TBC Bank Group PLC Half-year Report

Data : 15/08/2019 @ 08:11
Fonte : UK Regulatory (RNS & others)
Titolo : Tbc Bank Group Plc (TBCG)
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TBC Bank Group PLC Half-year Report

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RNS Number : 1554J

TBC Bank Group PLC

15 August 2019

TBC BANK GROUP PLC ("TBC Bank")

2Q AND 1H 2019 UNAUDITED CONSOLIDATED FINANCIAL RESULTS

Forward-Looking Statements

This document contains forward-looking statements; such forward-looking statements contain known and unknown risks, uncertainties and other important factors, which may cause the actual results, performance or achievements of TBC Bank Group PLC ("the Bank" or the "Group") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on numerous assumptions regarding the Bank's present and future business strategies and the environment in which the Bank will operate in the future. Important factors that, in the view of the Bank, could cause actual results to differ materially from those discussed in the forward-looking statements include, among others, the achievement of anticipated levels of profitability, growth, cost and recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Georgian economic, political and legal environment, financial risk management and the impact of general business and global economic conditions.

None of the future projections, expectations, estimates or prospects in this document should be taken as forecasts or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, expectations, estimates or prospects are based are accurate or exhaustive or, in the case of the assumptions, entirely covered in the document. These forward-looking statements speak only as of the date they are made, and subject to compliance with applicable law and regulation the Bank expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in the document to reflect actual results, changes in assumptions or changes in factors affecting those statements.

Certain financial information contained in this presentation, which is prepared on the basis of the Group's accounting policies applied consistently from year to year, has been extracted from the Group's unaudited management's accounts and financial statements. The areas in which the management's accounts might differ from the International Financial Reporting Standards and/or U.S. generally accepted accounting principles could be significant; you should consult your own professional advisors and/or conduct your own due diligence for a complete and detailed understanding of such differences and any implications they might have on the relevant financial information contained in this presentation. Some numerical figures included in this report have been subjected to rounding adjustments. Accordingly, numerical figures shown as totals in certain tables might not be an arithmetic aggregation of the figures that preceded them.

Contacts

 
Zoltan Szalai                    Anna Romelashvili            Investor Relations Department 
 Director of International        Head of Investor Relations 
 Media and Investor Relations 
 
 E-mail: ZSzalai@Tbcbank.com.ge   E-mail: IR@tbcbank.com.ge    E-mail: IR@tbcbank.com.ge 
 Tel: +44 (0) 7908 242128         Tel: +(995 32) 227 27        Tel: +(995 32) 227 27 
 Web: www.tbcbankgroup.com        27                           27 
 Address: 68 Lombard              Web: www.tbcbankgroup.com    Web: www.tbcbankgroup.com 
 St, London EC3V 9LJ,             Address: 7 Marjanishvili     Address: 7 Marjanishvili 
 United Kingdom                   St. Tbilisi, Georgia         St. Tbilisi, Georgia 
                                  0102                         0102 
 

Table of Contents

2Q and 1H 2019 Results Announcement

TBC Bank - Background

Financial Highlights

Recent Developments

Support from NBG and International Partners

Additional Funding

Development of Customer Focused Ecosystems.

Letter from the Chief Executive Officer

Economic Overview

Unaudited Consolidated Financial Results Overview for 2Q 2019

Unaudited Consolidated Financial Results Overview for 1H 2019

Additional Disclosures

Principal Risks and Uncertainties

Statement of Directors' Responsibilities

Unaudited Condensed Consolidated Interim Financial Information

TBC Bank Group PLC ("TBC Bank")

TBC Bank Announces Unaudited 2Q and 1H 2019 Consolidated Financial Results:

Underlying([1]) Net Profit for 2Q 2019 up by 4.3% YoY to GEL 125.0 million

Underlying(1) Net Profit for 1H 2019 up by 18.8% YoY to GEL 258.3 million

European Union Market Abuse Regulation EU 596/2014 requires TBC Bank Group PLC to disclose that this announcement contains Inside Information, as defined in that Regulation.

The preliminary unaudited and not reviewed results were published on 29 July 2019. This report contains a more detailed information on the same results.

The information in this announcement, which was approved by the Board of Directors on 14 August 2019, does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2018, which contained an unmodified audit report under Section 495 of the Companies Act 2006 (which did not make any statements under Section 498 of the Companies Act 2006) have been delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

TBC Bank - Background

TBC Bank is the largest banking group in Georgia, where 99.7% of its business is concentrated, with a 39.1% market share by total assets. It offers retail, corporate, and MSME banking nationwide.

These unaudited financial results are presented for TBC Bank Group PLC ("TBC Bank" or "the Group"), which was incorporated on 26 February 2016 as the ultimate holding company for JSC TBC Bank Georgia. TBC Bank became the parent company of JSC TBC Bank Georgia on 10 August 2016, following the Group's restructuring. As this was a common ownership transaction, the results have been presented as if the Group existed at the earliest comparative date as allowed under the International Financial Reporting Standards ("IFRS"), as adopted by the European Union. TBC Bank successfully listed on the London Stock Exchange's premium listing segment on 10 August 2016.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS. The Group classifies and separately discloses certain incomes and expenses, which are non-recurring by nature and are caused by extraordinary events, as one-off items in order to provide a consistent view and enable better analysis of the financial performance of the Group. Adjusted performance is an alternative performance measure and the reconciliation of the underlying profit and loss items with the reported profit and loss items and the underlying ratios are given under Annex 26 section on pages 51-52.

Financial Highlights

2Q 2019 P&L Highlights

-- Underlying(1) net profit amounted to GEL 125.0 million (2Q 2018: GEL 119.9 million; 1Q 2019: GEL 133.3 million)

-- Reported net profit amounted to GEL 120.2 million (2Q 2018: GEL 102.4 million; 1Q 2019: GEL 133.3 million)

-- Underlying(1) return on equity (ROE) amounted to 21.5% (2Q 2018: 24.9%; 1Q 2019: 23.8%)

-- Reported return on equity (ROE) amounted to 20.7% (2Q 2018: 21.3%; 1Q 2019: 23.8%)

-- Underlying(1) return on assets (ROA) amounted to 3.1 % (2Q 2018: 3.7%; 1Q 2019: 3.6%)

-- Reported return on assets (ROA) amounted to 3.0% (2Q 2018: 3.2%; 1Q 2019: 3.6%)

-- Total operating income amounted to GEL 272.3 million, up by 5.4% YoY and up by 0.1% QoQ

-- Underlying(1) cost to income was 38.1% (2Q 2018: 35.6%; 1Q 2019: 37.7%)

-- Reported cost to income was 40.2% (2Q 2018: 35.6%; 1Q 2019: 37.7%)

-- Cost of risk stood at 1.1% (2Q 2018: 1.8%; 1Q 2019: 1.4%)

-- FX adjusted cost of risk stood at 0.8% (2Q 2018: 1.7%; 1Q 2019: 1.4%)

-- Net interest margin (NIM) stood at 5.6% (2Q 2018: 7.1%; 1Q 2019: 6.1%)

-- Risk adjusted net interest margin (NIM) stood at 4.8% (2Q 2018: 5.5%; 1Q 2019: 4.7%)

1H 2019 P&L Highlights

-- Underlying[2] net profit amounted to GEL 258.3 million (1H 2018: GEL 217.4 million)

-- Reported net profit amounted to GEL 253.5 million (1H 2018: GEL 200.0 million)

-- Underlying(2) return on equity (ROE) of 22.7% (1H 2018: 23.0%)

-- Reported return on equity (ROE) amounted to of 22.3% (1H 2018: 21.2%)

-- Underlying(2) return on assets (ROA) was 3.3% (1H 2018: 3.4%)

-- Reported return on assets (ROA) was 3.3% (1H 2018: 3.1%)

-- Total operating income for the period was up by 9.5% YoY to GEL 544.2 million

-- Underlying(2) cost to income stood at 37.9% (1H 2018: 36.8%)

-- Reported cost to income stood at 38.9% (1H 2018: 36.8%)

-- Cost of risk on loans stood at 1.3% (1H 2018: 1.6%)

-- FX adjusted cost of risk stood at 1.2% (1H 2018: 1.7%)

-- Net interest margin (NIM) stood at 5.8% (1H 2018: 7.0%)

-- Risk adjusted net interest margin (NIM) stood at 4.6% (1H 2018: 5.3%)

Balance Sheet Highlights as of 30 June 2019

-- Total assets amounted to GEL 17,278.4 million as of 30 June 2019, up by 27.2% YoY and up by 13.9% QoQ

-- Gross loans and advances to customers stood at GEL 11,141.4 million as of 30 June 2019, up by 25.2% YoY and up by 7.5% QoQ

-- Net loans to deposits + IFI[3] funding stood at 91.4% and Net Stable Funding Ratio (NSFR) stood at 130.4%

-- NPLs were 3.1%, unchanged YoY and down by 0.2pp QoQ

-- NPLs coverage ratios stood at 97.9%, or 206.0% with collateral, on 30 June 2019 compared, to 116.1% or 216.1% with collateral, as of 30 June 2018 and 100.1%, or 210.8% with collateral, as of 31 March 2019

-- Total customer deposits amounted to GEL 9,876.8 million as of 30 June 2019, up by 24.5% YoY and up by 7.7% QoQ

-- As of 30 June 2019, the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios per NBG methodology stood at 12.4% and 17.4% respectively, while minimum requirements amounted to 11.9% and 16.7%

Market Shares([4])

-- Market share by total assets reached 39.1% as of 30 June 2019, up by 2.0pp YoY and up by 1.7pp QoQ

-- Market share by total loans was 38.5% as of 30 June 2019, up by 0.2pp YoY and up by 0.1pp QoQ

-- In terms of individual loans, TBC Bank had a market share of 39.6% as of 30 June 2019, down by 0.2pp YoY and up by 0.3pp QoQ. The market share for legal entity loans was 37.3%, up by 0.8pp YoY and down by 0.1pp QoQ

-- Market share of total deposits reached 41.0% as of 30 June 2019, up by 1.5pp YoY and up by 0.6pp QoQ

-- Market share of individual deposits stood at to 39.5%, down by 1.7pp YoY and unchanged on QoQ. In terms of legal entity deposits, TBC Bank holds a market share of 42.8%, up by 5.3pp YoY and up by 1.4pp QoQ.

Recent Developments

Buyback of shares

-- The Company has initiated a share buyback programme on 29 July 2019 (for more information please see our press release at www.tbcbankgroup.com)

Board changes

-- In July 2019, the Chairman Mamuka Khazaradze and Deputy Chairman Badri Japaridze stepped down from the board of TBC Bank Group PLC, to focus on the allegations made against them regarding historic transactions that took place in 2007 and 2008. The Board has appointed Senior Independent Director Nikoloz Enukidze to serve as the Chairman of TBC Bank Group PLC, based on his deep knowledge of the Bank, prior Chairmanship roles in the banking sector and extensive regional and international experience. (For more information please see our press release at www.tbcbankgroup.com)

-- TBC Bank also strengthened its supervisory board by appointing Jyrki Koskelo as a member and Chairman of the TBC Bank Supervisory Board in May 2019 and Arne Berggren as a member of the TBC Bank Supervisory Board in July 2019.

-- Mr Koskelo serves and has served as a board member and senior advisor in multiple emerging market focused banks and companies. Prior to joining TBC, he held a number of senior leadership positions during his 24 years at the International Financial Corporation.

-- Mr Berggren currently serves as a member of the board of Bank of Cyprus and Piraeus Bank and has extensive experience of senior leadership and advisory roles in prominent financial institutions including the IMF, World Bank, Swedbank, Carnegie Investment Bank AB and the Swedish Ministry of Finance and Bank Support Authority.

Awards

-- Best Bank in Georgia from EMEA Finance Magazine - TBC Bank has been awarded the Best Bank in Georgia 2019 by the Global EMEA Finance magazine. This award is confirmation of the Bank's outstanding financial performance, advanced digital capabilities and consistent focus on providing a superior customer experience. Alongside this, TBC Bank won the award for Best Investment Bank in Georgia 2018, whilst its subsidiary TBC Capital was named the Best Broker in Georgia 2018.

-- Best Bank in Georgia 2019 award from Euromoney - TBC Bank has been named The Best Bank in Georgia 2019 at the Euromoney Awards for Excellence ceremony. The award recognizes our continuous efforts to provide the highest standard of customer experience in Georgia and develop the best multichannel capabilities in the region, while delivering consistently superior financial results.

Internal control systems' review

TBC Bank, with the assistance of one of the big four audit firms, has undertaken benchmarking and review of its AML and Related Party policies and procedures compliance with local and international requirement. These reviews did not identify any material deficiencies.

Support from NBG and International Partners

National Bank of Georgia (NBG)

On 26 July 2019, the NBG issued the following statement: "In the light of recent events, National Bank of Georgia welcomes the decision of the founding shareholders to step down from the Board of Directors of TBC Bank Group PLC (which is a London based 100% shareholder of JSC TBC Bank).

National Bank of Georgia emphasizes that TBC Bank is one of the leading financial organization in the country and the region. It is a strong and robust financial institution. Since April 2019, Mamuka Khazaradze and Badri Japaridze no longer serve as the Supervisory Board members of JSC TBC Bank and the recent events will not have any impact on the operations of the bank."

The full statement is available on the following website: www.nbg.gov.ge

European Bank for Reconstruction and Development (EBRD)

On 25 July 2019, EBRD issued the following statement: "The EBRD notes the recent board changes at TBC Bank Group PLC. The bank is a solid financial institution led by a strong management and an independent board of directors.

We welcome the decision by the chairman and the deputy chairman of the bank to step down from the board at this time to focus on allegations made against them in a legal dispute.

We also welcome the strengthening of the board with the addition of independent directors with extensive executive level experience in financial institutions.

We expect a fair and transparent due process and a prompt resolution of the case with no adverse impact on the operations of the bank.

Meanwhile, the EBRD as a longstanding partner, shareholder and lender of TBC Bank will continue to work with and support TBC Bank Group PLC."

The full statement is available on the following website: www.ebrd.com

International Finance Corporation (IFC)

On 25 July 2019, IFC issued the following statement: "IFC, a member of the World Bank Group, is aware of the developments around TBC Bank, noting the recent board changes at TBC Bank Group PLC. We welcome the decision by the chairman and the deputy chairman of the bank to step down from the board to focus on legal proceedings.

We note the leading role of TBC Bank in Georgia's banking sector and expect a fair and transparent resolution of the case, with no adverse consequences for the bank's operations. IFC was the first international financial institution to become a shareholder of TBC Bank in 2000, and we will continue to support TBC Bank Group PLC.

The banking sector's growth is critical for the development of other sectors of the economy and our continued emphasis will be on strengthening the financial sector and increasing access to finance for businesses."

The full statement is available on the following website: www.ifc.org

Additional Funding

Senior Unsecured Bonds

In June 2019, TBC Bank successfully issued debut USD 300 million 5-year 6.0% yield senior unsecured bonds, representing the lowest ever yield achieved by a Georgian issuer in the international debt capital markets.

 
Main Terms 
Status         Senior unsecured 
Currency       USD 
Issue Size     300,000,000 
Maturity       5 years 
Interest       5.750% per annum payable semi-annually 
 Rate 
Denomination   USD 200,000 x USD 1,000 
Listing        Euronext Dublin / Georgian Stock 
                Exchange 
 

Additional Tier 1 Bond

In July 2019, TBC Bank successfully issued USD 125 million 10.75% yield Additional Tier 1 Capital Perpetual Subordinated Notes, which represents the largest and lowest coupon Additional Tier 1 issue ever to have been priced by a Georgian issuer.

 
Main Terms 
Status         Additional Tier 1 Capital Perpetual 
                Subordinated Notes 
Currency       USD 
Issue Size     125,000,000 
Maturity       Perpetual, 5 year non call 
Interest       10.775% per annum payable semi-annually 
 Rate 
Denomination   USD 200,000 x USD 1,000 
Listing        Euronext Dublin / Georgian Stock 
                Exchange 
 

IFI Funding

To meet future funding needs when and as required by the business, we have been working with our long term IFI partners - EBRD, ADB, EIB, FMO, DEG, Proparco, BSTDB, OFID, CDB, AIIB, Blue Orchard, EFSE, GCPF,GCF - on a funding pipeline of up to USD 900 million in total in 2019-2020, both in local currency and USD.

Under such approach, we have signed an agreement and attracted USD 10 million from ResponsAbility Investments AG.. The funds will be used to support SME Business growth.

Furthermore, we have signed a Continuing Agreement for Reimbursement of Trade Advances (CARTA) with Citibank. The trade finance framework agreement will primarily be used to finance trade activities of local importers and exporters in Georgia.

Development of Customer Focused Ecosystems

In order to integrate better with our customers, we have started to develop customer focused ecosystems, which are closely linked with our financial products and services and enable us to create synergies with our core banking offerings.

E-commerce

Our strategy is to develop an innovative e-commerce market place in Georgia, comprising:

-- An asset light platform (Intermediation);

-- A diverse products range and fast delivery within 24 hours; and

-- Exceptional customer service - NPS[5] 80%+;

Our estimated investment for the next two years will be around USD 2-3 million, or GEL6-9 million[6].

Our Progress

-- The soft launch of the marketplace took place in April and the full launch took place in May 2019.

-- In 2Q 2019, Vendoo developed an analytical system, a logistics system, an SMS communication system and service monitoring for customers, as well as a portal for merchants for managing their assortment and sales.

-- In addition, Vendoo enriched its existing product offering (comprising of electronics and personal care products) with gardening & housing, toys and household chemistry.

Real Estate

Our strategy is to create the first housing ecosystem in the region, with the following features:

-- An intuitive design & exceptional customer experience; and

-- A diverse products range.

Our estimated investment for the next two years is set at around USD 2 million, or GEL 6 million(6) .

Our Progress

-- We completed the rebranding process and launched a beta version of the platform in May 2019. The full launch is planned in October 2019.

-- We have introduced the first real-estate valuation service in Georgia, which provides independent valuation certificate within 24 hours.

-- We have developed a premier agent service for brokers, which will allow them to enhance their value proposition.

-- We have launched a customer contact center.

Additional Information Disclosure

The following materials in connection with TBC PLC's financial results are disclosed on our Investor Relations website on http://tbcbankgroup.com/ under Results Announcement section:

   -- 2Q and 1H 2019 Results Report 
 
   -- 2Q 2019 Results Call Presentation 

Letter from the Chief Executive Officer

I would like to start my letter with an update about the recent board changes. As we announced last week due to recent developments, regarding historic transactions that took place in 2007 and 2008, the Chairman and Deputy Chairman have decided to step down from the board of TBC Bank Group PLC with immediate effect. They have both arrived at this decision after careful consideration in order to ensure that the allegations made against them do not affect the Group. Following their resignation, the Board has appointed, with immediate effect, Senior Independent Director Nikoloz Enukidze to serve as the Chairman of TBC Bank Group PLC. I would like to thank both the Chairman and Deputy Chairman for their invaluable contribution to the bank and welcome the appointment of Mr Enukidze with whom we have enjoyed excellent working relationship over past 6 years.

Despite recent board changes, we continue to operate in our usual manner capitalising on our leading market share, strong capital and liquidity positions and operational excellence for the benefit of our shareholders. I welcome the supporting statements made by the NBG, EBRD and IFC in support of TBC. In light of our strong financial position and current share price, we have initiated a share buyback programme that was approved by the board yesterday.

Now I am pleased to present our financial results for the second quarter 2019 and first half of 2019.

In the second quarter of 2019, we achieved an underlying consolidated net profit([7]) of GEL 125.0 million, up by 4.3% year-on-year (our consolidated net reported profit was GEL 120.2 million, up by 17.4% year-on-year). The growth was mainly driven by an increase in net fee and commission income and other operating income, which was largely offset by a rise in operating expenses. Our operating expenses increased by 18.8% year-on-year, or by 12.7% on an underlying basis. Over the same period, provision expenses decreased by 4.9%, resulting in cost of risk of 1.1% (or FX adjusted cost of risk of 0.8%), driven by the decreasing share of higher-yield and higher-risk loans and improved performance across all segments. In the second quarter 2019, net interest income increased only by 1.2% year-on-year. The pressure on net interest income was related to a continued impact of the regulation implemented in January 2019, that limits the ability of banks to lend money to higher-yield retail customers, an increase in minimum reserve requirements for foreign currency funds, as well as competition in interest rates. As a result, net interest margin decreased by 0.5 percentage points quarter-on-quarter and stood at 5.6%. Our underlying return on equity reached 21.5%, while the underlying return on assets was 3.1% (our reported return on equity was 20.7%, while reported return on assets stood at 3.0%).

In the first half of 2019, our underlying net profit7 stood at GEL 258.3 million, up by 18.8% year-on-year, which resulted in an underlying return on equity of 22.7% and an underlying return on assets of 3.3% (our consolidated reported net profit was GEL 253.5 million, up by 26.8% year-on-year, while our reported return on equity was 22.3%, and reported return on assets stood at 3.3%).

Regarding balance sheet growth, our loan book expanded by 25.2% year-on-year, or by 14.7% at a constant currency rate. As a result, our market share increased to 38.5%, up by 0.2 percentage points year-on-year. Over the same period, customer accounts grew by 24.5% year-on-year, or by 13.4% at a constant currency rate leading to a market share of 41.0%, up by 1.5 percentage points year-on-year.

We continue to operate with a strong capital base and a robust liquidity position. As of 30 June 2019, our total capital adequacy ratio (CAR) per Basel III guidelines stood at 17.4%, above the minimum requirement of 16.7%, while our tier I capital ratio was 12.4%, also above the minimum requirement of 11.9%. The proceeds from the issuance of AT1 bonds in the amount of USD 125 million will be reflected in our capital in July, increasing our total and tier 1 capital by approximately 2.5 percentage points. Our regulatory liquidity coverage ratio stood at 126% (which will be increased by around 12 percentage points by AT1), compared to the minimum requirement of 100%, while the ratio of net loans to deposits + IFI funding was 91% and the net stable funding ratio (NSFR) was 130%.

According to Geostat's initial estimates, real GDP increased by 4.9% in the first 5 months of 2019. While credit growth has moderated, external inflows were reasonably strong and, unlike in 2018, the fiscal stance was expansionary. Also, the current account deficit has narrowed in the first quarter and this tendency is likely to be sustained in the second quarter as well, driven by the improved trade balance and the growth in tourism and remittances inflows. Going forward, the recent restriction on flights from Russia to Georgia will have a substantial impact on tourism inflows. However, according to TBC Research, taking into account the increase in tourism inflows from other destinations and the strengthening external balance, the growth will be still positive[8]. In terms of GDP growth, according to TBC Research as well as the National Bank of Georgia, real GDP is expected to increase by more than 4.0% in 2019, once again underlining the high growth potential and the resilience of the economy.

In May 2019, TBC Insurance entered the health insurance market. Our strategy is to focus on affluent individuals and to capture the affluent market by leveraging our strong brand name and cross-selling opportunities with payroll customers. Our medium term target is to reach 25% market share in the premium health insurance business.

I would also like to update you on the progress that we made in development of our ecosystems:

-- Vendoo: The full launch of the platform took place in May 2019, and during the second quarter Vendoo focused on developing its various internal systems. In addition, Vendoo enriched its existing product offering (comprised of electronics and personal care products) with gardening & housing, toys and household chemistry and is already selling up to 15,000 different items.

-- Livo: We completed the rebranding process and launched the beta version of the platform in May 2019, and we have already reached around 9,000 users daily. The full launch is planned in October 2019. We have introduced the first real-estate valuation service in Georgia, which provides an independent valuation certificate within 24 hours. We have also developed a premier agent service for brokers, which will allow them to enhance their value proposition, and we have launched a customer contact center.

We have also made progress in our international ventures:

-- In Azerbaijan, Nikoil bank is in the process of a significant reorganization, which includes re-branding and a shift to digitalization. It has also opened four new branches during the second quarter 2019.

-- In Uzbekistan, before the license is granted, we are working on core banking implementation, team formation and branch concept. At the same time, our newly acquired payment company, Payme, continued to grow rapidly, increasing its number of customers by 10.9% quarter-on-quarter to reach 1.4 million, while its revenue increased by 19.7% over the same quarter and amounted to around USD 700,000.

In terms of funding, I am pleased to report that in June 2019, our subsidiary, JSC TBC Bank successfully issued its first senior Eurobond in the amount of USD 300 million with a 5-year maturity and a coupon rate of 5.75% per annum, payable semi-annually. The bonds are priced at 6% yield, which represents the lowest ever yield achieved by a Georgian issuer in the international debt capital markets. The notes are listed on the regulated market of Euronext Dublin and on the Georgian Stock Exchange, making it the first dual-listed international offering of senior unsecured notes from Georgia. In July 2019, JSC TBC Bank also issued USD 125 million additional Tier 1 capital perpetual subordinated notes at 10.75% yield. This is the largest ever additional Tier 1 issue by a Georgian issuer, priced at the lowest ever coupon. The notes are listed on the regulated market of Euronext Dublin and on the Georgian Stock Exchange, making it the first dual-listed international offering of additional Tier 1 capital notes from Georgia.

Moreover, JSC TBC Bank strengthened its supervisory board by appointing Jyrki Koskelo as a member and Chairman of the JSC TBC Bank Supervisory Board in May 2019, and Arne Berggren as a member of the JSC TBC Bank Supervisory Board in July 2019. Mr Koskelo serves and has served as a board member and senior advisor in multiple emerging market focused banks and companies. Prior to joining TBC, he held number of senior leadership positions during his 24 years at The International Financial Corporation. Mr Berggren currently serves as a member of the board of Bank of Cyprus and Piraeus Bank and has extensive experience at senior leadership and advisory roles in prominent financial institutions including the IMF, World Bank, Swedbank, Carnegie Investment Bank AB and the Swedish Ministry of Finance and Bank Support Authority.

Finally, I would like to reiterate our medium term targets: ROE of above 20%, cost to income ratio below 35%, dividend pay-out ratio of 25-35% and loan book growth of 10-15%.

Economic Overview

Economic growth

According to Geostat's initial estimates, real GDP increased by 4.9% in the first half of 2019. While the credit growth has moderated, the inflows were reasonably strong and unlike 2018, the fiscal stance was expansionary. At the same time, the flight ban imposed by Russia will lower growth going forward. According to TBC Research estimates, GDP is still expected to increase by over 4% for the FY 2019 and 2020.

In terms of the sectors, transport and communications (+12.7% YoY), as well as the trade and repairs sector (+6.7% YoY), contributed the most to the growth. At the same time, the education (+15.7% YoY) and healthcare sectors (+11.4% YoY) increased substantially, mainly due to higher budget spending on education (+57.7% YoY) and healthcare (+14.4% YoY) in 1Q 2019.

Similarly, strong growth was observed in hotels and restaurants (+13.1% YoY), and real estate (+11.1% YoY). All of the other major sectors also increased, with the exception of construction (-9.6% YoY), agriculture (-0.3% YoY), and manufacturing (-1.3% YoY). The decline in the construction sector was broadly expected to reflect the finalization of BP's pipeline construction project. The decline in the construction sector was also aggravated by the weakness of residential buildings construction, which is related to the slower mortgage growth and tighter construction permit regulations. On the other hand, strong government capital expenditures partly offset the decline.

The trade balance continued to improve in 2Q 2019 with exports of goods up by 10.3% while imports fell by 6.1%. As a result, the trade deficit improved significantly by 15.7% YoY over the same period, all in USD terms. The growth in tourism inflows also accelerated to an estimated 15.5% in 2Q 2019, compared to the 5.0% growth in 1Q 2019. Remittance inflows went up by 9.3% YoY over the same period, which is somewhat faster growth than in the previous quarter.

FDI inflows decreased by 6.3% YoY in the USD terms from 300 million USD in 1Q 2018 to 281 million USD in 1Q 2019 (in EUR and GEL, 1.9% and 0.9% YoY increase, respectively). As in 2018, the finalization of the South Caucasus Pipeline Extension Project and the change of ownership of non-resident companies to residents likely played a role in 1Q 2019 as well. As of the last four quarters ending in 1Q 2019, FDI inflows still stood at a strong 7.3% of GDP. Furthermore, 2018 gross fixed capital formation was at a solid 33.3% of GDP

The current account balance improvement trend continued in 1Q 2019 as well, with a deficit to same quarter GDP ratio of 6.2%: this is historically low, reflecting an improvement of 5.7pp YoY, with the strongest contribution coming from trade in goods. This positive tendency has likely been sustained in 2Q as well, judging from the trade balance, tourism and remittances inflows, as the figures described above suggest. Over the last four quarters, the current account deficit to GDP ratio stood at 6.4%, which is improvement of 1.3pp compared to the previous quarter. Despite the reduction, FDI inflows, which stood at 6.6% of GDP, remained the key source of financing the current account deficit. At the same time, over the first six months of 2019 the NBG bought 216 million USD, or around 3% of GDP over the same period, indicating that the inflows were sufficient for even higher growth. The recent restriction on flights from Russia to Georgia will have a substantial impact on tourism inflows. However, according to TBC Research, taking into account the increase in tourism inflows from other destinations and the strengthening external balance, the impact should be manageable[9].

Bank credit growth came in at 14.1% YoY in June 2019 being 1.4 pp higher compared to the 12.7% in the previous month. In terms of the segments, corporate loans were the main driver of the acceleration with a 18.0% YoY growth rate, partly thanks to the one-off transactions. On top of that, MSME lending also increased by a solid 17.2% YoY. On the other hand, retail lending continues to moderate. Mortgage lending growth slowed to 25.7% YoY, while non-mortgage lending declined by around the same 5.6% rate on an annual basis, similar to previous months. At the same time, there are ongoing discussions on a possible revision of the retail credit regulatory framework. The NBG assesses around 13% credit growth to be moderate.

Inflation and the exchange rate

An annual inflation stood at 4.3% in June 2019, over the same period, while core inflation[10] came in at 3.6%.

As of the end of June 2019, the USD/GEL exchange rate of GEL depreciated by 17.0% YoY, while the EUR/GEL exchange rate depreciated by 14.4% YoY. GEL also depreciated compared to the major trading country currencies, as evidenced by the weaker effective exchange rate. As of July 15th, the estimated real effective exchange rate was around 10% below its medium term average, also indicating potential pressures on inflation.

On 24 July meeting, the Monetary Policy Committee (MPC) of the National Bank of Georgia decided to keep the policy rate unchanged at 6.5%. According to the NBG, the GEL was assessed as being undervalued and if the upward pressure from the exchange rate on inflation continues, the central bank will consider the monetary policy tightening, as well.

Going forward

According to the IMF's recently published World Economic Outlook[12], the Georgian economy is projected to grow by 4.6% in 2019 and 5.0% in 2020. Thereafter, the economy is expected to expand by 5.2%. Based on TBC Research estimates, taking into account the Russian flights ban, growth over the next 12 months should stand at around 4% with somewhat higher growth rates expected for FY 2019 and 2020.

More information on the Georgian economy and financial sector can be found at www.tbcresearch.ge.

Unaudited Consolidated Financial Results Overview for 2Q 2019

This statement provides a summary of the unaudited business and financial trends for 2Q 2019 for TBC Bank Group plc and its subsidiaries. The quarterly financial information and trends are unaudited. The preliminary unaudited and not reviewed results were published on 29 July 2019. This report contains a more detailed information on the same results.

Starting from 1 January 2019, TBC Bank adopted IFRS 16. Therefore, the comparative information for 2018 is not comparable to the information presented for 2019.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS. The Group classifies and separately discloses certain incomes and expenses, which are non-recurring by nature and are caused by extraordinary events, as one-off items in order to provide a consistent view and enable better analysis of the financial performance of the Group. Adjusted performance is an alternative performance measure and the reconciliation of the underlying profit and loss items with the reported profit and loss items and the underlying ratios are given under Annex 26 section on pages 51-52.

Please note, that there might be slight differences in previous periods' figures due to rounding.

 
Income Statement Highlights 
in thousands of GEL                  2Q'19               1Q'19              2Q'18               Change YoY  Change QoQ 
Net interest income                            190,481          196,958               188,204   1.2%        -3.3% 
Net fee and commission income                    43,534           41,807                39,162  11.2%       4.1% 
Other operating non-interest income              38,287           33,181                31,052  23.3%       15.4% 
Credit loss allowance                 (33,372)                   (33,095)    (35,091)           -4.9%       0.8% 
Operating income after credit loss 
 allowance                                     238,930          238,851               223,327   7.0%        0.0% 
Operating expenses                    (109,383)                (102,514)     (92,090)           18.8%       6.7% 
Reported profit before tax                     129,547          136,337               131,237   -1.3%       -5.0% 
Underlying profit before tax                   135,152          136,337               131,237   3.0%        -0.9% 
Reported income tax expense           (9,329)                      (3,015)   (28,799)           -67.6%      NMF 
Underlying income tax expense         (10,170)                     (3,015)   (11,373)           -10.6%      NMF 
Reported profit for the period                 120,218          133,322               102,438   17.4%       -9.8% 
Underlying profit for the period               124,982          133,322               119,864   4.3%        -6.3% 
 

NMF - no meaningful figures

 
Balance Sheet and Capital Highlights 
                                              Jun-19        Mar-19                    Change QoQ 
in thousands of GEL                           GEL           USD         GEL           USD 
Total assets                                   17,278,364    6,023,064   15,172,306   5,637,329  13.9% 
Gross loans                                    11,141,360    3,883,766   10,366,915   3,851,867  7.5% 
Customer deposits                                9,876,813   3,442,958     9,166,789  3,405,956  7.7% 
Total equity                                     2,369,005     825,811     2,347,756  872,318    0.9% 
Regulatory tier I capital (Basel III)            1,730,302     603,166     1,746,745  649,010    -0.9% 
Regulatory total capital (Basel III)             2,430,135     847,121     2,421,461  899,703    0.4% 
Regulatory risk weighted assets (Basel III)    13,986,201    4,875,449   12,689,740   4,714,922  10.2% 
 
 

The Jun-19 figures are converted into US$ using exchange rate of 2.8786 as of 30 June 2019, while Mar-19 figures are converted using exchange rate of 2.6914 as of 31 March 2019

 
Key Ratios                          2Q'19  1Q'19  2Q'18  Change YoY  Change QoQ 
Underlying ROE                      21.5%  23.8%  24.9%  -3.4 pp     -2.3 pp 
Reported ROE                        20.7%  23.8%  21.3%  -0.6 pp     -3.1 pp 
Underlying ROA                      3.1%   3.6%   3.7%   -0.6 pp     -0.5 pp 
Reported ROA                        3.0%   3.6%   3.2%   -0.2 pp     -0.6 pp 
NIM                                 5.6%   6.1%   7.1%   -1.5 pp     -0.5 pp 
Underlying cost to income           38.1%  37.7%  35.6%  2.5 pp      0.4 pp 
Reported cost to income             40.2%  37.7%  35.6%  4.6 pp      2.5 pp 
Cost of risk                        1.1%   1.4%   1.8%   -0.7 pp     -0.3 pp 
FX adjusted cost of risk            0.8%   1.4%   1.7%   -0.9 pp     -0.6 pp 
NPL to gross loans                  3.1%   3.3%   3.1%   0.0 pp      -0.2 pp 
Regulatory Tier 1 CAR (Basel III)   12.4%  13.8%  13.4%  -1.0 pp     -1.4 pp 
Regulatory Total CAR (Basel III)    17.4%  19.1%  17.0%  0.4 pp      -1.7 pp 
Leverage (Times)                    7.3x   6.5x   7.0x   0.3x        0.8x 
 

Income Statement Discussion

Net Interest Income

 
In thousands of GEL                             2Q'19          1Q'19          2Q'18             Change YoY  Change QoQ 
Loans and advances to customers                    290,844        292,055          270,378      7.6%        -0.4% 
Investment securities measured at fair value 
 through other comprehensive income                  17,016         19,934           11,968     42.2%       -14.6% 
Due from other banks                                   5,764          5,866            7,027    -18.0%      -1.7% 
Bonds carried at amortized cost                      13,981           9,429            9,842    42.1%       48.3% 
Investment in leases                                 12,696         10,631             8,937    42.1%       19.4% 
Interest income                                    340,301        337,915          308,152      10.4%       0.7% 
Customer accounts                                    80,500         75,133           64,804     24.2%       7.1% 
Due to credit institutions                           50,786         49,246           44,785     13.4%       3.1% 
Subordinated debt                                    16,076         15,672             9,959    61.4%       2.6% 
Finance lease                                             672            637                 -  NMF         5.5% 
Debt securities in issue                               1,786             269              400   NMF         NMF 
Interest expense                                   149,820        140,957          119,948      24.9%       6.3% 
Net interest income                                190,481        196,958          188,204      1.2%        -3.3% 
 
Net interest margin                             5.6%           6.1%           7.1%              -1.5%       -0.5 pp 
 

NMF - no meaningful figures

2Q 2019 to 2Q 2018 Comparison

Net interest income increased by GEL 2.3 million, or 1.2%, to GEL 190.5 million, compared to 2Q 2018, driven by a GEL 32.1 million, or 10.4%, higher interest income and a GEL 29.9 million, or 24.9%, higher interest expense.

Interest income grew by GEL 32.1 million, or 10.4%, YoY to GEL 340.3 million, mainly due to an increase in interest income from loans and advances to customers of GEL 20.5 million, or 7.6%. This is primarily related to an increase in the gross loan portfolio of GEL 2,245.4 million, or 25.2%, YoY. This effect was slightly offset by a 1.5 pp drop in loan yields, which was mainly driven by decreased loan yields on retail loans. The 2.5pp drop in yields on retail loans was primarily driven by a continued impact of the NGB's regulation effective from January 2019, which limits the banks' ability to lend money to higher-yield retail customers. The gain in interest income was also driven by the growth in interest income from financial securities (comprised of investment securities measured at fair value through other comprehensive income and bonds carried at amortized cost) by GEL 9.2 million, or 42.1%, which resulted from a significant increase in the respective portfolios. Yields on investment securities remained stable on a YoY basis. The yield on interest earning assets decreased by 1.7 pp to 10.0%, compared to 2Q 2019.

The GEL 29.9 million, or 24.9%, YoY growth in interest expense to GEL 149.8 million in 2Q 2019 was mainly due to a GEL 15.7 million, or 24.2%, increase in interest expense on customer accounts, a GEL 6.1 million, or 61.4%, increase in interest expense on subordinated debt and a GEL 6.0 million, or 13.4% increase in interest expense on amounts due to credit institutions. The higher interest expense on customer accounts was attributable to a GEL 1,944.2 million, or 24.5%, growth in the respective portfolio, further magnified by a 0.1pp increase in the cost of customer accounts attributable to the increased share of LC denominated deposits in total deposits. The rise in interest expense on subordinated debt was attributable to a GEL 290.4 million, or 73.0%, increase in the respective portfolio. This effect was slightly offset by a 0.4 pp decrease in the cost of subordinated debt to 9.6%. The increase in interest expense on amounts due to credit institutions was mainly driven by an increase in the average respective portfolio, slightly offset by a 0.1 pp drop in the respective cost. The cost of funding increased by 0.1 p p and stood at 4.5%.

Consequently, NIM stood at 5.6% in 2Q 2019, compared to 7.1% in 2Q 2018, while risk adjusted NIM stood at 4.8%, compared to 5.5% in 2Q 2018.

2Q 2019 to 1Q 2019 Comparison

On a QoQ basis, net interest income decreased by 3.3% as a result of a 0.7% higher interest income and a 6.3% higher interest expense.

The increase in interest income by GEL 2.4 million, or 0.7%, QoQ mainly resulted from the growth in interest income on investments in leases by GEL 2.1 million, or 19.4% and a GEL 1.6 million increase in interest income on financial securities (comprised of investment securities measured at fair value through other comprehensive income and bonds carried at amortized cost). The rise in interest income on investments in leases was due to a GEL 12.6 million, or 6.1%, increase in the respective portfolio. This effect was further magnified by a 2.8 pp rise in yields on investments in leases. The increase in financial securities was mainly driven by a GEL 124.1 million or 8.0% growth in the respective portfolios and a 0.2 pp rise in the respective yields. The increase was offset a GEL 1.2 million or by 0.4%, decline in interest income on loans to customers, which was driven by a drop of 0.5 pp in loan yields to 11.0%. This resulted from a 0.6 pp decline in yields on retail deposits, related to NBG's new regulation, as mentioned above. This effect was partially offset by a GEL 774.4 million or by 7.5%, increase in the gross loan portfolio. The yield on interest earning assets decreased by 0.5 pp to 10.0%, compared to 1Q 2019.

The GEL 8.9 million, or 6.3%, QoQ increase in interest expense was primarily due to the GEL 5.4 million, or 7.1%, rise in interest expense on customer accounts. The main driver was a GEL 710.0 million, or 7.7%, increase in the portfolio of customer accounts and a 0.1 pp rise in the cost of customer accounts to 3.4%. Other contributors to the increased interest expense were a GEL 1.5 million rise in interest expense on debt securities in issue and a GEL 1.5 million increase in interest expense on amounts due to credit institutions, both of which were related to an increase in the respective portfolios by GEL 835.4 million and GEL 360.2 million. The cost of funding remained stable at 4.5%.

Consequently, on a QoQ basis, NIM decreased by 0.5 pp and stood at 5.6%. Meanwhile risk adjusted NIM increased by 0.1 pp from 4.7% in 1Q 2019.

 
Fee and Commission Income 
In thousands of GEL                   2Q'19            1Q'19           2Q'18              Change YoY  Change QoQ 
Card operations                            31,598           28,486            25,274      25.0%       10.9% 
Settlement transactions                    18,992           17,617            17,454      8.8%        7.8% 
Guarantees issued                            6,689            5,857             4,859     37.7%       14.2% 
Issuance of letters of credit                1,279            1,040             1,289     -0.8%       23.0% 
Cash transactions                            3,537            3,169             4,543     -22.1%      11.6% 
Foreign currency exchange 
 transactions                                   631              757               406    55.4%       -16.6% 
Other                                        6,257            3,976             4,440     40.9%       57.4% 
Fee and commission income                  68,983           60,902            58,265      18.4%       13.3% 
Card operations                            19,825           14,350            12,975      52.8%       38.2% 
Settlement transactions                      3,873            2,749             2,143     80.7%       40.9% 
Guarantees issued                               462              402               313    47.6%       14.9% 
Letters of credit                               351              389               327    7.3%        -9.8% 
Cash transactions                               586           1,017             1,242     -52.8%      -42.4% 
Foreign currency exchange 
 transactions                                       3              28                  3  0.0%        -89.3% 
Other                                           349              160            2,100     -83.4%      NMF 
Fee and commission expense                 25,449           19,095            19,103      33.2%       33.3% 
Card operations                            11,773           14,136            12,299      -4.3%       -16.7% 
Settlement transactions                    15,119           14,868            15,311      -1.3%       1.7% 
Guarantees                                   6,227            5,455             4,546     37.0%       14.2% 
Letters of credit                               928              651               962    -3.5%       42.5% 
Cash transactions                            2,951            2,152             3,301     -10.6%      37.1% 
Foreign currency exchange 
 transactions                                   628              729               403    55.8%       -13.9% 
Other                                        5,908            3,816             2,340     NMF         54.8% 
Net fee and commission income              43,534           41,807            39,162      11.2%       4.1% 
 
 

NMF - no meaningful figures

2Q 2019 to 2Q 2018 Comparison

In 2Q 2019, net fee and commission income totalled GEL 43.5 million, up by GEL 4.4 million, or 11.2%, compared to 2Q 2018. This mainly resulted from an increase in other net fee and commission income of GEL 3.6 million and an increase in net fee and commission income from guarantees of GEL 1.7 million, or 37.0%.

The rise in other net fee and commission income was related to the reclassification of certain fee expenses from this category to settlement transactions. Without this reclassification, net fee and commission income from settlement transactions would have increased by GEL 0.6 million, or by 3.7% driven by our affluent retail sub-segment, TBC Status. The increase in net fee and commission income from guarantees was mainly related to an increase in the respective portfolio of GEL 559.2 million, or 67.9%.

2Q 2019 to 1Q 2019 Comparison

On a QoQ basis, net fee and commission income increased by GEL 1.7 million, or 4.1%, compared to 1Q 2019. This was primarily driven by an increase in other net fee and commission income of GEL 2.1 million, or 54.8%, a GEL 0.8 million, or 14.2%, increase in net fee and commission income from guarantees and a GEL 0.8 million, or 37.1%, increase in net fee and commission income from cash transactions, partially offset by a GEL 2.4 million, or 16.7%, decrease in net fee and commission income from card operations.

The rise in other net fee and commission income was mainly due to the increased brokerage activities of our subsidiary, TBC Capital. The increase in net fee and commission income from guarantees was mainly driven by the growth of the respective portfolio by GEL 172.4 million, or 14.3%. The decrease in net interest income from card operations was mainly driven by the depreciation of the local currency, as fee expenses are mostly denominated in FC.

 
Other Operating Non-Interest Income and Gross 
Insurance Profit 
In thousands of GEL            2Q'19                1Q'19               2Q'18   Change YoY  Change QoQ 
Net income from foreign 
 currency operations                    30,119               25,214     23,251  29.5%       19.5% 
Share of profit of associates                172                  169   340     -49.4%      1.8% 
Gains less losses/(losses 
 less gains) from derivative 
 financial instruments                        (71)               (158)  396     NMF         -55.1% 
Gains less losses from 
 disposal of investment 
 securities measured at fair 
 value through other 
 comprehensive income                          79                   68  -       NMF         16.2% 
Revenues from sale of cash-in 
 terminals                                   228                  214   226     0.9%        6.5% 
Revenues from operational 
 leasing                                     797                  863   1,567   -49.1%      -7.6% 
Gain from sale of investment 
 properties                                  482                  148   855     -43.6%      NMF 
Gain from sale of inventories 
 of repossessed collateral                   321                  260   100     NMF         23.5% 
Revenues from non-credit 
 related fines                                 97                   68  111     -12.6%      42.6% 
Gain on disposal of premises 
 and equipment                               140               1,231    154     -9.1%       -88.6% 
Other                                     1,585                1,375    799     98.4%       15.3% 
Other operating income                    3,650                4,159    3,812   -4.2%       -12.2% 
Gross insurance profit[13]                4,338                3,729    3,253   33.4%       16.3% 
Other operating non-interest 
 income and gross insurance 
 profit                                 38,287               33,181     31,052  23.3%       15.4% 
NMF - no meaningful figures 
 
 

2Q 2019 to 2Q 2018 Comparison

Total other operating non-interest income and gross insurance profit grew by GEL 7.2 million, or 23.3%, to GEL 38.3 million in 2Q 2019. This primarily resulted from the growth in net income from foreign currency operations by GEL 6.9 million, or 29.5%, and an increase in gross insurance profit of GEL 1.1 million, or 33.4%. This increase was slightly offset by a GEL 0.8 million, or 49.1% drop in revenues from operational leasing. Higher net income from foreign currency operations resulted from an increased number and volume of FX transactions in the retail and corporate segments.

The growth in gross insurance profit was related to the increase in non-health[13] insurance business as well as entry into a new business line, health insurance in May 2019. More information about TBC insurance can be found in Annex 23 on page 49.

