Earnings Release • Aug 17, 2021
Earnings Release
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National Storage Mechanism | Additional information RNS Number : 8166I Bank of Georgia Group PLC 17 August 2021 Bank of Georgia Group PLC 2nd quarter and half-year 2021 results Name of authorised official of issuer responsible for making notification: Natia Kalandarishvili, Head of Investor Relations and Funding www.bankofgeorgiagroup.com ABOUT BANK OF GEORGIA GROUP PLC The Group: Bank of Georgia Group PLC ("Bank of Georgia Group" or the "Group" and on the LSE: BGEO LN) is a UK incorporated holding company, which comprises: a) retail banking and payment services (Retail Banking); and b) corporate banking, investment banking and wealth management operations (Corporate and Investment Banking) in Georgia; and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("Bank of Georgia", "BOG", or the "Bank"), the systematically important and leading universal bank in Georgia, is the core entity of the Group. The Bank is a leader in payments business and financial mobile application, with the strong retail and corporate banking franchise in Georgia. With a continued focus on increasing digitalisation and expanding technological and data analytics capabilities, the Group aims to offer more personalised solutions and seamless experiences to its customers to enable them to achieve more of their potential. Employee empowerment, customer satisfaction, and data-driven decisions, coupled with the strong banking franchise, are key enablers in enhancing and developing the Group's strategic objectives. With all these strategic building blocks the Group has laid the groundwork for the bank of the future, and is committed to delivering strong profitability and maximising shareholder value. The Group aims to benefit from growth of the Georgian economy, and through both its Retail Banking and Corporate and Investment Banking services aims to deliver on its strategy, which is based on achieving at least 20% return on average equity (ROAE) and c.10% growth of its loan book in the medium term. 2Q21 AND 1H21 RESULTS AND CONFERENCE CALL DETAILS Bank of Georgia Group PLC announces the Group's consolidated financial results for the second quarter and the first half of 2021. Unless otherwise noted, numbers in this announcement are for 2Q21 and comparisons are with 2Q20. The results have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the United Kingdom and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the United Kingdom, are unaudited and derived from management accounts. This results announcement is also available on the Group's website at www.bankofgeorgiagroup.com. An investor/analyst conference call, organised by Bank of Georgia Group, will be held on 17 August 2021, at 14:00 BST / 15:00 CEST / 09:00 EST. Webinar instructions: Please click the link below to join the webinar: https://bankofgeorgia.zoom.us/j/97213488287?pwd=YVZ3NktkN3kxblc0WEZmSk5zeFJSUT09 Webinar ID: 972 1348 8287 Passcode: 838397 Or use the following international dial-in numbers available at: https://bankofgeorgia.zoom.us/u/adpOR8LHFt Webinar ID: 972 1348 8287# Passcode: 838397 Participants, who will be joining through the webinar, can use the "raise hand" feature at the bottom of the screen to ask questions. Participants, who will be joining through the international dial-in number, can dial 9 to raise hand and ask questions. CONTENTS 4 COVID-19 pandemic and macroeconomic developments 5 2Q21 and 1H21 financial results highlights 7 Chief Executive Officer's statement 8 Discussion of results 12 Discussion of segment results 12 Retail Banking 16 Corporate and Investment Banking 19 Selected financial and operating information 23 Principal risks and uncertainties 39 Statement of Directors' responsibilities 40 Interim condensed consolidated financial statements 41 Independent review report 43 Interim condensed consolidated financial statements 49 Selected explanatory notes 89 Glossary 90 Company information FORWARD-LOOKING STATEMENTS This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Bank of Georgia Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: macroeconomic risk, including currency fluctuations and depreciation of the Lari; regional and domestic instability; loan portfolio quality risk; regulatory risk; liquidity risk; capital risk; financial crime risk; cyber-security, information security and data privacy risk; operational risk; COVID-19 pandemic impact risk; climate change risk; and other key factors that indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports of the Group, including the 'Principal risks and uncertainties' included in Bank of Georgia Group PLC's Annual Report and Accounts 2020 and in this announcement. No part of this document constitutes, or shall be taken to constitute, an invitation or inducement to invest in Bank of Georgia Group PLC or any other entity within the Group, and must not be relied upon in any way in connection with any investment decision. Bank of Georgia Group PLC and other entities within the Group undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast. COVID-19 PANDEMIC AND MACROECONOMIC DEVELOPMENTS The COVID-19 pandemic has tested the resilience of our business and our customers, colleagues and communities. The pandemic and the measures introduced by the government, the National Bank of Georgia (the "NBG"), and the Group since the beginning of 2020 have had a major impact on our performance during the last six quarters. Strict lockdown measures introduced at the onset of the pandemic led to the containment of the virus in early 2020, however, as the restrictions were eased in the summer of 2020, a second wave of virus cases hit Georgia later in the year. The government introduced a partial lockdown from the end of November 2020 to early February 2021, leading to a decline in COVID-19 cases and allowing the gradual reopening of the domestic economy from March 2021. Mobility restrictions to contain the COVID-19 spread and a halt in international tourism resulted in a 6.2% year-on-year real GDP contraction in 2020, followed by a 4.5% year-on-year contraction in the first quarter of 2021. Sizeable donor support was mainly directed to assist households and businesses, and to strengthen the healthcare system. However, since March 2021 with the removal of most of the restrictions, the economy has swiftly gained traction, and the second quarter 2021 economic indicators have significantly beaten expectations. The year-on-year estimated real GDP growth was 29.8% during the second quarter of 2021, and the overall year-on-year growth came in at 12.7% in the first half of 2021. Robust growth in remittances and exports, and a faster than expected rebound in tourism, along with fiscal stimulus, have supported the recovery. Notably, the economy already surpassed the pre-pandemic level as the estimated real GDP growth compared to the second quarter and the first half of 2019 was 12.6% and 5.7%, respectively. Remittances have continued their strong growth trend and were up 40.8% year-on-year in the first half of 2021, and up 34.4% compared to 2019 levels. Goods exports also increased significantly by 25.2% year-on-year in the first half of the year, surpassing pre-pandemic level by 5.3%. Notably, tourism arrivals accelerated from April 2021 and tourism revenues accounted for c.21% of levels seen in 2019 in the first half of 2021. Strong external flows are expected to contribute to narrowing the current account deficit in 2021. The rise in world commodity prices, utility price increases and faster than expected recovery resumed price pressures in 2021 with annual inflation reaching 11.9% in July 2021. The NBG has responded by raising the monetary policy rate three times this year, reaching 10.0% in August 2021. A high inflation level is expected to continue throughout the year, before coming down in 2022 as temporary factors fade. Strong recovery dynamics, along with a tight monetary policy helped the local currency to partially regain its value against the US Dollar since May 2021, strengthening by 7.4% during the second quarter of 2021. Importantly, the international reserves remain high at US$ 3.9 billion as of 30 June 2021. That said, virus cases have picked up significantly in July-August 2021, and the government responded by re-introduction of restrictions in August, such as wearing face masks in public places, restricting large gatherings, concerts and other activities, and closing municipal transportation, among others. Although vaccination rate is currently low, immunisation progress has significantly accelerated since end of July, which is encouraging, and the government has sufficient vaccine doses secured for 2021. The COVID-19 pandemic still remains one of the key uncertainties in our growth outlook and is a risk factor to derail the recovery, unless more than half of the population is vaccinated by the end of the year. High inflation and the possibility of further tightening of the monetary policy rate by the NBG may also have a significant impact on the growth outlook. Based on the estimates of our brokerage and investment arm, Galt & Taggart, we currently expect real GDP growth of 8.6% in 2021, revised upwards from our previous forecast of 7.0% growth. The government and the IMF also revised Georgia's 2021 economic growth forecast upwards to 7.7% in July 2021, while the NBG expects higher growth of 8.5% in 2021. If the COVID-19-related risks do not materialise in the coming months, we also see the possibility of higher growth, at low double digits in 2021. Our 2Q21 results were supported by this rebound in economic activity on the back of lifting of the lockdown restrictions and full reopening of the economy. Both our Retail Banking and Corporate and Investment Banking businesses delivered robust results in the second quarter of 2021. Our lending activity was strong, we saw a significant increase in operating income and, particularly, net interest income and net fee and commission income generation was up, and our loan book has performed better than expected in terms of portfolio quality. At the same time, we continued our focus on customer satisfaction and strengthened our digital banking franchise while maintaining a very healthy cost to income structure. As a result, we delivered a return on average equity of 29.4% in the second quarter of 2021 and 25.6% in the first half of 2021, while maintaining strong liquidity and capital positions. We next outline the Group's second quarter and the first half of 2021 results highlights and the Chief Executive Officer's letter, before going into further detail. 2Q21 AND 1H21 FINANCIAL RESULTS HIGHLIGHTS GEL thousands 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y INCOME STATEMENT HIGHLIGHTS Net interest income 228,249 174,936 30.5% 212,332 7.5% 440,581 372,017 18.4% Net fee and commission income 57,206 32,901 73.9% 48,650 17.6% 105,856 73,013 45.0% Net foreign currency gain 22,082 22,743 -2.9% 19,176 15.2% 41,258 53,404 -22.7% Net other income 27,438 9,081 NMF 23,482 16.8% 50,920 15,707 NMF Operating income 334,975 239,661 39.8% 303,640 10.3% 638,615 514,141 24.2% Operating expenses (121,818) (105,158) 15.8% (107,359) 13.5% (229,177) (211,167) 8.5% (Loss) / profit from associates (4,299) 113 NMF 167 NMF (4,132) 414 NMF Operating income before cost of risk 208,858 134,616 55.2% 196,448 6.3% 405,306 303,388 33.6% Cost of risk 14,033 (10,221) NMF (44,117) NMF (30,084) (251,623) -88.0% Net operating income before non-recurring items 222,891 124,395 79.2% 152,331 46.3% 375,222 51,765 NMF Net non-recurring items (67) (1,241) -94.6% 17 NMF (50) (41,586) -99.9% Profit before income tax 222,824 123,154 80.9% 152,348 46.3% 375,172 10,179 NMF Income tax (expense) / benefit (20,654) (8,470) 143.8% (13,424) 53.9% (34,078) 4,560 NMF Profit 202,170 114,684 76.3% 138,924 45.5% 341,094 14,739 NMF GEL thousands Jun-21 Jun-20 Change y-o-y Mar-21 Change q-o-q BALANCE SHEET HIGHLIGHTS Liquid assets 5,904,270 5,447,730 8.4% 6,968,871 -15.3% Cash and cash equivalents 1,719,058 1,633,755 5.2% 2,361,663 -27.2% Amounts due from credit institutions 2,035,487 1,700,075 19.7% 2,200,803 -7.5% Investment securities 2,149,725 2,113,900 1.7% 2,406,405 -10.7% Loans to customers and finance lease receivables1 14,789,371 12,599,092 17.4% 14,601,275 1.3% Property and equipment 387,014 396,272 -2.3% 385,352 0.4% Total assets 21,851,510 19,183,966 13.9% 22,752,245 -4.0% Client deposits and notes 13,944,383 11,583,139 20.4% 14,003,209 -0.4% Amounts owed to credit institutions 3,224,577 3,521,860 -8.4% 4,039,250 -20.2% Borrowings from DFIs 1,927,225 1,755,656 9.8% 2,222,967 -13.3% Short-term loans from central banks 398,186 847,213 -53.0% 772,647 -48.5% Loans and deposits from commercial banks 899,166 918,991 -2.2% 1,043,636 -13.8% Debt securities issued 1,515,511 1,561,933 -3.0% 1,653,399 -8.3% Total liabilities 19,038,149 16,984,167 12.1% 20,064,595 -5.1% Total equity 2,813,361 2,199,799 27.9% 2,687,650 4.7% KEY RATIOS 2Q21 2Q20 1Q21 1H21 1H20 ROAA 3.6% 2.4% 2.5% 3.1% 0.2% ROAE 29.4% 21.8% 21.5% 25.6% 1.4% Net interest margin 4.7% 4.2% 4.5% 4.6% 4.6% Liquid assets yield 3.3% 3.4% 3.1% 3.2% 3.7% Loan yield 10.4% 10.2% 10.4% 10.4% 10.6% Cost of funds 4.5% 4.8% 4.5% 4.5% 4.8% Cost / income 36.4% 43.9% 35.4% 35.9% 41.1% NPLs to Gross loans to clients 3.5% 2.7% 3.6% 3.5% 2.7% NPL coverage ratio 73.1% 115.7% 77.5% 73.1% 115.7% NPL coverage ratio, adjusted for discounted value of collateral 122.2% 166.3% 127.8% 122.2% 166.3% Cost of credit risk ratio -0.6% -0.2% 0.8% 0.1% 3.5% NBG (Basel III) CET1 capital adequacy ratio 12.5% 9.9% 11.2% 12.5% 9.9% NBG (Basel III) Tier I capital adequacy ratio 14.4% 12.0% 13.3% 14.4% 12.0% NBG (Basel III) Total capital adequacy ratio 19.1% 17.4% 18.6% 19.1% 17.4% 1 Throughout this announcement, the gross loans to customers and respective allowance for impairment are presented net of expected credit loss (ECL) on contractually accrued interest income. These do not have an effect on the net loans to customers balance. Management believes that netted-off balances provide the best representation of the loan portfolio position. KEY FINANCIAL RESULTS HIGHLIGHTS �� Outstanding quarterly performance, reflecting the rebound in economic activity. The Group generated strong operating income before cost of risk of GEL 208.9mln in 2Q21 (up 55.2% y-o-y and up 6.3% q-o-q) and GEL 405.3mln in 1H21 (up 33.6% y-o-y), with robust profitability ��� ROAE of 29.4% in 2Q21 and 25.6% in the first half of 2021 �� Net interest margin was 4.7% in 2Q21, up 50bps y-o-y and up 20bps q-o-q, and stood flat y-o-y at 4.6% in 1H21. The increase in NIM primarily reflected the rebound in economic activity, coupled with the decline in cost of funds following the successful deployment of excess liquidity during the quarter �� Strong net fee and commission income generation. Net fee and commission income was up 73.9% y-o-y and up 17.6% q-o-q in 2Q21 and up 45.0% y-o-y in 1H21, reflecting strong fee and commission income generation in settlement operations on the back of the significant rebound in economic activity during the second quarter, and increase in fees generated from guarantees and letters of credit issued by the Corporate and Investment Banking business �� Operating expenses. We have continued investing in IT-related resources, digitalisation and marketing, in line with our strategic priorities, and, at the same time, maintained our focus on efficiency and cost control. As a result, our cost to income ratio stood at 36.4% in 2Q21 (down from 43.9% in 2Q20 and slightly up from 35.4% in 1Q21) and 35.9% in 1H21 (down from 41.1% in 1H20) �� Loan book increased by 17.4% y-o-y and by 1.3% q-o-q at 30 June 2021. Growth on a constant-currency basis was 13.7% y-o-y and 5.5% q-o-q. The y-o-y and q-o-q loan book growth reflected continued strong loan origination levels in all segments of our business, but particularly in the consumer, micro and SME portfolios �� Client deposits and notes increased by 20.4% y-o-y and were largely flat q-o-q at 30 June 2021. On a constant-currency basis, client deposits and notes grew by 17.4% y-o-y and by 4.1% q-o-q. This deposit franchise growth reflects a consistent stability in deposit balances of both our individual and business customers �� Cost of credit risk. The cost of credit risk ratio was a net gain of 0.6% in 2Q21 (a net gain of 0.2% in 2Q20 and cost of credit risk of 0.8% in 1Q21) and a cost of 0.1% in 1H21 (3.5% in 1H20). Having recorded a significant ECL provision in the first quarter of 2020, we are now seeing an increase in recoveries, particularly in our corporate lending portfolio, and a lower than normal level of new provision requirements. See details on page 9 �� Asset quality. NPLs to gross loans stood at 3.5% at 30 June 2021, compared with 2.7% at 30 June 2020 and 3.6% at 31 March 2021. The NPL coverage ratio was 73.1% at 30 June 2021 (115.7% at 30 June 2020 and 77.5% at 31 March 2021), and the NPL coverage ratio adjusted for the discounted value of collateral was 122.2% at 30 June 2021 (166.3% at 30 June 2020 and 127.8% at 31 March 2021). The y-o-y rise in NPLs to gross loans and decrease in NPL coverage ratios at 30 June 2021, was mainly driven by the gradual increase in non-performing borrowers since the second quarter of 2020 on the back of the COVID-19 pandemic outbreak, while the upfront ECL provision for the full economic cycle on loan portfolio were created already in the first quarter of 2020 �� Strong capital adequacy position. Considering the Bank's strong capital position, to ensure flexibility on capital distribution to shareholders, we have now confirmed to the NBG that we are no longer utilising, or expect to utilise, any of the Pillar 2 or conservation buffers that were waived last year. Consequently, there is no longer any regulatory restriction for Bank of Georgia on making any capital distributions. The Bank's capital adequacy ratios continue to be robust, and comfortably above the minimum regulatory requirements: At 30 June 2021, the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 12.5%, 14.4% and 19.1%, respectively, all well above the minimum required levels of 11.1%, 13.4% and 17.7%, respectively �� Strong liquidity and funding positions. As at 30 June 2021, after successfully deploying some excess liquidity during the second quarter, the Bank's liquidity coverage ratio was 124.5% and net stable funding ratio was 136.8%, still comfortably above the 100% minimum required level. The Bank continues to maintain excess liquidity at this level primarily for risk mitigation purposes on the back of the ongoing COVID-19 pandemic pressures CHIEF EXECUTIVE OFFICER'S STATEMENT Our team delivered an excellent performance in the second quarter of 2021, with the result being significant top and bottom-line growth. The Group's operations have also been supported by a strong rebound in economic activity. Estimated year-on-year real GDP growth was 12.7% in the first half of 2021 and 5.7% compared to the same period in 2019. The Lari has also been strong during 2Q21 and appreciated by 7.4% against the US Dollar. Our franchise has continued to thrive, and we saw particularly impressive results in our market-leading payments business. The number of transactions in our POS terminals was up 71.9% year-on-year and up 32.2% quarter-on-quarter in the second quarter of 2021, translating into strong total net fee and commission income growth of 73.9% year-on-year and 17.6% quarter-on-quarter. Lending growth in the second quarter was higher than expected, particularly in the consumer, micro and SME portfolios, and we expect this trend to continue for the rest of the year. On a constant currency basis, our customer lending increased by 5.5% quarter-on-quarter in 2Q21 which, coupled with the successful deployment of excess liquidity, supported a 30.5% year-on-year and a 7.5% quarter-on-quarter increase in net interest income in 2Q21. The quality of our loan portfolio is becoming even clearer, especially in Corporate and Investment Banking where we are now seeing good levels of recoveries, all this resulting in a net gain of 0.6% in terms of cost of credit risk ratio in the second quarter of 2021. We keep building on the popularity of our mobile app to provide superior digital experiences to our customers and further increase digitalisation. We had 795,000 active digital users at 30 June 2021, up 19.3% year-on-year, and our mobile app is becoming more integrated into customers' daily lives with 40% of active digital customers using it every day. The number of transactions in our mobile app increased markedly in 2Q21, by 90.0% year-on-year and 19.3% quarter-on-quarter. 96% of daily transactions of individual customers are performed through digital channels. The next step and a big upside for us is to further boost product sales in digital channels. In the first half of 2021, our product offloading rate was around 21% and, as we add innovative digital products and design better end-to-end digital journeys, we plan to increase our product offloading rate to around 36% over the next 12 months. What enables us to perform so well is our ongoing and rigorous focus on customer satisfaction and employee empowerment. Net Promoter Score was 43% in June 2021, slightly down from our previous March 2021 result, as the increase in the NBG's monetary policy rate contributed to deteriorated sentiments towards the banking system as a whole. We keep listening to our customers and improving customer experiences based on the constant feedback we receive from them, and, overall, we are pleased with the trend in customer satisfaction. Employee Net Promoter Score increased to 60% in April 2021, again reaching an all-time high. Underpinned by strong franchise growth, better than expected loan portfolio quality and our strong capital and liquidity positions, the Group's profit in 2Q21 increased by 76.3% year-on-year to GEL 202.2 million. We continue to deliver strong profitability, with a 29.4% return on average equity in 2Q21, our fifth consecutive quarter of delivering a return on average equity above 20% during the pandemic. Our book value per share has increased by 27.8% over the last 12 months. Considering Georgia's recent strong economic recovery, we have revised our expectations for full year 2021 economic growth upwards to 8.6%. Challenges remain, however, including political uncertainty, high inflation, which we believe is temporary, and the epidemiological situation, which we hope will improve as the vaccination rate picks up given the government's plan to vaccinate around 60% of the adult population by the end of year. We do not expect further broad lockdown measures. Given the improving operating environment, the strength of our franchise and the capabilities we have put in place, we expect to maintain our recent business momentum going forward. Capital and dividends Throughout the pandemic and despite significant volatility in economic activity, Bank of Georgia has delivered excellent operating performance, with good top-line growth, well-managed costs, and robust asset quality and risk management. This has led to consistently delivering strong profitability while maintaining capital adequacy ratios comfortably above our minimum regulatory requirements. Our high level of internal capital generation, combined with the appreciation of the Lari against the US Dollar, led to a 130 basis points increase in the CET1 capital adequacy ratio in the second quarter of 2021. As a result, considering the strength of the Bank's capital position, we have confirmed to the NBG that since end of May 2021 we are no longer using or expect to use any of the Pillar 2 or conservation buffers that were waived at the beginning of last year. There are no longer any regulatory restrictions on making capital distributions to shareholders. The Board has now decided to restore the payment of dividends to shareholders and has declared an interim dividend of GEL 1.48 per ordinary share in respect of the period ended 30 June 2021, payable to ordinary shareholders of Bank of Georgia Group PLC on 5 November 2021. See details on page 11. Clearly, some uncertainties in the external environment remain, but these are expected to gradually reduce over the next few quarters. In the light of the evolving macroeconomic situation and expected levels of medium-term growth, the Board will more formally review the Group's capital repatriation policy in the second half of the year. Archil Gachechiladze, CEO, Bank of Georgia Group PLC 16 August 2021 DISCUSSION OF RESULTS The Group's business is composed of three segments. (1) Retail Banking operations in Georgia principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfer and settlement services, and handling customers' deposits for both individuals as well as legal entities. Retail Banking targets mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate and Investment Banking comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus. OPERATING INCOME GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y Interest income 446,636 379,038 17.8% 428,580 4.2% 875,216 767,364 14.1% Interest expense (218,387) (204,102) 7.0% (216,248) 1.0% (434,635) (395,347) 9.9% Net interest income 228,249 174,936 30.5% 212,332 7.5% 440,581 372,017 18.4% Fee and commission income 94,727 54,389 74.2% 76,446 23.9% 171,173 125,284 36.6% Fee and commission expense (37,521) (21,488) 74.6% (27,796) 35.0% (65,317) (52,271) 25.0% Net fee and commission income 57,206 32,901 73.9% 48,650 17.6% 105,856 73,013 45.0% Net foreign currency gain 22,082 22,743 -2.9% 19,176 15.2% 41,258 53,404 -22.7% Net other income 27,438 9,081 NMF 23,482 16.8% 50,920 15,707 NMF Operating income 334,975 239,661 39.8% 303,640 10.3% 638,615 514,141 24.2% Net interest margin 4.7% 4.2% 4.5% 4.6% 4.6% Average interest earning assets 19,351,021 16,668,289 16.1% 18,932,570 2.2% 19,133,511 16,138,601 18.6% Average interest bearing liabilities 19,574,436 16,957,795 15.4% 19,345,778 1.2% 19,412,502 16,544,278 17.3% Average net loans and finance lease receivables, currency blended 14,852,631 12,862,536 15.5% 14,340,661 3.6% 14,595,985 12,486,425 16.9% Average net loans and finance lease receivables, GEL 6,230,683 4,984,078 25.0% 5,873,004 6.1% 6,054,977 4,987,437 21.4% Average net loans and finance lease receivables, FC 8,621,948 7,878,458 9.4% 8,467,657 1.8% 8,541,008 7,498,988 13.9% Average client deposits and notes, currency blended 13,889,287 11,115,351 25.0% 13,942,631 -0.4% 13,903,495 10,788,743 28.9% Average client deposits and notes, GEL 5,284,975 3,602,387 46.7% 5,313,836 -0.5% 5,319,952 3,516,911 51.3% Average client deposits and notes, FC 8,604,312 7,512,964 14.5% 8,628,795 -0.3% 8,583,543 7,271,832 18.0% Average liquid assets, currency blended 6,574,819 5,297,130 24.1% 6,732,512 -2.3% 6,608,636 5,299,872 24.7% Average liquid assets, GEL 2,652,100 2,341,763 13.3% 2,600,231 2.0% 2,641,984 2,280,286 15.9% Average liquid assets, FC 3,922,719 2,955,367 32.7% 4,132,281 -5.1% 3,966,652 3,019,586 31.4% Liquid assets yield, currency blended 3.3% 3.4% 3.1% 3.2% 3.7% Liquid assets yield, GEL 7.9% 7.5% 7.6% 7.8% 7.8% Liquid assets yield, FC 0.2% 0.1% 0.1% 0.2% 0.6% Loan yield, currency blended 10.4% 10.2% 10.4% 10.4% 10.6% Loan yield, GEL 14.9% 14.7% 14.8% 14.9% 15.2% Loan yield, FC 7.0% 7.3% 7.2% 7.1% 7.5% Cost of funds, currency blended 4.5% 4.8% 4.5% 4.5% 4.8% Cost of funds, GEL 7.8% 8.3% 7.8% 7.7% 8.1% Cost of funds, FC 2.7% 3.0% 2.8% 2.7% 2.9% Cost / income 36.4% 43.9% 35.4% 35.9% 41.1% Performance highlights �� The Group generated strong operating income of GEL 335.0mln in 2Q21 (up 39.8% y-o-y and up 10.3% q-o-q), ending six months of 2021 with operating income of GEL 638.6mln (up 24.2% y-o-y). The y-o-y and q-o-q increase in operating income was primarily driven by strong net interest income (up 30.5% y-o-y and up 7.5% q-o-q in 2Q21, and up 18.4% y-o-y in 1H21) and net fee and commission income (up 73.9% y-o-y and up 17.6% q-o-q in 2Q21, and up 45.0% y-o-y in 1H21) generation, on the back of the rebound in economic activity in the second quarter of 2021 �� Our NIM was 4.7% in 2Q21 (up 50bps y-o-y and up 20bps q-o-q) and 4.6% in the first half of 2021 (flat y-o-y). The y-o-y increase in NIM in 2Q21 was primarily due to the 20bps y-o-y increase in currency blended loan yields, coupled with 30bps decrease in cost of funds. On a six months basis, NIM was flat y-o-y in 1H21, reflecting 20bps decline in currency blended loan yields, offset by 30bps decline in cost of funds. The y-o-y decline in cost of funds both in 2Q21 and 1H21, primarily reflected the impact of the GEL 500mln local currency bonds repayment in June 2020, partially offset by the NBG's monetary policy rate changes). On a q-o-q basis, our NIM was up 20bps in 2Q21 (while both currency blended loan yields and cost of funds stood flat), primarily driven by successfully deploying the excess liquidity during the second quarter �� Liquid assets yield. Currency blended liquid assets yield was 3.3% in 2Q21 (down 10bps y-o-y and up 20bps q-o-q) and 3.2% in 1H21 (down 50bps y-o-y). The local currency denominated liquid assets yield movement (up 40bps y-o-y and up 30bps q-o-q in 2Q21, and flat y-o-y in 1H21) directly reflected the NBG's monetary policy rate changes (NBG decreased monetary policy rate by a cumulative of 100bps since April 2020, but increased the policy rate twice by a cumulative of 150bps during 1H21). As for the foreign currency denominated liquid assets yield, 40bps y-o-y decline in 1H21 largely reflected the cut in the US Fed in March 2020 (the NBG accrues interest rate on banks' US Dollar obligatory reserves at the US Fed rate upper bound minus 50bps), while 10bps y-o-y and q-o-q increase in 2Q21, was primarily due to the local currency appreciation during the second quarter, resulting in a lower average balance of interest-earning liquid assets. Overall, y-o-y decrease of higher yielding local currency denominated liquid assets portion in total interest-earning liquid assets portfolio in 2Q21 and 1H21, resulted in y-o-y decline in currency blended liquid assets yields during these periods �� Cost of funds was 4.5% in the second quarter of 2021 (down 30bps y-o-y and flat q-o-q) and in the first half of 2021 (down 30bps y-o-y). Local currency denominated cost of funds was down 50bps y-o-y in 2Q21, and down 40bps y-o-y in 1H21, reflecting the impact of the repayment of the GEL 500mln local currency bonds due in the beginning of June 2020, partially offset by the NBG's monetary policy rate changes. The cost of foreign currency denominated funds was down 30bps y-o-y and down 10bps q-o-q in 2Q21 and down 20bps y-o-y in 1H21, largely driven by the Libor rate decline as well as attracting certain borrowings from credit institutions at lower rates in 2021 �� Net fee and commission income reached GEL 57.2mln in 2Q21 (up 73.9% y-o-y and up 17.6% q-o-q) and GEL 105.9mln in 1H21 (up 45.0% y-o-y). The outstanding performance was mainly driven by a strong fee and commission income generation in our settlement operations on the back of the rebound in the economic activity during the second quarter, and increase in fees generated from guarantees and letters of credit issued by the Corporate and Investment Banking business �� Net foreign currency gain was down 2.9% y-o-y and up 15.2% q-o-q in 2Q21, and down 22.7% y-o-y in 1H21. The movement in net foreign currency gain directly reflected the level of currency volatility and client-driven flows during the periods presented �� Net other income in the second quarter and the first half of 2021 was mainly attributable to the net gains from the sale of real estate properties and net gains from the sale of investment securities NET OPERATING INCOME BEFORE NON-RECURRING ITEMS; COST OF RISK; PROFIT GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y Salaries and other employee benefits (68,812) (60,656) 13.4% (60,223) 14.3% (129,035) (117,194) 10.1% Administrative expenses (30,068) (22,450) 33.9% (23,563) 27.6% (53,631) (49,470) 8.4% Depreciation, amortisation and impairment (22,354) (21,139) 5.7% (22,561) -0.9% (44,915) (42,529) 5.6% Other operating expenses (584) (913) -36.0% (1,012) -42.3% (1,596) (1,974) -19.1% Operating expenses (121,818) (105,158) 15.8% (107,359) 13.5% (229,177) (211,167) 8.5% (Loss) /profit from associate (4,299) 113 NMF 167 NMF (4,132) 414 NMF Operating income before cost of risk 208,858 134,616 55.2% 196,448 6.3% 405,306 303,388 33.6% Expected credit loss on loans to customers 25,140 11,621 116.3% (28,236) NMF (3,096) (216,568) -98.6% Expected credit loss on finance lease receivables (683) (3,387) -79.8% (931) -26.6% (1,614) (5,273) -69.4% Other expected credit loss and impairment charge on other assets and provisions (10,424) (18,455) -43.5% (14,950) -30.3% (25,374) (29,782) -14.8% Cost of risk 14,033 (10,221) NMF (44,117) NMF (30,084) (251,623) -88.0% Net operating income before non-recurring items 222,891 124,395 79.2% 152,331 46.3% 375,222 51,765 NMF Net non-recurring items (67) (1,241) -94.6% 17 NMF (50) (41,586) -99.9% Profit before income tax 222,824 123,154 80.9% 152,348 46.3% 375,172 10,179 NMF Income tax (expense) / benefit (20,654) (8,470) 143.8% (13,424) 53.9% (34,078) 4,560 NMF Profit 202,170 114,684 76.3% 138,924 45.5% 341,094 14,739 NMF �� Operating expenses. We continued investing in IT-related resources as part of our agile transformation process, focus on digitalisation and investments in marketing, and at the same time maintained our focus on cost efficiencies. In the second quarter of 2020, we initiated cost optimisation measures, the impact of which has been reflected in subsequent quarters. Our cost to income ratio was 36.4% in 2Q21, down from 43.9% in 2Q20 and slightly up from 35.4% in 1Q21. On a six months basis, cost to income ratio improved to 35.9% in 1H21, down from 41.1% in 1H20 �� Although the Bank's Pillar 2 capital buffers are duly rebuilt, following the NBG's instruction in July 2021 that the discretionary remuneration of the Bank's management board for the year 2020 should not be awarded, the Remuneration Committee of Bank of Georgia Group PLC and the Remuneration Committee of the Bank's Supervisory Board had no choice but to comply resulting in the CEO's discretionary remuneration for the year 2020 (66,214 shares