21.1% p.a. LLC TBC Kredit Growth rate beyond ﬁve years of free cash flow to equity - - 2.7% p.a. Pre-tax discount rate - - 16.4% p.a. p.a. means per annum. Assumptions related to JSC Bank Republic are similar for all related CGU’s. Pre-tax discount rate used for value-in-use calculations is the assumption to which the recoverable amount is most sensitive. The management determined the budgeted gross margin based on past performance and its market ex- pectations. The weighted average long term growth rates used are consistent with the forecasts included in the industry reports. The discount rates reflect speciﬁc risks related to the relevant CGUs. If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic Retail had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carry- ing value of goodwill or carrying value of net assets of the CGU. Recoverable amount of Bank Republic Retail CGU exceeds its carrying amount by GEL 2,269,542 thousand (2020: GEL 619,250 thousand; 2019: GEL 3,068,466 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 41.86% p.a. (2020: 35.49% p.a.; 2019: 39.87% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic Corporate had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the 295 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 18. GOODWILL CONTINUED carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of Bank Republic Corporate CGU exceeds its carrying amount by GEL 1,744,639 thousand (2020: GEL 410,824 thousand; 2019: GEL 2,316,056 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 29.47% p.a. (2020: 30.87% p.a.; 2019: 36.34% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic MSME had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of Bank Republic MSME CGU exceeds its carrying amount by GEL 611,733 thousand (2020: GEL 389,641 thousand; 2019: GEL 1,210,045 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 28.41% p.a. (2020: 35.87% p.a.; 2019: 36.52% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Micro / JSC Bank Con- stanta had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of CGU Micro / JSC Bank Constanta exceeds its carrying amount by GEL 510,490 thousand (2020: GEL 370,815 thousand; 2019: GEL 732,567 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 29.62% p.a. (2020: 45.25% p.a.; 2019: 29.74% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of JSC United Financial Corpora- tion had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of goodwill or carrying value of net assets of the CGU. Recoverable amount of JSC United Financial Corporation CGU exceeds its carrying amount by GEL 151,060 thousand (2020: GEL 23,116 thousand; 2019: GEL 8,222 thousand). The CGUs’ carrying amount would equal its value in use at a discount rate of 53.79% p.a. (2020: 24.23% p.a.; 2019: 19.53% p.a.) If the revised estimated pre-tax discount rate applied to the discounted cash flows of JSC TBC Insurance had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of JSC TBC Insurance CGU exceeds its carrying amount by GEL 139,390 thousand (2020: GEL 31,179 thousand; 2019: 142,799). The CGU’s carrying amount would equal its value in use at a discount rate of 69.87% p.a. (2020: 53.08% p.a. 2019: 62.29% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of LLC Bonaco had been 10 per- centage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of LLC Bonaco CGU exceeds its car- rying amount by GEL 17,447 thousand (2020: GEL 116,174 thousand; 2019: GEL 500,031 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 37.49% p.a. (2020: 25.75% p.a. 2019: 49.45% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of LLC My.ge had been 10 per- centage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of LLC My.ge CGU exceeds its carry- ing amount by GEL 25,105 thousand (2020: GEL 46,079 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 30.44% p.a. (2020: 37.86% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of LLC Inspired had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net assets of the CGU. Recoverable amount of LLC Inspired CGU exceeds its carrying amount by GEL 379,264 thousand (2020: GEL 100,925 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 114.38% p.a. (2020: 55.26% p.a.). 296 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 19. DUE TO CREDIT INSTITUTIONS 20. CUSTOMER ACCOUNTS As of 31 December 2021 for the purposes of maturity analysis of ﬁnancial liabilities (Note 39) the above-mentioned due to other banks are included within the amounts for which repayment is expected within 3 months. in thousands of GEL 2021 2020 2019 Due to other banks Correspondent accounts and overnight placements 181,905 43,298 27,747 Deposits from banks 142,752 97,496 139,267 Total due to other banks 324,657 140,794 167,014 Other borrowed funds Borrowings from foreign banks and international ﬁnancial institutions 1,653,245 2,370,656 2,005,900 Borrowing from Ministry of Finance of Georgia - – 536 Borrowings from other ﬁnancial institutions - 58,949 41,456 Borrowings from other local banks and ﬁnancial institutions 24,855 32,684 62,916 Borrowings from National Bank of Georgia 981,419 1,883,290 1,316,079 Total other borrowed funds 2,659,519 4,345,579 3,426,887 Total amounts due to credit institutions 2,984,176 4,486,373 3,593,901 in thousands of GEL 2021 2020 2019 State and public organisations Current/settlement accounts 577,020 504,019 616,397 Term deposits 364,121 590,426 298,177 Other legal entities Current/settlement accounts 4,830,093 3,490,836 3,151,507 Term deposits 914,824 722,710 310,558 Individuals Current/settlement accounts 4,574,537 3,487,017 2,712,910 Term deposits 3,777,577 3,777,720 2,959,775 Total customer accounts 15,038,172 12,572,728 10,049,324 297 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 20. CUSTOMER ACCOUNTS CONTINUED State and public organisations include government owned proﬁt orientated businesses. Economic sector concen- trations within customer accounts are as follows: 31 December 2021 31 December 2020 31 December 2019 in thousands of GEL Amount % Amount % Amount % Individuals 8,352,114 55% 7,264,737 58% 5,672,685 56% Trade 1,237,656 8% 873,995 7% 741,385 7% Financial services 1,178,046 8% 709,943 6% 288,860 3% Services 713,164 5% 526,227 4% 446,876 5% Construction 598,856 4% 610,321 5% 596,703 6% Energy & utilities 542,425 4% 384,660 3% 322,331 3% Government sector 480,046 3% 647,856 5% 505,494 5% Real estate 418,062 3% 323,547 3% 322,416 3% Transportation 403,248 3% 332,850 2% 308,268 3% Healthcare 194,648 1% 131,936 1% 98,294 1% Hospitality & leisure 155,778 1% 99,770 1% 110,816 1% Agriculture 78,810 1% 58,005 0% 50,915 1% Metals and mining 32,675 0% 18,458 0% 12,264 0% Other 652,644 4% 590,423 5% 572,017 6% Total gross loans and advances to customers 15,038,172 100% 12,572,728 100% 10,049,324 100% As of 31 December 2021 the Group had 141 customers (2020: 117 customers; 2019: 93 customers) with balances above GEL 10,000 thousand. Their aggregate balance was GEL 4,754,533 thousand (2020: GEL 3,898,678 thousand; 2019: GEL 2,872,119 thousand) or 32% of total customer accounts (2020: 31%; 2019: 29%). In 2020 and 2019 annual ﬁnancial statements the above disclosure was measured using GEL 3,000 thousand threshold and number of customers us- ing respective threshold were 452 (GEL 5,569,608 thousand) and 359 (GEL 4,327,035 thousand). As of 31 December 2021 included in customer accounts are deposits of GEL 28,379 thousand and GEL 109,404 thou- sand (2020: GEL 4,903 thousand and GEL 94,348 thousand; 2019: GEL 9,555 thousand and GEL 101,615 thousand) held as collateral for irrevocable commitments under letters of credit and guarantees issued, respectively. The latter is discussed in Note 40. As of 31 December 2021, deposits held as collateral for loans to customers amounted to GEL 576,261 thousand (2020: GEL 512,637 thousand; 2019: 469,205 thousand). Refer to Note 44 for the disclosure of the fair value of each class of customer accounts. Information on related party balances is disclosed in Note 46. 298 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Currency Carrying amount as of 31 December 2020 Maturity Date Coupon rate Effective interest rate Bonds issued on Irish Stock Exchange USD 966,793 6/19/2024 5.80% 6.40% Bonds issued on Irish Stock Exchange USD 414,216 10/3/2024 10.80% 11.40% Private placement USD 44,467 5/27/2023 8.20% 8.99% Bonds issued on Georgian Stock Exchange GEL 38,504 3/20/2023 TIBR 3M+3.25% 12.50% Private placement USD 32,517 3/19/2023 6.50% 7.10% Total debt securities in issue 1,496,497 in thousands of GEL Currency Carrying amount as of 31 December 2019 Maturity Date Coupon rate Effective interest rate Bonds issued on Irish Stock Exchange USD 842,471 6/19/2024 5.80% 6.40% Bonds issued on Irish Stock Exchange USD 371,127 10/3/2024 10.80% 11.40% Total debt securities in issue 1,213,598 On 28 October 2021, the Bank completed the transaction of USD 75 million 8.894% yield Additional Tier 1 Capital Perpetual Subordinated Notes issue (“AT1 Notes”) and successfully returned to the international capital markets. The AT1 Notes are listed on the regulated market of Euronext Dublin and are rated B- by Fitch. On 23 September 2021 the TBC Kredit completed the transaction of AZN 3 million 2-year 12% named, interest-baring, paperless, unsecured bonds issue (the “Notes”). On 18 August 2021 the TBC Bank Group PLC completed the transaction of USD 31 million 3-year 5% senior unsecured bonds issue (the “Notes”). The private placement is direct, unsecured and unsubordinated obligations of the Group. On 20 March 2020, TBC Leasing with the help of TBC Capital placed senior secured bonds of amount GEL 58.4 million on the Georgian Stock Exchange. The percentage of securities is variable, 3.25% added to the 3-month Tbilisi Interbank Interest rate. Fitch rates the bonds ‘BB-‘. On 19 March 2020 the TBC Bank Group PLC completed the transaction of a USD 10 million 3-year 6.45% senior unse- cured bonds issue. The private placement is direct, unsecured and unsubordinated obligations of the Group. On 3 July 2019 the Bank completed the transaction of a debut inaugural USD 125 million 10.75% yield Additional Tier 1 Capital Perpetual Subordinated Notes issue (“AT1 Notes”). The AT1 Notes are listed on the regulated market of Euronext Dublin and are rated B- by Fitch. The AT1 Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the ﬁrst dual-listed international offering of additional Tier 1 Capital Notes from Georgia. On 19 June 2019 the Bank completed the transaction of a debut USD 300 million 5-year 5.75% (6% yield) senior un- secured bonds issue. The Notes are listed on the regulated market of Euronext Dublin and are rated Ba2 by Moody’s and BB- by Fitch. The Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the ﬁrst dual-listed international offering of senior unsecured Notes from Georgia. 21. DEBT SECURITIES IN ISSUE in thousands of GEL Currency Carrying amount as of 31 December 2021 Maturity Date Coupon rate Effective interest rate Bonds issued on Irish Stock Exchange USD 918,504 6/19/2024 5.80% 6.40% Bonds issued on Irish Stock Exchange USD 391,484 10/3/2024 10.80% 11.40% Bonds issued on Irish Stock Exchange USD 228,174 2/4/2027 8.90% 9.90% Private placement USD 96,723 8/18/2024 5.00% 5.40% Bonds issued on Georgian Stock Exchange GEL 38,532 3/20/2023 TIBR 3M+3.25% 12.50% Private placement USD 31,222 3/19/2023 6.50% 7.10% Baku Stock Exchange CJSC AZN 5,649 9/23/2023 12.00% 12.40% Total debt securities in issue 1,710,288 299 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Movements in credit loss allowance for performance guarantees, credit related commitment and liabilities and charges are as follows: 22. PROVISION FOR PERFORMANCE GUARANTEES, CREDIT RELATED COMMITMENTS AND LIABILITIES AND CHARGES in thousands of GEL Performance guarantees Credit related commitments Provision for other liabilities and charges Provision relat- ed to Insurance activities Total Carrying amount as of 1 January 2019 4,393 5,424 5,113 3,837 18,767 Charges/(releases) recorded in proﬁt or loss 3,069 (913) 1,264 2,041 5,461 Utilization of provision – – (1,104) – (1,104) Effect of translation to presentation currency 4 – – – 4 Carrying amount as of 31 December 2019 7,466 4,511 5,273 5,878 23,128 (Releases)/charges recorded in proﬁt or loss (3,568) 330 2,706 1,627 1,095 Effect of translation to presentation currency 529 583 – – 1,112 Carrying amount as of 31 December 2020 4,427 5,424 7,979 7,505 25,335 Charges/(releases) recorded in proﬁt or loss 384 (1,588) (27) 1,526 295 Effect of translation to presentation currency (191) (212) – 131 (272) Carrying amount as of 31 December 2021 4,620 3,624 7,952 9,162 25,358 Credit related commitments and performance guarantees: Impairment allowance estimation methods differ for (i) letter of credits and guarantees and (ii) undrawn credit lines. For letter of credits and guarantees allowance esti- mation purposes the Group applies the staged approach and classiﬁes them in stage 1, stage 2 or stage 3. Signiﬁcant stage 3 guarantees are assessed individually. Non-signiﬁcant stage 3 as well as all stage 1 and stage 2 guarantees and letter of credits are assessed collectively using exposure, marginal probability of conversion, loss given default and discount factor. Amount of the expected allowance differs based on the classiﬁcation of the facility in the respective stage. For impairment allowance assessment purposes for undrawn exposures the Group distinguishes between revocable and irrevocable loan commitments. For revocable commitments the Group does not create impairment allowance. As for the irrevocable undisbursed exposures the Group estimates utilization parameter (which represents expected limit utilization percentage conditional on the default event) in order to convert off-balance part of the exposure to on-balance. Once the respective on balance exposure is estimated, the Group applies the same impairment framework approach as the one used for the respective type of on balance exposures. Charges less releases recorded in proﬁt or loss for provision for impairment of credit related commitments include recovery of /charges to provision for insurance payables in the amount of GEL (27) thousand (2020: GEL 106 thousand; 2019: GEL (841) thousand), that are included in charges less releases recorded in proﬁt or loss for “Other” provision. 300 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Grant Date Maturity Date Currency Outstanding amount in orig- inal currency Outstanding amount in GEL Asian Developement Bank 10/18/2016 12/31/2026 USD 50,486 156,386 Private lenders 6/8/2017 12/19/2024 USD 35,304 109,427 Global Climate Partnership Fund 11/20/2018 11/20/2028 USD 25,097 77,739 European Fund for Southeast Europe 12/21/2018 12/21/2028 USD 20,079 62,195 Green for Growth Fund 12/18/2015 12/16/2030 USD 15,189 47,048 BlueOrchard Microﬁnance Fund 12/14/2018 12/15/2025 USD 14,966 46,360 BlueOrchard Microﬁnance Fund 12/14/2018 12/14/2028 USD 14,954 46,321 European Fund for Southeast Europe 12/18/2015 12/16/2030 USD 7,594 23,523 European Fund for Southeast Europe 3/15/2016 3/17/2031 USD 7,592 23,517 ResponsAbility SICAV (Lux) Micro and SME Finance Fund 11/30/2018 11/30/2028 USD 5,930 18,369 ResponsAbility SICAV (Lux) - Financial Inclusion Fund 11/30/2018 11/30/2028 USD 3,115 9,649 ResponsAbility SICAV (Lux) - Microﬁnance Leaders 11/30/2018 11/30/2028 USD 1,005 3,113 Total subordinated debt 623,647 23. OTHER FINANCIAL LIABILITIES 24. OTHER LIABILITIES Other liabilities comprise the following: in thousands of GEL 2021 2020 2019 Accrued employee beneﬁt costs 51,075 31,148 42,197 Taxes payable other than on income 17,938 13,162 10,730 Advances received 13,595 10,487 11,260 Unearned insurance premium 37,323 25,852 24,156 Other 11,041 7,193 6,819 Total other liabilities 130,972 87,842 95,162 All of the above liabilities are expected to be settled within twelve months after the year-end. 25. SUBORDINATED DEBT As of 31 December 2021, subordinated debt comprised of: * Management has revisited the classiﬁcation of margin call deposits balance from one of forward exchange contracts, as far as, it does not represent the derivative instrument. To improve clarity and understandability of ﬁnancial statements such deposit has been transferred from derivative ﬁnancial liabilities in the amount of GEL 5,270 thousand to other accrued liabilities sub categories within other ﬁnancial liability note. Refer to Note 44 for disclosure of the fair value of other ﬁnancial liabilities. Other ﬁnancial liabilities comprise the following: in thousands of GEL Note 2021 2020 2019 Trade payables 29,988 34,957 23,687 Debit or credit card payables 28,963 6,408 13,259 Liabilities to asset and service providers of ﬁnance leases 18,295 10,851 25,924 Transfers in transit 15,136 2,156 - Derivative ﬁnancial liabilities 43 9,727 121,934 20,266 Insurance contract liabilities 7,825 8,548 7,613 Liabilities related to co-ﬁnancing of hotels and restaurants sectors 1,638 13,771 315 Payable to deposit insurance agency 1,033 930 549 Security deposits for ﬁnance lease receivables 906 91 1,171 Prepayments related to guarantees 516 1,152 879 Other accrued liabilities 25,784 26,634 19,945 Total other ﬁnancial liabilities 139,811 227,432 113,608 301 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Refer to Note 44 for the disclosure of the fair value of subordinated debt. Information on related party balances is disclosed in Note 46. in thousands of GEL Grant Date Maturity Date Currency Outstand- ing amount in original currency Outstanding amount in GEL Asian Developement Bank 10/18/2016 12/31/2026 USD 50,585 145,064 Private Lenders 6/8/2017 12/19/2024 USD 25,218 72,317 Global Climate Partnership Fund 11/20/2018 11/20/2028 USD 25,089 71,948 European Fund for Southeast Europe 12/21/2018 12/21/2028 USD 20,074 57,565 Green for Growth Fund 12/18/2015 12/18/2025 USD 15,305 43,890 BlueOrchard Microﬁnance Fund 12/14/2018 12/14/2025 USD 14,924 42,798 BlueOrchard Microﬁnance Fund 12/14/2018 12/14/2028 USD 14,920 42,786 Subordinated Bond (Private lender) 8/31/2018 1/25/2023 USD 10,101 28,976 European Fund for Southeast Europe 12/18/2015 12/18/2025 USD 7,663 21,975 European Fund for Southeast Europe 3/15/2016 3/15/2026 USD 7,662 21,971 ResponsAbility Micro and SME Finance Fund 11/30/2018 11/30/2028 USD 5,935 17,020 ResponsAbility SICAV (Lux) - Financial Inclusion Fund 11/30/2018 11/30/2028 USD 3,117 8,940 KfW 5/4/2015 5/8/2021 GEL 6,739 6,739 KfW 6/10/2014 5/8/2021 GEL 6,162 6,162 Micro and SME Finance Leaders 11/30/2018 11/30/2028 USD 1,006 2,884 Total subordinated debt 591,035 As of 31 December 2020, subordinated debt comprised of: in thousands of GEL Grant Date Maturity Date Currency Outstanding amount in orig- inal currency Outstanding amount in GEL Asian Developement Bank 10/18/2016 12/31/2026 USD 50,438 165,266 Private Lenders 6/8/2017 12/19/2024 USD 25,217 82,628 Global Climate Partnership Fund 11/20/2018 11/20/2028 USD 25,096 82,230 European Fund for Southeast Europe 12/21/2018 12/21/2028 USD 20,079 65,789 Green for Growth Fund 12/18/2015 12/18/2025 USD 15,244 49,950 BlueOrchard Microﬁnance Fund 12/14/2018 12/14/2025 USD 14,949 48,983 BlueOrchard Microﬁnance Fund 12/14/2018 12/14/2028 USD 14,941 48,956 Subordinated Bond (Private lender) 8/31/2018 1/25/2023 USD 10,102 33,098 European Fund for Southeast Europe 12/18/2015 12/18/2025 USD 7,633 25,010 European Fund for Southeast Europe 3/15/2016 3/15/2026 USD 7,631 25,004 ResponsAbility SICAV (Lux) Micro and SME Finance Fund 11/30/2018 11/30/2028 USD 5,930 19,430 ResponsAbility SICAV (Lux) - Financial Inclusion Fund 11/30/2018 11/30/2028 USD 3,115 10,206 KfW 5/4/2015 5/8/2021 GEL 6,737 6,737 KfW 6/10/2014 5/8/2021 GEL 6,161 6,161 Micro and SME Finance Leaders 11/30/2018 11/30/2028 USD 1,005 3,292 Total subordinated debt 672,740 As of 31 December 2019, subordinated debt comprised of: 25. SUBORDINATED DEBT CONTINUED The debt ranks after all other creditors in case of liquidation. 302 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 26. SHARE CAPITAL in thousands of GEL Number of ordinary shares Share Capital As of 1 January 2019 54,244,329 1,650 Scrip dividend issued 296,392 10 Shares issued 615,175 22 As of 31 December 2019 55,155,896 1,682 As of 31 December 2020 55,155,896 1,682 As of 31 December 2021 55,155,896 1,682 As of 31 December 2021 the total authorised number of ordinary shares was 55,155,896 shares (31 December 2020: 55,155,896 shares; 2019: 55,155,896 shares). Each share has a nominal value of one British Penny. All issued ordinary shares are fully paid and entitled to dividends. On 21 March 2019, 615,175 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of the TBC PLC group long term incentive plan and rank pari passu in all respects with TBC PLC’s existing ordinary shares. All dividends declared in GEL and paid in GBP. On 12 August 2021, TBC Bank Group PLC’s Board of directors declared an interim dividend of GEL 1.5 per share. The dividend was recorded on 20 August 2021 and was paid on 17 September 2021. On 24 June 2019, at the Annual General Meeting, TBC Bank Group PLC’s shareholders agreed on a dividend of GEL 1.98 per share, based on the 2018 audited ﬁnancial statements. The dividend was recorded respectively and on 12 July 2019 shareholders received the payment of the total GEL 91,926 thousands. Scrip dividend shares amounted to 296,392 shares and were issued on 12th of July. Part of the shares are held by employee beneﬁt trust (EBT) for the purpose of future employee share based pay- ments plan. The number of shares held by trust as at 31 December 2021 comprised 641,391 shares (31 December 2020: 778,183 and 31 December 2019: 595,380 shares). The EBT has waived its rights to receive dividends on such shares. Information related to the repurchased shares are below: in thousands of GEL Number of shares held by trust Shares held by trust As of 1 January 2019 - - Purchase of shares by employee beneﬁt trust 595,380 27,516 As of 31 December 2019 595,380 27,516 Delivery of bonus shares to employees via trust shares (419,197) (19,596) Purchase of shares by employee beneﬁt trust 602,000 25,493 As of 31 December 2020 778,183 33,413 Delivery of bonus shares to employees via trust shares (136,792) (7,924) As of 31 December 2021 641,391 25,489 2021 2020 2019 in thousands of GEL Interim Ordinary Dividends payable at 1 January - - - Dividends declared during the year 81,772 - 108,622 Dividends paid during the year: (81,772) - (108,622) Scrip dividends - - (16,696) Dividends paid in cash (81,772) - (91,926) Dividends payable at 31 December - - - Dividends per share declared during the year GEL 1.5 - GEL 1.98 303 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 27. SHARE BASED PAYMENTS June 2015 arrangement: In June 2015, the Bank’s Supervisory Board approved management compensation scheme for the top and middle management which was enforced from 2015 through 2018. According to the scheme, each year, subject to pre- deﬁned performance conditions, a certain number of shares were awarded to the Group’s top managers and most of the middle ones. The performance features key performance indicators (KPIs) divided into (i) corporate and (ii) individual. The corporate KPIs are mainly related to achieving proﬁtability, efﬁciency, and portfolio quality metrics set by the Board as well as non-ﬁnancial indicators with regards to customers’ experience and employees’ engagement. The individual performance indicators are set on an individual basis and are used to calculate the number of shares to be awarded to each employee. According to the scheme, members of top management also received the ﬁxed number of shares. Once awarded, all shares carry service conditions and, before those conditions are met, are eligible to dividends; however they cannot be sold or transferred to third parties. Service conditions foresee continuous employment until the gradual transfer of the full title to the scheme partici- pants is complete. Shares for each of the 2015, 2016, 2017 and 2018 tranche gradually ran over on the second, third and fourth year following the performance appraisal. Eighty percent of the shares are vested in 3 years after being awarded. Under this compensation system the total vesting period extended to March 2022. In 2015 the Group considered 17 June as the grant date. Based on the management’s estimate of reached targets, as of 31 December 2015 1,908,960 shares were granted under the entire scheme 2015-2018. The shares were gradually awarded to the members as per the described scheme. At the grant date the fair value amounted to GEL 24.64 per share, as quoted on the London Stock Exchange. Following the listing on the Premium segment of the London Stock Exchange, the share-based payment scheme re- mained conceptually the same and was only updated to reflect the Group’s new structure, whereby TBC Bank Group PLC distributed its shares to the scheme’s participants, instead of JSC TBC Bank. The respective shares’ value was recharged to JSC TBC Bank. As a result, the accounting of the scheme did not change in the consolidated ﬁnancial statements. The share based payment scheme for middle management and other eligible employees continued under existing terms after 2018, except for vesting conditions that changed from 10%, 10%, 80% to 33%, 33%, 34% for the 3 year peri- od, starting from 2019. December 2018 arrangements: A new compensation system was approved by shareholders at the AGM on 21 May 2018 and came into effect on 1 January 2019 and it covered the period 2019-2021 inclusive. On 28 December 2018, the Board of Directors approved the following details for this new compensation schemes for the top management and the Group considered that as a grant date. All the share based schemes are equity settled and accounted respectively. Deferred share salary plan Part of the top management salary is paid with shares with the objective of closely promoting the long-term success of the Group and aligning senior executive directors’ and shareholders’ interests. Shares are usually delivered during the ﬁrst quarter of the second year (i.e. the year after the performance year) and the exact date is determined by the Board. 