2Q 2019 to 1Q 2019 Comparison

On a QoQ basis, total other operating non-interest income and gross insurance profit increased by GEL 5.1 million, or by 15.4%. This mainly resulted from the growth in net income from foreign currency operations by GEL 4.9 million, or 19.5%, mainly related to the increased number and volume of FX transactions across all segments, as well as the higher volatility of the local currency.

 
Credit Loss Allowance 
In thousands of GEL                         2Q'19           1Q'19            2Q'18              Change YoY  Change QoQ 
Credit loss allowance for loans to 
 customers                                      (30,067)        (36,416)          (37,982)      -20.8%      -17.4% 
Credit loss allowance for investments in 
 finance lease                                        219              (41)            (252)    NMF         NMF 
Credit loss allowance for performance 
 guarantees and credit related commitments           (824)            432             1,375     NMF         NMF 
Credit loss allowance for other financial 
 assets                                           (2,389)          2,969              1,950     NMF         NMF 
Credit loss allowance for financial assets 
 measured at fair value through other 
 comprehensive 
 income                                              (311)             (39)              (182)  NMF         NMF 
Total credit loss allowance                     (33,372)        (33,095)          (35,091)      -4.9%       0.8% 
Operating income after credit loss 
 allowance                                     238,930         238,851            223,327       7.0%        0.0% 
 
Cost of risk                                1.1%            1.4%             1.8%               -0.7 pp     -0.3 pp 
NMF - no meaningful figures 
 

2Q 2019 to 2Q 2018 Comparison

In 2Q 2019, total credit loss allowance declined by GEL 1.7 million, or by 4.9% to GEL 33.4 million compared to 2Q 2018.

This was primarily attributable to a drop in credit loss allowance for loans to customers by GEL 7.9 million, or 20.8%, which was mainly driven by recoveries in the corporate segment in 2Q 2019, as well as portfolio product mix change. This decrease was partially offset by increases in credit loss allowances for other financial assets and for performance guarantees and credit related commitments by GEL 4.2 million and GEL 2.2 million, respectively.

In 2Q 2019, the cost of risk stood at 1.1% (0.8% without the FX effect), compared to 1.8% (1.7% without the FX effect) in 2Q 2018.

2Q 2019 to 1Q 2019 Comparison

On a QoQ basis, total credit loss allowance increased by GEL 0.3 million, or 0.8%, to GEL 33.4 million.

This was mainly driven by an increase in credit loss allowance for other financial assets of GEL 5.4 million and a GEL 1.3 million increase in credit loss allowance for performance guarantees and credit related commitments. The rise in credit loss allowance for other financial assets was primarily related to the recovery of a single corporate debtor in 1Q 2019. The increase was partially offset by a drop in credit loss allowance for loans to customers of GEL 6.3 million, or 17.4%, which was mainly attributable to an improvement in the performance of the corporate and MSME segments, as well as portfolio product mix change.

In 2Q 2019, the cost of risk stood at 1.1% (0.8% without the FX effect), compared to 1.4% (1.4% without the FX effect) in 1Q 2019.

 
Operating Expenses 
 
In thousands of GEL                           2Q'19           1Q'19           2Q'18             Change YoY  Change QoQ 
Staff costs                                        58,886          57,753            50,732     16.1%       2.0% 
Provisions for liabilities and charges              (1,241)            (200)                 -  NMF         NMF 
Depreciation and amortization                      15,955          16,169            10,992     45.2%       -1.3% 
Professional services                                8,520           3,526             1,498    NMF         NMF 
Advertising and marketing services                   4,983           4,478             7,117    -30.0%      11.3% 
Expenses related to lease contracts[14]              3,196           2,630             -        NMF         21.5% 
Rent                                          -               -               5,843             NMF         NMF 
Utility services                                     1,623           1,947             1,453    11.7%       -16.6% 
Intangible asset enhancement                         3,234           2,741             2,572    25.7%       18.0% 
Taxes other than on income                           1,896           1,817             1,946    -2.6%       4.3% 
Communications and supply                            1,348           1,435             1,160    16.2%       -6.1% 
Stationary and other office expenses                 1,133           1,119             1,324    -14.4%      1.3% 
Insurance                                               278             229               483   -42.4%      21.4% 
Security services                                       521             504               506   3.0%        3.4% 
Premises and equipment maintenance                   2,730           2,035             1,128    NMF         34.2% 
Business trip expenses                                  656             409               669   -1.9%       60.4% 
Transportation and vehicles maintenance                 493             410               413   19.4%       20.2% 
Charity                                                 275          1,004                281   -2.1%       -72.6% 
Personnel training and recruitment                      305             291               233   30.9%       4.8% 
Write-down of current assets to fair value 
 less costs to sell                                    (251)               -            (567)   -55.7%      NMF 
Loss on disposal of Inventory                             37              14                80  -53.8%      NMF 
Loss on disposal of investment properties                 38               -                30  26.7%       NMF 
Loss on disposal of premises and equipment                19            233                 58  -67.2%      -91.8% 
Other                                                4,749           3,970             4,139    14.7%       19.6% 
Administrative and other operating expenses        35,783          28,792            30,366     17.8%       24.3% 
Operating expenses                               109,383         102,514             92,090     18.8%       6.7% 
Profit before tax                                129,547         136,337           131,237      -1.3%       -5.0% 
Income tax expense                                  (9,329)         (3,015)        (28,799)     -67.6%      NMF 
Profit for the period                            120,218         133,322           102,438      17.4%       -9.8% 
 
Cost to income                                40.2%           37.7%           35.6%             4.6 pp      2.5 pp 
ROE                                           20.7%           23.8%           21.3%             -0.6 pp     -3.1 pp 
ROA                                           3.0%            3.6%            3.2%              -0.2 pp     -0.6 pp 
 

NMF - no meaningful figures

2Q 2019 to 2Q 2018 Comparison

In 2Q 2019, total operating expenses expanded by GEL 17.3 million, or 18.8%, YoY to GEL 109.4 million, primarily due to an increase in staff costs of GEL 8.2 million, or 16.1%, YoY and a rise in professional services of GEL 7.0 million. The growth in staff cost was mainly driven by the increase in share price over the three year period for the purpose of top and middle management share based bonuses (while the change in the number of shares did not have material effect). The increase in professional services was mainly attributable to one-off consulting fees in the amount of GEL 5.6 million, in relation to the recent events regarding historic matters surrounding TBC Bank. For further details, please see the following press release. Without these one-off costs operating expenses would have increased by 12.7%.

As a result, cost to income ratio increased by 4.6 pp (or by 2.5 pp on an underlying basis) from 35.6% in 2Q 2018.

2Q 2019 to 1Q 2019 Comparison

On a QoQ basis, total operating expenses grew by GEL 6.9 million, or 6.7%. This was primarily attributable to a GEL 5.0 million rise in professional services and a GEL 1.1 million, or 2.0%, increase in staff costs. The increase in professional services was related to one-off costs as mentioned above. Without these one-off costs operating expenses would have increased by 1.2%.

As a result, the cost to income ratio expanded by 2.5 pp (or by 0.4 pp on an underlying basis) from 37.7%, compared to 1Q 2019.

Net Income

Reported net income for the second quarter decreased by GEL 13.1 million, or 9.8%, QoQ and increased by GEL 17.8 million, or 17.4%, YoY and amounted to GEL 120.2 million. Underlying net income decreased by GEL 8.3 million, or 6.3%, QoQ and increased by GEL 5.1 million, or 4.3%, YoY and amounted to GEL 125.0 million.

As a result, underlying ROE stood at 21.5%, down by 3.4 pp YoY and by 2.3 pp QoQ, while underlying ROA stood at 3.1%, down by 0.6 pp YoY but by 0.5 pp QoQ. Reported ROE stood at 20.7%, down by 0.6 pp YoY and by 3.1 pp QoQ, while reported ROA stood at 3.0%, down by 0.2 pp YoY but by 0.6 pp QoQ.

 
 
  Balance Sheet Discussion 
In thousands of GEL                                         Jun-19             Mar-19            Change QoQ 
Cash, due from banks and mandatory cash balances with NBG         3,497,441         2,373,893    47.3% 
Loans and advances to customers (Net)                           10,801,264        10,029,320     7.7% 
Financial securities                                              1,674,821         1,550,767    8.0% 
Fixed and intangible assets & investment property                    576,346           570,047   1.1% 
Right of use assets                                                    61,555            60,951  1.0% 
Other assets                                                         666,937           587,328   13.6% 
Total assets                                                    17,278,364        15,172,306     13.9% 
Due to credit institutions                                        3,052,742         2,692,585    13.4% 
Customer accounts                                                 9,876,813         9,166,789    7.7% 
Debt securities in issue                                             848,838             13,415  NMF 
Subordinated debt                                                    688,002           664,330   3.6% 
Other liabilities                                                    442,964           287,431   54.1% 
Total liabilities                                               14,909,359        12,824,550     16.3% 
Total equity                                                      2,369,005         2,347,756    0.9% 
 
 

Assets

On a QoQ basis, total assets rose by GEL 2,106.1 million, or 13.9%, mainly due to a GEL 1,123.5 million, or 47.3%, increase in liquid assets (comprising cash, due from banks and mandatory cash balances with NBG) and a GEL 771.9 million, or 7.7%, growth in net loans to customers. The expansion in liquid assets was primarily attributable to the rise in mandatory reserve requirements in FC effective from May 2019.

As of 30 June 2019, the gross loan portfolio reached GEL 11,141.4 million, up by GEL 774.4 million, or by 7.5% QoQ. Without the currency effect, the loans to customers would have increased by 3.3% QoQ. At the same time, gross loans denominated in foreign currency accounted for 59.9 % of total loans, compared to 59.6% as of 31 March 2019.

Asset Quality

Borrowers with FX income

 
                       30-Jun-19                                       31-Mar-19 
Segments               % of FX loans  of which borrowers with FX       % of FX loans  of which borrowers with FX 
                                      income**                                        income** 
Retail                 55.1%          30.0%                            56.0%          28.7% 
Non-mortgage           20.6%          23.5%                            19.9%          23.6% 
Mortgage               77.0%          31.1%                            81.1%          29.6% 
Corporate              71.4%          50.9%*                           70.0%          51.4%* 
MSME                   52.7%          12.8%                            52.2%          14.3% 
Total loan portfolio   59.9%          34.6%                            59.6%          34.4% 
 

(Based on internal estimates)

* Pure exports account for 5.8% and 6.4% of total corporate FX denominated loans as at 30 June 2019 and 31 March 2019, respectively

** FX income implies both direct and indirect income

 
PAR 30 by Segments and Currencies                   Jun-19             Mar-19 
                                                    GEL   FC    Total  GEL   FC    Total 
Corporate                                           1.7%  0.7%  1.0%   1.1%  1.2%  1.2% 
Retail                                              3.6%  1.9%  2.7%   4.4%  1.8%  2.9% 
MSME                                                2.0%  3.4%  2.8%   2.7%  3.5%  3.1% 
Total                                               2.7%  1.8%  2.1%   3.2%  1.9%  2.4% 
Loans overdue by more than 30 days to gross loans 
 
 
Total 
 Total PAR 30 improved by 0.3 pp QoQ, standing at 2.1%. The improvement 
 was attributable to all three segments. 
 
 Retail Segment 
 The retail segment's PAR 30 amounted to 2.7%, down by 0.2 pp QoQ 
 mainly driven by consumer loans. 
 
 Corporate 
 The corporate segment's PAR 30 improved by 0.2 pp QoQ and amounted 
 to 1.0%. 
 
 MSME 
 The MSME segment's PAR 30 improved by 0.3 pp QoQ and stood at 
 2.8%, mainly attributable to improved performance of both SME 
 and Micro sub segments. 
 
 NPLs        Jun-19             Mar-19 
             GEL   FC    Total  GEL   FC    Total 
 Corporate   1.5%  2.3%  2.1%   1.7%  3.0%  2.6% 
 Retail      4.2%  2.6%  3.3%   4.3%  2.3%  3.2% 
 MSME        2.7%  5.6%  4.2%   3.0%  5.6%  4.4% 
 Total       3.2%  3.1%  3.1%   3.3%  3.2%  3.3% 
 
 
 Total 
 Total NPLs improved by 0.2 pp on a QoQ basis and stood at 3.1%, 
 primarily attributable to the corporate and MSME segments. 
 
 Retail Segment 
 The retail segment's NPLs remained broadly stable QoQ and stood 
 at 3.3%. 
 
 Corporate 
 The corporate segment's NPLs dropped by 0.5 pp QoQ and stood at 
 2.1%, mainly attributable to improved performance of two non- 
 performing corporate borrowers as well as corporate loan book 
 growth effect. 
 
 MSME 
 The MSME segment's NPLs decreased by 0.2 pp on a QoQ basis and 
 stood at 4.2%. QoQ improvement is driven by improved performance 
 of both SME and Micro sub segments. 
 NPLs Coverage   Jun-19                             Mar-19 
                 Exc. Collateral  Incl. Collateral  Exc. Collateral  Incl. Collateral 
 Corporate       103.3%           299.1%            95.4%            288.7% 
 Retail          113.8%           180.4%            123.8%           190.0% 
 MSME            71.5%            179.0%            71.4%            175.2% 
 Total           97.9%            206.0%            100.1%           210.8% 
 

Liabilities

As of 30 June 2019, TBC Bank's total liabilities amounted to GEL 14,909.4 million, up by GEL 2,084.8 million, or 16.3%, QoQ. This primarily resulted from a GEL 835.4 million increase in debt securities in issue and a GEL 710.0 million or 7.7%, increase in customer accounts.

As of 30 June 2019, TBC Bank's customer accounts amounted to GEL 9,876.8, up by 3.5% on a constant currency. At the same time, customer accounts in foreign currency accounted for 62.8% of total customer accounts, compared to 63.2% as of 31 March 2019.

Liquidity

As of 30 June 2019, the Bank's liquidity ratio, as defined by the NBG, stood at 37.1%, compared to 35.9% as of 31 March 2019 and above the NBG limit of 30%. As of 30 June 2019, the total liquidity coverage ratio (LCR), as defined by the NBG, was 126.3%, above the 100.0% limit. The LCR in GEL and FC stood at 100.4% and 143.8% respectively, above the respective limits of 75% and 100%.

Total Equity

As of 30 June 2019, TBC's total equity totalled GEL 2,369.0 million, up by GEL 21.2 million from GEL 2,347.8 million as of 31 March 2019. The QoQ change in equity was mainly due to an increase in net income of GEL 120.2 million, which was partially offset by a declared dividend in the amount of GEL 108.6 million.

Regulatory Capital

As of 30 June 2019, the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 12.4% and 17.4%, respectively, compared to the minimum required levels of 11.9% and 16.7%. In comparison, as of 31 March 2019, the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 13.8% and 19.1%, respectively, higher than the minimum required levels of 11.9% and 16.7%.

In 30 June 2019, the Bank's Basel III Tier 1 Capital amounted to GEL 1,730.3 million, down by GEL 16.4 million, or 0.9%, compared to March 2019, due to dividend declared in 2Q 2019, which was partially offset by net income. The Bank's Basel III Total Capital amounted to GEL 2,430.1 million, up by GEL 8.7 million, or 0.4%, QoQ. The increase in total capital was attributable to the increase in net income as well as the increase in general reserves of loans to customers, mainly driven by the GEL depreciation. This increase was partially offset by the declared dividend. Risk weighted assets stood at GEL 13,986.2 million as of 30 June 2019, up by GEL 1,296.5 million, or 10.2%, compared to March 2019, mainly related to the increase in loan book as well as the rise in mandatory cash reserves in FC.

Results by Segments and Subsidiaries

The segment definitions are as follows (updated in 2019):

-- Corporate - legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or who have been granted facilities with more than GEL 5.0 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis;

-- Retail - non-business individual customers; all individual customers are included in retail deposits;

-- MSME - Business customers who are not included in corporate segment; or legal entities who have been granted a Pawn shop loan; or individual customers of the fully-digital bank, Space; and

-- Corporate centre and other operations - comprises of the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.

Business customers are all legal entities or individuals who have been granted a loan for business purposes.

Income Statement by Segments

 
2Q'19            Retail                 MSME                   Corporate            Corp.Centre         Total 
Interest income  143,095                72,421                 78,451                        46,334            340,301 
Interest 
 expense          (38,176)               (2,478)                (40,520)             (68,646)            (149,820) 
Net transfer 
 pricing          (16,585)               (24,103)              12,998                        27,690                      - 
Net interest 
 income          88,334                 45,840                           50,929                5,378           190,481 
Fee and 
 commission 
 income          47,987                 6,110                            12,752                2,134             68,983 
Fee and 
 commission 
 expense          (21,529)               (2,123)                (1,647)              (150)               (25,449) 
Net fee and 
 commission 
 income          26,458                 3,987                  11,105                          1,984             43,534 
Gross insurance 
 profit                              -                      -                    -             4,338               4,338 
Net income from 
 foreign 
 currency 
 operations      7,211                  5,673                  10,081                          1,567             24,532 
Foreign 
 exchange 
 translation 
 gains less 
 losses/(losses 
 less gains)     -                      -                                        -             5,587               5,587 
Gains less 
 Losses from 
 Disposal 
 of Investment 
 Securities 
 Measured 
 at Fair Value 
 through Other 
 Comprehensive 
 Income           (71)                  -                                        -                   -   (71) 
Net losses from 
 derivative 
 financial 
 instruments     -                      -                                        -                  79                  79 
Other operating 
 income          2,094                  241                    776                                539              3,650 
Share of profit 
 of associates   -                      -                                    -                    172                 172 
Other operating 
 non-interest 
 income and 
 insurance 
 profit          9,234                  5,914                  10,857                        12,282              38,287 
Credit loss 
 allowance for 
 loans to 
 customers        (28,158)               (5,740)               3,831                                 -          (30,067) 
Credit loss 
 allowance for 
 performance 
 guarantees and 
 credit related 
 commitments                        28   (189)                  (663)                                -               (824) 
Credit loss 
 allowance for 
 investments in 
 finance lease   -                      -                                        -                219                 219 
Credit loss 
 allowance for 
 other 
 financial 
 assets          55                     -                       (854)                (1,590)             (2,389) 
Credit loss 
 allowance for 
 financial 
 assets 
 measured 
 at fair value 
 through other 
 comprehensive 
 income          -                      -                       (281)                (30)                (311) 
Profit before 
 G&A expenses 
 and income 
 taxes           95,951                 49,812                 74,924                        18,243            238,930 
Staff costs       (32,939)               (11,831)               (9,510)              (4,606)             (58,886) 
Depreciation 
 and 
 amortization     (12,355)               (1,909)                (777)                (914)               (15,955) 
Provision for 
 liabilities 
 and charges                        -   -                                        -             1,241               1,241 
Administrative 
 and other 
 operating 
 expenses         (22,076)               (6,123)                (4,640)              (2,944)             (35,783) 
Operating 
 expenses         (67,370)               (19,863)               (14,927)             (7,223)             (109,383) 
Profit before 
 tax             28,581                 29,949                 59,997                        11,020            129,547 
Income tax 
 expense          (1,768)                (1,679)                (4,684)              (1,198)             (9,329) 
Profit for the 
 year            26,813                 28,270                 55,313                          9,822           120,218 
 
 
Portfolios by Segments 
In thousands of GEL                                  Jun-19         Mar-19 
Loans and advances to customers 
 
Non-mortgage                                            1,875,501      1,882,816 
Mortgage                                                2,959,819      2,695,457 
Retail                                                  4,835,320      4,578,273 
Corporate                                               3,658,340      3,364,911 
MSME                                                    2,647,700      2,423,731 
Total loans and advances to customers (Gross)         11,141,360     10,366,915 
Less: credit loss allowance for loans to customers       (340,096)      (337,595) 
Total loans and advances to customers (Net)           10,801,264     10,029,320 
 
Customer accounts 
 
Retail                                                  5,360,114      4,914,927 
Corporate                                               3,510,179      3,316,436 
MSME                                                    1,006,520         935,426 
Total Customer accounts                                 9,876,813      9,166,789 
 

Retail Banking

As of 30 June 2019, retail loans stood at GEL 4,835.3 million, up by GEL 257.0 million, or 5.6%, QoQ and accounted for 39.6% market share of total individual loans. Without the currency effect, retail loans would have increased by 1.8%. As of the same date, foreign currency loans represented 55.1% of the total retail loan portfolio.

In the reporting period, retail deposits stood at GEL 5,360.1 million, up by GEL 445.2 million, or 9.1%, QoQ and accounted for 39.5% market share of total individual deposits. Without the currency effect, retail deposits would have increased by 3.5%. As of 30 June 2019, term deposits accounted for 53.7% of the total retail deposit portfolio, while foreign currency deposits represented 80.5% of the total.

In 2Q 2019, retail loan yields and deposit rates stood at 12.2% and 3.0%, respectively. The segment's cost of risk on loans was 2.4% . The retail segment contributed 22.3%, or GEL 26.8 million, to the total net income in 2Q 2019.

Corporate Banking

As of 30 June 2019, corporate loans amounted to GEL 3,658.3 million, up by GEL 293.4 million, or 8.7%, QoQ. Foreign currency loans accounted for 71.4% of the total corporate loan portfolio. Without the currency effect, corporate loans would have increased by 3.7%. The market share of total legal entities loans stood at 37.3%.

As of the same date, corporate deposits totalled GEL 3,510.2 million, up by GEL 193.7 million, or 5.8%, QoQ. Foreign currency corporate deposits represented 41.1% of the total corporate deposit portfolio. Without the currency effect, corporate deposits would have increased by 3.1%. The market share of total legal entities deposits stood at 42.8%.

In 2Q 2019, corporate loan yields and deposit rates stood at 8.8% and 4.9%, respectively. In the same period, the cost of risk on loans was -0.5%. In terms of profitability, the corporate segment's net profit reached GEL 55.3 million, or 46.0%, of the total net income.

MSME Banking

As of 30 June 2019, MSME loans amounted to GEL 2,647.7, up by GEL 224.0 million, or 9.2%, QoQ. Without the currency effect, MSME loans would have increased by 5.5%. Foreign currency loans accounted for 52.7% of the total MSME portfolio.

As of the same date, MSME deposits stood at GEL 1,006.5 million, up by GEL 71.1 million, or 7.6%, QoQ. Without the currency effect, MSME deposits would have increased by 4.5%. Foreign currency MSME deposits represented 44.6% of the total MSME deposit portfolio.

In 2Q 2019, MSME loan yields and deposit rates stood at 11.5% and 1.0%, respectively, while the cost of risk on loans was 0.9%. In terms of profitability, net profit for the MSME segment amounted to GEL 28.3 million, or 23.5%, of the total net income.

Consolidated Financial Statements of TBC Bank Group PLC

 
Consolidated Balance Sheet 
In thousands of GEL                              Jun-19               Mar-19 
Cash and cash equivalents                              1,628,344              927,830 
Due from other banks                                        27,860              29,981 
Mandatory cash balances with National Bank of 
 Georgia                                               1,841,237           1,416,082 
Loans and advances to customers                      10,801,264          10,029,320 
Investment securities measured at fair value 
 through other comprehensive income                       908,158             889,137 
Bonds carried at amortized cost                           766,663             661,630 
Investments in finance leases                             220,871             208,243 
Investment properties                                       79,114              84,055 
Current income tax prepayment                               19,417              11,102 
Deferred income tax asset                                     1,753               1,973 
Other financial assets                                    165,382             124,093 
Other assets                                              211,850             207,518 
Premises and equipment                                    373,322             366,327 
Right of use assets                                         61,555              60,951 
Intangible assets                                         123,910             119,665 
Goodwill                                                    45,301              31,798 
Investments in associates                                     2,363               2,601 
TOTAL ASSETS                                         17,278,364          15,172,306 
LIABILITIES 
Due to credit institutions                             3,052,742           2,692,585 
Customer accounts                                      9,876,813           9,166,789 
Lease liabilities                                           62,598              58,276 
Other financial liabilities                               252,280             113,145 
Current income tax liability                                     727                   36 
Debt Securities in issue                                  848,838               13,415 
Deferred income tax liability                               21,361              19,337 
Provisions for liabilities and charges                      20,116              18,250 
Other liabilities                                           85,882              78,387 
Subordinated debt                                         688,002             664,330 
TOTAL LIABILITIES                                    14,909,359          12,824,550 
EQUITY 
Share capital                                                 1,672               1,672 
Share premium                                             831,773             831,773 
Retained earnings                                      1,668,810           1,657,330 
Group reorganisation reserve                            (162,166)            (162,166) 
Share based payment reserve                               (37,968)             (43,080) 
Revaluation reserve for premises                            56,606              56,701 
Fair value reserve                                          12,680                9,702 
Cumulative currency translation reserve                     (6,478)              (7,295) 
Net assets attributable to owners                      2,364,929           2,344,637 
Non-controlling interest                                      4,076               3,119 
TOTAL EQUITY                                           2,369,005           2,347,756 
TOTAL LIABILITIES AND EQUITY                         17,278,364          15,172,306 
 Consolidated Statement of Profit or Loss and 
 Other Comprehensive Income 
In thousands of GEL                              2Q'19                1Q'19                2Q'18 
Interest income                                     340,301              337,915                308,152 
Interest expense                                   (149,820)            (140,957)             (119,948) 
Net interest income                                 190,481              196,958                188,204 
Fee and commission income                             68,983               60,902                 58,265 
Fee and commission expense                           (25,449)             (19,095)              (19,103) 
Net fee and commission income                         43,534               41,807                 39,162 
Net insurance premiums earned                           8,663                7,329                  6,168 
Net insurance claims incurred and agents' 
 commissions                                           (4,325)              (3,600)               (2,915) 
Insurance profit                                        4,338                3,729                  3,253 
Net income from foreign currency operations           24,532               21,587                 21,701 
Net gain/(losses) from foreign exchange 
 translation                                            5,587                3,627                  1,550 
Net gains/(losses) from derivative financial 
 instruments                                                (71)               (158)                   396 
Gains less losses from disposal of investment 
 securities measured at fair value through 
 other 
 comprehensive income                                        79                   68                      - 
Other operating income                                  3,650                4,159                  3,812 
Share of profit of associates                              172                  169                    340 
Other operating non-interest income                   33,949               29,452                 27,799 
Credit loss allowance for loans to customers         (30,067)             (36,416)              (37,982) 
Credit loss allowance for investments in 
 finance lease                                             219                   (41)                (252) 
Credit loss allowance for performance 
 guarantees and credit related commitments                (824)                 432                 1,375 
Credit loss allowance for other financial 
 assets                                                (2,389)               2,969                  1,950 
Credit loss allowance for financial assets 
 measured at fair value through other 
 comprehensive 
 income                                                   (311)                  (39)                  (182) 
Operating income after credit loss allowance 
 for impairment                                     238,930              238,851                223,327 
Staff costs                                          (58,886)             (57,753)              (50,732) 
Depreciation and amortization                        (15,955)             (16,169)              (10,992) 
(Provision for)/ recovery of liabilities and 
 charges                                                1,241                   200                       - 
Administrative and other operating expenses          (35,783)             (28,792)              (30,366) 
Operating expenses                                 (109,383)            (102,514)               (92,090) 
Profit before tax                                   129,547              136,337                131,237 
Income tax expense                                     (9,329)              (3,015)             (28,799) 
Profit for the period                               120,218              133,322                102,438 
Other comprehensive income: 
Items that may be reclassified subsequently to 
profit or loss: 
Movement in fair value reserve                          2,976                1,023                (1,547) 
Exchange differences on translation to 
 presentation currency                                     815                 (358)                     81 
Items that will not be reclassified to profit 
or loss: 
Income tax recorded directly in other 
 comprehensive income                                         -                    -              (5,151) 
Other comprehensive income for the period               3,791                   665               (6,617) 
Total comprehensive income for the period           124,009              133,987                  95,821 
Profit attributable to: 
 - Shareholders of TBCG                             119,998              133,237                102,589 
 - Non-controlling interest                                220                    85                 (151) 
Profit for the period                               120,218              133,322                102,438 
Total comprehensive income is attributable to: 
 - Shareholders of TBCG                             123,785              133,902                  96,060 
 - Non-controlling interest                                224                    85                 (239) 
Total comprehensive income for the period           124,009              133,987                  95,821 
 
 

Key Ratios

Average Balances

The average balances included in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts prepared from TBC's accounting records. These were used by the management for monitoring and control purposes.

 
  Key Ratios 
 
Ratios (based on monthly averages, where applicable)   2Q'19   1Q'19   2Q'18 
Underlying ROE(1)                                      21.5%   23.8%   24.9% 
Reported ROE(2)                                        20.7%   23.8%   21.3% 
Underlying ROA(3)                                      3.1%    3.6%    3.7% 
Reported ROA(4)                                        3.0%    3.6%    3.2% 
ROE before credit loss allowance(5)                    26.4%   29.7%   28.6% 
Underlying cost to income(6)                           38.1%   37.7%   35.6% 
Reported cost to income(7)                             40.2%   37.7%   35.6% 
Cost of risk(8)                                        1.1%    1.4%    1.8% 
FX adjusted cost of risk(9)                            0.8%    1.4%    1.7% 
NIM(10)                                                5.6%    6.1%    7.1% 
Risk adjusted NIM(11)                                  4.8%    4.7%    5.5% 
Loan yields(12)                                        11.0%   11.5%   12.5% 
Risk adjusted loan yields(13)                          10.2%   10.1%   10.8% 
Deposit rates(14)                                      3.4%    3.3%    3.3% 
Yields on interest earning assets(15)                  10.0%   10.5%   11.7% 
Cost of funding(16)                                    4.5%    4.5%    4.4% 
Spread(17)                                             5.5%    6.0%    7.3% 
PAR 90 to gross loans(18)                              1.3%    1.3%    1.1% 
NPLs to gross loans(19)                                3.1%    3.3%    3.1% 
NPLs coverage(20)                                      97.9%   100.1%  116.1% 
NPLs coverage with collateral(21)                      206.0%  210.8%  216.1% 
Credit loss level to gross loans(22)                   3.1%    3.3%    3.6% 
Related party loans to gross loans(23)                 0.1%    0.1%    0.1% 
Top 10 borrowers to total portfolio(24)                8.6%    9.6%    9.2% 
Top 20 borrowers to total portfolio(25)                12.6%   13.5%   13.2% 
Net loans to deposits plus IFI funding(26)             91.4%   90.5%   89.5% 
Net stable funding ratio(27)                           130.4%  123.8%  128.7% 
Liquidity coverage ratio(28)                           126.3%  117.5%  119.2% 
Leverage(29)                                           7.3x    6.5x    7.0x 
Regulatory Tier 1 CAR (Basel III)(30)                  12.4%   13.8%   13.4% 
Regulatory Total 1 CAR (Basel III)(31)                 17.4%   19.1%   17.0% 
 
 

Ratio definitions

1. Underlying return on average total equity (ROE) equals underlying net income attributable to owners divided by monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period adjusted for the respective one-off items; Annualized where applicable.

2. Reported return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; annualised where applicable.

3. Underlying return on average total assets (ROA) equals underlying net income of the period divided by monthly average total assets for the same period. Annualised where applicable.

4. Reported return on average total assets (ROA) equals net income of the period divided by the monthly average total assets for the same period. Annualised where applicable.

5. Return on average total equity (ROE) before credit loss allowance equals net income attributable to owners excluding all credit loss allowance divided by the monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.

6. Underlying cost to income ratio equals total underlying operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

7. Reported cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

8. Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

9. FX adjusted cost of risk is calculated based on currency rates of the respective prior periods.

10. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with NBG which currently has negative interest, and includes other earning items from due from banks.

11. Risk Adjusted Net interest margin is NIM minus the cost of risk without one-offs and currency effect.

12. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

13. Risk Adjusted Loan yield is loan yield minus the cost of risk without one-offs and currency effect.

14. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable.

15. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; annualised where applicable.

16. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; annualised where applicable.

17. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).

18. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.

19. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.

20. NPLs coverage ratio equals total credit loss allowance for loans to customers calculated per IFRS 9 divided by the NPL loans.

21. NPLs coverage with collateral ratio equals credit loss allowance for loans to customers per IFRS 9 plus total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.

22. Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period.

23. Related party loans to total loans equals related party loans divided by the gross loan portfolio.

24. Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio.

25. Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio.

26. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.

27. Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as defined in Basel III.

28. Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as defined by the NBG.

29. Leverage equals total assets to total equity.

30. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

31. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

Exchange Rates

To calculate the QoQ growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.6914 as of 31 March 2019. For the calculations of the YoY growth without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4516 as of 30 June 2018. As of 30 June 2019 the USD/GEL exchange rate equalled 2.8687. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 2Q 2019 of 2.7393, 1Q 2019 of 2.6680, 2Q 2018 of 2.4460.

Unaudited Consolidated Financial Results Overview for 1H 2019

This statement provides a summary of the unaudited business and financial trends for 1H 2019 for TBC Bank Group plc and its subsidiaries. The semi-annual financial information and trends are reviewed. The preliminary unaudited and not reviewed results were published on 29 July 2019. This report contains a more detailed information on the same results.

Starting from 1 January 2019, TBC Bank adopted IFRS 16. Therefore, the comparative information for 2018 is not comparable to the information presented for 2019.

Please note that there might be slight differences in previous periods' figures due to rounding.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS. The Group classifies and separately discloses certain incomes and expenses, which are non-recurring by nature and are caused by extraordinary events, as one-off items in order to provide a consistent view and enable better analysis of the financial performance of the Group. Adjusted performance is an alternative performance measure and the reconciliation of the underlying profit and loss items with the reported profit and loss items and the underlying ratios are given under Annex 26 section on pages 51-52.

 
Income Statement Highlights 
in thousands of GEL                            1H'19                 1H'18             Change YoY 
Net interest income                                        387,439          363,607    6.6% 
Net fee and commission income                                85,341           74,082   15.2% 
Other operating non-interest income                          71,468           59,428   20.3% 
Credit loss allowance                                      (66,467)          (74,554)  -10.8% 
Operating income after credit loss allowance               477,781          422,563    13.1% 
Operating expenses                                       (211,897)         (183,022)   15.8% 
Reported profit before tax                                 265,884          239,541    11.0% 
Underlying profit before tax                               271,489          239,541    13.3% 
Reported income tax expense                                (12,344)          (39,578)  -68.8% 
Underlying income tax expense                              (13,185)          (22,152)  -40.5% 
Reported profit for the period                             253,540          199,963    26.8% 
Underlying profit for the period                           258,304          217,389    18.8% 
 
 
Balance Sheet and Capital Highlights 
                                              Jun-19         Jun-18                    Change YoY 
in thousands of GEL                           GEL            USD         GEL           USD 
Total assets                                    17,278,364    6,023,064   13,583,510    5,540,671  27.2% 
Gross loans                                     11,141,360    3,883,766     8,895,947   3,628,629  25.2% 
Customer deposits                                 9,876,813   3,442,958     7,932,585   3,235,677  24.5% 
Total equity                                      2,369,005     825,811     1,943,684     792,823  21.9% 
Regulatory tier I capital (Basel III)             1,730,302     603,166     1,498,857     611,379  15.4% 
Regulatory total capital (Basel III)              2,430,135     847,121     1,908,398     778,430  27.3% 
Regulatory risk weighted assets (Basel III)     13,986,201    4,875,449   11,200,354    4,568,589  24.9% 
 
 

The Jun-19 figures are converted into US$ using exchange rate of 2.8786 as of 30 June 2019, while Jun-18 figures are converted using exchange rate of 2.4516 as of 30 June 2018

 
Key Ratios                          1H'19  1H'18  Change YoY 
Underlying ROE                      22.7%  23.0%  -0.3 pp 
Reported ROE                        22.3%  21.2%  1.1 pp 
Underlying ROA                      3.3%   3.4%   -0.1 pp 
Reported ROA                        3.3%   3.1%   0.2 pp 
NIM                                 5.8%   7.0%   -1.2 pp 
Underlying cost to income           37.9%  36.8%  1.1 pp 
Reported cost to income             38.9%  36.8%  2.1 pp 
Cost of risk                        1.3%   1.6%   -0.3 pp 
FX adjusted cost of risk            1.2%   1.7%   -0.5 pp 
NPL to gross loans                  3.1%   3.1%   0.0 pp 
Regulatory Tier 1 CAR (Basel III)   12.4%  13.4%  -1.0 pp 
Regulatory Total CAR (Basel III)    17.4%  17.0%  0.4 pp 
Leverage (Times)                    7.3x   7.0x   0.3x 
 

Income Statement Discussion

 
Net Interest Income 
In thousands of GEL                                                   1H'19             1H'18           Change YoY 
Loans and advances to customers                                              582,899       526,431      10.7% 
Investment securities measured at fair value through other 
 comprehensive income                                                          36,950        25,135     47.0% 
Due from other banks                                                           11,630        11,946     -2.6% 
Bonds carried at amortized cost                                                23,410        17,879     30.9% 
Investment in leases                                                           23,327        16,610     40.4% 
Interest income                                                              678,216       598,001      13.4% 
Customer accounts                                                            155,634       127,727      21.8% 
Due to credit institutions                                                   100,032         86,262     16.0% 
Subordinated debt                                                              31,748        19,599     62.0% 
Finance lease                                                                    1,309               -  NMF 
Debt securities in issue                                                         2,054            806   NMF 
Interest expense                                                             290,777       234,394      24.1% 
Net interest income                                                          387,439       363,607      6.6% 
 
Net interest margin                                                   5.8%              7.0%            -1.2 pp 
 
 

NMF - no meaningful figures

1H 2019 to 1H 2018 Comparison

In 1H 2019, net interest income grew by GEL 23.8 million, or 6.6%, YoY to GEL 387.4 million, resulting from a GEL 80.2 million, or 13.4%, higher interest income and a GEL 56.4 million, or 24.1%, higher interest expense.

Interest income grew by GEL 80.2 million, or 13.4%, YoY to GEL 678.2 million. This was mainly driven by an increase in interest income from loans and advances to customers of GEL 56.5 million, or 10.7%, which was primarily related to a rise in the gross loan portfolio of GEL 2,245.4 million, or 25.2%, YoY. This effect was partially offset by a 1.2 pp drop in loan yields to 11.2%, which was driven by a decrease in yield on retail loans by 2.1pp. This drop in yields on retail loans was primarily driven by a continued impact of the NGB's regulation effective from January 2019, which limits the banks' ability to lend money to higher-yield retail customers. Another contributor to the increase in interest income was the interest income from financial securities (comprised of investment securities measured at fair value through other comprehensive income and bonds carried at amortized cost), which rose by GEL 17.3 million, or 40.3%. This resulted from an increase in the respective portfolio by GEL 379.3 million, or by 29.3%. The yield on investment securities decreased on a YoY basis by 0.3pp, mainly driven by a decrease in the refinance rate. Yields on interest earning assets decreased by 1.4 pp to 10.2%, compared to 1H 2018.

The YoY growth in interest expense by GEL 56.4 million, or 24.1%, to GEL 290.8 million in 1H 2019 was mainly due to a 21.8% increase in interest expense on customer accounts of GEL 27.9 million and a rise in interest expense on amounts due to credit institutions by GEL 13.8 million, or by 16.0%. The higher interest expense on customer accounts was attributable to a GEL 1,944.2 million, or 24.5%, growth in the respective portfolio. The cost of customer accounts remained broadly stable at 3.4%. The increase in interest expense on amounts due to credit institutions was mainly driven by an increase in the average respective portfolio, further magnified by a 0.1 pp rise in the cost of amount due to credit institutions. As a result, the cost of funding increased by 0.1 pp on a YoY basis and stood at 4.5%.

Consequently, NIM was 5.8% in 1H 2019, compared to 7.0% in 1H 2018.

 
 
  Fee and Commission Income 
In thousands of GEL                      1H'19               1H'18            Change YoY 
Card operations                                   60,084          47,010      27.8% 
Settlement transactions                           36,609          33,693      8.7% 
Guarantees issued                                 12,546            9,079     38.2% 
Issuance of letters of credit                       2,319           2,360     -1.7% 
Cash transactions                                   6,706           8,988     -25.4% 
Foreign currency exchange transactions              1,388              896    54.9% 
Other                                             10,233            7,073     44.7% 
Fee and commission income                       129,885         109,099       19.1% 
Card operations                                   34,174          23,443      45.8% 
Settlement transactions                             6,622           4,285     54.5% 
Guarantees issued                                      864             620    39.4% 
Letters of credit                                      740             588    25.9% 
Cash transactions                                   1,603           2,359     -32.0% 
Foreign currency exchange transactions                   31                5  NMF 
Other                                                  510          3,717     -86.3% 
Fee and commission expense                        44,544          35,017      27.2% 
Card operations                                   25,910          23,567      9.9% 
Settlement transactions                           29,987          29,408      2.0% 
Guarantees                                        11,682            8,459     38.1% 
Letters of credit                                   1,579           1,772     -10.9% 
Cash transactions                                   5,103           6,629     -23.0% 
Foreign currency exchange transactions              1,357              891    52.3% 
Other                                               9,723           3,356     NMF 
Net fee and commission income                     85,341          74,082      15.2% 
 
 

NMF - no meaningful figures

1H 2019 to 1H 2018 Comparison

In 1H 2019, net fee and commission income totalled GEL 85.3 million, up by GEL 11.3 million, or 15.2%, compared to 1H 2018. This mainly resulted from an increase in other net fee and commission income of GEL 6.4 million and an increase in net fee and commission income from guarantees of GEL 3.2 million, or 38.1%.

The rise in other net fee and commission income was related to the reclassification of certain fee expenses from this category to settlement transactions. Without reclassification, net fee and commission income from settlement transactions would have increased by GEL 2.1 million, or by 7.1%, driven by our affluent retail sub-segment, TBC Status. The increase in net fee and commission income from guarantees was mainly attributable to a GEL 559.2 million, or 67.9% increase in the respective portfolio.

 
Other Operating Non-Interest Income and Gross Insurance Profit 
In thousands of GEL                                                  1H'19              1H'18           Change YoY 
Net income from foreign currency operations                                   55,333         42,805     29.3% 
Share of profit of associates                                                      341            648   -47.4% 
Gains less losses/(losses less gains) from derivative financial 
 instruments                                                                     (229)            413   NMF 
Gains less losses from disposal of investment securities measured                  147               -  NMF 
at fair value through other 
comprehensive income 
Revenues from sale of cash-in terminals                                            443         1,253    -64.6% 
Revenues from operational leasing                                               1,660          3,142    -47.2% 
Gain from sale of investment properties                                            630         1,896    -66.8% 
Gain from sale of inventories of repossessed collateral                            582            205   NMF 
Revenues from non-credit related fines                                             165            254   -35.0% 
Gain on disposal of premises and equipment                                      1,370             199   NMF 
Other                                                                           2,959          3,314    -10.7% 
Other operating income                                                          7,809        10,263     -23.9% 
Gross insurance profit[16]                                                      8,067          5,299    52.2% 
Other operating non-interest income and gross insurance profit                71,468         59,428     20.3% 
NMF - no meaningful figures 
 
 

1H 2019 to 1H 2019 Comparison

Total other operating non-interest income and gross insurance profit increased by GEL 12.0 million, or 20.3%, to GEL 71.5 million in 1H 2019. This mainly resulted from a rise in net income from foreign currency operations of GEL 12.5 million, or 29.3%, mainly due to the increased number and volume of FX transactions across all of the segments. Another contributor was gross insurance profit, which rose by GEL 2.8 million, or 52.2%, but was slightly offset by a decrease in revenues from operational leasing of GEL 1.5 million, or 47.2%.

The growth in gross insurance profit was related to the increase in the non-health[16] insurance business as well as entry into new business line, health insurance in May 2019. More information about TBC insurance can be found in Annex 23 on page 49.

 
Credit Loss Allowance 
In thousands of GEL                                                      1H'19              1H'18           Change YoY 
Credit loss allowance for loans to customers                                    (66,483)        (65,980)    0.8% 
Credit loss allowance for investments in finance lease                                 178           (493)  NMF 
Credit loss allowance for performance guarantees and credit related 
 commitments                                                                         (392)        (2,500)   -84.3% 
Credit loss allowance for other financial assets                                       580        (5,469)   NMF 
Credit loss allowance for financial assets measured at fair value 
 through other comprehensive 
 income                                                                              (350)           (112)  NMF 
Total credit loss allowance                                                     (66,467)        (74,554)    -10.8% 
Operating income after credit loss allowance                                    477,781        422,563      13.1% 
 
Cost of risk                                                             1.3%               1.6%            -0.3 pp 
NMF - no meaningful figures 
 
 

1H 2019 to 1H 2018 Comparison

In 1H 2019, total credit loss allowance decreased by GEL 8.1 million, or 10.8%, to GEL 66.5 million, compared to 1H 2018. The main contributors to the decline were credit loss allowance for other financial assets and credit loss allowance for performance guarantees and credit related commitments by GEL 6.0 million and by GEL 2.1 million respectively. The decrease in credit loss allowance for other financial assets was mainly driven by the high base in 1H 2018 related to one large corporate debtor.

 
Operating Expenses 
In thousands of GEL                                             1H'19               1H'18           Change in % 
Staff Costs                                                            116,639         102,847      13.4% 
Provisions for Liabilities and Charges                                   (1,441)                 -  NMF 
Depreciation and Amortization                                            32,124          21,463     49.7% 
Professional services                                                    12,046            4,459    NMF 
Advertising and marketing services                                         9,461         11,644     -18.7% 
Expenses related to lease contracts[17]                         5,826               -               NMF 
Rent                                                                       -             11,707     NMF 
Utility services                                                           3,570           3,188    12.0% 
Intangible asset enhancement                                               5,976           5,066    18.0% 
Taxes other than on income                                                 3,713           3,603    3.1% 
Communications and supply                                                  2,782           2,193    26.9% 
Stationary and other office expenses                                       2,251           2,507    -10.2% 
Insurance                                                                     508             968   -47.5% 
Security services                                                          1,025           1,002    2.3% 
Premises and equipment maintenance                                         4,765           2,163    NMF 
Business trip expenses                                                     1,065              989   7.7% 
Transportation and vehicles maintenance                                       903             792   14.0% 
Charity                                                                    1,279              561   NMF 
Personnel training and recruitment                                            596             409   45.7% 
Write-down of current assets to fair value less costs to sell               (251)            (570)  -56.0% 
Loss on disposal of Inventory                                                   52            100   -48.0% 
Loss on disposal of investment properties                                       38              60  -36.7% 
Loss on disposal of premises and equipment                                    251             336   -25.3% 
Other                                                                      8,719           7,535    15.7% 
Administrative and other operating expenses                              64,575          58,712     10.0% 
Operating expenses                                                     211,897         183,022      15.8% 
Profit before tax                                                      265,884         239,541      11.0% 
Income tax expense                                                     (12,344)         (39,578)    -68.8% 
Profit for the period                                                  253,540         199,963      26.8% 
 
Cost to income                                                  38.9%               36.8%           2.1 pp 
ROE                                                             22.3%               21.2%           1.1 pp 
ROA                                                             3.3%                3.1%            0.2 pp 
NMF - no meaningful figures 
 

1H 2019 to 1H 2018 Comparison

In 1H 2019, total operating expenses expanded by GEL 28.9 million, or 15.8%, YoY. This mainly resulted from an increase in: staff costs by GEL 13.8 million, or 13.4%; depreciation and amortisation by GEL 10.7 million, or 49.7%; and administrative expenses by GEL 5.9 million, or 10.0% (mainly related to the growth of professional services). The growth in staff costs was mainly driven by a higher scale of business and by the increase in share price over the three year period for the purpose of top and middle management share based bonuses (while the change in the number of shares did not have material effect). The increase in depreciation and amortization was primarily related to IFRS 16. Higher professional services were mainly attributable to one-off consulting fees in the amount of GEL 5.6 million, in relation to the recent events regarding historic matters surrounding TBC Bank. For further details, please see the following press release. Without these one-off costs, operating expenses would have increased by 12.7%.