in the amount of US$ 1,060,814), and the Bank's management board's discretionary remuneration for the year 2020 (137,029 shares in the amount of US$ 2,078,774), each of which were subject to the NBG's relevant requirements, not being awarded. The expense already accrued in the first quarter of 2021 was not material, therefore, we did not restate the 1Q21 results �� Cost of risk in 2Q21 and 1H21 reflected a combination of the following factors: �� Cost of credit risk was a net gain of 0.6% in 2Q21 (a net gain of 0.2% in 2Q20 and cost of credit risk ratio of 0.8% in 1Q21) and cost of credit risk ratio of 0.1% in 1H21 (3.5% in 1H20). The 3.5% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds, created for the full economic cycle in the first quarter of 2020, related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions to reflect better visibility and up-to-date macroeconomic forecast scenarios, as well as in-depth analyses of the financial standing and the creditworthiness of borrowers. The Group recorded additional ECL provisions on loans to customers and finance lease receivables in the amount of GEL 7.3mln for the Retail Banking business, and net ECL reversal of GEL 30.4mln for the Corporate and Investment Banking segment in 2Q21. The latter was primarily driven by the recovery of several corporate loans during the quarter. Given that we are operating in a rapidly changing environment with a high level of uncertainty with regard to both the length and the severity of the COVID-19 impact, we continue to monitor new facts and circumstances on a continuous basis �� Expected credit loss and impairment charge on other assets and provisions. The Group recorded a GEL 10.4mln and a GEL 25.4mln ECL and impairment charge on other assets and provision in 2Q21 and 1H21, respectively. This mainly comprised expenses accrued for certain legal fees (these are not expected to be incurred going forward), which were partially offset by reversal of reserves on guarantees issued �� Quality of the loan book. The y-o-y rise in NPLs to gross loans and decrease in NPL coverage ratios at 30 June 2021, was mainly driven by the gradual increase in non-performing borrowers since the second quarter of 2020 on the back of the COVID-19 pandemic outbreak, while the upfront ECL provisions for the full economic cycle on loan portfolio were created already in the first quarter of 2020 GEL thousands, unless otherwise noted Jun-21 Jun-20 Change y-o-y Mar-21 Change q-o-q NON-PERFORMING LOANS NPLs 524,964 355,260 47.8% 534,626 -1.8% NPLs to gross loans 3.5% 2.7% 3.6% NPLs to gross loans, RB 3.3% 1.9% 3.3% NPLs to gross loans, CIB 3.6% 4.1% 4.0% NPL coverage ratio 73.1% 115.7% 77.5% NPL coverage ratio adjusted for the discounted value of collateral 122.2% 166.3% 127.8% �� BNB - the Group's banking subsidiary in Belarus - continues to perform well and remain strongly capitalised, with capital adequacy ratios well above the requirements of the National Bank of the Republic of Belarus ("NBRB"). At 30 June 2021, total capital adequacy ratio was 16.2%, well above the 12.5% minimum requirement, while Tier I capital adequacy ratio was 11.1%, again above the NBRB's 7.0% minimum requirement. ROAE was 12.8% in 2Q21 (12.2% in 2Q20 and 10.1% in 1Q21) and 11.4% in 1H21 (5.9% in 1H20), reflecting the rebound in economic activity. For financial results highlights of BNB, see page 21 �� Net non-recurring items in the first half of 2020 primarily comprised GEL 39.7mln one-off net losses on modification of financial assets recorded mostly in March 2020. These losses were related to the three-month payment holidays on principal and interest payments offered to our retail banking clients to reduce the requirement for customers to physically visit the branches and reduce the risk of the spread of the virus. In addition, in 1Q20, the Bank incurred GEL 1.2mln one-off costs to finance and donate 20,000 COVID-19 laboratory tests, 10 ventilators, 50,000 face masks and 60,000 gloves to the Ministry of Health of Georgia, to help curb the spread of the virus. These costs were classified as non-recurring items �� Overall, the Group recorded profit of GEL 202.2mln in 2Q21 (up 76.3% y-o-y and up 45.5% q-o-q) and GEL 341.1mln in 1H21 (compared with the profit of GEL 14.7mln in 1H20). The Group's ROAE was 29.4% in 2Q21 (21.8% in 2Q20 and 21.5% in 1Q21) and 25.6% in the first half of 2021 (1.4% in 1H20) BALANCE SHEET HIGHLIGHTS GEL thousands, unless otherwise noted Jun-21 Jun-20 Change y-o-y Mar-21 Change q-o-q Liquid assets 5,904,270 5,447,730 8.4% 6,968,871 -15.3% Liquid assets, GEL 2,388,405 2,461,639 -3.0% 2,515,544 -5.1% Liquid assets, FC 3,515,865 2,986,091 17.7% 4,453,327 -21.1% Net loans and finance lease receivables 14,789,371 12,599,092 17.4% 14,601,275 1.3% Net loans and finance lease receivables, GEL 6,438,426 5,001,418 28.7% 6,029,913 6.8% Net loans and finance lease receivables, FC 8,350,945 7,597,674 9.9% 8,571,362 -2.6% Client deposits and notes 13,944,383 11,583,139 20.4% 14,003,209 -0.4% Amounts owed to credit institutions 3,224,577 3,521,860 -8.4% 4,039,250 -20.2% Borrowings from DFIs 1,927,225 1,755,656 9.8% 2,222,967 -13.3% Short-term loans from central banks 398,186 847,213 -53.0% 772,647 -48.5% Loans and deposits from commercial banks 899,166 918,991 -2.2% 1,043,636 -13.8% Debt securities issued 1,515,511 1,561,933 -3.0% 1,653,399 -8.3% LIQUIDITY AND CAPITAL ADEQUACY RATIOS Net loans / client deposits and notes 106.1% 108.8% 104.3% Net loans / client deposits and notes + DFIs 93.2% 94.5% 90.0% Liquid assets / total assets 27.0% 28.4% 30.6% Liquid assets / total liabilities 31.0% 32.1% 34.7% NBG liquidity coverage ratio 124.5% 135.4% 149.3% NBG (Basel III) CET1 capital adequacy ratio 12.5% 9.9% 11.2% NBG (Basel III) Tier I capital adequacy ratio 14.4% 12.0% 13.3% NBG (Basel III) Total capital adequacy ratio 19.1% 17.4% 18.6% Our balance sheet remains highly liquid (NBG liquidity coverage ratio of 124.5%) and strongly capitalised (NBG Basel III CET1 capital adequacy ratio of 12.5%) with a well-diversified funding base (client deposits and notes to total liabilities of 73.2%) as at 30 June 2021. �� Liquidity. Liquid assets stood at GEL 5,904.3mln at 30 June 2021, up 8.4% y-o-y and down 15.3% q-o-q. The notable increase over the year was mostly attributable to excess liquidity placed with credit institutions, as the Bank maintained excess liquidity since 2020 for risk mitigation purposes on the back of the current COVID-19 crisis. Q-o-q decrease in liquid assets is largely reflective of successfully deploying excess liquidity during the second quarter of 2021. As a result, the NBG Liquidity coverage ratio was 124.5% at 30 June 2021, down from 135.4% at 30 June 2020 and down from 149.3% at 31 March 2021, still comfortably above the 100% minimum requirement level �� Loan book. Our net loan book and finance lease receivables reached GEL 14,789.4mln at 30 June 2021, up 17.4% y-o-y and up 1.3% q-o-q. Growth on a constant-currency basis was 13.7% y-o-y and 5.5% q-o-q. At 30 June 2021, the retail loan book represented 65.6% of the total loan portfolio (65.8% at 30 June 2020 and 65.5% 31 March 2021). Local currency portfolio experienced strong y-o-y and q-o-q growth of 28.7% and 6.8%, respectively, which was partially driven by the government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio �� Net loans to customer funds and Development Finance Institutions (DFI) ratio. Our net loans to customer funds and DFI ratio, which is closely monitored by management, stood at 93.2% at 30 June 2021, compared with 94.5% at 30 June 2020 and 90.0% at 31 March 2021 �� Diversified funding base. Debt securities issued decreased by 3.0% y-o-y and by 8.3% q-o-q at 30 June 2021. The y-o-y and q-o-q decrease was largely attributable to the appreciation of the local currency during the second quarter �� Strong capital position and update on minimum capital requirements. In April 2020, the NBG announced its updated supervisory plan for the Georgian banking sector, which was mainly focused on the capital adequacy and liquidity initiatives that allowed the banking sector to support financially stressed customers through the COVID-19 pandemic. From a capital adequacy perspective, a number of capital buffers were released, which reduced the minimum regulatory capital requirements at the time. During the period that banks partially or fully utilised the reduced Pillar 2 and conservation buffers, banks have not been able to make any form of capital distribution. Subsequently, the NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector. Throughout the pandemic, and the consequent significant reduction in economic activity, Bank of Georgia has delivered strong operating performance, with good operating income, well-managed costs, and robust asset quality. This has led to consistently delivering return on equity in excess of 20% over the last four quarters, and maintaining capital adequacy ratios comfortably above the minimum regulatory requirements. Considering the Bank's strong capital position, to ensure flexibility on capital distribution to shareholders, the Bank confirmed to the NBG that since end of May 2021, the Bank is no longer utilising, or expects to utilise, any of the Pillar 2 or conservation buffers that were waived last year. Consequently, there is no longer any regulatory restriction for Bank of Georgia on making any capital distributions. As a result of robust operating performance and strong internal capital generation, the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 12.5%, 14.4% and 19.1%, respectively, at 30 June 2021, all comfortably above the minimum required levels of 11.1%, 13.4% and 17.7%, respectively. The movement in capital adequacy ratios in 2Q21 and the potential impact of a 10% devaluation of local currency on different levels of capital is as follows: 31 March 2021 2Q21 profit Business growth GEL appreciation Tier 2 facility impact 30 June 2021 Potential impact of 10% GEL devaluation CET1 capital adequacy ratio 11.2% 1.3% -0.7% 0.7% - 12.5% -0.8% Tier I capital adequacy ratio 13.3% 1.3% -0.8% 0.6% - 14.4% -0.7% Total capital adequacy ratio 18.6% 1.3% -1.0% 0.5% -0.3% 19.1% -0.6% The Bank's ongoing minimum capital adequacy ratios reflecting the full phase-in of Basel III capital requirements, which remain subject to ongoing annual regulatory reviews, are currently expected to be as follows: Expected minimum capital requirements for 2021-2023 Dec-21 Dec-22 Dec-23 CET1 capital requirement 11.6% 11.9% 12.2% Tier 1 capital requirement 13.8% 14.3% 14.7% Total capital requirement 17.9% 17.9% 17.9% �� Dividends. The Board today declared an interim dividend of GEL 1.48 per ordinary share in respect of the period ended 30 June 2021, payable to ordinary shareholders of Bank of Georgia Group PLC on the register of members at the close of business on 22 October 2021, in British Pounds Sterling, pursuant to the following timetable: Ex-Dividend Date: 21 October 2021 Record Date: 22 October 2021 Currency Conversion Date: 22 October 2021 Payment Date: 5 November 2021 The NBG Lari/British Pounds Sterling average exchange rate for the period 18 to 22 October 2021 will be used as the exchange rate on the Currency Conversion Date. DISCUSSION OF SEGMENT RESULTS RETAIL BANKING (RB) Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is represented by the following sub-segments: (1) mass retail segment, (2) the mass affluent segment (through our SOLO brand), and (3) SME and micro businesses - MSME. GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y INCOME STATEMENT HIGHLIGHTS Net interest income 135,064 102,667 31.6% 131,448 2.8% 266,512 220,934 20.6% Net fee and commission income 44,223 22,184 99.3% 37,385 18.3% 81,608 51,581 58.2% Net foreign currency gain 10,026 7,525 33.2% 11,109 -9.7% 21,135 29,159 -27.5% Net other income 9,502 4,085 132.6% 8,841 7.5% 18,343 5,991 NMF Operating income 198,815 136,461 45.7% 188,783 5.3% 387,598 307,665 26.0% Salaries and other employee benefits (48,230) (41,826) 15.3% (40,055) 20.4% (88,285) (82,394) 7.1% Administrative expenses (22,992) (16,898) 36.1% (18,393) 25.0% (41,385) (37,629) 10.0% Depreciation, amortisation and impairment (19,097) (17,610) 8.4% (18,914) 1.0% (38,011) (35,499) 7.1% Other operating expenses (429) (550) -22.0% (630) -31.9% (1,059) (1,103) -4.0% Operating expenses (90,748) (76,884) 18.0% (77,992) 16.4% (168,740) (156,625) 7.7% (Loss) / profit from associate (4,299) 113 NMF 167 NMF (4,132) 414 NMF Operating income before cost of risk 103,768 59,690 73.8% 110,958 -6.5% 214,726 151,454 41.8% Cost of risk (10,435) (5,757) 81.3% (31,296) -66.7% (41,731) (147,835) -71.8% Net operating income before non-recurring items 93,333 53,933 73.1% 79,662 17.2% 172,995 3,619 NMF Net non-recurring items 211 (1,249) NMF 156 35.3% 367 (40,178) NMF Profit before income tax 93,544 52,684 77.6% 79,818 17.2% 173,362 (36,559) NMF Income tax (expense) / benefit (8,518) (3,214) NMF (5,834) 46.0% (14,352) 8,000 NMF Profit 85,026 49,470 71.9% 73,984 14.9% 159,010 (28,559) NMF BALANCE SHEET HIGHLIGHTS Net loans, currency blended 9,222,637 7,797,191 18.3% 9,048,924 1.9% 9,222,637 7,797,191 18.3% Net loans, GEL 5,397,390 4,241,765 27.2% 5,001,447 7.9% 5,397,390 4,241,765 27.2% Net loans, FC 3,825,247 3,555,426 7.6% 4,047,477 -5.5% 3,825,247 3,555,426 7.6% Client deposits, currency blended 7,334,708 5,962,044 23.0% 7,414,743 -1.1% 7,334,708 5,962,044 23.0% Client deposits, GEL 2,316,486 1,921,108 20.6% 2,240,838 3.4% 2,316,486 1,921,108 20.6% Client deposits, FC 5,018,222 4,040,936 24.2% 5,173,905 -3.0% 5,018,222 4,040,936 24.2% of which: Time deposits, currency blended 4,459,824 3,574,598 24.8% 4,564,157 -2.3% 4,459,824 3,574,598 24.8% Time deposits, GEL 1,184,271 973,050 21.7% 1,141,648 3.7% 1,184,271 973,050 21.7% Time deposits, FC 3,275,553 2,601,548 25.9% 3,422,509 -4.3% 3,275,553 2,601,548 25.9% Current accounts and demand deposits, currency blended 2,874,884 2,387,446 20.4% 2,850,586 0.9% 2,874,884 2,387,446 20.4% Current accounts and demand deposits, GEL 1,132,215 948,058 19.4% 1,099,190 3.0% 1,132,215 948,058 19.4% Current accounts and demand deposits, FC 1,742,669 1,439,388 21.1% 1,751,396 -0.5% 1,742,669 1,439,388 21.1% KEY RATIOS ROAE 22.1% 16.4% 20.7% 21.4% -4.7% Net interest margin, currency blended 4.5% 4.0% 4.6% 4.6% 4.4% Cost of credit risk ratio 0.3% 0.2% 1.4% 0.8% 3.7% Cost of funds, currency blended 5.5% 5.9% 5.4% 5.5% 5.9% Loan yield, currency blended 11.1% 11.1% 11.1% 11.1% 11.5% Loan yield, GEL 15.2% 14.9% 15.2% 15.2% 15.3% Loan yield, FC 5.9% 6.6% 6.1% 6.0% 6.8% Cost of deposits, currency blended 2.6% 2.9% 2.7% 2.7% 2.8% Cost of deposits, GEL 5.8% 6.4% 5.9% 5.8% 6.0% Cost of deposits, FC 1.2% 1.4% 1.3% 1.2% 1.4% Cost of time deposits, currency blended 3.6% 4.3% 3.8% 3.7% 4.1% Cost of time deposits, GEL 9.1% 10.3% 9.5% 9.3% 9.8% Cost of time deposits, FC 1.7% 2.2% 1.9% 1.8% 2.1% Current accounts and demand deposits, currency blended 1.0% 0.9% 1.1% 1.0% 0.9% Current accounts and demand deposits, GEL 2.4% 2.3% 2.4% 2.4% 2.3% Current accounts and demand deposits, FC 0.1% 0.1% 0.2% 0.2% 0.1% Cost / income ratio 45.6% 56.3% 41.3% 43.5% 50.9% Performance highlights �� Retail Banking generated strong operating income reaching GEL 198.8mln in the second quarter of 2021 (up 45.7% y-o-y and up 5.3% q-o-q) and GEL 387.6mln in the first half of 2021 (up 26.0% y-o-y). Robust net interest income and net fee and commission income generation were the main contributors to the increase in operating income in both periods presented �� Retail Banking net interest income was up 31.6% y-o-y and up 2.8% q-o-q in 2Q21 and up 20.6% y-o-y in 1H21, largely reflecting the 18.3% y-o-y growth in customer lending. RB NIM was 4.5% in 2Q21 (up 50bps y-o-y and slightly down 10bps q-o-q) and 4.6% in 1H21 (up 20bps y-o-y). The y-o-y increase in NIM both in 2Q21 and 1H21 was primarily reflecting a decline in the cost of funds (down 40bps y-o-y in 2Q21 and 1H21). Retail Banking net interest income also benefited from the growth of the local currency denominated loan portfolio, which generated 9.3ppts and 9.2ppts higher yield than the foreign currency denominated loan portfolio in 2Q21 and 1H21, respectively �� Retail Banking net loan book reached GEL 9,222.6mln at 30 June 2021, up 18.3% y-o-y and up 1.9% q-o-q. On a constant currency basis, retail loan book increased by 15.5% y-o-y and by 5.0% q-o-q in 2Q21. The local currency denominated loan book increased by 27.2% y-o-y and by 7.9% q-o-q, while the foreign currency denominated loan book grew by 7.6% y-o-y and decreased by 5.5% q-o-q in 2Q21, the latter mainly reflecting the appreciation of the local currency during the quarter. As a result, the local currency denominated loan book accounted for 58.5% of the Retail Banking loan book at 30 June 2021, compared with 54.4% at 30 June 2020 and 55.3% at 31 March 2021. The consumer loan portfolio, which is typically most sensitive to foreign currency risk, is now almost completely de-dollarised, while the share of retail mortgage loans in local currency was 48.9% at 30 June 2021 �� The y-o-y and q-o-q loan book growth reflected continued strong loan origination levels in all segments of Retail Banking business, largely driven by the rebound in economic activity: RETAIL BANKING LOAN BOOK BY PRODUCTS GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y Loan originations Consumer loans 642,450 143,060 NMF 455,590 41.0% 1,098,041 506,903 116.6% Mortgage loans 453,211 63,195 NMF 420,064 7.9% 873,275 322,505 NMF Micro loans 406,099 75,397 NMF 408,581 -0.6% 814,679 352,639 131.0% SME loans 389,201 104,893 NMF 371,256 4.8% 760,457 402,407 89.0% Outstanding balance Consumer loans 1,981,332 1,652,327 19.9% 1,809,839 9.5% 1,981,332 1,652,327 19.9% Mortgage loans 3,770,534 3,237,302 16.5% 3,812,962 -1.1% 3,770,534 3,237,302 16.5% Micro loans 1,870,061 1,586,847 17.8% 1,783,166 4.9% 1,870,061 1,586,847 17.8% SME loans 1,431,902 1,166,933 22.7% 1,505,649 -4.9% 1,431,902 1,166,933 22.7% �� Retail Banking client deposits amounted to GEL 7,334.7mln at 30 June 2021, up 23.0% y-o-y and down 1.1% q-o-q. The dollarisation level of deposits stood at 68.4% at 30 June 2021, compared with 67.8% at 30 June 2020 and 69.8% at 31 March 2021. The cost of foreign currency denominated deposits was 1.2% in 2Q21 (down 20bps y-o-y and down 10bps q-o-q) and 1H21 (down 20bps y-o-y), while the cost of local currency denominated deposits was 5.8% in 2Q21 (down 60bps y-o-y and down 10bps q-o-q) and 1H21 (down 20bps y-o-y). The spread between the cost of RB's client deposits in GEL and foreign currency was 4.6ppts in 2Q21 (GEL: 5.8%; FC: 1.2%), compared with 5.0ppts in 2Q20 (GEL: 6.4%; FC: 1.4%) and 4.6ppts in 1Q21 (GEL: 5.9%; FC: 1.3%). On a six months basis, the spread was 4.6ppts both in 1H21 (GEL: 5.8%; FC: 1.2%) and 1H20 (GEL: 6.0%; FC: 1.4%) �� Retail Banking net fee and commission income. Net fee and commission income generation was extremely strong, increasing by 99.3% y-o-y and by 18.3% q-o-q in the second quarter of 2021 and by 58.2% in the first half of 2021. The increase was mainly driven by strong performance in settlement operations, reflecting the rebound in economic activity during the second quarter �� Retail Banking's cost of credit risk ratio was 0.3% in 2Q21 (up from 0.2% in 2Q20 and down from 1.4% in 1Q21) and 0.8% in 1H21 (down from 3.7% in 1H20). The 3.7% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds created for the full economic cycle in the first quarter of 2020, related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions used in the reserve builds to reflect better visibility and up-to-date macroeconomic forecast scenarios, and the creditworthiness of borrowers. Based on the ongoing analyses, the Group recorded additional ECL reserves on loans to customers in the Retail Banking segment in 2Q21, resulting in a 0.3% cost of credit risk ratio during the quarter �� Our Retail Banking business continued to further execute our strategy of continuous digitalisation, as demonstrated by the following performance indicators: Volume information in GEL thousands 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y Retail Banking customers Number of new customers 47,809 27,214 75.7% 37,901 26.1% 72,189 59,010 22.3% Number of customers 2,573,729 2,540,721 1.3% 2,641,237 -2.6% 2,573,729 2,540,721 1.3% Cards Number of cards issued 213,185 92,315 130.9% 191,547 11.3% 404,732 245,253 65.0% Number of cards outstanding 2,079,783 2,178,053 -4.5% 2,111,254 -1.5% 2,079,783 2,178,053 -4.5% Express Pay terminals Number of Express Pay terminals 3,141 3,118 0.7% 3,125 0.5% 3,141 3,118 0.7% Number of transactions via Express Pay terminals 20,052,212 13,849,756 44.8% 16,784,029 19.5% 36,836,241 36,783,825 0.1% Volume of transactions via Express Pay terminals 2,847,236 1,550,286 83.7% 2,322,601 22.6% 5,169,837 3,577,132 44.5% POS terminals Number of desks 24,537 17,248 42.3% 22,889 7.2% 24,537 17,248 42.3% Number of contracted merchants 15,839 8,513 86.1% 13,298 19.1% 15,839 8,513 86.1% Number of POS terminals 33,772 23,788 42.0% 30,053 12.4% 33,772 23,788 42.0% Number of transactions via POS terminals 36,300,567 21,114,390 71.9% 27,455,781 32.2% 63,756,348 43,726,284 45.8% Volume of transactions via POS terminals 1,009,660 532,544 89.6% 705,118 43.2% 1,714,778 1,182,839 45.0% Internet banking Number of active users 2 129,521 247,342 -47.6% 133,237 -2.8% 129,521 247,342 -47.6% Number of transactions via internet bank 992,560 973,336 2.0% 918,907 8.0% 1,911,467 2,080,409 -8.1% Volume of transactions via internet bank 616,498 583,328 5.7% 584,089 5.5% 1,200,587 1,237,550 -3.0% Mobile banking Number of active users 2 763,365 619,519 23.2% 750,440 1.7% 763,365 619,519 23.2% Number of transactions via mobile bank 25,334,501 13,335,918 90.0% 21,242,482 19.3% 46,576,983 25,789,755 80.6% Volume of transactions via mobile bank 4,186,281 1,766,710 137.0% 3,279,566 27.6% 7,465,847 3,429,837 117.7% �� Sustained client base of c.2.6 million customers at 30 June 2021 reflected continuous increased offering of cost-effective remote channels and improvements in our products and services in many key areas. Based on the independent research conducted in spring 2021, Bank of Georgia is regarded as the most trusted financial institution and top of mind bank in Georgia �� The number of outstanding cards decreased by 4.5% y-o-y and by 1.5% q-o-q at 30 June 2021, mainly due to slower economic activity on the back of the COVID-19 pandemic. However, we already see a rebound in activity in the second quarter of 2021, reflected in strong issuances of new cards during the quarter. The number of Loyalty programme Plus+ cards reached 1,282,996 at 30 June 2021, up 34.1% y-o-y and up 5.4% q-o-q �� Digital channels. We have continued to develop our digital channels and provide superior digital experiences to our customers. More than 96% of total daily transactions of individuals were executed through digital channels3 in 2Q21 and 1H21 - mBank and iBank digital offloading. The Bank has continued to develop digital products and upgrade digital channels' functionalities to refine end-to-end digital journeys and incentivise transferring customer activity to digital channels. New innovative products and features have been introduced recently, including digital card, peer-to-peer payments, bill splitting and money request, fully digital consumer lending process, online instalment loans, digital onboarding, embedded online chat, and the fully redesigned iBank, among others. As a result of increased investments and efforts, the number of active users, as well as the number and volume of transactions through these channels, particularly, mBank, continue to expand rapidly. Furthermore, we see increased engagement of active users, as more than 40% of these customers are now using our mBank on a daily basis - The use of Express Pay terminals. The Bank has a large network of self-service terminals throughout Georgia, which are used extensively by our customers. Self-service terminals are viewed as the key transition channel from physical to digital, and the migration has been significant over the past few years. The increase in the number of transactions both y-o-y and q-o-q was primarily due to the rebound in economic activity during the second quarter of 2021 - Business iBank and mBank. Since the release of a new business internet banking platform for our MSME and corporate clients, we have focused on making the Business iBank even more useful for business transactions to further incentivise the transfer of client activity to digital channels. In 2Q21, we have introduced new online chat to our customers. Furthermore, we launched the Business mBank application in 1Q21 to offer full digital experience to our business customers. Our goal is to make the Business mBank useful for immediate business transactions, payments, accounting, money transfers, and administration, taking into consideration customer preferences and best practices. Our business customers are now able to have a single view of their finances on-the-go. As a result, we saw a significant increase in number of active Business iBank and mBank users, reaching 41,243 users at 30 June 2021 (up 28.9% y-o-y and up 8.1% q-o-q). We also saw a robust y-o-y and q-o-q increase in the number (up 39.2% y-o-y and up 25.8% q-o-q in 2Q21, and up 20.4% y-o-y in 1H21) and volume (up 64.7% y-o-y and 24.1% q-o-q in 2Q21, and 40.5% in 1H21) of transactions through Business iBank and mBank. Overall, c.97% of daily transactions of legal entities were executed through the Business iBank and mBank in the second quarter and the first half of 2021 - Product offloading to digital channels. Having achieved high transactions offloading rate to digital channels, the next step and a big upside for us is to further boost product sales in digital channels. In the first half of 2021, our product offloading rate4 was around 21% and, as we add innovative digital products and design better end-to-end digital journeys, we plan to increase our product offloading rate to around 36% over the next 12 months �� SOLO, our premium banking brand, continued its growth and investment in its lifestyle brand. We have 11 SOLO lounges, of which nine are located in Tbilisi, the capital of Georgia, and two in major regional cities of Georgia. The number of SOLO clients reached 65,746 at 30 June 2021 (56,207 at 30 June 2020 and 62,556 at 31 March 2021). At 30 June 2021, the product to client ratio for the SOLO segment was 4.7, compared with 2.2 for our retail franchise. While SOLO clients currently represent 2.6% of our total retail client base, they contributed 29.7% to our retail loan book, 38.2% to our retail deposits, 25.8% and 20.7% to our net retail interest income and to our net retail fee and commission income in 2Q21, respectively. The net fee and commission income from the SOLO segment was GEL 7.6mln in 2Q21 (up 37.5% y-o-y and up 11.9% q-o-q) and GEL 14.4mln in the first half of 2021 (up 23.3% y-o-y). At 30 June 2021, SOLO Club - a membership group within SOLO, which offers exclusive access to SOLO products and offers ahead of other SOLO clients at a higher fee - had 5,631 members, up 1.2% y-o-y and up 1.1% q-o-q �� MSME banking. The number of MSME segment clients reached 239,501 at 30 June 2021, up 6.2% y-o-y and up 2.7% q-o-q. MSME's gross loan portfolio reached GEL 3,490.4mln (up 19.1% y-o-y and largely flat q-o-q) and client deposits and notes amounted to GEL 977.4mln (up 23.5% y-o-y and largely flat q-o-q) at 30 June 2021. The q-o-q change in both loan and deposit portfolios was mostly due to the local currency appreciation during the quarter. The MSME segment generated robust operating income of GEL 56.2mln in 2Q21 (up 36.8% y-o-y and up 5.4% q-o-q) and GEL 109.5mln in the first half of 2021 (up 19.6% y-o-y), primarily reflecting the strong rebound in economic activity during the quarter �� Our digital ecosystem rests on four main business verticals: real estate, e-commerce, logistics, and point of sale. In 2019-1H21, we launched four platforms - real estate platform area.ge, online marketplace extra.ge, inventory management and point-of-sale solution for MSMEs Optimo and a full logistics services solution - IZiBox. During the second quarter of 2021, the Group has further developed these platforms, enlarging its network of partners, introducing new features and products, and increasing its customer base through active campaigns and initiatives. 500 Georgia Acceleration programme (launched in 2020 in partnership with 500 Startups and Georgia's Innovation and Technology Agency to help accelerate the development of Georgian and international early stage startups operating in the region). During 2020 and the first half of 2021, 28 companies from ten different business verticals (fintech; healthcare; lifestyle; accounting services; auto and transportation; HR services; travel and hospitality; Adtech; Agtech; Natural Language Processing and communications) completed the programme, and joined our Digital Area ecosystem. Since the launch, the startups have raised more than US$ 8.4 million from external international investors and venture capital funds. In August 2021, four of the 28 startups will complete the final acceleration stage in San Francisco During 2018-1H21, the Group has invested c.US$ 7.8 million in the development of the Digital Area Ecosystem. The Group plans an additional investment in the range of US$ 3-10 million during 2021-2023 �� Retail Banking recorded a profit of GEL 85.0mln in 2Q21 (up 71.9% y-o-y and up 14.9% q-o-q) and GEL 159.0mln in 1H21 (compared with the loss of GEL 28.6mln in 1H20), reflecting the rebound in economic activity in the second quarter of 2021. Retail Banking ROAE was 22.1% in 2Q21 (16.4% in 2Q20 and 20.7% in 1Q21) and 21.4% in the first half of 2021 (compared with negative profitability in 1H20) 2 The users that log-in in internet and mobile bank at least once in three months. 3 Digital channels comprise mBank and iBank, Express Pay terminals, ATMs, web platforms and call center. 