50% of the shares have 1 year deferral period and the remaining 50% is deferred for 2 years from the delivery date. The shares are registered in the trustees name as nominee for the participants and the participants are entitled to receive dividends. Starting from 2021, deferred share salary is no longer subject to the deferral and will be vested immediately upon delivery. Where applicable, deferred share salary is paid in part under the JSC TBC Bank’s management board members ser- vice contract with TBC JSC, with TBC PLC or other Group subsidiaries (as relevant and as applicable). Initial salaries are set and approved by the Supervisory Board and Board of Directors. The Remuneration Committee assists both Boards in compensation related matters and makes respective recommendations. Deferred compensation is subject to the Group’s malus and clawback policies until the shares are vested. If at any time after making the deferred com- pensation there is a material misstatement in the ﬁnancial results for the year in respect of which the compensation was formally granted, the Remuneration Committee has the right to cause some or all of the deferred compensation for that year or any subsequent ﬁnancial year that is unvested (or unpaid) to lapse (or not be paid). The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. 304 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Deferred Bonus plan The annual bonus for the top management is determined as to the extent that the annual KPIs have been met. Shares are usually delivered during the ﬁrst quarter of the second year (i.e. the year after the performance year): and the exact date is determined by the Board. 50% of the shares have 1 year deferral period and the remaining 50% is deferred for 2 years from the delivery date. The shares are registered in the trustees name as nominee for the participants and the participants are entitled to receive dividends. Annual KPIs are set by the Remuneration Committee at the beginning of each year in relation to that year and ap- proved by the Board. To the extent that the KPIs are achieved, the Remuneration Committee may recommend to the Board whether an award may be made and the amount of such award. The Group does not pay guaranteed bonuses to executive directors. The nature of the KPIs with their speciﬁc weightings and targets is disclosed in the published annual report. Awards are subject to the Group’s malus and clawback policies until the shares are vested. If at any time after making the award there is a material misstatement in the ﬁnancial results for the year in respect of which the award was formally granted, the Remuneration Committee can recommend to the Board that some or all of the award for that year or any subsequent ﬁnancial year that is unvested (or unpaid) to lapse (or not be paid). Where appli- cable, deferred share bonus is paid in part under the JSC TBC Bank’s management board members service contract with TBC JSC, with TBC PLC or other Group subsidiaries, (as relevant and as applicable). The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. Long Term Incentive Plan (LTIP) Long term incentive plan is used to provide a strong motivational tool to achieve long term performance conditions and to provide rewards to the extent those performance conditions are achieved. Performance conditions are cho- sen to align the Group’s and the Bank’s executive directors’ interests with strategic objectives of the Group over multi- year periods and encourage a long-term view. In order for the shares to be delivered, the executive directors need to meet rolling performance conditions over the 3 year performance period. More details about the LTIP and share based payments are given in Remuneration Committee report. During 2020 the Executive Directors of TBC Bank Group PLC and Management of JSC TBC Bank has forfeited their rights to deferred share bonuses and long-term incentive plan grants attributable to 2020.The above mentioned de- cision had no effect on the incentive schemes for 2019 and 2021 years. Decision has been agreed with remuneration committee details of which are given in remuneration report. 27. SHARE BASED PAYMENTS CONTINUED 305 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 27. SHARE BASED PAYMENTS CONTINUED Tabular information on the schemes is given below: 31 December 2021 31 December 2020 31 December 2019 Number of unvested shares at the beginning of the period 3,028,818 3,141,541 2,121,129 Number of shares granted Number of shares granted - Deferred salary – – 285,047 Number of shares granted - Deferred bonus – – 471,778 Number of shares granted - LTIP – – 459,751 Number of shares granted - Middle management, subsidiaries’ management and other eligible employees 321,453 528,325 396,525 Number of shares granted 321,453 528,325 1,613,101 Change in estimates of number of shares expected to be granted Change in estimates for 2019-2021 awards (361,739) – (57,058) Change in estimates for 2020 award for Deferred salary, 2021 awards for De- ferred bonus and LTIP – 479,580 – Management forfeiture of rights for 2020 bonus – (428,451) – Change in estimates of number of shares expected to be granted (361,739) 51,129 (57,058) Change in estimate of number of shares expected to vest based on changes in share price and exchange rate - 2020 performance (169,753) – – Change in estimate of number of shares expected to vest based on perfor- mance conditions, share price and exchange rate - 2019 performance – (71,847) – Change in estimate of number of shares expected to vest based on perfor- mance conditions - 2018 performance – – (16,501) Number of shares vested 2015 year award – 80% vesting – – (405,573) 2016 year award – 10% vesting – – (51,693) 2016 year award – 80% vesting – (413,544) – 2017 year award – 10% vesting – (105,527) (61,864) 2017 year award – 80% vesting (451,251) – – 2018 year award – 10% vesting (57,102) (101,259) – 2019 year award – MM 33% vesting (47,401) – – 2019 year award – TM 50% vesting (137,779) – – Number of shares vested (693,533) (620,330) (519,130) Number of unvested shares at the end of the period 2,125,246 3,028,818 3,141,541 Expense recognised as staff cost during the period (GEL thousand) 22,115 18,498 33,857 * The maximum amount is ﬁxed for deferred share compensations for top management, the exact number will be calculated as per policy. 306 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 27. SHARE BASED PAYMENTS CONTINUED Tax part of the existing bonus system is accounted under equity settled basis. Staff costs related to equity settled part of the share based payment schemes are recognised in the income state- ment on a straight line basis over the vesting period of each relevant tranche and corresponding entry is credited to share based payment reserve in equity. On 31 December 2021 based on level of achievement of key performance indicators the management has reassessed the number of shares that will have to be issued to the participants of the share based payment system by decreasing estimated number of shares to vest by 169,753 (31 December 2020: decreased estimated number of shares to vest by 71,847; 31 December 2019: decreased estimated number of shares to vest by 16,501). In 2019 the Group established employee beneﬁt trust (EBT) Executive Equity Compensation Trustee – Sanne Fiducia- ry Services Limited (the “Trustee”) which acts as the trustee of the Group’s share based payments plan. It purchases Group’s shares from the open market and holds them before they are awarded to participants and vesting date is due. The number of shares to be purchased and held are instructed by the Remuneration committee of the TBC Bank Group PLC. The shares are presented as treasury shares under shares held by trust category in the Statement of Financial Position until they are awarded to participants. When award takes place, treasury shares amount are credit- ed with corresponding debit recognized in share based payment reserve. As at 31 December 2021 the share number held by Trustee was 641,391 (31 December 2020: 778,183; 31 December 2019: 595,380), which represents 1.2% of total outstanding shares (31 December 2020: 1.4%; 31 December 2019: 1.1%). 28. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the proﬁt or loss attributable to the owners of the Group by the weighted average number of ordinary shares in issue during the year. in thousands of GEL 2021 2020 2019 Proﬁt for the period attributable to the owners of the Bank 800,782 317,752 537,895 Weighted average number of ordinary shares in issue 54,483,399 54,399,669 54,684,038 Basic earnings per ordinary share attributable to the owners of the Group (expressed in GEL per share) 14.7 5.8 9.8 Diluted earnings per share are calculated by dividing the proﬁt or loss attributable to owners of the Group by the weighted average number of ordinary shares adjusted for the effects of all dilutive potential ordinary shares during the year. Ordinary shares with dilutive potential represent those shares that were granted to the participants of the share based payments scheme and are not yet distributed. in thousands of GEL 2021 2020 2019 Proﬁt for the period attributable to the owners of the Bank 800,782 317,752 537,895 Weighted average number of ordinary shares in issue adjusted for the effects of all dilutive potential ordinary shares during the period 55,865,829 55,206,050 55,129,444 Diluted earnings per ordinary share attributable to the owners of the Group (expressed in GEL per share) 14.3 5.8 9.8 307 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 29. SEGMENT ANALYSIS The Management Board (the “Board”) is the chief operating decision maker and it reviews the Group’s internal report- ing in order to assess the performance and to allocate resources. In 2021 the Group made following re-segmentations: • Standard annual re-segmentation after which some of the clients were reallocated to different segments – GEL 93,916 thousand of loans and GEL 75,268 thousand of customer accounts were transferred from MSME to Cor- porate segment. • Wealth Management business with high net worth individuals has been transferred from retail to corporate seg- ment in the amount of GEL 141,122 thousand of loans and GEL 2,289,076 thousand of customer accounts due to changes in segment deﬁnitions. • Space segment has been fully transferred from MSME to retail segment in the amount of GEL 33,709 thousand of loans and GEL 9,717 thousand of customer accounts due to changes in segment deﬁnitions. The underlying rationale was the composition of product base, offered by Space to its customers. The majority of such products are consumer, fast consumer and installment loans, which by their nature represent the retail segment. In the tables below is disclosed the information as of 31 December 2020 and 2019 both with and without re-segmen- tation effect. Other transfers between segments were primarily due to changes in client size and speciﬁcations compared to prior period. The operating segments are determined as follows: • Corporate – a legal entity/group of afﬁliated entities with an annual revenue exceeding GEL 12.0 million or which has been granted facilities of more than GEL 5.0 million. Some other business customers may also be assigned to the CIB segment or transferred to the MSME segment on a discretionary basis. In addition, CIB includes Wealth Management private banking services to high-net-worth individuals with a threshold of US$ 250,000 on assets under management (AUM), as well as on discretionary basis; • Retail – non-business individual customers; or individual customers of the fully digital bank, Space, TBC Bank Uzbekistan; • MSME – business customers who are not included in the CIB segment; • Corporate centre and other operations - comprises of the treasury, other support and back ofﬁce functions, and non-banking subsidiaries of the Group. The Board of Directors assesses the performance of the operating segments based on a measure of proﬁt before income tax. The reportable segments are the same as the operating segments. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue in 2021, 2020 or 2019. The vast majority of the Group’s revenues are attributable to Georgia. A geographic analysis of origination of the Group’s assets and liabilities is given in Note 39. Allocation of indirect expenses is performed based on drivers identiﬁed for each type of cost if possible. If there is no identiﬁable driver for any type of expense/overhead cost, those expenses are allocated between segments based on the same logic as applied for the expenses with similar nature (e.g. other operating expenses would follow the pattern of closest category of operating expenses). Intersegment transfer pricing methodology is internally created tool, which is based on matched maturity logics. It is used to manage liquidity and interest rate risks. Corporate centre borrows monetary amounts (deposits) from busi- ness segments, therefore, each of segment is compensated on each deposit based on its currency, duration, type and liquidity requirements. Business segments then borrow money from corporate centre, to fund loans, on which each segment pays agreed price to corporate centre, based on each loans currency, type (ﬁxed or floating), duration, capital requirement. 308 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2021 – Interest income 562,055 691,257 384,337 248,207 1,885,856 – Interest expense (274,093) (131,233) (11,343) (494,598) (911,267) – Net interest gains on currency swaps - - - 28,143 28,143 – Inter-segment interest income/(expense) 71,408 (169,947) (154,827) 253,366 - Net interest income 359,370 390,077 218,167 35,118 1,002,732 – Fee and commission income 111,777 212,867 52,806 34,582 412,032 – Fee and commission expense (80,717) (38,191) (33,858) (11,266) (164,032) Net fee and commission income 31,060 174,676 18,948 23,316 248,000 – Insurance proﬁt - - - 23,546 23,546 – Net gains/(losses) from derivatives, foreign currency operations and translation 57,102 35,946 27,496 (3,274) 117,270 – Net gains from disposal of investment securities measured at fair value through other comprehensive income 1,412 - - 9,744 11,156 – Other operating income 2,677 8,001 877 36,924 48,479 – Share of proﬁt of associate - - - 837 837 Other operating non-interest income and insurance proﬁt 61,191 43,947 28,373 67,777 201,288 – Credit loss recovery/(allowance) for loans to customers 59,743 (26,795) 7,175 - 40,123 – Credit loss recovery for performance guarantees and credit related commitments 636 369 199 - 1,204 – Credit loss allowance for ﬁnance lease receivables - - - (321) (321) – Credit loss allowance for other ﬁnancial assets (513) (3,307) - (10,906) (14,726) – Credit loss recovery for ﬁnancial assets measured at fair value through other comprehensive income 1,104 - - 1,498 2,602 – Net impairment of non-ﬁnancial assets (7,954) (59) (1,373) (2,596) (11,982) Operating income after expected credit and non-ﬁnancial asset impairment losses 504,637 578,908 271,489 113,886 1,468,920 – Staff costs (50,727) (135,918) (53,828) (68,829) (309,302) – Depreciation and amortization (5,339) (51,558) (11,663) (11,331) (79,891) – Recovery of provision for liabilities and charges - - - 27 27 – Administrative and other operating expenses (18,459) (75,295) (20,221) (42,693) (156,668) Operating expenses (74,525) (262,771) (85,712) (122,826) (545,834) Losses from modiﬁcations of ﬁnancial instruments (945) (688) (93) - (1,726) Proﬁt/(loss) before tax 429,167 315,449 185,684 (8,940) 921,360 – Income tax expense (48,857) (32,200) (21,135) (10,169) (112,361) Proﬁt/(loss) for the year 380,310 283,249 164,549 (19,109) 808,999 Total gross loans and advances to customers reported 6,547,741 6,358,345 4,141,305 - 17,047,391 Total customer accounts reported 7,330,543 5,837,333 1,558,676 311,620 15,038,172 Total credit related commitments and performance guarantees 3,201,078 178,556 381,201 - 3,760,835 29. SEGMENT ANALYSIS CONTINUED A summary of the Group’s reportable segments for the years ended 31 December 2021, 2020 and 2019 is provided below: Segment disclosure below is prepared with the effect of 2021 re-segmentations as described above. 309 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 29. SEGMENT ANALYSIS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2020 – Interest income 476,829 616,535 321,304 253,331 1,667,999 – Interest expense (224,895) (116,759) (11,137) (500,725) (853,516) – Net interest gains on currency swaps - - - 20,950 20,950 – Inter-segment interest income/(expense) 59,132 (135,612) (121,732) 198,212 - Net interest income/(expense) 311,066 364,164 188,435 (28,232) 835,433 – Fee and commission income 83,919 168,320 37,740 16,198 306,177 – Fee and commission expense (55,333) (43,068) (22,892) (2,117) (123,410) Net fee and commission income 28,586 125,252 14,848 14,081 182,767 – Insurance proﬁt - - - 19,485 19,485 – Net gains/(losses) from derivatives, foreign currency operations and translation 55,911 28,581 25,699 (12,173) 98,018 – Net losses from disposal of investment securities measured at fair value through other comprehensive income - - - (624) (624) – Other operating income 1,856 6,939 391 11,326 20,512 Other operating non-interest income and insurance proﬁt 57,767 35,520 26,090 18,014 137,391 – Credit loss allowance for loans to customers (30,434) (205,180) (95,197) - (330,811) – Credit loss recovery/(allowance) for performance guarantees and credit related commitments 3,546 (241) (67) - 3,238 – Credit loss allowance for ﬁnance lease receivables - - - (8,398) (8,398) – Credit loss allowance for other ﬁnancial assets (5,600) (1,476) - (6,991) (14,067) – Credit loss allowance for ﬁnancial assets measured at fair value through other comprehensive income (875) - - (934) (1,809) – Net impairment of non-ﬁnancial assets (5) (3,672) (796) (1,688) (6,161) Operating income/(expense) after expected credit and non-ﬁnancial asset impairment losses 364,051 314,367 133,313 (14,148) 797,583 – Staff costs (39,735) (109,907) (45,557) (48,844) (244,043) – Depreciation and amortization (4,460) (45,939) (10,340) (7,653) (68,392) – Provision for liabilities and charges (400) (2,200) - (106) (2,706) – Administrative and other operating expenses (15,360) (67,434) (15,555) (23,972) (122,321) Operating expenses (59,955) (225,480) (71,452) (80,575) (437,462) Losses from modiﬁcations of ﬁnancial instruments (6,345) (23,633) (7,153) (3,884) (41,015) Proﬁt/(loss) before tax 297,751 65,254 54,708 (98,607) 319,106 – Income tax (expense)/credit (19,863) 23,759 2,337 (2,850) 3,383 Proﬁt/(loss) for the year 277,888 89,013 57,045 (101,457) 322,489 Total gross loans and advances to customers 5,925,787 5,846,274 3,428,459 - 15,200,520 Total customer accounts 5,792,615 4,975,661 1,293,222 511,230 12,572,728 Total credit related commitments and performance guarantees 3,146,940 176,937 308,480 - 3,632,357 For comparison purposes segment disclosure below is prepared with the effect of 2021 re-segmentations as de- scribed above. * Certain amounts do not correspond to the 2020 consolidated ﬁnancial statements as they reflect the certain restatements as described in Note 2. 310 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2020 – Interest income 462,383 617,124 335,161 253,331 1,667,999 – Interest expense (203,390) (184,990) (12,100) (453,036) (853,516) – Net interest gains on currency swaps - – – 20,950 20,950 – Inter-segment interest income/(expense) 34,455 (59,379) (125,599) 150,523 – Net interest income/(expense) 293,448 372,755 197,462 (28,232) 835,433 – Fee and commission income 57,197 206,377 26,405 16,198 306,177 – Fee and commission expense (8,575) (101,822) (10,896) (2,117) (123,410) Net fee and commission income 48,622 104,555 15,509 14,081 182,767 – Insurance proﬁt – – – 19,485 19,485 – Net gains/(losses) from derivatives, foreign currency operations and translation 51,443 31,561 27,187 (12,173) 98,018 – Net losses from disposal of investment securities measured at fair value through other comprehensive income – – – (624) (624) – Other operating income 1,856 6,901 429 11,326 20,512 Other operating non-interest income and insurance proﬁt 53,299 38,462 27,616 18,014 137,391 – Credit loss allowance for loans to customers (29,089) (201,652) (100,070) – (330,811) – Credit loss recovery/ (allowance) for performance guarantees and credit related commitments 3,546 (241) (67) – 3,238 – Credit loss allowance for ﬁnance lease receivables – – – (8,398) (8,398) – Credit loss allowance for other ﬁnancial assets (5,600) (1,476) – (6,991) (14,067) – Credit loss allowance for ﬁnancial assets measured at fair value through other comprehensive income (875) – – (934) (1,809) – Net impairment of non-ﬁnancial assets (5) (3,590) (878) (1,688) (6,161) Operating income/(expense) after expected credit and non-ﬁnancial asset impairment losses 363,346 308,813 139,572 (14,148) 797,583 – Staff costs (35,580) (110,988) (48,631) (48,844) (244,043) – Depreciation and amortization (4,296) (45,256) (11,187) (7,653) (68,392) – Provision for liabilities and charges (400) (2,200) – (106) (2,706) – Administrative and other operating expenses (13,644) (63,397) (21,308) (23,972) (122,321) Operating expenses (53,920) (221,841) (81,126) (80,575) (437,462) Losses from modiﬁcations of ﬁnancial instruments (6,345) (23,633) (7,153) (3,884) (41,015) Proﬁt/(loss) before tax 303,081 63,339 51,293 (98,607) 319,106 – Income tax (expense)/credit (18,695) 21,360 3,568 (2,850) 3,383 Proﬁt/(loss) for the year 284,386 84,699 54,861 (101,457) 322,489 Total gross loans and advances to customers 5,690,749 5,953,687 3,556,084 – 15,200,520 Total customer accounts 3,939,501 7,255,020 1,378,207 – 12,572,728 Total credit related commitments and performance guarantees 3,125,279 189,288 317,790 – 3,632,357 29. SEGMENT ANALYSIS CONTINUED Segment disclosure below is prepared without the effect of 2021 re-segmentations as described above. * Certain amounts do not correspond to the 2020 consolidated ﬁnancial statements as they reflect the certain restatements as described in Note 2. 311 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 29. SEGMENT ANALYSIS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2019 – Interest income 360,686 587,154 291,051 197,952 1,436,843 – Interest expense (141,671) (147,284) (10,015) (364,890) (663,860) – Net interest gains on currency swaps - - - 28,556 28,556 – Inter-segment interest income/(expense) 11,143 (73,190) (99,023) 161,070 - Net interest income 230,158 366,680 182,013 22,688 801,539 – Fee and commission income 49,879 203,391 25,787 10,564 289,621 – Fee and commission expense (7,101) (84,837) (9,081) (1,312) (102,331) Net fee and commission income 42,778 118,554 16,706 9,252 187,290 – Insurance proﬁt - - - 18,510 18,510 – Net gains/(losses) from derivatives, foreign currency operations and translation 51,060 30,650 23,087 (3,610) 101,187 – Net gains from disposal of investment securities measured at fair value through other comprehensive income - - - 169 169 – Other operating income 4,323 8,204 1,082 5,307 18,916 – Share of proﬁt of associates - - - 632 632 Other operating non-interest income and insurance proﬁt 55,383 38,854 24,169 21,008 139,414 – Credit loss recovery/(allowance) for loans to customers 3,270 (81,577) (3,723) - (82,030) – Credit loss (allowance)/recovery for performance guarantees and credit related commitments (2,691) 411 124 - (2,156) – Credit loss recovery for ﬁnance lease receivables - - - 582 582 – Credit loss recovery/(allowance) for other ﬁnancial assets 2,199 (3,533) (11) (6,753) (8,098) – Credit loss allowance for ﬁnancial assets measured at fair value through other comprehensive income (141) - - (149) (290) – Net impairment of non-ﬁnancial assets - (2,743) - - (2,743) Operating income after expected credit and non-ﬁnancial asset impairment losses 330,956 436,646 219,278 46,628 1,033,508 – Staff costs (38,360) (135,282) (46,879) (27,282) (247,803) – Depreciation and amortization (2,571) (45,522) (7,210) (4,175) (59,478) – Provision for liabilities and charges - - - (1,264) (1,264) – Administrative and other operating expenses (17,127) (78,921) (16,993) (26,397) (139,438) Operating expenses (58,058) (259,725) (71,082) (59,118) (447,983) Proﬁt/(loss) before tax 272,898 176,921 148,196 (12,490) 585,525 – Income tax (expense)/credit (29,048) (17,557) (15,369) 16,790 (45,184) Proﬁt for the year 243,850 159,364 132,827 4,300 540,341 Total gross loans and advances to customers 4,904,244 4,896,594 2,861,117 - 12,661,955 Total customer accounts 4,749,061 3,922,048 1,152,166 226,049 10,049,324 Total credit related commitments and performance guarantees 2,468,262 190,598 300,991 - 2,959,851 For comparison purposes segment disclosure below is prepared with the effect of 2021 re-segmentations as de- scribed above. * Certain amounts do not correspond to the 2019 consolidated ﬁnancial statements as they reflect the certain restatements as described in Note 2. 