As a result, the cost to income ratio increased by 2.1 pp (or by 1.1 pp on an underlying basis) from 36.8% in 1H 2018.

Net Income

Reported net income for 1H 2019 increased by GEL 53.6 million, or 26.8%, YoY and stood at GEL 253.5 million, while underlying net income increased by GEL 40.9 million, or 18.8%, YoY and amounted to GEL 258.3 million.

As a result, underlying ROE stood at 22.7%, down by 0.3pp YoY, while underlying ROA stood at 3.3%, down by 0.1pp YoY. Reported ROE stood at 22.3%, up by 1.1pp YoY, and reported ROA stood at 3.3%, up by 0.2pp YoY.

 
Balance Sheet Discussion 
In thousands of GEL                                         Jun-19            Jun-18             Change YoY 
Cash, due from banks and mandatory cash balances with NBG        3,497,441        2,681,809      30.4% 
Loans and advances to customers (Net)                          10,801,264         8,574,580      26.0% 
Financial securities                                             1,674,821        1,295,570      29.3% 
Fixed and intangible assets & investment property                   576,346          540,455     6.6% 
Right of use assets                                                   61,555                  -  NMF 
Other assets                                                        666,937          491,096     35.8% 
Total assets                                                   17,278,364       13,583,510       27.2% 
Due to credit institutions                                       3,052,742        3,097,602      -1.4% 
Customer accounts                                                9,876,813        7,932,585      24.5% 
Debt securities in issue                                            848,838            19,641    NMF 
Subordinated debt                                                   688,002          397,576     73.0% 
Other liabilities                                                   442,964          192,422     NMF 
Total liabilities                                              14,909,359       11,639,826       28.1% 
Total equity                                                     2,369,005        1,943,684      21.9% 
 

Assets

As of 30 June 2019, the Group's total assets amounted to GEL 17,278.4 million, up by GEL 3,694.9 million, or 27.2%, YoY. The increase was mainly due to a rise in net loans to customers of GEL 2,226.7 million, or 26.0%, YoY. Another contributor to the increase was a GEL 815.6 million, or 30.4%, rise in liquid assets (comprising cash, due from banks and mandatory cash balances with NBG), compared to 30 June 2018, which was primarily attributable to the rise in mandatory reserve requirements in FC effective from May 2019.

As of 30 June 2019, the gross loan portfolio reached GEL 11,141.4 million, up by 25.2% YoY, while the proportion of gross loans denominated in foreign currency increased by 1.4 pp on a YoY basis and accounted for 59.9% of total loans. Without the currency effect, loans to customers would have increased by 14.7% YoY.

Asset Quality

 
 
PAR 30 by Segments and Currencies                   Jun-19               Jun-18 
                                                    GEL     FC    Total  GEL     FC    Total 
Corporate                                           1.7%    0.7%  1.0%   0.0%    0.4%  0.3% 
Retail                                              3.6%    1.9%  2.7%   3.7%    1.8%  2.7% 
MSME                                                2.0%    3.4%  2.8%   1.6%    3.7%  2.7% 
Total                                               2.7%    1.8%  2.1%   2.5%    1.7%  2.0% 
Loans overdue by more than 30 days to gross loans 
 
 

Total

The total PAR 30 has remained broadly stable on a YoY basis and stood at 2.1% as of 30 June 2019.

Retail Segment

The retail segment's PAR 30 remained stable on a YoY basis and stood at 2.7% as of 30 June 2019.

Corporate

The corporate segment's PAR 30 increased by 0.7 pp YoY, mainly driven few corporate clients.

MSME

The MSME segment's PAR 30 remained broadly stable on a YoY basis and stood at 2.8% as of 30 June 2019.

 
 
NPLs        Jun-19               Jun-18 
            GEL     FC    Total  GEL     FC    Total 
Corporate   1.5%    2.3%  2.1%   1.5%    3.2%  2.8% 
Retail      4.2%    2.6%  3.3%   2.8%    2.9%  2.9% 
MSME        2.7%    5.6%  4.2%   2.2%    5.7%  4.0% 
Total       3.2%    3.1%  3.1%   2.4%    3.6%  3.1% 
 
 

Total

Total NPLs remained stable on a YoY basis and stood at 3.1% as of 30 June 2019.

Retail Segment

The retail segment's NPLs increased by 0.4 pp on a YoY basis to 3.3% as of 30 June 2019, mainly driven by consumer loans.

Corporate

The corporate NPLs decreased by 0.7pp on a YoY basis and stood at 2.1% as of as of 30 June 2019. This was mainly attributable to improved performance of two non- performing corporate borrowers as well as corporate loan book growth effect.

MSME

The MSME NPLs increased by 0.2 pp on a YoY basis and stood at 4.2% as of 30 June 2019.

 
 
NPLs Coverage   Jun-19                             Jun-18 
                Exc. Collateral  Incl. Collateral  Exc. Collateral  Incl. Collateral 
Corporate       103.3%           299.1%            99.2%            232.1% 
Retail          113.8%           180.4%            153.9%           226.8% 
MSME            71.5%            179.0%            76.9%            187.6% 
Total           97.9%            206.0%            116.1%           216.1% 
 
 

Liabilities

As of 30 June 2019, TBC Bank's total liabilities amounted to GEL 14,909.4 million, up by GEL 3,269.5 million, or 28.1%, YoY. This was primarily due to a GEL 1,944.2 million, or 24.5%, increase in customer accounts and a hike in debt securities in issue of GEL 829.2 million.

As of 30 June 2019, TBC Bank's customer accounts amounted to GEL 9,876.8 million, up by 13.4% on a constant currency. At the same time, customer accounts in foreign currency accounted for 62.8% of total customer accounts, compared to 67.2% as of 30 June 2018.

Liquidity

As of 30 June 2019, the Bank's liquidity ratio, as defined by the NBG, stood at 37.1%, compared to 33.3% as of 30 June 2018 and above the NBG limit of 30%. As of 30 June 2019, the total liquidity coverage ratio (LCR), as defined by the NBG, was 126.3%, above the 100.0% limit, while the LCR in GEL and FC stood at 100.4% and 143.8% respectively, above the respective limits of 75% and 100%.

Total Equity

As of 30 June 2019, TBC's total equity amounted to GEL 2,369.0 million, up by GEL 425.3 million or by 21.9% from GEL 1,943.7 million as of 30 June 2018. This YoY change in equity was mainly due to a net profit contribution of GEL 491.0 million during the last 12 months, which was slightly offset by a declared dividend in the amount of GEL 108.6 million.

Regulatory Capital

As of 30 June 2019, the Bank's Basel III Tier 1 and Total Capital Adequacy Ratios (CAR) stood at 12.4% and 17.4%, respectively, compared to the minimum required levels of 11.9% and 16.7%.

As of 30 June 2019, The Bank's Basel III Tier 1 Capital amounted to GEL 1,730.3 million, up by GEL 231.4 million or 15.4%, compared to June 2018, due to an increase in net income. The Bank's Basel III Total Capital totalled GEL 2,430.1 million, up by GEL 521.7 million, or by 27.3%. The increase in total capital was attributable to the increase in net income and the attraction of new subordinated loans. Risk weighted assets amounted to GEL 13,986.2 million as of 30 June 2019, up by GEL 2,785.8 million, or by 24.9%, compared to June 2018, mainly related to loan book growth primarily due to the GEL depreciation, as well as the increase in mandatory reserves in FC.

Results by Segments and Subsidiaries

The segment definitions are as follows (updated in 2019):

-- Corporate - legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or who have been granted facilities with more than GEL 5.0 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis;

-- Retail - non-business individual customers; all individual customers are included in retail deposits;

-- MSME - Business customers who are not included in corporate segment; or legal entities who have been granted a Pawn shop loan; or individual customers of the fully-digital bank, Space; and

-- Corporate centre and other operations - comprises of the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.

Business customers are all legal entities or individuals who have been granted a loan for business purposes.

 
Income Statement by Segments 
 
1H'19                                     Retail      MSME                 Corporate           Corp.Centre  Total 
Interest income                           288,909     141,797              157,355             90,155       678,216 
Interest expense                           (72,842)    (4,682)              (79,418)            (133,835)    (290,777) 
Net transfer pricing                       (33,609)    (47,566)            24,583              56,592       - 
Net interest income                       182,458     89,549               102,520             12,912       387,439 
Fee and commission income                 92,008      11,365               24,002              2,510        129,885 
Fee and commission expense                 (37,256)    (3,789)              (3,250)             (249)        (44,544) 
Net fee and commission income             54,752      7,576                20,752              2,261        85,341 
Gross insurance profit                    -                             -                   -  8,067        8,067 
Net income from foreign currency 
 operations                               13,370      10,119               22,288              342          46,119 
Foreign exchange translation gains less 
 losses/(losses less gains)               -                             -                   -  9,214        9,214 
Net losses from derivative financial 
 instruments                               (219)                        -                   -   (10)         (229) 
Gains less losses from disposal of 
 investment securities measured at fair 
 value through other 
 comprehensive income                     -                             -                   -  147          147 
Other operating income                    4,503       701                  1,040               1,565        7,809 
Share of profit of associates             -                             -                   -  341          341 
Other operating non-interest income       17,654      10,820               23,328              19,666       71,468 
Credit loss allowance for loans to 
 customers                                 (55,517)    (15,225)            4,259               -             (66,483) 
Credit loss allowance for performance 
 guarantees and credit related 
 commitments                              421          (6)                  (807)              -             (392) 
Credit loss allowance for investments in 
 finance lease                            -                             -                   -  178          178 
Credit loss allowance for other 
 financial assets                         93                            -  3,010                (2,523)     580 
Credit loss allowance for financial 
 assets measured at fair value through 
 other comprehensive 
 income                                   -                             -   (320)               (30)         (350) 
Profit before G&A expenses and income 
 taxes                                    199,861     92,714               152,742             32,464       477,781 
Staff costs                                (66,073)    (23,199)             (17,674)            (9,693)      (116,639) 
Depreciation and amortization              (24,854)    (3,924)              (1,494)             (1,852)      (32,124) 
Provision for liabilities and charges     -                             -                   -  1,441        1,441 
Administrative and other operating 
 expenses                                  (39,845)    (10,923)             (7,565)             (6,242)      (64,575) 
Operating expenses                         (130,772)   (38,046)             (26,733)            (16,346)     (211,897) 
Profit before tax                         69,089      54,668               126,009             16,118       265,884 
Income tax expense                         (6,985)     (5,429)              (14,555)           14,625        (12,344) 
Profit for the year                       62,104      49,239               111,454             30,743       253,540 
 
 
Portfolios by Segments 
In thousands of GEL                                  Jun-19         Jun-18 
Loans and advances to customers 
 
Non-mortgage                                            1,875,501    2,010,819 
Mortgage                                                2,959,819    2,185,630 
Retail                                                  4,835,320    4,196,449 
Corporate                                               3,658,340    2,581,612 
MSME                                                    2,647,700    2,117,886 
Total loans and advances to customers (Gross)         11,141,360     8,895,947 
Less: credit loss allowance for loans to customers       (340,096)     (321,367) 
Total loans and advances to customers (Net)           10,801,264     8,574,580 
 
Customer Accounts 
 
Retail                                                  5,360,114    4,467,638 
Corporate                                               3,510,179    2,559,449 
MSME                                                    1,006,520       905,498 
Total Customer Accounts                                 9,876,813    7,932,585 
 
 

Retail Banking

As of 30 June 2019, retail loans stood at GEL 4,835.3 million, up by GEL 638.9 million, or 15.2%, YoY and accounted for 39.6% market share of total individual loans. Without the currency effect, retail loans would have increased by 6.3%. As of 30 June 2019, foreign currency loans represented 55.1% of the total retail loan portfolio.

In the reporting period, retail deposits stood at GEL 5,360.1 million, up by GEL 892.5 million, or 20.0%, YoY and accounted for 39.5% market share of total individual deposits. Without the currency effect, retail deposits would have increased by 6.2%. As of 30 June 2019, term deposits accounted for 53.7% of the total retail deposit portfolio, while foreign currency deposits represented 80.5% of the total retail deposit portfolio.

In 1H 2019, retail loan yields and deposit rates stood at 12.5% and 2.9%, respectively. The segment's cost of risk on loans was 2.4%. The segment contributed 24.5%, or GEL 62.1 million, to the total net income in 1H 2019.

Corporate Banking

As of 30 June 2019, corporate loans amounted to GEL 3,658.3 million, up by GEL 1,076.7 million, or 41.7%, YoY. Foreign currency loans accounted for 71.4% of the total corporate loan portfolio. Without the currency effect, corporate loans would have increased by 27.5%. The market share of total legal entities loans stood at 37.3%.

As of the same date, corporate deposits totalled GEL 3,510.2 million, up by GEL 950.7 million, or 37.1%, YoY. Foreign currency corporate deposits represented 41.1% of the total corporate deposit portfolio. Without the currency effect, corporate deposits would have increased by 29.1%. The market share of total legal entities deposits stood at 42.8%.

In 1H 2019, corporate loan yields and deposit rates stood at 9.2% and 4.9%, respectively. In the same period, the cost of risk on loans was -0.3%. In terms of profitability, the corporate segment's net profit reached GEL 111.5 million, or 44.0% of the total net income.

MSME Banking

As of 30 June 2019, MSME loans amounted to GEL 2,647.7 million, up by GEL 529.8 million, or 25.0%, YoY. Foreign currency loans accounted for 52.7% of the total MSME portfolio. Without the currency effect, MSME loans would have increased by 15.7%.

As of the same date, MSME deposits stood at GEL 1,006.5 million, up by GEL 101.0 million, or 11.2%, YoY. Foreign currency MSME deposits represented 44.6% of the total MSME deposit portfolio. Without the currency effect, MSME deposits would have increased by 4.2%.

In 1H 2019, MSME loan yields and deposit rates stood at 11.5% and 0.9% respectively, while the cost of risk on loans was 1.2%. In terms of profitability, net profit for the MSME segment amounted to GEL 49.2 million, or 19.4%, of the total net income.

Consolidated Financial Statements of TBC Bank Group PLC

 
Consolidated Balance Sheet 
In thousands of GEL                                                             Jun-19              Jun-18 
Cash and cash equivalents                                                            1,628,344          1,605,163 
Due from other banks                                                                      27,860             42,469 
Mandatory cash balances with National Bank of Georgia                                1,841,237          1,034,177 
Loans and advances to customers                                                    10,801,264           8,574,580 
Investment securities measured at fair value through other comprehensive 
 income                                                                                 908,158            817,876 
Bonds carried at amortized cost                                                         766,663            477,694 
Investments in finance leases                                                           220,871            172,027 
Investment properties                                                                     79,114             78,094 
Current income tax prepayment                                                             19,417               7,369 
Deferred income tax asset                                                                   1,753              2,331 
Other financial assets                                                                  165,382            107,741 
Other assets                                                                            211,850            171,046 
Premises and equipment                                                                  373,322            374,414 
Right of use assets                                                                       61,555                    - 
Intangible assets                                                                       123,910              87,947 
Goodwill                                                                                  45,301             28,657 
Investments in associates                                                                   2,363              1,925 
TOTAL ASSETS                                                                       17,278,364         13,583,510 
LIABILITIES 
Due to credit institutions                                                           3,052,742          3,097,602 
Customer accounts                                                                    9,876,813          7,932,585 
Lease liabilities                                                                         62,598                    - 
Other financial liabilities                                                             252,280              88,320 
Current income tax liability                                                                   727                  26 
Debt Securities in issue                                                                848,838              19,641 
Deferred income tax liability                                                             21,361             22,980 
Provisions for liabilities and charges                                                    20,116             11,732 
Other liabilities                                                                         85,882             69,364 
Subordinated debt                                                                       688,002            397,576 
TOTAL LIABILITIES                                                                  14,909,359         11,639,826 
EQUITY 
Share capital                                                                               1,672              1,650 
Share premium                                                                           831,773            796,808 
Retained earnings                                                                    1,668,810          1,261,578 
Group reorganisation reserve                                                           (162,166)         (162,166) 
Share based payment reserve                                                              (37,968)          (21,085) 
Revaluation reserve for premises                                                          56,606             64,962 
Fair value reserve                                                                        12,680               2,541 
Cumulative currency translation reserve                                                    (6,478)           (7,345) 
Net assets attributable to owners                                                    2,364,929          1,936,943 
Non-controlling interest                                                                    4,076              6,741 
TOTAL EQUITY                                                                         2,369,005          1,943,684 
TOTAL LIABILITIES AND EQUITY                                                       17,278,364         13,583,510 
 
 
Consolidated Statement of Profit or Loss and Other Comprehensive Income 
In thousands of GEL                                                       1H'19               1H'18 
Interest income                                                                  678,216         598,001 
Interest expense                                                               (290,777)        (234,394) 
Net interest income                                                              387,439         363,607 
Fee and commission income                                                        129,885         109,099 
Fee and commission expense                                                       (44,544)         (35,017) 
Net fee and commission income                                                      85,341          74,082 
Net insurance premiums earned                                                      15,992          10,602 
Net insurance claims incurred and agents' commissions                              (7,925)          (5,303) 
Insurance profit                                                                     8,067           5,299 
Net income from foreign currency operations                                        46,119          38,782 
Net gain/(losses) from foreign exchange translation                                  9,214           4,023 
Net gains/(losses) from derivative financial instruments                              (229)             413 
Gains less losses from disposal of investment securities measured at                    147                - 
fair value through other 
comprehensive income 
Other operating income                                                               7,809         10,263 
Share of profit of associates                                                           341             648 
Other operating non-interest income                                                63,401          54,129 
Credit loss allowance for loans to customers                                     (66,483)         (65,980) 
Credit loss allowance for investments in finance lease                                  178            (493) 
Credit loss allowance for performance guarantees and credit related 
 commitments                                                                          (392)         (2,500) 
Credit loss allowance for other financial assets                                        580         (5,469) 
Credit loss allowance for financial assets measured at fair value 
 through other comprehensive 
 income                                                                               (350)            (112) 
Operating income after credit loss allowance                                     477,781         422,563 
Staff costs                                                                    (116,639)        (102,847) 
Depreciation and amortization                                                    (32,124)         (21,463) 
(Provision for)/ recovery of liabilities and charges                                 1,441                 - 
Administrative and other operating expenses                                      (64,575)         (58,712) 
Operating expenses                                                             (211,897)        (183,022) 
Profit before tax                                                                265,884         239,541 
Income tax expense                                                               (12,344)         (39,578) 
Profit for the period                                                            253,540         199,963 
Other comprehensive income: 
Items that may be reclassified subsequently to profit or loss: 
Movement in fair value reserve                                                       3,999              827 
Exchange differences on translation to presentation currency                            457               14 
Items that will not be reclassified to profit or loss: 
Revaluation of premises and equipment                                                      -               - 
Income tax recorded directly in other comprehensive income                                 -        (5,151) 
Other comprehensive income for the period                                            4,456          (4,310) 
Total comprehensive income for the period                                        257,996         195,653 
Profit attributable to: 
 - Shareholders of TBCG                                                          253,235         198,347 
 - Non-controlling interest                                                             305          1,616 
Profit for the period                                                            253,540         199,963 
Total comprehensive income is attributable to: 
 - Shareholders of TBCG                                                          257,687         194,089 
 - Non-controlling interest                                                             309          1,564 
Total comprehensive income for the period                                        257,996         195,653 
 
 
  Consolidated Statements of Cash Flows 
In thousands of GEL                                                       30-Jun-19           30-Jun-18 
Cash flows from/(used in) operating activities 
Interest received                                                         632,619             573,644 
Interest paid                                                              (291,963)           (234,845) 
Fees and commissions received                                             127,685             118,805 
Fees and commissions paid                                                  (44,370)            (35,025) 
Insurance premium received                                                18,560              10,973 
Insurance claims paid                                                      (9,727)             (5,898) 
Income received from trading in foreign currencies                        46,119              38,782 
Other operating income received                                            11,500              (2,672) 
Staff costs paid                                                           (123,342)           (111,715) 
Administrative and other operating expenses 
 paid                                                                      (81,397)            (59,836) 
Income tax paid                                                            (30,900)            (10,151) 
Cash flows from operating activities before 
 changes in operating assets and liabilities                              254,784             282,062 
Net change in operating assets 
Due from other banks and mandatory cash balances 
 with the National Bank of Georgia                                         (302,690)           (51,957) 
Loans and advances to customers                                            (385,945)           (671,825) 
Investment in finance lease                                                (3,498)             (34,101) 
Other financial assets                                                    37,044              40,231 
Other assets                                                              2,869                (879) 
Net change in operating liabilities 
Due to other banks                                                        276,076             126,870 
Customer accounts                                                         134,334             430,568 
Other financial liabilities                                               6,053                (10,995) 
Financial lease liabilities                                                (1,367)                               - 
Other liabilities and provision for liabilities 
 and charges                                                              9,607                (215) 
Net cash from operating activities                                        27,267              109,759 
Cash flows from/(used in) investing activities 
Acquisition of investment securities measured 
 at fair value through other comprehensive income                          (101,119)           (395,898) 
Proceeds from redemption at maturity of investment 
 securities measured at fair value through other 
 comprehensive income                                                     210,174             239,593 
Acquisition of bonds carried at amortized cost                             (240,420)           (166,188) 
Proceeds from redemption of bonds carried at 
 amortized cost                                                           126,113             142,432 
Acquisition of premises, equipment and intangible 
 assets                                                                    (51,490)            (34,241) 
Disposal of premises, equipment and intangible 
 assets                                                                   11,023              1,015 
Proceeds from disposal of investment property                             9,508               6,898 
Acquisition of subsidiaries, net of cash acquired                          (14,569)           - 
Net cash used in investing activities                                      (50,780)            (206,389) 
Cash flows from/(used in) financing activities 
Proceeds from other borrowed funds                                        553,781             1,468,097 
Redemption of other borrowed funds                                         (938,535)           (1,044,435) 
Redemption of subordinated debt                                           (8,576)              (7,688) 
Proceeds from debt securities in issue                                    820,708             28 
Redemption of debt securities in issue                                     (5,805)            - 
Dividends paid                                                            -                    (85,484) 
Net cash flows from financing activities                                  421,573             330,518 
Effect of exchange rate changes on cash and 
 cash equivalents                                                         63,373               (60,202) 
Net increase in cash and cash equivalents                                 461,433             173,686 
Cash and cash equivalents at the beginning 
 of the year                                                              1,166,911           1,431,477 
Cash and cash equivalents at the end of the 
 year                                                                     1,628,344           1,605,163 
 
 

Key Ratios

Average Balances

The average balances in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts prepared from TBC's accounting records. These were used by the management for monitoring and control purposes.

 
Key Ratios 
 
Ratios (based on monthly averages, where applicable)   1H'19   1H'18 
Underlying ROE(1)                                      22.7%   23.0% 
Reported ROE(2)                                        22.3%   21.2% 
Underlying ROA(3)                                      3.3%    3.4% 
Reported ROA(4)                                        3.3%    3.1% 
ROE before credit loss allowance(5)                    28.1%   29.1% 
Underlying cost to income(6)                           37.9%   36.8% 
Reported Cost to income(7)                             38.9%   36.8% 
Cost of risk(8)                                        1.3%    1.6% 
FX adjusted cost of risk(9)                            1.2%    1.7% 
NIM(10)                                                5.8%    7.0% 
Risk adjusted NIM(11)                                  4.6%    5.3% 
Loan yields(12)                                        11.2%   12.4% 
Risk adjusted loan yields(13)                          10.0%   10.7% 
Deposit rates(14)                                      3.4%    3.3% 
Yields on interest earning assets(15)                  10.2%   11.6% 
Cost of funding(16)                                    4.5%    4.4% 
Spread(17)                                             5.7%    7.1% 
PAR 90 to gross loans(18)                              1.3%    1.1% 
NPLs to gross loans(19)                                3.1%    3.1% 
NPLs coverage(20)                                      97.9%   116.1% 
NPLs coverage with collateral(21)                      206.0%  216.1% 
Credit loss level to gross loans(22)                   3.1%    3.6% 
Related party loans to gross loans(23)                 0.1%    0.1% 
Top 10 borrowers to total portfolio(24)                8.6%    9.2% 
Top 20 borrowers to total portfolio(25)                12.6%   13.2% 
Net loans to deposits plus IFI funding(26)             91.4%   89.5% 
Net stable funding ratio(27)                           130.4%  128.7% 
Liquidity coverage ratio(28)                           126.3%  119.2% 
Leverage(29)                                           7.3x    7.0x 
Regulatory Tier 1 CAR (Basel III)(30)                  12.4%   13.4% 
Regulatory Total 1 CAR (Basel III)(31)                 17.4%   17.0% 
 

Ratio definitions

1. Underlying return on average total equity (ROE) equals underlying net income attributable to owners divided by monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period adjusted for the respective one-off items; Annualized where applicable.

2. Reported return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; annualised where applicable.

3. Underlying return on average total assets (ROA) equals underlying net income of the period divided by monthly average total assets for the same period. Annualised where applicable.

4. Reported return on average total assets (ROA) equals net income of the period divided by the monthly average total assets for the same period. Annualised where applicable.

5. Return on average total equity (ROE) before credit loss allowance equals net income attributable to owners excluding all credit loss allowance divided by the monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.

6. Underlying cost to income ratio equals total underlying operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

7. Reported cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

8. Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

9. FX adjusted cost of risk is calculated based on currency rates of the respective prior periods.

10. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with NBG which currently has negative interest, and includes other earning items from due from banks.

11. Risk Adjusted Net interest margin is NIM minus the cost of risk without one-offs and currency effect.

12. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

13. Risk Adjusted Loan yield is loan yield minus the cost of risk without one-offs and currency effect.

14. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable.

15. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; annualised where applicable.

16. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; annualised where applicable.

17. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).

18. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.

19. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.

20. NPLs coverage ratio equals total credit loss allowance for loans to customers calculated per IFRS 9 divided by the NPL loans.

21. NPLs coverage with collateral ratio equals credit loss allowance for loans to customers per IFRS 9 plus total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.

22. Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period.

23. Related party loans to total loans equals related party loans divided by the gross loan portfolio.

24. Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio.

25. Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio.

26. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.

27. Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as defined in Basel III.

28. Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as defined by the NBG.

29. Leverage equals total assets to total equity.

30. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

31. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

Exchange Rates

To calculate the YoY growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 2.4516 as of 30 June 2018. As of 30 June 2019, the USD/GEL exchange rate equalled 2.8687. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 1H 2019 of 2.7038, 1H 2018 of 2.4656.

Additional Disclosures

Subsidiaries of TBC Bank Group PLC[18]

 
                            Ownership   Country     Year of         Industry             Total Assets 
                             / voting                incorporation                        (after elimination) 
                             % as 
                             of 30 
                             June 2019 
Subsidiary                                                                               Amount        % in TBC 
                                                                                          GEL'000       Group 
JSC TBC Bank                99.9%       Georgia     1992            Banking              16,791,968    97.18% 
   United Financial 
    Corporation JSC         98.7%       Georgia     1997            Card processing      7,867         0.05% 
   TBC Capital LLC          100.0%      Georgia     1999            Brokerage            7,198         0.04% 
   TBC Leasing JSC          100.0%      Georgia     2003            Leasing              289,004       1.67% 
                                                                    Non-banking 
   TBC Kredit LLC           100.0%      Azerbaijan  1999             credit institution  27,712        0.16% 
   Banking System Service                                           Information 
    Company LLC             100.0%      Georgia     2009             services            983           0.01% 
   TBC Pay LLC              100.0%      Georgia     2009            Processing           37,303        0.22% 
                                                                    Real estate 
   Index LLC                100.0%      Georgia     2011             management          866           0.01% 
   Real Estate Management                                           Real estate 
    Fund JSC*               0.0%        Georgia     2010             management          21            0.00% 
   TBC Invest LLC           100.0%      Israel      2011            PR and marketing     157           0.00% 
   BG LLC*                  0.0%        Georgia     2018            Asset management     17,018        0.10% 
JSC TBC Insurance           100.0%      Georgia     2014            Insurance            67,431        0.39% 
TBC International 
 LLC                        100.0%      Georgia     2019            Asset management     2,824         0.02% 
   Swoop JSC                100.0%      Georgia     2010            Retail Trade         637           0.00% 
   GE Commerce LTD          100.0%      Georgia     2018            Retail Trade         3,239         0.02% 
   LLC Online Tickets       55.0%       Georgia     2015            Software Services    1,746         0.01% 
   All property ge                                                  Real estate 
    LLC                     90.0%       Georgia     2013             management          920           0.01% 
Inspired LLC                51.0%       Uzbekistan  2011            Processing           2,988         0.02% 
(*)The Group has de facto control over the subsidiaries (control without 
 legal form of ownership) 
 

1) Earnings per Share

 
In GEL                                       1H 2019  1H 2018 
Earnings per share for profit attributable 
 to the owners of the Group: 
- Basic earnings per share                   4.64     3.70 
- Diluted earnings per share                 4.62     3.67 
 

Source: IFRS Consolidated

 
In GEL                                       2Q 2019  2Q 2018 
Earnings per share for profit attributable 
 to the owners of the Group: 
- Basic earnings per share                   2.19     1.90 
- Diluted earnings per share                 2.17     1.88 
 

Source: IFRS Consolidated

2) Sensitivity Scenario

 
Sensitivity Scenario                      30-Jun-19  10% Currency Devaluation 
                                                      Effect 
NIM*                                                 -0.15% 
Technical Cost of Risk                               +0.12% 
Regulatory Total Capital                  2,430      2,472 
Regulatory Capital adequacy ratios tier              0.64% - 0.80% 
 1 and total capital decrease by 
 

(*) Linear depreciation is assumed for NIM sensitivity analysis

Source: IFRS statements and Management Figures

3) The share of selected FC denominated P/L Items

 
Selected P&L Items 2Q        FC % of Respective 
 2019                         Totals 
Interest income              39% 
Interest expense             51% 
Fee and commission income    34% 
Fee and commission expense   66% 
Administrative expenses      16% 
 

Source: IFRS statements and Management figures

4) Open Interest Rate Position as of 30 June 2019

 
Open interest rate                             Open interest rate 
 position in GEL            GEL 886 m           position in FC     GEL 3,462 m 
                            GEL m  % share                         GEL    % share 
                                    in totals                       m      in totals 
Assets                      3,654  21%         Assets              5,261  30% 
Securities with fixed 
 yield(<=1y)*               372    22%         Nostro**            172    19% 
Securities with floating 
 yield                      551    33%         NBG reserves**      1,841  95% 
Loans with floating 
 yield                      2,575  23%         NBG deposits        0      0% 
Reserves in NBG             146    8%          Libor loans         3,248  29% 
Interbank loans& deposits 
 & repo                     10     1%          Interest rate swap  0      0% 
Liabilities                 2,768  19% 
Current accounts***         898    9%          Liabilities         1,799  12% 
Saving accounts***          589    6%          Senior loans        1,369  40% 
Refinancing loan of 
 NBG                        604    17%         Subordinated loans  430    63% 
Interbank loans &deposits 
 & repo                     171    38% 
IFI borrowings              506    15% 
 
 

(*) 46% of the less than 1-year securities are maturing in 6 months.

(**) Income on NBG reserves and Nostros are calculated as benchmark minus margin whereby benchmarks are correlated with Libor. From June 2018, according to NBG regulation is it possible to apply negative interest rates on NBG reserves and correspondent accounts. However, negative rate is floored by 0% in case of USD and by (-0.6)% in case of EUR accounts.

(***) The Bank considers that current and saving deposits promptly react to interest rate changes on the market (within 1 month prior notification)

 
 5) Yields and Rates 
 Yields and Rates           2Q'19  1Q'19  4Q'18  3Q'18  2Q'18 
 Loan yields                11.0%  11.5%  12.2%  12.4%  12.5% 
Loan yields GEL             15.6%  16.5%  17.4%  17.9%  18.3% 
Loan yields FX              7.8%   8.2%   8.7%   8.5%   8.4% 
 Retail Loan Yields         12.2%  12.8%  13.6%  14.1%  14.7% 
 Retail loan yields GEL     18.4%  19.6%  20.7%  20.8%  21.3% 
 Retail loan yields FX      7.3%   7.4%   7.8%   7.9%   8.0% 
 Corporate Loan Yields      8.8%   9.5%   10.0%  9.6%   9.4% 
 Corporate loan yields 
  GEL                       9.9%   10.8%  10.9%  11.0%  11.4% 
 Corporate loan yields 
  FX                        8.4%   9.0%   9.7%   9.1%   8.7% 
 MSME Loan Yields           11.5%  11.7%  12.2%  12.6%  12.0% 
 MSME loan yields GEL       15.5%  15.7%  16.2%  16.6%  15.9% 
 MSME loan yields FX        7.8%   8.1%   8.6%   8.9%   8.5% 
 Deposit rates              3.4%   3.3%   3.1%   3.3%   3.3% 
 Deposit rates GEL          5.8%   5.9%   5.3%   5.6%   5.8% 
 Deposit rates FX           2.1%   1.9%   2.0%   2.1%   2.1% 
 Retail Deposit Yields      3.0%   2.8%   2.6%   2.7%   2.7% 
 Retail deposit rates GEL   5.3%   5.4%   4.6%   4.4%   4.3% 
 Retail deposit rates FX    2.4%   2.2%   2.2%   2.3%   2.4% 
 Corporate Deposit Yields   4.9%   4.9%   4.5%   4.9%   5.2% 
 Corporate deposit rates 
  GEL                       7.2%   7.5%   6.8%   7.5%   7.9% 
 Corporate deposit rates 
  FX                        1.8%   1.6%   1.8%   2.0%   1.9% 
 MSME Deposit Yields        1.0%   0.9%   1.0%   1.0%   1.0% 
 MSME deposit rates GEL     1.5%   1.4%   1.6%   1.7%   1.7% 
 MSME deposit rates FX      0.3%   0.3%   0.3%   0.4%   0.4% 
 Yields on Securities       7.7%   7.5%   7.6%   7.8%   7.7% 
 
 

Source: IFRS Consolidated

 
6) Risk Adjusted Yields 
 & Cost of Risk 
Risk-adjusted Yields      2Q'19  1Q'19  4Q'18  3Q'18  2Q'18 
Loan yields               10.2%  10.1%  10.9%  10.9%  10.8% 
Retail Loan Yields        10.0%  10.4%  10.6%  11.6%  12.1% 
Corporate Loan Yields     9.8%   9.6%   10.1%  9.1%   8.6% 
MSME Loan Yields          10.9%  10.1%  12.4%  11.8%  11.1% 
 
                          2Q'19  1Q'19  4Q'18  3Q'18  2Q'18 
 
Cost of Risk              1.1%   1.4%   1.4%   1.9%   1.8% 
Retail                    2.4%   2.4%   2.9%   2.7%   2.6% 
Corporate                 -0.5%  -0.1%  0.1%   1.1%   0.9% 
MSME                      0.9%   1.6%   -0.1%  1.2%   1.0% 
 
 

Source: IFRS Consolidated

7) Loan Quality per NBG

Sub-Standard, Doubtful and Loss (SDL) Loans Ratio per NBG

 
                          Jun-19  Mar-19  Dec-18  Sep-18  Jun-18 
SDL loans as % of gross 
 loans                    3.7%    3.9%    3.6%    3.8%    3.3% 
 

Source: NBG

8) Cross Sell Ratio[19] and Number Active Products

 
                            Jun-19  Mar-19  Dec-18  Sep-18  Jun-18 
Cross sell ratio            3.68    3.75    3.81    3.85    3.89 
Number of active products 
 (in million)               4.52    4.58    4.62    4.58    4.64 
 

Source: Management's figures.

9) Diversified Deposit Base

Status: monthly income >=3,000 GEL or loans/deposits >=30,000 GEL

High-net-worth individuals >= deposit 100,000 USD as well as on discretionary basis

 
30 June 2019                 Volume of Deposits  Number of Deposits 
MASS                         35%                 90.3% 
STATUS                       34%                 9.2% 
High-net-worth individuals   31%                 0.5% 
 

Source: Management figures

10) Loan Concentration

 
                         Jun-19  Mar-19  Dec-18  Sep-18  Jun-18 
Top 20 borrowers as % 
 of total portfolio      12.6%   13.5%   14.2%   14.1%   13.2% 
Top 10 borrowers as % 
 of total portfolio      8.6%    9.6%    10.1%   10.3%   9.2% 
Related party loans as 
 % of total portfolio    0.1%    0.1%    0.1%    0.1%    0.1% 
 

Source: IFRS consolidated

11) Number of Transactions in Digital Channels (in thousands)

 
                                        2Q 19  2Q 18  2Q 17  2Q 16 
Internet banking number of 
 transactions                           2,171  2,584  2,166  1,797 
Mobile banking number of transactions   8,984  6,266  3,163  1,485 
 

Source: Management figures

12) Penetration Ratios of Digital Channels

 
                             2Q 19  2Q 18  2Q 17  2Q 16 
Internet or mobile banking 
 penetration ratio*          41%    40%    33%    33% 
Mobile banking penetration 
 ratio**                     37%    33%    25%    19% 
 

Source: Management figures

* Internet or Mobile Banking penetration equals active clients of Interment or Mobile Banking divided by total active clients

** Mobile Banking penetration equals active clients of Mobile Banking divided by total active clients

13) Number of Active Clients (in thousands)

 
                             Jun-19  Jun-18  Jun-17  Jun -16 
Internet or mobile banking   508     479     340     246 
Mobile banking               451     391     254     141 
 

Source: Management figures

14) Distribution of Transactions in Digital Channels

 
                    2Q 19 
Mobile Banking      30% 
Internet Banking    9% 
Branches            7% 
TBC Pay terminals   19% 
ATMs                34% 
Other               1% 
 

93% of all transactions are conducted in digital channels

15) Distribution of Sales in Channels

 
                         2Q 19  2Q 18  2Q 17  2Q 16 
Digital Channels         41%    42%    25%    26% 
Branches & call Center   59%    58%    75%    74% 
 

41% of selected retail products are sold through digital channels*

* For products being offered through remote channels: pre-approved loans, credit cards, limit increase of credit cards and opening of savings and term accounts

16) Percentage of Selected Product Sales in Digital Channels

 
                             2Q 19  2Q 18  2Q 17 
Pre-approved loans           20%*   49%    12% 
Credit cards                 5%     6%     8% 
Saving and term accounts     67%    63%    53% 
Credit card limit increase   54%*   85%    82% 
 

* The decrease is due to new regulations

17) POS Terminal Transactions

 
                             Jun-19  1Q 19  4Q 18  3Q 18  2Q 18 
POS number of transactions 
 (in millions)               30.5    26.6   27.4   24.1   22.3 
POS volume of transactions 
 (in mln GEL)                1,165   1,017  1,117  986    850 
 

* Data includes e-commerce and excludes transactions at POS terminals in TBC Bank's branches

18) Funding repayment ladder

Senior, Subordinated Loans' and Debt Securities in Issue's Principal Amount Outflow by Year (USD million)

 
                           2019  2020  2021  2022  2023  2024  2025  2026  2027  2028 
Senior loans                91    179   260   110   87    37    28    11    5     - 
Subordinated loans          3     14    11    11    32    1     41    73    15    35 
Debt securities in issue   -     -     -     -     -     300   -     -     -     - 
Total                      94    193   271   121   119   338   69    84    20    35 
 

Source: Management figures, revolving non IFI loans from NBG are excluded

19) NPL Build Up (in GEL million)

 
NPLs        NPLs as     Real Growth  FX Effect  Write-Offs  Repossessed  NPLs as 
             of Mar-19                                                    of Jun-19 
Retail      144         46           4          (31)        (4)          159 
Corporate   87          (14)         4          -           (1)          76 
MSME        106         13           5          (7)         (5)          112 
Total       337         45           13         (38)        (10)         347 
 
 
20) Net Write-Offs, 
 2Q 2019 
 In GEL million       Write-Offs  Recoveries  Net Write-Offs 
Retail                (31)        5           (26) 
Corporate             -           -           - 
MSME                  (7)         5           (2) 
Total                 (38)        10          (28) 
 

Source: IFRS Consolidated

 
21) Portfolio Breakdown by Collateral 
 Types as of 30-Jun-19 
Cash cover                          2% 
Gold                                2% 
Inventory                           9% 
Real estate                         68% 
Third party guarantees              6% 
Other                               1% 
Unsecured                           12% 
 

Source: IFRS Consolidated

 
 
  22) Loan to Value by Segments as of 30-Jun-19 
 
Retail                                  Corporate    MSME    Total 
55%                                     50%          48%     51% 
 
  Mortgage loan's LTV 
  stood at 51% 
 
 

23) TBC Insurance

TBC Insurance is a rapidly growing, wholly owned subsidiary of TBC Bank and it is the Bank's main bancassurance partner. The company was acquired by the Group in October 2016 and it has since grown significantly. In 2Q 2019[20], TBC Insurance held a total market share of 19.0%[21] without border motor third party liability (MTPL) insurance, while its market share in retail segment stood at 31.5%(21) .

TBC Insurance serves both individual and legal entities and provides a broad range of insurance products covering motor, travel, personal accident, credit life and property, business property, liability, cargo and agro insurance products. The company differentiates itself for its advanced digital channels, which include TBC bank's award-winning internet and mobile banking applications, a wide network of self-service terminals, a web channel, as well as a Georgian-speaking chat-bot B-Bot, which is available through Facebook messenger.

From 2Q 2019, TBC Insurance entered the health insurance market with a focus on the premium segment. Our strategy is to focus on affluent individuals and capture the affluent market by leveraging our strong brand name, leading digital capabilities and cross selling opportunities with payroll customers. Our medium term target is to reach 25% market share in the premium health insurance business. In 2Q 2019, TBC Insurance already attracted GEL 434.7 thousand gross written premium in health insurance.

In 2Q 2019, TBC Insurance achieved strong growth results in non-health[22] business lines. The gross written premium grew by 33.2% YoY and amounted to GEL 19.6 million. Over the same period, the net combined ratio([23]) decreased by 4.4 pp and stood at 76.6%. As a result, the net profit for 2Q 2019 stood at GEL 2.2 million.

 
In thousands of GEL (excl.   2Q'19   1Q'19   4Q'18   3Q'18   2Q'18 
 health insurance) 
Gross written premium        19,557  17,471  17,075  15,833  14,677 
Net earned premium[24]       12,218  10,677  10,554  9,841   8,804 
Net profit                   2,210   2,042   2,556   2,271   1,497 
                             2Q'19   1Q'19   4Q'18   3Q'18   2Q'18 
Net combined ratio           76.6%   82.8%   80.7%   78.8%   81.0% 
Market share                 19.0%   22.8%   23.0%   20.7%   18.5% 
 
 
In thousands of GEL (incl.   2Q'19   1Q'19   4Q'18   3Q'18   2Q'18 
 health insurance) 
Gross written premium        19,991  17,471  17,075  15,833  14,677 
Net earned premium25         12,259  10,677  10,554  9,841   8,804 
Net profit                   1,803   2,004   2,556   2,271   1,497 
                             2Q'19   1Q'19   4Q'18   3Q'18   2Q'18 
Net combined ratio           81.3%   82.8%   80.7%   78.8%   81.0% 
 

*Based on internal estimate.

Figures are provided without subsidiaries of TBC Insurance: Swoop JSC, GE Commerce LTD, All Property LTD.

24) Regulatory Capital

Total Capital and Tier 1 Capital Limits

 
                      30-Jun-2019    31-Dec-2019    31-Dec-2020    31-Dec-2021 
                       Actual         F              F              F 
                      Tier    Total  Tier    Total  Tier    Total  Tier        Total 
                       1              1              1              1 
Minimum requirement   6.0%    8.0%   6.0%    8.0%   6.0%    8.0%   6.0%        8.0% 
Conservation 
 buffer               2.5%    2.5%   2.5%    2.5%   2.5%    2.5%   2.5%        2.5% 
Counter-cyclical 
 buffer               0.0%    0.0%   0.0%    0.0%   0.0%    0.0%   0.0%        0.0% 
Systemic buffer       1.0%    1.0%   1.5%    1.5%   2.0%    2.0%   2.5%        2.5% 
Pillar 1 buffers      9.5%    11.5%  10.0%   12.0%  10.5%   12.5%  11.0%       13.0% 
Pillar 2              2.4%    5.2%   2.9%    5.2%   3.2%    4.7%   3.1-3.8%    4.1-5.1% 
Total                 11.9%   16.7%  12.9%   17.2%  13.7%   17.2%  14.1-14.8%  17.1-18.1% 
 

25) NBG Initiatives

The new regulation on responsible lending to individuals

Starting from January 2019, the National Bank of Georgia has adopted the regulation on responsible lending to individuals, which replaces the former regulation introduced in May 2018. The regulation requires financial institutions to conduct solvency analysis of a borrower before issuing a loan and it also sets new limits on Payment to Income (PTI) and Loan to Value (LTV) for individual loans. The thresholds are different for domestic and foreign currency loans in order to protect a borrower and the financial system against the risks stemming from exchange rate fluctuations.

Maximum Payment to Income Ratios:

 
Monthly income, net (in   For non-hedged borrower          For hedged borrowers 
 GEL)                      in case of maximum/contractual   in case of maximum/contractual 
                           maturity                         maturity 
<1,000                    20% / 25%                        25% / 35% 
>=1,000-2,000<                                             35% / 45% 
>=2,000-4,000<            25% / 30%                        45% / 55% 
>=4,000                   30% / 35%                        50% / 60% 
 

Maximum Loan to Value Ratios:

 
Maximum loan to value ratio (LTV) 
 for GEL loans                         85% 
Maximum loan to value ratio (LTV) 
 for foreign currency loans            70% 
 

Maximum tenures:

 
Mortgage                           15 years 
Consumer mortgages collateralized  10 years 
 by real estate 
Auto loans                         6 years 
Other consumer loans               4 years 
 

Minimum reserve requirements

In May 2019, the NBG updated its requirements on mandatory reserves. Currently the reserve requirements on funds attracted in the national currency amount to 5%, and stand at 30% for funds attracted in a foreign currency, up from 25%. Borrowed funds with a remaining maturity of over one year in the national currency, and over two years in a foreign currency, are exempt from reserve requirements. For foreign currency liabilities with a remaining maturity of 1-2 years, the reserve requirement amounts to 15%, up from 10%. Capital, and funds equalized to capital, are exempt from the required reserve norms.