4 Share of cards, loans and deposits activations via digital channels. CORPORATE AND INVESTMENT BANKING (CIB) CIB provides (1) loans and other credit facilities to Georgia's large corporate clients and other legal entities, excluding SME and micro businesses; (2) services such as fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits; (3) finance lease facilities through the Bank's leasing operations arm, the Georgian Leasing Company; (4) brokerage services through Galt & Taggart; and (5) Wealth Management private banking services to high-net-worth individuals and offers investment management products in Georgia and internationally through representative offices in London and Istanbul, and a subsidiary in Tel Aviv. GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y INCOME STATEMENT HIGHLIGHTS Net interest income 83,427 63,110 32.2% 72,532 15.0% 155,959 132,451 17.7% Net fee and commission income 11,322 9,197 23.1% 9,655 17.3% 20,977 18,152 15.6% Net foreign currency gain 9,027 11,431 -21.0% 4,521 99.7% 13,548 19,965 -32.1% Net other income 18,176 4,825 NMF 15,069 20.6% 33,245 9,506 NMF Operating income 121,952 88,563 37.7% 101,777 19.8% 223,729 180,074 24.2% Salaries and other employee benefits (14,498) (14,170) 2.3% (14,905) -2.7% (29,403) (24,731) 18.9% Administrative expenses (4,978) (3,488) 42.7% (3,503) 42.1% (8,481) (7,954) 6.6% Depreciation, amortisation and impairment (2,020) (2,434) -17.0% (2,492) -18.9% (4,512) (4,907) -8.0% Other operating expenses (166) (227) -26.9% (271) -38.7% (437) (523) -16.4% Operating expenses (21,662) (20,319) 6.6% (21,171) 2.3% (42,833) (38,115) 12.4% Operating income before cost of risk 100,290 68,244 47.0% 80,606 24.4% 180,896 141,959 27.4% Cost of risk 23,407 (2,536) NMF (12,066) NMF 11,341 (98,438) NMF Net operating income before non-recurring items 123,697 65,708 88.3% 68,540 80.5% 192,237 43,521 NMF Net non-recurring items (1) 32 NMF (73) -98.6% (74) (1,374) -94.6% Profit before income tax expense 123,696 65,740 88.2% 68,467 80.7% 192,163 42,147 NMF Income tax expense (10,914) (4,246) 157.0% (6,864) 59.0% (17,778) (2,398) NMF Profit 112,782 61,494 83.4% 61,603 83.1% 174,385 39,749 NMF BALANCE SHEET HIGHLIGHTS Net loans and finance lease receivables, currency blended 4,825,807 4,046,063 19.3% 4,752,895 1.5% 4,825,807 4,046,063 19.3% Net loans and finance lease receivables, GEL 997,397 705,502 41.4% 982,124 1.6% 997,397 705,502 41.4% Net loans and finance lease receivables, FC 3,828,410 3,340,561 14.6% 3,770,771 1.5% 3,828,410 3,340,561 14.6% Client deposits, currency blended 6,185,302 5,042,772 22.7% 6,123,346 1.0% 6,185,302 5,042,772 22.7% Client deposits, GEL 3,470,724 2,423,448 43.2% 2,934,200 18.3% 3,470,724 2,423,448 43.2% Client deposits, FC 2,714,578 2,619,324 3.6% 3,189,146 -14.9% 2,714,578 2,619,324 3.6% Time deposits, currency blended 3,090,526 2,552,135 21.1% 2,663,401 16.0% 3,090,526 2,552,135 21.1% Time deposits, GEL 2,283,595 1,468,397 55.5% 1,678,355 36.1% 2,283,595 1,468,397 55.5% Time deposits, FC 806,931 1,083,738 -25.5% 985,046 -18.1% 806,931 1,083,738 -25.5% Current accounts and demand deposits, currency blended 3,094,776 2,490,637 24.3% 3,459,945 -10.6% 3,094,776 2,490,637 24.3% Current accounts and demand deposits, GEL 1,187,129 955,051 24.3% 1,255,845 -5.5% 1,187,129 955,051 24.3% Current accounts and demand deposits, FC 1,907,647 1,535,586 24.2% 2,204,100 -13.5% 1,907,647 1,535,586 24.2% Letters of credit and guarantees, standalone (off-balance sheet item) 1,623,571 1,455,700 11.5% 1,640,556 -1.0% 1,623,571 1,455,700 11.5% Assets under management5 2,917,029 2,534,113 15.1% 3,091,462 -5.6% 2,917,029 2,534,113 15.1% RATIOS ROAE 42.1% 31.5% 24.1% 33.4% 9.9% Net interest margin, currency blended 4.1% 3.4% 3.6% 3.9% 3.7% Cost of credit risk ratio -2.5% -1.7% -0.2% -1.4% 3.2% Cost of funds, currency blended 2.8% 3.7% 3.3% 3.1% 3.6% Loan yield, currency blended 8.5% 8.3% 8.6% 8.5% 8.7% Loan yield, GEL 13.3% 12.4% 12.2% 12.8% 13.1% Loan yield, FC 7.3% 7.5% 7.6% 7.5% 7.8% Cost of deposits, currency blended 4.4% 4.2% 4.9% 4.6% 4.0% Cost of deposits, GEL 7.4% 8.1% 8.1% 7.7% 7.5% Cost of deposits, FC 1.4% 1.7% 1.5% 1.5% 1.7% Cost of time deposits, currency blended 6.6% 6.4% 7.3% 6.9% 6.1% Cost of time deposits, GEL 8.2% 9.5% 9.2% 8.6% 9.0% Cost of time deposits, FC 3.6% 3.6% 3.6% 3.6% 3.7% Current accounts and demand deposits, currency blended 2.6% 2.4% 2.6% 2.6% 2.2% Current accounts and demand deposits, GEL 6.3% 6.4% 6.3% 6.3% 5.8% Current accounts and demand deposits, FC 0.4% 0.4% 0.6% 0.5% 0.3% Cost / income ratio 17.8% 22.9% 20.8% 19.1% 21.2% Concentration of top ten clients 8.8% 7.3% 9.5% 8.8% 7.3% 5 We have amended the assets under management definition in the third quarter of 2020 to exclude certain illiquid assets that we hold in custody, and include only the most liquid assets that are being traded on an ongoing basis, and where we earn material fees on holding or trading such assets. The previous period balances have been restated accordingly. Previously disclosed amount of assets under management was GEL 2,834,975 thousand at 30 June 2020. Performance highlights �� Corporate and Investment Banking delivered outstanding quarterly results. CIB generated strong net interest and non-interest income during the second quarter and the first half of 2021, coupled with continuous cost discipline. As a result, the operating income before cost of risk reached GEL 100.3mln in 2Q21 (up 47.0% y-o-y and up 24.4% q-o-q) and GEL 180.9mln in 1H21 (up 27.4% y-o-y) �� CIB's net interest income increased by 32.2% y-o-y and by 15.0% q-o-q during the second quarter of 2021 and increased by 17.7% in the first half of 2021, largely reflecting 19.3% y-o-y lending growth. CIB NIM was 4.1% in 2Q21 (up 70bps y-o-y and up 50bps q-o-q) and 3.9% in 1H21 (up 20bps y-o-y). In 2Q21, 70bps y-o-y increase in NIM was primarily driven by 20bps increase in currency blended loan yields, coupled with 90bps decline in cost of funds, while 50bps q-o-q increase in NIM was the result of 10bps decline in currency blended loan yields, offset by 50bps decrease in cost of funds. On a six months basis, currency blended loan yields were down by 20bps y-o-y, while cost of funds were also down 50bps, resulting in 20bps increase in NIM y-o-y in 1H21 �� CIB's net fee and commission income reached GEL 11.3mln in 2Q21 (up 23.1% y-o-y and up 17.3% q-o-q) and GEL 21.0mln in 1H21 (up 15.6% y-o-y). The growth in net fee and commission income in all periods presented was largely driven by strong income generation from guarantees and letters of credit issued and income from settlement operations �� CIB's loan book and dollarisation. CIB loan portfolio totalled GEL 4,825.8mln at 30 June 2021, up 19.3% y-o-y and up 1.5% q-o-q. On a constant currency basis, CIB loan book was up 13.9% y-o-y and up 7.4% q-o-q. The concentration of the top 10 CIB clients was 8.8% at 30 June 2021 (7.3% at 30 June 2020 and 9.5% at 31 March 2021). Foreign currency denominated net loans represented 79.3% of CIB's loan portfolio at 30 June 2021, compared with 82.6% at 30 June 2020 and 79.3% at 31 March 2021. At 30 June 2021, 39.5% of total gross CIB loans were issued in foreign currency with exposure to foreign currency risk with regard to income, while 40.1% of total gross CIB loans were issued in foreign currency with no or minimal exposure to foreign currency risk �� Dollarisation of CIB deposits was 43.9% at 30 June 2021, compared with 51.9% a year ago and 52.1% at 31 March 2021. De-dollarisation of CIB's deposit portfolio was primarily supported by 43.2% y-o-y and 18.3% q-o-q increase in local currency denominated deposits, as a result of significantly higher interest rates offered on local currency funds. The interest rates on both local and foreign currency denominated deposits declined in 2Q21 y-o-y and q-o-q, and the cost of deposits in local currency remained well above the cost of foreign currency deposits �� Net other income generated in the second quarter and the first half of 2021 mainly comprised the net gains from the sale of real estate properties and net gains from the sale of investment securities �� CIB's cost of risk in 2Q21 and 1H21 reflected a combination of the following factors: �� Cost of credit risk. CIB's cost of credit risk was a net gain of 2.5% in 2Q21 (a net gain of 1.7% in 2Q20 and a net gain of 0.2% in 1Q21) and a net gain of 1.4% in 1H21 (cost of credit risk ratio of 3.2% in 1H20). The 3.2% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds, created for the full economic cycle related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions used in the reserve builds to reflect better visibility and up-to-date macroeconomic forecast scenarios, as well as in-depth analyses of the financial standing and the creditworthiness of corporate borrowers. The Group recorded a GEL 30.4mln and a GEL 32.8mln ECL reversal on loans to customers and finance lease receivables in 2Q21 and 1H21, respectively, primarily driven by the recovery of several corporate loans during these periods �� Expected credit loss and impairment charge on other assets and provisions in the second quarter and the first half of 2021 mainly comprised expenses accrued for certain legal fees (these are not expected to be incurred going forward), partially offset by ECL reversal on guarantees issued �� As a result, CIB recorded a profit of GEL 112.8mln in the second quarter of 2021 (up 83.4% y-o-y and up 83.1% q-o-q) and GEL 174.4mln in the first half of 2021 (profit of GEL 39.7mln in1H20). CIB's ROAE was 42.1% in 2Q21 (31.5% in 2Q20 and 24.1% in 1Q21) and 33.4% in 1H21 (9.9% in 1H20, reflecting the COVID-19 pandemic impact) Performance highlights of Investment Management operations �� Our strong Investment Management franchise comprises the Bank's regional Wealth Management practice and the leading investment bank in Georgia, Galt & Taggart. Our strategic objective in Investment Management is to focus on profitable growth through diversifying our Wealth Management offerings, unlocking the retail brokerage potential, and fully digitalising brokerage services �� The Investment Management's AUM reached to GEL 2,917.0mln as at 30 June 2021, up 15.1% y-o-y and down 5.6% q-o-q. This comprises: a) deposits of Wealth Management franchise clients, b) assets held at Bank of Georgia Custody, c) Galt & Taggart brokerage client assets, and d) Global certificates of deposit held by Wealth Management clients. The y-o-y increase in AUM mostly reflected the increase in client assets at Galt & Taggart, while the q-o-q decline largely reflected the appreciation of local currency in the second quarter of 2021 �� Strong international presence and diversified customer base across multiple geographies. We served 1,593 wealth management customers from 79 countries as at 30 June 2021, compared with 1,553 customers as at 30 June 2020 and 1,593 customers as at 31 March 2021 �� Wealth Management deposits amounted to GEL 1,433.1mln as at 30 June 2021, down 2.4% y-o-y and down 8.3% q-o-q, growing at a compound annual growth rate (CAGR) of 8.2% over the last five-year period. The cost of deposits was 2.6% in 2Q21 (down 40bps y-o-y and down 10bps q-o-q) and 2.7% in 1H21 (down 40bps y-o-y) �� Galt & Taggart, which brings under one brand corporate advisory, debt and equity capital markets research and brokerage services, continues to develop local capital markets in Georgia �� Our brokerage business demonstrated solid performance in the first half of 2021. Gross revenue of brokerage business was GEL 1.9mln in 2Q21 (up 10.9% y-o-y and down 6.8% q-o-q) and GEL 3.8mln in 1H21 (up 20.9% y-o-y). This was mostly driven by our online brokerage offered in partnership with Saxo Bank under a white label offering, which generated gross revenue of GEL 1.3mln in 2Q21 (down 10.9% y-o-y and down 16.5% q-o-q) and GEL 2.8mln in 1H21 (up 14.9% y-o-y) - We see significant upsides in the brokerage business in Georgia. Historically, we have focused on providing brokerage services to our wealth management customers, whereas the retail investor participation in the securities market has been limited. We are extending our offerings to the wider retail and mass affluent segments - In line with the Group's overall digital strategy, we are digitalising our brokerage offerings. Over the past few years we have significantly enhanced our back- and front-end processes to improve overall customer experience and engagement with brokerage services. Our single-view client dashboard, a product combining investment banking products into a single channel, continues to improve overall customer experience and reporting tools. In 2021, we plan to launch a mobile application to increase the usage and participation of the retail segment in this business and to further improve customer experiences �� In April 2021, Galt & Taggart acted as a Co-manager and facilitated a successful pricing of Georgia's US$ 500 million 2.750% 5-year sovereign Eurobond. Goldman Sachs International and J.P. Morgan Securities plc acted as Joint Global Coordinators and Joint Bookrunners on the transaction along with ICBC Standard Bank plc, while two local investment banks acted as Co-managers. The Eurobond was met with strong investor demand, with orders reaching US$ 2.0 billion. This marks a historic transaction for Georgia as it secured financing at the lowest coupon and yield in the history of the country �� In May 2021, Galt & Taggart, through a competitive bidding process, was awarded a contract to design and implement support mechanism for capital markets development in Georgia. The overall objective of this project is to increase access to finance for companies through debt and equity capital markets. The Project is funded by the Delegation of the European Union in Georgia and implemented by the Capital Markets Development team of European Bank for Reconstruction and Development �� In June 2021, Galt & Taggart acted as a Co-manager and facilitated a successful pricing of Georgian Railway's US$ 500 million 4.0% 7-year Eurobond. Citigroup and J.P. Morgan acted as Joint Lead Managers and Joint Bookrunners on the transaction. The strong investor demand led to 8.4x oversubscription as orders reached US$ 4.2 billion. This marks a historic transaction for the issuer as it secured financing at the lowest coupon and yield in its history �� Galt and Taggart is a leading research house in Georgia supporting our brokerage business and CIB activities with an in-depth quality macro and sector research coverage. Galt & Taggart publishes research reports on Georgia's and regional economies, key economic sectors in Georgia, regional fixed income securities, and global macro trends, among others. Currently, we have more than 6,500 unique subscribers, and our research is available on all major international platforms (Bloomberg, Capital IQ, Refinitiv, etc.) SELECTED FINANCIAL AND OPERATING INFORMATION INCOME STATEMENT BANK OF GEORGIA GROUP CONSOLIDATED GEL thousands, unless otherwise noted 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y Interest income 446,636 379,038 17.8% 428,580 4.2% 875,216 767,364 14.1% Interest expense (218,387) (204,102) 7.0% (216,248) 1.0% (434,635) (395,347) 9.9% Net interest income 228,249 174,936 30.5% 212,332 7.5% 440,581 372,017 18.4% Fee and commission income 94,727 54,389 74.2% 76,446 23.9% 171,173 125,284 36.6% Fee and commission expense (37,521) (21,488) 74.6% (27,796) 35.0% (65,317) (52,271) 25.0% Net fee and commission income 57,206 32,901 73.9% 48,650 17.6% 105,856 73,013 45.0% Net foreign currency gain 22,082 22,743 -2.9% 19,176 15.2% 41,258 53,404 -22.7% Net other income 27,438 9,081 NMF 23,482 16.8% 50,920 15,707 NMF Operating income 334,975 239,661 39.8% 303,640 10.3% 638,615 514,141 24.2% Salaries and other employee benefits (68,812) (60,656) 13.4% (60,223) 14.3% (129,035) (117,194) 10.1% Administrative expenses (30,068) (22,450) 33.9% (23,563) 27.6% (53,631) (49,470) 8.4% Depreciation, amortisation and impairment (22,354) (21,139) 5.7% (22,561) -0.9% (44,915) (42,529) 5.6% Other operating expenses (584) (913) -36.0% (1,012) -42.3% (1,596) (1,974) -19.1% Operating expenses (121,818) (105,158) 15.8% (107,359) 13.5% (229,177) (211,167) 8.5% (Loss) / profit from associates (4,299) 113 NMF 167 NMF (4,132) 414 NMF Operating income before cost of risk 208,858 134,616 55.2% 196,448 6.3% 405,306 303,388 33.6% Expected credit loss on loans to customers 25,140 11,621 116.3% (28,236) NMF (3,096) (216,568) -98.6% Expected credit loss on finance lease receivables (683) (3,387) -79.8% (931) -26.6% (1,614) (5,273) -69.4% Other expected credit loss and impairment charge on other assets and provisions (10,424) (18,455) -43.5% (14,950) -30.3% (25,374) (29,782) -14.8% Cost of risk 14,033 (10,221) NMF (44,117) NMF (30,084) (251,623) -88.0% Net operating income before non-recurring items 222,891 124,395 79.2% 152,331 46.3% 375,222 51,765 NMF Net non-recurring items (67) (1,241) -94.6% 17 NMF (50) (41,586) -99.9% Profit before income tax 222,824 123,154 80.9% 152,348 46.3% 375,172 10,179 NMF Income tax (expense) / benefit (20,654) (8,470) 143.8% (13,424) 53.9% (34,078) 4,560 NMF Profit 202,170 114,684 76.3% 138,924 45.5% 341,094 14,739 NMF Profit attributable to: - shareholders of the Group 201,239 114,174 76.3% 138,214 45.6% 339,454 14,659 NMF - non-controlling interests 931 510 82.5% 710 31.1% 1,640 80 NMF Earnings per share (basic) 4.21 2.40 75.4% 2.87 46.7% 7.08 0.31 NMF Earnings per share (diluted) 4.19 2.40 74.6% 2.87 46.0% 7.04 0.31 NMF BALANCE SHEET BANK OF GEORGIA GROUP CONSOLIDATED GEL thousands, unless otherwise noted Jun-21 Jun-20 Change y-o-y Mar-21 Change q-o-q Cash and cash equivalents 1,719,058 1,633,755 5.2% 2,361,663 -27.2% Amounts due from credit institutions 2,035,487 1,700,075 19.7% 2,200,803 -7.5% Investment securities 2,149,725 2,113,900 1.7% 2,406,405 -10.7% Loans to customers and finance lease receivables 14,789,371 12,599,092 17.4% 14,601,275 1.3% Accounts receivable and other loans 2,475 4,060 -39.0% 6,051 -59.1% Prepayments 33,903 31,513 7.6% 33,921 -0.1% Inventories 10,476 13,901 -24.6% 10,775 -2.8% Right-of-use assets 81,865 89,758 -8.8% 81,056 1.0% Investment property 235,649 212,182 11.1% 246,441 -4.4% Property and equipment 387,014 396,272 -2.3% 385,352 0.4% Goodwill 33,351 33,351 0.0% 33,351 0.0% Intangible assets 138,341 116,355 18.9% 129,044 7.2% Income tax assets 190 54,595 -99.7% 3,668 -94.8% Other assets 189,311 139,945 35.3% 208,135 -9.0% Assets held for sale 45,294 45,212 0.2% 44,305 2.2% Total assets 21,851,510 19,183,966 13.9% 22,752,245 -4.0% Client deposits and notes 13,944,383 11,583,139 20.4% 14,003,209 -0.4% Amounts owed to credit institutions 3,224,577 3,521,860 -8.4% 4,039,250 -20.2% Debt securities issued 1,515,511 1,561,933 -3.0% 1,653,399 -8.3% Lease liabilities 91,670 96,878 -5.4% 97,488 -6.0% Accruals and deferred income 54,626 37,257 46.6% 59,455 -8.1% Income tax liabilities 74,704 70,171 6.5% 57,541 29.8% Other liabilities 132,678 112,929 17.5% 154,253 -14.0% Total liabilities 19,038,149 16,984,167 12.1% 20,064,595 -5.1% Share capital 1,618 1,618 0.0% 1,618 0.0% Additional paid-in capital 511,273 500,887 2.1% 532,787 -4.0% Treasury shares (52) (54) -3.7% (34) 52.9% Other reserves 11,975 25,417 -52.9% 61,857 -80.6% Retained earnings 2,275,882 1,662,164 36.9% 2,079,362 9.5% Total equity attributable to shareholders of the Group 2,800,696 2,190,032 27.9% 2,675,590 4.7% Non-controlling interests 12,665 9,767 29.7% 12,060 5.0% Total equity 2,813,361 2,199,799 27.9% 2,687,650 4.7% Total liabilities and equity 21,851,510 19,183,966 13.9% 22,752,245 -4.0% Book value per share 58.86 46.07 27.8% 55.59 5.9% BELARUSKY NARODNY BANK (BNB) INCOME STATEMENT HIGHLIGHTS 2Q21 2Q20 Change y-o-y 1Q21 Change q-o-q 1H21 1H20 Change y-o-y GEL thousands, unless otherwise stated Net interest income 9,752 9,157 6.5% 8,347 16.8% 18,099 18,626 -2.8% Net fee and commission income 1,622 1,486 9.2% 1,570 3.3% 3,192 3,190 0.1% Net foreign currency gain 3,029 3,787 -20.0% 3,546 -14.6% 6,575 4,280 53.6% Net other income / (expense) 53 350 -84.9% (237) NMF (184) 683 NMF Operating income 14,456 14,780 -2.2% 13,226 9.3% 27,682 26,779 3.4% Operating expenses (9,656) (8,098) 19.2% (8,342) 15.8% (17,998) (16,804) 7.1% Operating income before cost of risk 4,800 6,682 -28.2% 4,884 -1.7% 9,684 9,975 -2.9% Cost of risk 1,061 (1,928) NMF (755) NMF 306 (5,350) NMF Net non-recurring items (277) (24) NMF (66) NMF (343) (34) NMF Profit before income tax expense 5,584 4,730 18.1% 4,063 37.4% 9,647 4,591 110.1% Income tax expense (1,222) (1,010) 21.0% (726) 68.3% (1,948) (1,042) 86.9% Profit 4,362 3,720 17.3% 3,337 30.7% 7,699 3,549 116.9% BALANCE SHEET HIGHLIGHTS Jun-21 Jun-20 Change y-o-y Mar-21 Change q-o-q GEL thousands, unless otherwise stated Cash and cash equivalents 122,271 187,920 -34.9% 192,338 -36.4% Amounts due from credit institutions 56,967 13,605 NMF 66,673 -14.6% Investment securities 95,899 93,549 2.5% 94,952 1.0% Loans to customers and finance lease receivables 657,473 638,713 2.9% 705,261 -6.8% Other assets 45,624 50,667 -10.0% 50,418 -9.5% Total assets 978,234 984,454 -0.6% 1,109,642 -11.8% Client deposits and notes 493,355 647,977 -23.9% 587,724 -16.1% Amounts owed to credit institutions 329,063 144,815 127.2% 347,018 -5.2% Debt securities issued 6,583 57,289 -88.5% 20,761 -68.3% Other liabilities 15,696 12,873 21.9% 17,498 -10.3% Total liabilities 844,697 862,954 -2.1% 973,001 -13.2% Total equity 133,537 121,500 9.9% 136,641 -2.3% Total liabilities and equity 978,234 984,454 -0.6% 1,109,642 -11.8% KEY RATIOS 2Q21 2Q20 1Q21 1H21 1H20 Profitability ROAA, annualised 3.6% 2.4% 2.5% 3.1% 0.2% ROAE, annualised 29.4% 21.8% 21.5% 25.6% 1.4% RB ROAE 22.1% 16.4% 20.7% 21.4% -4.7% CIB ROAE 42.1% 31.5% 24.1% 33.4% 9.9% Net interest margin, annualised 4.7% 4.2% 4.5% 4.6% 4.6% RB NIM 4.5% 4.0% 4.6% 4.6% 4.4% CIB NIM 4.1% 3.4% 3.6% 3.9% 3.7% Loan yield, annualised 10.4% 10.2% 10.4% 10.4% 10.6% RB Loan yield 11.1% 11.1% 11.1% 11.1% 11.5% CIB Loan yield 8.5% 8.3% 8.6% 8.5% 8.7% Liquid assets yield, annualised 3.3% 3.4% 3.1% 3.2% 3.7% Cost of funds, annualised 4.5% 4.8% 4.5% 4.5% 4.8% Cost of client deposits and notes, annualised 3.5% 3.5% 3.8% 3.6% 3.3% RB Cost of client deposits and notes 2.6% 2.9% 2.7% 2.7% 2.8% CIB Cost of client deposits and notes 4.4% 4.2% 4.9% 4.6% 4.0% Cost of amounts owed to credit institutions, annualised 6.9% 7.3% 6.2% 6.6% 7.5% Cost of debt securities issued 7.0% 7.7% 6.9% 7.0% 7.7% Operating leverage, y-o-y 23.9% -13.6% 9.3% 15.7% -11.2% Operating leverage, q-o-q -3.1% -11.9% 10.9% 0.0% 0.0% Efficiency Cost / income 36.4% 43.9% 35.4% 35.9% 41.1% RB Cost / income 45.6% 56.3% 41.3% 43.5% 50.9% CIB Cost /income 17.8% 22.9% 20.8% 19.1% 21.2% Liquidity NBG liquidity coverage ratio (minimum requirement 100%) 124.5% 135.4% 149.3% 124.5% 135.4% Liquid assets to total liabilities 31.0% 32.1% 34.7% 31.0% 32.1% Net loans to client deposits and notes 106.1% 108.8% 104.3% 106.1% 108.8% Net loans to client deposits and notes + DFIs 93.2% 94.5% 90.0% 93.2% 94.5% Leverage (times) 6.8 7.7 7.5 6.8 7.7 Asset quality: NPLs (GEL thousands) 524,964 355,260 534,626 524,964 355,260 NPLs to gross loans to clients 3.5% 2.7% 3.6% 3.5% 2.7% NPL coverage ratio 73.1% 115.7% 77.5% 73.1% 115.7% NPL coverage ratio, adjusted for discounted value of collateral 122.2% 166.3% 127.8% 122.2% 166.3% Cost of credit risk, annualised -0.6% -0.2% 0.8% 0.1% 3.5% RB Cost of credit risk 0.3% 0.2% 1.4% 0.8% 3.7% CIB Cost of credit risk -2.5% -1.7% -0.2% -1.4% 3.2% Capital adequacy: NBG (Basel III) CET1 capital adequacy ratio 12.5% 9.9% 11.2% 12.5% 9.9% Minimum regulatory requirement 11.1% 6.9% 7.8% 11.1% 6.9% NBG (Basel III) Tier I capital adequacy ratio 14.4% 12.0% 13.3% 14.4% 12.0% Minimum regulatory requirement 13.4% 8.7% 9.8% 13.4% 8.7% NBG (Basel III) Total capital adequacy ratio 19.1% 17.4% 18.6% 19.1% 17.4% Minimum regulatory requirement 17.7% 13.3% 13.8% 17.7% 13.3% Selected operating data: Total assets per FTE 2,863 2,671 3,054 2,863 2,671 Number of active branches, of which: 211 229 211 211 229 - Express branches 105 121 105 105 121 - Bank of Georgia branches 95 97 95 95 97 - SOLO lounges 11 11 11 11 11 Number of ATMs 972 940 963 972 940 Number of cards outstanding, of which: 2,079,786 2,178,053 2,111,255 2,079,786 2,178,053 - Debit cards 1,889,213 1,828,691 1,877,281 1,889,213 1,828,691 - Credit cards 190,573 349,362 233,974 190,573 349,362 Number of POS terminals 33,772 23,787 30,053 33,772 23,787 Number of Express pay terminals 3,141 3,118 3,125 3,141 3,183 FX Rates: GEL/US$ exchange rate (period-end) 3.1603 3.0552 3.4118 GEL/GBP exchange rate (period-end) 4.3754 3.7671 4.6929 Jun-21 Jun-20 Mar-21 Full time employees (FTE), of which: 7,633 7,181 7,450 - Full time employees, BOG standalone 6,050 5,693 5,889 - Full time employees, BNB 543 543 536 - Full time employees, other 1,040 945 1,025 Shares outstanding Jun-21 Jun-20 Mar-21 Ordinary shares 47,578,565 47,536,332 48,130,454 Treasury shares 1,590,863 1,633,096 1,038,974 Total shares outstanding 49,169,428 49,169,428 49,169,428 PRINCIPAL RISKS AND UNCERTAINTIES In the Group's 2020 Annual Report and Accounts we disclosed the principal and emerging risks and uncertainties that are most likely to have an impact on our business model, strategic objectives, operations, future performance, solvency and liquidity. We also disclosed the potential impact, as well as the trends and outlook associated with these risks and the actions we take to mitigate them. We have updated this disclosure to reflect recent developments and this is set out in full below. The order in which the principal risks and uncertainties appear does not denote their order of priority. It is not possible to fully mitigate all of our risks. Any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Group is exposed to risks wider than those listed. Additional risks and uncertainties, including those that the Group is currently not aware of or deems immaterial, may also result in decreased revenues, incurred expenses or other events that could result in a decline in the value of the Group's securities. We disclose the risks that we believe are likely to have had the greatest impact on our business and which have been discussed in depth at the Group's recent Board, Audit or Risk Committee meetings. MACROECONOMIC ENVIRONMENT Principal risk / uncertainty Macroeconomic factors relating to Georgia, including depreciation of the Lari against the US Dollar, may have a material impact on our loan book. Key drivers / trends The Group's operations are primarily located in, and most of its revenue is sourced from, Georgia. Macroeconomic factors relating to Georgia, such as changes in GDP, inflation and interest rates, may have a material impact on the quality of our loan portfolio, loan losses, our margins, and customer demand for our products and services. The estimated real GDP growth during the first half of 2021 was 12.7%, following a contraction of 6.2% in 2020. The growth was partly as a result of the low base in 2020, but also from a faster rebound than expected (the estimated real GDP growth compared to the first half of 2019 was 5.7%). This recovery was supported by robust exports and remittances and faster than expected recovery in tourism. That said, the pandemic still remains one of the key uncertainties in the growth outlook, but acceleration in vaccination process is expected to offset this risk. Uncertain and volatile global economic conditions could have substantial political and macroeconomic ramifications globally which, in turn, could impact the Georgian economy. In the first half of 2021, the Lari appreciated against the US Dollar by 3.5%, after depreciating by 14.3% in 2020. The volatility of the Lari against the US Dollar may adversely affect the quality of our loan portfolio, as well as increase the cost of credit risk and expected credit loss provisions. The creditworthiness of our customers may be adversely affected by the depreciation of the Lari against the US Dollar, which could result in them having difficulty repaying their loans. The depreciation of the Lari may also adversely affect the value of our customers' collateral. At 30 June 2021, approximately 41.3% and 79.6% of our gross Retail Banking and Corporate and Investment Banking loans, respectively, were denominated in foreign currency, while 6.7% of Retail Banking gross loans and 40.1% of Corporate and Investment Banking gross loans issued in foreign currency had no or minimal exposure to foreign currency risk. In the first quarter of 2020, following the COVID-19 pandemic outbreak, the Group created upfront provision for the full economic cycle in both Retail Banking and Corporate and Investment Banking businesses. This COVID-19-related charge was based on our expectations of future credit losses on our portfolio given the application of the future economic scenarios. The assumptions are being continuously revisited to reflect the macroeconomic forecast scenarios published by the NBG, and better visibility of the portfolio and the detailed review of creditworthiness of the borrowers. Based on these analyses, the reserves created in the first quarter of 2020 proved overall to be sufficient. As a result, our cost of credit risk ratio was 0.1% in the first half of 2021 compared to 3.5% in the first half of 2020. There still is uncertainty over the magnitude of the global slowdown that will result from the COVID-19 pandemic. Mitigation The Group continuously monitors market conditions and reviews market changes, and also performs stress and scenario testing to test its position under adverse economic conditions, including adverse currency movements. The Bank's Asset and Liability Management Committee sets our open currency position limits and the Bank's proprietary trading position limits, which are currently more conservative than those imposed by the NBG, our regulator. The Treasury department manages our open currency position on a day-to-day basis. The open currency position is also monitored by the Bank's Capital Adequacy and Financial Risk Management unit. In order to assess the creditworthiness of our customers, we take into account currency volatility when there is a currency mismatch between the customer's loan and the revenue. In line with the NBG requirements, we assign up to 75% additional risk weighting to the foreign currency loans of clients, whose source of income is in Lari (this requirement was temporarily decreased to 25% since April 2020 by the NBG on the back of the COVID-19 outbreak; however, we have not modified our approach with regard to underwriting principles and this change has not affected our pricing decisions). The Bank's Credit Committees and Credit Risk department set counterparty limits by using a credit risk classification and scoring system for approving individual transactions. The credit quality review process is continuous and provides early identification of possible changes in the creditworthiness of customers, including regular collateral revaluations, potential losses and corrective actions needed to reduce risk, which may include obtaining additional collateral in accordance with underlying loan agreements. In order to encourage responsible lending practices in the market, the NBG has in place macroprudential policy instruments that regulate lending conditions to individuals. The payment-to-income ratio (PTI) and the loan-to-value ratio (LTV) require the financial institutions to issue loans based on the rigorous assessment of clients' debt paying ability and aim at reducing high-risk products in the market. This initiative ensures the sustainability of the financial sector in the event of real estate price reductions and further reduces the risk of the loan portfolio quality. Since 2016, the NBG has actively implemented various measures to de-dollarise the Georgian economy. In January 2019, in order to hedge the borrowers against foreign currency risks, the NBG raised a threshold of small-sized loans that must be issued only in local currency from GEL 100,000 to GEL 200,000. Among the NBG's initiatives towards de-dollarisation and increasing access to long-term lending in the local currency is Liquidity Coverage Ratio (LCR) under the Basel III framework, effective since September 2017. The NBG's preferential treatment for the Lari is translated into 75% LCR for the local currency high-quality liquid assets, while the mandatory ratio stands at 100% for foreign currency as well as for all currencies in total. Moreover, since June 2018, in order to encourage the financial institutions to raise funding in the local currency, the NBG mandated changes in minimum reserve requirements on funds attracted in national and foreign currencies several times. Currently, 25% of customer deposits in foreign currencies are set aside as minimum reserves. In addition, the Bank maintains a minimum average balance of 5% of its customers' deposits in Lari at its correspondent account at the NBG. For Certificates of Deposit (CDs) and unsubordinated funding, the NBG requires the Bank to set aside 25% of CDs and borrowings in foreign currency with a remaining maturity of less than one year, 15% of CDs and borrowings in foreign currency with a remaining maturity of one to two years, and 5% of its unsubordinated local currency wholesale funding for borrowings with a remaining maturity of less than one year. There is no minimum reserves requirement for CDs denominated in local currency. In July 2021, to further support de-dollarisation of client deposits portfolio, the NBG mandated additional changes in minimum reserve requirements. The minimum reserve requirement of 25% and 15% on client deposits and notes attracted in foreign currencies mentioned above are applied in case the client deposits and notes portfolio dollarisation level is more than 70%. If the dollarisation falls to 40% or below, the minimum reserve requirement falls to 10%. For the dollarisation level between 40% and 70%, the reserve requirement is set within 10%-25% and 10%-15% range, respectively. Since the beginning of 2016, we have focused on increasing local currency lending. We actively work with International Finance Institutions to raise long-term Lari funding to increase our Lari-denominated loans to customers. Furthermore, in June 2017, we completed the inaugural local currency denominated international bond issuance in the amount of GEL 500mln to support local currency lending. From the beginning of 2017, the NBG expanded the list of assets that banks are permitted to use as collateral for REPO transactions, which provides an additional funding source for our Lari-denominated loan book. This list further expanded since the second quarter of 2020 as part of the NBG's response to the COVID-19 pandemic. The government and the NBG have appropriate tools to help mitigate the economic threat to a degree, and to try to support economic recovery to resume growth quickly. The Georgian economy is well-diversified, both by sector, and in terms of trading partner country dependence. However, if the virus leads to a continued global shutdown a significant negative impact on areas of the Georgian economy is expected. We continue to monitor the COVID-19 pandemic outbreak's impact and to consider our continued business resilience. REGIONAL AND DOMESTIC INSTABILITY Principal risk / uncertainty The Georgian economy and our business may be adversely affected by regional and domestic tensions and instability. The Group's operations are primarily located in, and most of its revenue is sourced from, Georgia. The Georgian economy is well-diversified and there is no significant dependency on a single country. However, it is dependent on economies of the region, in particular Russia, Turkey, Azerbaijan and Armenia, which are key trading partners. There has been ongoing geopolitical tension, political and economic instability and military conflict in the region, which may have an adverse effect on our business and financial position. Furthermore, our business and financial position may be adversely affected by domestic political challenges and instability. Key drivers / trends Russian troops continue to occupy the Abkhazia and the Tskhinvali/South Ossetia regions, and tensions between Russia and Georgia persist. Russia is opposed to the Eastward enlargement of NATO, including the former Soviet republics such as Georgia. Therefore, Georgia's continued progression towards approximation to the EU and NATO may intensify tensions between Georgia and Russia. Developments such as the introduction of a free trade regime between Georgia and the EU in September 2014 and the visa-free travel in the EU granted to Georgian citizens in March 2017 similarly contribute to tensions. The government has taken certain steps towards improving relations with Russia but, as of the date of this announcement, these have not resulted in any formal or legal changes in the relationship between the two countries. In June 2018, as a result of early parliamentary and presidential elections, amendments to the Turkish constitution became effective. The amendments which grant the president wider powers are expected to transform Turkey's system of government away from a parliamentary system, which could have a negative impact on political stability in Turkey. On 8 July 2019, Russia's ban on direct flights to Georgia, imposed earlier in June over anti-occupation protests in Tbilisi, came into effect. The sanction affected the Georgian tourism sector; however, it also provided more incentives to further diversify the country's tourist base. We note that, after a two-month war between Azerbaijan and Armenia over Nagorno-Karabakh region, a ceasefire agreement was signed on 10 November 2020. The agreement confirmed territorial gains of Azerbaijan, opening a direct land link with Turkey. Soon after the agreement, the Turkish government announced plans to build a railway connecting to Azerbaijan directly. This decision may shift transportation routes in the region in the long term, which could negatively affect Georgia's aspiration to become the transport and logistics hub of the region. However, at this stage we do not assume that cargo flows will shift from the Georgian corridor in the medium term, considering the difficult landscape of this potential new route and uncertainties related to security. In addition, Georgia is currently experiencing certain political challenges. The domestic political situation escalated following attacks on media representatives on 5-6 July 2021 committed by a group of radicals, and experienced further strains at the end of July, when the ruling party pulled out from the