312 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2019 – Interest income 356,652 582,788 299,451 197,952 1,436,843 – Interest expense (160,064) (152,751) (10,202) (340,843) (663,860) – Net interest gains on currency swaps – – – 28,556 28,556 – Inter-segment interest income/(expense) 31,352 (66,951) (101,424) 137,023 – Net interest income 227,940 363,086 187,825 22,688 801,539 – Fee and commission income 49,338 203,448 26,271 10,564 289,621 – Fee and commission expense (7,069) (84,869) (9,081) (1,312) (102,331) Net fee and commission income 42,269 118,579 17,190 9,252 187,290 – Insurance proﬁt – – – 18,510 18,510 – Net gains/(losses) from derivatives, foreign currency operations and translation 49,851 30,726 24,220 (3,610) 101,187 – Net gains from disposal of investment securities measured at fair value through other comprehensive income – – – 169 169 – Other operating income 2,953 9,563 1,093 5,307 18,916 – Share of proﬁt of associates – – – 632 632 Other operating non-interest income and insurance proﬁt 52,804 40,289 25,313 21,008 139,414 – Credit loss recovery/(allowance) for loans to customers 3,261 (77,323) (7,968) – (82,030) – Credit loss (allowance)/recovery for performance guarantees and credit related commitments (2,691) 411 124 – (2,156) – Credit loss recovery for ﬁnance lease receivables – – – 582 582 – Credit loss recovery/(allowance) for other ﬁnancial assets 2,211 (3,545) (11) (6,753) (8,098) – Credit loss allowance for ﬁnancial assets measured at fair value through other comprehensive income (141) – – (149) (290) – Net impairment of non-ﬁnancial assets – (2,743) – – (2,743) Operating income after expected credit and non-ﬁnancial asset impairment losses 325,653 438,754 222,473 46,628 1,033,508 – Staff costs (38,360) (134,143) (48,018) (27,282) (247,803) – Depreciation and amortization (2,571) (45,522) (7,210) (4,175) (59,478) – Provision for liabilities and charges – – – (1,264) (1,264) – Administrative and other operating expenses (17,127) (74,820) (21,094) (26,397) (139,438) Operating expenses (58,058) (254,485) (76,322) (59,118) (447,983) Proﬁt/(loss) before tax 267,595 184,269 146,151 (12,490) 585,525 – Income tax (expense)/credit (29,048) (18,101) (14,825) 16,790 (45,184) Proﬁt for the year 238,547 166,168 131,326 4,300 540,341 Total gross loans and advances to customers 4,660,473 5,053,203 2,948,279 – 12,661,955 Total customer accounts 3,187,319 5,673,917 1,188,088 – 10,049,324 Total credit related commitments and performance guarantees 2,451,770 205,433 302,648 – 2,959,851 29. SEGMENT ANALYSIS CONTINUED Segment disclosure below is prepared without the effect of 2021 re-segmentations as described above. * Certain amounts do not correspond to the 2019 consolidated ﬁnancial statements as they reflect the certain restatements as described in Note 2. 313 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 29. SEGMENT ANALYSIS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2021 – Fee and commission income 111,777 212,867 52,806 34,582 412,032 – Other operating income 2,677 8,001 877 36,924 48,479 Total 114,454 220,868 53,683 71,506 460,511 Timing of revenue recognition: – At point in time 114,435 219,365 53,683 71,506 458,989 – Over a period of time 19 1,503 - - 1,522 in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2020 – Fee and commission income 57,197 206,377 26,405 16,198 306,177 – Other operating income 1,856 6,901 429 11,326 20,512 Total 59,053 213,278 26,834 27,524 326,689 Timing of revenue recognition: – At point in time 59,053 210,986 26,834 27,524 324,397 – Over a period of time – 2,292 – – 2,292 in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2019 – Fee and commission income 49,338 203,448 26,271 10,564 289,621 – Other operating income 2,953 9,563 1,093 5,307 18,916 Total 52,291 213,011 27,364 15,871 308,537 Timing of revenue recognition: – At point in time 52,263 211,531 27,359 15,871 307,024 – Over a period of time 28 1,480 5 – 1,513 314 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Reportable segments’ assets were reconciled to total assets as follows: in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 Total segment assets (gross loans and advances to customers) 17,047,391 15,200,520 12,661,955 Credit loss allowance on gross loans and advances to customers (410,246) (606,246) (312,556) Cash and cash equivalents 1,722,137 1,635,405 1,003,583 Mandatory cash balances with National Bank of Georgia and Uzbekistan 2,087,141 2,098,506 1,591,829 Due from other banks 79,142 50,805 33,605 Investment securities measured at fair value through other comprehensive income 1,938,196 1,527,268 985,293 Bonds carried at amortised cost 49,582 1,089,801 1,022,684 Current income tax prepayment 194 69,888 25,695 Deferred income tax asset 12,357 2,787 2,173 Other ﬁnancial assets 453,115 171,302 133,736 Finance lease receivables 262,046 271,660 256,660 Other assets 397,079 266,960 255,712 Premises and equipment 392,506 372,956 334,728 Intangible assets 319,963 239,523 167,597 Investment properties 22,892 68,689 72,667 Goodwill 59,964 59,964 61,558 Right of use assets 70,513 53,927 59,693 Investments in associates 4,589 4,090 2,654 Total assets per statement of ﬁnancial position 24,508,561 22,577,805 18,359,266 29. SEGMENT ANALYSIS CONTINUED Reportable segments’ liabilities are reconciled to total liabilities as follows: in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 Total segment liabilities (customer accounts) 15,038,172 12,572,728 10,049,324 Due to credit institutions 2,984,176 4,486,373 3,593,901 Debt securities in issue 1,710,288 1,496,497 1,213,598 Current income tax liability 86,762 853 1,634 Deferred income tax liability 10,979 13,088 18,888 Provisions for liabilities and charges 25,358 25,335 23,128 Other ﬁnancial liabilities 139,811 227,432 113,608 Other liabilities 130,972 87,842 95,162 Subordinated debt 623,647 672,740 591,035 Lease Liabilities 66,167 58,983 59,898 Total liabilities per statement of ﬁnancial position 20,816,332 19,641,871 15,760,176 315 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL 2021 2020 2019 Interest income calculated using effective interest method Loans and advances to customers 1,614,374 1,394,033 1,225,196 Bonds carried at amortised cost 2,224 97,122 58,682 Investment securities measured at fair value through other comprehensive income 185,424 103,516 74,043 Due from other banks 20,856 18,590 29,570 Other ﬁnancial assets 4,540 1,655 1,418 Other interest income Finance lease receivables 58,438 53,083 47,934 Total interest income 1,885,856 1,667,999 1,436,843 Interest expense Customer accounts (477,429) (397,542) (320,350) Due to credit institutions (256,912) (289,369) (226,899) Subordinated debt (53,338) (55,716) (63,693) Debt securities in issue (120,167) (107,929) (50,248) Other interest expense Lease Liabilities (3,421) (2,960) (2,670) Total interest expense (911,267) (853,516) (663,860) Net interest gains on currency swaps 28,143 20,950 28,556 Net interest income 1,002,732 835,433 801,539 * 2021 reflects changes in business model of ﬁnancial securities described in Note 2. During 2021 interest accrued on defaulted loans amounted to GEL 36,105 thousand (2020: GEL 69,285 thousand; 2019: GEL 14,372 thousand). During 2021 capitalized interest expense in the amount of GEL 1,756 thousand (2020: GEL 1,403 thousand, 2019: nil), was attributable to the development of the Group’s headquarters. The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation is weighted average of interest bearing liabilities by currencies: 7.7% in GEL, 2.9% in USD and 1.3% in EUR. (2020: 7.7% in GEL, 3.6% in USD and 1.1% in EUR, 2019: nil) 30. INTEREST INCOME AND EXPENSE 316 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 31. FEE AND COMMISSION INCOME AND EXPENSE in thousands of GEL 2021 2020 (restated) 2019 (restated) Fee and commission income in respect of ﬁnancial instruments not at fair value through proﬁt or loss: – Card operations 188,413 138,796 134,810 – Settlement transactions 139,383 99,395 86,967 – Guarantees issued 42,124 35,761 28,701 – Cash transactions 8,195 8,305 13,211 – Issuance of letters of credit 2,896 6,200 5,215 – Foreign exchange operations 3,257 1,978 2,841 – Other 27,764 15,742 17,876 Total fee and commission income 412,032 306,177 289,621 Fee and commission expense in respect of ﬁnancial instruments not at fair value through proﬁt or loss: – Card operations 118,050 93,649 78,773 – Settlement transactions 18,065 13,111 13,739 – Cash transactions 6,085 6,454 4,732 – Guarantees and letters of credit received 4,247 4,052 3,627 – Foreign exchange operations 407 228 59 – Other 17,178 5,916 1,401 Total fee and commission expense 164,032 123,410 102,331 Net fee and commission income 248,000 182,767 187,290 * Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the reclassiﬁcations as described in Note 2. 32. OTHER OPERATING INCOME in thousands of GEL 2021 2020 2019 Gain from sale of investment properties 22,934 1,003 938 Revenues from e-commerce 7,185 6,604 259 Gain on disposal of premises and equipment 5,356 594 2,440 Gain from sale of repossessed collateral 3,086 1,568 2,755 Revenues from operational leasing 2,048 3,172 3,046 Revenues from non-credit related ﬁnes 334 236 344 Revenues from sale of cash-in terminals 294 477 926 Other 7,242 6,858 8,208 Total other operating income 48,479 20,512 18,916 In 2021, the Group disposed its certain investment properties and premises, out of which most part accounted to the single sale described in Note 15. Revenue from operational leasing is wholly attributable to investment properties. The carrying value of the repos- sessed collateral disposed in the year ended 31 December 2021 was GEL 48,029 thousand (2020: GEL 22,423 thou- sand; 2019: GEL 32,306 thousand). 317 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 33. NET GAINS FROM CURRENCY DERIVATIVES, FOREIGN CURRENCY OPERATIONS AND TRANSLATION Net gains from currency derivatives, foreign currency operations and translation for the following years are as fol- lows: in thousands of GEL 2021 2020 2019 Net gains/(losses) from trading in foreign currencies 113,043 (92,110) 79,279 Net gains/(losses) from foreign exchange translation 3,938 190,120 22,188 Net gains/(losses) from derivative ﬁnancial instruments 289 8 (280) Total net gains from currency derivatives, foreign currency operations and translation 117,270 98,018 101,187 34. NET INSURANCE PROFIT Net insurance proﬁt for the following years are as follows: in thousands of GEL 2021 2020 2019 Premium written on life insurance contracts 32,267 26,674 22,891 Premium written on general insurance contracts 60,297 41,807 40,583 Total premiums written 92,564 68,481 63,474 Change in gross reserves for life unearned premiums (216) (63) (80) Change in gross reserves for general unearned premiums (11,636) (2,729) (5,484) Total earned premiums 80,712 65,689 57,910 Reinsurers’ earned premium on life insurance contracts (5,944) (5,263) (4,897) Reinsurers’ earned premium on general insurance contracts (8,778) (7,067) (14,814) Total net earned premiums 65,990 53,359 38,199 Life insurance claims settled (10,629) (5,297) (4,656) General insurance claims settled (39,365) (31,757) (26,081) Reinsurer's share of life insurance claims settled 7,954 3,969 3,458 Reinsurer's share of general insurance claims settled 1,619 4,206 14,058 Total net claims settled (40,421) (28,879) (13,221) Gross change in reported but not settled claims (3,723) (461) (2,052) Incurred but not reported claims 27 (235) 340 Reinsurer's share of change in reported but not settled claims 1,728 (640) 339 Subrogation and recoveries 5,497 2,084 1,039 Expenses Associated with claims - (932) (329) Net claims incurred (36,892) (29,063) (13,884) Agent’s commissions/acquisition costs (5,552) (4,811) (5,805) Net claims incurred and agents’ commissions (42,444) (33,874) (19,689) Net Insurance Proﬁt 23,546 19,485 18,510 35. STAFF COSTS in thousands of GEL 2021 2020 2019 Salaries and bonuses 271,649 215,680 201,344 Share based compensation 22,115 18,498 33,857 Other compensation cost 15,538 9,865 12,602 Salaries and other employee beneﬁts 309,302 244,043 247,803 318 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Share based compensation represents remuneration paid in shares and is excluded as non-cash in the consolidated statement of cash flows. On the other hand, acquisition of treasury shares for share based payment scheme is includ- ed as ﬁnancing activity in the consolidated statement of cash flows. Breakdown of monthly average number of employees by categories is as follows: 35. STAFF COSTS CONTINUED 2021 2020 2019 Headquarters 3,917 3,228 2,924 Branches 3,889 3,600 3,638 Other administrative staff ** 1,259 1,123 700 * Under monthly average number of employees in headquarters and branches employees in JSC TBC Bank, JSC TBC Insurance, TBC bank Uzbekistan and LLC TBC Kredit’s are considered. ** Employees from other subsidiaries are considered under other administrative staff. In 2021 monthly average number of employees in TBC PLC, as a stand-alone entity, was 10 individuals (2020: 10; 2019: 10). 36. ADMINISTRATIVE AND OTHER OPERATING EXPENSES in thousands of GEL 2021 2020 (restated) 2019 (restated) Advertising and marketing services 32,519 21,260 22,634 Professional services 23,228 19,649 25,865 Intangible asset maintenance 22,223 15,677 12,885 Rent 13,883 13,853 13,541 Taxes other than on income 10,759 8,764 6,962 Utilities services 8,327 6,596 6,874 Premises and equipment maintenance 7,808 6,475 9,828 Communications and supply 7,398 6,059 5,960 Stationery and other ofﬁce expenses 5,472 5,841 5,167 Security services 1,843 1,872 2,035 Transportation and vehicle maintenance 2,508 1,732 2,140 Insurance 2,092 1,706 1,660 Personnel training and recruitment 2,740 1,632 3,120 Charity 418 1,530 1,990 Business trip expenses 520 720 2,612 Loss on disposal of repossessed collateral 682 181 1,310 Loss on disposal of premises and equipment 1,239 148 938 Other 13,009 8,626 13,917 Total administrative and other operating expenses 156,668 122,321 139,438 * Certain amounts do not correspond to the 2020 and 2019 consolidated ﬁnancial statements as they reflect the reclassiﬁcation of net impairment of non-ﬁnancial assets as described in Note 2. ** Includes short-term leases, low value leases, VAT and other relevant tax expense on lease contracts recognised under IFRS 16 scope 319 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Auditors’ remuneration is included within professional services expenses above and comprises: 36. ADMINISTRATIVE AND OTHER OPERATING EXPENSES CONTINUED in thousands of GEL Audit Audit Related Other Services Total 31 December 2021 Fees payable to the company’s auditors and its associates for the audit of parent company and consolidated ﬁnancial statements 2,179 – – 2,179 Audit of the ﬁnancial statements of the company’s subsidiaries 608 – – 608 Audit-related assurance services – 613 - 613 Other assurance services – - 932 932 Total auditors’ remuneration 2,787 613 932 4,332 31 December 2020 Fees payable to the company’s auditors and its associates for the audit of parent company and consolidated ﬁnancial statements 2,175 – – 2,175 Audit of the ﬁnancial statements of the company’s subsidiaries 429 – – 429 Audit-related assurance services – 334 – 334 Other assurance services – – 26 26 Total auditors’ remuneration 2,604 334 26 2,964 31 December 2019 Fees payable to the company’s auditors and its associates for the audit of parent company and consolidated ﬁnancial statements 1,427 – – 1,427 Audit of the ﬁnancial statements of the company’s subsidiaries 248 – – 248 Audit-related assurance services – 561 – 561 Other assurance services – – 864 864 Total auditors’ remuneration 1,675 561 864 3,100 Fees presented in the tables above are exclusive of taxes. For the year ended 31 December 2021, GEL 910 thousands (included in the table in other assurance services) is attributable to the services in relation to issuance of AT1 Notes in October 2021. 37. INCOME TAXES Income tax credit/(expense) comprise of the following: in thousands of GEL 2021 2020 2019 Current tax charge 124,040 3,022 46,166 Deferred tax credit (11,679) (6,405) (982) Total Income tax expense/(credit) for the year 112,361 (3,383) 45,184 Current income tax liability to the regulatory authorities is generally paid on a quarterly basis. The amount is calcu- lated by dividing previous year current income tax amount by 4 equal portion. In 2021, no prepayments for current income tax were made as the 2020 resulted in tax loss and there was no current income tax payable. Accordingly, at the end of 2021 Bank had income tax payable, whilst in 2020 and 2019, income tax asset. The income tax rate applicable to the majority of the Group’s income was 15% (2020: 15%; 2019: 15%). The income tax rate applicable to the majority of subsidiaries income ranged from 15% to 20% (2020: 15% - 20%; 2019: 15% - 20%). 320 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL 2021 2020 2019 Statutory rate 15% – 20% 15% – 20% 15% – 20% Proﬁt before tax 921,360 319,106 585,525 Theoretical tax charge at statutory rate (15%-20%) 137,852 46,327 87,829 Tax effect of items which are not deductible or assessable for taxation purposes: – Income which is exempt from taxation (25,435) (21,295) (19,318) – Non-deductible expenses (314) (2,322) (2,083) – Expected effects of change in tax legislation 343 (23,226) (20,757) – Other differences (85) (2,867) (487) Total Income tax expense/(credit) for the year 112,361 (3,383) 45,184 37. INCOME TAXES CONTINUED Differences between ﬁnancial reporting framework and statutory taxation regulations in Georgia, Azerbaijan and Uz- bekistan give rise to temporary differences between the carrying amount of assets and liabilities for ﬁnancial report- ing purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 15% (2020: 15%; 2019: 15%) for Georgia, 20% (2020: 20%; 2019: 20%) for Azerbaijan, 20% (2020: 20%; 2019: 20%) for Uzbekistan and 20% (2020: 20%; 2019: 20%) for United Kingdom. Income which is exempt from taxation includes interest income from placements in NBG, Georgian Government Treasury bills and IFI securities. Revaluation of investment securities held at FVOCI did not result in recognition of deferred tax assets/liabilities (since majority of securities were either tax exempt or were not supposed to be sold before Estonian model transition date discussed below) and its tax effect was not recognised in OCI. Non-deductible expenses include penalties paid and charity expenses towards beneﬁciary which are not registered charity organi- zations. On 13 May 2016 the Government of Georgia enacted the changes in the Tax Code of Georgia effective from 1 January 2019, for commercial banks, credit unions, insurance organizations, microﬁnance organizations and pawnshops and from 1 January 2017 for other entities. However, during 2018 Georgian Government changed transition date to 1 Jan- uary 2023 for commercial banks, credit unions, insurance organizations, microﬁnance organizations and pawnshops. The new code impacts the recognition and measurement principles of the Group’s income tax and it also affects the Group’s deferred income tax assets/liabilities. Companies do not have to pay income tax on their proﬁt before tax (earned since 1 January 2017 or 1 January 2023 for commercial banks, credit unions, insurance organizations, mi- croﬁnance organizations and pawnshops) until that proﬁt is distributed in a form of dividend or other forms of proﬁt distributions. Once dividend is paid, 15% income tax is payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form, to the foreign non-resident legal entities and foreign and domestic individuals. The dividends paid out to the resident legal entities are tax exempted. Apart from dividends’ distribution, the tax is still payable on expenses or other payments incurred not related to economic activities, free delivery of goods/services and/or transfer of funds and representation costs that exceed the maximum amount determined by the Income Tax Code of Georgia, in the same month they are incurred. Deferred tax assets/liabilities are re-measured to the amounts that are estimated to be utilized in the period from 1 January 2021 to 31 December 2022. Reconciliation between the expected and the actual taxation (credit)/expense is provided below. 321 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 in thousands of GEL 1 January 2021 Credited/ (charged) to proﬁt or loss 31 December 2021 Tax effect of (taxable)/deductible temporary differences and tax loss carry forwards Premises and equipment (3,344) 3,259 (85) Loans and advances to customers (18,617) 5,059 (13,558) Other ﬁnancial assets 2,602 1,606 4,208 Other assets 15 (820) (805) Due to credit institutions (1,684) 1,316 (368) Other ﬁnancial liabilities (920) 584 (336) Other liabilities (2,613) 2,128 (485) Share based payment 1,368 1,327 2,695 Finance lease receivables - 853 853 Tax loss carried forward 12,892 (3,633) 9,259 Net deferred tax (liability)/asset (10,301) 11,679 1,378 Recognised deferred tax asset 2,787 9,570 12,357 Recognised deferred tax liability (13,088) 2,109 (10,979) Net deferred tax (liability)/asset (10,301) 11,679 1,378 37. INCOME TAXES CONTINUED in thousands of GEL 1 January 2020 Credited/ (charged) to proﬁt or loss 31 December 2020 Tax effect of (taxable)/deductible temporary differences and tax loss carry forwards Premises and equipment (11,372) 8,019 (3,344) Loans and advances to customers (8,822) (9,795) (18,617) Other ﬁnancial assets 4,721 (2,119) 2,602 Other assets – 15 15 Due to credit institutions (2,487) 803 (1,684) Other ﬁnancial liabilities 792 (1,712) (920) Other liabilities (1,800) (813) (2,613) Share based payment 2,253 (885) 1,368 Tax loss carried forward – 12,892 12,892 Net deferred tax liability (16,715) 6,405 (10,301) Recognised deferred tax asset 2,173 614 2,787 Recognised deferred tax liability (18,888) 5,791 (13,088) Net deferred tax liability (16,715) 6,405 (10,301) 322 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL 1 January 2019 Credited/ (charged) to proﬁt or loss 31 December 2019 Tax effect of (taxable)/deductible temporary differences and tax loss carry forwards Premises and equipment (20,758) 9,386 (11,372) Loans and advances to customers 2,866 (11,688) (8,822) Other ﬁnancial assets 2,421 2,300 4,721 Due to credit institutions (3,641) 1,154 (2,487) Subordinated debt (70) 70 – Other ﬁnancial liabilities (41) 833 792 Other liabilities 864 (2,664) (1,800) Share based payment 663 1,590 2,253 Net deferred tax liability (17,696) 981 (16,715) Recognised deferred tax asset 2,097 76 2,173 Recognised deferred tax liability (19,793) 905 (18,888) Net deferred tax liability (17,696) 981 (16,715) 37. INCOME TAXES CONTINUED In the context of the Group’s current structure and Georgian tax legislation, tax losses and current tax assets of differ- ent group companies may not be offset against current tax liabilities and taxable proﬁts of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority. 38. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES The table below sets out movements in the Group’s liabilities from ﬁnancing activities for each of the periods pre- sented. The items of these liabilities are those that are reported as ﬁnancing activities in the statement of cash flows. in thousands of GEL Other borrowed funds Debt securities in Issue Subordinated debt Lease liabilities Total Liabilities from ﬁnancing activities at 1 January 2019 2,872,069 13,343 650,919 61,043 3,597,374 Proceeds from principal 1,819,899 1,176,049 - - 2,995,948 Redemption of principal (1,392,897) (14,296) (104,079) (6,453) (1,517,725) Net interest movement 5,225 1,140 (1,338) 625 5,652 Other non-cash movements - - - 2,575 2,575 Foreign exchange adjustments 122,591 37,362 45,533 2,108 207,594 Liabilities from ﬁnancing activities at 31 December 2019 3,426,887 1,213,598 591,035 59,898 5,291,418 Proceeds from principal 4,036,810 104,838 - - 4,141,648 Redemption of principal (3,324,230) - - (13,251) (3,337,481) Net interest movement 7,155 (2,779) (812) 10 3,574 Other non-cash movements - - - 5,671 5,671 Foreign exchange adjustments 198,957 180,840 82,517 6,655 468,969 Liabilities from ﬁnancing activities at 31 December 2020 4,345,579 1,496,497 672,740 58,983 6,573,799 Proceeds from principal 1,750,443 295,457 - - 2,045,900 Redemption of principal (3,338,139) - (12,562) (12,825) (3,363,526) Net interest movement (29,257) 3,918 (191) 201 (25,329) Other non-cash movements* - - - 24,246 24,246 Foreign exchange adjustments (69,107) (85,584) (36,340) (4,438) (195,469) Liabilities from ﬁnancing activities at 31 December 2021 2,659,519 1,710,288 623,647 66,167 5,059,621 * Other non-cash movements represent additions less terminations for ﬁnance lease contracts. Net interest movement includes interest accrued and interest paid. Interest paid on other borrowed funds, debt securities in issue, subordinated debt and lease liabilities is included in operating cash flow interest paid caption. 