26) Reconciliation of reported IFRS consolidated figures with underlying numbers

 
in thousands of GEL                          2Q 2019          1H 2019 
Reported net interest income                 190,481          387,439 
Reported net fee and commission income       43,534           85,341 
Reported gross insurance profit              4,338            8,067 
Reported other operating income              33,949           63,401 
Reported operating income                    272,302          544,248 
Reported total provision expenses            (33,372)         (66,467) 
Reported operating income after provisions   238,930          477,781 
Reported operating expenses                  (109,383)        (211,897) 
One-off consulting fees                      (5,605)          (5,605) 
Underlying operating expenses                (103,778)        (206,292) 
 
Reported profit before tax                   129,547          265,884 
Underlying profit before tax                 135,152          271,489 
 
Reported income tax                          (9,329)          (12,344) 
Effect on tax of one-off items               841              841 
Underlying income tax                        (10,170)         (13,185) 
 
Reported net profit                          120,218          253,540 
Underlying net profit                        124,982          258,304 
 
Reported non-controlling interest (NCI)      220              305 
Effect on NCI of one-off items                             -                - 
Underlying NCI                               220              305 
Reported net profit less NCI                 119,998          253,235 
Underlying net profit less NCI               124,762          257,999 
 
 
in thousands of GEL                               2Q 2019          1H 2019 
Average reported equity attributable to the 
 PLC's equity holders                             2,325,788        2,293,159 
Adjustment for one-off items on monthly average 
 basis                                                    2,306            3,807 
Average underlying equity attributable to the 
 PLC's equity holders                             2,328,094        2,296,966 
Average reported total assets                     15,988,280       15,634,558 
Adjustment for one-off items on monthly average                 -                - 
 basis 
Average underlying total assets                   15,988,280       15,634,558 
 
 
                                    2Q 2019  1H 2019 
Reported cost to income             40.2%    38.9% 
Underlying cost to income (APM)     38.1%    37.9% 
Reported return on equity           20.7%    22.3% 
Underlying return on equity (APM)   21.5%    22.7% 
Reported return on assets           3.0%     3.3% 
Underlying return on assets (APM)   3.1%     3.3% 
 
 
in thousands of GEL                          2Q 2018          1H 2018 
Reported net interest income                 188,204          363,607 
Reported net fee and commission income       39,162           74,082 
Reported gross insurance profit              3,253            5,299 
Reported other operating income              27,799           54,129 
Reported operating income                    258,418          497,117 
Reported total provision expenses            (35,091)         (74,554) 
Reported operating income after provisions   223,327          422,563 
Reported operating expenses                  -92,090          (183,022) 
 
Reported profit before tax                   131,237          239,541 
 
Reported income tax                          (28,799)         (39,578) 
Reversal of the one-off deferred tax gain    (17,426)         (17,426) 
Underlying income tax                        (11,373)         (22,152) 
 
Reported net profit                          102,438          199,963 
Underlying net profit                        119,864          217,389 
 
Reported non-controlling interest (NCI)      (151)            1,616 
Effect on NCI of one-off items                             -                - 
Underlying NCI                               (151)            1,616 
Reported net profit less NCI                 102,589          198,347 
Underlying net profit less NCI               120,015          215,773 
 
 
in thousands of GEL                               2Q 2018          1H 2018 
Average reported equity attributable to the 
 PLC's equity holders                             1,928,838        1,887,954 
Adjustment for one-off items on monthly average 
 basis                                                    4,357            3,799 
Average underlying equity attributable to the 
 PLC's equity holders                             1,933,195        1,891,753 
Average reported total assets                     12,979,958       12,811,990 
Adjustment for one-off items on monthly average                 -                - 
 basis 
Average underlying total assets                   12,979,958       12,811,990 
 
 
                                    2Q 2018  1H 2018 
Reported return on equity           21.3%    21.2% 
Underlying return on equity (APM)   24.9%    23.0% 
Reported return on assets           3.2%     3.1% 
Underlying return on assets (APM)   3.7%     3.4% 
 

27) Space - fully digital bank

 
 
Date           # of app. downloads   # of registered customers    loans in thousands GEL 
30-Sep-2018    186,044               72,447                     5,814 
31-Dec-2018    258,846               93,994                     14,693 
31-Mar-2019    292,423               114,675                    16,843 
30-Jun-2019    365,563               133,624                    22,047 
 
  Space development costs amounted GEL 1.4 million before the launch in May 2018. 
 

28) International strategy: expansion into Azerbaijan market

Main highlights

-- TBC Bank and Nikoil Bank agreed on shareholders agreement in late December 2018 and signed it in early January 2019. According to which our shareholding in the joint entity will be 8.34% The transaction is subject to regulatory approval

-- Currently bank is in the process of significant reorganization which includes re-branding and shift to digitalization

   --     In 2Q 2019 Nikoil Bank opened four new branches. 

Strengthening Management Team

 
 
  Existing management team of the joint entity 
CEO -                               Nikoloz Shurghaia 
First Deputy CEO, Head of MSME -    Farhad Hajinski 
Deputy CEO, Head of Retail -        Fuad Tagiyev 
 
New management team of the joint entity 
COO -                             Nukri Tetrashvili, former CEO at TBC Kredit 
CDM -                             David Birman, former Chief Digital Officer at Bank of Georgia 
CRO -                             David Tediashvili, former Head of Retail Credit Risk Department at TBC Bank 
CFO -                             Emil Dushdurov, former Associate Director, Deal Advisory at KPMG Azerbaijan 
CIO -                             Avtandil Tabatadze, former strategic projects manager at TBC Bank 
 
 
 

Current Developments

 
                      Loans Disbursements (USD '000)  Number of customers 
2Q 2018               18,721                          62,685 
1Q 2019               25,030                          66,691 
2Q 2019               32,912                          78,422 
 
  Mid-term vision 
 In USD millions      2Q 2019                         Mid-term targets 
                       results                         of joint entity 
                       of Nikoil 
                       Bank* 
Loan portfolio        c. 205                          c. 1,400 
Equity                c. 35                           c. 200 
ROE                   NMF                             20%+ 
*Based on management 
 accounts. 
 
   --     Core segments: Retail and MSME (not large SMEs and Corporates); 

-- Product offerings: A mix of Nikoil Bank and TBC Bank products adapted to the local needs and offered primarily through digital channels, including Space Bank.

29) International strategy: digital greenfield bank in Uzbekistan

This is still in the concept stage and subject to approval (including approval from the authorities), therefore it could change as we progress. The pre-license is expected in 2019.

Why Uzbekistan?

   --     Large underpenetrated market: 
   --     with a population of more than 33.45 million 
   --     retail loans to GDP stood at 7.2% at the end of 2018 
   --     Similar history as part of the Soviet Union and good cultural links 

-- Right time given the implementation of reforms, many of which were designed by former Georgian government officials

   --     Both Uzbekistan and Georgia are included into China's One Belt One Road initiative 
   --     No digital bank operates in Uzbekistan currently 

Strategic Positioning

   --     Build a next generation bank for retail and MSME 
   --     Focus on digital channels and SPACE 
   --     Operate asset light, smart branches 
   --     Establishing the highest standards of corporate governance 
   --     Simple and intuitive products and processes 
   --     Transparent and straightforward commissions structure 
   --     Best customer experience 
   --     Automated decision making system. 

Main highlights

   --     Initial investments from TBC Bank around USD 20-30 million, resulting in 51% shareholding 
   --     Medium to long-term financial targets after license is granted: 
   --     Achieve sustainable ROE up to 25% 
   --     Cost to income ratio below 35% 

Our Uzbek and Azerbaijan subsidiaries together will contribute c. 30% to the Group's loan book.

Upcoming Events

   --      Opening pilot branch in 2019 for a proof of concept 
   --      Core banking implementation with local IT company 
   --      Multichannel development including Space 

o Define user experience

o Testing of main processes among 100 clients including: onboarding, account opening and card ordering

   --      Client contact center development 

-- Our international partners, EBRD and IFC have expressed their interest to participate in this project subject to completion of their internal procedures and approvals

-- We have reached an agreement on main terms with Uzbek-Oman Investment Company (UOIC) to act as our local partner.

30) Payme

Main Highlights

-- TBC Bank Group PLC has entered into an agreement to acquire a 51% stake in LLC Inspired, a leading profitable payment platform in Uzbekistan under the Payme brand

-- The consideration for the 51% stake is USD 5.5 million, implying a valuation of USD 10.8 million for Payme

-- TBC Bank has also entered into a put/call arrangement for the remaining 49% of Payme, which, in normal circumstances, may only be exercised between the fourth and seventh anniversary of the date of completion of the transaction

-- The exercise price will depend on a set of parameters including Payme's revenue, EBIT and the number of active customers that Payme achieves.

Strategic Positioning and Next Steps

The transaction is in line with TBC Bank's international strategy to expand its regional operations, giving us the immediate access to a large customer base in the country and use our core digital strengths in Georgia to innovate in the Uzbekistani market.

We are planning to enrich the product base of Payme by launching the following new products by the end of 2019:

   --      Money transfers; 
   --      Cards and wallets; 
   --      Loyalty cards; 
   --      Instant check-out; 
   --      Ticketing. 

Management Team

-- The management team and founders will remain with Payme on a long-term basis and will continue to be actively involved in the development and execution of Payme's strategy. One of the founders of Payme, Sarvar Ruzmatov became the CEO and Nodir Gulyamov was appointed as Deputy CEO.

-- We also appointed a new CFO, Abdukhalil Rashidov, who has 12-year experience in banking sector and will be a valuable addition to the management team.

-- The supervisory board has been formatted which is chaired by Giorgi Shagidze and consists of Nikoloz Kurdiani, Lasha Gurgenidze, Abdul-Aziz Abdul-Axadov and Bakhrom Khodjaev.

Payme Financial and Operating Highlights*

 
In million            2Q 19  Growth  Growth 
 USD                          QoQ     YTD 
Revenue               0.7    19.7%   46.0% 
Net profit            0.5    33.6%   131.1% 
Number of customers   1.4    10.9%   26.1% 
 

* Source: Based on Payme's unaudited management accounts

Product Types

 
-- Utility and Top-up    -- E-commerce Acquiring 
                          and Payment GW 
-- P2P                   -- White Label Mobile Banking 
-- Loan Repayment        -- Invoicing System 
-- mPOS for QR Payments  -- Personal Finance Manager 
 

31) Nikoil Bank Financials

Profit & Loss Statement

 
In thousands of USD                                   2Q'19                    1Q'19                    2Q'18 
Interest income                                       5,066                    4,610                           3,416 
Interest expense                                      (2,245)                  (2,069)                  (2,491) 
Net interest income                                   2,821                    2,541                           925 
Fee and commission income                             699                      551                                690 
Fee and commission expense                            (282)                    (267)                    (269) 
Net Fee and Commission Income                         417                      284                                421 
Net income from foreign currency operations           175                      176                                595 
Net gain/(losses) from foreign exchange translation   (6)                      (1)                                (45) 
Other operating non-interest income                   169                      175                                550 
Credit loss allowance of loans                        923                      2,326                    (27,537) 
Credit loss allowance of other financial 
 assets                                               97                       44                       366 
Operating income after credit loss allowance          4,427                    5,370                    (25,275) 
Staff costs                                           (2,759)                  (2,036)                  (1,372) 
Depreciation and amortisation                         (339)                    (321)                    (342) 
Administrative and other operating expenses           (1,573)                  (1,165)                  (935) 
Operating expenses                                    (4,671)                  (3,522)                  (2,649) 
Profit before tax                                     (244)                    1,848                    (27,924) 
Income tax expense                                                          -                        -  - 
Profit for the period                                 (244)                    1,848                    (27,924) 
 

Balance Sheet

 
In thousands of USD                            30-Jun-19  31-Mar-19  30-Jun-18 
Cash and cash equivalents                      21,871     44,711     41,206 
Due from other banks                           53,381     36,654     26,676 
Net Loans                                      138,556    135,655    147,789 
Investment securities measured at fair value 
 through other comprehensive income            10,316     7,085      21,208 
Current income tax prepayment                  7          4          3 
Deferred income tax asset                      768        768        768 
Other financial assets                         12,628     10,252     12,368 
Other assets                                   2,127      1,100      582 
Premises and equipment (Net)                   5,625      5,663      5,571 
Intangible assets (Net)                        1,775      1,849      2,068 
TOTAL ASSETS                                   247,054    243,741    258,239 
Due to other banks                             4,152      20,152     21,944 
Customer Accounts                              154,648    136,900    153,586 
Other borrowed funds                           40,417     41,112     36,291 
Other financial liabilities                    7,502      4,998      4,076 
Subordinated debt                              5,000      5,000      15,000 
TOTAL LIABILITIES                              211,719    208,162    230,897 
Share capital                                  204,706    204,705    144,118 
Additional paid-in-capital                     500        500        500 
Retained earnings                              (169,871)  (169,626)  (117,276) 
TOTAL EQUITY                                   35,335     35,579     27,342 
TOTAL LIABILITIES AND EQUITY                   247,054    243,741    258,239 
 

Principal Risks and Uncertainties

Risk management is a critical pillar of the Group's strategy. It is essential to identify emerging risks and uncertainties that could adversely impact on the Group's performance, financial condition and prospects. This section analyses the principal risks and uncertainties the Group faces. However, we cannot exclude the possibility of the Group's performance being affected by yet unknown risks and uncertainties other than those listed below.

The Board has undertaken a robust assessment of the principal risks facing the Group and long-term viability of the Group's operations, in order to determine whether to adopt the going concern basis of accounting.

1. PRINCIPAL RISK

Credit risk is an integral part of the Group's business activities.

As a provider of banking services, the Group is exposed to the risk of loss due to the failure of a customer or counterparty to meet its obligations to settle outstanding amounts in accordance with agreed terms.

Risk description

Credit risk is the most material risk faced by the Group since it is engaged mainly in traditional lending activities. The Group's customers include legal entities as well as individual borrowers.

Due to high level of dollarization of the Georgia's economy, currency-induced credit risk is a component of credit risk, which relates to risks arising from foreign currency- denominated loans to unhedged borrowers in the Group's portfolio. Credit risk also includes concentration risk, which is the risk related to credit portfolio quality deterioration due to large exposures provided to single borrowers or groups of connected borrowers, or loan concentration in certain economic industries. Loses may be further aggravated by unfavourable macroeconomic conditions. These risks are described as a separate principal risks in more details.

Risk mitigation

A comprehensive credit risk assessment framework is in place with a clear segregation of duties among parties involved in the credit analysis and approval process. The credit assessment process is distinct across segments, and is further differentiated across various product types to reflect the differing natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an individual basis, whereas the decision- making process for smaller retail and micro loans is largely automated. Individual application underwriting and automated underwriting rules are performed by units within the risk function that is independent from origination and business development units.

The Group uses a robust monitoring system to react promptly to macro and micro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tailored to the specifics of individual segments, as well as encompassing individual credit exposures, overall portfolio performance and external trends that may impact on the portfolio's risk profile. Additionally, The Group uses a comprehensive portfolio supervision system to identify weakened credit exposures and promptly take early remedial actions when necessary.

The Group's credit portfolio is structurally highly diversified across customer types, product types and industry segments which minimizes credit risk at Group level. As of 30 June 2019 retail segment represented 43.4% % of the total portfolio which was split between mortgage and non-mortgage 61.2% and 38.8%, respectively. In business banking, no single industry represented more than 8.7% of the total portfolio at the end of June 2019.

Collateral represents the most significant credit risk mitigation tool for the Group, making effective collateral management one of the key risk management components. Collateral on loans extended by the Group may include, but is not limited to, real estate, cash deposits, vehicles, equipment, inventory, precious metals, securities and third party guarantees.

The Group has a largely collateralised portfolio in all its segments, with real estate representing a major share of collateral. As of 30 June 2019, 72.5% of the Group's portfolio was secured by cash, real estate or gold. Sound collateral management framework ensures that collateral serves as an adequate mitigating factor for credit risk management purposes.

2. PRINCIPAL RISK

The Group faces currency-induced credit risk due to the high share of loans denominated in foreign currencies in the Group's portfolio.

The potential material GEL depreciation is one of the most significant risks that could negatively impact on the portfolio quality due to the large presence of foreign currencies on the Group's balance sheet. Unhedged borrowers could suffer from an increased debt burden when their liabilities denominated in foreign currencies are amplified.

Risk description

A significant share of the Group's loans (and a large share of the total banking sector loans in Georgia) is denominated in currencies other than GEL, particularly in US$. As of 30 June 2019, the NBG reported that 57.1% of the total banking sector loans were denominated in foreign currencies. As of the same date, 59.9% of the Group's total gross loans and advances to customers (before provision for loan impairment) were denominated in foreign currencies.

The income of many customers is directly linked to the foreign currency via remittances, or exports in case of business borrowers. Nevertheless, customers may not be protected against significant fluctuations in the GEL exchange rate against the currency of the loan.

The US$/GEL rate remained volatile in the first half of 2019. As of 30 June 2019, USD has substantially strengthened against GEL by 17.0 % YoY and appreciated against the 2018 average GEL exchange rate by 13.2%. According to the NBG July 24th the Monetary Policy Committee statement, the current nominal effective exchange rate seems to be more undervalued than the size of the current shock would suggest.

The NBG continues to operate under its inflation-targeting framework. The GEL remains in free float and is exposed to many internal and external factors that in some circumstances could result in depreciation against the US$.

Risk mitigation

Particular attention is paid to currency-induced credit risk due to the high share of loans denominated in foreign currencies in the portfolio. The vulnerability to the exchange rate depreciation is monitored in order to promptly implement an action plan, as and when needed. The ability to withstand certain exchange rate depreciation is incorporated into the credit underwriting standards, which also include significant currency devaluation buffers for unhedged borrowers. In addition, the Group holds significant capital against currency-induced credit risk, which was showed by the regulatory stress test as well. Details of stress test are described on pages 118 to 119 of TBC Bank Group PLC Annual Report 2018. Given the experience and knowledge built throughout the recent currency volatility, the Group is in a good position to promptly mitigate exchange rate depreciation risks.

In January 2019, the Government authorities continued their efforts to reduce the economy's dependence on foreign currency financing by increasing the cap to GEL 200,000 under which loans are required to be disbursed in local currency. In addition, the NBG, under its responsible lending initiative, which came into force on 1 January 2019, introduced significantly more conservative PTI and LTV thresholds for unhedged retail borrowers further limiting the exposure to currency induced credit risk.

3. PRINCIPAL RISK

The Group's performance may be compromised by adverse developments in the economic environment.

A slowdown of economic growth in Georgia would have an adverse impact on the repayment capacity of the borrowers, restraining their future investment and expansion plans. These occurrences would be reflected in the Group's portfolio quality and profitability and would also impede the portfolio growth rates. Negative macroeconomic developments could compromise the Group's performance through various parameters, such as exchange rate depreciation, a spike in interest rates, rising unemployment, decrease in household disposable income, falling property values, worsening loan collateralisation, or falling debt service capabilities of companies as a result of decreasing sales.

Potential political and economic instability in the neighbouring and main trading partner countries could negatively impact Georgia's economic outlook through a worsening current account (e.g. decreased exports, tourism inflows, remittances and foreign direct investments).

Risk description

According to the Geostat's initial estimates, the real GDP increased by 4.9% in the first half of 2019. While the credit growth has moderated, the inflows were reasonably strong and unlike 2018, fiscal stance was expansionary. It is expected that the newly imposed Russian flight ban will lower the growth going forward. However, according to TBC Research estimates, GDP is still expected to increase somewhat higher than 4.0% for the full year 2019 and 2020.

The CA balance improvement trend continued in 1Q 2019 with the deficit to same quarter GDP ratio standing at 6.2% - being historically low with an improvement of 5.7 percentage points YoY and with the strongest contribution of the trade in goods. The positive tendency is likely to be sustained in 2Q as well, judging from the trade balance, tourism and remittances inflows. Over the last 4 quarters, the current account deficit to GDP ratio stood at 6.4%, up by 1.3 percentage points compared to the previous quarter. Despite the reduction, FDI inflows at 6.6% of GDP remained the main source of financing the CA deficit. At the same time, in the first half 2019, the NBG bought USD 216 million reserves or around 3.0% of the same period GDP, indicating that the external inflows were sufficient even for higher growth.

The annual inflation stood at 4.3% in June 2019. The above target price increase was primarily due to higher excise tax on tobacco. As of July 15, estimated real effective exchange rate was by around 10% below its medium term average, likely indicating the potential pressures on the inflation unless GEL appreciates back in the coming months.

In the first half 2019, the system-wide credit growth has moderated primarily driven by the weaker retail lending activity. As of June 2019, estimated credit to GDP ratio was somewhat above its long-term trend when measured at current exchange rate, however, the gap was negative at constant exchange rate.

Overall, from a macro perspective there were no signs of building up of system wide risks in the first half of 2019. At the same time, Georgia remains vulnerable to external and to some extent internal shocks, which could have adverse impact on the Georgian economy resulting in lower growth or, in some severe circumstances, a contraction of the economy. These negative developments could also have a negative impact on the GEL exchange rate.

Risk mitigation

To decrease its vulnerability to economic cycles, the Group identifies cyclical industries and proactively manages its underwriting approach and clients within its risk appetite framework.

The Group has in place a macroeconomic monitoring process that relies on close, recurrent observations of the economic developments in Georgia, as well as its neighbouring countries, to identify early warning signals indicating imminent economic risks. This system allows the Group to promptly assess significant economic and political occurrences and analyse their implications for the Group performance. The identified implications are duly translated into specific action plans with regards to reviewing the underwriting standards, risk appetite metrics or limits, including the limits for each of the most vulnerable industries.

Additionally, the stress-testing and scenario analysis applied during the credit review and portfolio monitoring processes enable the Group to have an advance evaluation of the impact of macroeconomic shocks on its business. The resilience towards a changing macroeconomic environment is incorporated into the Group's credit underwriting standards. As such, borrowers are expected to withstand certain adverse economic developments through prudent financials, debt-servicing capabilities and conservative collateral coverage.

4. PRINCIPAL RISK

The Group encounters the capital risk of not meeting the minimum regulatory requirements, which may compromise growth and strategic targets.

The Bank is regulated by the National Bank of Georgia (NBG). The regulations and various terms of its funding and other arrangements require compliance with certain capital adequacy and other ratios. At the same time, the local regulator has the right to impose additional regulations on a bank if it perceives excessive risks and uncertainties in that lender or in the market In addition, potential GEL depreciation would increase the Bank's risk weighted assets and impairment charges, which in turn will negatively affect the Bank's regulatory capital adequacy ratios. A 10% GEL depreciation translates into negative impact of 82bps, 80bps (70bps[25]) and 64bps (53bps(25) )bps on CET1, Tier 1 and Total Regulatory capital adequacy ratios, respectively.

Risk description

In December 2017 the NBG introduced a new capital adequacy framework. The updated regulation divides the current capital requirement across Pillar 1 and Pillar 2 buffers that are introduced gradually over a four-year period. As of year-end 2018, the Bank's minimum capital requirement increased by 1.5% for Tier 1 and 3.7% for Total Capital compared to the end of 2017. The increase in minimum requirements is driven by introduction of systemic risk, concentration and GRAPE buffers.

The Bank's capitalisation as of June 2019 stood at 12.0%, 12.4% and 17.4% well above the regulatory minimum requirement of 9.8%, 11.9% and 16.7% for CET 1, Tier 1 and total capital, respectively. In June 2019, the Bank issued USD 125 million additional Tier 1 perpetual bond, which will be included in the Bank's Tier 1 and Total Capital in July;

The Bank's capitalisation as of 30 June 2019 with AT1 would have been 12.0%, 14.9% and 19.9% for CET 1, Tier 1 and total regulatory capital, respectively.

Risk mitigation

The Group undertakes stress-testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Such analyses indicate that the Group holds sufficient capital to meet the minimum regulatory requirements.

Capital forecasts, as well as the results of the stress-testing and what-if scenarios, are actively monitored with the involvement of the Bank's Management Board and Risk Committee to ensure prudent management and timely actions when needed.

5. PRINCIPAL RISK

The Group is exposed to regulatory and enforcement action risk.

The Bank's activities are highly regulated and thus face regulatory risk. The local regulator, the NBG, can increase the prudential requirements across the whole sector as well as for specific institutions within it. Therefore, the Group's profitability and performance may be compromised by an increased regulatory burden, including higher capital requirements.

Risk description

The Bank is regulated by the NBG, who sets lending limits and other economic ratios (including, inter alia, lending, liquidity and investment ratios) in addition to mandatory capital adequacy ratios. During 2018, the NBG introduced several regulatory changes concerning the responsible lending standards. The details are outlined in the RECC report on pages 133 to 135 of TBC Bank Group PLC Annual Report 2018

Under the Georgian banking regulations, the Bank is required, among other things, to comply with minimum reserve requirements and mandatory financial ratios and regularly file periodic reports. The Bank is also regulated by respective tax code or other relevant laws in Georgia.

Following the Company's listing on the London Stock Exchange's premium segment, the Group became subject to increased regulations from the UK Financial Conduct Authority. In addition to its banking operations, the Group also offers other regulated financial services products, including leasing, insurance and brokerage services.

As part of the Group's international strategy, the ongoing merger between Nikoil Bank and TBC Kredit is subject to regulatory approval and the Group's intention is to increase over the four year period its shareholding in the merged entity to over 50%. This will, in turn, increase the Group's exposure to the regulatory environment in Azerbaijan. In addition, TBC Bank is working on the green field project in Uzbekistan. This project is currently in the development phase and is subject to approvals, including from the local authorities, which further increases regulatory compliance requirements for the Group.

The Group's operations remain in full compliance with all relevant legislation and regulations. The Group is also subject to financial covenants in its debt agreements. For more information, see pages 138-139 in the Group's Reviewed Financial Statements.

Risk mitigation

The Group has established systems and processes to ensure full regulatory compliance, which are embedded in all levels of the Group's operations.

The dedicated compliance department reports directly to the Chief Executive Officer and bears the primary responsibility for regulatory compliance.

The Group's RECC is responsible for regulatory compliance at the Board level.

In terms of banking regulations and Georgia's taxation system, the Group is closely engaged with the regulator to ensure that new procedures and requirements are discussed in detail before their implementation. There was also an extensive dialogue with the regulator regarding the new regulation on responsible lending.

Together with the new regulation on responsible lending, the government introduced initiatives to ensure continuous broad access to financing. These include simplification of the tax code to incentivize income registration rate.

Although decisions made by regulators are beyond the Group's control, significant regulatory changes are usually preceded by a consultation period that allows all lending institutions to provide feedback and adjust their business practice.

Investigation related to the historic transactions that took place in 2007 and 2008

The NBG is also responsible for conducting investigations into specific transactions to ensure compliance with Georgian finance laws and regulations. In that regard, the Bank was subject to an inspection by the NBG in connection with certain transactions, which took place in 2007 and 2008. The inspection alleged that these transactions between the Bank and certain entities were not in technical compliance with the Georgian law regulating conflicts of interest. In February 2019, the Company, the Bank and the NBG issued a joint statement confirming the settlement of this investigation and that the Bank fully complies with economic normative requirements and limits set by the NBG. As part of the settlement, the Bank paid approximately GEL 1 million fine; In addition, TBC's Chairman and Deputy Chairman of supervisory board stepped down from their roles. The respective regulatory disclosures in this regards can be found at www.tbcbankgroup.com under regulatory news section.

Furthermore, TBC Bank, with the assistance of one of the big four audit firms has, undertaken benchmarking and review of its AML and related Party Policies and procedures compliance with local and international requirement. These reviews did not identify any material deficiencies.

Separately, it is noted that the Georgian Office of Public Prosecution has also launched an investigation into the same matter and has made charges against the founders of TBC Bank. On 24 July, the Chairman and Deputy Chairman have decided to step down from the board of TBC Bank Group PLC with immediate effect. They have both arrived at this decision after careful consideration in order to ensure that the allegations made against them do not affect the Group and to be able to concentrate on refuting those allegations. The respective regulatory disclosures in this regards can be found at www.tbcbankgroup.com under regulatory news section.

On 26 July 2019, the NBG issued the following statement: "In the light of recent events, National Bank of Georgia welcomes the decision of the founding shareholders to step down from the Board of Directors of TBC Bank Group PLC (which is a London based 100% shareholder of JSC TBC Bank). National Bank of Georgia emphasizes that TBC Bank is one of the leading financial organization in the country and the region. It is a strong and robust financial institution. Since April 2019, Mamuka Khazaradze and Badri Japaridze no longer serve as the Supervisory Board members of JSC TBC Bank and the recent events will not have any impact on the operations of the bank." The full statement is available on the following website: www.nbg.gov.ge

6. PRINCIPAL RISK

The Group is exposed to concentration risk.

Banks operating in developing markets are typically exposed to both single-name and sector concentration risks.

The Group has large individual exposures to single-name borrowers whose potential default would entail increased credit losses and high impairment charges.

The Group's portfolio is well diversified across sectors, resulting in only a moderate vulnerability to sector concentration risks. However, should exposure to common risk drivers increase, the risks are expected to amplify correspondingly.

Risk description

The Group's loan portfolio is diversified, with maximum exposure to the single largest industry (energy and utility) standing at 8.7% of the loan portfolio as of 30 June 2019. This figure is reasonable and it demonstrates an adequate credit portfolio diversification.

At the end of June 2019 the exposure to the 20 largest borrowers improved by 0.9pp on QoQ basis and stands at 12.6% of the loan portfolio, which is in line with the Group's target of alleviating concentration risk.

Risk mitigation

The Group constantly checks the concentrations of its exposure to single counterparties, as well as sectors and common risk drivers, and it introduces limits for risk mitigation.

As part of its risk appetite framework, the Group limits both single-name and sector concentrations. Any considerable change in the economic or political environment, in Georgia as well as its neighbouring countries, will trigger the Group's review of the risk appetite criteria to mitigate emerging risk concentrations. Stringent monitoring tools are in place to ensure compliance with the established limits. In addition, the Bank has dedicated restructuring teams to manage borrowers with financial difficulties. When it is deemed necessary, clients are transferred to such teams for a more efficient handling and, ultimately, to limit resulting credit risk losses.

The NBG's new capital framework introduced a concentration buffer under Pillar 2 that helps to ensure that the Group remains adequately capitalised to mitigate concentration risks.

7. PRINCIPAL RISK

Liquidity risk is inherent in the Group's operations.

While the Board believes that the Group currently has sufficient financial resources available to meet its obligations as they fall due, liquidity risk is inherent in banking operations and can be heightened by numerous factors. These include an overreliance on, or an inability to access, a particular source of funding, as well as changes in credit ratings or market-wide phenomena, such as the global financial crisis that commenced in 2007 or any unexpected rapid withdrawals due to loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. In the first quarter of 2019, TBC experienced a higher volatility of deposit flows. Deposits (excluding a liquidity-neutral deposit from the Ministry of Finance) decreased by GEL 323.8 million or 3.5% (excluding foreign currency effects) in the first three months of 2019 compared to 31 December 2018. The decrease was primarily driven by retail deposit reductions (mostly in January and February, which were recovered in the following months) prior to the settlement with the NBG as well as the effects of seasonality.

Access to credit for companies in emerging markets is significantly influenced by the level of investor confidence and, as such, any factors affecting investor confidence (e.g. a downgrade in credit ratings, central bank or state interventions, or debt restructurings in a relevant industry) could influence the price or the availability of funding for companies operating in any of these markets.

Risk description

Throughout 2018 and 1H 2019, the Group was in compliance with the risk appetite limits, as well as the minimum liquidity requirements set by the NBG, which introduced a liquidity coverage ratio in 2017. This is in addition to the Basel III guidelines, under which a conservative approach was applied to the weighting of mandatory reserves and to the deposit withdrawal rates, depending on the concentration of client groups. As of 30 June 2019, the net loan to deposits plus international financial institution funding ratio stood at 91.4%, the liquidity coverage ratio at 126.3% (138.1%[27]), and the net stable funding ratio at 130.4% (133.8%(1) ). These figures are all comfortably above the NBG's minimum requirements or guidance for such ratios.

Risk mitigation

To mitigate this risk, the Group holds a solid liquidity position and performs an outflow scenario analysis for both normal and stress circumstances to make sure that it has adequate liquid assets and cash inflows. The Group maintains a diversified funding structure to manage respective liquidity risk. The Board believes there is adequate liquidity to withstand significant withdrawals of customer deposits, but the unexpected and rapid withdrawal of a substantial amount of deposits could have a material adverse impact on the Group's business, financial condition, and results of operations and/or prospects. As part of its liquidity risk management framework, the Group has a liquidity contingency plan in place outlining the risk indicators for different stress scenarios and respective action plans. Liquidity risk position and compliance with internal limits is closely monitored by the Assets and Liabilities Management Committee (ALCO).

8. PRINCIPAL RISK

Any decline in the Group's net interest income or net interest margin could lead to a reduction in profitability.

Net interest income accounts for the majority of the Group's total income. Consequently, fluctuations in its NIM affect the results of operations. The new regulation concerning responsible lending standards as well as high competition could drive interest rates down, compromising the Group's profitability. At the same time, the cost of funding is largely exogenous to the Group and is derived based on both the national and international markets.

Risk description

The majority of the Group's total income derives from net interest income. Consequently, NIM's fluctuations affect the Group's results. In 1H 2019, the NIM decreased by 1.1 pp YTD to 5.8%, mainly driven by the change of segment / product mix as a result of NBG responsible lending regulation, intensified competition in interest rates, increase in mandatory reserve requirements for FC funding, as well as high liquidity before the bonds are deployed .

The recent regulation regarding the responsible lending, as well as a one-off impact from the high liquidity after recent bonds issuance before its deployment, will further impact the Group's NIM negatively with the estimated range of 30-50 bps in 3Q 2019 and is expected to stabilize in 4Q 2019.

The Group manages its direct exposure to the LIBOR and local refinancing rates through respective limits and appropriate pricing. As of 30 June 2019, GEL 5,261 million in assets (30%) and GEL 1,799 million in liabilities (12%) were floating, related to the LIBOR/FED/ECB (deposit facility) rates, whereas GEL 3,654 million of assets (21%) and GEL 2,768 million of liabilities (19%) were floating, related to the NBG's refinancing rate. However, the assets are still longer term than liabilities.

Risk mitigation

The current high margin levels, the increase in fee and commission income and continuous cost optimization efforts safeguard against margin declines and profitability concerns for the Group. The Group continues to actively work on the margin management program, which includes an adequate pricing framework and profitability analysis to further assist in the decision making process. In addition, the recent NBG regulation, which limits consumer financing and shifts retail lending to mortgages, positively impacts the cost of credit risk, thus supporting to sustain the risk adjusted NIM. To mitigate asset-liability maturity mismatch, in cases where loans are extended on fixed rather than floating terms, the interest rate risk is translated into price premiums, safeguarding against changes in the interest rates.

9. PRINCIPAL RISK

The threat posed by cyber-attacks has increased in recent years and it continues to grow. The risk of potential cyber-attacks, which have become more sophisticated, may lead to significant security breaches. Such risks change rapidly and require continued focus and investment.

Risk description

No major cyber-attack attempts have targeted Georgian commercial banks in recent years. Nonetheless, the Group's rising dependency on IT systems increases its exposure to potential cyber-attacks.

Risk mitigation

The Group actively monitors, detects and prevents risks arising from cyber-attacks. Staff monitors the developments on both the local and international markets to increase awareness of emerging forms of cyber-attacks. Intrusion prevention and Distributed Denial of Service (DDoS) protection systems are in place to protect the Group from external cyber-threats. Security incident and event monitoring systems, in conjunction with respective processes and procedures, are in place to handle cyberincidents effectively.

Processes are continuously updated and enhanced to respond to new potential threats. A data recovery policy is in place to ensure business continuity in case of serious cyber-attacks. In addition, an Information Security Steering Committee is actively involved in improving information security and business continuity management processes to minimise information security risks.

10. PRINCIPAL RISK

External and internal fraud risks are part of the operational risk inherent in the Group's business. Considering the increased complexity and diversification of operations, together with the digitalisation of the baking sector, fraud risks are evolving. Unless proactively managed, fraud events may materially impact the Group's profitability and reputation.

Risk description

External fraud events may arise from the actions of third parties against the Group and, most frequently, this involved events related to banking cards and cash. Internal frauds arise from actions committed by the Group's employees and such events happen less frequently.

During the reporting period, the Group faced only a few instances of fraud events, none of which had a material impact upon the Group's profit and loss statement. Nonetheless, fraudsters are adopting new techniques and approaches to exploit various possibilities to illegally obtain funds. Therefore, unless properly monitored and managed, the potential impact can become substantial.

Risk mitigation

The Group actively monitors, detects and prevents risks arising from fraud events and permanent monitoring processes are in place to timely detect unusual activities. The risk and control self-assessment exercise focuses on identifying residual risks in key processes, subject to respective corrective actions. Given our continuous efforts to monitor and mitigate fraud risks, together with the high sophistication of our internal processes, the Group ensures a timely identification and control of fraud-related activities.

11. PRINCIPAL RISK

The Group is exposed to the risks inherent in international operations.

The Group is expanding its international presence in Azerbaijan and Uzbekistan. The expansion exposes the Group to new macro-economic, political and regulatory environments, including exposure to risks arising from credit, market, operational and capital adequacy risks in local jurisdictions.

Currently, the Group's business activities are mainly concentrated in Georgia, but international activities are expected to contribute to around 30% of the Group's loan book over the medium to long-term.

Risk description

The risk posed by the external environment in Uzbekistan and Azerbaijan may change the Group's risk profile as a result of international expansion. According to the latest IMF forecasts, Uzbekistan is a rapidly developing economy with above 5% real GDP growth projection in the medium term.

The Uzbekistani economy is well diversified with no major reliance on a particular industry. It has one of the lowest public debts as a percentage of GDP in the region and high international reserve implying the macroeconomic stability as well as room for future high growth. The new government of Uzbekistan plans to reform the economy and open it up to foreign investments.

While the operational environment in Uzbekistan can be assessed as attractive, there are important risks, which can materially affect the Group's performance in the country. These risks include, but are not limited to, the political instability, low pace of reforms, adverse developments in inflation and fluctuations in the exchange rate.

Azerbaijan economy has high reliance on oil exports. The economy of Azerbaijan started to recover in 2017 after the contraction in 2016 caused by the significant decline in oil prices in the period of 2014-2016 years. The IMF projects Azerbaijan's economic growth rate to improve to 3.4% in 2019 and to average at 2.0% over the next 5 years. Along with the stabilisation in oil prices and exchange rate, annual inflation remained stable in 1H 2019. Azerbaijan's economic recovery has also contributed to the strengthening of its financial sector and gradual recovery of the lending to the economy. Despite relatively more stable environment, Azerbaijan's growth is still significantly depends on oil prices and any adverse developments in oil prices could negatively affect the growth perspectives and exchange rate. Furthermore, potential political instability and unfavorable developments in the state regulations can also negatively affect the Groups business in Azerbaijan.

Risk mitigation

The Group' strategy is to follow an asset-light, limited capital investment approach with a strong focus on digital channels and to invest in stages to make sure that we are comfortable with the results and the operating environment before committing additional investment.

The Group plans to serve retail and MSME customers leading to non-concentrated portfolio, leading to the lower credit risk.

The Group will maintain close relationship with the IFIs to ensure business plan funding flexibility across many different options. In particular, the IFIs will be the Group's partners in Uzbekistan.

The Group has been operating in Azerbaijan through a small microfinance organisation for a number of years, which provides experience and knowledge of local banking environment. In addition, in Azerbaijan the exposure is limited before the option is exercised. The Group will exercise the option only after it becomes comfortable with the development, including operating environment.

The management will focus on establishing strong risk management function to ensure that all risks are managed and mitigated properly. The Group will leverage on its strong risk management expertise to establish sound risk management practices in new jurisdictions.

Overall, from the Group perspective international expansion will result in diversification of business lines, macroeconomic cycles and revenue streams balancing overall risk profile of the Group.

Statement of Directors' Responsibilities

Each of the Directors (the names of whom are set out below) confirm that to the best of their knowledge that:

-- The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union;

-- The interim management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules 4.2.7R and 4.2.8R namely:

o an indication of important events that have occurred during the six months ended 30 June 2019 and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

o any related party transactions in the six months ended 30 June 2019 that have materially affected the financial position or performance of TBC Bank during that period and any changes in the related party transactions described in the last Annual Report that could have a material effect on the financial position or performance of TBC Bank in the six months ended 30 June 2019.

Signed on behalf of the Board by:

 
Vakhtang Butskhrikidze         Giorgi Shagidze 
 
  CEO                            Deputy CEO, CFO 
 
  14 August 2019                 14 August 2019 
 
 
  TBC Bank Group PLC Board of 
  Directors: 
 
Chairman 
Nikoloz Enukidze 
 
Executive Directors            Non-executive Directors 
Vakhtang Butskhrikidze (CEO)   Nicholas Dominic Haag 
Giorgi Shagidze (CFO)          Maria Luisa Cicognani 
                               Tsira Kemularia 
 
 
 

TBC BANK GROUP PLC

International Financial Reporting Standards

Condensed Consolidated Interim Financial

Statements (Unaudited)

30 June 2019

Contents

Independent review report

Unaudited Condensed Consolidated Interim Financial Information

Condensed Consolidated Interim Statement of Financial Position ........................................................................................... 71

Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income....................................... 72

Condensed Consolidated Interim Statement of Changes in Equity...........................................................................................74

Condensed Consolidated Interim Statement of Cash Flows...................................................................................................... 76

Notes to the Condensed Consolidated Interim Financial Statements........................................................................................ 77

Independent review report to TBC Bank Group plc

Report on the Unaudited Condensed Consolidated Interim Financial Statements

Our conclusion

We have reviewed TBC Bank Group plc's Unaudited Condensed Consolidated Interim Financial Statements (the "interim financial statements") in the 2Q and 1H Consolidated Financial Results of TBC Bank Group plc for the 6 month period ended 30 June 2019. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

   --      the condensed consolidated interim statement of financial position as at 30 June 2019; 

-- the condensed consolidated interim statement of profit or loss and other comprehensive income for the period then ended;

   --      the condensed consolidated interim statement of cash flows for the period then ended; 

-- the condensed consolidated interim statement of changes in equity for the period then ended; and

   --      the explanatory notes to the interim financial statements. 

The interim financial statements included in the 2Q and 1H Consolidated Financial Results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The 2Q and 1H Consolidated Financial Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2Q and 1H Consolidated Financial Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the 2Q and 1H Consolidated Financial Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. 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.