EU-mediated agreement concluded in April 2021. An opposition boycott and media demands, and upcoming local elections in Autumn 2021, may result in further political tension, exacerbate uncertainty and negatively impact the recovery. Mitigation The Group actively monitors regional and local market conditions and risks related to political instability, and the Georgian government's response thereto. It performs stress and scenario tests to assess the impact on its financial position, and develops responsive strategies and action plans. While financial market turbulences and geopolitical tensions affect regional trading partners, Georgia's preferential trading regimes and well-diversified economy in terms of dependency on a single country, support the country to enhance resilience to regional external shocks. Although the COVID-19 pandemic had an adverse impact on the Georgian economy, which is highly dependent on tourism revenues, a series of state support measures aided by international financial institutions have partly mitigated the negative consequences of the pandemic. As a result, the Georgian economy contracted by 6.2% in 2020. We already see various sectors of the economy recovering on the back of a significant rebound in economic activity, resulting in y-o-y estimated real GDP growth of 12.7% during the first half of 2021, surpassing the 2019 pre-pandemic levels. Georgia is expected to surpass 2019 level of growth in 2021 as more people get vaccinated and tourism gradually comes back. We believe that Georgia's efforts to further diversify its economic linkages, use the potential of new large markets - the EU and China - and further enhance its institutions will enable the economy to deal with the external shocks relatively well. On 9 April 2021, the Executive Board of the International Monetary Fund (IMF) completed the Eighth Review of Georgia's economic reform programme supported by a four-year extended arrangement under the Extended Fund Facility (EFF). This was the last review under the arrangement and its completion released SDR 78 million (about US$ 111 million), bringing total disbursements to SDR 484 million (about US$ 687 million). On 19 July 2021, IMF concluded the 2021 Article IV Mission. Based on the IMF statement, as the recovery proceeds, the focus of fiscal policy should shift toward unwinding crisis support measures and bringing down the deficit and debt. The pandemic naturally led to sharp rise in the fiscal deficit and debt as the government provided support to businesses and households, and as revenues declined. Georgia's fiscal rule has been an essential anchor and source of policy credibility and the authorities' strong commitment to the fiscal rule is welcome. Faster than expected economic recovery has substantially improved the revenue outlook for 2021. In the planned supplementary budget, new revenues will largely finance additional healthcare costs as well as capital and other spending. Saving more of these revenues would help speed progress on the fiscal consolidation required to comply with the fiscal rule by 2023 and provide a buffer against risks. Accordingly, further revenue windfalls should be saved. The eventual unwinding of COVID-19 support measures as the pandemic recedes will help shrink the deficit, but additional adjustments are still needed. Faster deficit reduction in the 2022 budget would better balance the need for new revenue or saving measures over the next two years. The mission welcomes the NBG's appropriate increases in the monetary policy rate in March and April to help ensure that the temporary effects of commodity price increases and supply constraints remain transient and that inflation expectations stay anchored around the 3 percent target. With recovery now faster than expected, risks to inflation are tilted to the upside, and the NBG should be ready to promptly hike rates further if inflation expectations or core inflation suggest high inflation risks becoming entrenched. Overall, the inflation targeting framework and floating exchange rate regime have helped Georgia adjust to the COVID-19 shock and remain appropriate. Considering risks, including due to financial dollarisation, the NBG should continue prudent use of foreign exchange interventions to prevent disorderly market conditions. The recent introduction of differentiated reserve requirements on foreign exchange liabilities of banks could be a useful step to reduce deposit dollarisation. Notably, Fitch Ratings and S&P Global maintained Georgia's sovereign credit ratings unchanged in 2020 and 1H21, respectively, despite the COVID-19-induced economic crisis and sharp reduction of external earnings on the back of halt in international tourism. Both agencies underline Georgia's relatively strong institutional arrangements, in the regional context, and an ability to mobilise concessional financing from international financial institutions. Furthermore, on 6 August 2021, Fitch Ratings revised Georgia's sovereign credit rating outlook to Stable from Negative and affirmed at BB, which is a return to pre-pandemic indicator. According to Fitch Ratings, the outlook revision reflects a much-improved macroeconomic baseline, and confidence that the Georgian authorities will continue implementing policies supporting macroeconomic stability and medium-term sustainability of public finances. Fitch Ratings revised its 2021 real GDP growth estimate for Georgia upwards to 7.8% from 4.3%. For 2022-2023, the rating agency forecasts real GDP growth to average 5.4%, above the potential growth of 4.0-4.5%, supported by a more robust recovery in the tourism sector and an increase in investment. The Group closely monitors the current domestic political situation, related risks and the Georgian government's response thereto. The international community is closely involved in the process and acts as mediators between the government and the opposition parties. The desire to join the EU is likely to encourage Georgia's political players to put their differences behind them and to act more collaboratively. LOAN PORTFOLIO QUALITY RISK Principal risk / uncertainty The Group may not be able to maintain the quality of its loan portfolio. The quality of the Group's loan portfolio may deteriorate due to external factors beyond the Group's control such as negative developments in Georgia's economy or in the economies of its neighbouring countries, the unavailability or limited availability of credit information on certain of its customers, any failure of its risk management procedures or rapid expansion of its loan portfolio. The Group's Corporate and Investment Banking loan portfolio is concentrated and to the extent that such borrowers enter into further loan arrangements with the Group, this will increase the credit and general counterparty risk of the Group, with respect to those counterparties and could result in deterioration of the Group's loan portfolio quality. Furthermore, the collateral values that the Group holds against the loans may decline, which may have an adverse effect on the business and financial position of the Group. Key drivers / trends Expected credit loss and, in turn, the Group's cost of credit risk could increase if a single large borrower defaults or a material concentration of smaller borrowers default. The Corporate and Investment Banking loan portfolio is concentrated, with the Group's top ten Corporate and Investment Banking borrowers accounting for 8.8% of gross loans to customers and finance lease receivables at 30 June 2021, as compared to 9.7% at 31 December 2020 and 9.9% at 31 December 2019. As at 30 June 2021, the Group held collateral against gross loans covering 84.9% of the total gross loans to customers. The main forms of collateral taken in respect of Corporate and Investment Banking loans are liens over real estate, property, plant and equipment, corporate guarantees, inventory, deposits and securities, and transportation equipment. The most common form of collateral accepted in Retail Banking loans is a lien over residential property. Downturns in the residential and commercial real estate markets, or a general deterioration of economic conditions in the industries in which the Group's customers operate, may result in illiquidity and a decline in the value of the collateral securing loans, including a decline to levels below the outstanding principal balance of those loans. In addition, declining or unstable prices of collateral in Georgia may make it difficult for the Group to accurately value collateral it holds. If the fair value of the collateral that the Group holds declines significantly in the future, it could be required to record additional provisions and could experience lower than expected recovery levels on collateralised loans. Further changes to laws or regulations may impair the value of such collateral. During the first half of 2021, the Group's cost of credit risk ratio was 0.1%, as compared to 3.5% in the first half of 2020. The latter was driven by additional expected credit losses created for the full economic cycle in both Retail and Corporate and Investment Banking segments, primarily related to deterioration of macroeconomic environment and expected creditworthiness of borrowers as a result of the impact of the COVID-19 pandemic, which further proved overall to be sufficient. As of 30 June 2021, 31 December 2020 and 31 December 2019, the Group's non-performing loans accounted for 3.5%, 3.7% and 2.1% of gross loans to customers and finance lease receivables, respectively. Mitigation The Group continuously monitors market conditions and reviews market changes, and also performs stress and scenario testing to test its position under adverse economic conditions. Our Credit Committees and Credit Risk department set counterparty limits by using a credit risk classification and scoring system for approving individual transactions. The credit quality review process is continuous and provides early identification of possible changes in the creditworthiness of customers, including regular collateral revaluations, potential losses and corrective actions needed to reduce risk, which may include obtaining additional collateral in accordance with underlying loan agreements. The Group continuously monitors the market value of the collateral it holds against the loans. When evaluating collateral for provisioning purposes, the Group discounts the market value of the assets to reflect the liquidation value of the collateral. In terms of Retail Banking loan portfolio, when disbursing the loans to retail customers the Group strictly adheres to PTI and LTV ratios set by the NBG based on the rigorous assessment of clients' debt paying ability. This further reduces the risk of the loan portfolio quality in the event of real estate price reductions. To respond to challenges caused by the COVID-19 pandemic, the Group has adjusted the credit assessment criteria, both for business as well as household loans. The Group applied sector specific discounts to financial forecasts, increased discounts applied to rental income and increased LTV requirements prior to these adjustments materialising into real impact. The Group also actively monitored portfolio of impacted customers and offered suitable loan payment schedule modifications to meet customers' cash flow needs for them to be able to meet their credit obligations. In addition, in order to manage the risk at an appropriate level, the Group has temporarily ceased the lending to high-risk retail and micro-express loans segments. In terms of Corporate and Investment Banking loan portfolio concentration, the Group aims to adhere strictly to the limits set by the NBG for client exposures, as well as internally-set limits, monitors the level of concentration in its loan portfolio and the financial performance of its largest borrowers, uses collateral to minimise loss given default on its largest exposures and maintains a well-diversified loan book sector concentration. REGULATORY RISK Principal risk / uncertainty We are at risk of failing to identify, assess, correctly interpret, comply with, or manage regulatory requirements, leading to financial loss, legal or regulatory censure, and/or damage to the Group's reputation. Key drivers / trends The Group is subject to increasing regulatory requirements, and the competitive landscape in which we operate may change as a result of changes in regulation, the extent and impact of which may not be fully predicted. Since the Group is listed on the London Stock Exchange's main market for listed securities, it is subject to the UK Financial Conduct Authority regulations. The Group is subject to regulatory oversight of the National Bank of Georgia, which supervises the banking sector and the securities market in Georgia. Furthermore, the Group companies are also subject to relevant laws and regulations in Georgia, and the banking subsidiary in Belarus, BNB, is subject to regulatory oversight of the National Bank of the Republic of Belarus. Our ability to comply with existing or potential regulatory or legal requirements may be affected by a number of factors, including those outside of our control. Mitigation In order to ensure compliance with relevant regulations, the Group has established compliance policies and procedures that enable the integration of compliance risk management principles across the Group's operations. The Group compliance policies set the principles and standards for managing compliance risks across the Group and describe key roles and responsibilities of an independent group compliance function. The adherence to the policies is mandatory for all employees and is monitored through the relevant KPIs. In line with our integrated control framework, we carefully evaluate the impact of legislative and regulatory changes as part of our formal risk identification and assessment processes and, to the extent possible, proactively participate in the drafting of relevant legislation. As part of this process, we engage in constructive dialogue with regulatory bodies, where possible, and seek external advice on potential changes to legislation. We then develop appropriate policies, procedures and controls, as required, to meet our compliance obligations. The Bank has taken further steps to effectively and efficiently mature its compliance risk management framework, including the development of a robust toolkit for the timely implementation of new regulatory requirements, and the establishment of a formal link and coordinated process of communication with the regulator. The Bank has policies and processes in place to identify, assess, and monitor related party transactions. Our compliance risk management framework, at all levels, is subject to regular review by the Bank's Internal Audit department and external assurance service providers. LIQUIDITY RISK Principal risk / uncertainty The Group is exposed to liquidity risk when the maturities of its assets and liabilities do not coincide, as well as funding risk. Although the Group expects to have sufficient funding over the next 12 months and beyond to execute its strategy and to have sufficient liquidity over the next 12 months and beyond, liquidity risk is nevertheless inherent in banking operations and may be heightened by a number of factors, including an over-reliance on, or an inability to access, a particular source of funding, changes in credit ratings or market-wide phenomena, such as financial market instability. Credit markets worldwide have in recent years experienced, and may continue to experience, a reduction in liquidity and long-term funding as a result of global economic and financial factors. The availability of credit in emerging markets, in particular, is significantly influenced by the level of investor confidence and, as such, any factors that affect investor confidence (for example, a downgrade in credit ratings of Bank of Georgia, Georgia, or state interventions or debt restructurings in a relevant industry) could affect the pricing or availability of funding for the Group companies, operating in any of these markets. Key drivers / trends The Group's current liquidity may be affected by unfavourable financial market conditions. If assets held by the Group in order to provide liquidity become illiquid or their value drops substantially, the Group may be required, or may choose, to rely on other sources of funding to finance its operations and future growth. Only a limited amount of funding, however, is available on the Georgian inter-bank market, and recourse to other funding sources may pose additional risks, including the possibility that other funding sources may be more expensive and less flexible. In addition, the Group's ability to access such external funding sources depends on the level of credit lines available to it, and this, in turn, is dependent on the Group's financial and credit condition, as well as general market liquidity. In terms of current and short-term liquidity, the Group is exposed to the risk of unexpected, rapid withdrawal of deposits by its customers in large volumes. Circumstances in which customers are more likely to withdraw deposits in large volumes rapidly include, among others, a severe economic downturn, a loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. If a substantial portion of customers rapidly or unexpectedly withdraw their demand or term deposits or do not roll over their term deposits upon maturity, this could have a material adverse effect on the Group's business, financial condition and results of operations. Furthermore, should the COVID-19 pandemic continue to cause disruption to economic activity in Georgia and globally, there could be adverse impacts on the Group's liquidity and funding positions. Mitigation The Group manages its liquidity risk through the liquidity risk management framework, which models the ability of the Group to meet its payment obligations under both normal conditions and crisis. The Bank has developed a model based on the Basel III liquidity guidelines. It maintains a solid buffer on top of the LCR requirement of 100%, mandated by the NBG since September 2017. A strong LCR enhances the Group's short-term resilience. Moreover, the Bank holds a comfortable buffer on top of the Net Stable Funding Ratio (NSFR) requirement of 100%, which came into effect on 1 September 2019. A solid buffer over NSFR provides stable funding sources over a longer time span. This approach is designed to ensure that the funding framework is sufficiently flexible to secure liquidity under a wide range of market conditions. Notably, both LCR and NSFR measures as implemented by the NBG are already more conservative compared with the minimum levels required under the Basel III framework. As of 30 June 2021, 31 December 2020 and 31 December 2019, the LCR was 124.5%, 138.6%, and 136.7%, respectively, while NSFR was 136.8%, 137.5% and 132.5%, at 30 June 2021, 31 December 2020 and 31 December 2019, respectively, all comfortably above the NBG's minimum regulatory requirement. Among other things, the Group maintains a diverse funding base comprising short-term sources of funding (including Retail Banking and Corporate and Investment Banking customer deposits, inter-bank borrowings and borrowings from the NBG) and longer-term sources of funding (including term Retail Banking and Corporate and Investment Banking deposits, borrowing from international credit institutions, and long-term debt securities). Client deposits and notes are one of the most important sources of funding for the Group. As at 30 June 2021, 31 December 2020 and 31 December 2019, 88.8%, 88.7%, and 90.4%, respectively, of client deposits and notes had contractual maturities of one year or less, of which 49.1%, 48.2%, and 55.2%, respectively, were payable on demand. As of the same dates, the ratio of net loans to client deposits and notes was 106.1%, 101.2%, and 118.4%, respectively, and the ratio of net loans to client deposits and notes and DFIs was 93.2%, 89.4%, and 103.2%, respectively. The Bank has strong support from International Financial Institutions. It has already attracted a number of new local and foreign currency long-term borrowings during 2020-2021 of more than US$ 200 million from the International Finance Corporation, the European Investment Bank, FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders, and the European Bank for Reconstruction and Development, part of which has been drawn-down during 2020 and 2021. The Group currently has c.GEL 225mln undrawn long-term facilities from DFIs with up to five years of maturity, as well as strong pipeline to secure resources needed for the next 12 months. Furthermore, as part of its updated supervisory plan for the Georgian banking sector, aimed at elevating the negative financial and economic challenges created by the COVID-19 in Georgia, the NBG announced the readiness to revisit and reduce LCR requirements (on 1 May 2020, the NBG temporarily cancelled the 75% LCR requirement for local currency for a one-year period), as well as mandatory reserve requirements, if necessary. Moreover, the NBG has also introduced the FX swap instruments, and extended the eligibility criteria of collateral used for refinancing loan provided by the NBG; this may be revisited further, if necessary, to support the local currency liquidity. CAPITAL RISK Principal risk / uncertainty The Bank faces the risk of not meeting the minimum capital adequacy requirements set by the NBG. The Bank, like all regulated financial institutions in Georgia, is required to comply with capital adequacy ratios set by the NBG. The failure to maintain the minimum capital adequacy requirements may have a material adverse effect on the Group and may compromise its strategic targets. Key drivers / trends Since December 2017, the Bank is subject to the NBG capital adequacy regulation, which is based on the Basel III guidelines of the Basel Committee of Banking Supervision, with regulatory discretion applied by the NBG due to the specifics of the local banking industry. The new increased requirements are phased-in gradually with fully loaded requirement of capital adequacy ratios of risk-weighted assets effective by end of March 2023 (as amended in March 2020, and subsequently, as part of the NBG's response to the COVID-19 pandemic outbreak). Our ability to comply with existing or amended NBG requirements may be affected by a number of factors, including those outside of our control, such as an increase in the Bank's risk-weighted assets, our ability to raise capital, losses resulting from deterioration in our asset quality and/or a reduction in income levels and/or an increase in expenses, local currency volatility, as well as weakening of global and Georgian economies. In March 2020, as a response to the emerging COVID-19 pandemic, in agreement with the NBG, the Bank created a c.GEL 400mln general provision under the Bank's local regulatory accounting basis that is used to calculate the capital adequacy ratios. This provision covers the NBG's expectation of estimated credit losses on the Bank's lending book for the full economic cycle. This resulted in a decline in capital ratios in 2020, which still stood comfortably above the minimum regulatory requirements. That said, should the COVID-19 pandemic continue to cause disruption to economic activity in Georgia and globally, there could be further adverse impact on the Bank's capital adequacy position. Mitigation The Group maintains an actively managed capital base to cover risks inherent to its business. As part of our capital adequacy management framework, we continuously monitor market conditions and review market changes, and perform stress and scenario testing to test our position under adverse economic conditions, market and regulatory developments. Capital position is continuously monitored by the management, as well as the Board, to ensure prudent management and timely actions, when necessary. In 2019, we underwent a capital optimisation exercise to strengthen the Bank's capital position and enable the realisation of the potential upsides. For that, in March 2019, the Bank issued inaugural US$ 100 million Additional Tier 1 Capital Notes, which marks the first ever AT1 transaction from Georgia. This issuance helped Bank of Georgia optimise its capital structure from a foreign currency perspective, and provided a natural hedge against operating in a dollarised economy. Further, in December 2019, the Bank signed a ten-year US$ 107 million subordinated syndicated loan agreement arranged by FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders, which qualifies for the Tier 2 capital instrument under the NBG Basel III framework. In addition, in December 2020, the Bank signed an amendment to the syndicated Tier 2 facility on increasing the loan exposure by additional US$ 20 million. In March 2020, given the level of uncertainty with regard to the global impact of COVID-19 and the potential length of time of that impact, the Board of Directors decided not to recommend a dividend for the 2019 year to shareholders at the 2020 Annual General Meeting. Furthermore, as part of its updated supervisory plan for the Georgian banking sector, aimed at elevating the negative financial and economic challenges created by COVID-19 in Georgia, in April 2020, the NBG implemented certain measures in relation to capital adequacy requirements to allow the banks to use existing regulatory capital buffers to support customers in the current financially stressed circumstances, to continue normal business activities as far as possible, and to support the economy through ongoing lending operations. From a capital adequacy perspective, a number of capital buffers were released, which reduced the minimum regulatory capital requirements at the time. During the period that banks partially or fully utilised the reduced Pillar 2 and conservation buffers, banks have not been able to make any form of capital distribution. Subsequently, the NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector. Throughout the pandemic, and the consequent significant reduction in economic activity, the Bank has delivered strong operating performance, with good operating income, well-managed costs, and robust asset quality. This has led to consistently delivering return on equity in excess of 20% over the last four quarters, and maintaining capital adequacy ratios comfortably above our minimum regulatory requirements. As a result, considering the Bank's strong capital position, the Bank has now confirmed to the NBG that we are no longer utilising, or expect to utilise, any of the Pillar 2 or conservation buffers that were waived in 2020. The Group's capital position remains robust, and comfortably above the minimum regulatory requirements. At 30 June 2021, the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 12.5%, 14.4% and 19.1%, respectively, all comfortably above the minimum required levels of 11.1%, 13.4% and 17.7%, respectively. FINANCIAL CRIME RISK Principal risk / uncertainty We are at risk of knowingly or unknowingly facilitating illegal activity, including money laundering, fraud, bribery and corruption, tax evasion, sanctions evasion, financing of terrorism and proliferation, through the Bank. We may be adversely affected if we fail to mitigate the risk of our products and services being used to facilitate financial crime, leading to financial loss, legal or regulatory censure and/or damage to our reputation. Key drivers / trends Financial crime risks continue to evolve globally. The Group faces stringent regulatory and supervisory requirements related to the management of financial crime risks. Failure to comply with these requirements may lead to enforcement action by the regulator, leading to financial loss and/or damage to the Group's reputation. Main sources of financial crime risk may arise from the following: - An inherent risk related to providing products and services to customers that may expose the Group to financial crime; - Inadequate controls to capture risk and/or reduce the residual impact and likelihood of financial crime risk; - Business activities with an unacceptable level of risk exposure may not be adequately managed. Globally, increased volume and speed of transactions/payments and digital transformation in financial services are fueling following trends in financial crime risk management: - Increased speed of service delivery ��� transaction are being executed more quickly, and therefore, the primary line of defense needs to use more advanced detection techniques and data to mitigate risks; - Identity fraud ��� the number of identity fraud, account takeover, fabricated client accounts is expected to rise globally. The Group will need to combine breadth of information with a more advanced data analytics and machine learning capabilities to be able to mitigate the risk; - Diagnose products (new and nontraditional) for money laundering - criminals are more likely to shift their attention to more nontraditional products, including trade finance, securities and insurance, and thus the Group will need more advanced technological solutions and comprehensive policies to prevent and detect money laundering across the Group. Mitigation Within the scope of the Group-wide financial crime risk management programme, all business units, support functions and subsidiaries are expected to consider the impact of their activities on the risk profile of the Group and take effective measures to ensure alignment with the Group's risk taking approach for financial crime. We have an anti-money laundering (AML)/counter-terrorist financing (CTF) framework, which includes a risk-based approach (RBA) towards the ML/FT risks. The framework is designed to comply with the local legislation, international standards (Financial Action Task Force (FATF) recommendations), and international financial sanctions programmes. The Bank has standards that define Know Your Customer (KYC), transaction monitoring, transaction screening procedures to comply with international economic sanctions regulations, customer activity monitoring and filing for mandatory and suspicious activity reports, correspondent relationship assessment and monitoring, and training of relevant staff ML/FT policies. To strengthen our ability to prevent and detect financial crime, we continue to enhance our AML risk management function. We have invested significant resources to further improve our ML/FT risk management capabilities, including advanced analytics and transaction monitoring solutions. We use an established risk governance structure to mitigate risks related to ML/FT, which implies three lines of defense model. As an organisation that is fully committed to the prevention of bribery and corruption, Bank of Georgia ensures that appropriate policies and effective controls are in place. The Bank has Know Your Employee (KYE) procedures, based on which the Bank conducts different screening procedures at recruitment, employment and departure stages of the employment. In the first half of 2021, there was no bribery or corruption incident registered in the Bank, and the Bank did not incur any bribery or corruption fines. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems. Financial crime risks are on the regular agenda of the Audit and Risk Committees and are also frequently discussed at the Board level. CYBER-SECURITY, INFORMATION SECURITY AND DATA PRIVACY RISK Principal risk / uncertainty We are at risk of failing to effectively govern, manage and control our data, as well as of experiencing the failure, unauthorised or erroneous use of information systems. These could lead to unethical decisions, disrupt our critical services, result in financial loss, have legal or regulatory implications, and/or negatively affect our reputation. Key drivers / trends Cyber and information security threats have continued to increase over the past few years. Although, to date, neither our operations have been materially affected nor have we suffered a data breach, the external threat profile is continuously changing, and we expect threats to continue to increase. In addition, local data protection legislation in Georgia, which is approximated to the General Data Protection Regulation, requires robust and multidisciplinary approach to privacy organisation. We are committed to ensuring that personal data is handled in accordance with the requirements of laws of Georgia and state-of-the-art principles. While the country has already taken steps to align its laws with EU data protection instruments, further legislative developments are underway. Over the past few years, as we have accelerated our focus on digitalisation, coupled with the shift to remote work due to the COVID-19 pandemic, we have seen an increase in electronic crime rate, including fraud, however losses have not been significant. Further, the risks will need to be balanced against the requirements driven by the local regulatory reforms on Open Banking, aimed at alignment with the EU's Second Directive on Payment Services (PSD2). The NBG has taken a phased approach to implementing the reforms, and the process is expected to be completed by the end of 2021. Mitigation We have an integrated control framework encompassing operational risk management, IT systems, and corporate and other data security, each managed by a separate department. We are committed to ensuring that personal data is handled in accordance with the requirements of the Georgian data protection legislation and state-of-the-art principles. We have established a rigorous information security and privacy programme, which is aligned with current business and regulatory requirements and an emerging threat landscape. Policies and standards: We have in place privacy and information security policies, which outline the basic contours of the measures to take in the processing and handling of personal data to preserve the integrity, confidentiality and availability of the data. Designated Governance and Risk Management unit develops and maintains a comprehensive set of information security policies and standards, which are regularly reviewed by the unit to ensure that they are up to date. These policies and standards are reviewed and approved by the relevant governance bodies on an annual basis, are aligned with recognised industry standards, such as those determined by the National Institute of Standards and Technology (NIST), the International Organisation for Standardisation (ISO) and the General Data Protection Regulation (GDPR), and are made available to all relevant personnel through internal channels. We have embedded robust privacy standards and practices within corporate operations and structure and maintain a comprehensive set of information security and privacy policies and standards. Internal and external information security checks: To ensure the adequacy and effectiveness of our risk management, internal controls and systems in place, we carry out regular information security checks internally as well as with the assistance of external consultants. Our Internal Audit department independently evaluates the Bank's overall control environment, issues recommendations and monitors the implementation of control measures. Once a year, we engage external auditors to conduct a cyber-security audit. In addition, we regularly initiate authorised simulated attacks on our system, have an internationally recognised vendor conduct a penetration test once a year, and carry out vulnerability assessments on a quarterly basis. Access management: We have established access controls that are based on general principles, such as principle of least privilege access, separation of duties, defence in depth, and privileges commensurate with a particular role's duties. We continuously strive to keep the existing controls up to date. In response to our employees working remotely due to the COVID-19 pandemic outbreak and to address information and cyber-security risks, we have developed new monitoring rules and alerts, modified thresholds to detect anomalous activity, and tightened security requirements for gaining remote access. Vendor security: While effective relationships with vendors are essential to our success, we understand that they may pose significant risks to our information security. In addition, under the local data protection legislation, organisations are responsible for personal data managed by their third-parties. To this end, we have established a comprehensive procedure for evaluating the maturity of vendors' information security, data protection and business continuity practices. As part of the selection process, vendors are subject to information security and data protection due diligence. In line with the findings of vendors' information security due diligence, necessary contractual and technical controls are implemented. Existing vendor relationships are subject to, at a minimum, annual monitoring and review to determine their fulfilment of information security requirements. Termination of a relationship with a vendor is subject to exit procedures to ensure the protection of our information's confidentiality, integrity and availability. Awareness programmes: Building a privacy and information security strategy means changing the mindset and perspective of the entire organisation. Awareness raising is one of the key aspects of our privacy and information security framework. As part of the privacy and cyber-security programme, we conduct awareness campaigns to enable our employees to recognise information security concerns and respond accordingly. Information security training, including cyber-security and data privacy, is mandatory for all employees as part of the onboarding process, and afterwards once a year. On a quarterly basis, the Information Security department initiates a phishing campaign to test the ability of our staff to detect phishing attacks and respond duly. On a periodic basis, the Information Security department sends awareness emails and shares posts through internal channels regarding current information security threats. In response to the COVID-19 pandemic outbreak, we have developed a mandatory special training course for our employees on how to work remotely in a secure manner and protect themselves from the emerging information security threats. Privacy Strategy: To evaluate where an organisation currently stands with respect to the local data protection legislation, the GDPR and industry best practices, we regularly perform privacy gap assessments. The outcome of this exercise is a specific risk-based implementation plan with priority steps required to improve privacy compliance within the Bank. This helps us make informed decisions on the use of personal data, develop assumptions at the Board level, and increase control over privacy risks. The Data Protection Officer regularly reports to the Board of Directors on the status of implementation and compliance with personal data protection laws. As a result, the Bank's senior management as well as the Board of Directors are aware of relevant data protection matters at all times. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems in place. Cyber-security and data privacy risks are on the Audit and Risk Committees' regular agenda and are also frequently discussed at the Board level. OPERATIONAL RISK Principal risk / uncertainty We are at risk of incurring losses as a result of inadequate or failed internal processes, people and systems, or from external events. Operational risk may result in losses emerging from following events, among others: - internal and external fraud, theft and unauthorised activity - business disruption and system failures; - employment practices; - clients, products and business practices; - damage to physical assets and infrastructure; - execution, delivery and process management. Key drivers / trends We are highly dependent on the proper functioning of our risk management, internal controls and systems, and internal processes. The objective of the Group's operational risk management is to keep operational risk at appropriate levels relative to the characteristics of the Group's business, the markets, its capital and liquidity positions, and the competitive, economic and regulatory environment. Deficiencies or ineffectiveness in operational risk management may result in inaccurate financial, regulatory or risk reporting, which may have adverse effect on accurate and timely visibility of the Group's risk profile to our key stakeholders. This may deter the actions needed by each line of defense, including senior management and relevant committees to timely respond to the shift in the Group's risk profile and undertake corrective measures. The trends that are driving the need to transform other than above mentioned emerging risks stem from multiple sources: - It is expected that regulation will continue to deepen and become more stringent as public becomes less tolerant of errors or inappropriate business practices; - Customer expectations of banking products and services will change with the emergence of new technologies and new service models; - Accelerating digitalisation and automation will make IT and data more sophisticated; - The talent pool will need to shift to more IT, data savvy profiles to catch up with increased level of digitalisation and automation of processes. As a result, ORM will need to adapt and manage the evolution of new types of risks (e.g. model, contagion), all of which will require new skills, tools, and resources. Mitigation The Group has a comprehensive and diversified set of risk management and mitigation practices and strategies in place, including the use of risk models in analysing and monitoring various risk groups. The assumptions and judgments used in the existing risk models may not fully anticipate the timing or the specifics of every event in the Group's operating environment. To manage operational risk, the Group has implemented and sustains a system of policies and procedures and has established a framework for anticipating, mitigating, controlling and communicating operational risks and the overall effectiveness of the internal control environment across the Group. Through effective alignment of roles and responsibilities related to operational risks among three lines of defense, the Group identifies, monitors, measures, reports on and manages risks and related controls. Internal controls: We have designed internal controls that ensure the Bank has efficient and effective operations, safeguards its assets, produces reliable financial reports, and complies with applicable laws and regulations. The following elements of the internal control framework enable us to mitigate operational risks: - established clear authorities and processes for approval; - close monitoring of key risk indicators and alert system to ensure adherence to thresholds or limits; - infrastructure security; - appropriate employee recruitment, learning and development practices to maintain expertise; - continuous processes to identify business lines or products that appear to under or over perform in comparison with reasonable expectations; - regular verification and reconciliation of transactions and accounts; and - vacation policy that ensures that employees are absent from their duties for a period of not less than two consecutive weeks. Policies and standards: Operational risk management department develops and maintains a comprehensive set of policies and standards, which are regularly reviewed to ensure that they are up to date. These policies and standards are reviewed and approved by the relevant governance bodies to ensure they are aligned with recognised industry standards, such as Organisation for Standardisation (ISO), and are made available to all relevant employees through internal channels. Segregation of duties: The existing risk and control frameworks require that the appropriate segregation of duties is in place, so that the conflicting duties that potentially may result in the concealment of losses, errors or other inappropriate action are eliminated. Thus, one of the key objectives of ORM is to identify potential areas of conflict of interest and manage and monitor the risk. Technology risk: The use of technology related to products, activities, processes and delivery channels exposes us to strategic, operational, and reputational risks and the possibility of a material financial loss. We manage this risk with an integrated approach to identifying, measuring, monitoring and managing technology risks that use the same principles as operational risk management. Business resiliency and continuity: We are exposed to disruptive events, which could be severe and affect our inability to fulfil some or all of our business obligations. Incidents that damage the Bank's physical infrastructure, information technology infrastructures, or a pandemic that negatively impact human resources may result in significant financial losses for the Group, as well as for the industry. To provide resiliency against this risk, the Group has established a business continuity plan that is appropriate for the nature, size and complexity of our operations. The plan takes into account different types of scenarios to which the Group may be vulnerable. The Group continuously performs business impact analysis, recovery strategies, testing, training and awareness programmes, and communication and crisis management programmes. We identify and reassess critical business operations, cyclically or as needed, key internal and external dependencies and appropriate resilience levels. The identified plausible disruptive scenarios are assessed for their financial, operational and reputational impact, and the resulting risk assessment is the foundation for recovery objectives and measures and ultimately recovery plan. Outsourcing: The Group's sourcing policy ensures that outsourcing initiatives follow a defined process, including due diligence, risk evaluation and ongoing assurance. The following attributes support effective monitoring and management of the risk: - standards that define whether and how activities can be outsourced; - due diligence in the selection of potential service providers; process for identifying, managing and monitoring the associated risks, including the financial condition of the service provider; - sound contracting of outsourcing arrangements; and - establishment of viable contingency plans. Awareness programmes: We conduct awareness campaigns to enable our employees to recognise existing and potential risks and their role in risk management. Such training mandatory for all employees as part of the onboarding process and afterwards cyclically. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems. These types of operational risks are on the Audit and Risk Committees' regular agenda and are also frequently discussed at the Board level. The Group is committed to continuous improvement of its risk management programme and is constantly adapting to the evolving operating environment by becoming more agile and developing relevant talent pool as well as capabilities necessary to continue delivering on the Group's key strategic objectives. COVID-19 PANDEMIC IMPACT RISK Principal risk / uncertainty The COVID-19 outbreak was declared as a global pandemic at the beginning of 2020 and continues to rapidly spread throughout the world. The spread of the virus has led to global shutdowns. Full lockdown in Georgia was introduced on 21 March 2020, and a state of emergency declared in the country, which lasted for around two months, after which the government started to gradually release restrictions and open the economy. The outbreak in Georgia at its early stage was not as severe as in many other countries, as the Georgian government took significant early actions to reduce the spread of the virus, which included early flight bans, and school and business closures, and continued with complete restrictions of all economic activities, other than essential stores and services. From mid-May 2020, businesses gradually reopened, but international flights resumed only to a limited number of countries from August 2020. A surge in COVID-19 cases in autumn resulted in further lockdown measures put in place in retail and hospitality sectors at the end of November 2020, as well as a curfew and a ban on public transportation, while avoiding a full-scale lockdown for other areas of the economy, unlike in April-May 2020. This has led to a decline in COVID-19 cases and allowed the gradual reopening of the domestic economy from March 2021. Virus cases have picked up again significantly in July-August 2021, and the government responded by re-introduction of restrictions in August, such as wearing face masks in public places, restricting large gatherings, concerts and other activities, and closing municipal transportation, among others. Although, vaccination rate is currently low, immunisation progress has significantly accelerated since end of July, which is encouraging, and the government has sufficient vaccine supplies secured for 2021. The COVID-19 pandemic still remains the key risk factor to derail the recovery unless more than half of the population is vaccinated by the end of the year. We are monitoring the impact on our business, customers and employees on an ongoing basis. There is still uncertainty over the magnitude of the global slowdown that will result from this pandemic. New COVID-19 variants and/or vaccination delays could derail the recovery as a result of required lockdowns and reduced external demand. The Georgian economy is well-diversified, both by sector and in terms of trading partner country dependence; however, if the virus leads to continued uncertainties, then a significant negative impact on the hospitality sector in Georgia is expected. This may also impact other areas of the Georgian economy, such as real estate. A prolonged COVID-19 spread, protectionism, and a protracted slowdown in major trading partners, along with intensified regional conflicts and security risks could harm investment and reduce external demand, especially tourism, for longer. Delays in structural reforms may deepen the damaging effects from the crisis. Key drivers / trends Economic activity in Georgia has slowed down significantly in 2020 in the wake of the COVID-19 pandemic, resulting in the real GDP contraction of 6.2% in 2020 on the back of the lockdown and the halt in international tourism. The government responded quickly to support businesses and households during each lockdown phases, including health-related spending, transfers targeting vulnerable households, and support to SMEs and businesses in hard-hit sectors. Georgian economy quickly regained its momentum during the first half of 2021, mainly supported by pent-up demand, strong goods exports, solid remittances, and a faster than expected rebound in tourism. Investments are also expected to contribute positively to growth in 2021 boosted by public infrastructure spending along with increased private sector activity. The estimated real GDP growth came in at 12.7% in the first half of 2021, beating market expectations, partly as a result of low base in 2020, but also from a faster rebound from external earnings (the estimated growth compared to the first half of 2019 was 5.7%). The rise in world commodity prices, utility price increases and faster than expected recovery resumed price pressures in 2021 with annual inflation coming at 11.9% in July 2021. The NBG responded by raising monetary policy rate three times this year, reaching 10.0% in August 2021. A high inflation is expected through the end of the year, before it declines in 2022 as temporary factors fade. Notably, strong recovery dynamics along with a tight monetary policy helped the local currency to partially regain its value against the US Dollar since May 2021, strengthening by 7.4% during the second quarter of 2021. Importantly, the international reserves remain high at US$ 3.9 billion as of 30 June 2021. The outlook remains subject to significant uncertainty as the vaccination rate is currently low and virus cases remain alleviated. Mitigation The Group has introduced a number of resilience protocols and a comprehensive Business Continuity Plan (BCP) aimed at curbing the spread of COVID-19 in Georgia and mitigating the negative impact on our business and the community. We started developing the BCP at the end of January 2020, such that all of our operations would be successfully adapted to the new operating environment, while establishing the health and safety of all our staff and customers as the number one priority. Our BCP was focused on four main pillars: operational continuity (employees and customers), supporting the public health system and communities, abundant liquidity, and strength of capital. Details of initiatives implemented as part of the BCP by the Group to respond to the COVID-19 pandemic outbreak are outlined in the Group's Annual Report 2020. We are monitoring the developing economic trends on the back of the COVID-19 pandemic and its impact on our business, customers and employees on an ongoing basis. There is still significant uncertainty over the magnitude of the global slowdown that will result from this pandemic, and we will continue to take appropriate actions to proactively manage evolving circumstances. Emerging risk - Climate change Principal risk / uncertainty Climate-related risks are financial and non-financial risks that may arise from accelerating transition to a lower-carbon economy to meet the goals of the Paris Agreement as well as the actual physical damage that may materialise as a result of acute or chronic weather events on the back of changing climate. Key drivers / trends Climate-related risks for the Bank's operations are subject to increasing regulatory scrutiny and require additional risk assessment actions. There is growing demand for climate-related disclosures by key stakeholders, including investors and creditors for aspects such as climate risk assessment and greenhouse gas emission reporting. Beginning with financial year 2021, as a premium-listed UK company, we are required to make disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. We recognise climate change as an emerging risk and are beginning to consider and integrate climate-related risks, both physical and transition, into the overall risk management framework and decision-making processes across the Bank. Mitigation The Group's Environmental and Social Policy governs its environmental and social risk management procedures that enable us to identify, assess, manage, and monitor environmental and social risks in our lending and investment activities. Environmental and Social Risk Management procedures ensure that all commercial transactions are reviewed and evaluated against relevant Georgian environmental, social, health and safety, and labour laws and regulations as well as global ESG best practices. The Bank conducts extensive Environmental and Social Due Diligence on its clients and provides support and guidance where needed. We are committed to integrating sustainable finance principles into our credit risk management procedures, with our dedicated Environmental and Social team being part of the credit review process. In 2020, we expanded the Bank's consideration of climate-related issues and determined suitable next steps. In 2021, we have started an engagement with an external consultant to develop a comprehensive Climate Action Strategy and integrate climate-related risks into our risk management framework and business resilience assessments. We will be making climate-related disclosures in line with the TCFD recommendations for financial year 2021. We will address each of the four TCFD pillars - Governance, Strategy, Risk Management, and Metrics and Targets. Although we are just beginning our journey to better understand climate-related risks and opportunities and formulate our climate strategy, we will lay a solid groundwork in 2021 by focusing on the following key steps: - ensure that climate-related governance is in place; - raise climate awareness across the Bank and deepen our understanding of climate-related risks and opportunities; - develop climate-related scenario analysis, including a 2��C scenario, and assess how climate-related risks, both transition and physical risks, may affect the Bank's business, strategies, and financial performance over time; - consider climate-related opportunities across business segments; - perform a gap analysis of existing practices against the TCFD recommendations to identify areas for improvements and formulate action plans; - identify metrics for assessing climate-related risks and opportunities as well as information and data needs for climate-related disclosures; - continue to report on Scope 1, 2 and 3 GHG emissions and consider portfolio GHG emissions. STATEMENT OF DIRECTORS' RESPONSIBILITIES We, the Directors, confirm that to the best of our knowledge: �� The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the United Kingdom and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; �� This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and �� This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related parties' transactions and changes therein). After considering the Group's financial and cash flow forecasts and all other available information and possible outcomes or responses to events, the Board is satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore, the Directors considered it appropriate to adopt the going concern basis in preparing this Results Report. The Directors of the Group are as follows: Neil Janin Archil Gachechiladze Hanna Loikkanen Alasdair Breach Tamaz Georgadze Jonathan Muir Cecil Quillen V��ronique McCarroll Mariam Megvinetukhutsesi By order of the Board Neil Janin Archil Gachechiladze Chairman Chief Executive Officer 16 August 2021 INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTENTS INDEPENDENT REVIEW REPORT Interim condensed consolidated statement of financial position.................................................................................................. 43 Interim condensed consolidated income statement........................................................................................................................ 44 Interim condensed consolidated statement of comprehensive income......................................................................................... 45 Interim condensed consolidated statement of changes in equity .................................................................................................. 46 Interim condensed consolidated statement of cash flows ............................................................................................................. 47 SELECTED EXPLANATORY NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Principal activities 2. Basis of preparation 3. Summary of significant accounting policies 4. Significant accounting judgements and estimates 5. Segment information 6. Cash and cash equivalents 7. Amounts due from credit institutions 8. Investment securities 9. Loans to customers and finance lease receivables 10. Taxation 11. Client deposits and notes 12. Amounts owed to credit institutions 13. Debt securities issued 14. Commitments and contingencies 15. Equity 16. Net interest income. 17. Net fee and commission income 18. Expected credit loss and impairment charge on other assets and provisions 19. Net non-recurring items 20. Risk management 21. Fair value measurements 22. Maturity analysis of financial assets and liabilities 23. Related party disclosures 24. Capital adequacy 25. Events after the reporting period INDEPENDENT REVIEW REPORT TO BANK OF GEORGIA GROUP PLC Conclusion We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 which comprises Interim Condensed Consolidated Statement of Financial Position, Interim Condensed Consolidated Income Statement, Interim Condensed Consolidated Statement of Comprehensive Income, Interim Condensed Consolidated Statement of Changes in Equity, Interim Condensed Consolidated Statement of Cash flows and related notes 1 to 25. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. Basis for Conclusion We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. As disclosed in note 2, the annual financial statements of the group will be prepared in accordance with UK adopted IFRSs. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting". Responsibilities of the directors The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority Auditor's Responsibilities for the review of the financial information In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, is based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report. Use of our report This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed. Ernst & Young LLP London 16 August 2021 INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2021 (Thousands of Georgian Lari) As at Notes 30 June 2021 (unaudited) 31 December 2020 Assets Cash and cash equivalents 6 1,719,058 1,970,955 Amounts due from credit institutions 7 2,035,487 2,016,005 Investment securities 8 2,149,725 2,544,397 Loans to customers and finance lease receivables 9 14,789,371 14,192,078 Accounts receivable and other loans 2,475 2,420 Prepayments 33,903 27,593 Inventories 10,476 10,340 Right-of-use assets 81,865 83,208 Investment properties 235,649 231,241 Property and equipment 387,014 387,851 Goodwill 33,351 33,351 Intangible assets 138,341 125,806 Income tax assets 10 190 22,033 Other assets 189,311 325,994 Assets held for sale 45,294 62,648 Total assets 21,851,510 22,035,920 Liabilities Client deposits and notes 11 13,944,383 14,020,209 Amounts owed to credit institutions 12 3,224,577 3,335,966 Debt securities issued 13 1,515,511 1,585,545 Lease liability 91,670 95,635 Accruals and deferred income 54,626 53,894 Income tax liabilities 10 74,704 62,434 Other liabilities 132,678 332,322 Total liabilities 19,038,149 19,486,005 Equity 15 Share capital 1,618 1,618 Additional paid-in capital 511,273 526,634 Treasury shares (52) (54) Other reserves 11,975 71,227 Retained earnings 2,275,882 1,939,122 Total equity attributable to shareholders of the Group 2,800,696 2,538,547 Non-controlling interests 12,665 11,368 Total equity 2,813,361 2,549,915 Total liabilities and equity 21,851,510 22,035,920 The financial statements on page 43 to 88 were approved by the Board of Directors on and signed on its behalf by: Archil Gachechiladze Chief Executive Officer 16 August 2021 Bank of Georgia Group PLC Registered No. 1091701 The accompanying selected explanatory Notes on pages 49 to 88 are an integral part of these interim condensed consolidated financial statements. INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT For the six months ended 30 June 2021 (Thousands of Georgian Lari) For the six months ended Notes 30 June 2021 (unaudited) 30 June 2020 (unaudited) Interest income calculated using EIR method 861,073 751,436 Other interest income 14,143 15,928 Interest income 875,216 767,364 Interest expense (427,472) (390,473) Deposit insurance fees (7,163) (4,874) Net interest income 16 440,581 372,017 Fee and commission income 171,173 125,284 Fee and commission expense (65,317) (52,271) Net fee and commission income 17 105,856 73,013 Net foreign currency gain 41,258 53,404 Net other income 50,920 15,707 Operating income 638,615 514,141 Salaries and other employee benefits (129,035) (117,194) Administrative expenses (53,631) (49,470) Depreciation, amortisation and impairment (44,915) (42,529) Other operating expenses (1,596) (1,974) Operating expenses (229,177) (211,167) Profit from associates (4,132) 414 Operating income before cost of risk 405,306 303,388 Expected credit loss on loans to customers 18 (3,096) (216,568) Expected credit loss on finance lease receivables 18 (1,614) (5,273) Other expected credit loss 18 11,788 (21,744) Impairment charge on other assets and provisions 18 (37,162) (8,038) Cost of risk (30,084) (251,623) Net operating income before non-recurring items 375,222 51,765 Net non-recurring items 19 (50) (41,586) Profit before income tax expense 375,172 10,179 Income tax (expense) gain 10 (34,078) 4,560 Profit for the period 341,094 14,739 Total profit attributable to: - shareholders of the Group 339,454 14,659 - non-controlling interests 1,640 80 341,094 14,739 Basic earnings per share 15 7.0809 0.3080 Diluted earnings per share 15 7.0368 0.3079 INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the six months ended 30 June 2021 (Thousands of Georgian Lari) For the six months ended Notes 30 June 2021 (unaudited) 30 June 2020 (unaudited) Profit for the period 341,094 14,739 Other comprehensive (loss) income Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods: - Net change in fair value on investments in debt instruments measured at fair value through other comprehensive income (FVOCI) 8 (32,345) 34,171 - Realised gain on financial assets measured at FVOCI (25,338) (1,323) -Change in allowance for expected credit losses on investments in debt instruments measured at FVOCI reclassified to the consolidated income statement (1,306) 205 - Loss from currency translation differences (2,511) (4,789) Income tax impact 10 - - Net other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods (61,500) 28,264 Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods: - Net income (loss) on investments in equity instruments designated at FVOCI 1,185 (828) Net other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods 1,185 (828) Other comprehensive (loss) income for the period, net of tax (60,315) 27,436 Total comprehensive income for the period 280,779 42,175 Total comprehensive income attributable to: - shareholders of the Group 279,495 41,943 - non-controlling interests 1,284 232 280,779 42,175 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended 30 June 2021 (Thousands of Georgian Lari) Attributable to shareholders of the Group Non-controlling interests Total equity Share capital Additional paid-in capital Treasury shares Other reserves Retained earnings Total 31 December 2019 1,618 492,072 (64) (7,481) 1,655,256 2,141,401 9,507 2,150,908 Profit for the six months ended 30 June 2020 (unaudited) - - - - 14,659 14,659 80 14,739 Other comprehensive income for the six months ended 30 June 2020 (unaudited) - - - 32,899 (5,615) 27,284 152 27,436 Total comprehensive income for the six months ended 30 June 2020 (unaudited) - - - 32,899 9,044 41,943 232 42,175 Increase in equity arising from share-based payments - 28,137 21 - - 28,158 - 28,158 Purchase of treasury shares - (19,322) (11) - - (19,333) - (19,333) Dividends to shareholders of the Group (Note 15) - - - - (2,136) (2,136) - (2,136) Increase in share capital of subsidiaries - - - 9 - 9 18 27 Dilution of interests in subsidiaries - - - (10) - (10) 10 - 30 June 2020 (unaudited) 1,618 500,887 (54) 25,417 1,662,164 2,190,032 9,767 2,199,799 31 December 2020 1,618 526,634 (54) 71,227 1,939,122 2,538,547 11,368 2,549,915 Profit for the six months ended 30 June 2021 (unaudited) - - - - 339,454 339,454 1,640 341,094 Other comprehensive income for the six months ended 30 June 2021 (unaudited) - - - (59,239) (720) (59,959) (356) (60,315) Total comprehensive income for the six months ended 30 June 2021 (unaudited) - - - (59,239) 338,734 279,495 1,284 280,779 Increase in equity arising from share-based payments - 21,838 22 - - 21,860 - 21,860 Purchase of treasury shares - (37,199) (20) - - (37,219) - (37,219) Dividends to shareholders of the Group (Note 15) - - - - (1,974) (1,974) - (1,974) Increase in share capital of subsidiaries - - - (13) - (13) 13 - 30 June 2021 1,618 511,273 (52) 11,975 2,275,882 2,800,696 12,665 2,813,361 . INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended 30 June 2021 (Thousands of Georgian Lari) For the six months ended Notes 30 June 2021 (unaudited) 30 June 2020 (unaudited) Cash flows from operating activities Interest received 884,965 578,260 Interest paid (430,728) (378,469) Fees and commissions received 171,206 140,288 Fees and commissions paid (65,317) (52,271) Net cash inflow from real estate 17,397 6,284 Net realised gain from foreign currencies 56,971 52,059 Recoveries of loans to customers previously written off 9 33,250 14,592 Other income received (expense paid) 3,059 (3,442) Salaries and other employee benefits paid (107,175) (89,036) General and administrative and operating expenses paid (60,973) (61,418) Cash flows from operating activities before changes in operating assets and liabilities 502,655 206,847 Net (increase) decrease in operating assets Amounts due from credit institutions (93,399) 29,290 Loans to customers and finance lease receivables (1,037,324) (194,329) Prepayments and other assets (6,528) 6,895 Net increase (decrease) in operating liabilities Amounts due to credit institutions (34,569) (528,940) Debt securities issued 16,893 (212,495) Client deposits and notes 223,886 1,007,920 Other liabilities (7,234) (41,188) Net cash flows used in operating activities before income tax (435,620) 274,000 Income tax paid - (17,500) Net cash flows used in operating activities (435,620) 256,500 Cash flows from (used in) investing activities Net sales (purchases) of investment securities 356,559 (288,691) Proceeds from sale of investment properties and assets held for sale 61,115 23,512 Proceeds from sale of property and equipment and intangible assets 508 317 Purchase of property and equipment and intangible assets (53,804) (65,233) Dividends received 401 632 Net cash flows from (used in) investing activities 364,779 (329,463) For the six months ended Notes 30 June 2021 (unaudited) 30 June 2020 (unaudited) Cash flows from (used in) financing activities Repurchase of debt securities issued (19,625) - Repayment of the principal portion of the debt securities issued (15,614) (440,410) Cash payments for the principal portion of the lease liability (14,582) (2,502) Dividends paid (1,980) (2,164) Purchase of treasury shares (37,219) (19,333) Net cash used in financing activities (89,020) (464,409) Effect of exchange rates changes on cash and cash equivalents (92,051) 17,445 Effect of expected credit losses on cash and cash equivalents 15 58 Net decrease in cash and cash equivalents (251,897) (519,869) Cash and cash equivalents, beginning of the period 6 1,970,955 2,153,624 Cash and cash equivalents, end of the period 6 1,719,058 1,633,755 Bank of Georgia Group PLC and Subsidiaries Selected Explanatory Notes to Interim Condensed Consolidated Financial Statements (Thousands of Georgian Lari) 1. Principal activities Bank of Georgia Group PLC ("BOGG") is a public limited liability company incorporated in England and Wales with registered number 10917019. BOGG holds 99.55% of the share capital of JSC Bank of Georgia (the "Bank") as at 30 June 2021, representing the Bank's ultimate parent company. Together with the Bank and other subsidiaries, the Group makes up a group of companies (the "Group") and provides banking, leasing, brokerage and investment management services to corporate and individual customers. The shares of BOGG ("BOGG Shares") are 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 21 May 2018. The Bank is the Group's main operating unit and accounts for most of the Group's activities. JSC Bank of Georgia was established on 21 October 1994 as a joint stock company ("JSC") under the laws of Georgia. The Bank operates under a general banking licence issued by the National Bank of Georgia ("NBG"; the Central Bank of Georgia) on 15 December 1994. The Bank accepts deposits from the public and extends credit, transfers payments in Georgia and internationally, and exchanges currencies. Its main office is in Tbilisi, Georgia. At 30 June 2021, the Bank has 211 operating outlets in all major cities of Georgia (31 December 2020: 211). The Bank's registered legal address is 29a Gagarini Street, Tbilisi 0160, Georgia. BOGG's registered legal address is 42 Brook Street, London United Kingdom W1K 5DB. As at 30 June 2021, 31 December 2020, the following shareholders owned more than 3% of the total outstanding shares of BOGG. Other shareholders individually owned less than 3% of the outstanding shares. Shareholder As at 30 June 2021 (unaudited) 31 December 2020 JSC Georgia Capital 19.90% 19.90% Fidelity Investments 6.35% 6.15% Harding Loevner LP 4.34% 4.50% Van Eck Associates Corporation 3.48% 3.26% Dimensional Fund Advisors (DFA) LP 2.99% 3.04% Others 62.94% 63.15% Total 100.00% 100.00% * For the purposes of calculating percentage of shareholding, the denominator includes total number of issued shares, which includes shares held in the trust for the share-based compensation purposes of the Group. ** JSC Georgia Capital will exercise its voting rights at the Group's general meetings in accordance with the votes cast by all other Group Shareholders, as long as JSC Georgia Capital's percentage holding in Bank of Georgia Group PLC is greater than 9.9%. 