323 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT Credit Quality Depending on the type of ﬁnancial asset the Group may utilize different sources of asset credit quality information including credit ratings assigned by the international rating agencies (Standard & Poor’s, Fitch), credit scoring infor- mation from credit bureau and internally developed credit ratings. Financial assets are classiﬁed in an internally devel- oped credit quality grades by taking into account the internal and external credit quality information in combination with other indicators speciﬁc to the particular exposure (e.g. delinquency). The Group deﬁnes following credit quality grades: • Very low risk – exposures demonstrate strong ability to meet ﬁnancial obligations; • Low risk – exposures demonstrate adequate ability to meet ﬁnancial obligations; • Moderate risk – exposures demonstrate satisfactory ability to meet ﬁnancial obligations; • High risk – exposures that require closer monitoring, and • Default – exposures in default, with observed credit impairment. Expected credit loss (ECL) measurement ECL is a probability-weighted estimate of the present value of future cash shortfalls. An ECL measurement is unbi- ased and is determined by evaluating a range of possible outcomes. ECL measurement is based on four components used by the Group: Probability of Default (“PD”), Exposure at Default (“EAD”), Loss Given Default (“LGD”) and Discount Rate. The estimates consider forward looking information, that is, ECLs reflect probability weighted development of key macroeconomic variables that have an impact on credit risk. The Group uses is a three-stage model for ECL measurement and classiﬁes its borrowers across three stages: The Group classiﬁes its exposures as Stage 1 if no signiﬁcant deterioration in credit quality occurred since initial recog- nition and the instrument was not defaulted when initially recognized. The exposure is classiﬁed to Stage 2 if the signiﬁcant deterioration in credit quality was identiﬁed since initial recognition but the ﬁnancial instrument is not considered defaulted. The exposures for which the defaulted indicators have been identiﬁed are classiﬁed as Stage 3 instruments. The Expected Credit Loss (ECL) amount differs depending on exposure allocation to one of the Stages. In the case of Stage 1 instruments, the ECL represents that portion of the lifetime ECL that can be attributed to default events potentially occurring within the next 12 months from the reporting date. In case of Stage 2 instruments, the ECL represents the lifetime ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a ﬁnancial instrument. Generally, lifetime is set equal to the remaining contractual maturity of the ﬁnancial instrument. Factors such as existence of contractual repayment schedules, options for extension of repayment ma- turity and monitoring processes held by The Group affect the lifetime determination. In case of Stage 3 instruments, default event has already incurred and the lifetime ECL is estimated based on the expected recoveries. Deﬁnition of default Financial assets for which the Group observed occurrence of one or more loss events are classiﬁed in Stage 3. The Group uses both quantitative and qualitative criteria for the deﬁnition of default. The borrower is classiﬁed as defaulted if at least one of the following occurred: • Any amount of contractual repayments is past due more than 90 days; • Factors indicating the borrower’s unlikeliness-to-pay. In case of individually signiﬁcant borrowers The Group additionally applies criteria including but not limited to: bank- ruptcy proceedings, signiﬁcant fraud in the borrower’s business that signiﬁcantly affected its ﬁnancial condition, breach of the contract terms etc. For SME and corporate borrowers default is identiﬁed on the counterparty level, meaning that all the claims against the borrower are treated as defaulted. As for retail and micro exposures, facility level default deﬁnition is applied considering additional pulling effect criteria. If the amount of defaulted exposure ex- ceeds predeﬁned threshold, all the claims against the borrower are classiﬁed as defaulted. Once ﬁnancial instrument is classiﬁed as defaulted, it remains as such until it no longer meets any of the default criteria for a consecutive period of six months, in which case exposure is considered to no longer be in default (i.e. to have cured). Probation period of six months has been determined on analysis of likelihood of a ﬁnancial instrument returning to default status after curing. Exposures which are moved to stage 2 from default state are kept there for certain period before transferring to Stage 1 and classiﬁed as fully performing instruments again. 324 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Signiﬁcant increase in credit risk (“SICR”) Financial assets for which the Group identiﬁes signiﬁcant increase in credit risk since its origination are classiﬁed in Stage 2. SICR indicators are recognized at ﬁnancial instrument level even though some of them refer to the borrower’s characteristics. The Group uses both quantitative and qualitative indicators of SICR. Quantitative criteria On a quantitative basis The Group assess change in probability of default parameter for each particular exposure since initial recognition and compares it to the predeﬁned threshold. When absolute change in probability of default exceeds the applicable threshold, SICR is deemed to have occurred and exposure is transferred to Stage 2. Quantita- tive indicator of SICR is applied to retail and micro segments, where the Group has sufﬁcient number of observations. Qualitative criteria Financial asset is transferred to Stage 2 and lifetime ECLs is measured if at least one of the following SICR qualitative criteria is observed: • delinquency period of more than 30 days on contractual repayments; • exposure is restructured, but is not defaulted; • borrower is classiﬁed as “watch”. The Group has not rebutted the presumption that there has been signiﬁcant increase in credit risk since origination when ﬁnancial asset becomes more than 30 days past due. This qualitative indicator of SICR together with debt restructuring is applied to all segments. Particularly for corporate and SME segment the Group uses downgrade of risk category since origination of the ﬁnancial instrument as a qualitative indicator of SICR. Based on the results of the monitoring borrowers are classiﬁed across different risk categories. In case there are certain weaknesses present, which if materialized may lead to loan repayment problems, borrowers are classiﬁed as “watch” category. Although watch borrowers’ ﬁnancial standing is sufﬁcient to repay obligations, these borrowers are closely monitored and spe- ciﬁc actions are undertaken to mitigate potential weaknesses. Once the borrower is classiﬁed as “watch” category it is transferred to Stage 2. If any of the SICR indicators described above occur ﬁnancial instrument is transferred to Stage 2. Financial asset may be moved back to Stage 1, if SICR indicators are no longer observed. ECL measurement The Group utilizes two approaches for ECL measurement – individual assessment and collective assessment. Indi- vidual assessment is mainly used for stage 2 and stage 3 individually signiﬁcant borrowers. Additionally, the Group may arbitrarily designate selected exposures to individual measurement of ECL based on the Group’s credit risk management or underwriting departments’ decision. The Group uses the discounted cash flow (DCF) method for the determination of recovery amount under individual assessment. In order to ensure the accurate estimation of recoverable amount the Group utilizes scenario analysis approach. Scenarios may be deﬁned considering the speciﬁcs and future outlook of individual borrower, sector the borrower operates in or changes in values of collateral. In case of scenario analysis The Group forecasts recoverable amount for each scenario and estimates respective losses. Ultimate ECL is calculated as the weighted average of losses expected in each scenario, weighted by the probability of scenario occurring. As for the non-signiﬁcant and non-impaired signiﬁcant borrowers The Group estimates expected credit losses col- lectively. For the collective assessment and risk parameters estimation purposes the exposures are grouped into a homogenous risk pools based on similar credit risk characteristics. Common credit risk characteristics of the group include but are not limited to: Stage (Stage 1, Stage 2 or Stage 3), type of counterparty (individual vs business), type of product, rating (external or internal), overdue status, restructuring status, months in default category or any other char- acteristics that may differentiate certain sub-segments for risk parameter’s estimation purposes. Number of pools differs for different products/ segments considering speciﬁcs of portfolio and availability of data within each pool. Collective ECL is the sum of the multiplications of the following credit risk parameters: EAD, PD and LGD, that are deﬁned as explained below, and discounted to present value using the instrument’s effective interest rate. The key principles of calculating the credit risk parameters: 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED 325 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 Exposure at default (EAD) The EAD represents estimation of exposure to credit risk at the time of default occurring during the life of ﬁnancial instrument. The EAD parameter used for the purpose of the ECL calculation is time-dependent, i.e. the Group allows for various values of the parameter to be applied to subsequent time periods during the lifetime of an exposure. Such structure of the EAD is applied to all Stage 1 and Stage 2 ﬁnancial instruments. In case of Stage 3 ﬁnancial instruments and defaulted POCI assets, the EAD vector is one-element with current EAD as the only value. EAD is determined differently for amortising ﬁnancial instruments with contractual repayment schedules and for revolving facilities. For amortising products EAD is calculated considering the contractual repayments of principal and interest over the 12-month period for facilities classiﬁed in Stage 1 and over lifetime period for remaining instruments. It is additionally adjusted to include effect of reduction in exposure due to prepayments - Namely full prepayment ratio. Full Pre- payment Rate (FPR) parameter represents the probability that a ﬁnancial instrument will be fully prepaid during the particular period to maturity. For the purpose of calculating Full Prepayment Ratio, the Group makes the analysis of the historical data of the contracts fully prepaid until the maturity. Probability of default (PD) Probability of default parameter describes the likelihood of a default of a facility over a particular time horizon. It pro- vides an estimate of the likelihood that a borrower will be unable to meet its contractual debt obligations. The PD parameter is time-dependent (i.e. has a speciﬁc term structure) and is applied to all non-defaulted contracts. Taking into account speciﬁc nature of different segments of clients for which the PD is estimated as well as unique char - acteristics that drive their default propensity, the PD is modelled differently for Retail and Micro segments and Cor- porate and SME segments. PD assessment approach is also differentiated for different time horizons and is further adjusted due to expected influence of macroeconomic variables as forecasted for the period (see ‘Forward Looking Information” section for further details on incorporation of macroeconomic expectations in ECL calculation). FLI ad- justment is applied on PD for the three-year period, given the uncertainty involved in the macroeconomic forecasts for the longer time horizon. Two types of PDs are used for calculating ECLs: 12-month and lifetime PD. Lifetime PDs represent the estimated probability of a default occurring over the remaining life of the ﬁnancial instrument and it is a sum of the 12 months marginal PDs over the life of the instrument. The Group generally uses number based approach of PD model construction, however for the nonhomogeneous portfolios exposure-weighted approach is utilised. The Group uses different statistical approaches such as the extrapolation of 12-month PDs based on migration ma- trixes, developing lifetime PD curves based on the historical default data and gradual convergence of long-term PD with the long-term default rate. Loss given default (LGD) The LGD parameter represents the share of an exposure that would be irretrievably lost if a borrower defaults. For Stage 1 and Stage 2 ﬁnancial instruments, the LGD is estimated for each period in the instrument’s lifetime and re- flects the share of the expected EAD for that period that will not be recovered over the remaining lifetime of the instrument after the default date. For Stage 3 ﬁnancial instruments, the LGD represents the share of the EAD as of reporting date that will not be recovered over the remaining life of that instrument. Assessment of LGD varies by the type of counterparty, segment, type of product, securitization level and availability of historical observations. The general LGD estimation process employed by the Group is based on the assumption that after the default of the exposure, two mutually exclusive scenarios are possible. The exposure either leaves the default state (cure scenario) or does not leave the default state and will be subject to recovery process (non-cure scenario). The probability that an exposure defaults again in the cure scenario is involved in the estimation process. Risk parameters applicable to both scenarios, i.e. cure rates and recovery rates, are estimated by means of migration matrices approach, where risk groups are deﬁned by consecutive months-in-default. For each LGD portfolio the Group deﬁnes the recovery hori- zon, since the default date after which no material recoveries are assumed. Recovery horizon is deﬁned by data ana- lytics and expert judgment. For certain portfolios based on the limitations of observations alternative versions of the general approach may be applied. For signiﬁcant corporate exposures, the Group uses the LGD modelling approach that is based on realized recoveries from historical defaults, adjusted with approximation of future recoveries from individually assessed defaulted exposures. In order to model LGD for SME and non-signiﬁcant corporate borrowers, the Group is estimating recoverable amount directly from the collateral and assumes that no recoveries from cash is expected. In order to estimate recoverable amount from the collateral the Group is applying respective haircuts deﬁned for different types of collateral and discounts them using effective interest rate over the realization period. In addition, at each reporting date, the Group makes the decision which historical data horizon should be used in order to model recoveries. 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED 326 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED Forward-looking information The measurement of unbiased, probability weighted ECL requires inclusion of forward looking information obtain- able without undue cost or effort. For forward-looking information purposes the Group deﬁnes three macro scenari- os. The scenarios are deﬁned as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy. To derive the baseline macro-economic scenario, the Group takes into account forecasts from various external sources – the National Bank of Georgia, Ministry of Finance, Inter- national Monetary Fund (“IMF”) as well as other International Financial Institutions (“IFI”’s) – in order to ensure the to the consensus market expectations. Upside and downside scenarios are deﬁned based on the framework developed by the Group’s macroeconomic unit. The Group uses statistical models and historical relationship between the various macroeconomic factors and de- fault observations to derive forward-looking adjustments. In case these models do not provide reasonable results either from statistical or business perspective, the Group may apply expert judgment or use alternative approach. As at 31 December 2021, The Group uses same approaches as in 31 December 2020. The Group employs statistical models to derive forward looking adjustment in all segments except for corporate.In corporate segment, due to the availability of comprehensive borrower-level ﬁnancial information and insigniﬁcance of the statistical models, the Group uses stress test approach instead. The baseline, upside and downside scenarios were assigned probability weighing of 50%, 25% and 25%, respectively. The forward looking information is incorporated in both individual and collective assessment of expected credit losses Model maintenance and validation The Group regularly reviews its methodology and assumptions to reduce any difference between the estimates and the actual credit loss. Such back-testing is performed at least once a year. As part of the back-testing process, the Group evaluates actual realization of the risk parameters and their consistency with the model estimates. Additionally staging criteria are also analysed within the back-testing process. The results of back-testing the ECL measurement methodology are communicated to the Group Management and further actions for tuning the models and assump- tions are deﬁned after discussions between authorised persons. Risk governance ECL impairment models were developed by internal credit risk governance division with the involvement of exter- nal consultants. The division runs the models to calculate ECL each month. They are also responsible for model back-testing, analytics and governance. Economic scenarios and probability weights are prepared by macro-ﬁnancial analysis unit.All the assumptions, in- cluding PMAs and PMOs used in the ECL measurement go through of review and approval process: • Chief Economist reviews and approves the forward-looking scenarios and respective weights; • Internal allowance committee reviews and approves appropriateness of the estimates and judgements as well as PMAs and PMOs used in ECL measurement on a regular basis; internal committee includes Head of ERM, Heads of Portfolio Credit Risk Management divisions and CRO, who ultimately approves ECL results as of each reporting date. Climate risk. The Group’s largest operations are located in Georgia hence the climate risk overview is done by the management from Georgian perspective. The Georgia’s 2030 Climate Change Strategy and Climate Action Plan lays out different policy measures on which TBC Bank based its identiﬁcation of the potential impact of the pol- icy measures on different economic sectors. As a summary of the potential impact of the various transition risks and physical risks identiﬁed, the transitional risks in Georgia are low, considering, that trade and services domi- nate the Georgian economy, the policy measures outlined in the Georgia’s 2030 Climate Change Strategy will have overall low impact on the economic sectors, especially in short and medium term. The Georgia’s 2030 Cli- mate Change Strategy takes into consideration that Georgia is a transitional and growing economy, and there- fore the government strategy is not to impede the growth of the GDP with policy measures and rather to support a smooth transition where necessary. It is worth noting, that the economic sectors most affected by transitional risks world-wide such as mining crude petroleum, natural gas and metal ores, manufacturing coke and reﬁned pe- 327 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED troleum products are present to the extremely limited extend in Georgia, resulting in a low overall impact of tran- sitional measures on economic growth, if any. In order to increase the understanding of climate-related risks on its loan portfolio, the Bank performed a high-level sectoral risk assessment, as different sectors might be vulnera- ble to different climate-related risks over different time horizons. The maturity structure of the loan portfolio shows that the largest part of assets is distributed in the time horizons that are much shorter that the impacts of climate change, especially of physical risks, can be materialized in Georgia. Therefore, the bank has not made any adjust- ment to the level of provisions purely related to climate risk. On the other hand, the understanding of climate re- lated risks, which have longer-term impacts need to be increased in coming years, therefore, if the bank will have a plausible ﬁndings and conclusions, it will further develop the approach, how to consider climate risks in provision- ing. No post model adjustments (PMAs) or Post model overlays (PMOs) have been posted for 2021 in this regard. Details of climate related risks and steps taken are disclosed in the material existing and emerging risks section of the annual report Geographical risk concentrations Assets, liabilities, credit related commitments and performance guarantees have generally been attributed to geo- graphic regions based on the country in which the counterparty is located. Balances legally outstanding to/from off- shore companies which are closely related to Georgian counterparties are allocated to the caption “Georgia”. Cash on hand and premises and equipment have been allocated based on the country in which they are physically held. Tables below includes geographical concentration by country of incorporation. Loans and advances to OECD and Non-OECD resident customers, as well as to Georgian customers, are issued to the entities most of which are based and performing in Georgia. The geographical concentration of the Group’s assets and liabilities as at 31 December 2021 is set out below by coun- try of incorporation: in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents 989,156 593,003 139,978 1,722,137 Due from other banks 56,203 16,033 6,906 79,142 Mandatory cash balances with National Bank of Georgia and Uzbekistan 2,086,113 - 1,028 2,087,141 Loans and advances to customers 16,104,160 126,415 406,570 16,637,145 Investment securities measured at fair value through OCI 1,440,168 496,377 1,651 1,938,196 Bonds carried at amortised cost 1,537 - 48,045 49,582 Finance lease receivables 246,328 - 15,718 262,046 Other ﬁnancial assets 443,536 2,749 6,830 453,115 Total ﬁnancial assets 21,367,201 1,234,577 626,726 23,228,504 Non-ﬁnancial assets 1,226,898 - 53,159 1,280,057 Total assets 22,594,099 1,234,577 679,885 24,508,561 Liabilities Due to credit institutions 1,272,866 1,612,336 98,974 2,984,176 Customer accounts 12,752,286 1,029,719 1,256,167 15,038,172 Debt securities in issue 1,704,639 - 5,649 1,710,288 Other ﬁnancial liabilities 137,171 270 2,370 139,811 Lease liabilities 57,303 - 8,864 66,167 Subordinated debt 109,427 357,834 156,386 623,647 Total ﬁnancial liabilities 16,033,692 3,000,159 1,528,410 20,562,261 Non-ﬁnancial liabilities 243,935 - 10,136 254,071 Total liabilities 16,277,627 3,000,159 1,538,546 20,816,332 Net balance sheet position 6,316,472 (1,765,582) (858,661) 3,692,229 Performance guarantees 724,502 675,323 165,661 1,565,486 Credit related commitments 2,178,835 4,197 12,317 2,195,349 328 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents 940,076 686,110 9,219 1,635,405 Due from other banks 37,753 13,052 – 50,805 Mandatory cash balances with National Bank of Georgia 2,098,506 – – 2,098,506 Loans and advances to customers 14,111,683 131,066 351,525 14,594,274 Investment securities measured at fair value through OCI 1,206,673 318,682 1,913 1,527,268 Bonds carried at amortised cost 1,089,801 – – 1,089,801 Finance lease receivables 271,314 – 346 271,660 Other ﬁnancial assets 167,163 3,978 161 171,302 Total ﬁnancial assets 19,922,969 1,152,888 363,164 21,439,021 Non-ﬁnancial assets 1,133,766 396 4,622 1,138,784 Total assets 21,056,735 1,153,284 367,786 22,577,805 Liabilities Due to credit institutions 2,363,147 2,110,307 12,919 4,486,373 Customer accounts 10,647,808 911,146 1,013,774 