We have read the other information contained in the 2Q and 1H Consolidated Financial Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Edinburgh

August 2019

TBC Bank Group PLC

Condensed Consolidated Interim Statement of Financial Position

 
                                                30 June 2019  31 December 2018 
In thousands of GEL                       Note  (Unaudited) 
 
Assets 
Cash and cash equivalents                 4      1,628,344    1,166,911 
Due from other banks                      5       27,860      47,316 
Mandatory cash balances with the 
 National Bank of Georgia                 6      1,841,237    1,422,809 
Loans and advances to customers           7     10,801,264    10,038,452 
Investment securities measured at 
 fair value through other comprehensive 
 income                                           861,529     1,005,239 
Repurchase Receivable                           179,762       - 
Bonds carried at amortized cost                    633,530    654,203 
Investments in associates                        2,363        2,432 
Investments in finance leases                   220,871       203,802 
Investment properties                           79,114        84,296 
Current income tax prepayment                   19,417        2,116 
Deferred income tax asset                       1,753         2,097 
Other financial assets                          165,382       167,518 
Other assets                                     211,850      192,792 
Right of use assets                       2     61,555        N/A 
Premises and equipment                    8     373,322       367,504 
Intangible assets                         8     123,910       109,220 
Goodwill                                        45,301        31,286 
 
 
Total assets                                    17,278,364    15,497,993 
 
 
Liabilities 
Due to credit institutions                9     3,052,742     3,031,503 
Customer accounts                         10    9,876,813     9,352,142 
Other financial liabilities                     252,280       98,714 
Current income tax liability                    727           63 
Debt securities in issue                  12    848,838       13,343 
Deferred income tax liability             22    21,361        22,237 
Provisions for liabilities and charges    11    20,116        18,767 
Other liabilities                               85,882        104,337 
Lease Liabilities                         2     62,598        N/A 
Subordinated debt                         13    688,002       650,919 
 
 
Total liabilities                               14,909,359    13,292,025 
 
 
EQUITY 
Share capital                             14    1,672         1,650 
Share premium                             14    831,773       796,854 
Retained earnings                               1,668,810     1,523,879 
Group reorganisation reserve                    (162,166)     (162,166) 
Share based payment reserve               15    (37,968)      (16,294) 
Revaluation reserve for premises                56,606        57,240 
Fair value reserve                              12,680        8,680 
Cumulative currency translation 
 reserve                                        (6,478)       (6,937) 
 
 
Net assets attributable to owners               2,364,929     2,202,906 
Non-controlling interest                        4,076         3,062 
 
 
Total equity                                    2,369,005     2,205,968 
 
 
Total liabilities and equity                    17,278,364    15,497,993 
 
 

The financial statements on pages 71 to 148 were approved by the Board of Directors on 14 August 2019 and signed on its behalf on 15 August 2019 by:

   ______________________________                                     ______________________________ 

Vakhtang Butskhrikidze Giorgi Shagidze

Chief Executive Officer Chief Financial Officer

TBC Bank Group PLC

Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income

 
                                                                                             Six months ended 
                                                                                            30 June 2019  30 June 2018 
In thousands of GEL                                                                   Note  (Unaudited)   (Unaudited) 
 
Interest income                                                                       18     678,216      598,001 
Interest expense                                                                      18     (290,777)    (234,394) 
 
 
Net interest income                                                                         387,439       363,607 
 
 
Fee and commission income                                                             19     129,885      109,099 
Fee and commission expense                                                            19     (44,544)     (35,017) 
 
 
Net fee and commission income                                                               85,341        74,082 
 
 
Net insurance premiums earned                                                                15,992       10,602 
Net insurance claims incurred and agents' commissions                                       (7,925)       (5,303) 
 
 
Insurance Profit                                                                            8,067         5,299 
 
 
Net gains from trading in foreign currencies                                                 46,119        38,782 
Net gains from foreign exchange translation                                                  9,214         4,023 
Net (losses)/gains from derivative financial instruments                                     (229)         413 
Net gains from disposal of investment securities measured at fair value through 
 other comprehensive 
 income                                                                               20    147           - 
Other operating income                                                                      7,809         10,263 
Share of profit of associates                                                               341           648 
 
 
Other operating non-interest income                                                         63,401        54,129 
 
 
Credit loss allowance for loan to customers                                           7      (66,483)      (65,980) 
Recovery of/(Charge to) credit loss allowance for investments in finance lease              178            (493) 
Credit loss allowance for performance guarantees and credit related commitments       11    (392)          (2,500) 
Recovery of/(Charge to) credit loss allowance for other financial assets                    580            (5,469) 
Credit loss allowance for financial assets measured at fair value through other 
 comprehensive 
 income                                                                                     (350)          (112) 
 
 
Operating income after credit impairment losses                                             477,781       422,563 
 
 
Staff costs                                                                                 (116,639)      (102,847) 
Depreciation and amortisation                                                         8     (32,124)       (21,463) 
(Provision for)/recovery of provision for liabilities and charges                           1,441          - 
Administrative and other operating expenses                                           21    (64,575)       (58,712) 
 
 
Operating expenses                                                                          (211,897)     (183,022) 
 
 
Profit before tax                                                                           265,884       239,541 
 
 
Income tax expense                                                                    22    (12,344)      (39,578) 
 
 
Profit for the period                                                                       253,540       199,963 
 
Other comprehensive income: 
 Items that may be reclassified subsequently to profit or loss: 
Movement in fair value reserve                                                              3,999          827 
Exchange differences on translation to presentation currency                                457           14 
Items that will not be reclassified to profit or loss: 
Income tax recorded directly in other comprehensive income                                  -             (5,151) 
 
 
Other comprehensive income for the period                                                   4,456         (4,310) 
 
 
Total comprehensive income for the PERIOD                                                   257,996       195,653 
 
 
 

TBC Bank Group PLC

Condensed Consolidated Interim Statement of Profit or Loss and Other Comprehensive Income

 
                                                                                Six months ended 
                                                                               30 June 2019  30 June 2018 
In thousands of GEL                                                      Note  (Unaudited)   (Unaudited) 
 
Profit is attributable to: 
- Shareholders of TBCG                                                          253,235              198,347 
- Non-controlling interest                                                      305          1,616 
 
Profit for the period                                                          253,540       199,963 
 
 
Total comprehensive income is attributable to: 
- Shareholders of TBCG                                                          257,687      194,089 
- Non-controlling interest                                                      309           1,564 
 
 
Total comprehensive income for the period                                      257,996       195,653 
 
 
Earnings per share for profit attributable to the owners of the Group: 
- Basic earnings per share                                               16    4.64          3.70 
- Diluted earnings per share                                             16    4.62          3.67 
 
 
 

TBC Bank Group PLC

Condensed Consolidated Interim Statement of Changes in Equity

 
                                                                                                                   Non-control-ling  Total 
                                          Net assets attributable to owners                                        interest           equity 
                      Share    Share     Group           Share      Revaluation  Fair     Cumulative   Retained   Total 
                      capital  pre-mium  reorganisation  based      reserve for  value    currency      earnings 
In thousands                             reserve         payments   premises     reserve  translation 
of GEL          Note                                     reserve                          reserve 
 
 
 
  Balance as 
  of 1 January 
  2018                1,605    714,651   (162,166)       9,828      70,045       1,730    (7,359)      1,169,937  1,798,271          28,536    1,826,807 
 
 
Profit for the 
 six months 
 ended 30 June 
 2018 
 (unaudited)          -        -         -               -          -            -        -            198,347    198,347            1,616     199,963 
Other 
 comprehensive 
 income/(loss) 
 for six 
 months ended 
 30 June 2018 
 (unaudited)          -        -         -               -          (5,083)      811       14          -          (4,258)            (52)      (4,310) 
 
 
Total 
 comprehensive 
 income/(loss) 
 for six 
 months ended 
 30 June 2018 
 (unaudited)          -        -         -               -          (5,083)      811      14           198,347    194,089            1,564     195,653 
 
Share issue           23       41,984    -               (38,670)   -            -        -            -          3,337              -         3,337 
Share based 
 payment 
 expense        15     -        -        -               7,757      -            -        -            -          7,757              (885)     6,872 
Conversion of 
 shares               22       40,173    -               -          -            -        -            (17,837)   22,358             (22,358)  - 
Dividends 
 declared             -        -         -               -          -            -        -            (88,869)   (88,869)           (116)     (88,985) 
 
Balance as of 
 30 June 2018 
 (unaudited)           1,650   796,808      (162,166)    (21,085)   64,962       2,541    (7,345)      1,261,578  1,936,943          6,741     1,943,684 
 
 
 
Balance as of 
 1 January 
 2019                 1,650    796,854   (162,166)        (16,294)   57,240       8,680    (6,937)     1,523,879  2,202,906           3,062    2,205,968 
 
 
 
Profit for the 
 six months 
 ended 30 June 
 2019 
 (unaudited)          -        -         -               -          -            -        -            253,235    253,235            305       253,540 
Other 
 comprehensive 
 income/(loss) 
 for six 
 months ended 
 30 June 2019 
 (unaudited)          -        -         -               -          -            3,999     457         -          4,456              -         4,456 
 
 
Total 
 comprehensive 
 income/(loss) 
 for six 
 months ended 
 30 June 2019 
 (unaudited)          -        -         -               -          -            3,999    457          253,235    257,691            305       257,996 
 
 
Share issue           22       34,919    -               (34,941)   -            -        -            -          -                  -         - 
Share based 
 payment 
 expense        15     -        -        -               13,267     -            -        -            -          13,267             (25)      13,242 
Business 
 Combination    29     -        -        -                -          -           -         -            -         -                  838       838 
Purchase of 
 additional 
 interest from 
 NCI                   -        -        -                -          -           -         -            -         -                  (104)     (104) 
Dividends 
 declared             -        -         -               -          -            -        -            (108,622)  (108,622)          -         (108,622) 
Transfer of 
 revaluation 
 surplus to RE 
 and other 
 movements            -        -         -               -          (634)        -        -            321        (313)              -         (313) 
 
 
Balance as of 
 30 June 2019 
 (unaudited)          1,672    831,773   (162,166)       (37,968)   56,606       12,680   (6,478)      1,668,810  2,364,929          4,076     2,369,005 
 
 
 

TBC Bank Group PLC

Condensed Consolidated Interim Statement of Cash Flows

 
                                                                   Six months ended 
 
  In thousands of GEL                                        Note  30 June 2019 (Unaudited)   30 June 2018 (Unaudited) 
 
Cash flows from/(used in) operating activities 
Interest received                                                   632,619                   573,644 
Interest paid                                                       (291,963)                 (234,845) 
Fees and commissions received                                       127,685                   118,805 
Fees and commissions paid                                           (44,370)                  (35,025) 
Insurance premium received                                           18,560                   10,973 
Insurance claims paid                                                (9,727)                  (5,898) 
Income received from trading in foreign currencies                  46,119                    38,782 
Other operating income received                                      11,500                   (2,672) 
Staff costs paid                                                    (123,342)                 (111,715) 
Administrative and other operating expenses paid                    (81,397)                  (59,836) 
Income tax paid                                                     (30,900)                  (10,151) 
 
 
Cash flows from operating activities before changes in 
 operating assets and liabilities                                  254,784                    282,062 
 
 
Net change in operating assets 
Due from other banks and mandatory cash balances with the 
 National Bank of Georgia                                            (302,690)                  (51,957) 
Loans and advances to customers                                     (385,945)                 (671,825) 
Investment in finance lease                                         (3,498)                   (34,101) 
Other financial assets                                             19,610                     40,231 
Other assets                                                        2,869                     (879) 
Net change in operating liabilities 
Due to other banks                                                  276,076                   126,870 
Customer accounts                                                   134,334                   430,568 
Other financial liabilities                                          23,487                   (10,995) 
Lease liabilities                                                   (1,367)                   N/A 
Other liabilities and provision for liabilities and charges         9,607                     (215) 
 
 
Net cash flows from operating activities                           27,267                     109,759 
 
 
Cash flows from/(used in) investing activities 
 
Acquisition of investment securities measured at fair value 
 through other comprehensive income                                         (101,119)         (395,898) 
Proceeds from redemption at maturity of investment 
 securities measured at fair value through 
 other comprehensive income                                                   210,174         239,593 
Acquisition of bonds carried at amortised cost                              (240,420)         (166,188) 
Proceeds from redemption of bonds carried at amortised cost                   126,113         142,432 
Acquisition of premises, equipment and intangible assets                       (51,490)       (34,241) 
Proceeds from disposal of premises, equipment and 
 intangible assets                                                              11,023        1,015 
Proceeds from disposal of investment property                                      9,508      6,898 
Acquisition of subsidiaries and associates                         (14,569)                   - 
 
 
Net cash used in investing activities                              (50,780)                   (206,389) 
 
 
Cash flows from/(used in) financing activities 
Proceeds from other borrowed funds                                            553,781         1,468,097 
Redemption of other borrowed funds                                          (938,535)         (1,044,435) 
Proceeds from subordinated debt                                                            -  - 
Redemption of subordinated debt                                                  (8,576)      (7,688) 
Proceeds from debt securities in issue                       12     820,708                   28 
Redemption of debt securities in issue                             (5,805) 
Dividends paid                                               14      -                        (85,484) 
 
 
Net cash flows from financing activities                           421,573                    330,518 
 
 
Effect of exchange rate changes on cash and cash 
 equivalents                                                       63,373                     (60,202) 
 
 
Net increase in cash and cash equivalents                          461,433                    173,686 
 
Cash and cash equivalents at the beginning of the period     4     1,166,911                  1,431,477 
 
 
Cash and cash equivalents at the end of the period           4     1,628,344                  1,605,163 
 
 
   1           Introduction 

Principal activity. TBC Bank Group PLC ("TBCG" or "Group") is a public limited liability company, incorporated in England and Wales. TBCG held 99.88% of the share capital of JSC TBC Bank (hereafter the "Bank") as at 30 June 2019 (31 December 2018: 99.88%), thus representing the Bank's ultimate parent company. Together with the Bank and subsidiaries, TBCG makes up a group of companies. The Bank is a parent of a group of companies incorporated in Georgia and Azerbaijan, their primary business activities include providing banking, leasing, brokerage and card processing services to corporate and individual customers. Group's subsidiary JSC TBC Insurance provides insurance services in property, casualty, motor and life insurance throughout Georgia.

The shares of TBCG ("TBCG Shares") were admitted to the Premium Listing segment of the Official List of the UK Listing Authority and admitted to trading on the London Stock Exchange PLC's Main Market for listed securities effective on 10 August 2016 (the "Admission", Note14). TBC Bank Group PLC's registered legal address is 6 St. Andrew Street, London, United Kingdom EC4A 3AE. Registered number of TBC Bank Group PLC is 10029943. The Bank is the Group's main operating unit and it accounts for most of the Group's activities.

JSC TBC Bank was incorporated on 17 December 1992 and is domiciled in Georgia. The Bank is a joint stock company limited by shares and was set up in accordance with Georgian regulations. The Bank's registered address and place of business is 7 Marjanishvili Street, 0102 Tbilisi, Georgia.

The Bank's principal business activity is universal banking operations that include corporate, small and medium enterprises, retail and micro operations within Georgia. In 2018, the Bank launched fully-digital bank, Space. The Bank has been operating since 20 January 1993 under a general banking license issued by the National Bank of the Georgia ("NBG").

The Group had 146 branches and 7,266 employees within Georgia as at 30 June 2019 (30 June 2018: 149 branches and 7,065 employees).

As of 30 June 2019 and 31 December 2018, the following shareholders directly owned more than 5% of the total outstanding shares of the Group. Other shareholders individually owned less than 5% of the outstanding shares. As of 30 June 2019 and 31 December 2018 the Group had no ultimate controlling party. Other includes individual as well as corporate shareholders.

 
                                                    30 June 2019         31 December 2018 
Shareholders                                         Ownership interest   Ownership interest 
 
European Bank for Reconstruction and Development    8.09%                8.18% 
JPMorgan Asset Management                           7.28%                8.40% 
Schroder Investment Management                      6.67%                7.08% 
Badri Japaridze*                                    6.37%                6.08% 
Mamuka Khazaradze*                                  6.32%                6.19% 
Dunross & Co.                                       5.93%                5.51% 
Other                                               59.34%               58.56% 
 
 
Total                                               100.00%              100.00% 
 
 

* Represents direct ownership of the shares for Mamuka Khazaradze and Badri Japaridze. Mamuka Khazaradze has beneficial ownership of 11.90% (31 December 2018: 13.54%) and Badri Japaridze has beneficial ownership of 6.37% (31 December 2018: 6.77%)

The condensed consolidated interim financial statements ("financial statements") include the following principal subsidiaries:

 
                     Proportion of voting rights and 
                     ordinary share capital 
                                                             Principal place    Year of             Industry 
                                                             of business or     incorpo-ration 
Company Name         30 June 2019        31 December 2018    incorporation 
 
JSC TBC Bank         99.88%              99.88%              Tbilisi, Georgia   1992                Banking 
United Financial 
 Corporation JSC     98.67%              98.67%              Tbilisi, Georgia   1997                Card processing 
TBC Capital LLC      100.00%             100.00%             Tbilisi, Georgia   1999                Brokerage 
TBC Leasing JSC      100.00%             99.61%              Tbilisi, Georgia   2003                Leasing 
                                                                                                    Non-banking credit 
TBC Kredit LLC       100.00%             100.00%             Baku, Azerbaijan   1999                institution 
Banking System 
 Service Company                                                                                    Information 
 LLC                 100.00%             100.00%             Tbilisi, Georgia   2009                services 
TBC Pay LLC          100.00%             100.00%             Tbilisi, Georgia   2009                Processing 
TBC Invest LLC       100.00%             100.00%             Ramat Gan, Israel  2011                PR and marketing 
                                                                                                    Real estate 
Index LLC            100.00%             100.00%             Tbilisi, Georgia   2011                management 
BG LLC*              0.00%               0.00%               Tbilisi, Georgia   2018                Asset management 
JSC TBC Insurance    100.00%             100.00%             Tbilisi, Georgia   2014                Insurance 
LLC TBC 
 International       100.00%             0.00%               Tbilisi, Georgia   2019                Asset management 
   GE Commerce LTD   100.00%             100.00%             Tbilisi, Georgia   2018                Retail Trade 
   Swoop JSC         100.00%             100.00%             Tbilisi, Georgia   2010                Retail Trade 
   LLC Online 
    Tickets          55.00%              26.00%              Tbilisi, Georgia   2015                Software Services 
                                                                                                    Real estate 
   LLC Allproperty   90.00%               0.00%              Tbilisi, Georgia   2013                management 
                                                             Tashkent, 
Inspired LLC         51.00%              0.00%               Uzbekistan         2011                Processing 
 
 

* The Group has de-facto control over the subsidiary (control without legal form of ownership)

The consolidated financial statements include the following associates:

 
                    Proportion of voting rights and         Principal place of  Year of 
                    ordinary share capital held as of 30    business or         incorpo-ration 
                    June                                    incorporation                           Industry 
Company Name        2019                2018 
JSC Credit 
 Information 
 Bureau Creditinfo                                                                                  Financial 
 Georgia            21.08%              21.08%              Tbilisi, Georgia    2005                intermediation 
 
 

The country of registration or incorporation is also the principal area of operation of each of the above subsidiaries.

The Group's corporate structure consists of a number of related undertakings, comprising subsidiaries and associates, which are not consolidated due to immateriality. A full list of these undertakings, the country of incorporation is set out below.

 
                     Proportion of voting rights and 
                     ordinary share capital 
                     30 June            31 December 2018    Principal place of  Year of             Industry 
                      2019                                  business or         incorpo-ration 
Company Name                                                incorporation 
 
TBC Invest 
 International Ltd   100.00%            100.00%             Tbilisi, Georgia    2016                Investment Vehicle 
University 
 Development Fund    33.33%             33.33%              Tbilisi, Georgia    2007                Education 
 
 

In January 2019, TBC Bank signed an agreement with Nikoil Open Join-Stock Company Investment Commercial Bank ("Nikoil Bank") and its shareholders to develop joint business in Azerbaijan. The agreement assumes transfer by TBC Bank of 100% share interest in TBC Kredit to Nikoil Bank in exchange for around 8% of share interest in Nikoil Bank. TBC Bank receives a right to acquire additional shareholding in Nikoil Bank (controlling interest) within four years at TBC's sole discretion. Shareholders of Nikoil bank also receive right to sell their remaining shareholdings to TBC Bank in case the Bank exercises its right to acquire additional shareholding in Nikoil Bank. The whole arrangement is still subject to regulatory approval in Azerbaijan.

TBC Kredit is planned to be merged with Nikoil Bank. Subject to the completion of the merger, TBC Bank would contribute to the development and execution of the merged entity's strategy. TBC Bank would be represented on the board of Nikoil Bank and, together with Nikoil management, would play a crucial role in the future development of the company. TBC Bank intends to use its Georgian banking sector expertise, including its newly-launched fully digital bank, Space, to support Nikoil Bank's local growth in its targeted retail and MSME customer markets.

2 Summary of Significant Accounting Policies, Critical Accounting Estimates, and Judgements in Applying Accounting Policies

2.1 Basis of preparation

These condensed consolidated interim financial statements for the six months ended 30 June 2019 for TBC Bank Group PLC and its subsidiaries (together referred to as the "Group") has been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting as adopted by the European Union. These condensed consolidated interim financial statements do not include all the notes of the type normally included in an annual consolidated financial statements. Accordingly, this report is to be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2018, which have been prepared in accordance with IFRSs as adopted by the European Union and any public announcements made by TBC Bank Group PLC during the interim reporting period.

The condensed consolidated interim financial statements are presented in thousands of Georgian Lari ("GEL thousands"), except per-share amounts and unless otherwise indicated.

These condensed consolidated interim financial statements have been reviewed, not audited. Auditor's review conclusion is included in this report.

Going Concern. The Board of Directors of TBC Bank Group PLC has prepared these condensed consolidated interim financial statements on a going concern basis. In making this judgement, management considered the Group's financial position, current intentions, profitability of operations and access to financial resources. Management is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern.

Foreign currency translation. At 30 June 2019 the closing rate of exchange used for translating foreign currency balances was USD 1 = GEL 2.8687(31 December 2018: USD 1 = GEL 2.6766); EUR 1 = GEL 3.2657 (31 December 2018: EUR 1 = GEL 3.0701); GBP 1 = GEL 3.6384 (31 December 2018: GBP 1 = GEL 3.3955).

Except as described below, the same accounting policies and methods of computation were followed in the preparation of this condensed consolidated interim financial statements as compared with the annual consolidated financial statements of the Group for the year ended 31 December 2018.

Interim period tax measurement. Interim period income tax expense is accrued using the effective tax rate that would be applicable to expected total annual earnings, that is, the estimated weighted average annual effective income tax rate applied to the pre-tax income of the interim period.

New accounting policy for leases by the Group as a lessee. The Group adopted IFRS 16, Leases, using modified retrospective method and applied certain simplifications or practical expedients. Refer to section 2.3 below.

2.2 Critical accounting estimates, and judgements in applying accounting policies

ECL measurement. Measurement of ECLs is a significant estimate that involves forecasting future economic conditions, longer the term of forecasts more management judgment is applied and those judgements may be the source of uncertainty. Details of ECL measurement methodology are disclosed in Note 24. The following components have a major impact on credit loss allowance: definition of default, definition of significant increase in credit risk (SICR), probability of default ("PD"), exposure at default ("EAD"), and loss given default ("LGD"), as well as models of macro-economic scenarios. The Group regularly reviews and validates the models and inputs to the models to reduce any differences between expected credit loss estimates and actual credit loss experience.

Significant increase in credit risk ("SICR"). The Bank applies both qualitative and quantitative indicators to determination of SICR considering all reasonable and supportable information available without undue cost and effort, on past events, current conditions and future behavioural aspects of particular portfolios. The Bank tries to identify indicators of increase in credit risk of individual instruments prior to delinquency and incorporates significant assumptions in the model in doing so. One of such judgement is determination of thresholds of significant increase in credit risk. 20% decrease in SICR thresholds would increase impairment allowance on loans and advances by GEL 2,426thousand (31 December 2018: GEL 2,056 thousand) and would result in a change of the Bank's cost of credit risk ratio by 5 basis points (31 December 2018: 2 basis points). 10% increase in Stage 2 exposures would increase impairment allowance on loans and advances by GEL 2,548 thousand (31 December 2018: GEL 2,723 thousand) and would result in a change of the Bank's cost of credit risk ratio by 5 basis points (31 December 2018: 3 basis points).

Risk parameters: Probability of default (PD) and Loss given default (LGD) parameters are one of the key drivers of expected credit losses. A 10% increase (decrease) in PD estimates at 30 June 2019 would increase (decrease) impairment allowance on loans and advances by GEL 19,434 thousand (GEL 19,459 thousand) (31 December 2018: increase (decrease) by GEL 18,876 thousand (GEL 18,942 thousand)) and would result in a change of the Bank's cost of credit risk ratio by 37 (37) basis points (31 December 2018: 21 (21) basis points). As for the LGD ratio, a 10% increase (decrease) in LGD estimates at 30 June 2019 would increase (decrease) impairment allowance on loans and advances by GEL 27,998 thousand (GEL 29,740 thousand) (31 December 2018: increase (decrease) by GEL 28,185 thousand (GEL 28,012 thousand)) and would result in a change of the Bank's cost of credit risk ratio by 54 (57) basis points (31 December 2018: 31 (31) basis points).

Macro-economic scenarios: The Bank incorporates forward-looking information with three macro-economic scenarios to calculate unbiased and probability weighted ECL. They represent the Baseline scenario (most likely outcome) and two less likely scenarios, referred as the Upside (better than Baseline) and Downside (worse than Baseline). Weight for the baseline scenario is set to 50% and 25% weight (31 December 2018: 50% and 25% weight) is applied for each less likely scenarios.

To set the weight assigned to upside forward looking macro-economic set of assumptions to 15% and respectively increase the weight of the downside level assumptions from current 25% to 35% would increase impairment allowance on loans and advances by GEL 4,870 thousand and would result in a change of the Bank's cost of credit risk ratio by 9 basis points as at June 2019 (31 December 2018: increase by GEL 4,860 thousand would result in a change of the Bank's cost of credit risk ratio by 5 basis points).

2.3 Adoption of new and revised standards

Initial application of IFRS 16

IFRS 16 replaces IAS 17 Leases for annual periods beginning on or after 1 January 2019. The group has adopted IFRS 16 retrospectively from 1 January 2019 with certain simplifications, and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard (modified retrospective approach). The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019. The comparative information for 2018 is reported under IAS 17 and is not comparable to the information presented for 2019.

On adoption of IFRS 16, the group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rates as of 1 January 2019 which were applied on a portfolio basis of leases with reasonably similar characteristics.

The average incremental borrowing rates applied to the lease liabilities on 1 January 2019 was 3.77% for USD denominated contracts and 9.19% for GEL denominated contracts.

In applying IFRS 16 for the first time, the group has used the following practical expedients permitted by the standard:

-- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

-- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases.

The group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the group relied on its assessment made applying IAS 17 in determining whether an arrangement contains a Lease.

The Group did not have finance leases balances outstanding as at 31 December 2018. TBC has made no adjustments where the Group acts as lessor, in either a finance or operating lease, of physical assets it owns. Where TBC acts as an intermediate lessor, i.e., enters into a head lease and subleases the asset to a third party, the sublease has been classified as either a finance or operating lease based primarily on whether the sublease term consumes the majority of the remaining useful life of the right-of-use asset arising from the head lease as at the transition date. The following table reconciles the obligations in respect of operating leases as at 31 December 2018 to the opening lease liabilities recognized on 1 January 2019:

Differences arising from the adoption of IFRS 16 as of 1 January 2019 are disclosed below:

 
In thousands of GEL                                       1 January 2019 
 
Total future minimum lease payments for non-cancellable 
 operating leases disclosed as at 31 December 2018.       11,022 
 
- Future lease payments that are due in periods 
 subject to lease extension options that are reasonably 
 certain to be exercised                                  58,573 
- Effect of discounting to present value                  (8,552) 
 
 
Total effect on the Lease Liability as at 1 January 
 2019                                                     61,043 
 
Of which are: 
- Current lease liabilities                               11,467 
- Non-current lease liabilities                           49,576 
 
 
 

2.3 Adoption of new and revised standards (continued)

The right-of use assets were measured at the amount equal to the lease liability. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. The recognised right-of-use assets mostly relate to the branches and office buildings.

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

   --      right-of-use assets - increase by GEL 61,043 thousand; 
   --      lease liabilities - increase by GEL 61,043 thousand. 

The net impact on retained earnings on 1 January 2019 was nil.

IFRS 16 subsequent recognition and policies

As at 30 June the balances of Right of the use asset and the Lease liability are GEL 61,555 thousand and GEL 62,598 thousand respectively. The interest charge on lease liabilities presented within interest expense amounted GEL 1,182 thousand, recognized within interest expense. During the first six month period of 2019, the weighted average lease term was approximately 5 years and depreciation expense of right-of-use assets amounted GEL 6,590 thousand.

TBC predominantly enters into lease contracts, or contracts that include lease components, as a lessee of real estate, including offices, retail branches and service centers. TBC identifies non-lease components of a contract and accounts for them separately from lease components.

When TBC is lessee in a lease arrangement, TBC recognizes a lease liability and corresponding right-of-use (RoU) asset at the commencement of the lease term when TBC acquires control of the physical use of the asset. The lease liability is measured based on the present value of the lease payments over the lease term, discounted using TBC's incremental borrowing rate. Interest expense on the lease liability is presented within Interest expense from financial instruments. The RoU asset is recorded at an amount equal to the lease liability but is adjusted for rent prepayments, initial direct costs, any costs to refurbish the leased asset or lease incentives received. The RoU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset, with the depreciation presented within depreciation expense in statement of comprehensive income.

Lease payments generally include fixed payments. When the lease contains an extension or termination option that the Group considers reasonably certain to be exercised, the expected rental payments or costs of termination are included within the lease payments used to generate the lease liability. TBC does not typically enter into leases with purchase options or residual value guarantees.

Where TBC acts as lessor or sublessor under a finance lease, a receivable is recognized and measured at amortized cost at an amount equal to the present value of the aggregate of the lease payments plus any unguaranteed residual value that TBC expects to recover at the end of the lease term.

Initial direct costs are also included in the initial measurement of the lease receivable. Lease payments received during the lease term are allocated as repayments of the outstanding receivable.

Interest income reflects a constant periodic rate of return on TBC's net investment using the interest rate implicit in the lease (or, for subleases, the rate for the head lease). TBC reviews the estimated unguaranteed residual value annually, and if the estimated residual value to be realized is less than the amount assumed at lease inception, a loss is recognized for the expected shortfall. Where TBC acts as a lessor or sublessor in an operating lease of owned real estate, TBC recognizes the operating lease income on a straight-line basis over the lease term.

2.3 Adoption of new and revised standards (continued)

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the group. Each lease payment is allocated between the liability and interest expense. The interest expense is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-- fixed payments (including in-substance fixed payments), less any lease incentives receivable;

   --      variable lease payment that are based on an index or a rate; 
   --      amounts expected to be payable by the lessee under residual value guarantees; 

-- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

-- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following at initial recognition:

   --      the amount of the initial measurement of lease liability; 

-- any lease payments made at or before the commencement date less any lease incentives received;

   --      any initial direct costs, and 
   --      restoration costs. 

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture or the items below the market value of USD 5,000.

Extension and termination options

Extension and termination options are included in a number of property and equipment leases across the group. These terms are used to maximize operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the group and not by the respective lessor. The key assumptions applied by the Group on making decisions regarding lease term are follows:

Judgements in determining the lease term

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee.

As for the adoption date management has reassessed expected lease terms for the branch offices. The assessment was performed by retail sales department taking into account a few criteria, namely: location, profitability and strategic importance of the branch offices. Based on the analysis performed, management identified and recorded expected terms for the lease contracts, subject to lease extension options that are reasonably certain to be exercised.

Adoption of other Standards and Interpretations

The adopted accounting policies are consistent with those of the previous financial year. There were no other new or amended standards or interpretations that resulted in a change of the accounting policy except described above.

   3            New Accounting Pronouncements 

Minor amendments to IFRSs

The IASB has published a number of minor amendments some of which has not yet been endorsed for use in the EU. The Group has not early adopted any of the amendments effective after 31 December 2018 and it expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the Group.

Major new IFRSs

IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. The Group is currently assessing the impact of the new standard on its financial statements.

   4        Cash and Cash Equivalents 
 
                                                                   31 December 
In thousands of GEL                                  30 June 2019   2018 
 
Cash on hand                                          674,466      491,928 
Cash balances with the National Bank of 
 Georgia (other than mandatory reserve deposits)      91,051       118,749 
Correspondent accounts and overnight placements 
 with other banks                                     440,849      371,902 
Placements with and receivables from other 
 banks with original maturities of less than 
 three months                                         422,083       184,429 
 
 
Total gross amount of cash and cash equivalents      1,628,449     1,167,008 
 
Less: Credit loss allowance                          (105)         (97) 
 
Total carrying amount of cash and cash equivalents   1,628,344     1,166,911 
 
 

As of 30 June 2019, 95.3% of the correspondent accounts and overnight placements with other banks are placed with OECD banking institutions (31 December 2018: 95%).

As of 30 June 2019, GEL 399,004 thousand was placed on interbank term deposits with three OECD banks and GEL 23,080 with two Georgian bank (31 December 2018: GEL 13,383 thousand with one non-OECD bank and GEL 171,046 thousand with two OECD bank).

   5        Due from Other Banks 

Amounts due from other banks include placements with original maturities of more than three months that are not collateralised and do not represent past due amounts at the 30 June 2019 and 31 December 2018. As of 30 June 2019 GEL 10,339 thousand (31 December 2018: GEL 15,725 thousand) were kept on deposits as restricted cash. Refer to Note 27 for the estimated fair value of amounts due from other banks.

As of 30 June 2019 the Group had no loan issued to any bank, with original maturities of more than three months and with aggregated amounts above GEL 5,000 thousand (2018: one bank in the amount of GEL 19,311 thousand).

   6        Mandatory cash balances with the National Bank of Georgia 

Mandatory cash balances with the National Bank of Georgia ("NBG") represent amounts deposited with the NBG. Resident financial institutions are required to maintain an interest-earning obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by the financial institutions. The Group earned up to 6.50%, 0.25% and (0.6%) annual interest in GEL, USD and EUR respectively on mandatory reserve with NBG in the six months ended 30 June 2019 (30 June 2018: 5.0%, 1.0% and (0.4%) in GEL, USD and EUR respectively).

In February 2019 Fitch Ratings has upgraded Georgia's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-'. The Outlook is Stable. The issue ratings on Georgia's long-term senior unsecured foreign- and local-currency bonds upgraded to 'BB' from 'BB-'. The Country Ceiling upgraded to 'BBB-' from 'BB' and the Short-term foreign and local currency IDR affirmed at 'B'.

   7        Loans and Advances to Customers 
 
                                               30 June     31 December 
In thousands of GEL                             2019        2018 
 
Corporate                                       3,658,341  3,177,289 
Consumer                                        1,875,500  1,989,516 
Mortgage                                        2,959,819  2,709,183 
Loans to micro, small and medium enterprises    2,647,700  2,496,594 
 
Total gross loans and advances to customers    11,141,360  10,372,582 
 
Less: credit loss allowance                    (340,096)   (334,130) 
 
 
Total carrying amount of loans and advances 
 to customers                                  10,801,264  10,038,452 
 
 

In 2019, the Group made re-segmentation as disclosed in Note 17. Some of the clients were reallocated to different segments.

The following table discloses the changes in the credit loss allowance and gross carrying amount for loans and advances to customers carried at amortised cost between the beginning and the end of the reporting period. Below main movements in the table are described:

-- Transfers between Stage 1, 2 and 3 due to balances experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent "step up" (or "step down") between 12-month and Lifetime ECL. It should be noted, that

o Movement does not include exposures which were issued and repaid during the period;

o For loans, which existed at the beginning of the period, opening exposures are disclosed as transfer amounts;

o For newly issued loans, starting exposures are disclosed as transfer amount

o For the exposures which changed stage several times during the period, transfers between starting and ending stage is disclosed.

-- New originated or purchased gives us information regarding gross loans and corresponding credit impairment losses issued during the period (however, exposures which were issued and repaid during the period and issued to refinance existing loans are excluded);

-- The line, derecognised during the period refers to starting balance of loans which were repaid or written-off during the period (gross exposure and corresponding credit impairment losses, however, exposures which were issued and repaid during the period and repaid by newly issued refinancing loans are excluded);

   --      Net repayments refers to net changes consisting of withdrawal of loan and repayment; 
   --      Write off line refers to write off of loans during the period; 
   --      Recovery section refers to recoveries of already written off loans during the period; 

-- Foreign exchange translations of assets denominated in foreign currencies and effect to translation in presentational currency for foreign subsidiary.

-- Net remeasurement due to stage transfers and risk parameters changes refers to the movements in ECL as a result of transfer of exposure between stages or changes in risk parameters and forward looking expectations.

As of 30 June 2019 loans and advances to customers carried at GEL 358,230 thousand have been pledged to local banks or other financial institutions as collateral with respect to other borrowed funds (31 December 2018: GEL 228,454 thousand).

Movements in the expected credit loss allowance during the six months ended 30 June 2019 are as follows:

 
Corporate loans    Gross carrying amount                              Credit loss allowance 
                   Stage        Stage       Stage                     Stage        Stage       Stage 
                    1            2           3                         1            2           3 
                                             (lifetime                              (lifetime   (lifetime 
                                 (lifetime    ECL for                                ECL         ECL for 
 In thousands of    (12-months    ECL for     credit                   (12-months    for         credit 
  GEL                ECL)         SICR)       im-paired)  Total         ECL)         SICR)       im-paired)  Total 
 
At 31 December 
 2018              2,903,313    138,715     135,261       3,177,289   32,940       4,994       43,571        81,505 
 
Resegmentation      119,408      711         -             120,119     837          75          -             912 
 
At 1 January 2019   3,022,721    139,426     135,261       3,297,408   33,777       5,069       43,571        82,417 
 
Transfers: 
- to lifetime 
 (from Stage 1 
 and Stage 3 to 
 Stage 2)           (167,699)    171,769     (4,070)       -           (2,653)      2,653       -             - 
- to 
 credit-impaired 
 (from Stage 1 
 and Stage 2 to 
 Stage 3)           (11,763)     (79)        11,842        -           (2,661)      -           2,661         - 
- to 12-months 
 ECL (from Stage 
 2 and Stage 3 
 to Stage 1)        19,415       (19,415)    -             -           736          (736)       -             - 
New originated 
 or purchased       648,386      -           -             648,386     12,666       -           -             12,666 
Derecognised 
 during 
 the period         (159,780)    (12,940)    (17,273)      (189,993)   (4,335)      469         (6,675)       (10,541) 
Net repayments      (190,985)    (50,062)    (12,603)      (253,650)   -            -           -             - 
Write-offs          -            -           -             -           -            -           572           572 
Net remeasurement 
 due to stage 
 transfers 
 and risk 
 parameters 
 changes            -            -           -             -           137          (690)       (5,958)       (6,511) 
FX movements        139,759      9,386       7,045         156,190     -            -           -             - 
 
 
At 30 June 2019     3,300,054    238,085     120,202       3,658,341   37,667       6,765       34,171        78,603 
 
 
 
Corporate loans        Gross carrying amount                             Credit loss allowance 
                       Stage        Stage       Stage                    Stage        Stage       Stage 
                        1            2           3                        1            2           3 
                                                 (lifetime                             (lifetime   (lifetime 
                                     (lifetime   ECL for                                ECL        ECL for 
                        (12-months    ECL for    credit                   (12-months    for        credit 
 In thousands of GEL     ECL)         SICR)      im-paired)  Total         ECL)         SICR)      im-paired)  Total 
 
At 31 December 2017     2,041,538    325,919     107,935      2,475,392   21,208       15,036      31,719       67,963 
 
Resegmentation          53,704       1,216       -            54,920      185          -           -            185 
 
At 1 January 2018       2,095,242    327,135     107,935      2,530,312   21,393       15,036      31,719       68,148 
 
Transfers: 
- to lifetime (from 
 Stage 1 and Stage 
 3 to Stage 2)          (33,294)     37,738      (4,444)      -           (932)        952         (20)         - 
- to credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                     (26,330)     (14,452)    40,782       -           (15,865)     (57)        15,922       - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 
 1)                     36,023       (36,023)    -            -           126          (126)       -            - 
New originated or 
 purchased              812,742      -           -            812,742     24,507       -           -            24,507 
Derecognised during 
 the period             (340,551)    (27,897)    (40,250)     (408,698)   (3,255)      (731)       (12,102)     (16,088) 
Net repayments          (207,680)    (42,210)    (10,387)     (260,277)   -            -           -            - 
Write-offs              -            -           (321)        (321)       -            -           1,726        1,726 
Net remeasurement 
 due to stage 
 transfers 
 and risk parameters 
 changes                -            -           -            -           (2,702)      (2,442)     (1,678)      (6,822) 
FX movements            (77,829)     (9,395)     (4,936)      (92,160)    -            -           -            - 
 
 
At 30 June 2018         2,258,323    234,896     88,379       2,581,598   23,272       12,632      35,567       71,471 
 
 
 
Loans to micro,     Gross carrying amount                              Credit loss allowance 
 small and medium 
 enterprises 
In thousands of     Stage        Stage       Stage         Total       Stage        Stage       Stage 3       Total 
 GEL                 1            2           3                         1            2 
                     (12-months   (lifetime   (lifetime                 (12-months   (lifetime   (lifetime 
                      ECL)         ECL for     ECL for                   ECL)         ECL         ECL for 
                                   SICR)       credit                                 for         credit 
                                               im-paired)                             SICR)       im-paired) 
 
At 31 December 
 2018               2,210,725    193,049     92,820        2,496,594    19,301       22,379      29,334        71,014 
Resegmentation       (119,163)    (786)       -            (119,949)    (836)        (78)        -             (914) 
 
At 1 January 2019   2,091,562    192,263     92,820        2,376,645    18,465       22,301      29,334        70,100 
 
Transfers: 
- to lifetime 
 (from 
 Stage 1 and Stage 
 3 to Stage 2)       (130,631)    133,823     (3,192)      0            (3,613)      5,462       (1,849)       - 
- to 
 credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                  (16,515)     (29,982)    46,497       0            (1,859)      (4,798)     6,657         - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 
 1)                  31,837       (31,837)    -             -           2,921        (2,921)     -             - 
New originated or 
 purchased           564,817      -           -             564,817     7,630        -           -             7,630 
 
  Derecognised 
  during 
  the period         (165,252)    (21,507)    (14,088)      (200,847)   (1,244)      (2,305)     (2,312)       (5,861) 
Net repayments       (132,446)    (19,047)    (15,845)      (167,338)   -            -           -             - 
Write-offs           -            -           (14,041)      (14,041)    -            -           (5,699)       (5,699) 
Net remeasurement 
 due to stage 
 transfers 
 and risk 
 parameters 
 changes             -            -           -             -           (2,971)      7,605       8,957         13,591 
FX movements         77,199       6,695       4,570         88,464      8            1           326           335 
 
 
At 30 June 2019      2,320,571    230,408     96,721        2,647,700   19,337       25,345      35,414        80,096 
 
 
Loans to micro,     Gross carrying amount                              Credit loss allowance 
 small and medium 
 enterprises 
                    Stage        Stage       Stage                     Stage        Stage       Stage 
                     1            2           3                         1            2           3 
                                              (lifetime                              (lifetime   (lifetime 
                                  (lifetime    ECL for                                ECL         ECL for 
 In thousands of     (12-months    ECL for     credit                   (12-months    for         credit 
  GEL                 ECL)         SICR)       im-paired)  Total         ECL)         SICR)       im-paired)  Total 
 
At 31 December 
 2017               1,630,103    149,799     64,770        1,844,672   9,894        11,890      24,468        46,252 
 
Resegmentation       112,814      32,474      2,740         148,028     3,596        2,424       927           6,947 
 
At 1 January 2018    1,742,917    182,273     67,510        1,992,700   13,490       14,314      25,395        53,199 
 
Transfers: 
- to lifetime 
 (from 
 Stage 1 and Stage 
 3 to Stage 2)       (92,577)     101,058     (8,481)       -           (3,102)      5,014       (1,912)       - 
- to 
 credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                  (13,640)     (17,094)    30,734        -           (608)        (3,163)     3,771         - 
- to 12-months 
 ECL (from Stage 
 2 and Stage 3 to 
 Stage 1)            27,348       (27,348)    -             -           811          (811)       -             - 
New originated 
 or purchased        548,941      -           -             548,941     7,382        -           -             7,382 
Derecognised 
 during 
 the period          (185,804)    (17,854)    (13,119)      (216,777)   (1,481)      (1,122)     (6,501)       (9,104) 
Net repayments       (125,379)    (15,971)    (1,851)       (143,201)   -            -           -             - 
Write-offs           -            -           (9,992)       (9,992)     -            -           (4,675)       (4,675) 
Net remeasurement 
 due to stage 
 transfers 
 and risk 
 parameters 
 changes             -            -           -             -           (303)        10,946      8,357         19,000 
FX movements         (46,321)     (5,451)     (2,006)       (53,778)    (19)         (21)        (366)         (406) 
 
 
At 30 June 2018      1,855,485    199,613     62,795        2,117,893   16,170       25,157      24,069        65,396 
 
 
 
Consumer loans         Gross carrying amount                             Credit loss allowance 
                       Stage        Stage       Stage                    Stage        Stage       Stage 
                        1            2           3                        1            2           3 
                                     (lifetime   (lifetime                             (lifetime   (lifetime 
                                      ECL        ECL for                                ECL        ECL for 
                        (12-months    for        credit                   (12-months    for        credit 
 In thousands of GEL     ECL)         SICR)      im-paired)  Total         ECL)         SICR)      im-paired)  Total 
 
At 31 December 2018    1,641,993    265,673     81,850       1,989,516   42,903       59,245      54,575       156,723 
 
Resegmentation          4,772        1,244       698          6,714       19           104         235          358 
 
At 1 January 2019       1,646,765    266,917     82,548       1,996,230   42,922       59,349      54,810       157,081 
 
Transfers: 
- to lifetime (from 
 Stage 1 and Stage 
 3 to Stage 2)          (116,970)    122,462     (5,492)      -           (9,701)      12,244      (2,543)      - 
- to credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 3)    (31,878)     (52,798)    84,676       -           (2,978)      (12,634)    15,612       - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 1)    62,544       (62,544)    -            -           12,388       (12,388)    -            - 
New originated or 
 purchased              317,555      -           -            317,555     15,126       -           -            15,126 
Derecognised during 
 the period             (96,268)     (24,561)    (71,162)     (191,991)   (380)        (6,742)     (4,244)      (11,366) 
Net repayments          (246,739)    (22,287)    62,094       (206,932)   -            -           -            - 
Write-offs              -            -           (64,522)     (64,522)    -            -           (57,740)     (57,740) 
Net remeasurement 
 due to stage 
 transfers 
 and risk parameters 
 changes                -            -           -            -           (18,991)     15,663      51,849       48,521 
FX movements            21,588       2,296       1,276        25,160      9            -           24           33 
 
 
At 30 June 2019         1,556,597    229,485     89,418       1,875,500   38,395       55,492      57,768       151,655 
 
 
 
Consumer loans         Gross carrying amount                             Credit loss allowance 
                       Stage        Stage       Stage                    Stage        Stage       Stage 
                        1            2           3                        1            2           3 
                                     (lifetime   (lifetime                             (lifetime   (lifetime 
                                      ECL        ECL for                                ECL        ECL for 
                        (12-months    for        credit                   (12-months    for        credit 
 In thousands of GEL     ECL)         SICR)      im-paired)  Total         ECL)         SICR)      im-paired)  Total 
 
At 31 December 2017    1,788,523    301,923     72,981       2,163,427   42,066       64,309      48,195       154,570 
 
Resegmentation          (164,022)    (33,629)    (2,740)      (200,391)   (3,764)      (2,422)     (927)        (7,113) 
 
At 1 January 2018       1,624,501    268,294     70,241       1,963,036   38,302       61,887      47,268       147,457 
 
Transfers: 
- to lifetime (from 
 Stage 1 and Stage 
 3 to Stage 2)          (167,119)    172,812     (5,693)      -           (8,415)      9,660       (1,245)      - 
- to credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                     (29,524)     (39,130)    68,654       -           (4,255)      (3,301)     7,556        - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 
 1)                     57,116       (57,116)    -            -           2,520        (2,520)     -            - 
New originated or 
 purchased              709,714      -           -            709,714     33,591       -           -            33,591 
Derecognised during 
 the period             (203,757)    (38,065)    (56,405)     (298,227)   (4,868)      (5,607)     (43,153)     (53,628) 
Net repayments          (311,045)    (30,967)    39,349       (302,663)   -            -           -            - 
Write-offs              -            -           (43,971)     (43,971)    -            -           (33,647)     (33,647) 
Net remeasurement 
 due to stage 
 transfers 
 and risk parameters 
 changes                -            -           -            -           (9,952)      11,056      63,603       64,707 
FX movements            (13,874)     (2,191)     (1,302)      (17,367)    (29)         (6)         (72)         (107) 
 
 
At 30 June 2018         1,666,012    273,637     70,873       2,010,522   46,894       71,169      40,310       158,373 
 
 
 
Mortgage loans      Gross carrying amount                              Credit loss allowance 
In thousands of     Stage        Stage       Stage         Total       Stage        Stage       Stage         Total 
 GEL                 1            2           3                         1            2           3 
                     (12-months   (lifetime   (lifetime                 (12-months   (lifetime   (lifetime 
                      ECL)         ECL for     ECL for                   ECL)         ECL         ECL for 
                                   SICR)       credit                                 for         credit 
                                               im-paired)                             SICR)       im-paired) 
 
At 31 December 
 2018               2,470,603    194,410     44,170        2,709,183   1,696        9,166       14,026        24,888 
 
Resegmentation       (5,016)      (1,170)     (698)         (6,884)     (20)         (102)       (235)         (357) 
 
At 1 January 2019    2,465,587    193,240     43,472        2,702,299   1,677        9,063       13,791        24,531 
 
Transfers: 
- to lifetime 
 (from 
 Stage 1 and Stage 
 3 to Stage 2)       (127,153)    133,830     (6,677)       -           (498)        2,426       (1,928)       - 
- to 
 credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                  (5,137)      (10,802)    15,939        -           (566)        (451)       1,017         - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 
 1)                  48,659       (48,659)    -             -           1,352        (1,448)     96            - 
New originated or 
 purchased           356,648      -           -             356,648     1,089        -           -             1,089 
Derecognised 
 during 
 the period          (54,886)     (21,013)    104           (75,795)    (38)         (975)       (1,214)       (2,227) 
Net repayments       (156,483)    (12,021)    (2,958)       (171,462)   -            -           -             - 
Write-offs           -            -           (650)         (650)       -            -           1,886         1,886 
Net remeasurement 
 due to stage 
 transfers 
 and risk 
 parameters 
 changes             -            -           -             -           (1,483)      2,507       3,352         4,376 
FX movements         131,723      13,873      3,183         148,779     6            1           80            87 
 
 
At 30 June 2019      2,658,958    248,448     52,413        2,959,819   1,539        11,123      17,080        29,742 
 
 
 
Mortgage loans         Gross carrying amount                             Credit loss allowance 
                       Stage        Stage       Stage                    Stage        Stage       Stage 
                        1            2           3                        1            2           3 
                                                 (lifetime                                         (lifetime 
                                     (lifetime   ECL for                               (lifetime   ECL for 
                        (12-months    ECL for    credit                   (12-months    ECL for    credit 
 In thousands of GEL     ECL)         SICR)      im-paired)  Total         ECL)         SICR)      im-paired)  Total 
 
At 31 December 2017    1,839,707    189,887     40,136       2,069,730   1,371        9,336       12,102       22,809 
 
Resegmentation          (2,495)      (61)        -            (2,556)     (17)         (2)         -            (19) 
 
At 1 January 2018       1,837,212    189,826     40,136       2,067,174   1,354        9,334       12,102       22,790 
 
Transfers: 
- to lifetime (from 
 Stage 1 and Stage 
 3 to Stage 2)          (91,879)     100,517     (8,638)      -           (335)        1,240       (905)        - 
- to credit-impaired 
 (from Stage 1 and 
 Stage 2 to Stage 
 3)                     (3,910)      (14,134)    18,044       -           (710)        (1,551)     2,261        - 
- to 12-months ECL 
 (from Stage 2 and 
 Stage 3 to Stage 
 1)                     41,331       (41,331)    -            -           305          (400)       95           - 
New originated or 
 purchased              452,562      -           -            452,562     1,331        -           -            1,331 
Derecognised during 
 the period             (85,457)     (21,831)    (3,974)      (111,262)   (116)        (1,215)     (1,680)      (3,011) 
Net repayments          (124,644)    (11,714)    (913)        (137,271)   -            -           -            - 
Write-offs              -            -           (1,933)      (1,933)     -            -           1,031        1,031 
Net remeasurement 
 due to stage 
 transfers 
 and risk parameters 
 changes                -            -           -            -           (369)        3,955       541          4,127 
FX movements            (72,007)     (9,627)     (2,004)      (83,638)    (9)          (27)        (105)        (141) 
 
 
At 30 June 2018         1,953,208    191,706     40,718       2,185,632   1,451        11,336      13,340       26,127 
 
 
 
                                                                               Loans to micro, small and 
In thousands of GEL           Corporate loans  Consumer loans  Mortgage loans  medium enterprises            Total 
 
Credit loss allowance as of 
 1 January 2019               81,505           156,723         24,888          71,014                        334,130 
 
Resegmentation effect          767              -               -               (767)                         - 
Credit loss allowance during 
 the period                    (3,669)          59,421          5,417           23,556                        84,725 
Amounts written off during 
 the period as uncollectible   -                (64,522)        (650)           (14,042)                      (79,214) 
Effect of translation to 
 presentation currency        -                33              87              335                           455 
 
Credit loss allowance as of 
 30 June 2019                 78,603           151,655         29,742          80,096                        340,096 
 
 

Loans and advances to customers written off in the first half of 2019 included loans to customers in the gross amount of GEL 6,806 thousand issued in 2019 and GEL 32,829 thousand issued in previous years.