2. Basis of preparation General The financial information set out in these interim condensed consolidated financial statements does not constitute Bank of Georgia Group PLC's statutory financial statements within the meaning of section 434 of the Companies Act 2006. Statutory financial statements were prepared for the year ended 31 December 2020 in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and reported on by BOGG's auditors and delivered to the Registrar of Companies. The auditor's report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. These interim condensed consolidated financial statements of Bank of Georgia Group PLC for the six months ended 30 June 2021 were prepared, in accordance with UK adopted International Accounting Standard 34 "Interim Financial Reporting" and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. The preparation of the interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported income and expense, assets and liabilities and disclosure of contingencies at the date of the interim condensed consolidated financial statements. Although these estimates and assumptions are based on management's best judgment at the date of the interim condensed consolidated financial statements, actual results may differ from these estimates. Assumptions and significant estimates other than disclosed in these interim condensed consolidated financial statements are consistent with those applied in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2020. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements as at and for the year ended 31 December 2020, signed and authorized for release on 30 March 2021. These interim condensed consolidated financial statements are presented in thousands of Georgian Lari ("GEL"), except per share amounts, which are presented in Georgian Lari, and unless otherwise noted. The interim condensed consolidated financial statements are unaudited, reviewed by the auditors and their review conclusion is included in this report. Going concern The Board of Directors of BOGG has made an assessment of the Group's ability to continue as a going concern which also included assessment of forecast cash flows as a result of COVID-19 pandemic. The assessment specifically incorporated analysis of the COVID-19 pandemic impact implications on the Group's projected performance, liquidity, funding and capital positions. Based on this, the Board of Directors is satisfied that it has the resources to continue in business for a period of at least 12 months from the date of approval of the interim condensed consolidated financial statements. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern for the foreseeable future. Therefore, the interim condensed consolidated financial statements continue to be prepared on the going concern basis. 3. Summary of significant accounting policies Basis of consolidation The accounting policies and methods of computation applied in the preparation of these interim condensed consolidated financial statements are consistent with those disclosed in the annual consolidated financial statements of the Group as at and for the year ended 31 December 2020. Amendments effective from 1 January 2021 Covid-19-Related Rent Concessions beyond 30 June 2021 - Amendments to IFRS 16. In March 2021, the Board amended the conditions of the practical expedient in IFRS 16 that provides relief to lessees from applying the IFRS 16 guidance on lease modifications to rent concessions arising as a direct consequence of the covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. Following the amendment, the practical expedient now applies to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022, provided the other conditions for applying the practical expedient are met. The amendment is effective for annual periods beginning on or after 1 April 2021. The Group has early adopted the Amendment. The Group has adopted the amendment, however the effect was not material for the Group's interim condensed consolidated financial statements. Interest Rate Benchmark Reform - Phase 2 Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR). The amendments include a practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest. Inherent in allowing the use of this practical expedient is the requirement that the transition from an IBOR benchmark rate to an RFR takes place on an economically equivalent basis with no value transfer having occurred. Any other changes made at the same time, such as a change in the credit spread or maturity date, are assessed. If they are substantial, the instrument is derecognised. If they are not substantial, the updated effective interest rate (EIR) is used to recalculate the carrying amount of the financial instrument, with any modification gain or loss recognised in profit or loss. The amendment is effective for annual reporting periods beginning on or after 1 January 2021. There were no IBOR replacements during the first six months of 2021, therefore the amendment did not have effect on Group's interim condensed consolidated financial statements. The Group is currently assessing the impact of the amendment for the future periods. 4. Significant accounting judgements and estimates In the process of applying the Group's accounting policies, the Board of Directors and management use their judgement and make estimates in determining the amounts recognised in the interim condensed consolidated financial statements. Given the unprecedented nature of the COVID-19 pandemic and the uncertainties associated with it, similar to the prior year, the Group continued to apply management overlays to the existing methodology and accounting judgements and estimates., The Group has made a number of changes in the significant judgements that were applied in the pre-COVID-19 reporting periods. The most significant changes to the standard methodology made for the reporting date were as follows: Allowance for impairment of financial assets Significant Increase in Credit Risk (SICR) Back in 2020, in response to COVID-19 outbreak the Group implemented an initiative to grant 3 months payment holidays to its borrowers in order to significantly reduce the requirement for customers to physically visit Bank branches. Subsequent to that a number of restructurings (including prolongations, partial or full grace on principal and interest) were granted to customers who approached the bank with the request. In assessing whether the credit risk of a loan has significantly increased as a result, the Group has identified a series of qualitative and quantitative criteria based on undertaking the holistic analysis of various factors including those which are specific to a particular financial instrument or to a borrower as well as those applicable to particular sub-portfolios. Retail and Micro portfolio: Transfer to stage 2 or 3 was made based on analysis of payment-to-income (PTI) ratios or other financial information as available, overdue days, grace period granted and other relevant parameters. If the borrower has made at least two consecutive payments subsequent to the grace period, the loan was not transferred to stage 3 and remained within the same stage unless other stage transfer rules were applicable. Further, for the borrowers for which the credit risk was considered as significantly increased, Probability of Default (PD) of 100% were assigned in the downside scenario and the ECL was calculated as a weighted average of the scenario results. Commercial and SME portfolio: The Group applied individual approach to identify if SICR occurred since loan origination. The loan was transferred to stage 2 only when observable evidence of financial difficulties of the borrower indicated that the level of risk has increased significantly since loan origination. Measurement of expected credit losses Loss given default (LGD): LGD is defined as the likely loss in case of a counterparty default. It provides an estimation of the exposure that cannot be recovered in a default event and therefore captures the severity of a loss. The determination of the LGD takes into account expected future cash flows from collateral and other credit enhancements, or expected payouts from bankruptcy proceedings for unsecured claims and where applicable time to realisation of collateral and the seniority of claims. The Group segments its financial instruments into homogeneous portfolios, based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g. product type, wider range of collateral types). Based on this information, the Group estimates the recovery rate (other than through collateral), cure rate and probability of re-default. Recovery through collateral is further considered in LGD calculations individually for each financial instrument. With the purpose to incorporate the uncertainties caused by the COVID-19 pandemic while determination of expected losses, the Group further discounted recovery and cure rates by 20 percent. Forward-looking information Forward-looking variable assumptions To incorporate forward-looking information into the Group's allowance for credit losses, the Group uses the macroeconomic forecasts provided by National Bank of Georgia for Group companies operating in Georgia, while data used by Belarusky Narodny Bank ("BNB") is provided by a non-governmental research centre operating in Belarus. Macroeconomic variables covered by these forecasts and which the Group incorporated in its ECL model, include: GDP growth, foreign exchange rate and inflation rate which are updated for anticipated impact of COVID-19 pandemic. 4. Significant accounting judgements and estimates (continued) Forward-looking variable assumptions (continued) The most significant period end assumptions used for ECL estimate as at 30 June 2021 per geographical segments are set out below. The scenarios "base", "upside" and "downside" were used for all portfolios. Georgia Key drivers ECL scenario Assigned weight As at 30 June 2021 Assigned weight As at 31 December 2020 2021 2022 2023 2021 2022 2023 GDP growth in % Upside 25% 5.00% 6.00% 5.00% 25.0% -3.00% 6.00% 5.00% Base case 50% 4.00% 5.00% 5.00% 50.0% -4.00% 4.50% 5.00% Downside 25% 1.00% 3.00% 4.50% 25.0% -9.00% 2.50% 4.00% GEL/USD exchange rate Upside 25% 5.00% 5.00% 0.00% 25.0% 5.00% 5.00% 0.00% Base case 50% 0.00% 0.00% 0.00% 50.0% 0.00% 0.00% 0.00% Downside 25% -10.00% -5.00% -5.00% 25.0% -10.00% -5.00% 5.00% CPI inflation rate in % Upside 25% 4.00% 3.00% 3.00% 25.0% 5.50% 4.00% 3.00% Base case 50% 4.50% 3.00% 3.00% 50.0% 4.50% 1.50% 2.50% Downside 25% 7.00% 4.00% 2.50% 25.0% 7.00% 2.00% 2.50% The above information is based on the macroeconomic forecasts provided by the NBG as of March 2021. Belarus Key drivers ECL scenario Assigned weight As at 30 June 2021 Assigned weight As at 31 December 2020 2021Q3 2021Q4 2022Q1 2022Q2 2021Q1 2021Q2 2021Q3 2021Q4 GDP growth in % Upside 10% -0.40% 3.30% 1.80% 4.40% 10% -0.40% 3.30% 1.80% 4.40% Base case 50% -1.80% 1.30% -0.95% 1.20% 50% -1.80% 1.30% -0.95% 1.20% Downside 40% -3.20% -0.90% -3.65% -2.00% 40% -3.20% -0.90% -3.65% -2.00% BYN/USD exchange rate % Upside 10% -2.89% 1.95% 0.04% -1.00% 10% -2.89% 1.95% 0.04% -1.00% Base case 50% 1.07% 3.20% 1.12% 0.41% 50% 1.07% 3.20% 1.12% 0.41% Downside 40% 5.04% 4.36% 2.10% 1.66% 40% 5.04% 4.36% 2.10% 1.66% CPI inflation rate in % Upside 10% 0.48% 0.73% 0.10% 1.58% 10% 0.48% 0.73% 0.10% 1.58% Base case 50% 2.02% 1.20% 0.48% 1.75% 50% 2.02% 1.20% 0.48% 1.75% Downside 40% 3.56% 1.66% 0.85% 1.90% 40% 3.56% 1.66% 0.85% 1.90% All other parameters held constant, increase in GDP growth, appreciation of local currency and decrease of inflation would result in decrease in ECL, with opposite changes resulting in ECL increase. GDP growth input has the most significant impact on ECL, followed by foreign exchange rate and inflation. Retail portfolio ECL is less affected by foreign exchange rate inputs due to larger share of GEL-denominated exposures. However, retail portfolio ECL is affected by inflation, which does not have a significant impact on corporate ECL. The table below shows the sensitivity of the recognised ECL amounts to the forward looking assumptions used in the model. For these purposes, 100% weight is assigned to each macroeconomic scenario separately and respective ECL is recalculated. Sensitivity of ECL to forward looking assumptions As at 30 June 2021 Reported ECL Reported ECL coverage ECL coverage by scenarios Key drivers Upside Base case Downside Commercial loans 158,418 3.03% 3.01% 3.02% 3.06% Residential mortgage loans 52,454 1.37% 1.24% 1.25% 1.73% Micro and SME loans 87,253 2.54% 2.31% 2.35% 3.14% Consumer loans 111,525 4.62% 4.43% 4.52% 5.02% Gold - pawn loans 722 0.47% 0.32% 0.33% 0.92% As at 31 December 2020 Reported ECL Reported ECL coverage ECL coverage by scenarios Key drivers Upside Base case Downside Commercial loans 178,556 3.49% 3.46% 3.48% 3.53% Residential mortgage loans 48,609 1.28% 1.05% 1.06% 1.95% Micro and SME loans 102,352 3.13% 2.79% 2.83% 4.06% Consumer loans 113,801 5.15% 4.78% 4.82% 6.18% Gold - pawn loans 228 0.22% 0.21% 0.21% 0.23% 4. Significant accounting judgements and estimates (continued) Post-model adjustments Limitations in the Group's impairment model or input data may be identified through the on-going assessment and validation of the output of the models. If management considers that impairment models do not sufficiently capture all material risks, appropriate adjustments are made to the ECL. In order to incorporate the uncertainties related to the economic outlook caused by COVID-19 pandemic into ECL calculated as at the end of the reporting period, the Group applied post-model adjustments. The effect of such overlays as at 30 June 2021 amounted to GEL 85,132 . As at 30 June 2021 Modelled ECL Post-model adjustments and management overlays Total ECL Adjustments as a % of total ECL Commercial loans 152,146 6,272 158,418 4.0% Residential mortgage loans 24,015 28,439 52,454 54.2% Micro and SME loans 65,459 21,794 87,253 25.0% Consumer loans 83,178 28,347 111,525 25.4% Gold - pawn loans 442 280 722 38.8% Total 325,240 85,132 410,372 20.7% As at 31 December 2020 Modelled ECL Post-model adjustments and management overlays Total ECL Adjustments as a % of total ECL Commercial loans 173,946 4,610 178,556 2.6% Residential mortgage loans 21,810 26,799 48,609 55.1% Micro and SME loans 75,525 26,827 102,352 26.2% Consumer loans 86,570 27,231 113,801 23.9% Gold - pawn loans 174 54 228 23.7% Total 358,025 85,521 443,546 19.3% Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded in the interim condensed consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values (Note 21). No specific adjustment due to COVID-19 was applied. Measurement of fair value of investment properties The Group performs valuation of its investment properties with a sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. The last date of valuation of investment properties was 31 December 2020. In order to identify whether there was any significant change in the real estate market since last revaluation that could indicate that investment properties are not stated at fair value as at the reporting date, the Group hired an independent valuator to perform real estate market research. The research results have revealed that no material change was noted on the real estate market since year ended 2020. Therefore, no revaluation was applied as at the reporting date. 5. Segment information The Group disaggregated revenue from contracts with customers by products and services for each of the segments, as the Group believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. For management purposes, the Group is organised into the following operating segments based on products and services as follows: RB - Retail Banking (excluding Retail Banking of BNB) - principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfers and settlement services, and handling of customers' deposits for both individuals and legal entities. The Retail Banking business targets the emerging retail, mass retail and mass affluent segments, together with small and medium-sized enterprises, and micro businesses. CIB - Corporate Investment Banking - comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients and brokerage services through Galt & Taggart. BNB - Comprising JSC Belarusky Narodny Bank mainly, principally providing retail and corporate banking services in Belarus. Management monitors the operating results of its segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as explained in the table below, is measured in the same manner as profit or loss in the consolidated income statement. Transactions between operating segments are on an arm's length basis in a similar manner to transactions with third parties. The Group's operations are primarily concentrated in Georgia, except for BNB, which operates in Belarus. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group's operating income in 2021 or 2020. 5. Segment information (continued) The following table presents the income statement and certain asset and liability information regarding the Group's operating segments as at and for the six months period ended 30 June 2021: Retail Banking Corporate Investment Banking BNB Eliminations Group Total Net interest income 266,512 155,959 18,099 11 440,581 Net fee and commission income 81,608 20,977 3,192 79 105,856 Net foreign currency gain 21,135 13,548 6,575 - 41,258 Net other income 18,343 33,245 (184) (484) 50,920 Operating income 387,598 223,729 27,682 (394) 638,615 Operating expenses (168,740) (42,833) (17,998) 394 (229,177) Profit from associates (4,132) - - - (4,132) Operating income before cost of risk 214,726 180,896 9,684 - 405,306 Cost of risk (41,731) 11,341 306 - (30,084) Net operating income before non-recurring items 172,995 192,237 9,990 - 375,222 Net non-recurring expense/loss 367 (74) (343) - (50) Profit before income tax 173,362 192,163 9,647 - 375,172 Income tax expense (14,352) (17,778) (1,948) - (34,078) Profit for the period 159,010 174,385 7,699 - 341,094 Assets and liabilities Total assets 13,842,108 7,102,932 978,234 (71,764) 21,851,510 Total liabilities 12,251,180 6,014,036 844,697 (71,764) 19,038,149 Other segment information Property and equipment 27,054 2,328 275 - 29,657 Intangible assets 20,441 1,732 2,792 - 24,965 Capital expenditure 47,495 4,060 3,067 - 54,622 Depreciation, amortisation and impairment (38,011) (4,512) (2,392) - (44,915) - 5. Segment information (continued) The following table presents the income statement information regarding the Group's operating segments for the six months period ended 30 June 2020 and certain asset and liability information as at 31 December 2020: Retail Banking Corporate Investment Banking BNB Eliminations Group Total Net interest income 220,934 132,451 18,626 6 372,017 Net fee and commission income 51,581 18,152 3,190 90 73,013 Net foreign currency gain (loss) 29,159 19,965 4,280 - 53,404 Net other (expense) income 5,991 9,506 683 (473) 15,707 Operating income 307,665 180,074 26,779 (377) 514,141 Operating expenses (156,625) (38,115) (16,804) 377 (211,167) Profit from associates 414 - - - 414 Operating income (expense) before cost of risk 151,454 141,959 9,975 - 303,388 Cost of risk (147,835) (98,438) (5,350) - (251,623) Net operating income (loss) before non-recurring items 3,619 43,521 4,625 - 51,765 Net non-recurring expense/loss (40,178) (1,374) (34) - (41,586) Profit (loss) before income tax (36,559) 42,147 4,591 - 10,179 Income tax expense 8,000 (2,398) (1,042) - 4,560 Profit (loss) for the period (28,559) 39,749 3,549 - 14,739 Assets and liabilities Total assets 13,382,575 7,699,107 1,018,652 (64,414) 22,035,920 Total liabilities 11,963,455 6,700,867 886,097 (64,414) 19,486,005 Other segment information Property and equipment 65,097 5,910 616 - 71,623 Intangible assets 36,176 2,958 2,291 - 41,425 Capital expenditure 101,273 8,868 2,907 - 113,048 Depreciation, amortisation and impairment (35,499) (4,907) (2,123) - (42,529) - 6. Cash and cash equivalents As at 30 June 2021 (unaudited) 31 December 2020 Cash on hand 674,703 703,459 Current accounts with central banks, excluding obligatory reserves 253,773 158,588 Current accounts with credit institutions 536,504 590,331 Time deposits with credit institutions with maturities of up to 90 days 254,134 518,648 Cash and cash equivalents, gross 1,719,114 1,971,026 Less - Allowance for expected credit loss (56) (71) Cash and cash equivalents, net 1,719,058 1,970,955 As at 30 June 2021, GEL 625,109 (31 December 2020: GEL 985,848 ) was placed on current and time deposit accounts with internationally recognised OECD banks and central banks that are the counterparties of the Group in performing international settlements. The Group earned up to 10.25% interest per annum on these deposits (31 December 2020: up to 0.21%). Management does not expect any losses from non-performance by the counterparties holding cash and cash equivalents, and there are no material differences between their book and fair values. 7. Amounts due from credit institutions As at 30 June 2021 (unaudited) 31 December 2020 Obligatory reserves with central banks 1,957,896 1,994,662 Time deposits with maturities of more than 90 days 26,169 8,424 Deposits pledged as security for open commitments 4,946 1,856 Inter-bank loan receivables 46,850 11,463 Amounts due from credit institutions, gross 2,035,861 2,016,405 Less - Allowance for expected credit loss (374) (400) Amounts due from credit institutions, net 2,035,487 2,016,005 Obligatory reserves with central banks represent amounts deposited with the NBG and National Bank of the Republic of Belarus (the "NBRB"). Credit institutions are required to maintain cash deposits (obligatory reserve) with the NBG and with the NBRB, the amount of which depends on the level of funds attracted by the credit institution. The Group's ability to withdraw these deposits is restricted by regulation. The Group earned up to 0.00% interest on obligatory reserves with NBG and NBRB for the period ended 30 June 2021 (31 December 2020: 1.25%). As at 30 June 2021, inter-bank loan receivables include GEL 46,849 deposits placed with non-OECD banks (31 December 2020: 11,464). 8. Investment securities As at 30 June 2021 (unaudited) 31 December 2020 Investment securities measured at FVOCI - debt instruments 2,139,920 2,539,019 Investment securities designated as measured at FVOCI - equity investments 9,805 5,378 Investment securities 2,149,725 2,544,397 As at 30 June 2021 (unaudited) 31 December 2020 Ministry of Finance of Georgia treasury bonds 1,155,389 1,344,404 Ministry of Finance of Georgia treasury bills 7,116 36,879 Foreign treasury bonds 122,712 159,537 Certificates of deposit of central banks 14,232 - Other debt instruments 840,471 998,199 Investment securities measured at FVOCI - debt instruments 2,139,920 2,539,019 * Treasury bonds of GEL 999,059 was pledged for short-term loans from the NBG (31 December 2020: GEL 1,044,066), and 90,360 was pledged as security for cash kept by the NBG at the Group's premises under cash custodian services (31 December 2020: 8,188). ** No treasury bills were pledged for short-term loans from the NBG (31 December 2020: GEL Nil), and Nil was pledged as security for cash kept by the NBG at the Group's premises under cash custodian services (31 December 2020: 9,180). *** Corporate bonds of GEL 619,011 was pledged for short-term loans from the NBG (31 December 2020: GEL 685,901 ). Other debt instruments as at 30 June 2021 mainly comprises bonds issued by the European Bank for Reconstruction and Development of GEL 204,811 (31 December 2020: GEL 312,144), GEL-denominated bonds issued by International Finance Corporation of GEL 205,655 (31 December 2020: GEL 211,250), GEL-denominated bonds issued by The Netherlands Development Finance Company of GEL 163,444 (31 December 2020: GEL 162,949), GEL-denominated bonds issued by Black Sea Trade and Development Bank of GEL 126,379 (31 December 2020: GEL 151,592), and GEL-denominated bonds issued by Asian Development Bank of GEL 61,571 (31 December 2020: GEL 61,350). Foreign treasury bonds comprise of Ministry of Finance of the Republic of Lithuania treasury bonds in amount of GEL 16,817 (31 December 2020: 26,982), Ministry of Finance of the Republic of Poland treasury bonds in amount of GEL 16,567 (31 December 2020: Nil), Ministry of Finance of the Republic of Belarus treasury bonds in amount of GEL 89,328 (31 December 2020: GEL 79,563) and US Treasury Notes in amount of Nil (31 December 2020: 52,992). 9. Loans to customers and finance lease receivables As at 30 June 2021 (unaudited) 31 December 2020 Commercial loans 5,229,781 5,123,393 Residential mortgage loans 3,839,288 3,796,384 Micro and SME loans 3,436,763 3,269,454 Consumer loans 2,413,354 2,208,013 Gold - pawn loans 152,836 103,384 Loans to customers at amortised cost, gross 15,072,022 14,500,628 Less - Allowance for expected credit loss (410,372) (443,546) Loans to customers at amortised cost, net 14,661,650 14,057,082 Finance lease receivables, gross 132,183 139,372 Less - Allowance for expected credit loss (4,462) (4,376) Finance lease receivables, net 127,721 134,996 Total loans to customers and finance lease receivables 14,789,371 14,192,078 As at 30 June 2021, loans to customers carried at GEL 441,221 (31 December 2020: GEL 692,052 ) were pledged for short-term loans from the NBG. Expected credit loss Movements of the gross loans and respective allowance for expected credit loss / impairment of loans to customers by class are provided in the table below, within which the new financial asset originated or purchased and the assets repaid during the year include the effects from revolving loans and increase of exposure to clients, where existing loans have been repaid with new contracts issued during the year. All new financial assets are originated either in Stage 1 or POCI category. Utilisation of additional tranches on existing financial assets are reflected in Stage 2 or Stage 3 if the credit risk of the borrower has deteriorated since initiation. Currency translation differences relate to loans issued by the subsidiaries of the Group whose functional currency is different from the presentation currency of the Group, while foreign exchange movement relates to foreign currency denominated loans issued by the Group. Net other changes in gross loan balances includes the effects of changes in accrued interest. Net other measurement of ECL includes the effect of changes in ECL due to post-model adjustments, changes in PDs and other inputs, as well as the effect from ECL attributable to changes in accrued interest. 