12,572,728 Debt securities in issue 1,496,497 – – 1,496,497 Other ﬁnancial liabilities 227,063 356 13 227,432 Lease liabilities 57,317 – 1,666 58,983 Subordinated debt 115,394 390,941 166,405 672,740 Total ﬁnancial liabilities 14,907,226 3,412,750 1,194,777 19,514,753 Non-ﬁnancial liabilities 122,684 63 4,371 127,118 Total liabilities 15,029,910 3,412,813 1,199,148 19,641,871 Net balance sheet position 6,026,825 (2,259,529) (831,362) 2,935,934 Performance guarantees 745,511 746,871 258,659 1,751,041 Credit related commitments 1,868,011 4,678 8,627 1,881,316 The geographical concentration of the Group’s assets and liabilities as at 31 December 2020 is set out below by country of incorporation: 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED 329 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The geographical concentration of the Group’s assets and liabilities as at 31 December 2019 is set out below by coun- try of incorporation: in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents 701,993 287,079 14,511 1,003,583 Due from other banks 21,538 12,067 – 33,605 Mandatory cash balances with National Bank of Georgia 1,591,829 – – 1,591,829 Loans and advances to customers 11,775,027 147,222 427,150 12,349,399 Investment securities measured at fair value through OCI 985,293 – – 985,293 Bonds carried at amortised cost 1,022,684 – – 1,022,684 Finance lease receivables 255,596 – 1,064 256,660 Other ﬁnancial assets 132,060 1,431 245 133,736 Total ﬁnancial assets 16,486,020 447,799 442,970 17,376,789 Non-ﬁnancial assets 978,387 364 3,726 982,477 Total assets 17,464,407 448,163 446,696 18,359,266 Liabilities Due to credit institutions 1,813,684 1,744,130 36,087 3,593,901 Customer accounts 8,406,484 733,778 909,062 10,049,324 Debt securities in issue 1,213,598 – – 1,213,598 Other ﬁnancial liabilities 113,271 329 8 113,608 Lease liabilities 59,898 – – 59,898 Subordinated debt 100,993 343,861 146,181 591,035 Total ﬁnancial liabilities 11,707,928 2,822,098 1,091,338 15,621,364 Non-ﬁnancial liabilities 132,559 830 5,423 138,812 Total liabilities 11,840,487 2,822,928 1,096,761 15,760,176 Net balance sheet position 5,623,920 (2,374,765) (650,065) 2,599,090 Performance guarantees 603,910 232,328 622,646 1,458,884 Credit related commitments 1,485,032 4,476 11,459 1,500,967 Market risk. The Bank follows the Basel Committee’s deﬁnition of market risk as the risk of losses in on- and off-bal- ance sheet positions arising from movements in market prices. This risk is principally made up of (a) risks pertaining to interest rate instruments and equities in the trading book and (b) foreign exchange rate risk (or currency risk) and commodities risk throughout the Bank. The Bank’s strategy is not to be involved in trading book activity or invest- ments in commodities. Accordingly, the Bank’s exposure to market risk is primarily limited to foreign exchange rate risk in the structural book. Currency risk. Foreign exchange rate risk arises from the potential change in foreign currency exchange rates, which can affect the value of a ﬁnancial instrument. This risk stems from the open currency positions created due to mis- matches in foreign currency assets and liabilities. The NBG requires the Bank to monitor both balance-sheet and total aggregate (including off-balance sheet) open currency positions and to maintain the later one within 20% of the Bank’s regulatory capital. As at 31 December 2021, the Bank maintained an aggregate open currency position of 0.5% of regulatory capital (2020: 3.4%; 2019: 0.5%). The Asset-Liability Management Committee (“ALCO”) has set limits on the level of exposure by currency as well as on aggregate exposure positions which are more conservative than those set by the NBG. The Bank’s compliance with such limits is monitored daily by the heads of the Treasury and Financial Risk Management Departments. On 13 August 2018 the NBG introduced new regulation on changes to OCP (“open currency position”) calculation method, according to this regulation, from March 2019 special reserves assigned to FC balance-sheet assets would be deductible gradually for OCP calculation purposes. As a result of COVID-19 pandemic, the NBG implemented countercyclical measure in relation to OCP requirements: suspended the phasing in of special reserved planned to be fully implemented by July 2022. 330 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Currency risk management framework is governed through the Market Risk Management Policy. The table below summarises the Group’s exposure to foreign currency exchange rate risk at the balance sheet date. While managing open currency position the Group considers part of the provisions to be denominated in the USD, Euro and other currencies. Gross amount of currency swap deposits is included in Derivatives. Therefore, total ﬁnancial assets and liabilities below are not traceable with either balance sheet or liquidity risk management tables, where net amount of gross currency swaps is presented. 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As of 31 December 2021 in thousands of GEL Monetary ﬁnancial assets Monetary ﬁnancial liabilities Derivatives Net position Georgian Lari 10,265,265 7,401,028 (113,407) 2,750,830 US Dollar 8,106,000 11,108,986 3,014,476 11,490 Euro 4,422,716 1,686,664 (2,725,047) 11,005 Other 434,523 365,583 (39) 68,901 Total 23,228,504 20,562,261 175,983 2,842,226 As of 31 December 2020 in thousands of GEL Monetary ﬁnancial assets Monetary ﬁnancial liabilities Derivatives Net position Georgian Lari 8,756,581 7,115,738 159,241 1,800,084 US Dollar 8,004,885 10,956,193 2,914,494 (36,814) Euro 4,556,780 1,315,871 (3,227,918) 12,991 Other 120,775 126,951 61,164 54,988 Total 21,439,021 19,514,753 (93,019) 1,831,249 As of 31 December 2019 in thousands of GEL Monetary ﬁnancial assets Monetary ﬁnancial liabilities Derivatives Net position Georgian Lari 7,502,497 5,706,300 (91,472) 1,704,725 US Dollar 6,846,799 8,774,033 1,945,714 18,480 Euro 2,970,008 1,035,944 (1,924,793) 9,271 Other 57,485 105,087 56,134 8,532 Total 17,376,789 15,621,364 (14,417) 1,741,008 US Dollar strengthening by 20% (weakening 20%) would increase Group’s proﬁt or loss and equity in 2021 by GEL 2,298 thousand (decrease by GEL 2,298 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s proﬁt or loss and equity in 2021 by GEL 2,201 thousand (decrease by GEL 2,201 thousand). US Dollar strengthening by 20% (weakening 20%) would decrease Group’s proﬁt or loss and equity in 2020 by GEL 7,363 thousand (increase by GEL 7,363 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s proﬁt or loss and equity in 2020 by GEL 2,598 thousand (decrease by GEL 2,598 thousand). US Dollar strengthening by 20% (weakening 20%) would increase Group’s proﬁt or loss and equity in 2019 by GEL 3,696 thousand (decrease by GEL 3,696 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s proﬁt or loss and equity in 2019 by GEL 1,854 thousand (decrease by GEL 1,854 thousand). 331 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED Interest rate risk. Interest rate risk arises from potential changes in the market interest rates that can adversely affect the fair value or future cash flows of the ﬁnancial instrument. This risk can arise from maturity mismatches of assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities. The biggest share of the Bank’s deposits and the part of the loans are at ﬁxed interest rates, while a portion of the Bank’s borrowings is at a floating interest rate. In case of need, the Bank also applies for interest rate risk hedging in- struments in order to mitigate interest rate risk. Furthermore, many of the Bank’s loans to customers contain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, thereby limiting the Bank’s exposure to interest rate risk. The management also believes that the Bank’s interest rate margins provide a reasonable buffer to mitigate the effect of possible adverse interest rate movements. The Group employs an advanced framework for the management of interest rate risk by establishing appropriate Risk Appetite limits, monitoring compliance with them and preparing forecasts. From September, 2020 the NBG in- troduced regulation on interest rate risk and set the limit for Economic Value of Equity (EVE) sensitivity at 15% of NBG Tier 1 Capital. The main principles and assumptions of NBG IRR methodology are in line with Basel standards and EBA guidelines developed for IRR management purposes. As of 31 December 2021 the Bank was in compliance with the regulatory requirement with EVE=2.9%. According to NBG guidelines the net interest income sensitivity under parallel shifts of interest rate scenarios are maintained for monitoring purposes, while EVE sensitivity is calculated under 6 predeﬁned stress scenarios of interest rate changes and the limit is applied to the worst case scenario result. Interest rate risk is managed by the ﬁnancial risk management department and is monitored by the ALCO, which decides on actions that are necessary for effective interest rate risk management and follows up on their implemen- tation. The major aspects of interest rate risk management development and the respective reporting are periodically provided to the Management Board, the Supervisory Board and the Risk Committee. Following main assumptions under NBG IRR Regulation and EBA 2018 guidelines, at 31 December, 2021, if interest rates had been 200 basis points higher, with all other variables held constant, proﬁt would have been GEL 129 million higher, mainly as a result of higher interest income on variable interest assets (2020: GEL 95 million). If interest rates at 31 December, 2021 had been 200 basis points lower with all other variables held constant, proﬁt for the year would have been GEL 40 million lower, mainly as a result of lower interest income on variable interest assets (2020: GEL 31 million). At 31 December, 2021, if interest rates had been 200 basis points lower, with all other variables held constant, other comprehensive income would have been GEL 57 million higher (2020: GEL 24 million; 2019: GEL 9.4 million), as a re- sult of an increase in the fair value of ﬁxed rate ﬁnancial assets measured at fair value through other comprehensive income and repurchase receivables. If interest rates at 31 December, 2021 had been 200 basis points higher with all other variables held constant, Other comprehensive income would have been GEL 60.8 million lower (2020: GEL 35 million; 2019: GEL 9.1 million), as a result of decrease in the fair value of ﬁxed rate ﬁnancial assets measured at fair value through other comprehensive income. The Bank calculates the impact of changes in interest rates using both Net Interest Income and Economic Value sen- sitivity. Net Interest Income sensitivity measures the impact of a change of interest rates along the various maturities on the yield curve on the net interest revenue for the nearest year. Economic Value measures the impact of a change of interest rates along the various maturities on the yield curve on the present value of the Group’s assets, liabilities and off-balance sheet instruments. When performing Net Interest Income and Economic Value sensitivity analysis, the Bank uses parallel shifts in interest rates as well as number of different scenarios. TBC Bank closely monitors the adverse effect of possible parallel yield curve shift scenarios on net interest income over a one-year period to ensure compliance with the predeﬁned risk appetite of the Bank. In order to manage interest rate risk the Bank establishes appropriate limits. The Bank monitors compliance with the limits and prepares forecasts. ALCO decides on actions that are necessary for effective interest rate risk manage- ment and follows up on the implementation. Periodic reporting is done to Management Board and the Board’s Risk, Committee Liquidity Risk. The liquidity risk is the risk that TBC Bank either does not have sufﬁcient ﬁnancial resources available to meet all of its obligations and commitments as they fall due, or can access those resources only at a high cost. The risk is managed by the Financial Risk Management and Treasury Departments and is monitored by the ALCO. The principal objectives of the TBC Bank’s liquidity risk management policy are to: (i) ensure the availability of funds in order to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; (ii) recognise any structural mismatch existing within TBC Bank’s statement of ﬁnancial position 332 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED and set monitoring ratios to manage funding in line with well-balanced growth; and (iii) monitor liquidity and funding on an on-going basis to ensure that approved business targets are met without compromising the risk proﬁle of the Bank. The liquidity risk is categorised into two risk types: the funding liquidity risk and the market liquidity risk. Funding liquidity risk is the risk that TBC will not be able to efﬁciently meet both expected and unexpected current and future cash flow and collateral needs without affecting either its daily operations or its ﬁnancial condition. To manage funding liquidity risk TBC Bank uses theLiquidity Coverage ratio and the Net Stable Funding ratioset, forth under Basel III, and deﬁned further by the NBG. In addition the Bank performs stress tests and “what-if” scenario anal- ysis. In 2017, for liquidity risk management purposes National Bank of Georgia introduced Liquidity Coverage Ratio (“NBG LCR”), where in addition to Basel III guidelines conservative approaches are applied to the deposits’ withdrawal rates depending on the clients group’s concentration. From September, 2017 the Bank also monitors compliance with NBG LCR limits. In 2019, for long-term liquidity risk management purposes NBG introduced Net Stable Funding Ratio (“”NBG NSFR”). From September, 2019, on a monthly basis the Bank monitors compliance with the set limit for NBG NSFR. The Liquidity Coverage Ratio is used to help manage short-term liquidity risks. The Bank’s liquidity risk management framework is designed to comprehensively project cash flows arising from assets, liabilities and off-balance sheet items over certain time buckets and ensure that NBG LCR limits, are met on a daily basis. The Net Stable Funding ratio is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating additional incentives for TBC Bank to rely on more stable sources of funding on a continuous basis. The Bank also monitors deposit concentration for large deposits and set limits for non-Georgian residents deposits share in total deposit portfolio. The management believes, that a strong and diversiﬁed funding structure is one of TBC Bank’s differentiators. The Bank relies on relatively stable deposits from Georgia as the main source of funding. In order to maintain and further enhance the liability structure TBC Bank sets the targets for deposits and IFI funding within the Bank’s risk appetite. Maturity analysis. The table below summarizes the maturity analysis of the Group’s ﬁnancial liabilities, based on re- maining undiscounted contractual obligations as of 31 December 2021 subject-to-notice repayments are treated as if notice were to be given immediately. However, the Group expects, that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indi- cated by the Group’s deposit retention history. 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED 333 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The maturity analysis of undiscounted ﬁnancial liabilities as of 31 December 2021 is as follows: in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Due to credit institutions 1,439,008 569,613 1,162,095 7,407 3,178,123 Customer accounts – individuals 5,444,135 1,714,309 1,265,259 85,094 8,508,797 Customer accounts – other 5,467,638 330,231 850,626 439,336 7,087,831 Other ﬁnancial liabilities 128,667 11,096 48 - 139,811 Lease liabilities 3,995 11,836 50,322 5,705 71,858 Subordinated debt 5,331 60,491 338,052 478,851 882,725 Debt securities in issue 6,593 109,343 1,735,965 242,651 2,094,552 Gross settled swaps and forwards: -Inflows 603,531 19,722 401,231 - 1,024,484 -Outflows 606,432 19,967 407,812 - 1,034,211 Performance guarantees 1,596,244 - - - 1,596,244 Financial guarantees 357,896 - - - 357,896 Letters of credit 20,619 96,112 64,687 - 181,418 Other credit related commitments 1,672,854 - - - 1,672,854 Total potential future payments for ﬁnancial obligations 16,145,881 2,903,276 5,473,635 1,259,044 25,781,836 The maturity analysis of undiscounted ﬁnancial liabilities as of 31 December 2020 is as follows: in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Due to credit institutions 2,138,399 1,156,117 2,678,130 146,205 6,118,851 Customer accounts – individuals 4,275,412 1,828,748 1,282,427 53,445 7,440,032 Customer accounts – other 4,077,900 502,224 619,298 492,887 5,692,309 Other ﬁnancial liabilities 210,061 16,834 537 – 227,432 Lease liabilities 3,098 9,029 35,298 5,849 53,274 Subordinated debt 13,998 75,845 1,441,419 1,635,831 3,167,093 Debt securities in issue 1,230 59,356 1,451,263 – 1,511,849 Gross settled swaps and forwards: -Inflows 2,937,065 259,369 103,181 - 3,299,615 -Outflows 3,045,427 262,302 113,820 – 3,421,549 Performance guarantees 1,751,075 - - - 1,751,075 Financial guarantees 318,935 - - - 318,935 Letters of credit 10,820 90,559 59,463 - 160,842 Other credit related commitments 1,401,539 – – – 1,401,539 Total potential future payments for ﬁnancial obligations 14,310,829 3,741,645 7,578,474 2,334,217 27,965,165 334 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The maturity analysis of undiscounted ﬁnancial liabilities as of 31 December 2019 is as follows: 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Due to credit institutions 1,590,089 616,417 3,724,084 435,233 6,365,823 Customer accounts – individuals 3,407,952 1,658,316 699,554 27,344 5,793,166 Customer accounts – other 3,722,452 339,113 250,328 142,043 4,453,936 Other ﬁnancial liabilities 92,795 15,896 4,917 – 113,608 Lease liabilities 4,367 12,509 57,058 11,988 85,922 Subordinated debt 2,019 55,182 1,255,291 2,330,270 3,642,762 Debt securities in issue – 56,797 1,156,801 – 1,213,598 Gross settled swaps and forwards: -Inflows 1,240,368 412,444 160,951 - 1,813,763 -Outflows 1,248,782 418,016 167,231 – 1,834,029 Performance guarantees 1,458,884 - - - 1,458,884 Financial guarantees 241,124 - - - 241,124 Letters of credit 41,132 19,687 48,914 - 109,733 Other credit related commitments 1,150,110 – – – 1,150,110 Total potential future payments for ﬁnancial obligations 11,719,338 2,779,489 7,203,227 2,946,878 24,648,932 The undiscounted ﬁnancial liability analysis gap does not reflect the historical stability of the current accounts. Their liquidation has historically taken place over a longer period than the one indicated in the tables above. These balanc- es are included in amounts due in less than three months in the tables above. Term deposits included in the customer accounts are classiﬁed based on remaining contractual maturities, accord- ing to the Georgian Civil Code, however, individuals have the right to withdraw their deposits prior to maturity, if they partially or fully forfeit their right to accrued interest and the Group is obliged to repay such deposits upon the depositor’s demand. Based on the Bank’s deposit retention history, the Management does not expect that many cus- tomers will require repayment on the earliest possible date; accordingly, the table does not reflect the management’s expectations as to actual cash outflows. The Group does not use the above undiscounted maturity analysis to manage liquidity as it shows contractual terms purely and disregard the actual expected behaviour of the instruments. Instead, the Group monitors the liquidity gap analysis based on the expected maturities. In particular, expected maturities disclosure include customers’ deposits and contingent liabilities according to their behavioral analysis, while for undiscounted cash flow disclosure purpos- es, demand deposits and issued guarantees are put in on demand bucket. * In 2021 the Management took more conservative approach for the classiﬁcation of performance guarantees contractual maturities by pulling the whole contractual amount into the less than 3 months bucket. As far as, contractually (which may differ from behavioral maturity) performance guaran- tee contracts can be reimbursed at any point in time Management considers that the amended approach will be more prudent for contractual analysis disclosure. Comparable periods has also been amended respectively to reflect the similar logic (2020: less than 3 months GEL 211,607 thousand, from 3 to 12 months GEL 588,883 thousand, from 1 to 5 years GEL 937,975 thousand and over 5 years GEL 12,610 thousand; 2019: less than 3 months GEL 115,997 thousand, from 3 to 12 months GEL 332,833 thousand, from 1 to 5 years GEL 909,502 thousand and over 5 years GEL 100,552thousand). 335 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As at 31 December 2021 the analysis by expected maturities is as follows: in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Cash and cash equivalents 1,722,137 - - - 1,722,137 Due from other banks 32,075 17,983 14,305 14,779 79,142 Mandatory cash balances with National Bank of Georgia and Uzbekistan 2,086,737 - - 404 2,087,141 Loans and advances to customers 1,421,375 3,348,606 6,696,990 5,170,174 16,637,145 Investment securities measures at fair value through OCI 1,938,196 - - - 1,938,196 Bonds carried at amortised cost 48,082 1,000 500 - 49,582 Finance lease receivables 30,810 66,683 158,573 5,980 262,046 Insurance and reinsurance Receivables 11,366 21,108 - - 32,474 Other financial assets 415,852 2,410 2,379 - 420,641 Total ﬁnancial assets 7,706,630 3,457,790 6,872,747 5,191,337 23,228,504 Due to credit institutions 1,418,250 509,471 1,049,362 7,093 2,984,176 Customer accounts 1,178,993 105,267 - 13,753,912 15,038,172 Debt securities in issue 5,261 100,349 1,454,896 149,782 1,710,288 Other financial liabilities 126,717 5,221 48 - 131,986 Lease liabilities 4,045 10,703 46,275 5,144 66,167 Insurance contract liabilities 1,950 5,875 - - 7,825 Subordinated debt 2,357 19,067 179,989 422,234 623,647 Total ﬁnancial liabilities 2,737,573 755,953 2,730,570 14,338,165 20,562,261 Performance guarantees 4,620 - - - 4,620 Financial guarantees 3,624 - - - 3,624 Other credit related commitments 64,196 - - - 64,196 Credit related commitments and performance guarantees 72,440 - - - 72,440 Net liquidity gap as of 31 December 2021 4,896,617 2,701,837 4,142,177 (9,146,828) 2,593,803 Cumulative gap as of 31 December 2021 4,896,617 7,598,454 11,740,631 2,593,803 336 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED As at 31 December 2020 the analysis by expected maturities is as follows: 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Cash and cash equivalents 1,634,585 820 – – 1,635,405 Due from other banks 11,736 14,600 24,469 – 50,805 Mandatory cash balances with National Bank of Georgia 2,098,506 – – – 2,098,506 Loans and advances to customers 1,555,793 2,512,140 6,117,469 4,408,872 14,594,274 Investment securities measures at fair value through OCI 1,527,268 – – – 1,527,268 Bonds carried at amortised cost 41,168 164,846 559,823 323,964 1,089,801 Finance lease receivables 23,675 73,284 168,447 6,254 271,660 Insurance and reinsurance Receivables 7,641 14,190 – – 21,831 Other financial assets 135,716 2,094 11,652 9 149,471 Total ﬁnancial assets 7,036,088 2,781,974 6,881,860 4,739,099 21,439,021 Due to credit institutions 2,116,391 1,007,235 1,322,468 40,279 4,486,373 Customer accounts 1,267,458 380,992 – 10,924,278 12,572,728 Debt securities in issue 121 56,031 1,440,345 – 1,496,497 Other financial liabilities 208,111 10,236 537 – 218,884 Lease liabilities 4,061 9,061 35,281 10,580 58,983 Insurance contract liabilities 1,950 6,598 – – 8,548 Subordinated debt 11,747 16,369 258,110 386,514 672,740 Total ﬁnancial liabilities 3,609,839 1,486,522 3,056,741 11,361,651 19,514,753 Performance guarantees 4,427 – – – 4,427 Financial guarantees 5,424 – – – 5,424 Other credit related commitments 100,214 – – – 100,214 Credit related commitments and performance guarantees 110,065 – – – 110,065 Net liquidity gap as of 31 December 2020 3,316,184 1,295,452 3,825,119 (6,622,552) 1,814,203 Cumulative gap as of 31 December 2020 3,316,184 4,611,636 8,436,755 1,814,203 337 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 39. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As of 31 December 2019 the analysis by expected maturities is as follows: in thousands of GEL Less than 3 months From 3 to 12 months From 1 to 5 Years Over 5 years Total Cash and cash equivalents 1,003,583 – – – 1,003,583 Due from other banks 15,193 3,500 14,912 – 33,605 Mandatory cash balances with National Bank of Georgia 1,591,829 – – – 1,591,829 Loans and advances to customers 1,303,711 2,307,064 5,108,650 3,629,974 12,349,399 Investment securities measures at fair value through OCI 985,293 – – – 985,293 Bonds carried at amortised cost 124,006 215,711 555,379 127,588 1,022,684 Finance lease receivables 34,448 70,398 148,542 3,272 256,660 Insurance and reinsurance Receivables 9,073 17,104 – – 26,177 Other financial assets 104,611 2,946 2 – 107,559 Total ﬁnancial assets 5,171,747 2,616,723 5,827,485 3,760,834 17,376,789 Due to credit institutions 1,573,720 427,794 1,496,459 95,928 3,593,901 Customer accounts 1,082,198 174,905 – 8,792,221 10,049,324 Debt securities in issue – 56,797 1,156,801 – 1,213,598 Other financial liabilities 90,944 10,133 4,918 – 105,995 Lease liabilities 4,394 8,513 38,831 8,160 59,898 Insurance contract liabilities 1,850 5,763 – – 7,613 Subordinated debt 331 – 113,497 477,207 591,035 Total ﬁnancial liabilities 2,753,437 683,905 2,810,506 9,373,516 15,621,364 Performance guarantees 7,466 – – – 7,466 Financial guarantees 4,511 – – – 4,511 Other credit related commitments 100,212 – – – 100,212 Credit related commitments and performance guarantees 112,189 – – – 112,189 Net liquidity gap as of 31 December 2019 2,306,121 1,932,818 3,016,979 (5,612,682) 1,643,236 Cumulative gap as of 31 December 2019 2,306,121 4,238,939 7,255,918 1,643,236 The Management believes that the Group has sufﬁcient liquidity to meet its current on- and off-balance sheet obli- gations. 40. CONTINGENCIES AND COMMITMENTS Legal proceedings. When determining the level of provision to be set up with regards to such claims, or the amount (not subject to provisioning) to be disclosed in the ﬁnancial statements, the management seeks both internal and external professional advice. The management believes that the provision recorded in these ﬁnancial statements is adequate and the amount (not subject to provisioning) need not be disclosed as the probability of material adverse effect on the ﬁnancial condition or the results of future operations of the Group is remote. Tax legislation. Georgian, Azerbaijani and Uzbekistan tax and customs legislation is subject to varying interpreta- tions, and changes, which can occur frequently. The management’s interpretation of the legislation as applied to the Group’s transactions and activity may be challenged by the relevant authorities. Fiscal periods remain open to review by the authorities in respect of taxes for ﬁve calendar years preceding the review period. To respond to the risks, the Group has engaged external tax specialists to carry out periodic reviews of Group’s taxation policies and tax ﬁlings. The Group’s management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax and customs positions will be sustained. Accordingly, as of 31 December 2021, 2020 and 2019 no material provision for potential tax liabilities has been recorded. Compliance with covenants. The Group is subject to certain ﬁnancial and non-ﬁnancial covenants primarily related 338 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group includ- ing mandatory prepayment and declaration of default. The Group was in compliance with all covenants as of 31 De- cember 2021, 31 December 2020 and 31 December 2019. Group’s ﬁnancial covenants mainly consist of three major sub-categories. Key covenants within each category and their compliance status is disclosed below: 40. CONTINGENCIES AND COMMITMENTS CONTINUED Covenant Description Status Liquidity Net Stable Funding Ratio (NSFR) Complied Liquidity Coverage Ratio (LCR) Complied Net loan to deposit and funding ratio Complied Capital Adequacy Tier 1 capital ratio Complied Total capital ratio Complied Asset Quality Net problem loans to total capital Complied Covid-19 pandemic didn’t have major negative effects on the compliance of Group’s ﬁnancial covenants in 2020, except for the asset quality ratios. Due to bank’s immediate action to request the waiver from lenders, at the end of 2020 all waivers were granted with the pre-deﬁned validity period. In 2021, as the probability of non-compliance was relatively high due to unforeseen negative consequences of Covid-19 on Group’s operations, bank continued to work with the lenders on this matter, with the core objective to either prolong the waivers or amend the asset quality ratios. Before pandemic, covenants in loan agreements with IFIs incorporated non-performing loans exposures, which has been composed of restructured loans. As pandemic evolved, the number of restructurings has increased signiﬁcantly due to loan repayment grace periods granted to borrowers back in 2020, partially in line with imposed Government programs. Although, majority of such borrowers remained healthy, the number of restructured loan exposures has still increased. As a result, the Group has renegotiated the NPL ratio with majority of IFIs, replacing non-performing loans exposures that included restructured loans, by stage 3 loans according to IFRS 9. Respective change has been successfully implemented in the vast majority of covenants with IFI’s. Alternatively, for the two lenders the Group has extended renegotiated compliance terms existing in relation to the asset quality ra- tios. Apart from asset quality ratios for other ﬁnancial covenants the Group has sufﬁcient headroom for any potential violation risks to materialise. Management of capital. The Bank manages capital requirements under regulatory rules. The Bank complied with all its imposed capital requirements throughout the reporting period. Credit related commitments and ﬁnancial guarantees. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Financial guarantees and standby letters of credit, which represent the irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, that are underwritten by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under speciﬁc terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to prolong credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss is lower than the total unused commitments since most commitments to extend credit are contingent upon customers main- taining speciﬁc credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term ones. 339 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 40. CONTINGENCIES AND COMMITMENTS CONTINUED As of 31 December 2021 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Stage 1 Stage 2 Stage 3 Undrawn credit lines 1,628,437 40,572 3,856 Letters of credit issued 170,174 208 - Financial guarantees issued 343,536 8,510 56 Total credit related commitments (before provision) 2,142,147 49,290 3,912 Credit loss allowance for credit related commitments Stage 1 Stage 2 Stage 3 Undrawn credit lines (1,961) (578) (22) Letters of credit issued (320) - - Financial guarantees issued (734) (9) - Credit loss allowance for credit related commitments (3,015) (587) (22) Total credit related commitments 2,139,132 48,703 3,890 As of 31 December 2020 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Stage 1 Stage 2 Stage 3 Undrawn credit lines 1,222,916 165,798 12,825 Letters of credit issued 158,131 1,464 1,247 Financial guarantees issued 303,046 14,571 1,318 Total credit related commitments (before provision) 1,684,093 181,833 15,390 Credit loss allowance for credit related commitments Stage 1 Stage 2 Stage 3 Undrawn credit lines (3,246) (986) (15) Letters of credit issued (376) - - Financial guarantees issued (795) (4) (2) Credit loss allowance for credit related commitments (4,417) (990) (17) Total credit related commitments 1,679,676 180,843 15,373 As of 31 December 2019 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Stage 1 Stage 2 Stage 3 Undrawn credit lines 1,124,862 18,548 6,700 Letters of credit issued 109,299 - 434 Financial guarantees issued 240,205 550 369 Total credit related commitments (before provision) 1,474,366 19,098 7,503 Credit loss allowance for credit related commitments Stage 1 Stage 2 Stage 3 Undrawn credit lines (2,096) (514) (182) Letters of credit issued (473) - - Financial guarantees issued (1,244) (2) - Credit loss allowance for credit related commitments (3,813) (516) (182) Total credit related commitments 1,470,553 18,582 7,321 340 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The credit quality of contingencies and commitments is as follows at 31 December 2021: 40. CONTINGENCIES AND COMMITMENTS CONTINUED 31 December 2021 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Undrawn credit lines risk category – Very low 1,537,915 1,794 - 1,539,709 – Low 86,611 30,143 - 116,754 – Moderate 3,911 7,764 - 11,675 – High - 871 - 871 – Default - - 3,856 3,856 Gross carrying amount 1,628,437 40,572 3,856 1,672,865 Credit loss allowance (1,961) (578) (22) (2,561) Carrying amount 1,626,476 39,994 3,834 1,670,304 Letters of credit issued risk category – Very low 167,570 - - 167,570 – Low 2,604 - - 2,604 – Moderate - 208 - 208 – High - - - - – Default - - - - Gross carrying amount 170,174 208 - 170,382 Credit loss allowance (320) - - (320) Carrying amount 169,854 208 - 170,062 Financial guarantees issued risk category – Very low 331,437 1,733 - 333,170 – Low 12,099 1,367 - 13,466 – Moderate - 5,108 - 5,108 – High - 302 - 302 – Default - - 56 56 Gross carrying amount 343,536 8,510 56 352,102 Credit loss allowance (734) (9) - (743) Carrying amount 342,802 8,501 56 351,359 341 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 40. CONTINGENCIES AND COMMITMENTS CONTINUED The credit quality of contingencies and commitments is as follows at 31 December 2020: 31 December 2020 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Undrawn credit lines risk category - Very low 1,157,753 3,820 - 1,161,573 - Low 62,193 146,114 - 208,307 - Moderate 2,963 14,723 - 17,686 - High 7 1,141 - 1,148 - Default - - 12,825 12,825 Gross carrying amount 1,222,916 165,798 12,825 1,401,539 Credit loss allowance (3,246) (986) (15) (4,247) Carrying amount 1,219,670 164,812 12,810 1,397,292 Letters of credit issued risk category - Very low 157,992 - - 157,992 - Low 139 1,464 - 1,603 - Moderate - - - - - High - - - - - Default - - 1,247 1,247 Gross carrying amount 158,131 1,464 1,247 160,842 Credit loss allowance (376) - - (376) Carrying amount 157,755 1,464 1,247 160,466 Financial guarantees issued risk category - Very low 268,333 100 - 268,433 - Low 34,713 14,471 - 49,184 - Moderate - - - - - High - - - - - Default - - 1,318 1,318 Gross carrying amount 303,046 14,571 1,318 318,935 Credit loss allowance (795) (4) (2) (801) Carrying amount 302,251 14,567 1,316 318,134 342 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The credit quality of contingencies and commitments is as follows at 31 December 2019: 40. CONTINGENCIES AND COMMITMENTS CONTINUED 31 December 2019 in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total Undrawn credit lines risk category - Very low 1,027,350 2,706 - 1,030,056 - Low 92,030 5,589 - 97,619 - Moderate 5,480 9,455 - 14,935 - High 2 798 - 800 - Default - - 6,700 6,700 Gross carrying amount 1,124,862 18,548 6,700 1,150,110 Credit loss allowance (2,096) (514) (182) (2,792) Carrying amount 1,122,766 18,034 6,518 1,147,318 Letters of credit issued risk category - Very low 108,476 - - 108,476 - Low 823 - - 823 - Moderate - - - - - High - - - - - Default - - 434 434 Gross carrying amount 109,299 - 434 109,733 Credit loss allowance (473) - - (473) Carrying amount 108,826 - 434 109,260 Financial guarantees issued risk category - Very low 233,004 - - 233,004 - Low 7,027 62 - 7,089 - Moderate 174 488 - 662 - High - - - - - Default - - 369 369 Gross carrying amount 240,205 550 369 241,124 Credit loss allowance (1,244) (2) - (1,246) Carrying amount 238,961 548 369 239,878 The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not neces- sarily represent future cash requirements, as these ﬁnancial instruments may expire or terminate without being fund- ed. Non-cancellable commitments as of 31 December 2021 were GEL 251,903 thousand (2020: GEL 579,915 thousand; 2019: GEL 472,485 thousand). Performance guarantees. Performance guarantees are contracts that provide compensation in case of another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. The risk under the performance guarantee contracts is the possibility that the insured event occurs (i.e.: the failure to perform the contractual obli- gation by another party). The key risks the Group faces are signiﬁcant fluctuations in the frequency and severity of payments incurred on such contracts, relative to expectations. Outstanding amount of performance guarantees and respective provision as of 31 December 2021 is GEL 1,565,486 thousand and GEL 4,620 thousand (2020: GEL 1,751,041 thousand and GEL 4,427 thousand, 2019: GEL 1,458,884 thou- sand and GEL 7,466 thousand). Fair value of credit related commitments were GEL 3,624 thousand as of 31 December 2021 (2020: GEL 5,424 thou- sand; 2019: GEL 4,511 thousand). Total credit related commitments and performance guarantees are denominated in currencies as follows: 343 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 40. CONTINGENCIES AND COMMITMENTS CONTINUED in thousands of GEL 2021 2020 2019 Georgian Lari 897,969 1,208,199 1,155,421 US Dollar 901,092 1,584,878 1,203,296 Euro 220,068 776,307 542,303 Other 68,841 62,973 58,830 Total 2,087,970 3,632,357 2,959,850 Capital expenditure commitments. As of 31 December 2021, the Group has contractual capital expenditure com- mitments amounting to GEL 104,162 thousand (2020: GEL 14,631 thousand; 2019: GEL 33,723 thousand). Out of total amount as at 31 December 2021, contractual commitments related to the head ofﬁce construction amounted GEL 79,004 thousand (2020: GEL 4,853 thousand). 41. NON-CONTROLLING INTEREST Acquisition of remaining interest in My.ge LLC In September 2021 TBC Bank Group PLC ﬁnalized acquisition process of remaining interest in My.ge LLC. The ac- quired interest amounted 35% of total shareholding. The consideration amounted GEL 16,180 thousands. The acquisition-date fair value of the total purchase consideration is following: In thousands of GEL Cash consideration paid 16,180 Total purchase consideration 16,180 The carrying value of the net assets of My.ge LLC was GEL 8,421 thousands, out of which NCI amounted to GEL 2,947 thousands. Considering, that the Group has already owned 65% of stake in My.ge, the acquisition of remaining 35% has been treated as acquisition of NCI of controlled subsidiary. The consideration paid for acquiring 35% of stake, has exceeded the net assets acquired by GEL 13,233 thousand which has been recorded as equity transaction between the Group members. The following table discloses the calculation of excess consideration paid for acquiring non-controlling interest in My.ge LLC: In thousands of GEL Cash consideration paid 16,180 Carrying value of purchased interest (NCI) (2,947) Difference: Transaction with Non-Controlling Shareholders recognised in retained earnings 13,233 Sale of shares in TBC Bank UZ On 16 December 2021 TBC Bank Group PLC ﬁnalized selling of 39.8% ownership interest in fully owned subsidiary TBC Bank UZ. TBC Bank UZ issued 174,215 thousands of additional shares, which was fully acquired by EBRD and IFC for the stake of 19.9% each. The control has still remained with the Group. The consideration received from EBRD and IFC amounted GEL 57,039 thousands. The carrying value of total net assets owned by TBC Bank UZ at the point of selling the stake to EBRD and IFC has been GEL 95,359 thousand. The following table discloses the calculation of excess consideration received for the disposed interest: In thousands of GEL Cash consideration received 57,039 Carrying value of disposed interest (NCI) (37,914) Difference: Transaction with Non-Controlling Shareholders recognised in retained earnings 19,125 344 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 41. NON-CONTROLLING INTEREST CONTINUED in thousands of GEL Proportion of non-controlling interest’s voting rights held Proﬁt/(loss) attributable to non-controlling interest Accumulated non-controlling interest in the subsidiary TBC Bank UZ 39.8% (2,056) 37,914 TKT Online LLC 45% (32) 617 TKT UZ 25% (14) (39) Inspired LLC 49% 8,370 5,132 Billing solution 49% (96) (30) Accumulated net income of NCI before disposal - 980 - TBC Bank JSC including: 0.12% 1,065 4,465 United Financial Corporation JSC 0.47% 16 93 Total Non-Controlling 8,217 48,059 The following table provides information for each subsidiary with a non-controlling interest as of 31 December 2021: The summarised ﬁnancial information of these subsidiaries was as follows as of and for the year ended 31 December 2021: in thousands of GEL Current assets Non- current assets Current liabilities Non- current liabilities Revenue Proﬁt/ (loss) Total com- prehensive (expense)/ income Net cash flows TBC Bank UZ 210,512 105,427 132,100 90,908 1,876 (34,747) (38,986) 92,613 TKT Online LLC 875 1,745 1,271 - 905 (58) (58) 577 TKT UZ 94 9 3 - 3 (22) (22) (32) Inspired LLC 14,262 2,078 1,976 - 28,826 17,989 17,989 (119) Billing solution 12 412 4 464 95 (190) (190) (24) TBC Bank JSC including: 11,268,120 12,771,392 3,627,610 16,821,847 1,399,104 858,266 835,938 (36,200) United Financial Corporation JSC 4,173 16,352 1,838 3,593 16,691 3,113 3,113 (626) The following table provides information for each subsidiary with a non-controlling interest as of 31 December 2020: in thousands of GEL Proportion of non-controlling interest’s voting rights held Proﬁt attributable to non-controlling interest Accumulated non-controlling interest in the subsidiary Inspired LLC 49% 4,164 4,824 TKT Online LLC 45% (182) 643 TKT UZ 25% (86) (26) My.Ge LLC 35% 507 2,496 Allproperty.ge LLC 10% 9 (27) Billing Solutions LLC 49% (108) 61 TBC Bank JSC including: 0.12% 433 3,508 United Financial Corporation JSC 0.47% 22 105 Total Non-Controlling 4,737 11,479 * In September 2021 the Group purchased remaining 35% shareholding from My.Ge LLC shareholders and became 100% owner of the Company. * In November 2021 the Group purchased remaining 10% shareholding from allproperty.ge LLC shareholders and became 100% owner of the Company. 345 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 41. NON-CONTROLLING INTEREST CONTINUED The summarised ﬁnancial information of these subsidiaries was as follows as of and for the year ended 31 December 2020: in thousands of GEL Current assets Non- current assets Current liabilities Non- current liabilities Revenue Proﬁt/ (loss) Total com- prehensive income/ (expense) Net cash flows TBC Bank JSC 9,992,348 12,070,130 14,066,164 5,251,319 1,033,580 330,969 353,307 557,847 Inspired LLC 8,972 1,572 496 – 15,094 8,498 8,498 5,160 United Financial Corporation JSC 5,269 17,803 504 257 14,716 4,573 4,573 676 Allproperty.ge LLC 1,410 1,496 595 237 2,200 87 87 (530) My.Ge LLC 625 7,394 925 – 5,646 1,449 1,449 (499) TKT Online LLC 181 1,705 478 – 649 (404) (404) (1,255) TKT UZ 126 10 5 – 15 (147) (147) (107) Billing Solutions LLC 38 406 3 318 (17) (220) (220) 36 The following table provides information about each subsidiary with a non-controlling interest for the year ended as of 31 December 2019: in thousands of GEL Proportion of non-controlling interest’s voting rights held Proﬁt/(loss) attributable to non-controlling interest Accumulated non-controlling interest in the subsidiary Inspired LLC 49% 1,350 1,906 TKT Online LLC 45% 303 815 TKT UZ 25% – 21 My.Ge LLC 35% 130 2,094 Allproperty.ge LLC 10% (65) (36) Billing Solutions LLC 49% – 169 TBC Bank JSC including: 0.12% 728 3,561 TBC Leasing JSC 0.39% 11 – United Financial Corporation JSC 0.47% 63 582 Total Non-Controlling 2,446 8,530 * In September 2021 the Group purchased remaining 35% shareholding from My.Ge LLC shareholders and became 100% owner of the Company. * In November 2021 the Group purchased remaining 10% shareholding from allproperty.ge LLC shareholders and became 100% owner of the Company. The summarised ﬁnancial information of these subsidiaries was as follows as of and for the year ended 31 December 2019: in thousands of GEL Current assets Non- current assets Current liabilities Non- current liabilities Revenue Proﬁt/ (loss) Total com- prehensive income/ (expense) Net cash flows TBC Bank JSC 8,026,612 10,280,004 11,254,319 4,520,588 1,010,616 545,055 545,080 (434,292) TBC Leasing JSC 180,282 172,275 133,198 182,804 29,894 6,861 6,861 719 TBC Kredit LLC 10,605 14,140 6,238 5,730 4,543 2,221 2,221 473 United Financial Corporation JSC 9,507 8,821 155 435 12,023 4,725 4,725 (622) Inspired LLC 2,796 1,177 185 – 5,683 2,759 2,756 1,686 TKT Online LLC 1,586 1,562 1,336 – 1,468 714 675 1,280 Allproperty.ge LLC 1,286 1,053 426 582 1,965 651 651 697 My.Ge LLC 863 5,845 586 – 2,122 442 442 482 TKT UZ 231 5 1 – – (1) (1) 230 Billing Solutions LLC – 344 – – – – – – 346 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 42. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES As of 31 December 2021, ﬁnancial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: in thousands of GEL Gross amounts before offsetting in the state- ment of ﬁnancial position (a) Gross amounts set off in the statement of ﬁnancial position (b) Net amount after offset- ting in the statement of ﬁnancial position (c)=(a)-(b) Amounts subject to master netting and similar arrangements not set off in the statement of ﬁnan- cial position Net amount of exposure (c)-(d)-(e Financial instru- ments (d) Cash collateral received (e) Assets Other ﬁnancial assets: – Receivables on credit card services and money transfers 70,501 7,620 62,881 - - 62,881 ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 70,501 7,620 62,881 - - 62,881 Liabilities Other ﬁnancial liabilities: – Payables on credit card services and money transfers 36,583 7,620 28,963 - - 28,963 LIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 36,583 7,620 28,963 - - 28,963 As of 31 December 2020, ﬁnancial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: in thousands of GEL Gross amounts before offsetting in the state- ment of ﬁnancial position (a) Gross amounts set off in the statement of ﬁnancial position (b) Net amount after offset- ting in the statement of ﬁnancial position (c)=(a)-(b) Amounts subject to master netting and similar arrangements not set off in the statement of ﬁnan- cial position Net amount of exposure (c)-(d)-(e Financial instru- ments (d) Cash collateral received (e) Assets Other ﬁnancial assets: – Receivables on credit card services and money transfers 25,245 18 25,227 – – 25,227 ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 25,245 18 25,227 – – 25,227 Liabilities Other ﬁnancial liabilities: – Payables on credit card services and money transfers 8,800 18 8,782 – – 8,782 LIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 8,800 18 8,782 – – 8,782 347 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 As of 31 December 2019, ﬁnancial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: 42. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES CONTINUED in thousands of GEL Gross amounts before offsetting in the state- ment of ﬁnancial position (a) Gross amounts set off in the statement of ﬁnancial position (b) Net amount after offset- ting in the statement of ﬁnancial position (c)=(a)-(b) Amounts subject to master netting and similar arrangements not set off in the statement of ﬁnan- cial position Net amount of exposure (c)-(d)-(e Financial instru- ments (d) Cash collateral received (e) Assets Other ﬁnancial assets: – Receivables on credit card services and money transfers 24,139 2,244 21,895 – – 21,895 ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 24,139 2,244 21,895 – – 21,895 Liabilities Other ﬁnancial liabilities: – Payables on credit card services and money transfers 17,518 2,244 15,274 – – 15,274 LIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 17,518 2,244 15,274 – – 15,274 The amount set off in the statement of ﬁnancial position reported in column (b) is the lower of (i) the gross amount before offsetting reported in column (a) and (ii) the amount of the related instrument that is eligible for offsetting. Similarly, the amounts in columns (d) and (e) are limited to the exposure reported in column (c) for each individual instrument in order not to understate the ultimate net exposure. Deposits placed with other banks and deposits received from other banks as part of gross settled currency swap arrangements have been netted-off in these ﬁnancial statements and the instrument has been presented as either asset or liability at a fair value. The disclosure does not apply to loans and advances to customers and related customer deposits unless they are netted-off in the statement of ﬁnancial position. 43. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Group enters into various derivative ﬁnancial instruments, to manage currency, liquidity and interest rate risks and for trading purposes. in thousands of GEL 2021 2020 2019 Fair value of gross settled currency swaps, included in other ﬁnancial assets or due from banks 185,710 28,915 5,849 Fair value of foreign exchange forwards and gross settled currency swaps, included in other ﬁnancial liabilities (9,727) (121,934) (20,266) Total 175,983 (93,019) (14,417) 348 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED Foreign Exchange Forwards and gross settled currency swaps. Foreign exchange derivative ﬁnancial instruments the Group entered are generally traded in an over-the-counter market with professional counterparties on stan- dardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative ﬁnancial assets and liabilities can fluctuate signiﬁcantly from time to time. The table below sets out fair values, at the balance sheet date, of currencies receivable or payable under foreign ex- change forwards contracts and gross settled currency swaps the Group entered. The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the respective balance sheet date. 43. DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED 2021 2020 2019 In thousands of GEL Contracts with positive fair value Contracts with negative fair value Contracts with positive fair value Contracts with negative fair value Contracts with positive fair value Contracts with negative fair value Foreign exchange forwards and gross settled currency swaps: fair values, at the balance sheet date, of – USD payable on settlement (-) (301,500) (528,905) (404,289) (145,313) (123,836) (14,480) – USD receivable on settlement (+) 3,353,189 491,692 353,946 3,110,150 337,218 1,746,812 – GEL payable on settlement (-) (112,743) (476,269) (164,233) (23,545) - (200,386) – GEL receivable on settlement (+) 269,936 205,667 211,903 135,116 108,914 - – EUR payable on settlement (-) (3,096,222) (9,883) (175,194) (3,252,692) (333,757) (1,616,275) – EUR receivable on settlement (+) 54,955 326,103 199,968 - 16,048 9,191 – Other payable on settlement (-) (1,031) (19,165) (2,903) - (1,630) (2,887) – Other receivable on settlement (+) 19,126 1,031 9,717 54,350 2,892 57,759 Fair value of foreign exchange forwards and gross settled currency swaps 185,710 (9,727) 28,915 (121,934) 5,849 (20,266) Net fair value of foreign exchange forwards and gross settled currency swaps 175,983 (93,019) (14,417) 349 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 44. FAIR VALUE DISCLOSURES (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the statement of ﬁnancial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised as follows: 31 December 2021 31 December 2020 31 December 2019 in thousands of GEL Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value ASSETS CARRIED AT FAIR VALUE FINANCIAL ASSETS Investment securities measured at fair value through other comprehensive income – Certificates of Deposits of National Bank of Georgia – – – – – – 21,687 – 21,687 21,687 – 40,346 – 40,346 40,346 – Corporate Bonds – 704,435 – 704,435 704,435 – 664,563 – 664,563 664,563 – 611,000 – 611,000 611,000 – Ministry of Finance of Uz- bekistan treasury bills – 1,683 – 1,683 1,683 – 1,950 – 1,950 1,950 – 1,596 – 1,596 1,596 – Ministry of Finance Treasury Bills – 1,231,024 – 1,231,024 1,231,024 – 838,152 – 838,152 838,152 – 329,352 – 329,352 329,352 – Corporate shares – – 1,054 1,054 1,054 – – 916 916 916 – – 2,999 2,999 2,999 Investment securities measured at fair value through proﬁt and loss – Foreign ex- change forwards and gross settled currency swaps, included in other financial assets or due from banks – 185,710 – 185,710 185,710 – 28,915 – 28,915 28,915 – 5,849 – 5,849 5,849 – Investment held at fair value through profit or loss – – 11,125 11,125 11,125 – – 17,239 17,239 17,239 – – – – – TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS – 2,122,852 12,179 2,135,031 2,135,031 – 1,555,267 18,155 1,573,422 1,573,422 – 988,143 2,999 991,142 991,142 LIABILITIES CARRIED AT FAIR VALUE FINANCIAL LIABILITIES Foreign exchange forwards and gross settled currency swaps, included in other ﬁnancial liabilities - 9,727 - 9,727 9,727 – 121,934 – 121,934 121,934 – 20,266 – 20,266 20,266 TOTAL LIABILITIES RECURRING FAIR VALUE MEASUREMENTS - 9,727 - 9,727 9,727 – 121,934 – 121,934 121,934 – 20,266 – 20,266 20,266 There were no transfers between levels 1 and 2 during the year ended 31 December 2021 (2020 none, 2019: none). 350 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The description of the valuation technique and the description of inputs used in the fair value measurement for level 2 measurements: 44. FAIR VALUE DISCLOSURES CONTINUED Fair value at 31 December in thousands of GEL 2021 2020 2019 Valuation technique Inputs used ASSETS CARRIED AT FAIR VALUE – Certificates of Deposits of NBG, Ministry of Finance Treasury Bills, Government notes, Cor- porate bonds 1,937,142 1,526,352 982,294 Discounted cash flows (“DCF”) Government bonds yield curve – Foreign exchange forwards and gross settled currency swaps, included in due from banks 185,710 28,915 5,849 Forward pricing using present value calculations Ofﬁcial exchange rate, risk-free rate TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS AT LEVEL 2 2,122,852 1,555,267 988,143 LIABILITIES CARRIED AT FAIR VALUE FINANCIAL LIABILITIES – Foreign exchange forwards included in other financial liabilities 9,727 121,934 20,266 Forward pricing using present value calculations Ofﬁcial exchange rate, risk-free rate TOTAL LIABILITIES RECURRING FAIR VALUE MEASUREMENTS AT LEVEL 2 9,727 121,934 20,266 The description of the valuation technique and the description of inputs used in the fair value measurement for level 3 measurements: in thousands of GEL 2021 2020 2019 Valuation technique Inputs used ASSETS CARRIED AT FAIR VALUE – Investment held at fair value through profit or loss 11,125 17,239 - Discounted cash flows (“DCF”) Government bonds yield curve – Corporate shares 1,054 916 2,999 Discounted cash flows (“DCF”) Government bonds yield curve TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS AT LEVEL 3 12,179 18,155 2,999 There were no changes in the valuation technique for the level 2 and level 3 recurring fair value measurements during the year ended 31 December 2021 (2020: none; 2019: none). Sensitivity of the input to fair value – increase/(decrease) in projected cash flows by 10% would result in increase/ (decrease) in fair value by GEL 886 thousand/ (GEL 886 thousand). Fair value measurement analysis by level in the fair value hierarchy is disclosed in Note 2. 351 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 44. FAIR VALUE DISCLOSURES CONTINUED (b) Assets and liabilities not measured at fair value but for which fair value is disclosed Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows: 31 December 2021 31 December 2020 31 December 2019 in thousands of GEL Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value FINANCIAL ASSETS Cash and cash equivalents 839,821 882,316 – 1,722,137 1,722,137 755,686 879,719 – 1,635,405 1,635,405 650,700 352,883 – 1,003,583 1,003,583 Due from other banks – 79,142 – 79,142 79,142 – 50,805 – 50,805 50,805 – 33,605 – 33,605 33,605 Mandatory cash balances with the NBG and NBU – 2,087,141 – 2,087,141 2,087,141 – 2,098,506 – 2,098,506 2,098,506 – 1,591,829 – 1,591,829 1,591,829 Loans and advances to customers: – Corporate loans – – 6,492,668 6,492,668 6,497,010 – – 5,728,134 5,728,134 5,583,108 – – 4,838,348 4,838,348 4,579,723 – Consumer loans – – 2,394,481 2,394,481 2,062,976 – – 2,025,055 2,025,055 1,769,760 – – 1,876,364 1,876,364 1,750,050 – Mortgage loans – – 4,522,528 4,522,528 4,048,955 – – 4,032,243 4,032,243 3,845,232 – – 3,354,901 3,354,901 3,137,492 – Loans to micro, small and medium enterprises – – 4,126,318 4,126,318 4,028,204 – – 3,508,881 3,508,881 3,396,174 – – 2,891,382 2,891,382 2,882,134 Bonds carried at amortised cost – 49,582 – 49,582 49,582 – 1,086,007 – 1,086,007 1,089,801 – 990,537 – 990,537 1,022,684 Finance lease receivables – – 261,561 261,561 262,046 – – 274,402 274,402 271,660 – – 265,165 265,165 256,660 Other ﬁnancial assets – – 256,280 256,280 256,280 – – 125,148 125,148 125,148 – – 127,887 127,887 127,887 NON-FINANCIAL ASSETS Investment properties, at cost – – 29,493 29,493 22,892 – – 105,628 105,628 68,689 – – 123,325 123,325 72,667 TOTAL ASSETS 839,821 3,098,181 18,083,329 22,021,331 21,116,365 755,686 4,115,037 15,799,491 20,670,214 19,934,288 650,700 2,968,854 13,477,372 17,096,926 16,458,314 FINANCIAL LIABILITIES Customer accounts – 9,982,595 5,026,676 15,009,271 15,038,172 – 7,481,872 5,113,469 12,595,341 12,572,728 – 6,480,250 3,580,630 10,060,880 10,049,324 Debt securities in issue 1,798,023 – – 1,798,023 1,710,288 1,463,830 – – 1,463,830 1,496,497 1,136,297 – – 1,136,297 1,136,297 Due to credit institutions – – 2,986,731 2,986,731 2,984,176 – 4,490,963 – 4,490,963 4,486,373 – 3,600,318 – 3,600,318 3,593,901 Other ﬁnancial liabilities –- –- 196,249 196,249 196,249 – 164,479 – 164,479 164,479 – 153,241 – 153,241 153,241 Subordinated debt – – 626,503 626,503 623,647 – 677,246 – 677,246 672,740 – 594,892 – 594,892 591,035 TOTAL LIABILITIES 1,798,023 9,982,595 8,836,159 20,616,777 20,552,532 1,463,830 12,814,560 5,113,469 19,391,859 19,392,817 1,136,297 10,828,701 3,580,630 15,545,628 15,523,798 The fair values in the level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valua- tion technique. The fair value of unquoted ﬁxed interest rate instruments was calculated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of investment properties was estimated using market comparatives (refer to Note 17). Amounts due to credit institutions were discounted at the Group’s own incremental borrowing rate. Liabilities due on demand were discounted from the ﬁrst date that the Group could be required to pay the amount. Amounts due to credit institutions, subordinated debt and other ﬁnancial liabilities were moved from level 2 to level 3. There were no changes in the valuation technique for the level 2 and level 3 measurements of assets and liabilities not measured at fair values in the year ended 31 December 2021 (2020: none; 2019: none) 352 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 45. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY The following table provides a reconciliation of classes of ﬁnancial assets with these measurement categories as of 31 December 2021: in thousands of GEL Amortised cost Fair value through other comprehensive income Fair value through proﬁt or loss Total ASSETS Cash and cash equivalents 1,722,137 - - 1,722,137 Due from other banks 79,142 - - 79,142 Mandatory cash balances with National Bank of Georgia and Uzbekistan 2,087,141 - - 2,087,141 Loans and advances to customers 16,637,145 - - 16,637,145 Investment securities measured at FVOCI - 1,938,196 - 1,938,196 Bonds carried at amortised cost 49,582 - - 49,582 Other ﬁnancial assets 256,280 - 196,835 453,115 TOTAL FINANCIAL ASSETS SUBJECT TO IFRS 9 MEASUREMENT CATEGORIES 20,831,427 1,938,196 196,835 22,966,458 Finance lease receivables - - - 262,046 Non-ﬁnancial assets - - - 1,280,057 TOTAL ASSETS 20,831,427 1,938,196 196,835 24,508,561 For the measurement purposes, IFRS 9, classiﬁes ﬁnancial assets into the categories discussed in Note 2. The follow- ing table provides a reconciliation of classes of ﬁnancial assets with these measurement categories as of 31 Decem- ber 2020: in thousands of GEL Amortised cost Fair value through other comprehensive income Fair value through proﬁt or loss Total ASSETS Cash and cash equivalents 1,635,405 – – 1,635,405 Due from other banks 50,805 – – 50,805 Mandatory cash balances with National Bank of Georgia 2,098,506 – – 2,098,506 Loans and advances to customers 14,594,274 – – 14,594,274 Investment securities measured at FVOCI – 1,527,268 – 1,527,268 Bonds carried at amortised cost 1,089,801 – – 1,089,801 Other ﬁnancial assets 125,148 – 46,154 171,302 TOTAL FINANCIAL ASSETS SUBJECT TO IFRS 9 MEASUREMENT CATEGORIES 19,593,939 1,527,268 46,154 21,167,361 Finance lease receivables – – – 271,660 Non-ﬁnancial assets – – – 1,138,784 TOTAL ASSETS 19,593,939 1,527,268 46,154 22,577,805 353 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The following table provides a reconciliation of classes of ﬁnancial assets with these measurement categories as of 31 December 2019: 45. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY CONTINUED in thousands of GEL Amortised cost Fair value through other comprehensive income Fair value through proﬁt or loss Total ASSETS Cash and cash equivalents 1,003,583 – – 1,003,583 Due from other banks 33,605 – – 33,605 Mandatory cash balances with National Bank of Georgia 1,591,829 – – 1,591,829 Loans and advances to customers 12,349,399 – – 12,349,399 Investment securities measured at FVOCI – 985,293 – 985,293 Bonds carried at amortised cost 1,022,684 – – 1,022,684 Other ﬁnancial assets 131,649 – 2,087 133,736 TOTAL FINANCIAL ASSETS SUBJECT TO IFRS 9 MEASUREMENT CATEGORIES 16,132,749 985,293 2,087 17,120,129 Finance lease receivables – – – 256,660 Non-ﬁnancial assets – – – 982,477 TOTAL ASSETS 16,132,749 985,293 2,087 18,359,266 As of 31 December 2021, 2020 and 2019 all of the Group’s ﬁnancial liabilities except for derivatives are carried at am- ortised cost. Derivatives belong to the assets fair value through proﬁt or loss measurement category under IFRS 9. 46. RELATED PARTY TRANSACTIONS Pursuant to IAS 24 “Related Party Disclosures”, parties are generally considered to be related if the parties are under common control or one party has the ability to control the other or it can exercise signiﬁcant influence over the other party in taking ﬁnancial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form: • Parties with material ownership stake (more than 5% beneﬁcial ownership stake for 2021, 2020 and 2019) in the TBCG or with representatives in the Board of Directors are considered as Signiﬁcant Shareholders. Their close family members and related companies with ownership stake of more than 50% are also considered as signiﬁcant shareholders • The key management personnel include members of TBCG’s Board of Directors, the Management Board of the Bank and their close family members. Transactions between TBC Bank Group PLC and its subsidiaries also meet the deﬁnition of related party transactions. Where these are eliminated on consolidation, they are not disclosed in the Group Financial Statements. The deﬁnition of the related party is different per standards of National Bank of Georgia and is regulated by the pub- lished Decree N 26/04 of the Governor of the National Bank of Georgia. 354 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED As of 31 December 2021, 2020 and 2019 the Group’s outstanding balances with related parties were as follows: 46. RELATED PARTY TRANSACTIONS CONTINUED in thousands of GEL Contractual interest rate Signiﬁcant shareholders Key management personnel 2021 Gross amount of loans and advances to customers 4.0%-36.0% 24 12,394 Credit loss allowance for loans and advances to customers – – 6 Customer accounts 0%-12.5% 19,460 23,620 Other borrowed funds from EBRD 0.86%-12.85% 360,889 – 2020 Gross amount of loans and advances to customers 6.6% – 36.0% 54 6,869 Credit loss allowance for loans and advances to customers – – 4 Customer accounts 0.0% – 11.5% 16,574 16,555 Other borrowed funds from EBRD 0.98%–11.09% 411,765 – 2019 Gross amount of loans and advances to customers 6.6% – 36.0% 77 9,723 Credit loss allowance for loans and advances to customers – – 1 Customer accounts 0.0% – 11.5% 16,418 12,997 Other borrowed funds from EBRD 4.5% – 11.55% 243,040 – The Group’s income and expense items with related parties except from key management compensation for the year 2021, 2020 and 2019 were as follows: in thousands of GEL Signiﬁcant shareholders Key management personnel 2021 Interest income - loans and advances to customers 5 384 Interest expense 98 673 Interest expense with EBRD 36,819 – Fee and commission income 27 72 Administrative and other operating expenses (excluding staff costs) – 431 2020 Interest income - loans and advances to customers 8 346 Interest expense – 1 Interest expense with EBRD 29,580 – Fee and commission income 21 24 Administrative and other operating expenses (excluding staff costs) – 323 2019 Interest income - loans and advances to customers 42 620 Interest expense 87 197 Interest expense with EBRD 22,826 – Fee and commission income 77 61 Administrative and other operating expenses (excluding staff costs) 68 978 * The management has added and separately disclosed the interest expense incurred for EBRD borrowings for current and comparative periods, considering, the data was incomplete and that the latter represents more than 5% shareholder of the Group. Other borrowed funds from EBRD were GEL 411,765 thousand and GEL 243,040 thousand as at 31 December 2020 and 2019. Interest expense with EBRD for the year 2020 and 2019 were GEL 29,580 thousand and GEL 22,826 thousand.. 355 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 The aggregate loan amounts advanced to, and repaid, by related parties during 2021, 2020 and 2019 were as follows: 46. RELATED PARTY TRANSACTIONS CONTINUED in thousands of GEL Signiﬁcant share- holders Key management personnel 2021 Amounts advanced to related parties during the year 67 5,131 Amounts repaid by related parties during the year (97) (5,311) 2020 Amounts advanced to related parties during the year 107 3,750 Amounts repaid by related parties during the year (76) (8,193) 2019 Amounts advanced to related parties during the year 249 15,160 Amounts repaid by related parties during the year (1,878) (17,747) During the year 2021, 15 related parties were removed from the insider list. If they had remained in the list, customer accounts with related parties as of 31 December 2021 would have been GEL 324 thousand higher. During the year 2020, 6 related parties were removed from the insider list. If they had remained in the list, customer accounts with related parties as of 31 December 2020 would have been GEL 27 thousand higher. During the year 2019, 3 related parties were removed from the insider list. If they had remained in the list, customer accounts with related parties as of 31 December 2019 would have been GEL 266 thousand higher. As of 31 December 2021, 2020 and 2019 transactions and balances of TBC Bank PLC with subsidiaries were as follows: in thousands of GEL Contractual interest rate Total 2021 Cash and cash equivalents – 14,614 Loans issued 7.5% 10,862 Investment in subsidiary – 1,674,273 Foreign exchange forward contracts – 13,504 2020 Due from other banks 8.05% – 9.03% 27,700 Cash and cash equivalents – 10,631 Investment in subsidiary – 1,456,862 Foreign exchange forward contracts – 2,527 2019 Due from other banks 8.05% – 9.03% 40,815 Cash and cash equivalents – 6,612 Investment in subsidiary – 1,463,084 Included in Investments in subsidiary in Separate Statement of Financial Position GEL 7,823 thousands and GEL 78,752 thousands relates to investment in JSC TBC Insurance and JSC TBC Bank UZ. 356 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED The income and expense items for TBC Bank Group PLC with subsidiaries except from key management compen- sation for the year 2021, 2020 and 2019 were as follows: 46. RELATED PARTY TRANSACTIONS CONTINUED in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 Interest income 1,649 3,438 5,625 Interest expense 212 - - Fee and commission expense 1 5 48 Dividend income 95,252 6,297 109,520 Processional Expenses 12 746 - Net gains from currency derivatives, foreign currency operations and translation 10,977 2,527 - The compensation of the TBCG Board of Directors and the Bank’s Management Board is presented below: 2021 2020 2019 In thousands of GEL Expense Accrued liability Expense Accrued liability Expense Accrued liability Salaries and short-term bonuses 14,853 – 9,997 – 10,274 – Cash settled bonuses related to share- based compensation – – – – (1,627) – Equity-settled share-based compensation 13,013 – 11,514 – 25,695 – Total 27,866 – 21,511 – 34,342 – Included in salaries and bonuses for 2021, GEL 2,758 thousand (2020: GEL 2,513 thousand; 2019: GEL 2,879 thousand) relates to compensation for directors (2021: 8 person, 2020: 8 person, 2019: 9 person) of TBCG paid by TBC Bank Group PLC. Details of director’s compensation is discussed in the remuneration committee report. 47. BUSINESS COMBINATION Acquisition of Inspired LLC In May 2019 TBC Bank Group PLC ﬁnalized acquisition process of Inspired LLC – the leading payment platform “Payme”. The acquired interest amounted 51% of total shareholding. The transaction is in line with the Group’s inter- national expansion strategy of operations. The consideration amounted GEL 14,981 thousands. The acquisition-date fair value of the total purchase consideration is as follows: In thousands of GEL 2019 Cash consideration paid 14,981 Total purchase consideration 14,981 The consideration paid by the Group was based on results of an appraisal of the acquiree’s business taken as a whole. However, in accordance with IFRS 3 “Business Combinations”, the Group must account for acquisitions based on fair values of the identiﬁable assets acquired and liabilities and contingent liabilities assumed. These two different ap- proaches can lead to differences; and, as set out in the table below, recognition of goodwill. Details of the assets and liabilities acquired and goodwill arising is as follows: 357 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 47. BUSINESS COMBINATION CONTINUED In thousands of GEL Fair Values Cash and cash equivalents 223 Due from other banks 424 Other ﬁnancial assets 676 Premises and equipment 379 Intangible assets 212 Other assets 79 Other liabilities (159) Fair value of net assets of subsidiary 1,834 Non-controlling interest (868) Goodwill arising from the acquisition 14,015 Total purchase consideration 14,981 Less: cash and cash equivalents of subsidiary acquired (223) Outflow of cash and cash equivalents on acquisition 14,758 The goodwill is primarily attributable to the proﬁtability of the acquired business and the positive synergies expected to arise. The acquired business combination contributed to Group’s net operating income in the amount of GEL 5,683 thou- sand and to Group’s net proﬁt in the amount of GEL 2,759 thousand from the date of acquisition to 31 December 2019. If the acquisition had occurred on 1st of January 2019, the contribution to the Group’s net operating income for the year ended 31 December 2019 would have been of GEL 8,561 thousand and to net proﬁt would have been positive of GEL 4,272 thousand. Acquisition of My.ge LLC In August 2019 TBC Bank Group PLC ﬁnalized acquisition process of LLC My.ge – the leading online services plat- form in Georgia “My Group”. The acquired interest amounted 65% of total shareholding. The transaction is in line with the Group’s international expansion strategy of operations. The consideration amounted GEL 19,450 thousands. The acquisition-date fair value of the total purchase consideration is follows: In thousands of GEL 2019 Cash consideration paid 19,450 Total purchase consideration 19,450 The consideration paid by the Group was based on results of an appraisal of the acquiree’s business taken as a whole. However, in accordance with IFRS 3 “Business Combinations”, the Group must account for acquisitions based on fair values of the identiﬁable assets acquired and liabilities and contingent liabilities assumed. These two different ap- proaches can lead to differences; and, as set out in the table below, recognition of goodwill. Details of the assets and liabilities acquired and goodwill arising is as follows: 358 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 47. BUSINESS COMBINATION CONTINUED In thousands of GEL Fair Values Cash and cash equivalents 1,667 Other ﬁnancial assets 232 Premises and equipment 1,208 Intangible assets 4,403 Other assets 1 Other ﬁnancial liabilities (1,862) Other liabilities (51) Fair value of net assets of subsidiary 5,598 Non-controlling interest (1,960) Goodwill arising from the acquisition 15,812 Total purchase consideration 19,450 Less: cash and cash equivalents of subsidiary acquired (1,667) Outflow of cash and cash equivalents on acquisition 17,783 The goodwill is primarily attributable to the proﬁtability of the acquired business and the positive synergies expected to arise. The acquired business combination contributed to Group’s net revenue in the amount of GEL 2,122 thousand and to Group’s net proﬁt in the amount of GEL 442 thousand from the date of acquisition to 31 December 2019. If the acquisi- tion had occurred on 1st of January 2019, the contribution to the Group’s net revenue for the year ended 31 December 2019 would have been of GEL 5,208 thousand and to net proﬁt would have been positive of GEL 1,497 thousand. 48. EVENTS AFTER REPORTING PERIOD Since February 2022 ongoing political tension in the region escalated as a result of Russian invasion in Ukraine. This has negatively impacted commodity and ﬁnancial markets, and increased volatility, particularly with regard to foreign exchange rates. As a result of sanctions imposed from a number of countries, many companies left Russian market and as a result ceased providing services and products to Russian Market. There is an expectation of further sanc- tions and limitations on business activity of companies operating in Russia. To avoid the severe effects on Georgian economy the Georgian Government has not joined on all sanctions, but the full nature and possible effects of the imposed restrictions against Russia and Ukrainian economy downturn are yet unknown. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia and economic links with these countries, there will be adverse implications for the growth outlook, as well as, for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risks. Russian entities from having access to the Euro and US$ ﬁnancial markets including removing access to the interna- tional SWIFT system and in such a situation this could further impact the Group’s ability to transfer or receive funds in Russia. At this stage, it is not possible for the Management to predict with any degree of certainty the impact of all this uncertainty on the future operations of the Group. However, Group’s Management believes, the war in Ukraine is non-adjusting event and closely monitors the current economic environment to adjust the Groups performance accordingly where needed. In March 2022, the Bank obtained the funding resource of EUR 20 million from The European Fund for Southeast Europe S.A. (“EFSE”) and USD 50 million from the Proparco. Loan agreements have the maturity of 3 and 5 years. USD 9.2 million from the European Bank for Reconstruction and Development (“EBRD”) USD 15 million from the City Bank, also have been obtained in March 2022, with agreements maturity of 6-6 months. 359 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 A FULL LIST OF RELATED UNDERTAKINGS AND THE COUNTRY OF INCORPORATION IS SET OUT BELOW Company Name Country of incorporation JSC TBC Bank 7 Marjanishvili Street, 0102, Tbilisi, Georgia United Financial Corporation JSC 154 Agmashenebeli Avenue, 0112, Tbilisi, Georgia TBC Capital LLC 11 Chavchavadze Avenue, 0179, Tbilisi, Georgia TBC Leasing JSC 76 Chavchavadze Avenue, 0162,, Tbilisi, Georgia TBC Kredit LLC 71-77, 28 May Street, AZ1010, Baku, Azerbaijan TBC Pay LLC 7 Marjanishvili Street, 0102, Tbilisi, Georgia TBC Invest LLC 7 Jabonitsky street, , 52520, Tel Aviv, Israel Index LLC 8 Tetelashvili,0102,, Tbilisi, Georgia JSC TBC Insurance 24B, Al. Kazbegi Avenue, 0160, Tbilisi, Georgia TBC Invest International Ltd 7 Marjanishvili Street, 0102, Tbilisi, Georgia University Development Fund 1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia CreditInfo Georgia JSC 2 Tarkhnishvili street, 0179, Tbilisi, Georgia Online Tickets LLC 3 Irakli Abashidze street, 0179, Tbilisi, Georgia VENDOO LLC (Geo) 44 Petre Kavtaradze street, 0128, Tbilisi, Georgia Natural Products of Georgia LLC 1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia Mobi Plus JSC 45 Vajha Pshavela Street, 0177, Tbilisi, Georgia Mineral Oil Distribution Corporation JSC 11 Tskalsadeni Street, 0153, Tbilisi, Georgia Georgian Card JSC 106 Beliashvili Street, 0159, Tbilisi Georgia Georgian Central Securities Depository JSC 74 Chavchavadze Avenue, 0162, Tbilisi, Georgia JSC Givi Zaldastanishvili American Academy In Georgia 37 Chavchavadze Avenue, 0162, Tbilisi Georgia United Clearing Centre 5 Sulkhan Saba Street, 0105, Tbilisi, Georgia GRDC N.V Utrechtseweg 95, 1213 TN Hilversum,Netherlands Banking and Finance Academy of Georgia 123, Agmashenebeli Avenue, 0112, Tbilisi, Georgia Tbilisi's City JSC 15 Rustaveli Avenue, 0108, Tbilisi Georgia TBC Trade LLC 11A Chavchavadze Ave, 0179, Tbilisi, Georgia Redmed LLC 25 Al. Kazbegi Avenue, 0160, Tbilisi, Georgia TBC Net LLC 7 Marjanishvili st. Didube-chugureti District, Tbilisi,Georgia TKT UZ 12, Shota Rustaveli, Yakkasaray district, Tashkent, Uzbekistan Mypost LLC 129a Sh. Nutsubidze St. Vake,Tbilisi, Georgia Billing Solutions LLC 14 Khelovanta St. Isani, Tbilisi, Georgia F Solutions LLC 36, Kakheti Hwy, Isani-Samgori District, Tbilisi, Georgia Inspired LLC 1, Chust, Mirzo Ulugbek district, Tashkent, Uzbekistan VENDOO LLC (UZ Leasing) 10B, Fidokor, Yakkasaray, Tashkent, Uzbekistan Marjanishvili 7 LLC 7 Marjanishvili st. Didube-chugureti District, Tbilisi,Georgia TBC Bank JSC UZ 118/1, Amir Temur avenue, Yunusobod district, Tashkent, Uzbekistan TBC Group Support LLC 7 Marjanishvili st. Didube-chugureti District, Tbilisi,Georgia Tbilisi Stock Exchange JSC floor 2th block 8, 71 Vazha Pshavela Ave, Tbilisi, Georgia Georgian Stock Exchange JSC 74a chavchavadzis avenue, vake-saburtalo, Tbilisi, Georgia Kavkasreestri JSC 74a chavchavadzis avenue, vake-saburtalo, Tbilisi, Georgia Freeshop.ge LLC 74 chavchavadzis avenue, vake-saburtalo, Tbilisi, Georgia The.ge LLC 20 amaglebis st. old Tbilisi, Georgia SABA LLC 5, Gabashvili street, vake-saburtalo Tbilisi, Georgia Artarea.ge LLC 25 Al. Kazbegi Avenue, 0160, Tbilisi, Georgia TBC Art Gallery LLC 6, Tsimakuridze str, Tbilisi, Georgia TBC Capital Asset Management LLC 7 Marjanishvili Street, 0102, Tbilisi, Georgia Swift 1 Adele Avenue, B-1310, La Hulpe, Belgium Space International JSC 7 Marjanishvili Street, 0102, Tbilisi, Georgia Space JSC 7 Marjanishvili Street, 0102, Tbilisi, Georgia Georgia Large Cap Diversiﬁed Credit Portfolio JSC 7 Marjanishvili Street, 0102, Tbilisi, Georgia ADDITIONAL INFORMATION 362 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 GLOSSARY Active customers Clients who have at least one active product or performed at least one transaction during the last 3 months. Active retail digital users Includes unique digital users of TBC Bank, Space app and TBC Pay mobile app, who logged in at least once for the past 3 months. Active merchant terminals Active merchant terminals include POS terminals and e-commerce with at least one transaction conducted during the month. Bank Joint Stock Company TBC Bank Board Board of Directors of TBC Bank Group PLC Chairman Chairman of Board of Directors of TBC Bank Group PLC Code The UK Corporate Governance Code Company TBC Bank Group PLC Consumer loans offloading Consumer loans offloading ratios includes the number of consumer loans disbursed via the remote channels divided by total number of such loans issued. Corporate and Investment Banking segment A legal entity/group of afﬁliated entities with an annual revenue exceeding GEL 12.0 million or which has been granted facilities of more than GEL 5.0 million. Some other business customers may also be assigned to the CIB segment or transferred to the MSME segment on a discretionary basis. In addition, CIB includes Wealth Management private banking services to high-net-worth individuals with the threshold of US$ 250,000 on assets under management (AUM), as well as on discretionary basis. Daily active digital users (DAU) Monthly average number of digital users who logged into our digital channels at least once per day. DAU/MAU Average daily active digital users divided by monthly active digital users. DAU/MAU is calculated for the Bank internet and mobile banking only. Deposit offloading Deposit offloading ratio includes the number of time and savings deposits opened via remote channels divided by total number of such deposits opened. Director(s) Members of the Board of TBC Bank Group PLC ENPS (Employee Net Promoter Score) The employee net promoter score measures employee loyalty and reflects the likelihood of our colleagues recommending their workplace to their friends and family Group TBC Bank Group PLC and its subsidiary companies Management Board Management Board of Joint Stock Company TBC Bank Monthly active digital users (MAU) For Georgian business, the number of digital users who logged into our digital channels at least once a month; For Uzbek businesses, number of digital users who conducted at least one transaction per month. MSME (Micro, Small and Medium) segment Business customers who are not included in the CIB segment NPS (Net Promoter Score) Net promoter score measures how willing customers are to recommend our products and services to others. Retail offloading ratio The retail offloading ratios measures the share of transactions conducted in our remote channels, that is outside the branches. Retail segment Non-business individual customers, including the fully-digital bank, Space Supervisory Board Supervisory Board of Joint Stock Company TBC Bank TBC Bank TBC Bank Group PLC and its subsidiary companies TBC Bank Group PLC A public limited company registered in England and Wales. It is the parent company of JSC TBC Bank (the Bank) and a group of companies that principally operate in Georgia in the ﬁnancial sector and other closely related ﬁelds. TBC Bank Group PLC is listed on the London Stock Exchange under the symbol TBCG. TBC JSC JSC TBC Bank TBC PLC TBC Bank Group PLC TBC UZ TBC Bank UZ JSCB TBCG TBC Bank Group PLC 363 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ALTERNATIVE PERFORMANCE MEASURES Term # Type Deﬁnition Proﬁtability ROE 1 IFRS based Return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders’ equity attributable to the PLC’s equity holders for the same period; annualised where applicable. Bank’s standalone ROE IFRS based Bank’s standalone ROE equals the Bank’s net income of the period divided by the monthly average of total shareholders’ equity for the same period; For the ratio calculation all relevant group recurring costs are allocated to the bank; annualised where applicable. ROA 2 IFRS based Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period; annualised where applicable. Bank’s standalone ROA IFRS based Bank’s standalone ROA equals the Bank’s net income of the period divided by monthly average total assets for the same period; For the ratio calculation all relevant group recurring costs are allocated to the bank; annualised where applicable. Cost to income 3 IFRS based Cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income). Bank’s standalone cost to income IFRS based Bank’s standalone cost to income ratio equals the Bank’s total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income); For the ratio calculation all relevant group recurring costs are allocated to the bank; annualised where applicable. NIM 4 IFRS based Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities (excluding CIB shares), net investment in ﬁnance lease, net loans, and amounts due from credit institutions. Loan yields 5 IFRS based Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable. Deposit rates 6 IFRS based Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable. Cost of funding 7 IFRS based Cost of funding equals sum of the total interest expense and net interest gains on currency swaps (entered for funding management purposes), divided by monthly average interest bearing liabilities; annualized where applicable. Asset quality & portfolio concetration Cost of risk 8 IFRS based Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable. PAR 90 to Gross Loans 9 IFRS based PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period. NPLs to Gross Loans 10 IFRS based NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with a well-deﬁned weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period. The Group utilises a wide range of alternative performance measures (APMs) to assess the Group’s performance. These measures can be grouped under the following headings: • Proﬁtability • Asset quality & portfolio concentration • Capital & liquidity positions Certain performance measures are calculated on standalone basis for the Bank only in order to highlight the perfor- mance of the Bank, which is the major subsidiary of the Group, as well as facilitate peer comparison. The regulatory performance measures are calculated in accordance with NBG’s requirements for the Bank only based on local accounting standards. 364 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 NPL provision coverage 11 IFRS based NPL provision coverage equals total credit loss allowance for loans to customers divided by the NPL loans. Total NPL coverage 12 IFRS based Total NPL coverage equals total credit loss allowance plus the minimum of collateral amount of the respective NPL loan (after applying haircuts in the range of 0%-50% for cash, gold, real estate and PPE) and its gross loan exposure divided by the gross exposure of total NPL loans. Credit loss level to Gross Loans 13 IFRS based Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period. Related Party Loans to Gross Loans 14 IFRS based Related party loans to total loans equals related party loans divided by the gross loan portfolio. Top 10 Borrowers to Total Portfolio 15 IFRS based Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio. Top 20 Borrowers to Total Portfolio 16 IFRS based Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio. Capital & liquidity positions Net Loans to Deposits plus IFI Funding 17 IFRS based Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international ﬁnancial institutions. Net Stable Funding Ratio Regulatory based Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as deﬁned by NBG in line with Basel III guidelines. Calculations are made for the Bank only, based on local standards. Liquidity Coverage Ratio Regulatory based Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as deﬁned by the NBG. Calculations are made for the Bank only, based on local accounting standards. Leverage 18 IFRS based Leverage equals total assets to total equity. CET 1 CAR (Basel III) Regulatory based CET 1 CAR equals CET 1 capital divided by total risk weighted assets, both calculated in accordance with requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local accounting standards. Tier 1 CAR (Basel III) Regulatory based Tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local accounting standards. Total CAR (Basel III) Regulatory based Total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local accounting standards. ALTERNATIVE PERFORMANCE MEASURES CONTINUED 1 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Net income Consolidated statement of proﬁt and loss and other comprehensive income 800,782 317,752 Total shareholders’ equity Consolidated statement of ﬁnancial position 3,644,170 2,924,455 Adjustment to get weighted average -362,376 -211,425 Monthly averages of total shareholders’ equity 3,281,794 2,713,030 Return on average total equity (ROE) 24.4% 11.7% These tables provide the reconciliation of the Group’s IFRS based alternative performance measures with Financial Statements. 365 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 2 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Net income attributable to owners Consolidated statement of proﬁt and loss and other comprehensive income 800,782 317,752 Total assets Consolidated statement of ﬁnancial position 24,508,561 22,577,805 Adjustment to get weighted average -1,251,670 -2,303,071 Monthly averages of total assets 23,256,891 20,274,734 Return on average total assets (ROA) 3.4% 1.6% 3 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total operating expenses Consolidated statement of proﬁt and loss and other comprehensive income (545,834) (437,462) Total revenue Consolidated statement of proﬁt and loss and other comprehensive income 1,452,020 1,155,591 Cost to income 37.6% 37.9% 4 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Net interest income Consolidated statement of proﬁt and loss and other comprehensive income 1,002,732 835,433 Total interest earning assets Consolidated statement of ﬁnancial position 21,037,596 19,619,662 – Investment securities measured at fair value through OCI (excluding corporate shares) 1,937,177 1,526,352 – Bonds carried at amortised cost 49,582 1,089,801 – Net investment in finance lease 262,046 271,660 – Net loans 16,637,145 14,594,274 – Mandatory cash balances with National Bank of Georgia 2,087,141 2,098,506 – Due from other banks (excluding restricted cash) 64,505 39,069 Adjustment to get weighted average -1,223,602 -1,884,835 Monthly average interest earning assets 19,813,994 17,734,827 Net intrest margin (NIM) 5.1% 4.7% 5 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Interest income from loans Note 30. Interest income and expense 1,614,374 1,394,033 Total loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Adjustment to get weighted average -1,376,579 -1,381,833 Total monthly average loan portfolio 15,670,812 13,818,687 Loan yields 10.3% 10.1% 6 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Interest expense from customer accounts Note 30. Interest income and expense (471,972) (397,542) Total deposits portfolio Note 20. Customer accounts 15,038,172 12,572,728 Adjustment to get weighted average -1,130,292 -1,430,623 Total monthly average deposits portfolio 13,907,880 11,142,105 Deposit rates 3.4% 3.6% 366 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 7 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total Interest expense (883,124) (832,566) – Interest Expense Consolidated statement of proﬁt and loss and other comprehensive income (911,267) (853,516) – Net gains from currency swaps Consolidated statement of proﬁt and loss and other comprehensive income 28,143 20,950 Total interest bearing liabilities Consolidated statement of ﬁnancial position 20,422,450 19,287,321 – Customer accounts 15,038,172 12,572,728 – Due to credit institutions 2,984,176 4,486,373 – Subordinated Debt 623,647 672,740 – Debt securities in issue 1,710,288 1,496,497 – Lease Liabilities 66,167 58,983 Adjustment to get weighted average -809,229 -2,012,762 Monthly average interest bearing liabilities 19,613,221 17,274,559 Cost of funding 4.5% 4.8% 8 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Credit loss allowance for loans Consolidated statement of proﬁt and loss and other comprehensive income 40,123 (330,811) Total loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Adjustment to get weighted average -1,376,579 -1,381,833 Total monthly average loan portfolio 15,670,812 13,818,687 Cost of risks -0.3% 2.4% 9 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total principal or interest repayment is overdue for more than 90 days Not available 195,857 227,498 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Par 90 to gross loans 1.1% 1.5% 10 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 NPLs to gross loans equals loans with 90 days past due on principal Not available 410,853 714,424 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 NPLs to gross loans 2.4% 4.7% 11 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total credit loss allowance for loans to customers Note 9. Loans and advances to customers 410,246 606,246 Total NPL exposure Not available 410,853 708,116 NPL provision coverage 99.9% 85.6% ALTERNATIVE PERFORMANCE MEASURES CONTINUED 367 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 12 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 NPL collateral Not available 309,979 522,584 Total credit loss allowance for loans to customers Note 9. Loans and advances to customers 410,246 606,246 Total 720,225 1,128,831 Total NPL exposure Not available 410,853 708,116 Total NPL Coverage 175.3% 159.4% 13 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total credit loss allowance for loans to customers Note 9. Loans and advances to customers 410,246 606,246 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Credit loss level to Gross Loans 2.4% 4.0% 14 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Related party loans Note 44. Related party transactions 12,015 6,923 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Related party loans to gross loans 0.1% 0.0% 15 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Top 10 borrowers Not available 1,165,425 1,204,111 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Top 10 borrowers 6.8% 7.9% 16 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Top 20 borrowers Not available 1,796,675 1,838,204 Total gross loan portfolio Note 9. Loans and advances to customers 17,047,391 15,200,520 Top 20 borrowers 10.5% 12.1% 18 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Total assets Consolidated statement of ﬁnancial position 24,508,561 22,577,805 Total equity Consolidated statement of ﬁnancial position 3,644,170 2,924,455 Leverage 6.7 7.7 17 in thousands of GEL Reference to ﬁnancial statements FY 2021 FY 2020 Net loans Consolidated statement of ﬁnancial position 16,637,145 14,594,274 Total Deposits portfolio Note 20. Customer accounts 15,038,172 12,572,728 IFI funding Not available 1,455,723 1,853,303 Deposits + IFI Funding 16,493,895 14,426,031 Net loans to deposits + IFI Funding 100.9% 101.2% 368 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 CHANGES IN KPIS Proﬁtability Asset quality Capital Growth Added KPIs • Return on assets; • Growth of net fee and commission income • Non-performing loans • CET 1 Capital ratio • Loan book growth; • Deposit growth Removed KPIs • Net profit; • Basic earnings per share; • Return on equity before expected credit loss allowances • Cost of risk • Tier 1 Capital ratio; • Total Capital ade- quacy ratio • Loan book mar- ket share Customer satisfaction Digitalization Added KPIs • Net promoter score (NPS) • Daily active users/monthly active user (DAU/MAU) Removed KPIs • The best service company in Georgia (gap with peer bank) • Retail internet and mobile banking penetration ratio Financial KPIs Non-ﬁnancial KPIs The following tables summarise the changes in 2021 KPIs compared to 2020 KPIs: 369 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 ABBREVIATIONS ACCA Association of Chartered Certiﬁed Accountants AFS Available for sale ALCO Asset-liability management committee APM Alternative performance measure ATM Automated teller machine BNY Bank of New York CAGR Compounded annual growth rate CAR Capital adequacy ratio CEE Central and Eastern Europe CEO Chief executive ofﬁcer CFA Chartered Financial Analyst CFO Chief ﬁnancial ofﬁcer CGU Cash generating unit CIB Corporate investment banking CIS The Commonwealth of Independent States COR Cost of risk CRM Customer relationship management CRO Chief risk ofﬁcer CSAT Customer satisfaction CSR Corporate social responsibility CVP Cost volume proﬁt DCF Discounted cash flows EBRD European Bank for Reconstruction and Development ECL Expected credit losses EECG Energy Efﬁciency Centre Georgia EFSEDF The Development Facility of the European Funds for Southeast Europe EMEA Europe, Middle East and Africa ENPS Employee Net Promoter Score EPS Earnings per share ERM Enterprise risk management ESRM Environmental and social risk management EU European Union EUR Euro FDI Foreign direct investment FTSE Financial Times Stock Exchange FVOCI Fair value through other comprehensive income FVPL Fair value through proﬁt or loss GBP Great British pound, national currency of the UK GDP Gross domestic product GDR Global depositary receipt GEL Georgian lari, national currency of Georgia GHG Greenhouse gas GWP Gross written premium HNWI High-net-worth individuals HR Human resources IAS International Accounting Standards IASB International Accounting Standards Board IDR Issuer default rating IFC International Finance Corporation IFI International ﬁnancial institution IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standards IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change IPO Initial public offering IT Information technology JSC Joint stock company KPI Key performance indicators LED Light-emitting diode LSE London Stock Exchange LTV Loan to value MBA Master of Business Administration MBO Management-by-objectives MSME Micro, small and medium-sized enterprises NBG National Bank of Georgia NCI Non-controlling interest NIM Net interest margin NPL Non-performing loans NPS Net promoter score OCI Other comprehensive income OECD Organisation for Economic Cooperation and Development PLC Public limited company POS Point of sale P2P Peer-to-peer PPP Purchasing power parity PTI Payment to income PWC PricewaterhouseCoopers ROA Return on average assets ROE Return on average equity SME Small and medium-sized enterprises SPPI Solely payments of principal and interest STEM Science, technology, engineering and mathematics UK United Kingdom of Great Britain and Northern Ireland US$ The US dollar, national currency of the United States VAR Value-at-risk VIP Very important person WB World Bank WRI World Resources Institute 370 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021 REPORTS AND COMMUNICATIONS We issue regulatory announcements through the Regulatory News Service (“RNS”). Our regulatory announcements are also available at our website www.tbcbankgroup.com in the “regulatory news” section. SHARE PRICE INFORMATION Our latest and historical share prices are available through our website www.tbcbankgroup.com. SHAREHOLDER INQUIRES TBC Bank Group’s share register is maintained by Equiniti. If you have any questions about your TBC Bank Group’s shares, please contact Equiniti SHAREHOLDER HELPLINE UK callers: 0371 384 2030 International callers: +44 121 415 7047 Aspect House Spencer Road Lancing West Sussex N99 6DA United Kingdom OUR REGISTERED ADDRESS TBC Bank Group PLC Highdown House Yeoman Way Worthing, West Sussex BN99 3HH United Kingdom WEBSITE Our annual report, ﬁnancial results and investor presentations, as well as other signiﬁcant information are available through our website: www.tbcbankgroup.com. SHAREHOLDERS INFORMATION NOTES

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