Movements in the expected credit loss allowance during the six months ended 30 June 2018 were as follows:

 
In thousands of                                                                                             Loans to micro, small 
GEL              Corporate loans                 Consumer loans            Mortgage loans                    and medium enterprises                                                    Total 
 
Credit loss 
 allowance as 
 of 1 January 
 2018            67,963                          154,570                   22,809                           46,252                                                                     291,594 
Resegmentation                             446                (14,889)                                (21)                                                                  14,464                                 - 
effect 
Credit loss                             3,383                   62,749                            5,402                                                                     15,050                        86,584 
allowance 
during the 
period 
Amounts written                           (321)               (43,951)                          (1,922)                                                                      (9,965)                    (56,159) 
off during the 
period as 
uncollectible 
Effect of         -                                                 (106)                          (141)                                                                        (405)                         (652) 
translation to 
presentation 
currency 
 
Credit loss 
 allowance as 
 of 30 June 
 2018             71,471                          158,373                   26,127                           65,396                                                                     321,367 
 
 

Economic sector risk concentrations within the customer loan portfolio are as follows:

 
                                              30 June 2019      31 December 2018 
In thousands of GEL                           Amount      %     Amount        % 
Individual                                     4,810,901  43%    4,677,328    45% 
Energy and Utilities                           970,932    9%     776,204      7% 
Hotels and Leisure                             913,244    8%     759,605      7% 
Real Estate                                    688,291    6%     564,197      5% 
Food Industry                                  659,409    6%     570,810      6% 
Trade                                          549,187    5%     445,290      4% 
Agriculture                                    460,080    4%     418,432      4% 
Construction                                   448,005    4%     359,549      3% 
Pawn Shops                                     272,640    2%     278,384      3% 
Healthcare                                     242,208    2%     220,756      2% 
Services                                       205,084    2%     180,045      2% 
Automotive                                     199,842    2%     156,241      2% 
Transportation                                 118,118    1%     80,075       1% 
Metals and Mining                              93,781     1%     100,855      1% 
Financial Services                             84,691     1%     71,617       1% 
Communication                                  39,719     1%     229,522      2% 
Other                                          385,228    3%     483,672      5% 
 
 
Total Gross loans and advances to customers   11,141,360  100%  10,372,582    100% 
 
 

As of 30 June 2019 the Group had 200 borrowers (31 December 2018: 170 borrowers) with aggregated gross loan amounts above GEL 5,000 thousand. The total aggregated amount of these loans was GEL 3,464,602 thousand (31 December 2018: GEL 3,054,314 thousand) or 31.1% of the gross loan portfolio (31 December 2018: 29.4%).

Analysis by credit quality of loans outstanding as of 30 June 2019 is as follows:

 
                           Stage 1           Stage 2                   Stage 3                              Total 
In thousands of GEL         (12-months ECL)   (lifetime ECL for SICR)   (lifetime ECL for credit impaired) 
 
Corporate loans risk 
category 
 
- Very low                 3,108,279         2,156                                   -                      3,110,435 
- Low                      187,872           219,849                                 -                      407,721 
- Moderate                 3,903             16,080                                  -                      19,983 
- High                     -                 -                         -                                    - 
- Default                  -                               -           120,202                              120,202 
 
 
Gross carrying amount      3,300,054         238,085                   120,202                              3,658,341 
 
 
Credit loss allowance       (37,667)          (6,765)                   (34,171)                             (78,603) 
 
 
Carrying amount             3,262,387         231,320                   86,031                               3,579,738 
 
 
Consumer loans risk 
category 
 
- Very low                  1,088,263         5,422                     -                                    1,093,685 
- Low                       329,746           19,011                    -                                    348,757 
- Moderate                  138,588           180,202                   -                                    318,790 
- High                      -                 24,850                    -                                    24,850 
- Default                   -                 -                         89,418                               89,418 
 
 
Gross carrying amount       1,556,597         229,485                   89,418                               1,875,500 
 
 
Credit loss allowance       (38,395)          (55,492)                  (57,768)                             (151,655) 
 
 
Carrying amount             1,518,202         173,993                   31,650                               1,723,845 
 
 
Mortgage loans risk 
category 
 
- Very low                  2,474,180         30,154                    -                                    2,504,334 
- Low                       170,112           79,019                    -                                    249,131 
- Moderate                  14,666            125,022                   -                                    139,688 
- High                      -                 14,253                    -                                    14,253 
- Default                   -                 -                         52,413                               52,413 
 
 
Gross carrying amount       2,658,958         248,448                   52,413                               2,959,819 
 
 
Credit loss allowance       (1,539)           (11,123)                  (17,080)                             (29,742) 
 
 
Carrying amount             2,657,419         237,325                   35,333                               2,930,077 
 
 
 
                        Stage 1      Stage 2         Stage 3                 Total 
In thousands of          (12-months   (lifetime ECL   (lifetime ECL 
 GEL                      ECL)         for SICR)       for credit impaired) 
 
Loans to MSME risk 
 category 
 
- Very low               1,935,037    23,886          -                       1,958,923 
- Low                    359,854      95,454          -                       455,308 
- Moderate               25,680       96,862          -                       122,542 
- High                   -            14,206          -                       14,206 
- Default                -            -               96,721                  96,721 
 
 
Gross carrying amount    2,320,571    230,408         96,721                  2,647,700 
 
 
Credit loss allowance    (19,337)     (25,345)        (35,414)                (80,096) 
 
 
Carrying amount          2,301,234    205,063         61,307                  2,567,604 
 
 

Analysis by credit quality of loans outstanding as of 31 December 2018 is as follows:

 
                           Stage 1           Stage 2                   Stage 3                              Total 
In thousands of GEL         (12-months ECL)   (lifetime ECL for SICR)   (lifetime ECL for credit impaired) 
 
Corporate loans risk 
category 
 
- Very low                  2,712,885         6,417                                   -                      2,719,302 
- Low                       189,086           130,798                                 -                      319,884 
- Moderate                  1,344             1,238                                   -                      2,582 
- High                      -                 260                       -                                    260 
- Default                   -                               -           135,261                              135,261 
 
 
Gross carrying amount       2,903,315         138,713                   135,261                              3,177,289 
 
 
Credit loss allowance       (32,940)          (4,994)                   (43,571)                             (81,505) 
 
 
Carrying amount             2,870,375         133,719                   91,690                               3,095,784 
 
 
Consumer loans risk 
category 
 
- Very low                  1,118,057         3,373                     -                                    1,121,430 
- Low                       349,406           19,874                    -                                    369,280 
- Moderate                  174,530           212,707                   -                                    387,237 
- High                      -                 29,719                    -                                    29,719 
- Default                   -                 -                         81,850                               81,850 
 
 
Gross carrying amount       1,641,993         265,673                   81,850                               1,989,516 
 
 
Credit loss allowance       (42,903)          (59,245)                  (54,575)                             (156,723) 
 
 
Carrying amount             1,599,090         206,428                   27,275                               1,832,793 
 
 
Mortgage loans risk 
category 
 
- Very low                  2,268,634         20,051                    -                                    2,288,685 
- Low                       177,273           62,060                    -                                    239,333 
- Moderate                  24,696            104,550                   -                                    129,246 
- High                      -                 7,749                     -                                    7,749 
- Default                   -                 -                         44,170                               44,170 
 
 
Gross carrying amount       2,470,603         194,410                   44,170                               2,709,183 
 
 
Credit loss allowance       (1,696)           (9,166)                   (14,026)                             (24,888) 
 
 
Carrying amount             2,468,907         185,244                   30,144                               2,684,295 
 
 
 
                        Stage 1      Stage 2         Stage 3           Total 
                         (12-months   (lifetime ECL   (lifetime 
In thousands of           ECL)         for SICR)       ECL for credit 
 GEL                                                   impaired) 
 
Loans to MSME risk 
 category 
 
- Very low               1,865,077    16,285          -                 1,881,362 
- Low                    324,306      72,742          -                 397,048 
- Moderate               21,342       84,520          -                 105,862 
- High                   -            19,502          -                 19,502 
- Default                -            -               92,820            92,820 
 
 
Gross carrying 
 amount                  2,210,725    193,049         92,820            2,496,594 
 
 
Credit loss allowance    (19,273)     (22,379)        (29,362)          (71,014) 
 
 
Carrying amount          2,191,452    170,670         63,458            2,425,580 
 
 

The tables above provide an analysis of the loan portfolio based on credit quality. As at January 1, 2018 the group implemented provisioning methodology in accordance with IFRS 9.

The Group conducts collective assessment of the borrowers on a monthly basis. As for the individual assessment, it is performed quarterly.

The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. There are three key types of collateral:

                  --      Real estate; 
                  --      Movable property including fixed assets, inventory and precious metals; 
    --       Financial assets including deposits, stocks, and third party guarantees. 

The financial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets' carrying value ("over-collateralised assets") and (ii) those assets where collateral and other credit enhancements are less than the assets' carrying value ("under-collateralised assets").

The effect of collateral as of 30 June 2019:

 
                            Over-collateralised assets                       Under-collateralised assets 
                            Carrying value of the       Value of collateral  Carrying value of the       Value of 
  In thousands of GEL       assets                                           assets                       collateral 
 
Corporate                   3,017,921                   7,274,274            640,420                     832,360 
Consumer                    1,102,892                   2,506,369            772,608                     279,896 
Mortgage                    2,869,687                   5,965,668            90,132                      1,464,718 
Loans to micro, small and 
 medium enterprises         2,294,035                   5,429,670            353,665                     215,504 
 
 
Total                       9,284,535                   21,175,981           1,856,825                   2,792,478 
 
 
 
 

The effect of collateral as of 31 December 2018:

 
                          Over-collateralised assets                     Under-collateralised assets 
                          Carrying value of the     Value of collateral  Carrying value of the     Value of collateral 
  In thousands of GEL     assets                                         assets 
 
Corporate loans           2,857,207                 6,516,492            320,082                   47,249 
Consumer loans            1,213,594                 2,543,720            775,922                   34,242 
Mortgage loans            2,663,362                 5,404,518            45,821                    28,934 
Loans to micro, small 
 and medium enterprises    2,340,847                 5,324,290            155,747                   68,110 
 
 
Total                     9,075,010                 19,789,020           1,297,572                 178,535 
 
 

The effect of collateral is determined by comparing the fair value of collateral to outstanding gross loans and advances in the reporting date.

At the central level a specific unit manages collateral to ensure that they serve as an adequate mitigation for credit risk management purposes. In line with the Group's internal policies, collateral provided to loans are evaluated by the Internal Appraisal Group (external reviewers are used in case of loans to related parties or specific cases when complex objects are appraised). The Internal Appraisal Group is part of the collateral management unit and, in order to ensure adequate and objective appraisal procedures, it is independent from the loan granting process. Real estate collateral of significant value is re-evaluated annually by internal appraisers. Statistical methods are used to monitor the value of real estate collateral that are of non-significant value and other types of collaterals such as movable assets and precious metals.

Collateral values include the contractual price of third-party guarantees, which, due to their nature, are capped at the loan's carrying value. The values of third-party guarantees in the tables above amounted to GEL 24,349 thousand and GEL 527,498 thousand as of 30 June 2019 and 31 December 2018, respectively. These third-party guarantees are not taken into consideration when assessing the impairment allowance. Refer to Note 27 for the estimated fair value of each class of loans and advances to customers. Interest rate analysis of loans and advances to customers is disclosed in Note 24. Information on related party balances is disclosed in Note 28.

   8            Premises, Equipment and Intangible Assets 
 
                               Land,          Office and      Construction    Total          Intangible     Total 
                               Premises and   Other           in              premises and   Assets 
                               leasehold      equipment*      progress        equipment 
In thousands of GEL            improvements 
 
 
 
Carrying amount at 1 January 
 2018                          197,924        78,534          90,455          366,913        83,492         450,405 
 
 
Additions                       3,724          20,034          856             24,614         11,810         36,424 
Disposals                       (2,578)        (2,962)         -               (5,540)        (75)           (5,615) 
Transfer                        1,596          -               (1,596)         -              -              - 
Effect of translation to 
 presentation currency (cost)   (37)           (62)            -               (99)           (16)           (115) 
(Impairment charge)/reversal 
 of impairment to profit or 
 loss                           (164)          (14)            -               (178)          -              (178) 
Depreciation/amortisation 
 charge                         (2,808)        (10,753)        -               (13,561)       (7,338)        (20,899) 
Elimination of accumulated 
 depreciation/amortisation on 
 disposals                      1,201          958             -               2,159          65             2,224 
Effect of translation to 
 presentation currency 
 (accumulated depreciation)     36             70              -               106            9              115 
 
 
Carrying amount at 30 June 
 2018                           198,894        85,805          89,715          374,414        87,947         462,361 
 
 
Cost or valuation at 30 June 
 2018                           235,659        208,758         89,715          534,132        135,553        669,685 
Accumulated 
 depreciation/amortisation 
 including accumulated 
 impairment loss                (36,765)       (122,953)       -               (159,718)      (47,606)       (207,324) 
 
 
Carrying amount at 1 January 2019                    213,592    88,781      65,131    367,504     109,220    476,724 
 
 
Additions                                            3,431      14,413      12,067    29,911      24,756     54,667 
Business Combination                                 -          771         -         771         1,019      1,790 
Disposals                                            (3,520)    (4,759)     (4,496)   (12,775)    (633)      (13,408) 
Transfer                                             700        (18)        (557)     125         29         154 
Transfer to financial leases and repossessed 
 assets                                              -          (1,071)     -         (1,071)     -          (1,071) 
Revaluation                                          -          5           -         5           -          5 
Effect of translation to presentation currency 
 (cost)                                              (39)       (38)        -         (77)        (15)       (92) 
(Impairment charge)/reversal of impairment to 
 profit or loss                                      (30)       46          -         16          -          16 
Depreciation/amortisation charge                     (2,894)    (11,340)    -         (14,234)    (10,851)   (25,085) 
Elimination of accumulated 
 depreciation/amortisation on disposals              814        2,275       -         3,089       359        3,448 
Effect of translation to presentation currency 
 (accumulated depreciation)                          47         11          -         58          26         84 
 
 
Carrying amount at 30 June 2019                      212,101    89,076      72,145    373,322     123,910    497,232 
 
 
Cost or valuation at 30 June 2019                    254,825    225,080     72,145    552,050     190,938    742,988 
Accumulated depreciation/amortisation including 
 accumulated impairment loss                         (42,724)   (136,004)   -         (178,728)   (67,028)   (245,756) 
 
 

*Office and other equipment include furniture and fixtures, computer and office equipment, motor vehicles as well as other equipment.

Depreciation and amortisation charge presented on the face of the statement of profit or loss and other comprehensive income include depreciation and amortisation charge of premises and equipment, investment properties and intangible assets.

Construction in progress consists of construction and refurbishment of branch premises and the Bank's new headquarters. Upon completion, assets are to be transferred to premises.

   9            Due to Credit Institutions 
 
In thousands of GEL                                         30 June 2019  31 December 2018 
 
  Due to other banks 
Correspondent accounts and overnight placements              12,234       23,273 
Deposits from banks                                          261,153      136,161 
Short-term loans from banks                                  170,188              - 
Total due to other banks                                     443,575      159,434 
 
Other borrowed funds 
Borrowings from foreign banks and financial institutions     2,227,596    2,065,560 
Borrowings from local banks and financial institutions       340,323      769,911 
Borrowings from Ministry of Finance                         1,083         1,520 
Borrowings from other financial institutions                40,165        35,078 
Total other borrowed funds                                   2,609,167    2,872,069 
 
 
Total amounts due to credit institutions                    3,052,742     3,031,503 
 
 
   10           Customer Accounts 
 
In thousands of GEL              30 June 2019  31 December 2018 
 
State and public organisations 
- Current/settlement accounts     850,984      667,553 
- Term deposits                   568,312      538,311 
 
Other legal entities 
- Current/settlement accounts     2,852,831    2,791,092 
- Term deposits                   244,572      251,215 
 
Individuals 
- Current/demand accounts         2,479,482    2,426,597 
- Term deposits                   2,880,632    2,677,374 
 
 
Total customer accounts          9,876,813     9,352,142 
 
 

State and public organisations include government owned profit orientated businesses.

Economic sector concentrations within customer accounts are as follows:

 
                          30 June 2019      31 December 2018 
 
In thousands of GEL       Amount         %    Amount        % 
 
Individual                 5,360,114  54%   5,103,971     55% 
Government Sector          811,579    8%    531,964       6% 
Trade                      534,431    5%    550,527       6% 
Construction               520,912    6%    613,973       7% 
Services                   401,901    4%    360,084       4% 
Transportation             361,531    4%    422,281       5% 
Financial Services        346,419     4%    394,336       4% 
Energy and Utilities      299,987     3%    397,653       4% 
Real Estate                199,358    2%    207,227       2% 
Hotels and Leisure        113,606     1%    102,529       1% 
Healthcare                 99,093     1%    76,464        1% 
Agriculture                43,085     0%    35,884        0% 
Metals and Mining          14,295     0%    12,479        0% 
Other                      770,502    9%    542,770       5% 
 
 
Total customer accounts    9,876,813  100%  9,352,142     100% 
 

As of 30 June 2019 the Group had 327 customers (31 December 2018: 305 customers) with balances above GEL 3,000 thousand. Their aggregate balance was GEL 4,587,861 thousand (2018: GEL 4,117,881 thousand) or 46.5% of total customer accounts (31 December 2018: 44.0%).

As of 30 June 2019 included in customer accounts are deposits of GEL 2,835 thousand and GEL 120,218 thousand (31 December 2018: GEL 6,766 thousand and GEL 158,306 thousand) held as collateral for irrevocable commitments under letters of credit and guarantees issued, respectively. Refer to Note 26. As of 30 June 2019, deposits held as collateral for loans to customers amounted to GEL 368,148 thousand (31 December 2018: GEL 270,787 thousand).

Refer to Note 27 for the disclosure of the fair value of customer accounts. Information on related party balances is disclosed in Note 28.

11 Provisions for Performance Guarantees, Credit Related Commitments and Liabilities and Charges

Movements in provisions for performance guarantees, credit related commitment and liabilities and charges are as follows:

 
In thousands of GEL                                Perfor-mance guarantees  Credit related commitments  Other  Total 
Carrying amount as of 1 January 2018               2,751                    3,578                       2,894  9,223 
 
Charges less releases recorded in profit or loss   1,811                    203                         501    2,515 
Effect of translation to presentation currency     (6)                      -                           -      (6) 
 
 
Carrying amount at 30 June 2018                    4,556                    3,781                       3,395  11,732 
 
 
Carrying amount at 1 January 2019                  4,393                     5,424                      8,950  18,767 
 
 
Charges less releases recorded in profit or loss   1,133                    (741)                       898    1,290 
Effect of translation to presentation currency     59                       -                           -      59 
 
Carrying amount as of 30 June 2019                 5,585                    4,683                       9,848  20,116 
 
 

Credit related commitments and performance guarantees: Impairment allowance estimation methods differ for (i) letter of credits and guarantees and (ii) undrawn credit lines.

For letter of credits and guarantees allowance estimation purposes the Bank applies the staged approach and classifies them in stage 1, stage 2 or stage 3. Significant stage 3 guarantees are assessed individually. Non-significant stage 3 as well as all stage 1 and stage 2 guarantees and letter of credits are assessed collectively using exposure, marginal probability of conversion, loss given default and discount factor. Amount of the expected allowance differs based on the classification of the facility in the respective stage.

For impairment allowance assessment purposes for undrawn exposures the Bank distinguishes between revocable and irrevocable loan commitments. For revocable commitments the Bank does not create impairment allowance. As for the irrevocable undisbursed exposures the Bank estimates utilization parameter (which represents expected limit utilization percentage conditional on the default event) in order to convert off-balance part of the exposure to on-balance.

Once the respective on balance exposure is estimated, the Bank applies the same impairment framework approach as the one used for the respective type of on balance exposures.

Additions less releases recorded in profit or loss for "Other" provisions does not include gross change in total reserves for insurance claims in amount of GEL 2,339 thousand (30 June 2018: GEL 15 thousand) that are included in net claims incurred.

   12      Debt securities in issue 

On 19 June 2019 the Bank completed the transaction of a debut USD 300 million 5-year 5.75% (6% yield) senior unsecured bonds issue (the "Notes"). The Notes are listed on the regulated market of Euronext Dublin and are rated Ba2 by Moody's and BB- by Fitch. The Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the first dual-listed international offering of senior unsecured Notes from Georgia.

   13           Subordinated Debt 

As of 30 June 2019, subordinated debt comprised of:

 
In thousands of GEL                      Start Date   Maturity    Currency   Outstanding   Outstanding 
                                                       Date                   amount        amount 
                                                                              in original   in GEL 
                                                                              currency 
Deutsche Investitions und 
 Entwicklungsgesellschaft 
 MBH                                     26-Jun-13    15-Jun-20   USD        7,514         21,554 
Nederlandse Financierings-Maatschappij 
 Voor Ontwikkelingslanden 
 N.V.                                    19-Dec-13    15-Apr-23   USD        25,971        74,504 
Kreditanstalt für Wiederaufbau 
 Bankengruppe                            10-Jun-14    8-May-21    GEL        6,399         6,399 
Kreditanstalt für Wiederaufbau 
 Bankengruppe                            4-May-15     8-May-21    GEL        6,998         6,998 
Green for Growth Fund                    18-Dec-15    18-Dec-25   USD        15,330        43,979 
European Fund for Southeast 
 Europe                                  18-Dec-15    18-Dec-25   USD        7,676         22,020 
European Fund for Southeast 
 Europe                                  15-Mar-16    15-Mar-26   USD        7,675         22,016 
Asian Development Bank (ADB)             18-Oct-16    18-Oct-26   USD        50,618        145,209 
Private lenders                          8-Jun-17     19-Dec-24   USD        25,226        72,365 
Subordinated Bond                        17-Aug-18    30-Nov-22   USD        10,105        28,988 
Global climate partnership 
 fund                                    20-Nov-18    20-Nov-28   USD        25,076        71,936 
ResponsAbility SICAV (Lux) 
 Microfinance Leaders                    30-Nov-18    30-Nov-28   USD        1,007         2,888 
ResponsAbility SICAV (Lux) 
 Financial inclusion fund                30-Nov-18    30-Nov-28   USD        3,120         8,952 
ResponsAbility Micro and 
 SME finance fund                        30-Nov-18    30-Nov-28   USD        5,941          17,043 
BlueOrchard Microfinance 
 Fund                                    14-Dec-18    14-Dec-25   USD        14,920         42,800 
BlueOrchard Microfinance 
 Fund                                    14-Dec-18    14-Dec-28   USD        14,918         42,794 
European Fund for Southeast 
 Europe                                  21-Dec-18    21-Dec-28   USD        20,064         57,557 
 
 
Total subordinated debt                                                                    688,002 
 
 

As of 31 December 2018, subordinated debt comprised of:

 
                               Start Date       Maturity Date    Currency    Outstanding amount  Outstanding amount 
                                                                             in original         in GEL 
 In thousands of GEL                                                         currency 
 
 Deutsche Investitions und 
  Entwicklungsgesellschaft 
  MBH                          26-Jun-13        15-Jun-20        USD          7,509               20,100 
 Nederlandse 
  Financierings-Maatschappij 
  Voor Ontwikkelingslanden 
  N.V.                         19-Dec-13        15-Apr-23        USD          29,213              78,191 
 Kreditanstalt für 
  Wiederaufbau Bankengruppe    10-Jun-14        8-May-21         GEL          6,161               6,161 
 Kreditanstalt für 
  Wiederaufbau Bankengruppe    4-May-15         8-May-21         GEL          6,737               6,737 
 Green for Growth Fund         18-Dec-15        18-Dec-25        USD          15,312              40,983 
 European Fund for Southeast 
  Europe                       18-Dec-15        18-Dec-25        USD          7,666               20,520 
 European Fund for Southeast 
  Europe                       15-Mar-16        15-Mar-26        USD          7,665               20,516 
 Asian Development Bank (ADB)  18-Oct-16        18-Oct-26        USD          50,617              135,482 
 Private lenders               30-Jun-17        30-Jun-23        USD          25,218              67,497 
 Subordinated Bond             17-Aug-18        30-Nov-22        USD          10,109              27,057 
 Global climate partnership 
  fund                         20-Nov-18        20-Nov-28        USD          25,111              67,211 
 ResponsAbility SICAV (Lux) 
  Microfinance Leaders         30-Nov-18        30-Nov-28        USD          1,007               2,695 
 ResponsAbility SICAV (Lux) 
  Financial inclusion fund     30-Nov-18        30-Nov-28        USD          3,121               8,354 
 ResponsAbility Micro and SME 
  finance fund                 30-Nov-18        30-Nov-28        USD          5,943               15,906 
 BlueOrchard Microfinance 
  Fund                         14-Dec-18        14-Dec-25        USD          14,916              39,923 
 BlueOrchard Microfinance 
  Fund                         14-Dec-18        14-Dec-28        USD          14,915              39,923 
 European Fund for Southeast 
  Europe                       21-Dec-18        21-Dec-28        USD          20,049              53,663 
 
 
 
Total subordinated debt                                                           650,919 
 
 
 

The debt ranks after all other creditors in case of liquidation. Refer to Note 27 for the disclosure of the fair value of subordinated debt.

   14           Share Capital 
 
                                                  Number of         Share capital 
In thousands of GEL except for number of shares    ordinary shares 
 
As of 1 January 2018                              52,931,867        1,605 
 
Shares issued                                     618,640           21 
Scrip dividend issued                             58,762            2 
Share exchange                                    635,060           22 
 
 
As of 31 December 2018                            54,244,329        1,650 
 
 
Shares issued                                     615,175           22 
 
 
As of 30 June 2019                                54,859,504        1,672 
 
 

As of 30 June 2019 the total authorised number of ordinary shares was 54,859,504 shares (31 December 2018: 54,244,329 shares). Each share has a nominal value of one British Penny. All issued ordinary shares are fully paid and entitled to dividends.

On 21 March 2019, 615,175 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of the TBC PLC group long term incentive plan and rank pari passu in all respects with TBC PLC's existing ordinary shares.

On 24 June 2019, at the Annual General Meeting, TBC Bank Group PLC's shareholders agreed on a dividend of GEL 1.98 per share, based on the 2018 audited financial statements. The respective dividend payable is recorded in the Statement of Financial Position as at 30 June 2019.

On 8 March 2018, 618,640 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of the TBC PLC group long term incentive plan and rank pari passu in all respects with TBC PLC's existing ordinary shares.

On 24 April 2018 635,060 new ordinary shares of TBC Bank Group PLC were admitted to the premium segment of the London Stock Exchange. The Offer Shares were issued pursuant to the terms of a private offer to the holders of the ordinary shares of JSC TBC Bank who have tendered Bank shares pursuant to the Offer. The holders of Bank shares are individuals that did not participate in the tender offer to holders made in 2016 or 2017 by TBC Bank Group PLC. Holders of Bank shares received one Offer Share for each Bank Share tendered pursuant to the Offer.

On 21 May 2018, at the Annual General Meeting, TBC Bank Group PLC's shareholders agreed on a dividend of GEL 1.64 per share, based on the 2017 audited financial statements. The dividend was recorded on 24 May 2018 and on 22 June 2018 shareholders received the payment of the total GEL 85,484 dividends. Scrip dividend shares amounted to 58,762 and were issued on 22th of June.

   15      Share Based Payments 

June 2015 arrangement:

In June 2015, the Bank's Supervisory Board approved new management compensation scheme for the top and middle management and it accordingly authorised the issue of a maximum 3,115,890 new shares. The system was enforced from 2015 through 2018. According to the scheme, each year, subject to predefined performance conditions, a certain number of shares were awarded to the Group's top managers and most of the middle ones. The performance features key performance indicators (KPIs) divided into (i) corporate and (ii) individual. The corporate KPIs are mainly related to achieving profitability, efficiency, and portfolio quality metrics set by the Board as well as non-financial indicators with regards to customers' experience and employees' engagement. The individual performance indicators are set on an individual basis and are used to calculate the number of shares to be awarded to each employee. According to the scheme, members of top management also received the fixed number of shares. Once awarded, all shares carry service conditions and, before those conditions are met, are eligible to dividends; however they cannot be sold or transferred to third parties.

Service conditions foresee continuous employment until the gradual transfer of the full title to the scheme participants is complete. Shares for each of the 2015, 2016, 2017 and 2018 tranche gradually ran over on the second, third and fourth year following the performance appraisal. Eighty percent of the shares are vested in the fourth year after being awarded. Under this compensation system the total vesting period extends to March 2022.

In 2015 the Group considered 17 June as the grant date. Based on the management's estimate of reached targets, as of 31 December 2015 1,908,960 shares were granted. The shares were gradually awarded to the members as per the described scheme. At the grant date the fair value amounted to GEL 24.64 per share, as quoted on the London Stock Exchange.

Following the listing on the Premium segment of the London Stock Exchange, the share-based payment scheme remained conceptually the same and was only updated to reflect the Group's new structure, whereby TBC Bank Group PLC distributes its shares to the scheme's participants, instead of JSC TBC Bank. The respective shares' value is recharged to JSC TBC Bank. As a result, the accounting of the scheme did not change in the consolidated financial statements.

The Bank also payed personal income tax on behalf of equity settled scheme beneficiaries, which was accounted as cash settled part.

The share based payment scheme for middle management and other eligible employees continues under existing terms for 2019-2020.

December 2018 arrangements:

In December 2018, the Bank's Supervisory Board approved following new compensation schemes for the top management. The Group considered 28 December 2018 as the grant date. Arrangements are discussed in below paragraphs:

Deferred share salary plan

Part of the top management salary is given in the form of shares and despite being salary, is still intended to promote the long-term success of the Group by closely aligning executive directors' and shareholders' interests. The new system is enforced from January 2019 through 2021. Shares are usually delivered during the first quarter of the second year (i.e. the year after the work is performed) and the exact date is determined by the Remuneration Committee. Once shares are delivered, they remain subject to continued employment; 50% of the shares for 1 year and the other 50% for 2 years from the delivery date. Upon the delivery, whilst the shares remain subject to the continued employment condition, the shares are registered in the trustees name as nominee for the participants and the participants are entitled to receive dividends.

Where applicable, deferred share salary is paid in part under the executive director's service contract with TBC JSC and in part under his service contract with TBC PLC, to reflect the executive director's duties to each. Initial salaries are set by the Remuneration Committee based on responsibilities and market data and are set out in a directors' service contracts with the Group. Deferred compensation is subject to the Group's malus and clawback policies until the shares are vested and during the holding period. If at any time after making the deferred compensation there is a material misstatement in the financial results for the year in respect of which the compensation was formally granted, the Remuneration Committee has the right to cause some or all of the deferred compensation for that year or any subsequent financial year that is unvested (or unpaid) to lapse (or not be paid).

The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. The bank pays income tax and other employee-related taxes related to the award, however, taxes are included in the maximum amounts.

Deferred Bonus plan

The annual bonus for the top management is determined as to the extent that the annual KPIs have been met. The new system is enforced from January 2019 through 2021. Shares are usually delivered during the first quarter of the second year (i.e. the year after the work is performed) and the exact date is determined by the remuneration committee. Once shares are delivered, they remain subject to continued employment; 50% of the shares for 1 year and the other 50% for 2 years from the delivery date. Upon the delivery, whilst the shares remain subject to the continued employment condition the shares are registered in the trustees name as the nominee for the participants and the participants are entitled to receive dividends.

KPIs are set by the Remuneration Committee at the beginning of each year in relation to that year. To the extent that the KPIs are achieved, the Remuneration Committee may decide whether an award may be made and the amount of such award. The Group does not pay guaranteed bonuses to executive directors. The nature of the KPIs (but not necessarily their specific weightings) will be disclosed in the annual report published in the performance year. However, the precise targets are commercially sensitive and will be disclosed retrospectively. Awards are subject to the Group's malus and clawback policies until the shares are vested and during the holding period. If at any time after making the award there is a material misstatement in the financial results for the year in respect of which the award was formally granted, the Remuneration Committee has the right to cause some or all of the award for that year or any subsequent financial year that is unvested (or unpaid) to lapse (or not be paid).

The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. The bank pays income tax and other employee-related taxes related to the award, however, taxes are included in the maximum amounts.

Long Term Incentive Plan (LTIP)

Long term incentive plan is used to provide a strong motivational tool to achieve long term performance conditions and to provide rewards to the extent those performance conditions are achieved. Performance conditions are chosen to align our executive directors' interests with strategic objectives of the Group over multi-year periods and encourage a long-term view. In order for the shares to be delivered, the executive directors need to meet performance conditions over the 3 year performance period. The new system will be enforced from 2021 through 2023. Shares are usually delivered during the first quarter of the fourth year (i.e. the year after the performance period ends) and the exact date is determined by the remuneration committee. Once shares are delivered, they remain subject to 2 year holding period and continued employment requirements. An award holder shall have no voting rights, or rights to receive dividends, in respect of a conditional share award before such award becomes a vested award. The awards may be granted in the form of conditional share awards, options or restricted share awards. Performance Conditions are set by the Remuneration Committee for a period of 3 years. The Remuneration Committee determines the level of award at the end of the performance period, based on the extent to which the performance conditions have been met. Awards are subject to the Group's malus and clawback policies until three years after the shares are delivered. If at any time after making the award the award holder

deliberately mislead the Company or the Bank in relation to the financial performance, there is a material misstatement (or material error) in the financial statements of the Company or the Bank, the award holder's unit has suffered a material downturn in its financial performance caused by the award holder, there is misconduct on the part of the award holder that caused material harm to the Company's or the Bank's reputation or there is misconduct on the part of the award holder that caused failure of the risk management resulting in a material loss to the Company or the Bank, the Remuneration Committee has the right to cause some or all of the award for that year or any subsequent financial year that is unvested (or unpaid) to lapse (or not be paid) and to clawback any amount that has already been paid. For newly issued and treasury shares, the LTIP is limited to using 10% in 10 years for employee plans and 5% in 10 years for discretionary plans. These limits will exclude shares under awards that have been renounced, forfeited, released, lapsed or cancelled or awards that were granted prior to the Company's IPO or awards that the Remuneration Committee decide will be satisfied by existing shares.

The number of shares is calculated based on the average share price during the 10 days after the preliminary annual results of the year preceding the year of each grant is announced. The bank pays income tax and other employee-related taxes related to the award, however, taxes are included in the maximum amounts.

The performance conditions for the award are set by the Committee each year. The Remuneration Committee's current view is that performance conditions will include: 1) a measure of efficiency (e.g. ROE) 2) a measure of share price performance (e.g. EPS/TSR) 3) a measure of customer experience Weightings of these measures may vary year-on-year. The performance period is three year.

Tabular information on both of the schemes is given below:

 
In GEL except for number of shares                                  30 June 2019              31 December 2018 
 
Number of unvested shares at the beginning of the period            2,121,129                  2,284,773 
Number of shares granted                                            1,610,159                 - 
Change in estimates of number of shares expected to be granted**    (57,058)                  - 
Change in estimate of number of shares expected to vest based on 
 performance conditions                                             (16,501)                  166,377 
Number of shares vested                                             (519,130)                 (330,021) 
 
Number of unvested shares at the end of the period                  3,138,599                 2,121,129 
 
Value at grant date per share according to June 2015 scheme (GEL)                      24.64                     24.64 
Value at grant date per share (GEL) middle management and other 
 eligible employees plan                                            50.16                     - 
Value at grant date per share (GEL) Deferred share salary plan      50.16                     - 
Value at grant date per share (GEL) Deferred bonus plan             50.16                     - 
Value at grant date per share (GEL) LTIP*                           50.16                     - 
 
 
                                                                    30 June 2019              30 June 2018 
 
Expense on equity-settled part (GEL thousand)                       13,245                    6,872 
Expense on cash-settled part (GEL thousand)                         491                       6,734 
 
 
Expense recognised as staff cost during the period (GEL thousand)   13,736                    13,606 
 
 

*Grant date for LTIP plan has been determined for the first award tranche only, which is planned in 2021. For remaining tranches expense is accrued based on estimated fair value during the future grant date.

** The maximum amount is fixed for deferred share compensations for top management, the exact number will be calculated as per policy.

Liability in respect of the cash-settled part of the award amounted to GEL 2,503 thousand as of 30 June 2019 (31 December 2018: GEL 11,001 thousand). Tax part of the new bonus system for the top management is accounted under equity settled basis.

Staff costs related to equity settled part of the share based payment schemes are recognised in the income statement on a straight line basis over the vesting period of each relevant tranche and corresponding entry is credited to share based payment reserve in equity.

On 30 June 2019 based on level of achievement of key performance indicators the management has reassessed the number of shares that will have to be issued to the participants of the share based payment system and decreased estimated number of shares to vest by 16,501 (30 June 2018: increased by 194,060).

   16           Earnings per Share 

Basic earnings per share are calculated by dividing the profit or loss attributable to the owners of the Group by the weighted average number of ordinary shares in issue during the period.

 
 In thousands of GEL except for number of shares     30 June 2019  30 June 2018 
 
  Profit for the period attributable to the owners 
   of the Bank (excluding the profit attributable 
   to the shares encumbered under the share based 
   payment scheme                                    253,235       198,347 
 
 Weighted average number of ordinary shares 
  in issue                                           54,587,603    53,563,016 
 
 
Basic earnings per ordinary share attributable 
 to the owners of the Bank (expressed in GEL 
 per share)                                          4.64          3.70 
 
 
 

Diluted earnings per share are calculated by dividing the profit or loss attributable to owners of the Group by the weighted average number of ordinary shares adjusted for the effects of all dilutive potential ordinary shares during the period:

 
In thousands of GEL except for number of shares      30 June 2019  30 June 2018 
 
Profit for the period attributable to the owners 
 of the Bank (excluding the profit attributable 
 to the shares encumbered under the share based 
 payment scheme -                                    253,235       198,347 
 
 
Weighted average number of ordinary shares 
 in issue adjusted for the effects of all dilutive 
 potential ordinary shares during the period         54,840,290    54,056,392 
 
 
Diluted earnings per ordinary share attributable 
 to the owners of the Bank (expressed in GEL 
 per share)                                          4.62          3.67 
 
 
   17      Segment Analysis 

The Management Board (the "Board) is the chief operating decision maker and it reviews the Group's internal reporting in order to assess the performance and to allocate resources. In 2019 the Group made the re-segmentation after which some of the clients were reallocated to different segments - GEL 128 million of loans and customers amount was transferred from MSME to Corporate segment. In the tables below is disclosed the information as of 30 June 2019 both with and without re-segmentation effect.

The operating segments according to the definition are determined as follows:

-- Corporate - legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or who have been granted facilities with more than GEL 5 million. Some other business customers may also be assigned to the corporate segment or transferred to MSME on a discretionary basis

-- Retail - non-business individual customers; all individual customers are included in retail deposits;

-- MSME - Business customers who are not included in either corporate or legal entities who have been granted a Pawn shop loan; or individual customers of the newly-launched fully-digital bank, Space;

-- Corporate centre and other operations - comprises of the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.

The Management Board assesses the performance of the operating segments based on a measure of profit before income tax.

The reportable segments are the same as the operating segments.

No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group's total revenue in as of 30 June 2019 and 31 December 2018.

The vast majority of the entity's revenues are attributable to Georgia. A geographic analysis of origination of the Group's assets and liabilities is given in Note 24.