9. Loans to customers and finance lease receivables (continued) Commercial loans at amortised cost, gross: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 4,491,078 382,118 241,821 8,376 5,123,393 New financial asset originated or purchased 2,130,157 23,968 440 - 2,154,565 Transfer to Stage 1 74,143 (74,143) - - - Transfer to Stage 2 (116,171) 136,286 (20,115) - - Transfer to Stage 3 (4,319) (26,133) 30,452 - - Assets derecognised due to pass-through arrangement (25,034) (1,582) (124) - (26,740) Assets repaid (1,868,503) (54,959) (43,838) (66) (1,967,366) Resegmentation 98,411 36,294 - - 134,705 Impact of modifications 106 (2) 2 (2) 104 Write-offs - - (3,991) - (3,991) Recoveries of amounts previously written off - - 18,656 66 18,722 Unwind of discount - - 1,371 (8) 1,363 Currency translation differences (2,966) (298) 69 - (3,195) Foreign exchange movement (212,789) (13,481) (7,744) (264) (234,278) Net other changes 27,186 1,065 4,058 190 32,499 Balance at 30 June 2021 4,591,299 409,133 221,057 8,292 5,229,781 Individually assessed 3,441 - 210,666 - 214,107 Collectively assessed 4,587,858 409,133 10,391 8,292 5,015,674 Balance at 30 June 2021 4,591,299 409,133 221,057 8,292 5,229,781 Commercial loans at amortised cost, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 33,823 8,157 136,572 4 178,556 New financial asset originated or purchased 2,719 1,378 150 (12) 4,235 Transfer to Stage 1 821 (821) - - - Transfer to Stage 2 (566) 8,910 (8,344) - - Transfer to Stage 3 (46) (75) 121 - - Impact on ECL of exposures transferred between stages during the year (275) (8,179) 2,401 - (6,053) Assets derecognised due to pass-through arrangement (132) (11) (70) - (213) Assets repaid (5,920) (467) (28,721) (66) (35,174) Resegmentation 193 298 - - 491 Impact of modifications 1 1 2 - 4 Write-offs - - (3,991) - (3,991) Recoveries of amounts previously written off - - 18,656 66 18,722 Unwind of discount - - 1,371 (8) 1,363 Currency translation differences (197) (50) (351) 12 (586) Foreign exchange movement (1,220) (127) (3,616) - (4,963) Net other measurement of ECL (9,201) (1,810) 16,993 45 6,027 Balance at 30 June 2021 20,000 7,204 131,173 41 158,418 Individually assessed - - 126,790 - 126,790 Collectively assessed 20,000 7,204 4,383 41 31,628 Balance at 30 June 2021 20,000 7,204 131,173 41 158,418 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Residential mortgage loans at amortised cost, gross: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 3,287,844 314,215 168,476 25,849 3,796,384 New financial asset originated or purchased 693,876 17 102 3,967 697,962 Transfer to Stage 1 288,606 (267,608) (20,998) - - Transfer to Stage 2 (175,439) 305,798 (130,359) - - Transfer to Stage 3 (109,280) (69,801) 179,081 - - Assets derecognised due to pass-through arrangement - - - - - Assets repaid (454,609) (56,060) (37,834) (4,739) (553,242) Resegmentation (2) - - - (2) Impact of modifications 995 666 621 12 2,294 Write-offs - - (2,853) (413) (3,266) Recoveries of amounts previously written off - - 584 92 676 Unwind of discount - - 49 (6) 43 Currency translation differences (544) (35) (6) - (585) Foreign exchange movement (87,070) (4,359) (5,696) (879) (98,004) Net other changes (1,691) (1,569) 246 42 (2,972) Balance at 30 June 2021 3,442,686 221,264 151,413 23,925 3,839,288 Individually assessed - - 420 - 420 Collectively assessed 3,442,686 221,264 150,993 23,925 3,838,868 Balance at 30 June 2021 3,442,686 221,264 151,413 23,925 3,839,288 Residential mortgage loans at amortised cost, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 8,652 11,410 25,236 3,311 48,609 New financial asset originated or purchased 11 1 7 101 120 Transfer to Stage 1 12,885 (10,097) (2,788) - - Transfer to Stage 2 (1,898) 19,640 (17,742) - - Transfer to Stage 3 (708) (3,492) 4,200 - - Impact on ECL of exposures transferred between stages during the year (4,905) (15,759) 11,312 - (9,352) Assets derecognised due to pass-through arrangement - - - - - Assets repaid (1,016) (2,021) (5,618) (776) (9,431) Resegmentation 2 - - - 2 Impact of modifications - - 11 10 21 Write-offs - - (2,853) (413) (3,266) Recoveries of amounts previously written off - - 584 92 676 Unwind of discount - - 49 (6) 43 Currency translation differences - (1) (1) - (2) Foreign exchange movement (251) 211 (1,027) (217) (1,284) Net other measurement of ECL 840 5,103 19,307 1,068 26,318 Balance at 30 June 2021 13,612 4,995 30,677 3,170 52,454 Individually assessed - - 31 - 31 Collectively assessed 13,612 4,995 30,646 3,170 52,423 Balance at 30 June 2021 13,612 4,995 30,677 3,170 52,454 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Micro and SME loans at amortised cost, gross: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 2,649,107 439,405 177,471 3,471 3,269,454 New financial asset originated or purchased 1,526,045 9,209 549 2,677 1,538,480 Transfer to Stage 1 233,956 (227,297) (6,659) - - Transfer to Stage 2 (351,408) 413,106 (61,698) - - Transfer to Stage 3 (68,830) (64,838) 133,668 - - Assets derecognised due to pass-through arrangement - - - - - Assets repaid (886,873) (167,344) (48,730) (2,540) (1,105,487) Resegmentation (120,747) (37,004) (11) - (157,762) Impact of modifications 43 115 (2,419) (3) (2,264) Write-offs - - (23,853) (171) (24,024) Recoveries of amounts previously written off - - 4,692 8 4,700 Unwind of discount - - 213 (9) 204 Currency translation differences (1,246) (68) (230) - (1,544) Foreign exchange movement (95,255) (14,790) (5,296) (101) (115,442) Net other changes 27,724 (1,515) 4,204 35 30,448 Balance at 30 June 2021 2,912,516 348,979 171,901 3,367 3,436,763 Individually assessed - - 26,501 - 26,501 Collectively assessed 2,912,516 348,979 145,400 3,367 3,410,262 Balance at 30 June 2021 2,912,516 348,979 171,901 3,367 3,436,763 Micro and SME loans at amortised cost, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 26,157 20,571 55,560 64 102,352 New financial asset originated or purchased 1,304 144 66 81 1,595 Transfer to Stage 1 15,886 (14,375) (1,511) - - Transfer to Stage 2 (5,885) 18,807 (12,922) - - Transfer to Stage 3 (287) (5,512) 5,799 - - Impact on ECL of exposures transferred between stages during the year (3,756) (11,044) 16,155 - 1,355 Assets derecognised due to pass-through arrangement - - - - - Assets repaid (8,027) (5,453) (11,319) (184) (24,983) Resegmentation (709) (392) - - (1,101) Impact of modifications - (7) (1,736) - (1,743) Write-offs - - (23,853) (171) (24,024) Recoveries of amounts previously written off - - 4,692 8 4,700 Unwind of discount - - 213 (9) 204 Currency translation differences (49) (22) (301) - (372) Foreign exchange movement (553) (43) (1,415) (44) (2,055) Net other measurement of ECL 2,173 7,349 21,207 596 31,325 Balance at 30 June 2021 26,254 10,023 50,635 341 87,253 Individually assessed - - 13,961 - 13,961 Collectively assessed 26,254 10,023 36,674 341 73,292 Balance at 30 June 2021 26,254 10,023 50,635 341 87,253 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Consumer loans at amortised cost, gross: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 1,904,182 194,366 100,950 8,515 2,208,013 New financial asset originated or purchased 1,111,694 3,303 1,119 3,776 1,119,892 Transfer to Stage 1 156,377 (139,780) (16,597) - - Transfer to Stage 2 (135,297) 194,062 (58,765) - - Transfer to Stage 3 (80,098) (64,516) 144,614 - - Assets derecognised due to pass-through arrangement - - - - - Assets repaid (779,012) (50,191) (31,552) (1,806) (862,561) Resegmentation (31) - 80 - 49 Impact of modifications 240 83 (4,585) - (4,262) Write-offs - - (38,438) - (38,438) Recoveries of amounts previously written off - - 9,131 20 9,151 Unwind of discount - - (346) 26 (320) Currency translation differences (1,720) (7) (31) - (1,758) Foreign exchange movement (22,213) (653) (402) (97) (23,365) Net other changes 1,151 (1,148) 7,330 (380) 6,953 Balance at 30 June 2021 2,155,273 135,519 112,508 10,054 2,413,354 Individually assessed - - 1,688 - 1,688 Collectively assessed 2,155,273 135,519 110,820 10,054 2,411,666 Balance at 30 June 2021 2,155,273 135,519 112,508 10,054 2,413,354 Consumer loans at amortised cost, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 40,597 25,533 46,641 1,030 113,801 New financial asset originated or purchased 7,026 799 268 182 8,275 Transfer to Stage 1 23,441 (15,755) (7,686) - - Transfer to Stage 2 (8,875) 32,333 (23,458) - - Transfer to Stage 3 (1,305) (11,406) 12,711 - - Impact on ECL of exposures transferred between stages during the year (10,661) (20,106) 26,143 - (4,624) Assets derecognised due to pass-through arrangement - - - - - Assets repaid (20,301) (6,827) (16,603) (291) (44,022) Resegmentation - - - - - Impact of modifications (2) (1) (2,586) - (2,589) Write-offs - - (38,438) - (38,438) Recoveries of amounts previously written off - - 9,131 20 9,151 Unwind of discount - - (346) 26 (320) Currency translation differences (3) - (11) (15) (29) Foreign exchange movement (73) (10) (373) (15) (471) Net other measurement of ECL 16,224 8,266 46,426 (125) 70,791 Balance at 30 June 2021 46,068 12,826 51,819 812 111,525 Individually assessed - - 556 - 556 Collectively assessed 46,068 12,826 51,263 812 110,969 Balance at 30 June 2021 46,068 12,826 51,819 812 111,525 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Gold - pawn loans at amortised cost, gross: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 97,775 3,879 1,730 - 103,384 New financial asset originated or purchased 93,365 622 130 - 94,117 Transfer to Stage 1 4,139 (3,731) (408) - - Transfer to Stage 2 (8,977) 9,747 (770) - - Transfer to Stage 3 (2,186) (1,043) 3,229 - - Assets derecognised due to pass-through arrangement - - - - - Assets repaid (63,081) (3,020) (1,834) - (67,935) Resegmentation 22,369 710 (69) - 23,010 Impact of modifications - - - - - Write-offs - - (100) - (100) Recoveries of amounts previously written off - - 1 - 1 Unwind of discount - - (1) - (1) Currency translation differences - - - - - Foreign exchange movement (10) (5) (5) - (20) Net other changes 321 18 41 - 380 Balance at 30 June 2021 143,715 7,177 1,944 - 152,836 Individually assessed - - - - - Collectively assessed 143,715 7,177 1,944 - 152,836 Balance at 30 June 2021 143,715 7,177 1,944 - 152,836 Gold - pawn loans at amortised cost, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 40 16 172 - 228 New financial asset originated or purchased 275 74 - - 349 Transfer to Stage 1 29 (5) (24) - - Transfer to Stage 2 - 30 (30) - - Transfer to Stage 3 (1) (3) 4 - - Impact on ECL of exposures transferred between stages during the year (24) - - - (24) Assets derecognised due to pass-through arrangement - - - - - Assets repaid (8) (1) (33) - (42) Resegmentation 514 94 - - 608 Impact of modifications - - - - - Write-offs - - (100) - (100) Recoveries of amounts previously written off - - 1 - 1 Unwind of discount - - (1) - (1) Currency translation differences (1) - - - (1) Foreign exchange movement - - - - - Net other measurement of ECL (495) 61 138 - (296) Balance at 30 June 2021 329 266 127 - 722 Individually assessed - - - - - Collectively assessed 329 266 127 - 722 Balance at 30 June 2021 329 266 127 - 722 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) In 2020 there were significant transfers of loans to stage 2 and 3 as compared to previous periods. This was basically driven by the COVID-19 effect on the creditworthiness of borrowers in all sectors and the related ECL model overlays to identify SICR and default cases. For details on the model overlays see Note 4. Commercial loans at amortised cost, gross: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 3,583,051 349,494 161,744 7,661 4,101,950 New financial asset originated or purchased 1,274,881 29,387 - - 1,304,268 Transfer to Stage 1 239,313 (239,313) - - - Transfer to Stage 2 (292,276) 296,107 (3,831) - - Transfer to Stage 3 (727) (36,618) 37,345 - - Assets derecognised due to pass-through arrangement (21,592) (6,620) - - (28,212) Assets repaid (1,121,366) (95,010) (8,502) (676) (1,225,554) Resegmentation 17,856 - - - 17,856 Impact of modifications (744) 30 (6) (7) (727) Write-offs - - (6,483) - (6,483) Recoveries of amounts previously written off - - 3,045 291 3,336 Unwind of discount - - 5,964 (259) 5,705 Currency translation differences (18,510) (655) (1,316) - (20,481) Foreign exchange movement 214,212 15,675 7,213 421 237,521 Net other changes 20,664 155 6,684 422 27,925 Balance at 30 June 2020 3,894,762 312,632 201,857 7,853 4,417,104 Individually assessed - - 193,949 - 193,949 Collectively assessed 3,894,762 312,632 7,908 7,853 4,223,155 Balance at 30 June 2020 3,894,762 312,632 201,857 7,853 4,417,104 Commercial loans at amortised cost, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 16,903 3,414 77,995 298 98,610 New financial asset originated or purchased 1,959 919 - - 2,878 Transfer to Stage 1 2,892 (2,892) - - - Transfer to Stage 2 (353) 1,028 (675) - - Transfer to Stage 3 (9) (7,547) 7,556 - - Impact on ECL of exposures transferred between stages during the year (212) (544) 12,288 - 11,532 Assets derecognised due to pass-through arrangement (5) (48) - - (53) Assets repaid (5,832) (989) (4,201) (443) (11,465) Resegmentation 72 - - - 72 Impact of modifications 1 8 (6) - 3 Write-offs - - (6,483) - (6,483) Recoveries of amounts previously written off - - 3,045 291 3,336 Unwind of discount - - 5,964 (259) 5,705 Currency translation differences (267) (52) (318) - (637) Foreign exchange movement 885 (180) 2,512 (25) 3,192 Net other measurement of ECL 16,145 22,167 21,148 804 60,264 Balance at 30 June 2020 32,179 15,284 118,825 666 166,954 Individually assessed - - 115,616 - 115,616 Collectively assessed 32,179 15,284 3,209 666 51,338 Balance at 30 June 2020 32,179 15,284 118,825 666 166,954 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Residential mortgage loans at amortised cost, gross: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 2,764,959 160,038 109,413 32,273 3,066,683 New financial asset originated or purchased 348,647 335 60 4,835 353,877 Transfer to Stage 1 103,303 (99,161) (4,142) - - Transfer to Stage 2 (275,155) 293,588 (18,433) - - Transfer to Stage 3 (19,989) (18,360) 38,349 - - Assets repaid (272,680) (17,097) (15,699) (3,033) (308,509) Resegmentation 218 - - - 218 Impact of modifications (12,886) (1,297) (1,297) (810) (16,290) Write-offs - - (1,720) (114) (1,834) Recoveries of amounts previously written off - - 122 58 180 Unwind of discount - - 215 84 299 Currency translation differences (1,732) (1) (2) - (1,735) Foreign exchange movement 112,847 4,215 5,371 1,482 123,915 Net other changes 57,264 10,178 3,640 1,300 72,382 Balance at 30 June 2020 2,804,796 332,438 115,877 36,075 3,289,186 Individually assessed - - 139 - 139 Collectively assessed 2,804,796 332,438 115,738 36,075 3,289,047 Balance at 30 June 2020 2,804,796 332,438 115,877 36,075 3,289,186 Residential mortgage loans at amortised cost, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 461 160 6,588 1,808 9,017 New financial asset originated or purchased 483 - 2 10 495 Transfer to Stage 1 632 (573) (59) - - Transfer to Stage 2 (828) 1,874 (1,046) - - Transfer to Stage 3 (25) (395) 420 - - Impact on ECL of exposures transferred between stages during the year (158) (848) 708 - (298) Assets repaid (842) (140) (1,874) (489) (3,345) Resegmentation - - - - - Impact of modifications (44) (43) (179) (48) (314) Write-offs - - (1,720) (114) (1,834) Recoveries of amounts previously written off - - 122 58 180 Unwind of discount - - 215 84 299 Currency translation differences (16) - - - (16) Foreign exchange movement (258) (51) (323) (101) (733) Net other measurement of ECL 6,525 8,267 20,772 5,309 40,873 Balance at 30 June 2020 5,930 8,251 23,626 6,517 44,324 Individually assessed - - - - - Collectively assessed 5,930 8,251 23,626 6,517 44,324 Balance at 30 June 2020 5,930 8,251 23,626 6,517 44,324 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Micro and SME loans at amortised cost, gross: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 2,426,866 113,130 118,475 1,749 2,660,220 New financial asset originated or purchased 763,397 3,775 - 303 767,475 Transfer to Stage 1 76,933 (74,821) (2,112) - - Transfer to Stage 2 (455,075) 462,052 (6,977) - - Transfer to Stage 3 (8,784) (36,135) 44,919 - - Assets repaid (621,945) (31,496) (16,890) (172) (670,503) Resegmentation (17,844) - - - (17,844) Impact of modifications (6,684) (909) (1,229) (4) (8,826) Write-offs - - (9,219) (919) (10,138) Recoveries of amounts previously written off - - 2,612 68 2,680 Unwind of discount - - 883 22 905 Currency translation differences (7,717) (985) (518) - (9,220) Foreign exchange movement 102,170 5,560 4,009 108 111,847 Net other changes 48,676 11,385 6,204 542 66,807 Balance at 30 June 2020 2,299,993 451,556 140,157 1,697 2,893,403 Individually assessed - - 20,158 - 20,158 Collectively assessed 2,299,993 451,556 119,999 1,697 2,873,245 Balance at 30 June 2020 2,299,993 451,556 140,157 1,697 2,893,403 Micro and SME loans at amortised cost, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 12,890 5,803 24,976 876 44,545 New financial asset originated or purchased 861 587 - - 1,448 Transfer to Stage 1 4,125 (3,695) (430) - - Transfer to Stage 2 (4,442) 5,973 (1,531) - - Transfer to Stage 3 (76) (1,866) 1,942 - - Impact on ECL of exposures transferred between stages during the year (1,026) (211) 1,328 - 91 Assets repaid (4,617) (864) (5,633) (95) (11,209) Resegmentation (72) - - - (72) Impact of modifications (152) (125) (490) - (767) Write-offs - - (9,219) (919) (10,138) Recoveries of amounts previously written off - - 2,612 68 2,680 Unwind of discount - - 883 22 905 Currency translation differences (142) (140) (492) - (774) Foreign exchange movement 60 100 465 53 678 Net other measurement of ECL 14,175 29,417 28,590 385 72,567 Balance at 30 June 2020 21,584 34,979 43,001 390 99,954 Individually assessed - - 7,325 - 7,325 Collectively assessed 21,584 34,979 35,676 390 92,629 Balance at 30 June 2020 21,584 34,979 43,001 390 99,954 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Consumer loans at amortised cost, gross: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 1,856,795 110,158 108,414 9,741 2,085,108 New financial asset originated or purchased 636,546 2,427 740 1,539 641,252 Transfer to Stage 1 77,934 (70,217) (7,717) - - Transfer to Stage 2 (183,949) 196,774 (12,825) - - Transfer to Stage 3 (25,517) (19,810) 45,327 - - Assets repaid (558,235) (32,097) (28,991) (1,414) (620,737) Resegmentation (230) - 93 - (137) Impact of modifications (13,560) (1,912) (2,074) (146) (17,692) Write-offs - - (11,666) (4) (11,670) Recoveries of amounts previously written off - - 8,367 11 8,378 Unwind of discount - - 2,053 25 2,078 Currency translation differences (9,627) (25) (50) - (9,702) Foreign exchange movement 12,741 1,288 1,178 196 15,403 Net other changes 63,288 10,177 5,394 311 79,170 Balance at 30 June 2020 1,856,186 196,763 108,243 10,259 2,171,451 Individually assessed - - 1,232 - 1,232 Collectively assessed 1,856,186 196,763 107,011 10,259 2,170,219 Balance at 30 June 2020 1,856,186 196,763 108,243 10,259 2,171,451 Consumer loans at amortised cost, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 16,823 6,345 49,325 214 72,707 New financial asset originated or purchased 8,006 562 528 3 9,099 Transfer to Stage 1 7,652 (4,914) (2,738) - - Transfer to Stage 2 (7,444) 13,004 (5,560) - - Transfer to Stage 3 (219) (2,376) 2,595 - - Impact on ECL of exposures transferred between stages during the year (3,510) (3,831) (1,813) - (9,154) Assets repaid (9,954) (2,023) (17,763) (58) (29,798) Resegmentation - - - - - Impact of modifications (510) (279) (1,086) (11) (1,886) Write-offs - - (11,666) (4) (11,670) Recoveries of amounts previously written off - - 8,367 11 8,378 Unwind of discount - - 2,053 25 2,078 Currency translation differences (36) (6) (47) - (89) Foreign exchange movement (68) (12) (129) (15) (224) Net other measurement of ECL 25,402 18,482 37,818 793 82,495 Balance at 30 June 2020 36,142 24,952 59,884 958 121,936 Individually assessed - - 257 - 257 Collectively assessed 36,142 24,952 59,627 958 121,679 Balance at 30 June 2020 36,142 24,952 59,884 958 121,936 9. Loans to customers and finance lease receivables (continued) Expected credit loss (continued) Gold - pawn loans at amortised cost, gross: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 80,794 1,114 3,632 - 85,540 New financial asset originated or purchased 49,721 - - - 49,721 Transfer to Stage 1 1,103 (533) (570) - - Transfer to Stage 2 (4,417) 4,805 (388) - - Transfer to Stage 3 (2,061) (307) 2,368 - - Assets repaid (39,963) (702) (1,644) - (42,309) Resegmentation - - (93) - (93) Impact of modifications - - - - - Write-offs - - (58) - (58) Recoveries of amounts previously written off - - 18 - 18 Unwind of discount - - (4) - (4) Currency translation differences - - - - - Foreign exchange movement 93 (3) (171) - (81) Net other changes 1,678 171 395 - 2,244 Balance at 30 June 2020 86,948 4,545 3,485 - 94,978 Individually assessed - - - - - Collectively assessed 86,948 4,545 3,485 - 94,978 Balance at 30 June 2020 86,948 4,545 3,485 - 94,978 Gold - pawn loans at amortised cost, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 9 1 244 - 254 New financial asset originated or purchased - - - - - Transfer to Stage 1 20 (3) (17) - - Transfer to Stage 2 (8) 25 (17) - - Transfer to Stage 3 - - - - - Impact on ECL of exposures transferred between stages during the year (17) (1) - - (18) Assets repaid (9) 2 (57) - (64) Resegmentation - - - - - Impact of modifications - - - - - Write-offs - - (58) - (58) Recoveries of amounts previously written off - - 18 - 18 Unwind of discount - - (4) - (4) Currency translation differences - - - - - Foreign exchange movement (1) - - - (1) Net other measurement of ECL 51 (8) 239 - 282 Balance at 30 June 2020 45 16 348 - 409 Individually assessed - - - - - Collectively assessed 45 16 348 - 409 Balance at 30 June 2020 45 16 348 - 409 Concentration of loans to customers As at 30 June 2021, the concentration of loans granted by the Group to the ten largest third-party borrowers comprised GEL 1,341,345 accounting for 9% of the gross loan portfolio of the Group (31 December 2020: GEL 1,415,618 and 10% respectively). An allowance of GEL 8,479 (31 December 2020: GEL 13,612 ) was established against these loans. As at 30 June 2021, the concentration of loans granted by the Group to the ten largest third-party group of borrowers comprised GEL 2,048,376 accounting for 14% of the gross loan portfolio of the Group (31 December 2020: GEL 2,051,055 and 14% respectively). An allowance of GEL 12,920 (31 December 2020: GEL 16,927 ) was established against these loans. 9. Loans to customers and finance lease receivables (continued) Concentration of loans to customers (continued) As at 30 June 2021 and 31 December 2020 loans were principally issued within Georgia, and their distribution by industry sector was as follows: As at 30 June 2021 (unaudited) 31 December 2020 Individuals 8,025,457 7,608,953 Manufacturing 1,271,062 1,360,213 Trade 1,221,611 1,214,835 Real estate 1,073,957 1,068,176 Hospitality 896,098 848,630 Electricity, gas and water supply 389,216 251,892 Construction 312,325 275,070 Service 291,061 276,759 Financial intermediation 228,370 112,988 Mining and quarrying 197,999 200,494 Transport & communication 195,254 303,030 Other 969,612 979,588 Loans to customers, gross 15,072,022 14,500,628 Less - Allowance for expected credit loss (410,372) (443,546) Loans to customers, net 14,661,650 14,057,082 COVID-19 had affected many areas of the country's economy. However, some of the sectors, such as the hospitality sector, retail and micro businesses were more affected than others. Loans have been extended to the following types of customers: As at 30 June 2021 (unaudited) 31 December 2020 Individuals 8,025,457 7,608,953 Private companies 7,032,402 6,871,541 State-owned entities 14,163 20,134 Loans to customers, gross 15,072,022 14,500,628 Less - Allowance for expected credit loss (410,372) (443,546) Loans to customers, net 14,661,650 14,057,082 Finance lease receivables As at 30 June 2021 (unaudited) 31 December 2020 Minimum lease payments receivable 181,843 189,959 Less - Unearned finance lease income (49,660) (50,587) 132,183 139,372 Less - Allowance for expected credit loss / impairment loss (4,462) (4,376) Finance lease receivables, net 127,721 134,996 . The difference between the minimum lease payments to be received in the future and the finance lease receivables represents unearned finance income. As at 30 June 2021, finance lease receivables carried at GEL 87,763 were pledged for inter-bank loans received from several credit institutions (31 December 2020: GEL 75,134). As at 30 June 2021, the concentration of investment in the five largest lease receivables comprised GEL 22,068 or 17% of total finance lease receivables (31 December 2020: GEL 20,486 or 15% ) and finance income received from them for the period ended 30 June 2021 comprised GEL 1,470 or 10% of total finance income from lease (31 December 2020: GEL 3,161 or 10%). 9. Loans to customers and finance lease receivables (continued) Finance lease receivables (continued) Future minimum lease payments to be received after 30 June 2021 and 31 December 2020 are as follows: As at 30 June 2021 (unaudited) 31 December 2020 Within 1 year 85,221 92,391 From 1 to 5 years 91,515 94,753 More than 5 years 5,107 2,815 Minimum lease payment receivables 181,843 189,959 Movements of the gross finance lease receivables and respective allowance for expected credit loss/impairment of finance lease receivables are as follows: Finance lease receivables, gross As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 67,346 53,276 18,750 - 139,372 New financial asset originated or purchased 46,350 - 468 2,021 48,839 Transfer to Stage 1 22,359 (22,338) (21) - - Transfer to Stage 2 (18,512) 29,840 (11,328) - - Transfer to Stage 3 (710) (10,697) 11,407 - - Assets derecognised due to pass-through arrangement - - - - - Assets repaid (28,270) (18,865) (4,767) (78) (51,980) Resegmentation - - - - - Impact of modifications - - - - - Write-offs - - (4,818) - (4,818) Recoveries of amounts previously written off - - - - - Unwind of discount - - 3 - 3 Currency translation differences (270) - (46) - (316) Foreign exchange movement 811 1,591 (528) (98) 1,776 Net other changes (835) (7) (2) 151 (693) Balance at 30 June 2021 88,269 32,800 9,118 1,996 132,183 Individually assessed - - 3,564 - 3,564 Collectively assessed 88,269 32,800 5,554 1,996 128,619 Balance at 30 June 2021 88,269 32,800 9,118 1,996 132,183 Finance lease receivables, ECL: As at 30 June 2021 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2021 649 1,109 2,618 - 4,376 New financial asset originated or purchased 748 - 258 - 1,006 Transfer to Stage 1 384 (384) - - - Transfer to Stage 2 (370) 1,478 (1,108) - - Transfer to Stage 3 (5) (476) 481 - - Impact on ECL of exposures transferred between stages during the year (209) (140) 1,718 - 1,369 Assets derecognised due to pass-through arrangement - - - - - Assets repaid (227) (337) (345) - (909) Resegmentation - - - - - Impact of modifications - - - - - Write-offs - - (1,488) - (1,488) Recoveries of amounts previously written off - - - - - Unwind of discount - - 3 - 3 Currency translation differences (10) - (33) - (43) Foreign exchange movement (6) (83) (94) - (183) Net other measurement of ECL (1) - 332 - 331 Balance at 30 June 2021 953 1,167 2,342 - 4,462 Individually assessed - - 1,706 - 1,706 Collectively assessed 953 1,167 636 - 2,756 Balance at 30 June 2021 953 1,167 2,342 - 4,462 9. Loans to customers and finance lease receivables (continued) Finance lease receivables (continued) Finance lease receivables, gross As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 130,232 12,498 16,461 - 159,191 New financial asset originated or purchased 43,477 - - - 43,477 Transfer to Stage 1 38,983 (36,788) (2,195) - - Transfer to Stage 2 (90,735) 91,675 (940) - - Transfer to Stage 3 (3,163) (35,132) 38,295 - - Assets repaid (24,005) (684) (2,884) - (27,573) Resegmentation - - - - - Impact of modifications - (973) (199) - (1,172) Write-offs - - (6,006) - (6,006) Recoveries of amounts previously written off - - - - - Unwind of discount - - (4) - (4) Currency translation differences (1,308) (70) (90) - (1,468) Foreign exchange movement 3,805 1,342 1,317 - 6,464 Net other changes 829 (81) (230) - 518 Balance at 30 June 2020 98,115 31,787 43,525 - 173,427 Individually assessed - - 873 - 873 Collectively assessed 98,115 31,787 42,652 - 172,554 Balance at 30 June 2020 98,115 31,787 43,525 - 173,427 Finance lease receivables, ECL: As at 30 June 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 759 95 1,443 - 2,297 New financial asset originated or purchased 137 - - - 137 Transfer to Stage 1 144 (140) (4) - - Transfer to Stage 2 (255) 256 (1) - - Transfer to Stage 3 (168) (2,555) 2,723 - - Impact on ECL of exposures transferred between stages during the year 232 2,492 2,806 - 5,530 Assets repaid (270) (13) (96) - (379) Resegmentation - - - - - Impact of modifications - (1) (18) - (19) Write-offs - - (618) - (618) Recoveries of amounts previously written off - - - - - Unwind of discount - - (4) - (4) Currency translation differences (47) (6) (15) - (68) Foreign exchange movement - 2 (85) - (83) Net other measurement of ECL 14 40 33 - 87 Balance at 30 June 2020 546 170 6,164 - 6,880 Individually assessed - - 42 - 42 Collectively assessed 546 170 6,122 - 6,838 Balance at 30 June 2020 546 170 6,164 - 6,880 10. Taxation The corporate income tax expense in income statement comprises: For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Current income (expense) benefit (50,964) 38,255 Deferred income tax credit (expense) 16,886 (33,695) Income tax expense (34,078) 4,560 The income tax rate applicable to most of the Group's income is the income tax rate applicable to subsidiaries' income, which ranges from 15% to 25% (30 June 2020: from 15% to 25% ). As at 30 June 2021 and 31 December 2020 income tax assets and liabilities consist of the following: As at 30 June 2021 (unaudited) 31 December 2020 Current income tax assets - 21,841 Deferred income tax assets 190 192 Income tax assets 190 22,033 Current income tax liabilities 29,214 - Deferred income tax liabilities 45,490 62,434 Income tax liabilities 74,704 62,434 11. Client deposits and notes The amounts due to customers include the following: As at 30 June 2021 (unaudited) 31 December 2020 Time deposits 7,869,924 8,025,100 Current accounts 6,074,459 5,995,109 Client deposits and notes 13,944,383 14,020,209 At 30 June 2021, amounts due to customers of GEL 2,806,742 (20%) were due to the ten largest customers (31 December 2020: GEL 2,951,893 (21%)). Amounts due to customers include accounts with the following types of customers: As at 30 June 2021 (unaudited) 31 December 2020 Individuals 7,886,347 7,801,351 Private enterprises 4,206,230 4,303,313 State and state-owned entities 1,851,806 1,915,545 Client deposits and notes 13,944,383 14,020,209 11. Client deposits and notes (continued) The breakdown of customer accounts by industry sector is as follows: As at 30 June 2021 (unaudited) 31 December 2020 Individuals 7,886,347 7,801,351 Government services 1,839,447 1,866,346 Financial intermediation 922,298 778,226 Trade 771,125 858,474 Construction 557,480 588,880 Transport & communication 441,456 541,154 Manufacturing 337,165 317,961 Service 294,204 390,856 Real estate 183,995 159,503 Electricity, gas and water supply 94,009 75,221 Hospitality 68,066 65,825 Other 548,791 576,412 Client deposits and notes 13,944,383 14,020,209 12. Amounts owed to credit institutions Amounts due to credit institutions comprise: As at 30 June 2021 (unaudited) 31 December 2020 Borrowings from international credit institutions 1,668,290 1,583,056 Short-term loans from National Bank of Georgia 398,186 590,293 Time deposits and inter-bank loans 258,792 258,920 Correspondent accounts 217,601 196,049 2,542,869 2,628,318 - Non-convertible subordinated debt 681,708 707,648 - Amounts due to credit institutions 3,224,577 3,335,966 During the period ended 30 June 2021, the Group paid up to 6.00% on US$ borrowings from international credit institutions (31 December 2020: up to 5.49% ). During the period ended 30 June 2021, the Group paid up to 7.75% on Dollar subordinated debt (31 December 2020: up to 9.39%). Some long-term borrowings from international credit institutions are received upon certain conditions (the "Lender Covenants") that the Group maintains different limits for capital adequacy, liquidity, currency positions, credit exposures, leverage and others. At 30 June 2021 and 31 December 2020 , the Group complied with all the Lender Covenants of the significant borrowings from international credit institutions. In January 2021, the Bank drew down EUR 60 million under the loan agreements signed with the European Investment Bank ("EIB") with a maturity of seven years. In March 2021, the Group drew down USD 10 million under the loan agreements signed with Cargill Financial Services International, Inc. maturing in September 2022. In March 2021, the Bank drew down USD 20 million under subordinated syndicated loan agreement arranged by FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders signed in December 2019 and amended in December 2020. In May 2021, the Group drew down USD 10 million under the loan agreements signed with Cargill Financial Services International, Inc. maturing in October 2022. 13. Debt securities issued Debt securities issued comprise: As at 30 June 2021 (unaudited) 31 December 2020 Eurobonds and notes issued 958,907 1,019,120 Additional Tier 1 capital notes issued 311,977 323,320 Local bonds 145,556 102,187 Certificates of deposit 99,071 140,918 Debt securities issued 1,515,511 1,585,545 Changes in liabilities arising from financing activities Eurobonds and notes issued Additional Tier 1 capital notes issued Carrying amount at 31 December 2019 1,406,200 282,407 Repayment of the principal portion of the debt securities issued (440,410) - Other movements 42,810 18,654 Carrying amount at 30 June 2020 (unaudited) 1,008,600 301,061 Carrying amount at 31 December 2020 1,019,120 323,320 Repurchase of debt securities issued (19,625) - Repayment of the principal portion of the debt securities issued (15,614) - Other movements (24,974) (11,343) Carrying amount at 30 June 2021 (unaudited) 958,907 311,977 14. Commitments and contingencies Legal Sai-invest As at 30 June 2021, the Bank was engaged in litigation with Sai-Invest LLC in relation to a deposit pledge in the amount of EUR 7 million used to reduce the outstanding loan of LTD Sport Invest towards JSC Bank of Georgia. The Bank's management is of the opinion that the probability of incurring material losses on this claim is low, and, accordingly, no provision has been made in these Interim condensed consolidated statements. Financial commitments and contingencies As at 30 June 2021 and 31 December 2020, the Group's financial commitments and contingencies comprised the following: As at 30 June 2021 (unaudited) 31 December 2020 Credit-related commitments Guarantees issued 1,542,048 1,490,028 Letters of credit 107,502 125,031 Undrawn loan facilities 719,036 685,533 2,368,586 2,300,592 Less - Cash held as security against letters of credit and guarantees (Note 11) (105,510) (131,946) Less - Provisions (6,955) (15,325) Operating lease commitments Not later than 1 year 1,778 2,356 Later than 1 year but not later than 5 years 2,432 2,774 Later than 5 years 1,239 1,657 5,449 6,787 Capital expenditure commitments 3,930 2,863 The Group discloses its undrawn loan facility balances based on the contractual terms and existing practice in regards to disbursement of these amounts. The balances are disclosed as commitments if the Group has an established practice of disbursing undrawn amounts without any subsequent approval. In 2020 the Group has modified its disbursement practice in regards to certain revolving credit facilities resulting in increased commitment balances. 15. Equity Share capital As at 30 June 2021 and 31 December 2020 issued share capital comprised 49,169,428 common shares of BOGG, all of which were fully paid. Each share has a nominal value of one (1) British penny. Shares issued and outstanding as at 30 June 2021 and 30 June 2020 are described below: Number of ordinary shares Amount of ordinary shares 31 December 2019 49,169,428 1,618 30 June 2020 (unaudited) 49,169,428 1,618 31 December 2020 49,169,428 1,618 30 June 2021 (unaudited) 49,169,428 1,618 15. Equity (continued) Share capital (continued) Treasury shares Treasury shares are held by the Group solely for the purpose of future employee share-based compensation. The number of treasury shares held by the Group as at 30 June 2021, comprised 1,590,863 (31 December 2020: 1,638,844), with nominal amount of GEL 52 (31 December 2020: GEL 54). Dividends Shareholders are entitled to dividends in Pounds Sterling. In 2021 and 2020 the Group distributed dividends on the shares vested and exercised during 2021 and 2020, respectively. No other dividends have been declared by Bank of Georgia Group PLC in 2021 and 2020. Nature and purpose of other reserves Unrealised gains (losses) on investment securities This reserve records fair value changes on investment securities. Unrealised gains (losses) from dilution or sale / acquisition of shares in existing subsidiaries This reserve records unrealised gains (losses) from dilution or sale / acquisition of shares in existing subsidiaries. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of subsidiaries with functional currency other than GEL. Movements on this account during the periodss ended 30 June 2021 and 30 June 2020, are presented in the statements of other comprehensive income. Earnings per share For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Basic earnings per share Profit for the period attributable to ordinary shareholders of the Group 339,454 14,659 Weighted average number of ordinary shares outstanding during the period 47,939,475 47,596,373 Basic earnings per share 7.0809 0.308 For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Diluted earnings per share Effect of dilution on weighted average number of ordinary shares: Dilutive unvested share options 300,582 7,857 Weighted average number of ordinary shares adjusted for the effect of dilution 48,240,057 47,604,230 Diluted earnings per share 7.0368 0.3079 16. 16. Net interest income For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Interest income calculated using EIR method 861,073 751,436 From loans to customers 760,303 662,851 From investment securities 95,949 79,512 From amounts due from credit institutions 8,949 14,050 Net loss on modification of financial assets (4,128) (4,977) - Other interest income 14,143 15,928 From finance lease receivable 14,133 15,888 From other assets 10 - From loans and advances to customers measured at FVTPL - 40 Interest income 875,216 767,364 On client deposits and notes (255,385) (191,705) On amounts owed to credit institutions (129,317) (141,766) On debt securities issued (57,842) (83,432) Interest element of cross-currency swaps 18,016 29,267 On lease liability (2,944) (2,837) Interest expense (427,472) (390,473) Deposit insurance fees (7,163) (4,874) Net interest income 440,581 372,017 In 2020, a GEL 39,730 net one-off loss on modification of financial assets was recorded in relation to the three-month payment holidays on principal and interest offered to our Retail Banking clients, as an immediate response to COVID-19 pandemic outbreak, in order to reduce the requirement for customers to physically visit Bank branches and reduce the risk of the virus spread. The net loss incurred as a result of these modifications has been classified as a non-recurring item in the income statement. 17. Net fee and commission income For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Settlements operations 135,202 94,669 Guarantees and letters of credit 17,043 14,410 Cash operations 6,336 5,673 Currency conversion operations 5,374 4,846 Brokerage service fees 3,728 3,193 Advisory 536 592 Other 2,954 1,901 Fee and commission income 171,173 125,284 Settlements operations (54,170) (42,967) Guarantees and letters of credit (351) (250) Cash operations (4,237) (4,276) Currency conversion operations (1,122) (1,281) Insurance brokerage service fees (2,410) (2,013) Advisory (33) (36) Other (2,994) (1,448) Fee and commission expense (65,317) (52,271) Net fee and commission income 105,856 73,013 18. Expected credit loss and impairment charge on other assets and provisions The table below shows ECL charges on financial instruments for the period recorded in the income statement: Stage 1 Stage 2 Stage 3 POCI Collective Collective Individual Collective Total Cash and cash equivalents 15 - - - - 15 Amounts due from credit institutions 23 - - - - 23 Investment securities measured at FVOCI - debt instruments 1,306 - - - - 1,306 Loans to customers at amortised cost 2,756 30,300 3,852 (39,651) (353) (3,096) Finance lease receivables (314) (58) (714) (528) - (1,614) Other financial assets (252) - - - - (252) Financial guarantees 6,623 63 3,746 (8) - 10,424 Letter of credit to customers 1,515 - 315 - - 1,830 Other financial commitments (1,085) (356) - - - (1,441) For the period 30 June 2021 10,470 29,949 7,199 (40,187) (353) 7,078 Stage 1 Stage 2 Stage 3 POCI Collective Collective Individual Collective Total Cash and cash equivalents 58 - - - - 58 Amounts due from credit institutions (66) - - - - (66) Investment securities measured at amortised cost - debt instruments (85) - - - - (85) Investment securities measured at FVOCI - debt instruments (920) - - - - (920) Loans to customers at amortised cost (49,255) (67,957) (40,396) (52,888) (6,072) (216,568) Finance lease receivables 166 (81) 28 (5,386) - (5,273) Financial guarantees (6,041) (544) 845 (10) - (5,750) Letter of credit to customers (1,490) (215) 12 - - (1,693) Other financial commitments (658) (18) 48 - - (628) For the period ended 30 June 2020 (70,951) (68,815) (39,463) (58,284) (6,072) (243,585) The table below shows impairment charge on other assets and provisions in the income statement: For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Legal fees 31,677 5,851 Impairment charge on other non-financial assets 2,505 908 Impairment charge on assets held for sale 1,558 1,195 Provision charge on legal claims 1,422 84 37,162 8,038 19. Net non-recurring items For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Modification loss of financial assets* - (39,730) Corporate social responsibility expense - (1,454) Other (50) (402) Net non-recurring expense/loss (50) (41,586) * Modification loss of financial assets: in response to the COVID-19 outbreak, the Group implemented an initiative to grant a three-month grace period to its borrowers with the interest accrued for grace period being deferred and either allocated over the original repayment schedule till maturity on a straight line basis (i.e. no compounding applied) or in some cases beyond maturity (i.e., maturity extended by 3 months). The payment holiday was intended to reduce customer traffic to branches and thus reduce chances of the rapid spread of the virus in the country. The noted immediate social response to COVID-19 pandemic resulted in modification loss in amount of GEL 39,730. Given the initiative was driven by high social responsibility motives and was similar to a CSR cost with high degree of abnormality and extraordinary nature, such modification losses were presented as non-recurring item in the Group's consolidated financial statements. ** In 2020, corporate social responsibly expense: in order to assist in the fight against the COVID-19 the Group purchased and donated laboratory tests, respiratory equipment, etc. to the Government of Georgia on a one-off basis. 20. Risk management COVID-19 pandemic impact risk The COVID-19 outbreak was declared as a global pandemic at the beginning of 2020 and spread throughout the world. The outlook still remains subject to uncertainty. The path of the pandemic, the availability of effective treatments and the associated impact on economic activity continue to remain inherently difficult to predict. On the upside, a faster than expected development and distribution of an effective vaccine is expected to boost confidence, support a rebound in tourism and investment, and accelerate the recovery. In 2020, the National Bank of Georgia's (the "NBG") updated supervisory plan for the Georgian banking sector, which was mainly focused on the capital adequacy and liquidity initiatives that allowed the banking sector to support financially stressed customers through the global COVID-19 pandemic. In 2021, NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector. The Bank confirmed to NBG that no utilization of any of the Pillar 2 or conservation buffers that were waived during the last year is expected. Consequently, there is no longer any regulatory restriction for Bank of Georgia on making any capital distributions. The Group continues to maintain a number of resilience protocols and a comprehensive Business Continuity Plan (BCP) aimed at curbing the spread of COVID-19 in Georgia and mitigating the negative impact on its business and the community. Further, the Group is actively monitoring the developing economic trends on the back of the COVID-19 pandemic and its impact on the business, customers and employees on an ongoing basis. There is still significant uncertainty over the magnitude of the global slowdown that will result from this pandemic, and the Group will continue to take appropriate actions to proactively manage evolving circumstances. Liquidity risk and funding management Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a regular basis. This incorporates an assessment of expected cash flows and the availability of high-grade collateral which could be used to secure additional funding if required. The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Group maintains a cash deposit (obligatory reserve) with the NBG, the amount of which depends on the level of customer funds attracted. The liquidity position is assessed and managed by the Group primarily on a standalone Bank basis, based on certain liquidity ratios established by the NBG. The banks are required to maintain a liquidity coverage ratio, which is defined as the ratio of high-quality liquid assets to net cash outflow over the next 30 days. The order requires that, absent a stress-period, the value of the ratio be no lower than 100%. The liquidity coverage ratio as at 30 June 2021 was 124.5% (31 December 2020: 138.6% ). The Bank holds a comfortable buffer on top of Net Stable Funding Ratio (NSFR) requirement of 100%, which came into effect on 1 September 2019. A solid buffer over NSFR provides stable funding sources over a longer time span. This approach is designed to ensure that the funding framework is sufficiently flexible to secure liquidity under a wide range of market conditions. NSFR as at 30 June 2021 was 136.8%, (31 December 2020: 137.5%), all comfortably above the NBG's minimum regulatory requirements. The Group also matches the maturity of financial assets and financial liabilities and regularly monitors negative gaps compared with the Bank's standalone total regulatory capital calculated per NBG regulation. The ratios are assessed and monitored monthly and compared against set limits. In the case of deviations, amendment strategies / actions are discussed and approved by ALCO. 21. Fair value measurements Fair value hierarchy For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability. The following tables show analysis of assets and liabilities measured at fair value or for which fair values are disclosed by level of the fair value hierarchy, except for cash and short-term deposits for which fair value approximates to their carrying value: At 30 June 2021 Level 1 Level 2 Level 3 Total Assets measured at fair value Total investment properties - - 235,649 235,649 Land - - 15,203 15,203 Residential properties - - 167,946 167,946 Non-residential properties - - 52,500 52,500 Investment securities 6,043 2,139,991 3,691 2,149,725 Other assets - derivative financial assets - 32,803 - 32,803 Other assets - trading securities owned 2,454 1,071 - 3,525 Assets for which fair values are disclosed Amounts due from credit institutions - 2,035,487 - 2,035,487 Loans to customers and finance lease receivables - - 14,572,480 14,572,480 Liabilities measured at fair value Other liabilities - derivative financial liabilities - 42,121 - 42,121 Liabilities for which fair values are disclosed Client deposits and notes - 13,933,244 - 13,933,244 Amounts owed to credit institutions - 2,538,423 686,153 3,224,576 Debt securities issued - 1,351,043 244,179 1,595,222 Lease liability - 3,829 94,002 97,831 At 31 December 2020 Level 1 Level 2 Level 3 Total Assets measured at fair value Total investment properties - - 231,241 231,241 Land - - 10,981 10,981 Residential properties - - 147,585 147,585 Non-residential properties - - 72,675 72,675 Investment securities 3,229 2,539,092 2,076 2,544,397 Other assets - derivative financial assets - 9,154 - 9,154 Other assets - trading securities owned 5,731 - - 5,731 - - - - Assets for which fair values are disclosed - - - - Amounts due from credit institutions - 2,016,005 - 2,016,005 Loans to customers and finance lease receivables - - 13,896,221 13,896,221 - - - - Liabilities measured at fair value - - - - Other liabilities - derivative financial liabilities - 247,520 - 247,520 - - - - Liabilities for which fair values are disclosed - - - - Client deposits and notes - 14,007,521 - 14,007,521 Amounts owed to credit institutions - 2,899,263 436,703 3,335,966 Debt securities issued - 1,402,958 241,976 1,644,934 Lease liability - - 103,012 103,012 21. Fair value measurements (continued) Fair value hierarchy (continued) The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Group's estimate of assumptions that a market participant would make when valuing the instruments. Derivative financial instruments Derivative financial instruments valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps, forward foreign exchange contracts and option contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations, as well as standard option pricing models. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates, interest rate curves and implied volatilities. Trading securities and investment securities Trading securities and a certain part of investment securities are quoted equity and debt securities. Investment securities valued using a valuation technique or pricing models consist of unquoted equity and debt securities. These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates. Fair value of financial instruments that are carried in the financial statements not at fair value Set out below is a comparison by class of the carrying amounts and fair values of the Group's financial instruments that are carried in the financial statements. The table does not include the fair values of non-financial assets and non-financial liabilities, fair values of other smaller financial assets and financial liabilities, or cash and short-term deposits, fair values of which are materially close to their carrying values. At 30 June 2021 At 31 December 2020 Carrying value 2021 Fair value 2021 Unrecognised gain (loss) 2021 Carrying value 2020 Fair value 2020 Unrecognised gain (loss) 2020 Financial assets Amounts due from credit institutions 2,035,487 2,035,487 - 2,016,005 2,016,005 - Loans to customers and finance lease receivables 14,789,371 14,572,480 (216,891) 14,192,078 13,896,221 (295,857) Financial liabilities Client deposits and notes 13,944,383 13,933,244 11,139 14,020,209 14,007,521 12,688 Amounts owed to credit institutions 3,224,577 3,224,576 1 3,335,966 3,335,966 - Debt securities issued 1,515,511 1,595,222 (79,711) 1,585,545 1,644,934 (59,389) Lease liability 91,670 97,831 (6,161) 95,635 103,012 (7,377) Total unrecognised change in unrealised fair value (291,623) (349,935) The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the consolidated financial statements. Assets for which fair value approximates carrying value For financial assets and financial liabilities that are liquid or have a short-term maturity (less than three months), it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity, and variable rate financial instruments. Fixed rate financial instruments The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity. For financial assets and financial liabilities maturing in less than a year, it is assumed that the carrying amounts approximate to their fair value. 22. Maturity analysis of financial assets and liabilities The table below shows an analysis of financial assets and liabilities according to their contractual maturities, except for current accounts and credit card loans as described below. At 30 June 2021 On demand Up to 3 months Up to 6 months Up to 1 year Up to 3 years Up to 5 years Over 5 years Total Financial assets Cash and cash equivalents 1,465,019 254,039 - - - - - 1,719,058 Amounts due from credit institutions 1,968,150 47,374 1,212 450 5,730 2,453 10,118 2,035,487 Investment securities 1,124,170 812,065 12,188 36,073 62,034 95,406 7,789 2,149,725 Loans to customers and finance lease receivables 3,784 2,432,212 934,423 1,788,067 3,740,814 2,127,934 3,762,137 14,789,371 Total 4,561,123 3,545,690 947,823 1,824,590 3,808,578 2,225,793 3,780,044 20,693,641 Financial liabilities Client deposits and notes 1,949,085 3,804,903 1,018,805 5,603,329 942,262 362,478 263,521 13,944,383 Amounts owed to credit institutions 217,601 811,783 190,170 281,730 759,908 512,293 451,092 3,224,577 Debt securities issued - 83,175 16,633 113,811 1,077,113 224,779 - 1,515,511 Lease liability - 6,682 6,329 11,395 34,750 22,943 9,571 91,670 Total 2,166,686 4,706,543 1,231,937 6,010,265 2,814,033 1,122,493 724,184 18,776,141 Net 2,394,437 (1,160,853) (284,114) (4,185,675) 994,545 1,103,300 3,055,860 1,917,500 Accumulated gap 2,394,437 1,233,584 949,470 (3,236,205) (2,241,660) (1,138,360) 1,917,500 At 31 December 2020 On demand Up to 3 months Up to 6 months Up to 1 year Up to 3 years Up to 5 years Over 5 years Total Financial assets Cash and cash equivalents 1,452,379 518,576 - - - - - 1,970,955 Amounts due from credit institutions 1,987,538 12,054 539 1,931 4,161 1,203 8,579 2,016,005 Investment securities 309,234 2,101,428 23,996 11,165 12,013 31,404 55,157 2,544,397 Loans to customers and finance lease receivables - 2,671,296 842,716 1,594,714 3,482,213 2,189,857 3,411,282 14,192,078 Total 3,749,151 5,303,354 867,251 1,607,810 3,498,387 2,222,464 3,475,018 20,723,435 - - - - - - - - Financial liabilities - - - - - - - - Client deposits and notes 2,167,103 3,761,867 1,164,650 5,349,181 971,894 345,709 259,805 14,020,209 Amounts owed to credit institutions 196,049 781,139 225,093 558,857 721,802 501,080 351,946 3,335,966 Debt securities issued - 72,550 36,352 98,412 1,144,567 46,258 187,406 1,585,545 Lease liability - 6,229 6,234 11,846 34,630 22,802 13,894 95,635 Total 2,363,152 4,621,785 1,432,329 6,018,296 2,872,893 915,849 813,051 19,037,355 Net 1,385,999 681,569 (565,078) (4,410,486) 625,494 1,306,615 2,661,967 1,686,080 Accumulated gap 1,385,999 2,067,568 1,502,490 (2,907,996) (2,282,502) (975,887) 1,686,080 The Group's capability to discharge its liabilities relies on its ability to realise equivalent assets within the same period of time. In the Georgian marketplace, where most of the Group's business is concentrated, many short-term credits are granted with the expectation of renewing the loans at maturity. As such, the ultimate maturity of assets may be different from the analysis presented above. To reflect the historical stability of current accounts, the Group calculates the minimal daily balance of current accounts over the past two years and includes the amount in the "Up to 1 year" category in the table above. The remaining current accounts are included in the "On demand" category. To match the coverage of short-term borrowings from the NBG with the investment securities pledged to secure it, those securities are included in the "On demand" category. Considering credit cards have no contractual maturities, the above allocation per category is done based on the statistical coverage rates observed. 22. Maturity analysis of financial assets and liabilities (continued) The Group's principal sources of liquidity are as follows: �� deposits; �� borrowings from international credit institutions; �� inter-bank deposit agreements; �� debt issues; �� proceeds from sale of securities; �� principal repayments on loans; �� interest income; and �� fees and commissions income. As at 30 June 2021, client deposits and notes amounted to GEL 13,944,383 (31 December 2020: GEL 14,020,209) and represented 73% (31 December 2020: 72%) of the Group's total liabilities. These funds continue to provide a majority of the Group's funding and represent a diversified and stable source of funds. As at 30 June 2021, amounts owed to credit institutions amounted to GEL 3,224,577 (31 December 2020: GEL 3,335,966) and represented 17% (31 December 2020: 17%) of total liabilities. As at 30 June 2021, debt securities issued amounted to GEL 1,515,511 (31 December 2020: GEL 1,585,545) and represented 8% (31 December 2020: 8%) of total liabilities. In the Board's opinion, liquidity is sufficient to meet the Group's present requirements. The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled, except for current accounts which are included in up to 1 year time bucket, noting that respective contractual maturity may expand over significantly longer periods: At 30 June 2021 At 31 December 2020 Less than 1 year More than 1 year Total Less than 1 year More than 1 year Total Cash and cash equivalents 1,719,058 - 1,719,058 1,970,955 - 1,970,955 Amounts due from credit institutions 2,017,186 18,301 2,035,487 2,002,062 13,943 2,016,005 Investment securities 1,984,496 165,229 2,149,725 2,445,823 98,574 2,544,397 Loans to customers and finance lease receivables 5,158,486 9,630,885 14,789,371 5,108,726 9,083,352 14,192,078 Accounts receivable and other loans 2,475 - 2,475 2,420 - 2,420 Prepayments 32,275 1,628 33,903 26,467 1,126 27,593 Inventories 10,476 - 10,476 10,340 - 10,340 Right-of-use assets - 81,865 81,865 - 83,208 83,208 Investment properties - 235,649 235,649 - 231,241 231,241 Property and equipment - 387,014 387,014 - 387,851 387,851 Goodwill - 33,351 33,351 - 33,351 33,351 Intangible assets - 138,341 138,341 - 125,806 125,806 Income tax assets - 190 190 21,841 192 22,033 Other assets 177,609 11,702 189,311 288,602 37,392 325,994 Assets held for sale 45,294 - 45,294 62,648 - 62,648 Total assets 11,147,355 10,704,155 21,851,510 11,939,884 10,096,036 22,035,920 Client deposits and notes 12,376,122 1,568,261 13,944,383 12,442,801 1,577,408 14,020,209 Amounts owed to credit institutions 1,501,284 1,723,293 3,224,577 1,761,138 1,574,828 3,335,966 Debt securities issued 213,619 1,301,892 1,515,511 207,314 1,378,231 1,585,545 Lease liability 24,406 67,264 91,670 24,309 71,326 95,635 Accruals and deferred income 42,352 12,274 54,626 30,536 23,358 53,894 Income tax liabilities 29,214 45,490 74,704 - 62,434 62,434 Other liabilities 131,975 703 132,678 306,299 26,023 332,322 Total liabilities 14,318,972 4,719,177 19,038,149 14,772,397 4,713,608 19,486,005 Net (3,171,617) 5,984,978 2,813,361 (2,832,513) 5,382,428 2,549,915 23. Related party disclosures In accordance with IAS 24 "Related Party Disclosures", parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making 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. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be affected on the same terms, conditions and amounts as transactions between unrelated parties. All transactions with related parties disclosed below have been conducted on an arm's-length basis. The volumes of related party transactions, outstanding balances at 30 June 2021 and 30 June 2020, and related expenses and income for the period are as follows: At 30 June 2021 (unaudited) At 30 June 2020 (unaudited) Associates Key management personnel Associates Key management personnel Loans outstanding at 1 January, gross - 10,646 - 6,718 Loans issued during the year - 2,618 - 3,585 Loan repayments during the year - (3,394) - (3,399) Other movements - (932) - 481 Loans outstanding at 30 June, gross - 8,938 - 7,385 Less: allowance for impairment at 30 June - - - (16) Loans outstanding at 30 June, net - 8,938 - 7,369 Interest income on loans - 283 - 169 Expected credit loss - - - (23) Deposits at 1 January 166 32,619 3 30,475 Deposits received during the year - 17,948 83 7,429 Deposits repaid during the year - (21,347) - (8,561) Other movements - (429) - 1,862 Deposits at 30 June 166 28,791 86 31,205 Interest expense on deposits - (555) - (654) * Key management personnel includes members of BOGG's Board of Directors and key executives of the Group. Compensation of key management personnel comprised the following: For the six months ended 30 June 2021 (unaudited) 30 June 2020 (unaudited) Salaries and other benefits 6,671 6,847 Share-based payments compensation 13,345 12,980 Total key management compensation 20,016 19,827 Key management personnel do not receive cash-settled compensation, except for fixed salaries. The major part of the total compensation is share-based. The number of key management personnel at 30 June 2021 was 20 (30 June 2020: 20). 24. Capital adequacy The Group maintains an actively managed capital base to cover risks inherent to the business. The adequacy of the Group's capital is monitored using, among other measures, the ratios established by the NBG in supervising the Bank. During the period ended 30 June 2021, the Bank and the Group complied in full with all its externally imposed capital requirements. The primary objectives of the Group's capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholder value. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. NBG (Basel III) capital adequacy ratio In December 2017, the NBG adopted amendments to the regulations relating to capital adequacy requirements, including amendments to the regulation on capital adequacy requirements for commercial banks, and introduced new requirements on the determination of the countercyclical buffer rate, on the identification of systematically important banks, on determining systemic buffer requirements and on additional capital buffer requirements for commercial banks within Pillar 2. The NBG requires the Bank to maintain a minimum total capital adequacy ratio of risk-weighted assets, computed based on the Bank's standalone special-purpose financial statements prepared in accordance with NBG regulations and pronouncements, based on Basel III requirements. At the end of March 2020, NBG introduced an updated supervisory plan for the Georgian banking sector, aimed at alleviating the negative financial and economic challenges created by the global COVID-19 pandemic in Georgia. Following capital adequacy initiatives were introduced: �� Combined buffer - the conservation buffer requirement of 2.5% of risk-weighted assets has been reduced to 0%. �� Pillar 2 requirements: o Currency induced credit risk buffer (CICR) requirement reduced by two-thirds. o The phase-in of additional credit portfolio concentration risk buffer (HHI) and net GRAPE buffer requirements on Common Equity Tier 1 (CET1) and Tier 1 capital, planned at the end of March 2020, has been postponed indefinitely; however, the phase-in of additional HHI and GRAPE buffer requirements were postponed till end of March 2021 as subsequently instructed by the NBG. o The possibility of fully or partially releasing the remaining requirements of Pillar 2 buffers (HHI, CICR, net GRAPE), if necessary, remains open. �� During the period the banks are allowed to partially or fully use the Pillar 2 and conservation buffers, the banks are restricted to make capital distribution in any form. NBG requested the Georgian banks to create general provisions under the local accounting basis in the first quarter of 2020, the accounting basis is that used for calculation of capital adequacy ratios. The specific quantum of the provision reflects the NBG's current expectation of estimated credit losses on the lending book of the banking system for the entire economic cycle, given current economic expectations. The NBG considers the banking system capital ratios to be sufficiently in excess of the expected minimum capital requirements, to be able to absorb this upfront general provision, whilst maintaining sufficiently comfortable buffers over the required minimum capital ratios. Subsequently, the NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector. As a result, considering the Bank's strong capital position, to ensure flexibility on capital distribution to shareholders, the Bank has confirmed to the NBG that it is no longer utilising, or expect to utilise, any of the Pillar 2 or conservation buffers that were waived in 2020. 24. Capital adequacy (continued) As at 30 June 2021 and 31 December 2020, the Bank's capital adequacy ratio on this basis was as follows: As at 30 June 2021 (unaudited) 31 December 2020 Tier 1 capital 2,389,590 1,989,190 Tier 2 capital 782,067 830,145 Total capital 3,171,657 2,819,335 - Risk-weighted assets 16,598,810 16,040,094 Tier 1 capital ratio 14.4% 12.4% Total capital ratio 19.1% 17.6% Min. requirement for Tier 1 capital ratio 13.4% 9.2% Min. requirement for Total capital ratio 17.7% 13.8% 25. Events after the reporting period The Board of Bank of Georgia Group PLC declared an interim dividend of GEL 1.48 per ordinary share for the six months ended 30 June 2021, payable to ordinary shareholders of Bank of Georgia Group PLC on the register of members at the close of business on 22 October 2021, in British Pounds Sterling. In July 2021, to further support de-dollarisation of client deposits portfolio, the NBG mandated additional changes in minimum obligatory reserve requirements. The minimum obligatory reserve requirement of 25% and 15% on client deposits and notes attracted in foreign currencies are applied in case the client deposits and notes portfolio dollarisation level is more than 70%. If the dollarisation falls to 40% or below, the minimum obligatory reserve requirement falls to 10%. For the dollarisation level between 40% and 70%, the reserve requirement is set within 10%-25% and 10%-15% range, respectively. Following the change we expect that the Bank's reserves will be well above minimum requirements set by the NBG, expected impact on mandatory reserves is expected to be GEL 207.7 million. GLOSSARY �� Alternative performance measures (APMs) In this announcement the management uses various APMs, which they believe provide additional useful information for understanding the financial performance of the Group. These APMs are not defined by International Financial Reporting Standards, and also may not be directly comparable with other companies who use similar measures. We believe that these APMs provide the best representation of our financial performance as these measures are used by management to evaluate the Group's operating performance and make day-to-day operating decisions �� Basic earnings per share Profit for the period attributable to shareholders of the Group divided by the weighted average number of outstanding ordinary shares over the same year �� Book value per share Total equity attributable to shareholders of the Group divided by ordinary shares outstanding at period-end; Ordinary shares outstanding at period-end equals number of ordinary shares at period-end less number of treasury shares at period-end �� Cost of credit risk Expected loss on loans to customers and finance lease receivables for the period divided by monthly average gross loans to customers and finance lease receivables over the same period �� Cost of funds Interest expense of the period divided by monthly average interest bearing liabilities �� Cost to income ratio Operating expenses divided by operating income �� Interest-bearing liabilities Amounts owed to credit institutions, client deposits and notes, and debt securities issued �� Interest-earning assets (excluding cash) Amounts due from credit institutions, investment securities (but excluding corporate shares) and net loans to customers and finance lease receivables �� Leverage (times) Total liabilities divided by total equity �� Liquid assets Cash and cash equivalents, amounts due from credit institutions and investment securities �� Liquidity coverage ratio (LCR) High quality liquid assets (as defined by the NBG) divided by net cash outflows over the next 30 days (as defined by NBG) �� Loan yield Interest income from loans to customers and finance lease receivables divided by monthly average gross loans to customers and finance lease receivables �� NBG (Basel III) Common Equity Tier I (CET1) capital adequacy ratio Common Equity Tier I capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG instructions �� NBG (Basel III) Tier I capital adequacy ratio Tier I capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG instructions �� NBG (Basel III) Total capital adequacy ratio Total regulatory capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG instructions �� Net interest margin (NIM) Net interest income of the period divided by monthly average interest earning assets excluding cash for the same period �� Net stable funding ratio (NSFR) available amount of stable funding (as defined by the NBG) divided by the required amount of stable funding (as defined by NBG) �� Non-performing loans (NPLs) The principal and interest on loans overdue for more than 90 days and any additional potential losses estimated by management �� NPL coverage ratio Allowance for expected credit loss of loans and finance lease receivables divided by NPLs �� NPL coverage ratio adjusted for discounted value of collateral Allowance for expected credit loss of loans and finance lease receivables divided by NPLs (discounted value of collateral is added back to allowance for expected credit loss) �� Operating leverage Percentage change in operating income less percentage change in operating expenses �� Return on average total assets (ROAA) Profit for the period divided by monthly average total assets for the same period �� Return on average total equity (ROAE) Profit for the period attributable to shareholders of the Group divided by monthly average equity attributable to shareholders of the Group for the same period �� NMF Not meaningful COMPANY INFORMATION Bank of Georgia Group PLC Registered Address 42 Brook Street London W1K 5DB United Kingdom www.bankofgeorgiagroup.com Registered under number 10917019 in England and Wales Secretary Link Company Matters Limited 65 Gresham Street London EC2V 7NQ United Kingdom Stock Listing London Stock Exchange PLC's Main Market for listed securities Ticker: "BGEO.LN" Contact Information Bank of Georgia Group PLC Investor Relations Telephone: +44(0) 203 178 4052; +995 322 444444 (9282) E-mail: [email protected] Auditors Ernst & Young LLP 25 Churchill Place Canary Wharf London E14 5EY United Kingdom Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE United Kingdom Please note that Investor Centre is a free, secure online service run by our Registrar, Computershare, giving you convenient access to information on your shareholdings. Investor Centre Web Address - www.investorcentre.co.uk. Investor Centre Shareholder Helpline - +44 (0)370 873 5866 Share price information Shareholders can access both the latest and historical prices via the website www.bankofgeorgiagroup.com This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com. RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. 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