A summary of the Group's reportable segments as of 30 June 2019 with updated segmentation and also without re-segmentation effect (for comparative reasons) and 30 June 2018 is provided below:

 
Per new 
segmentation: 
                   Corpo-rate               Retail                   MSME                   Corpo-rate centre    Total 
In thousands of                                                                             and other 
GEL                                                                                         operations 
 
30 June 2019 
 
- Interest income   156,857                  288,909                  141,798                90,652               678,216 
- interest 
 expense            (79,418)                 (72,843)                 (4,682)                (133,834)            (290,777) 
- Inter-segment 
 interest 
 income/(expense)   24,584                   (33,609)                 (47,567)               56,592               - 
 
 
- Net interest 
 income             102,023                  182,457                  89,549                 13,410               387,439 
 
 
- Fee and 
 commission 
 income             24,002                   92,008                   11,365                 2,510                129,885 
- Fee and 
 commission 
 expense            (3,251)                  (37,256)                 (3,789)                (248)                (44,544) 
 
 
- Net Fee and 
 commission 
 income             20,751                   54,752                   7,576                  2,262                85,341 
 
 
- Net insurance 
 premiums earned   -                        -                        -                      15,992               15,992 
- Net insurance 
 claims incurred   -                        -                        -                      (7,925)              (7,925) 
- Insurance 
 Profit            -                        -                        -                      8,067                8,067 
- Net gains from 
 trading in 
 foreign 
 currencies         22,288                   13,370                   10,120                 341                  46,119 
- Net losses from 
 foreign exchange 
 translation        -                        -                        -                      9,214                9,214 
- Net losses from 
 derivative 
 financial 
 instruments        -                        (218)                    -                      (11)                 (229) 
- Net losses from 
 disposal of 
 investment 
 securities 
 measured at fair 
 value through 
 other 
 comprehensive 
 income             -                        -                        -                      147                  147 
- Other operating 
 income             1,040                    4,502                    701                    1,566                7,809 
- Share of profit 
 of associates      -                        -                        -                      341                  341 
 
 
- Other operating 
 non-interest 
 income                             23,328                   17,654                10,821                19,665                 71,468 
 
 
- Credit loss 
 allowance for 
 loans to 
 customers          4,259                    (55,517)                 (15,225)               -                    (66,483) 
- Credit loss 
 allowance for 
 performance 
 guarantees and 
 credit related 
 commitments        (807)                    421                      (6)                    -                    (392) 
- Credit loss 
 allowance for 
 investments in 
 finance lease      -                        -                        -                      178                  178 
- Credit loss 
 allowance for 
 other financial 
 assets            3,010                    92                       -                      -2,522                580 
- Credit loss 
 allowance for 
 financial assets 
 measured at fair 
 value through 
 OCI               -320                     -                         -                     -30                   (350) 
 
 
- Profit before 
 administrative 
 and other 
 expenses and 
 income taxes                    152,244                  199,859                  92,715                32,963              477,781 
 
 
- Staff costs       (17,674)                 (66,073)                 (23,199)               (9,693)              (116,639) 
- Depreciation 
 and amortisation   (1,494)                  (24,854)                 (3,924)                (1,852)              (32,124) 
- Provision for 
 liabilities and 
 charges            -                        -                        -                      1,441                1,441 
- Administrative 
 and other 
 operating 
 expenses           (7,565)                  (39,845)                 (10,923)               (6,242)              (64,575) 
 
 
- Operating 
 expenses                         (26,733)               (130,772)                (38,046)             (16,346)             (211,897) 
 
- Profit before 
 tax                125,511                  69,087                   54,669                 16,617               265,884 
- Income tax 
 expense            (14,546)                 (6,985)                  (5,429)                14,616               (12,344) 
- Profit for the 
 period             110,965                  62,102                   49,240                 31,233               253,540 
 
 
30 June 2019 
Total gross loans 
 and advances to 
 customers 
 reported           3,658,341                4,835,319                2,647,700              -                    11,141,360 
Total customer 
 accounts 
 reported           3,510,179                5,360,114                1,006,520              -                    9,876,813 
Total credit 
 related 
 commitments and 
 performance 
 guarantees         1,983,645                222,636                  252,082                -                    2,458,363 
 
 
 
Per old segmentation: 
                                    Corpo-rate  Retail      MSME        Corpo-rate centre and other        Total 
In thousands of GEL                                                     operations 
 
30 June 2019 
 
- Interest income                    151,181     288,909     147,972     90,154                             678,216 
- interest expense                   (78,940)    (72,842)    (5,160)     (133,835)                          (290,777) 
- Inter-segment interest 
 income/(expense)                    26,500      (33,609)    (49,483)    56,592                             - 
 
 
- Net interest income                98,741      182,458     93,329      12,911                             387,439 
 
 
- Fee and commission income          23,625      92,008      11,741      2,511                              129,885 
- Fee and commission expense         (3,250)     (37,257)    (3,789)     (248)                              (44,544) 
 
 
- Net Fee and commission income      20,375      54,751      7,952       2,263                              85,341 
 
 
- Net insurance premiums earned      -           -           -           15,992                             15,992 
- Net insurance claims incurred      -           -           -           (7,925)                            (7,925) 
- Insurance Profit                  -           -           -           8,067                              8,067 
- Net gains from trading in 
 foreign currencies                  21,579      13,370      10,829      341                                46,119 
- Net losses from foreign exchange 
 translation                         -           -           -           9,214                              9,214 
- Net losses from derivative 
 financial instruments               -           (218)       -           (11)                               (229) 
- Net losses from disposal of 
 investment securities measured at 
 fair value through other 
 comprehensive 
 income                              -           -           -           147                                147 
- Other operating income             1,040       4,502       701         1,566                              7,809 
- Share of profit of associates      -           -           -           341                                341 
 
 
- Other operating non-interest 
 income                              22,619      17,654      11,530      19,665                             71,468 
 
 
- Credit loss allowance for loans 
 to customers                        5,752       (55,517)    (16,718)    -                                  (66,483) 
- Credit loss allowance for 
 performance guarantees and credit 
 related commitments                 (899)       421         86          -                                  (392) 
- Credit loss allowance for 
 investments in finance lease        -           -           -           178                                178 
- Credit loss allowance for other 
 financial assets                    3,010       92          -           (2,522)                            580 
- Credit loss allowance for 
 financial assets measured at fair 
 value through OCI                   (320)       -           -           (30)                               (350) 
 
 
- Profit before administrative and 
 other expenses and income taxes    149,278      199,859    96,178      32,465                             477,781 
 
 
- Staff costs                        (17,674)    (66,073)    (23,199)    (9,693)                            (116,639) 
- Depreciation and amortisation      (1,494)     (24,854)    (3,924)     (1,852)                            (32,124) 
- Provision for liabilities and 
 charges                             -           -           -           1,441                              1,441 
- Administrative and other 
 operating expenses                 (7,565)     (39,845)    (10,923)    (6,242)                            (64,575) 
 
 
- Operating expenses                 (26,733)    (130,772)   (38,046)    (16,346)                           (211,897) 
 
- Profit before tax                  122,545     69,087      58,133      16,119                             265,884 
- Income tax expense                 (14,491)    (6,985)     (5,493)     14,625                             (12,344) 
- Profit for the period              108,054     62,102      52,640      30,744                             253,540 
 
 
30 June 2019 
Total gross loans and advances to 
 customers reported                  3,505,849  4,835,319    2,800,192   -                                  11,141,360 
Total customer accounts reported     3,478,134  5,360,114    1,038,565   -                                  9,876,813 
Total credit related commitments 
 and performance guarantees          1,954,266   222,636     281,461     -                                  2,458,363 
 
 
 
                                     Corpo-rate  Retail      MSME       Corpo-rate centre and other         Total 
In thousands of GEL                                                     operations 
 
30 June 2018 
 
- Interest income                    117,838      299,007     112,534   68,622                               598,001 
- interest expense                    (63,859)    (58,951)    (4,917)    (106,667)                           (234,394) 
- Inter-segment interest 
 income/(expense)                     16,168      (42,704)    (37,998)   64,534                              - 
 
 
- Net interest income                70,147       197,352     69,619    26,489                               363,607 
 
 
- Fee and commission income           18,399      78,330      10,621     1,749                               109,099 
- Fee and commission expense          (3,260)     (28,407)    (3,209)    (141)                               (35,017) 
 
 
- Net Fee and commission income       15,139      49,923      7,412      1,608                               74,082 
 
 
- Net insurance premiums earned      -           -           -          10,602                              10,602 
- Net insurance claims incurred      -           -           -          (5,303)                             (5,303) 
- Insurance Profit                    -           -           -          5,299                               5,299 
- Net gains from trading in foreign 
 currencies                           19,816      11,879      10,030     (2,943)                             38,782 
- Net losses from foreign exchange 
 translation                          -           -           -          4,023                               4,023 
- Net losses from derivative 
 financial instruments                -           -           -          413                                 413 
- Other operating income              4,576       4,679       365        643                                 10,263 
- Share of profit of associates       -           -           -          648                                 648 
 
 
- Other operating non-interest 
 income                               24,392      16,558      10,395     8,083                               59,428 
 
 
- Credit loss allowance for loans 
 to customers                         (1,336)     (54,872)    (9,772)   -                                    (65,980) 
- Credit loss allowance for 
 performance guarantees and credit 
 related commitments                  (1,879)     (95)        (40)       (486)                               (2,500) 
- Credit loss allowance for 
 investments in finance lease         -           -           -          (493)                               (493) 
- Credit loss allowance for other 
 financial assets                     (697)       (3,843)     (2)        (927)                               (5,469) 
- Credit loss allowance for 
 financial assets measured at fair 
 value through OCI                    (31)        -           -          (81)                                (112) 
 
 
- Profit before administrative and 
 other expenses and income taxes     105,735      205,023     77,612    34,193                               422,563 
 
 
- Staff costs                         (13,370)    (62,795)    (19,530)   (7,152)                             (102,847) 
- Depreciation and amortisation       (1,038)     (17,373)    (2,342)    (710)                               (21,463) 
- Provision for liabilities and 
charges                               -           -           -          -                                   - 
- Administrative and other 
 operating expenses                   (3,596)     (39,431)    (8,271)    (7,414)                             (58,712) 
 
 
- Operating expenses                  (18,004)    (119,599)   (30,143)   (15,276)                            (183,022) 
 
- Profit before tax                  87,731       85,424      47,469    18,917                               239,541 
- Income tax expense                 (13,304)     (11,460)    (7,308)   (7,506)                              (39,578) 
- Profit for the period              74,427       73,964      40,161    11,411                               199,963 
 
 
31 December 2018 
Total gross loans and advances to 
 customers reported                  3,177,289   4,698,699   2,496,594  -                                   10,372,582 
Total customer accounts reported     3,230,653   5,103,971   1,017,518  -                                   9,352,142 
Total credit related commitments 
 and performance guarantees          1,578,184   246,639     246,824    -                                   2,071,647 
 
 

Reportable segments' assets were reconciled to total assets as follows:

 
In thousands of GEL                                                          30 June 2019             31 December 2018 
 
Total segment assets (gross loans and advances to customers)                          11,141,360      10,372,582 
Provision for loan impairment                                                             (340,096)   (334,130) 
Cash and cash equivalents                                                               1,628,344     1,166,911 
Mandatory cash balances with National Bank of Georgia                                   1,841,237     1,422,809 
Due from other banks                                                                          27,860  47,316 
Investment securities measured at fair value through other comprehensive 
 income                                                                                    861,529    1,005,239 
Repurchase Receivable                                                                      179,762    - 
Bonds carried at amortized cost                                                 633,530               654,203 
Investments in subsidiaries and associates                                    2,363                   2,432 
Current income tax prepayment                                                19,417                   2,116 
Deferred income tax asset                                                    1,753                    2,097 
Other financial assets                                                       165,382                  167,518 
Investments in finance leases                                                220,871                  203,802 
Right of use assets                                                          61,555                   - 
Other assets                                                                  211,850                 192,792 
Premises and equipment                                                       373,322                  367,504 
Intangible assets                                                            123,910                  109,220 
Investment properties                                                        79,114                   84,296 
Goodwill                                                                     45,301                   31,286 
 
 
Total assets per statement of financial position                             17,278,364               15,497,993 
 
 

Reportable segments' liabilities are reconciled to total liabilities as follows:

 
In thousands of GEL                                     30 June 2019               31 December 2018 
 
Total segment liabilities (customer accounts)                      9,876,813       9,352,142 
Due to Credit institutions                                         3,052,742       3,031,503 
Debt securities in issue                                              848,838      13,343 
Current income tax liability                                                  727  63 
Deferred income tax liability                                            21,361    22,237 
Provisions for liabilities and charges                                   20,116    18,767 
Other financial liabilities                                           252,280      98,714 
Other liabilities                                                        85,882    104,337 
Lease Liabilities                                                        62,598    N/A 
Subordinated debt                                                     688,002      650,919 
 
 
Total liabilities per statement of financial position   14,909,359                 13,292,025 
 
 
   18           Interest Income and Expense 
 
In thousands of GEL                          30 June 2019  30 June 2018 
 
Interest income calculated using effective 
 interest method 
Loans and advances to customers               582,899       526,431 
Bonds carried at amortised cost               23,410       17,879 
Investment securities measured at fair 
 value through OCI                           36,950         25,135 
Due from other banks                          11,630        11,946 
 
Other interest income 
Investments in leases                         23,327        16,610 
 
 
Total interest income                        678,216       598,001 
 
 
Interest expense 
 Customer accounts                           155,634       127,727 
 Due to credit institutions                  100,032       86,262 
 Subordinated debt                           31,748        19,599 
 Debt Securities in issue                    2,054         806 
 Lease liability                             1,309         N/A 
 
 
Total interest expense                       290,777       234,394 
 
 
Net interest income                          387,439       363,607 
 
 

During the six months ended 30 June 2019 the interest accrued on impaired loans amounted to GEL 17,964 thousand (30 June 2018: GEL 13,887 thousand).

   19           Fee and Commission Income and Expense 
 
In thousands of GEL                     30 June 2019  30 June 2018 
 
Fee and commission income 
Fee and commission income in respect 
 of financial instruments not at fair 
 value through profit or loss: 
- Card operations                       60,084        47,010 
- Settlement transactions               36,609        33,693 
- Guarantees issued                     12,546        9,079 
- Cash transactions                     6,706         8,988 
- Issuance of letters of credit         2,319         2,360 
- Foreign exchange operations           1,388         896 
- Other                                 10,233        7,073 
 
 
Total fee and commission income         129,885       109,099 
 
 
Fee and commission expense 
Fee and commission expense in respect 
 of financial instruments not at fair 
 value through profit or loss: 
- Card operations                       34,174        23,443 
- Settlement transactions               6,622         4,285 
- Cash transactions                     1,603         2,359 
- Guarantees received                   864           620 
- Letters of credit                     740           588 
- Foreign exchange operations           31            5 
- Other                                 510           3,717 
 
 
Total fee and commission expense        44,544        35,017 
 
 
Net fee and commission income           85,341        74,082 
 
 
   20      Other Operating Income 
 
In thousands of GEL                             30 June 2019  30 June 2018 
 
Revenues from operational leasing               1,660         3,142 
Gain on disposal of premises and equipment      1,370         199 
Gain from sale of investment properties         630           1,896 
Gain from sale of inventories of repossessed 
 collateral                                     582           205 
Revenues from sale of cash-in terminals         443           1,253 
Revenues from non-credit related fines          165           254 
Other                                           2,959         3,314 
 
 
Total other operating income                    7,809         10,263 
 
 

Revenue from operational leasing is wholly attributable to investment properties. The carrying value of

inventories of repossessed collateral disposed of in the period ended 30 June 2019 was GEL 5,980 thousand (30 June 2018: GEL 10,663 thousand).

   21      Administrative and Other Operating Expenses 
 
                                                  30 June            30 June 
In thousands of GEL                                2019               2018 
 
Professional services                                   12,046        4,459 
Advertising and marketing services                        9,461       11,644 
Intangible asset enhancement                              5,976       5,066 
Expenses related to lease contracts*                      5,826       11,707 
Premises and equipment maintenance                        4,765       2,163 
Taxes other than on income                                3,713       3,603 
Utility services                                          3,570       3,188 
Communications and supply                                 2,782       2,193 
Stationery and other office expenses                      2,251       2,507 
Charity                                                   1,279       561 
Business trip expenses                                    1,065       989 
Security services                                         1,025       1,002 
Transportation and vehicle maintenance                        903     792 
Personnel training and recruitment                            596     409 
Insurance                                                     508     968 
Loss on disposal of premises and equipment                    251     336 
Loss on disposal of inventories                                 52    100 
Loss on disposal of investment properties                       38    60 
Impairment of Premises & Equipment                               -    178 
Write-down of current assets to fair value 
 less costs to sell                                         (251)     (570) 
Other                                                     8,719       7,357 
 
 
Total administrative and other operating 
 expenses                                         64,575             58,712 
 
*as at 1 January 2019, the group adopted IFRS 16, under which 
 contracts that do not qualify for lease arrangements, short-term 
 lease expenses, low-value lease expenses and non-lease components 
 of contracts (GEL 618 thousand, GEL 3,278 thousand, GEL 733 thousand 
 and GEL 1,198 thousand for the six months period ended) are expensed 
 under this category of administrative expenses, previously recognized 
 in rent expenses under IAS 17 
 During 6m 2019, under IFRS 16, GEL 1,309 thousand is recognized 
 under interest expense from lease liability (Note 18) and GEL 
 6,590 thousand is recognized within depreciation and amortization 
 in statement of profit or loss and other comprehensive income. 
 
   22           Income Taxes 

As at 30 June 2019, the statutory income tax rate applicable to the majority of the Group's income is 15% (six months ended 30 June 2018: 15%). On 12 June 2018 the new amendment to the current corporate taxation model came into force that postpones tax relief for re-invested profit from 1 January 2019 to 1 January 2023 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops. As a result, deferred tax assets/liabilities are measured to the amounts that are realizable until 31 December 2022.

   23           Net Debt Reconciliation 

The table below sets out an analysis of our debt and the movements in our debt for each of the periods presented. The debt items are those that are reported as financing in the statement of cash flows.

 
                                             Liabilities from financing activities 
                           Other borrowed    Debt Securities   Subordinated    Lease Liabilities  Total 
In thousands of GEL         funds             in Issue          debt 
 
Net debt at 1 January 
 2019                      2,872,072         13,343            650,919         -                  3,536,334 
 
 
Cash flows                       (471,557)         798,537           (40,238)          (5,771)    280,971 
Foreign exchange 
 adjustments                       116,649           32,102            45,345            4,517    198,613 
Other non-cash movements             92,003             4,856          31,976          63,852     192,687 
 
 
Net debt at 30 June 
 2019                      2,609,167         848,838           688,002         62,598             4,208,605 
 
 
 
                           Liabilities from financing activities 
                           Other borrowed    Debt Securities    Subordinated    Total 
In thousands of GEL         funds             in Issue           debt 
 
Net debt at 1 January 
 2018                       2,534,496         20,695             426,788         2,981,979 
 
 
Cash flows                         340,409               (755)        (25,922)       313,732 
Foreign exchange 
 adjustments                       (67,066)           (1,106)         (22,733)        (90,905) 
Other non-cash movements             82,158                807          19,443       102,408 
 
 
Net debt at 30 June 
 2018                      2,889,997         19,641             397,576         3,307,214 
 
 
   24           Financial and Other Risk Management 

TBC Bank Group's strong risk governance reflects the importance placed by the Board and the Group's Risks, Ethics and Compliance Committee on shaping the risk strategy and managing credit, financial and non-financial risks. All components necessary for comprehensive risk governance are embedded into risk organization structure: enterprise risk management; credit, financial and non-financial risks management; risk reporting & supporting IT infrastructure; cross-risk analytical tools and techniques such as capital adequacy management and stress-testing. Comprehensive, transparent and prudent risk governance facilitates understanding and trust from multiple stakeholders, ensures sustainability and resiliency of the business model and positioning of risk management as Group's competitive advantage and strategic enabler.

The TBC Bank Group's governance structure ensures adequate oversight and accountabilities as well as clear segregation of duties. The Risks, Ethics and Compliance Committee is responsible for taking all the day-to-day decisions relating to the Group apart from those that are reserved for the Board. Namely, the committee carries out following duties: 1) Review and assessment of the Group's risk management strategy, risk appetite and tolerance, risk management system and risk policies; 2) Review and monitoring of the processes for compliance with laws, regulations and ethical codes of practice; 3) monitoring of the remediation of internal control deficiencies identified by internal and external auditors around compliance, ethics and risk management functions; 4) Annual self-assessment of the committee's performance and reporting of the results to the Board; 5) Review of the key risk management framework and other policy documents and make recommendations to the Board for their approval.

On the Bank level, risk management is the duty of the Supervisory Board, which has the overall responsibility to set the tone at the top and monitor compliance with established objectives. At the same time, Management Board governs and directs Groups' daily activities.

Both the Supervisory Board and the Management Board have established dedicated risk committees. Risk, Ethics and Compliance Committee of Supervisory Board approves Bank's Risk Appetite, supervises risk profile and risk governance practice within the Bank while Audit Committee is responsible for implementation of key accounting policies and facilitation of activities of internal and external auditors.

Management Board Risk Committee is established to guide group-wide risk management activities and monitor major risk trends to make sure risk profile complies with the established Risk Appetite of the Group.

Operational Risk Committee makes decisions related to operational risk governance while Asset-Liability Management Committee ("ALCO") is responsible for implementation of ALM policies.

The Management Board of the Group and, the Supervisory Board and Senior Management of the Bank govern risk objectives through Risk Appetite Statement ("RAS") which sets desired risk profile and respective risk limits for different economic environments. Risk Appetite ("RA") establishes monitoring and reporting responsibilities as well as escalation paths for different trigger events and limit breaches which as well prompt risk teams to establish and implement agreed mitigation actions. In order to effectively implement Risk Appetite in the Group's day-to-day operations, the RA metrics are cascaded into more granular business unit level limits. That way risk allocation is established across different segments and activities. The Board level oversight coupled with the permanent involvement of the Senior Management in TBC Group risk management ensures the clarity regarding risk objectives, intense monitoring of risk profile against risk appetite, prompt escalation of risk-related concerns and establishment of remediation actions.

The daily management of individual risks is based on the principle of the three lines of defense. While business lines are primary risk owners, risk teams assume the function of the second line defense. This role is performed through sanctioning transactions as well as tools and techniques for risk identification, analysis, measurement, monitoring and reporting. The committees are established at operational levels in charge of making transaction-level decisions that comprise of component of clear and sophisticated delegations of the authority framework based on "four-eye principle". All new products/projects go through the risk teams to assure risks are analyzed comprehensively.

Such control arrangements guarantee that the Bank takes informed risk-taking decisions that are adequately priced, avoiding taking risks that are beyond the Group's established threshold. Within the Risk Organization the below teams manage the credit, liquidity, market, operational and other non-financial risks:

   --      Enterprise Risk Management (ERM); 
   --      Credit Risk Management; 
   --      Underwriting (Credit sanctioning); 
   --      Restructuring and Collections; 
   --      Financial Risk Management; 
   --      Operational Risk Management. 

The strong and independent structure enables fulfilment of all the required risk management functions within the second line of defense by highly skilled professionals with a balanced mix of credentials in banking and real sectors both on the local and international markets.

In addition to the above-mentioned risk teams, the Compliance Department (reporting directly to CEO) is specifically in charge of AML and compliance risk management. As the third line of defense, the Internal Audit Department provides an independent and objective assurance and recommendations to Group that facilitates further improvement of operations and risk management.

For the management of each significant risk, the Bank puts in place specific policies and procedures, governance tools and techniques, methodologies for risk identification, assessment and quantification. Sound risk reporting systems and IT infrastructure are important tools for efficient risk management of TBC Bank. Thus, significant emphasis and investments are made by the Bank to constantly drive the development of required solutions. Comprehensive reporting framework is in place for the Management Board of the Group and the Supervisory Board and the Senior Management of the Bank that enables intense oversight over risk developments and taking early remedial actions upon necessity.

Beyond the described risk governance components, compensation system features one of the most significant tools for introducing incentives for staff, aligned with the Bank's long term interests to generate sustainable risk-adjusted returns. The risk Key Performance Indicators ("KPIs") are incorporated into both the business line and the risk staff remunerations. The performance management framework differentiates risk staff incentives to safeguard the independence from business areas that they supervise and at the same time enable attraction and maintenance of qualified professionals. For that purpose, the Bank overweighs risk KPIs for risk and control staff and caps the share of variable remuneration.

Credit risk

The Group is exposed to credit risk, which is the risk that a customer or counterparty will be unable to meet its obligation to settle outstanding amounts. The Group's exposure to credit risk arises as a result of its lending operations and other transactions with counterparties giving rise to financial assets. Maximum exposure to credit risk of on-balance sheet items equals their carrying values. For maximum exposure on off-balance sheet commitments refer to Note 26.

Credit risks include: risks arising from transactions with individual counterparties, concentration risk, currency-induced credit risks and residual risks.

- Risks arising from transactions with individual counterparties are the loss risk related to default or non-fulfillment of contracts due to deterioration in the counterparty's credit quality;

- Concentration risk is the risk related to the quality deterioration due to large exposures provided to single borrowers or a group of connected borrowers, or loan concentration in certain economic industries;

- Currency-induced credit risks relate to risks arising from foreign currency-denominated loans in the Group's portfolio;

- Residual risks result from applying credit risk-mitigation techniques, which could not satisfy expectation in relation to received collateral.

Comprehensive risk management methods and processes are established as part of the Group's risk management framework to manage credit risk effectively. The main principles for Group's credit risk management are: establish a prudent credit risk environment; operate under a sound credit-granting process; and maintain efficient processes for credit risk identification, measurement, control and monitoring. Respective policies and procedures establish a framework for lending decisions reflecting the Group's tolerance for credit risk. This framework includes detailed and formalised credit evaluation and collateral appraisal processes, administration and documentation, credit approval authorities at various levels, counterparty and industry concentration limits, and clearly defined roles and responsibilities of entities and staff involved in the origination, monitoring and management of credit.

Credit Approval

The Group strives to ensure a sound credit-granting process by establishing well-defined credit granting criteria and building up an efficient process for the comprehensive assessment of a borrower's risk profile. The concept of three lines of defense is embedded in the credit risk assessment framework, with a clear segregation of duties among the parties involved in the credit assessment process.

The credit assessment process differs across segments, being further differentiated across various product types reflecting the different natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an individual basis with thorough analysis of the borrower's creditworthiness and structure of the loan; whereas smaller retail and micro loans are mostly assessed in an automated way applying respective scoring models for the loan approval. Lending guidelines for business borrowers have been tailored to individual economic sectors, outlining key lending criteria and target ratios within each industry.

The Loan Approval Committees are responsible to review the credit applications and approve the credit products. Different Loan Approval Committees with clearly defined delegation authority are in place for the approval of credit exposures to Corporate, MSME and Retail customers (except those products which are assessed applying scorecards). The composition of a Loan Approval Committee depends on aggregated liabilities of the borrower and the borrower's risk profile. Credit risk managers (as members of respective Loan Approval Committees) ensure that the borrower and the proposed credit exposure risks are thoroughly analysed. A loan to the Bank's top 20 borrowers or exceeding 5% of the Bank's regulatory capital requires the review and the approval of the Supervisory Board's Risk, Ethics and Compliance Committee. This committee also approves transactions with related parties resulting in exposures to individuals and legal entities exceeding GEL 150 and 200 thousand, respectively.

Credit Risk Monitoring

The Group's risk management policies and processes are designed to identify and analyse risk in a timely manner, and monitor adherence to predefined limits by means of reliable and timely data. The Group dedicates considerable resources to gain a clear and accurate understanding of the credit risk faced across various business segments. The Group uses a robust monitoring system to react timely to macro and micro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tailored to the specifics of individual segments, as well as they encompass individual credit exposures, overall portfolio performance and external trends that may impact the portfolios risk profile. Early warning signals serve as an important early alert system for the detection of credit deteriorations, leading to mitigating actions.

Complex monitoring system is in place for monitoring of individual counterparties with frequency of monitoring depending on the borrower's risk profile and exposure. Based on the results of the monitoring borrowers are classified across different risk categories. In case there are certain weaknesses present, which if materialized may lead to loan repayment problems, borrowers are classified as "watch" category. Although watch borrowers' financial standing is sufficient to repay obligations, these borrowers are closely monitored and specific actions are undertaken to mitigate potential weaknesses. Watch category is used as one of the qualitative indicators for transferring of exposures to Stage 2 for the corporate and SME borrowers. For retail and micro borrowers along with other portfolio level indicators, portfolio breakdown across risk categories is monitored on a regular basis. In case there are indicators that portfolio distribution across risk categories deteriorates above the predefined threshold it might trigger transferring the respective portfolio to stage 2, as long as deterioration signs are in place.

Reports relating to the credit quality of the credit portfolio are presented to the Board's Risk, Ethics and Compliance Committees on a quarterly basis. By comparing current data with historical figures and analysing forecasts, the management believes that it is capable identifying risks and responding to them by amending its policies in a timely manner.

Credit Risk Mitigation

Credit decisions are based primarily on the borrower's repayment capacity and creditworthiness; in addition, the Group uses credit risk mitigation tools such as collateral and guarantees to reduce the credit risk. The reliance that can be placed on these mitigation factors is carefully assessed for legal certainty and enforceability, market valuation of collateral and counterparty risk of the guarantor.

A centralised unit for collateral management governs the Group's view and strategy in relation to collateral management and ensures that collateral serves as an adequate mitigating factor for credit risk management purposes. The collateral management framework consists of a sound independent appraisal process, haircut system throughout the underwriting process, monitoring and revaluations.

Credit Risk Restructuring and Collection

A comprehensive portfolio supervision system is in place to identify weakened or problem credit exposures in a timely manner and to take prompt remedial actions. Dedicated restructuring units manage weakened borrowers across all business segments. The Bank differentiates between two types of restructuring considering the severity of financial weakness of the borrowers. For the measurement of ECL, restructured borrowers may be classified either in Stage 2 or Stage 3. The primary goal of the restructuring units is to rehabilitate the borrower and return to the performing category or to Stage 1. The sophistication and complexity of rehabilitation process differs based on the type and size of exposure.

A centralised monitoring team monitors retail borrowers in delinquency, which coupled with branches' efforts, are aimed at maximizing collection. The specialised software is applied for early collection processes management. Specific strategies are tailored to different sub-groups of customers, reflecting respective risk levels, so that greater effort is dedicated to customers with a higher risk profile. Correcting the delinquency at early stage limits the amount of exposures becoming past due more than 30 days (one of the criteria indicating SICR) and transferred to Stage 2.

Dedicated recovery units manage loans with higher risk profile. Corporate and SME borrowers are transferred to a recovery unit in case of a strong probability that a material portion of the principal amount will not be paid and the main stream of recovery is no longer the borrower's cash flow. Retail and micro loans are generally transferred to the recovery unit or external collection agencies (in the case of unsecured loans) at 90 days overdue, although they may be transferred earlier if it is evident that the borrower is unable to repay the loan.

Credit Quality

Depending on the type of financial asset the Group may utilize different sources of asset credit quality information including credit ratings assigned by the international rating agencies (Standard & Poor's, Fitch), credit scoring information from credit bureau and internally developed credit ratings. Financial assets are classified in an internally developed credit quality grades by taking into account the internal and external credit quality information in combination with other indicators specific to the particular exposure (e.g. delinquency). The Group defines following credit quality grades:

   --      Very low risk - exposures demonstrate strong ability to meet financial obligations; 
   --      Low risk - exposures demonstrate adequate ability to meet financial obligations; 
   --      Moderate risk - exposures demonstrate satisfactory ability to meet financial obligations; 
   --      High risk - exposures that require closer monitoring, and 
   --      Default - exposures in default, with observed credit impairment. 

The internal credit ratings are estimated by the Group by statistical models with the limited involvement of credit officers. Statistical models include qualitative and quantitative information that shows the best predictive power based on historical data on defaults.

The rating models are regularly reviewed and back tested on actual default data. The Group regularly validates the accuracy of ratings estimates and appraises the predictive power of the models.

Expected credit loss (ECL) measurement

ECL is a probability-weighted estimate of the present value of future cash shortfalls. An ECL measurement is unbiased and is determined by evaluating a range of possible outcomes. ECL measurement is based on four components used by the Group: Probability of Default ("PD"), Exposure at Default ("EAD"), Loss Given Default ("LGD") and Discount Rate. The estimates consider forward looking information, that is, ECLs reflect probability weighted development of key macroeconomic variables that have an impact on credit risk.

The Bank uses is a three-stage model for ECL measurement and classifies its borrowers across three stages: The Bank classifies its exposures as Stage 1 if no significant deterioration in credit quality occurred since initial recognition and the instrument was not credit-impaired when initially recognized. The exposure is classified to Stage 2 if the significant deterioration in credit quality was identified since initial recognition but the financial instrument is not considered credit-impaired. The exposures for which the credit-impaired indicators have been identified are classified as Stage 3 instruments. The Expected Credit Loss (ECL) amount differs depending on exposure allocation to one of the Stages. In the case of Stage 1 instruments, the ECL represents that portion of the lifetime ECL that can be attributed to default events potentially occurring within the next 12 months from the reporting date. In case of Stage 2 instruments, the ECL represents the lifetime ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a financial instrument. Generally, lifetime is set equal to the remaining contractual maturity of the financial instrument. Factors such as existence of contractual repayment schedules, options for extension of repayment maturity and monitoring processes held by the Bank affect the lifetime determination. In case of Stage 3 instruments, default event has already incurred and the lifetime ECL is estimated based on the expected recoveries.

Definition of default

Financial assets for which the Group observed occurrence of one or more loss events are classified in Stage 3. For purposes of disclosure, the Group fully aligned the definition of default with the definition of credit-impaired assets. The Group's definition of default for the purpose of ECL measurement, is in accordance with the Capital Requirements Regulation (EU).

The Group uses both quantitative and qualitative criteria for the definition of default. The borrower is classified as defaulted if at least one of the following occurred:

   --         Any amount of contractual repayments is past due more than 90 days; 
 
   --         Factors indicating the borrower's unlikeliness-to-pay. 

In case of individually significant borrowers the Bank additionally applies criteria including but not limited to: bankruptcy proceedings, significant fraud in the borrower's business that significantly affected its financial condition, breach of the contract terms etc. For SME and corporate borrowers default is identified on the

counterparty level, meaning that all the claims against the borrower are treated as defaulted. As for retail and micro exposures, facility level default definition is applied considering additional pulling effect criteria. If the amount of defaulted exposure exceeds predefined threshold, all the claims against the borrower are classified as defaulted. Once financial instrument is classified as defaulted, it remains as such until it no longer meets any of the default criteria for a consecutive period of six months, in which case exposure is considered to no longer be in default (i.e. to have cured). Grace period of six months has been determined on analysis of likelihood of a financial instrument returning to default status after curing. Exposures which are moved to stage 2 from default state are kept there for certain period before transferring to Stage 1 and classified as fully performing instruments again.

Significant increase in credit risk ("SICR")

Financial assets for which the Group identifies significant increase in credit risk since its origination are classified in Stage 2. SICR indicators are recognized at financial instrument level even though some of them refer to the borrower's characteristics. The Group uses both quantitative and qualitative indicators of SICR.

Quantitative criteria

On a quantitative basis the Bank assess change in probability of default parameter for each particular exposure since initial recognition and compares it to the predefined threshold. When absolute change in probability of default exceeds the applicable threshold, SICR is deemed to have occurred and exposure is transferred to Stage 2. Quantitative indicator of SICR is applied to retail and micro segments, where the Group has sufficient number of observations.

Qualitative criteria

Financial asset is transferred to Stage 2 and lifetime ECLs is measured if at least one of the following SICR qualitative criteria is observed:

   --         delinquency period of more than 30 days on contractual repayments; 
 
   --         exposure is restructured, but is not credit impaired; 
 
   --         borrower is classified as "watch". 

The Group has not rebutted the presumption that there has been significant increase in credit risk since origination when financial asset becomes more than 30 days past due. This qualitative indicator of SICR together with debt restructuring is applied to all segments. Particularly for corporate and SME segment the Group uses downgrade of risk category since origination of the financial instrument as a qualitative indicator of SICR. Based on the results of the monitoring borrowers are classified across different risk categories. In case there are certain weaknesses present, which if materialized may lead to loan repayment problems, borrowers are classified as "watch" category. Although watch borrowers' financial standing is sufficient to repay obligations, these borrowers are closely monitored and specific actions are undertaken to mitigate potential weaknesses. Once the borrower is classified as "watch" category it is transferred to Stage 2. If any of the SICR indicators described above occur financial instrument is transferred to Stage 2. Financial asset may be moved back to Stage 1, if SICR indicators are no longer observed.

ECL measurement

The Group utilizes two approaches for ECL measurement - individual assessment and collective assessment. Individual assessment is mainly used for credit impaired individually significant borrowers. Additionally, the Bank may arbitrarily designate selected exposures to individual measurement of ECL based on the Bank's credit risk management or underwriting departments' decision.

The Bank uses the discounted cash flow (DCF) method for the determination of recovery amount under individual assessment. In order to ensure the accurate estimation of recoverable amount the Bank may utilize scenario analysis approach. Scenarios may be defined considering the specifics and future outlook of individual borrower, sector the borrower operates in or changes in values of collateral. In case of scenario analysis the Bank forecasts recoverable amount for each scenario and estimates respective losses. Ultimate ECL is calculated as the weighted average of losses expected in each scenario, weighted by the probability of scenario occurring.

As for the non-significant and non-impaired significant borrowers the Bank estimates expected credit losses collectively. For the collective assessment and risk parameters estimation purposes the exposures are grouped into a homogenous risk pools based on similar credit risk characteristics. Common credit risk characteristics of the group include but are not limited to: Stage (Stage 1, Stage 2 or Stage 3), type of counterparty (individual vs business), type of product, rating (external or internal), overdue status, restructuring status, months in default category or any other characteristics that may differentiate certain sub-segments for risk parameter's estimation purposes. Number of pools differs for different products/ segments considering specifics of portfolio and availability of data within each pool. Collective ECL is the sum of the multiplications of the following credit risk parameters: EAD, PD and LGD, that are defined as explained below, and discounted to present value using the instrument's effective interest rate.

The key principles of calculating the credit risk parameters:

Exposure at default (EAD)

The EAD represents estimation of exposure to credit risk at the time of default occurring during the life of financial instrument. The EAD parameter used for the purpose of the ECL calculation is time-dependent, i.e. the Bank allows for various values of the parameter to be applied to subsequent time periods during the lifetime of an exposure. Such structure of the EAD is applied to all Stage 1 and Stage 2 financial instruments. In case of Stage 3 financial instruments and defaulted POCI assets, the EAD vector is one-element with current EAD as the only value. EAD is determined differently for amortising financial instruments with contractual repayment schedules and for revolving facilities. For amortising products EAD is calculated considering the contractual repayments of principal and interest over the 12-month period for facilities classified in Stage 1 and over lifetime period for remaining instruments. It is additionally adjusted to include effect of reduction in exposure due to prepayments. For revolving products, the Bank estimates the EAD based on the expected limit utilisation percentage conditional on the default event.

Probability of default (PD)

Probability of default parameter describes the likelihood of a default of a facility over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its contractual debt obligations. The PD parameter is time-dependent (i.e. has a specific term structure) and is applied to all non-defaulted contracts. Taking into account specific nature of different segments of clients for which the PD is estimated as well as unique characteristics that drive their default propensity, the PD is modelled differently for Retail and Micro segments and Corporate and SME segments. PD assessment approach is also differentiated for different time horizons and is further adjusted due to expected influence of macroeconomic variables as forecasted for the period. Two types of PDs are used for calculating ECLs: 12-month and lifetime PD. Lifetime PDs represent the estimated probability of a default occurring over the remaining life of the financial instrument and it is a sum of the 12 months marginal PDs over the life of the instrument. The Group uses different statistical approaches such as the extrapolation of 12-month PDs based on migration matrixes, developing lifetime PD curves based on the historical default data and gradual convergence of long-term PD with the long-term default rate.

Loss given default (LGD)

The LGD parameter represents the share of an exposure that would be irretrievably lost if a borrower defaults. For Stage 1 and Stage 2 financial instruments, the LGD is estimated for each period in the instrument's lifetime and reflects the share of the expected EAD for that period that will not be recovered over the remaining lifetime of the instrument after the default date. For Stage 3 financial instruments, the LGD represents the share of the EAD as of reporting date that will not be recovered over the remaining life of that instrument. Assessment of LGD varies by the type of counterparty, segment, type of product, securitization level and availability of historical observations. The general LGD estimation process employed by the Bank is based on the assumption that after the default of the exposure, two mutually exclusive scenarios are possible. The exposure either leaves the default state (cure scenario) or does not leave the default state and will be subject to recovery process (non-cure scenario). The probability that an exposure defaults again in the cure scenario is involved in the estimation process. Risk parameters applicable to both scenarios, i.e. cure rates and recovery rates, are estimated by means of migration matrices approach, where risk groups are defined by consecutive months-in-default. For certain portfolios based on the limitations of observations alternative versions of the general approach may be applied.

Forward-looking information

The measurement of unbiased, probability weighted ECL requires inclusion of forward looking information obtainable without undue cost or effort. For forward looking information purposes the Bank defines three macro scenarios. The scenarios are defined as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy with weights of 50%, 25% and 25% assigned to each scenario respectively.

To derive the baseline macro-economic scenario, the Group takes into account forecasts from various external sources - the National Bank of Georgia, Ministry of Finance, International Monetary Fund ("IMF") as well as other International Financial Institutions ("IFI"'s) - in order to ensure the to the consensus market expectations. Upside and downside scenarios are defined based on the framework developed by the Bank's macroeconomic unit.

The forward looking information is incorporated in both individual and collective assessment of expected credit losses.

Model maintenance and validation

The Group regularly reviews its methodology and assumptions to reduce any difference between the estimates and the actual credit loss. Such back-testing is performed at least once a year. As part of the back-testing process, the Group evaluates actual realization of the risk parameters and their consistency with the model estimates. Additionally staging criteria are also analysed within the back-testing process. The results of back-testing the ECL measurement methodology are communicated to the Group Management and further actions for tuning the models and assumptions are defined after discussions between authorised persons.

Geographical risk concentrations. Assets, liabilities, credit related commitments and performance guarantees have generally been attributed to geographic regions based on the country in which the counterparty is located. Balances legally outstanding to/from off-shore companies which are closely related to Georgian counterparties are allocated to the caption "Georgia". Cash on hand and premises and equipment have been allocated based on the country in which they are physically held.

The geographical concentration of the Group's assets and liabilities as of 30 June 2019 is set out below:

 
In thousands of GEL                          Georgia     OECD          Non-OECD    Total 
 
Assets 
Cash and cash equivalents                    798,873     819,155       10,316      1,628,344 
Due from other banks                         14,115      13,745         -          27,860 
Mandatory cash balances with National 
 Bank of Georgia                             1,841,237    -             -          1,841,237 
Loans and advances to customers              10,249,693  136,928       414,643     10,801,264 
Investment securities measured 
 at fair value through other comprehensive 
 income                                       395,852     465,677       0           861,529 
Bonds carried at amortised cost              633,530      -             -          633,530 
Repurchase receivables                       179,762      -             -          179,762 
Investments in leases                        219,254      -            1,617       220,871 
Other financial assets                       164,735     405           242         165,382 
 
 
Total financial assets                       14,497,051  1,435,910     426,818     16,359,779 
 
 
Non-financial assets                         914,898     51            3,636       918,585 
 
 
Total assets                                 15,411,949  1,435,961     430,454     17,278,364 
 
 
Liabilities 
Due to credit institutions                   954,299     2,036,769     61,674      3,052,742 
Customer accounts                            8,084,558   804,576       987,679     9,876,813 
Debt securities in issue                     848,838      -             -          848,838 
Other financial liabilities                  251,915     365            -          252,280 
Lease liabilities                            62,598      -             -           62,598 
Subordinated debt                            101,052     440,568       146,382     688,002 
 
 
Total financial liabilities                  10,303,260  3,282,278     1,195,735   14,781,273 
 
 
Non-financial liabilities                     118,449     660           8,977       128,086 
 
 
Total liabilities                            10,421,709  3,282,938     1,204,712   14,909,359 
 
 
Net balance sheet position                    4,990,240   (1,846,977)   (774,258)   2,369,005 
 
 
Performance guarantees                       628,331     339,933       238,257     1,206,521 
Credit related commitments                   1,244,046   3,280         4,515       1,251,841 
 
 
 

The geographical concentration of the Group's assets and liabilities as of 31 December 2018 is set out below:

 
In thousands of GEL                          Georgia      OECD         Non-OECD    Total 
 
Assets 
Cash and cash equivalents                     650,575      515,159      1,177       1,166,911 
Due from other banks                          28,418       12,852       6,046       47,316 
Mandatory cash balances with National 
 Bank of Georgia                              1,422,809    -            -           1,422,809 
Loans and advances to customers               9,526,939    121,713      389,800     10,038,452 
Investment securities measured 
 at fair value through other comprehensive 
 income                                       1,004,564    -            675         1,005,239 
Bonds carried at amortised cost               654,203      -            -           654,203 
Investments in leases                         202,850      -            952         203,802 
Other financial assets                       166,899       329          290        167,518 
 
 
Total financial assets                        13,657,257   650,053      398,940     14,706,250 
 
 
Non-financial assets                         788,042       55           3,646       791,743 
 
 
Total assets                                 14,445,299    650,108      402,586     15,497,993 
 
 
Liabilities 
Due to credit institutions                    1,154,327    1,811,299    65,877      3,031,503 
Customer accounts                             7,790,236    697,753      864,153     9,352,142 
Debt securities in issue                      7,927        -            5,416       13,343 
Other financial liabilities                   98,379       296          39          98,714 
Subordinated debt                             94,264       420,031      136,624     650,919 
 
 
Total financial liabilities                   9,145,133   2,929,379     1,072,109   13,146,621 
 
 
Non-financial liabilities                    144,386       525          493        145,404 
 
 
Total liabilities                            9,289,519    2,929,904    1,072,602    13,292,025 
 
 
Net balance sheet position                   5,155,780    (2,279,796)   (670,016)  2,205,968 
 
 
Performance guarantees                        684,810      291,795      219,207     1,195,812 
Credit related commitments                   870,446      3,751         1,638       875,835 
 
 
 

Market risk

The Bank follows the Basel Committee's definition of market risk as the risk of losses in on- and off-balance sheet positions arising from movements in market prices. This risk is principally made up of (a) risks pertaining to interest rate instruments and equities in the trading book and (b) foreign exchange rate risk (or currency risk) and commodities risk throughout the Bank. The Bank's strategy is not to be involved in trading book activity or investments in commodities. Accordingly, the Bank's exposure to market risk is primarily limited to foreign exchange rate risk in the structural book.

Currency risk

Foreign exchange rate risk arises from the potential change in foreign currency exchange rates, which can affect the value of a financial instrument. This risk stems from the open currency positions created due to mismatches in foreign currency assets and liabilities. The NBG requires the Bank to monitor both balance-sheet and total aggregate (including off-balance sheet) open currency positions and to maintain the later one within 20% of the Bank's regulatory capital. As of 30 June 2019, the Bank maintained an aggregate open currency position of 1.8% of regulatory capital (2018: 7.6%). The Asset-Liability Management Committee ("ALCO") has set limits on the level of exposure by currency as well as on aggregate exposure positions which are more conservative than those set by the NBG. The Bank's compliance with such limits is monitored daily by the heads of the Treasury and Financial Risk Management Departments.

Currency risk management framework is governed through the Market Risk Management Policy, market risk management procedure and relevant methodologies. In 2016 within the ICAAP framework the Bank developed methodology for allocating capital charges for FX risk following Basel guidelines.

On 13 August 2018, the NBG introduced new regulation regarding the changing of OCP calculation method, according to this regulation, from March 2019, special reserves assigned to FX balance-sheet assets would be deducted gradually for OCP calculation purposes and fully implemented by September 2020 in line with the transition period defined by the NBG.

The table below summarises the Group's exposure to foreign currency exchange rate risk at the balance sheet date. While managing open currency position the Group considers all provisions to be denominated in the local currency. Gross amount of currency swap deposits is included in Derivatives. Therefore total financial assets and liabilities below are not traceable with either balance sheet or liquidity risk management tables, where net amount of gross currency swaps is presented:

 
            As of 30 June 2019                                  As of 31 December 2018 
            Monetary     Monetary     Deri-vatives  Net         Monetary    Monetary     Deri-vatives  Net 
In           financial   financial                  balance      financial  financial                  balance 
thousands    assets      liabilities                sheet        assets     liabilities                sheet 
of GEL                                              position                                           position 
 
Georgian 
 Lari        6,341,862    5,034,692    231,722       1,538,892   5,920,867   4,663,300    86,122        1,343,689 
US Dollars   7,816,629    8,724,107    917,232       9,754       7,309,173   7,445,413    323,306       187,066 
Euros        1,987,218    932,664      (1,046,713)   7,841       1,375,295   948,398      (409,565)     17,332 
Other        214,070      88,509       (110,314)     15,247      100,915     89,498       (458)         10,959 
 
 
Total        16,359,779  14,779,972    (8,073)      1,571,734   14,706,250  13,146,609    (595)        1,559,046 
 
 
 

To assess the currency risk the Bank performs a value-at-risk ("VAR") sensitivity analysis on a quarterly basis. The analysis calculates the effect on the Group's income determined by possible worst movement of currency rates against the Georgian Lari, with all other variables held constant. To identify the maximum expected losses resulting from currency fluctuations, a 99% confidence level is defined based on the monthly variations in exchange rates over 3 year look-back period. During the six months ended 30 June 2019 and the year ended 31 December 2018 the sensitivity analysis did not reveal any significant potential effect on the Group's equity:

 
                                                         31 December 
  In thousands of GEL                      30 June 2019   2018 
Maximum loss (VAR, 99% confidence level)   (1,201)       (8,890) 
Maximum loss (VAR,95% confidence level)    (811)         (6,162) 
 
 

Interest rate risk

The Bank's deposits and approximately half of the loans offered by TBC are at fixed interest rates, while a portion of the Bank's borrowings is at a floating interest rate. The Bank's floating rate borrowings are, to a certain extent, hedged by the NBG paying a floating rate on the minimum reserves that the Bank holds with the NBG. In case of need, the Bank shall enter into interest rate hedging agreements (IRR swap, IRR cap, Cross-currency swaps) in order to mitigate interest rate risk. Furthermore, many of the Bank's loans to customers contain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, thereby limiting the Bank's exposure to interest rate risk. The management also believes that the Bank's interest rate margins provide a reasonable buffer to mitigate the effect of possible adverse interest rate movements.

The table below summarises the Group's exposure to interest rate risks. It illustrates the aggregated amounts of the Group's financial assets and liabilities at the amounts monitored by the management and categorised by the earlier of contractual interest re-pricing or maturity dates. Currency and interest rate swaps are not netted when assessing the Group's exposure to interest rate risks. Therefore, total financial assets and liabilities below are not traceable with either balance sheet or other financial risk management tables. The tables consider both reserves placed with NBG and Interest bearing Nostro accounts. Income on NBG reserves and Nostros are calculated as benchmark minus margin whereby, for benchmark, Federal funds rate and ECB rates are conside red in case of USD and EUR respectively. Therefore, they have impact on the TBC's Net interest income in case of both upward and downward shift of interest rates.

 
In thousands of GEL          Less than 1 month  From 1 to 6 months  From 6 to 12 months  More than 1 year  Total 
 
30 June 2019 
Total financial assets        6,146,966          3,693,216           958,489              5,561,108         16,359,779 
Total financial liabilities   5,416,241          2,873,916           1,091,405            5,399,711         14,781,273 
 
 
Net interest sensitivity 
 gap as of 30 June 2019       730,725            819,300             (132,916)            161,397           1,578,506 
 
 
31 December 2018 
Total financial assets        4,782,800          3,610,949           1,017,711            5,295,712         14,707,172 
Total financial liabilities   4,563,135          3,337,999           948,719              4,297,701         13,147,554 
 
 
Net interest sensitivity 
 gap as of 31 December 2018   219,665            272,950             68,992               998,011           1,559,618 
 
 

At 30 June 2019, if interest rates had been 100 basis points higher, with all other variables held constant, profit would have been GEL 12,574 thousands higher, mainly as a result of higher interest income on variable interest assets. Other comprehensive income would have been GEL 8,433 thousand higher (30 June 2018: GEL 8,503 thousand), as a result of an increase in the fair value of fixed rate financial assets measured at fair value through other comprehensive income and repurchase receivables.

If interest rates at that date had been 100 basis points lower with all other variables held constant, profit for the year would have been GEL 12,005 thousands lower, mainly as a result of lower interest income on variable interest assets. Other comprehensive income would have been GEL8,044 thousand lower (30 June 2018: GEL 8,086 thousand), as a result of decrease in the fair value of fixed rate financial assets measured at fair value through other comprehensive income.

TBC employs an advanced framework for the management of interest rate risk. The interest rate risk assessment on a standalone basis is performed monthly by the Financial Risk Management Department.

The Bank calculates the impact of changes in interest rates using both Net Interest Income and Economic Value sensitivity. Net Interest Income sensitivity measures the impact of a change of interest rates along the various maturities on the yield curve on the net interest revenue for the nearest year. Economic Value measures the impact of a change of interest rates along the various maturities on the yield curve on the present value of the Group's assets, liabilities and off-balance sheet instruments. When performing Net Interest Income and Economic Value sensitivity analysis, the Bank uses parallel shifts in interest rates as well as number of different scenarios. Under the ICAAP framework, TBC Bank reserves capital in the amount of the adverse effect of possible parallel yield curve shift scenarios on net interest income over a one-year period.

In order to manage Interest Rate risk the Bank establishes appropriate limits. The Bank monitors compliance with the limits and prepares forecasts. ALCO decides on actions that are necessary for effective interest rate risk management and follows up on the implementation. Periodic reporting is done to Management Board and the Board's Risk, Ethics and Compliance Committee.

Liquidity Risk

The liquidity risk is the risk that TBC Bank either does not have sufficient financial resources available to meet all of its obligations and commitments as they fall due, or can access those resources only at a high cost. The risk is managed by the Financial Risk Management and Treasury Departments and is monitored by the ALCO.

The principal objectives of the TBC Bank's liquidity risk management policy are to: (i) ensure the availability of funds in order to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; (ii) recognise any structural mismatch existing within TBC Bank's statement of financial position and set monitoring ratios to manage funding in line with well-balanced growth; and (iii) monitor liquidity and funding on an ongoing basis to ensure that approved business targets are met without compromising the risk profile of the Bank.

The liquidity risk is categorised into two risk types: the funding liquidity risk and the market liquidity risk.

Funding liquidity risk

Funding liquidity risk is the risk that TBC will not be able to efficiently meet both expected and unexpected current and future cash flow and collateral needs without affecting either its daily operations or its financial condition. To manage funding liquidity risk TBC Bank uses the Liquidity Coverage ratio and the Net Stable Funding ratio set forth under Basel III, as well as minimum liquidity ratio defined by the NBG. In addition the Bank performs stress tests, what if and scenarios analysis. In 2017, for liquidity risk management purposes National Bank of Georgia introduced Liquidity Coverage Ratio ("NBG LCR"), where in addition to Basel III guidelines conservative approaches were applied to Mandatory Reserves' weighting and to the deposits' withdrawal rates depending on the clients group's concentration. From 1(st) of September, 2017 the Bank also monitors compliance with NBG LCR limits.

The Liquidity Coverage ratio is used to help manage short-term liquidity risks. The Bank's liquidity risk management framework is designed to comprehensively project cash flows arising from assets, liabilities and off-balance sheet items over certain time bands and ensure that NBG LCR limits are met on a daily basis. TBC Bank also stress tests the results of liquidity through large shock scenarios set by the NBG.

The Net Stable Funding ratio is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating additional incentives for TBC Bank to rely on more stable sources of funding on a continuous basis. The Bank also sets deposit concentration limits for large deposits and deposits of non-Georgian residents in its deposit portfolio.

Net Stable Funding ratio is calculated based on the IFRS consolidated financial statements. In addition, for internal purposes TBC Bank calculates NSFR ratio on the basis of standalone financial statements prepared in accordance with NBG's accounting rules.

The management believes that a strong and diversified funding structure is one of TBC Bank's differentiators. The Bank relies on relatively stable deposits from Georgia as the main source of funding. In order to maintain and further enhance the liability structure TBC Bank sets the targets for retail deposits in its strategy and sets the loan to deposit ratio limits.

The loan to deposit ratio (defined as total value of net loans divided by total value of deposits) stood at 109.4% and 107.3%, at the 30 June 2019 and 31 December 2018, respectively.

Market liquidity risk

Market liquidity risk is the risk that the Bank cannot easily offset or eliminate a position at the then-current market price because of inadequate market depth or market disruption. To manage it, TBC Bank follows Basel III guidelines on high-quality liquidity asset eligibility in order to ensure that the Bank's high-quality liquid assets can be sold without causing a significant movement in the price and with minimum loss of value.

In addition, TBC Bank has a liquidity contingency plan, which is part of the Bank's overall prudential liquidity policy and is designed to ensure that TBC Bank is able to meet its funding and liquidity requirements and maintain its core business operations in deteriorating liquidity conditions that could arise outside the ordinary course of its business.

The Bank calculates its liquidity ratio on a daily basis in accordance with the NBG's requirements.

The Liquidity Ratio: The limit is set by the NBG for average liquidity ratio, which is calculated as the ratio of average liquid assets to average liabilities for the respective month, including borrowings from financial institutions and part of off-balance sheet liabilities with residual maturity up to 6 months.

NBG LCR is calculated by reference to the qualified liquid assets divided by 30-day cash net outflows defined as per NBG guidelines. The limit is set by the NBG as per total LCR also by currency (GEL, FX). To promote larization in the country of Georgia, NBG defines lower limit for GEL LCR than that for FX LCR. In addition, NBG mandatory Regulatory reserves in FX currency is only considered at 75% per LCR calculation purposes. As announced by the NBG on 13 March 2019, from April to May, 2019 mandatory reserves requirements gradually increased from 25% to 30% for customer deposits in foreign currencies. For wholesale funding and Certificates of Deposits, the NBG requires the Bank to reserve 30% of its unsubordinated foreign currency wholesale funding for borrowings with a remaining maturity of less than one year (which increased gradually from 25% to 30%), 15% for foreign currency borrowings with a remaining maturity of one to two years (which gradually increased from 10% to 15%) and 5% of its unsubordinated Georgian Lari wholesale funding for borrowings with a remaining maturity of less than one year. There is no minimum reserves requirement for Georgian Lari Certificates of Deposits.

As of 30 June the ratios were well above the prudential limit set by the NBG as follows:

 
                                               31 December 
                                 30 June 2019   2018 
Average Liquidity Ratio          37.1%         33.3% 
Total Liquidity Coverage Ratio   126.3%        113.9% 
GEL Liquidity Coverage Ratio     100.4%        102.5% 
FX Liquidity Coverage Ratio      143.8%        121.1% 
 
 

According to daily cash flow forecasts and the surplus in liquidity standing, the Treasury Department places funds in short-term liquid assets , largely made up of short-term risk-free securities, interbank deposits and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.

Maturity analysis

The table below summarizes the maturity analysis of the Group's financial liabilities, based on remaining undiscounted contractual obligations as of 30 June 2019 Subject-to-notice repayments are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group's deposit retention history.

The maturity analysis of financial liabilities as of 30 June 2019 is as follows:

 
                                   Less than      From 3       From 12        Over 5            Total 
                                    3 months       to 12        months         years 
In thousands of GEL                                months       to 5 years 
 
Liabilities 
Due to Credit institutions          902,004        486,467      1,819,514      189,102           3,397,087 
Customer accounts - individuals     3,215,408      1,499,066    719,912        27,523            5,461,909 
Customer accounts - other           4,144,187      250,169      211,547        107,041           4,712,944 
Other financial liabilities        216,095        12,009        -              -                228,104 
Lease Liabilities                  23,549         12,271       37,418         13,536            86,774 
Subordinated debt                   2,993          91,427       375,169        612,210           1,081,799 
Debt securities in issue            8,882          -            1,086,522      -                 1,095,404 
Gross settled forwards              1,258,414      79,150       -              -                 1,337,564 
Performance guarantees              100,219        447,442      631,646        27,215            1,206,522 
Financial guarantees                40,282         183,957      78,763         4,466             307,468 
Other credit related commitments    944,373        -            -              -                 944,373 
 
 
Total potential future payments 
 for financial obligations            10,856,406    3,061,958      4,960,491           981,093       19,859,948 
 
 

The maturity analysis of financial liabilities as of 31 December 2018 is as follows:

 
                                   Less than      From 3        From 12        Over 5           Total 
                                    3 months       to 12         months         years 
In thousands of GEL                                months        to 5 years 
 
Liabilities 
Due to Credit institutions          950,084        372,517       1,909,587      187,454          3,419,642 
Customer accounts - individuals     3,152,851      1,408,710     628,831        27,397           5,217,789 
Customer accounts - other           3,821,862      208,250       137,275        195,007          4,362,394 
Other financial liabilities         77,522         21,192        -              -                98,714 
Subordinated debt                   5,267          71,519        388,594        588,197          1,053,577 
Debt securities in issue            366            13,847        -              -                14,213 
Gross settled forwards              567,259        16,008        -              -                583,267 
Performance guarantees              119,959        349,354       671,333        55,166           1,195,812 
Financial guarantees                9,932          44,703        51,337         -                105,972 
Other credit related commitments    769,863        -             -              -                769,863 
 
 
Total potential future payments 
 for financial obligations             9,474,965     2,506,100      3,786,957        1,053,221       16,821,243 
 
 

The undiscounted financial liability analysis does not reflect the historical stability of the current accounts. Their liquidation has historically taken place over a longer period than the one indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.

Term Deposits included in the customer accounts are classified based on remaining contractual maturities, according to the Georgian Civil Code, however, individuals have the right to withdraw their deposits prior to maturity if they partially or fully forfeit their right to accrued interest and the Group is obliged to repay such deposits upon the depositor's demand. Based on the Bank's deposit retention history, the management does not expect that many customers will require repayment on the earliest possible date; accordingly, the table does not reflect the management's expectations as to actual cash outflows.

The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors the liquidity gap analysis based on the expected maturities. In particular, the customers' deposits are distributed in the given maturity gaps following their behavioural analysis.

As of 30 June 2019 the analysis by expected maturities may be as follows:

 
In thousands of GEL              Less than 3 months  From 3 to 12 months  From 1 to 5 Years  Over 5 years  Total 
 
Assets 
Cash and cash equivalents         1,628,344           -                    -                  -             1,628,344 
Due from other banks              13,773              -                    14,087             -             27,860 
Mandatory cash balances with 
 National Bank of Georgia         1,841,237           -                    -                  -             1,841,237 
Loans and advances to customers   1,157,037           2,060,109            4,517,828          3,066,290     10,801,264 
Investment securities measured 
 at fair value through other 
 comprehensive income             861,529             -                    -                  -             861,529 
Bonds carried at amortised cost   64,358              99,748               432,383            37,041        633,530 
Repurchase receivables            43,148              55,814               15,166             65,634        179,762 
Investments in finance leases     36,170              61,234               121,017            2,450         220,871 
Other financial assets            144,206             21,164               -                  12            165,382 
 
 
Total financial assets            5,789,802           2,298,069            5,100,482          3,171,427     16,359,779 
 
 
Liabilities 
Due to Credit institutions        884,417             389,724              1,602,273          176,328       3,052,742 
Customer accounts                 1,014,153           121,467              -                  8,741,193     9,876,813 
Debt securities in issue          8,521               -                    840,317            -             848,838 
Other financial liabilities      236,811             12,390               1,443              1,635         252,279 
Lease liabilities                2,833               11,890               35,975             11,901        62,599 
Subordinated debt                 599                 41,540               165,103            480,760       688,002 
 
 
Total financial liabilities       2,147,334           577,011              2,645,111          9,411,817     14,781,273 
 
 
Credit related commitments and 
performance guarantees 
Performance guarantees            5,586               -                    -                  -             5,586 
Financial guarantees              4,683               -                    -                  -             4,683 
Other credit related 
 commitments                      96,986              -                    -                  -             96,986 
 
Credit related commitments and 
 performance guarantees           107,255             -                    -                  -             107,255 
 
 
Net liquidity gap as of 30 June 
 2019                             3,535,213           1,721,058            2,455,370          (6,240,390)   1,471,251 
 
 
Cumulative gap as of 30 June 
 2019                             3,535,213           5,256,271            7,711,641          1,471,251 
 
 

The management believes that the Group has sufficient liquidity to meet its current on- and off-balance sheet obligations. As of 31 December 2018 the analysis by expected maturities may be as follows:

 
In thousands of GEL              Less than 3 months  From 3 to 12 months  From 1 to 5 Years  Over 5 years  Total 
 
Assets 
Cash and cash equivalents         1,166,911           -                    -                  -             1,166,911 
Due from other banks              27,153              11,075               9,088              -             47,316 
Mandatory cash balances with 
 National Bank of Georgia         1,422,809           -                    -                  -             1,422,809 
Loans and advances to customers  1,090,521           2,056,149            4,152,436          2,739,346      10,038,452 
Investment securities measured 
 at fair value through other 
 comprehensive income             1,005,239           -                    -                  -             1,005,239 
Bonds carried at amortised cost   119,489             92,877               368,843            72,994        654,203 
Repurchase receivables                       -       -                    -                  - 
Investments in finance leases     31,133              56,432               113,087            3,150         203,802 
Other financial assets            131,586             34,268               1,664              -             167,518 
 
 
Total financial assets           4,994,841           2,250,801            4,645,118          2,815,490      14,706,250 
 
 
Liabilities 
Due to Credit institutions        933,511             271,993              1,653,575          172,424       3,031,503 
Customer accounts                 997,594             128,395              -                  8,226,153     9,352,142 
Debt securities in issue          112                 13,231               -                  -             13,343 
Other financial liabilities       77,522             21,192                -                  -            98,714 
Subordinated debt                 3,048               23,246               182,986            441,639       650,919 
 
 
Total financial liabilities       2,011,787          458,057               1,836,561          8,840,216     13,146,621 
 
 
Credit related commitments and 
performance guarantees 
Performance guarantees            4,393               -                    -                  -             4,393 
Financial guarantees              5,424               -                    -                  -             5,424 
Other credit related 
 commitments                      103,029             -                    -                  -             103,029 
 
Credit related commitments and 
 performance guarantees          112,846              -                    -                  -            112,846 
 
 
Net liquidity gap as of 31 
 December 2018                    2,870,208           1,792,744            2,808,557          (6,024,726)   1,446,783 
 
 
Cumulative gap as of 31 
 December 2018                   2,870,208           4,662,952            7,471,509          1,446,783 
 
 

The management believes that the Group has sufficient liquidity to meet its current on- and off-balance sheet obligations.

In order to assess the possible outflow of the bank's customer accounts management applied value-at-risk analysis. The statistical data was used on the basis of a holding period of one month for a look-back period of five years with a confidence level of 99%. The value at risk analysis was performed for the following maturity gaps: (0-1 months), (0-3 months), (0-6 months) and (0-12 months), based on which the maximum percentage of deposits' outflow was calculated.

Management believes that in spite of a substantial portion of customers' accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide a long-term and stable source of funding for the Group. Moreover, the Group's liquidity risk management includes estimation of maturities for its current deposits. The estimate is based on statistical methods applied to historic information on the fluctuations of customer account balances.

Operating environment

Most of the Group's business is based in Georgia. Emerging economies, such as Georgia's, are subject to rapid change and are vulnerable to global market conditions and economic downturns. Consequently, operations in Georgia may be exposed to certain risks that are not typically associated with those in developed markets. Nevertheless, over the last few years the Georgian government has embarked on a number of civil, criminal, tax, administrative, and commercial reforms that have positively affected the overall investment climate of the country. Today Georgia has an international reputation as a country with a favourable investment environment. Georgia continued to progress in the report "Doing Business 2019" by the World Bank (WB) and International Financing Corporation (IFC) ranking as the 6th easiest country in the world to do business (out of 190) - up by 2 steps compared to the previous year rankings. The country improved its ranking in almost all categories, confirming its position as a regional leader and outperforming most of the EU economies. Georgia also boasts low corruption levels, a low tax burden, and high transparency of its institutions, according to the number of surveys by international institutions. Recognizing the resilience of the Georgia's economy and high growth potential, Standard & Poor's improved the outlook to Georgia's credit rating from "stable" to "positive".

According to Geostat's initial estimates, real GDP increased by 4.9% in the first half of 2019. While the credit growth has moderated, the inflows were reasonably strong and unlike 2018, the fiscal stance was expansionary. At the same time, the flight ban imposed by Russia will lower growth going forward. According to TBC Research estimates, GDP is still expected to increase by over 4% for the FY 2019 and 2020.

In terms of the sectors, transport and communications (+12.7% YoY), as well as trade and repairs sector (+6.7% YoY), contributed most to the growth. At the same time, education (+15.7% YoY) and healthcare sectors (+11.4% YoY) increased substantially, mainly due to the higher budget spending on education (+57.7% YoY) and healthcare (+14.4% YoY) in Q1 2019.

Similarly, strong growth was observed in hotels and restaurants (+13.1% YoY), and real estate (+11.1% YoY). All other major sectors also increased with the exception of construction (-9.6% YoY), agriculture (-0.3% YoY), and manufacturing (-1.3% YoY). Decline of the construction sector was broadly expected to reflect the finalization of BP's pipeline construction project. Also, the decline of construction sector was aggravated by the weakness of residential buildings construction related to the slower mortgage growth and tighter construction permit regulations. On the other hand, strong government capital expenditures partly offset the decline.

The trade balance continued to improve in Q2 2019 with the exports of goods up by 10.3% while the imports fell further by 6.1%. As a result, the trade deficit improved significantly by 15.7% YoY over the same period, all in USD terms. Tourism inflows growth also accelerated to an estimated 15.5% in Q2 2019, compared to the 5.0% growth in Q1 2019. Remittance inflows went up by 9.3% YoY over the same period - somewhat faster growth compared to previous quarter.

FDI inflows decreased by 6.3% YoY in the USD terms from USD 300 million in Q1 2018 to USD 281 million in Q1 2019 (in the EUR and the GEL, 1.9% and 0.9% YoY increase, respectively). As in 2018, the finalization of South Caucasus Pipeline Extension Project and the change of ownership of non-resident companies to residents likely played a role in Q1 2019 as well. As of the last four quarters ending in Q1 2019, FDI inflows still stood at a strong 7.3% of GDP. Furthermore, 2018 gross fixed capital formation was at a solid 33.3% of GDP.

The CA balance improvement trend continued in Q1 2019 as well, with the deficit to same quarter GDP ratio at 6.2% - being historically low with an improvement of 5.7 percentage points YoY and with the strongest contribution of the trade in goods. The positive tendency has likely sustained in Q2 as well, judging from the trade balance, tourism and remittances inflows as above described figures suggest. Over the last 4 quarters, the current account deficit to GDP ratio stood at 6.4%, also improving by 1.3 percentage points compared to the previous quarter. Despite the reduction, FDI inflows at 6.6% of GDP remained the key source of financing the CA deficit. At the same time, over the first six months of 2019 the NBG bought USD 216 million or around 3% of the same period GDP, indicating that the inflows were sufficient even for higher growth. Recent restriction on flights from Russia to Georgia will have substantial impact on tourism inflows. However, according to TBC Research, taking into account the increase in tourism inflows from other destinations and the strengthening external balance, the impact should be manageable[27]

Bank credit growth came in at 14.1% YoY in June 2019 being 1.4 pp higher compared to the 12.7% in the previous month. In terms of the segments, corporate loans were the main driver of the acceleration with an 18.0% YoY growth rate, partly thanks to the one-off transactions. On top of that, MSME lending also increased by a solid 17.2% YoY. On the other hand, retail lending continues to moderate. Mortgage lending growth slowed to 25.7% YoY, while non-mortgage lending declined by around the same 5.6% rate on an annual basis, similar to previous months. At the same time, there are ongoing discussions on a possible revision of the retail credit regulatory framework. The NBG assesses around 13% credit growth to be moderate.

The annual inflation stood at 4.3% in June 2019, over the same period, while core inflation[28] came in at 3.6%.

As of the end of June 2019, USD/GEL exchange rate of GEL depreciated by 17.0% YoY, while EUR/GEL exchange rate depreciated by 14.4% YoY. GEL also depreciated compared to the major trading country currencies, as evidenced by the weaker effective exchange rate. As of July 15th, estimated real effective exchange rate was around 10% below its medium term average, also indicating the potential pressures on the inflation.

According to the IMF's recently published World Economic Outlook[29], Georgian economy is projected to increase at 4.6% in 2019 and by 5.0% in 2020. Thereafter, the economy is expected to expand at by 5.2%. Based on TBC Research estimates, taking into account the Russian flights ban, growth over the next 12 months should stand at around 4% with somewhat higher growth rates expected for FY 2019 and 2020.

   25           Management of Capital 

The Group's objectives in terms of capital management are to maintain appropriate levels of capital to support the business strategy, meet regulatory and stress testing-related requirements and safeguard the Group's ability to continue as a going concern. Additionally, the Group's capital management objectives entail ensuring that the Bank complies with the capital requirements set by the Basel Capital Accord 1988 capital adequacy ratios as stipulated by borrowing agreements. The compliance with capital adequacy ratios set by the NBG is monitored monthly with the reports outlining their calculation and are reviewed and signed by the Bank's CFO and Deputy CFO.

The Bank and the Group complied with all its internally and externally imposed capital requirements throughout the six months periods ended 30 June 2019 and the year 2018.

In December 2017, the NBG has introduced updated capital framework that is more compliant with Basel III guidelines. Under updated capital framework capital requirements are divided into Pillar 1 minimum requirement, Pillar 2 requirement and combined buffer. Details regarding the capital requirements are outlined below:

Pillar 1 Minimum Requirements

-- The updated Pillar 1 minimum requirements are 4.5%, 6% and 8% for Common Equity Tier 1, Tier 1 and Total Regulatory Capital respectively.

Pillar 2 Requirements

-- A currency induced credit risk (CICR) buffer for un-hedged FX loans denominated in foreign currencies;

   --         Concentration buffer for sectoral and single borrower exposure; 

-- The need for the net stress buffer will be assessed based on stress testing results provided by the Group;

-- A General Risk-assessment Programme (GRAPE) buffer defined by the regulator, is applied based on the Bank's specific risks.

Combined buffer is set directly on Common Equity Tier 1 and consists of certain buffers:

-- The capital conservation buffer (which was incorporated in minimum capital requirements) is set at 2.5%;

-- A systemic risk buffer will be introduced for systematically important banks over the 4 years period; A systemic risk buffer as of June 2019 equals to 1%;

   --         A countercyclical capital buffer is set at 0%; 

Under the NBG regulation 56% of capital required under pillar 2 should be held by Common Equity Tier 1 Capital, while 75% of the capital should be held through Tier 1 capital and 100% of capital should be held through Total Regulatory Capital. For the purposes to comply with this requirements, pillar 2 requirements will be implemented over a four year period.

As of June 2019, Banks Pillar 2 requirement is 1.8%, 2.4% and 5.2% for Common Equity Tier 1, Tier 1 and Total Regulatory Capital respectively

In addition, based on the updated methodology, specific PTI (payment to income) and LTV (loan to value) thresholds were introduced. For the exposures which do not fall into pre-defined limits for PTI and LTV ratios, higher risk weights were applied.

NBG Basel II Capital adequacy ratio

Both Tier 1 and Total capital adequacy ratios are calculated based on the Basel III methodology introduced by NBG.

The table below presents the capital adequacy ratios as well as minimum requirements set by the NBG.

 
In thousands of GEL                             30 June 2019  31 December 2018 
 
Tier 1 Capital                                  1,730,302     1,678,716 
Tier 2 Capital                                  699,834       672,553 
Regulatory capital                              2,430,136     2,351,269 
 
Risk-weighted Exposures 
Credit Risk Weighted Exposures                  12,425,570    11,458,497 
Risk Weighted Exposures for Market Risk         43,638        179,381 
Risk Weighted Exposures for Operational Risk    1,516,993     1,516,993 
Total Risk-weighted Exposures                   13,986,201    13,154,871 
 
Minimum Tier 1 ratio                            11.9%         11.8% 
Tier 1 Capital adequacy ratio                   12.4%         12.8% 
 
Minimum total capital adequacy ratio            16.7%         16.7% 
Total Capital adequacy ratio                    17.4%         17.9% 
 

The breakdown of the Bank's assets into the carrying amounts based on NBG accounting rules and relevant risk-weighted exposures as of 30 June 2019 and 31 December 2018 are given in the tables below:

 
                                                              30 June 2019 
In thousands of GEL                                           Carrying Value   RW amount 
 
Cash, cash equivalents, Interbank Exposures and Securities    4,994,745        2,096,098 
Gross loans and accrued interests,                            10,025,120       7,848,726 
Repossessed Assets                                            54,830           54,830 
Fixed Assets and intangible assets                            584,681          297,943 
Other assets                                                  1,226,244        1,290,090 
 minus general provision, penalty and interest provision      (38,639)         (38,639) 
Total                                                         16,846,981       11,549,048 
Total Off-balance                                             3,844,260        876,523 
Market Risk                                                   43,638           43,638 
Operational Risk                                              809,063          1,516,993 
Total Amount                                                  21,543,942       13,986,202 
                                                              31 December 2018 
In thousands of GEL                                           Carrying Value   RW amount 
 
Cash, cash equivalents, Interbank Exposures and Securities     4,181,199       1,625,289 
Gross loans and accrued interests,                             9,206,646       7,203,609 
Repossessed Assets                                             46,755          46,755 
Fixed Assets and intangible assets                            508,582          287,403 
Other assets                                                  1,428,945        1,639,128 
 minus general provision, penalty and interest provision      (37,705)         (37,705) 
Total                                                         15,334,422       10,764,479 
Total Off-balance                                             2,694,174        694,018 
Market Risk                                                   179,381          179,381 
Operational Risk                                              809,063          1,516,993 
Total Amount                                                  19,017,040       13,154,871 
 
 

Capital adequacy ratio under Basel Capital Accord 1988

The Group and the Bank are also subject to minimum capital requirements established by covenants stated in loan agreements. These requirements include capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. The composition of the Group's capital calculated in accordance with Basel Accord is as follows:

 
                                                 30 June     31 December 2018 
In thousands of GEL                               2019 
 
Tier 1 capital 
Share capital                                    542,204     542,204 
Retained earnings and disclosed reserves         1,664,835   1,509,990 
Less: Goodwill                                   (29,459)    (29,459) 
Non-controlling interest                         417         527 
Total tier 1 capital                             2,177,997   2,023,262 
 
Tier 2 capital 
Revaluation reserves                             62,768      58,995 
General Reserve                                  170,122     129,739 
Subordinated debt (included in tier 2 capital)   550,289     548,508 
Total tier 2 capital                             783,179     737,242 
 
 
Total capital                                    2,961,176   2,760,504 
 
 
Credit risk weighted assets (including 
 off-balance obligations)                        13,609,779  10,379,124 
Less: General Reserve                             (169,974)  (204,391) 
Market Risk                                      93,044      210,916 
Total Risk-weighted assets                       13,532,849  10,385,649 
 
Minimum Tier 1 ratio                             4.0%        4.0% 
Tier 1 Capital adequacy ratio                    16.1%       19.5% 
 
Minimum total capital adequacy ratio             8.0%        8.0% 
Total Capital adequacy ratio                     21.9%       26.6% 
 
 

Following the Basel I guidelines the General Reserve is defined by the management as the minimum among the following:

a) IFRS provisions created on loans without impairment trigger event

b) 2% of loans without impairment trigger event

c) 1.25% of total RWA (Risk Weighted Assets)

The breakdown of the Group's assets into the carrying amounts and relevant risk-weighted exposures as of 30 June 2019 and 31 December 2018 provided in the tables below:

 
In thousands of GEL                                                                    30 June 2019 
Risk weighted Exposures                                                                Carrying Value  RW amount 
 
Cash and other cash equivalents, mandatory cash balances with the NBG, due from other 
 banks, 
 investment securities measured at fair value through other comprehensive income         5,157,454      307,485 
Gross loans and accrued interests                                                       11,141,360      11,138,983 
Repossessed assets                                                                      146,844         146,844 
Fixed assets and intangible assets                                                      579,336         549,878 
Other assets                                                                            501,714         501,714 
Total                                                                                   17,526,708      12,644,904 
Total Off-balance                                                                       3,816,230       964,876 
Less: Loan loss provision minus General Reserve                                         (169,974)       (169,974) 
Market Risk                                                                             93,044          93,044 
Total Amount                                                                           21,266,008      13,532,850 
 
 
In thousands of GEL                                                                    31 December 2018 
Risk weighted Exposures                                                                Carrying Value  RW amount 
 
Cash and other cash equivalents, mandatory cash balances with the NBG, due from other 
 banks, 
 investment securities measured at fair value through other comprehensive income       4,285,970       244,844 
Gross loans and accrued interests                                                       10,372,582      8,281,144 
Repossessed assets                                                                      124,643         124,643 
Fixed assets and intangible assets                                                     504,035          474,576 
Other assets                                                                           499,747          499,747 
Total                                                                                  15,786,977       9,624,954 
Total Off-balance                                                                      2,674,697        754,170 
Less: Loan loss provision minus General Reserve                                        (204,391)        (204,391) 
Market Risk                                                                            210,916          210,916 
Total Amount                                                                           18,468,199       10,385,649 
 
   26      Contingencies and Commitments 

Legal proceedings

When determining the level of provision to be set up with regards to such claims, or the amount (not subject to provisioning) to be disclosed in the financial statements, the management seeks both internal and external professional advice. The management believes that the provision recorded in these financial statements is adequate and the amount (not subject to provisioning) need not be disclosed as it will not have a material adverse effect on the financial condition or the results of future operations of the Group.

Tax legislation

Georgian, Azerbaijani and Uzbekistan tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. The management's interpretation of the legislation as applied to the Group's transactions and activity may be challenged by the relevant authorities. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the review period. To respond to the risks, the Group has engaged external tax specialists to carry out periodic reviews of Group's taxation policies and tax filings. The Group's management believes that its interpretation of the relevant legislation is appropriate and the Group's tax and customs positions will be sustained. Accordingly, as of 30 June 2019 and 31 December 2018 no material provision for potential tax liabilities has been recorded.

Compliance with covenants.

The Group is subject to certain covenants primarily related to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group including growth in the cost of borrowings and declaration of default. The Group was in compliance with all covenants as of 30 June 2019 and as of 31 December 2018.

Credit related commitments and financial guarantees

The primary purpose of these instruments is to ensure that funds are available to a customer as required. Financial guarantees and standby letters of credit, which represent the irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, that are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to prolong credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss is lower than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term ones.

Outstanding credit related commitments are as follows:

 
In thousands of GEL                                    30 June 2019  31 December 2018 
 
Financial guarantees issued                             175,800      - 
Undrawn credit lines                                    944,373      769,863 
Letters of credit issued                                131,668      105,972 
 
Total credit related commitments (before provision)    1,251,841     875,835 
 
Provision for credit related commitments               (4,683)       (5,424) 
 
 
Total credit related commitments                       1,247,158     870,411 
 
 

The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Non-cancellable commitments as of 30 June 2019 included in undrawn credit lines above were GEL 492,696 thousand (31 December 2018: GEL 344,360 thousand).

Performance guarantees. Performance guarantees are contracts that provide compensation in case of another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. The risk under the performance guarantee contracts is the possibility that the insured event occurs (i.e.: the failure to perform the contractual obligation by another party). The key risks the Group faces are significant fluctuations in the frequency and severity of payments incurred on such contracts, relative to expectations.

Outstanding amount of performance guarantees and respective provision as of 30 June 2019 is GEL 1,206,521 thousand and GEL 5,586 thousand (31 December 2018: GEL 1,195,812 thousand and GEL 4,393 thousand).

Fair value of credit related commitments and financial guarantees were GEL 3,781 thousand as of 30 June 2019 (31 December 2018: GEL 5,424 thousand). Total credit related commitments and performance guarantees are denominated in currencies as follows:

 
In thousands of GEL    30 June 2019  31 December 2018 
 
Georgian Lari           1,002,857    853,965 
US Dollars              1,109,682    955,829 
Euro                    292,934      218,091 
Other                   52,890       43,762 
 
 
Total                  2,458,363     2,071,647 
 
 

Capital expenditure commitments. As of 30 June 2019, the Group has contractual capital expenditure commitments amounting to GEL 19,614 thousand (31 December 2018: GEL 12,210 thousand).

   27           Fair Value Disclosures 

(a) Recurring fair value measurements

Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised as follows:

 
                               30 June 2019                                   31 December 2018 
                               Level      Level         Level     Total        Level  Level      Level    Total 
In thousands of GEL             1          2             3                      1      2          3 
Assets AT FAIR VALUE 
FINANCIAL Assets 
Investment securities 
 measured at fair value 
 through other comprehensive 
 income 
- Certificates of Deposits 
 of National Bank of Georgia    -          3,742         -         3,742      -       14,982     -        14,982 
- Corporate bonds               -          595,820       -         595,820    -       548,864    -        548,864 
- Ministry of Finance 
 Treasury Bills                       -    259,487       -         259,487    -       372,927    -        372,927 
Netherlands Government 
 Bonds                          -                    -   -         -          -       66,760     -        66,760 
Repurchase receivables 
- Ministry of Finance 
 Treasury Bills                 -          46,628        -         46,628     -       -          -        - 
Foreign exchange forwards 
 and gross settled currency 
 swaps, included in other 
 financial assets or due 
 from banks                     -          6,512         -         6,512      -       1,490      -        1,490 
NON-FINANCIAL Assets 
- Premises and leasehold 
 improvements                   -          -             283,040   283,040    -       -          277,798  277,798 
 
Total ASSETS RECURRING 
 FAIR VALUE MEASUREMENTS        -          912,189       283,040   1,195,229  -       1,005,023  277,798  1,282,821 
 
 
Liabilities Carried AT 
 FAIR VALUE 
FINANCIAL liabilities 
- Interest rate swaps 
 included in other financial 
 liabilities                    -          -             -         -          -       -          -        - 
- Foreign exchange forwards 
 and gross settled currency 
 swaps, included in other 
 financial liabilities          -          14,583        -         14,583     -       2,085      -        2,085 
 
Total Liabilities RECURRING 
 FAIR VALUE MEASUREMENTS        -          14,583        -         14,583     -       2,085      -        2,085 
 
 

There were no transfers between levels during the six months ended 30 June 2019 (2018: none).

(a) Recurring fair value measurements (continued)

The description of the valuation technique and the description of inputs used in the fair value measurement for level 2 measurements:

 
                                  Fair value 
                                  30 June  31 December              Valuation   Inputs used 
In thousands of GEL                2019     2018                     technique 
 
Assets AT FAIR VALUE 
FINANCIAL Assets 
Certificates of Deposits 
 of NBG, Ministry of Finance                            Discounted 
 Treasury Bills, Government                              cash flows             Government bonds 
 notes, Corporate bonds           905,677  1,003,533     ("DCF")                 yield curve 
Foreign exchange forwards 
 and gross settled currency                             Forward pricing         Official exchange 
 swaps, included in due                                  using present           rate, risk-free 
 from banks                       6,512    1,490         value calculations      rate 
 
 
Total ASSETS RECURRING 
 FAIR VALUE MEASUREMENTS          912,189  1,005,023 
 
 
LIABILITIES CARRIED AT 
 FAIR VALUE 
FINANCIAL LIABILITIES 
Other financial liabilities 
- Interest rate swaps included                          Swap model              Observable yield 
 in other financial liabilities                          using present           curves 
                                   -       -             value calculations 
- Foreign exchange forwards                             Forward pricing         Official exchange 
 included in other financial                             using present           rate, risk-free 
 liabilities                       14,583  2,085         value calculations      rate 
 
 
Total RECURRING FAIR VALUE 
 MEASUREMENTS at level 2          14,583   2,085 
 
 

There were no changes in the valuation technique for the level 2 and level 3 recurring fair value measurements during the six month period ended 30 June 2019 (2018: none).

For details the techniques and inputs used for Level 3 recurring fair value measurement of (as well as reconciliation of movements in) premises refer to Note 8. The unobservable input to which the fair value estimate for premises is most sensitive is price per square meter: the higher the price per square meter,

the higher the fair value.

(b) Assets and liabilities not measured at fair value but for which fair value is disclosed

Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:

 
                    30 June 2019                                            31 December 2018 
In thousands of     Level      Level       Level              Carrying      Level    Level      Level       Carrying 
 GEL                 1          2           3                  Value         1        2          3           Value 
 
Financial Assets 
Cash and cash 
 equivalents         674,466   953,878                     -   1,628,344    491,928  674,983    -            1,166,911 
Due from other 
 banks               -          27,860       -                 27,860       -         47,316    -            47,316 
Mandatory cash 
 balances 
 with the NBG       -          1,841,237   -                  1,841,237     -        1,422,809  -           1,422,809 
Loans and advances 
 to customers: 
 
  - Corporate 
  loans              -          -           3,852,641          3,562,894    -        -          3,212,490   3,095,784 
- Consumer loans    -          -           1,847,843          1,723,845              -          1,970,006   1,832,793 
- Mortgage loans    -          -           2,973,959           2,930,077    -        -          2,702,768   2,684,295 
- MSME              -          -           2,653,743           2,552,569    -        -          2,440,078   2,425,580 
Repurchase 
 receivables        -            138,692                  -        133,135  -        -          -           - 
Bonds carried at 
 amortised cost     -          640,133     -                  632,723       -        660,916    -           654,203 
Investments in 
 leases             -          -           223,591            220,871       -        -          207,579     203,802 
Other financial 
 assets             -          -           158,870            158,870       -        -          166,028     166,028 
NON-FINANCIAL 
Assets                                                                      -        - 
Investment 
 properties, 
 at cost            -          -           90,058             79,114        -        -          97,425      84,296 
 
 
Total ASSETS          674,466  3,601,800    11,800,705         15,491,539   491,928  2,806,024  10,796,374  13,783,817 
 
 
FINANCIAL 
liabilities 
Due to credit 
 institutions       -          3,055,749   -                  3,052,742     -        3,028,180  -           3,031,503 
Customer accounts   -          6,183,298   3,709,554          9,876,813     -        5,885,242  3,482,741   9,352,142 
Debt securities 
 in issue           -          848,838     -                  848,838       -        13,343     -            13,343 
Other financial 
 liabilities        -           300,294     -                 300,294       -        96,629      -           96,629 
Subordinated debt   -          687,472     -                  688,002       -        648,802    -            650,919 
 
 
Total Liabilities   -          11,075,651  3,709,554          14,766,689    -        9,672,196  3,482,741   13,144,536 
 
 

The fair values of financial assets and liabilities in the level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of unquoted fixed interest rate instruments was calculated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of investment properties was estimated using market comparatives.

Amounts due to credit institutions were discounted at the Group's own incremental borrowing rate. Liabilities due on demand were discounted from the first date that the Group could be required to pay the amount.

There were no changes in the valuation technique for the level 2 and level 3 measurements of assets and liabilities not measured at fair values in the six months ended 30 June 2019 (2018: none).

   28      Related Party Transactions 

Pursuant to IAS 24 "Related Party Disclosures", parties are generally considered to be related if the parties are under common control or one party has the ability to control the other or it can exercise significant influence over the other party in taking financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form:

-- Parties with more than 10% of ownership stake in the TBCG or with representatives in the Board of Directors are considered as Significant Shareholders.

-- The key management personnel include members of TBCG's Board of Directors, the Management Board of the Bank and their close family members.

Transactions between TBC Bank Group PLC and its subsidiaries also meet the definition of related party transactions. Where these are eliminated on consolidation, they are not disclosed in the Group Financial Statements.

As of 30 June 2019, the outstanding balances with related parties were as follows:

 
                                           Significant    Key management 
In thousands of GEL                         shareholders   personnel 
 
Gross amount of loans and advances 
 to customers (contractual interest 
 rate: 5.3% - 36.0%)                       1,175          11,863 
Credit loss allowance for loans and 
 advances to customers                     -              10 
Customer accounts (contractual interest 
 rate: 0% - 11.5 %)                        17,976         8,222 
Performance guarantees                     5,782          - 
Provision on performance guarantees        24             - 
 
 

The income and expense items with related parties except from key management compensation during 30 June 2019 were as follows:

 
                                             Significant    Key management 
In thousands of GEL                           shareholders   personnel 
 
Interest income                              35             361 
Interest expense                             53             97 
Gains less losses from trading in foreign 
 currencies                                  53             23 
Foreign exchange translation gains 
 less losses                                 389            (968) 
Fee and commission income                    37             17 
Administrative and other operating 
 expenses (excluding staff costs)            104            208 
 
 

The aggregate loan amounts advanced to, and repaid, by related parties during 30 June 2019 were as follows:

 
                                             Significant    Key management 
In thousands of GEL                           shareholders   personnel 
 
Amounts advanced to related parties during 
 the period                                  176            5,143 
Amounts repaid by related parties during 
 the period                                  (1,037)        (4,081) 
 
 

As of 31 December 2018, the outstanding balances with related parties were as follows:

 
                                           Significant    Key management 
In thousands of GEL                         shareholders   personnel 
 
Gross amount of loans and advances 
 to customers (contractual interest 
 rate: 0.4% - 48.0%)                       1,614           11,407 
Credit loss allowance for loans and 
 advances to customers                     -               9 
Customer accounts (contractual interest 
 rate: 0.0% - 10.2 %)                       27,095         21,328 
Performance guarantees                     10,216         - 
Provision on performance guarantees        36             - 
 
 

The income and expense items with related parties except from key management compensation during 30 June 2018 were as follows:

 
                                             Significant    Key management 
In thousands of GEL                           shareholders   personnel 
 
Interest income                              9              248 
Interest expense                             222            111 
Gains less losses from trading in foreign 
 currencies                                  74             35 
Foreign exchange translation gains 
 less losses                                 4              (343) 
Fee and commission income                    38             27 
Fee and commission expense                   304            - 
Administrative and other operating 
 expenses (excluding staff costs)            51             198 
 
 

Aggregate amounts of loans advanced to and repaid by related parties during the six months ended 30 June 2018 were as follows:

 
                                             Significant    Key management 
In thousands of GEL                           shareholders   personnel 
 
Amounts advanced to related parties during 
 the period                                  275            3,160 
Amounts repaid by related parties during 
 the period                                  (305)          (2,404) 
 
 

The compensation of the TBCG Board of Directors and the Bank's Management Board is presented below:

 
                                          Expense over the     Accrued liability 
                                           six months ended     as of 
In thousands of GEL                       30 June     30 June  30 June  31 December 
                                           2019        2018     2019     2018 
 
Salaries and bonuses                          6,263   6,426    151      270 
Cash settled bonuses related 
 to share-based compensation              (1,627)     5,253    -        8,395 
Equity-settled share-based compensation   9,444       5,537    -        - 
 
 
Total                                     14,080      17,216   151      8,665 
                                                                        - 
 

Included in salaries and bonuses for six months ended 30 June 2019 GEL 1,782 thousand relates to compensation for directors of TBCG paid by TBC Bank Group PLC (six months ended 30 June 2018: GEL 1,387 thousand).

   29      Business combination 

Acquisition of Inspired LLC

In May 2019 TBC bank group PLC finalized acquisition process of LLC Inspired - the leading payment platform "Payme". The acquired interest amounted 51% of total shareholding. The transaction is in line with the Group's international expansion strategy of operations. The consideration amounted USD 5.5 million.

The acquisition-date fair value of the total purchase consideration in Georgian Lari is follows:

 
In thousands of GEL 
 
Cash consideration paid        14,981 
 
 
Total purchase consideration   14,981 
 
 

The consideration paid by the Group was based on results of an appraisal of the acquiree's business taken as a whole. However, in accordance with IFRS 3 "Business Combinations", the Group must account for acquisitions based on fair values of the identifiable assets acquired and liabilities and contingent liabilities assumed. These two different approaches can lead to differences; and, as set out in the table below, recognition of goodwill. Details of the assets and liabilities acquired and goodwill arising is as follows:

 
                                                 Provisional Fair 
In thousands of GEL                               Values 
 
Cash and cash equivalents                         223 
Due from other banks                              424 
Other financial assets                            676 
Premises and equipment                            379 
Intangible assets                                 212 
Other assets                                      79 
Other liabilities                                 (159) 
 
 
Fair value of net assets of subsidiary           1,834 
 
 
Non-controlling interest                         (868) 
Goodwill arising from the acquisition            14,015 
 
 
Total purchase consideration                     14,981 
Less: cash and cash equivalents of subsidiary 
 acquired                                        (223) 
 
 
Outflow of cash and cash equivalents on 
 acquisition                                     14,758 
 
 

The goodwill is primarily attributable to the profitability of the acquired business and the positive synergies expected to arise.

   30      Events after the reporting period 

On 3 July 2019 the Bank completed the transaction of a debut inaugural USD 125 million 10.75% yield Additional Tier 1 Capital Perpetual Subordinated Notes issue ("AT1 Notes"). The AT1 Notes are listed on the regulated market of Euronext Dublin and are rated B- by Fitch. The AT1 Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the first dual-listed international offering of additional Tier 1 Capital Notes from Georgia.

In July 2019, the Bank prepaid obligation towards one of the lenders of amount of USD 9.2 million as at transaction date. In August 2019, the Bank also prepaid its subordinated debt towards Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V., of amount USD 26.9 Million.

A full list of related undertakings and the country of incorporation is set out below.

 
 
Company Name                        Country of incorporation 
 
JSC TBC Bank                        7 Marjanishvili Street, 0102, Tbilisi, Georgia 
United Financial Corporation JSC    154 Agmashenebeli Avenue, 0112, Tbilisi, Georgia 
TBC Capital LLC                     11 Chavchavadze Avenue, 0179, Tbilisi, Georgia 
TBC Leasing JSC                     8 Bulachauri Street, 0160, Tbilisi, Georgia 
TBC Kredit LLC                      71-77, 28 May Street, AZ1010, Baku, Azerbaijan 
Banking System Service Company LLC  7 Marjanishvili Street, 0102, Tbilisi, Georgia 
TBC Pay LLC                         7 Marjanishvili Street, 0102, Tbilisi, Georgia 
TBC Invest LLC                      7 Jabonitsky street, , 52520, Tel Aviv, Israel 
Index LLC                           23 Chkheidze Street, 0102, Tbilisi, Georgia 
JSC TBC Insurance                   24B, Al. Kazbegi Avenue, 0160, Tbilisi, Georgia 
   TBC Invest International Ltd     7 Marjanishvili Street, 0102, Tbilisi, Georgia 
   University Development Fund      1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia 
J JSC CreditInfo Georgia            2 Tarkhnishvili street, 0179, Tbilisi, Georgia 
L LTD Online Tickets                3 Irakli Abashidze street, 0179, Tbilisi, Georgia 
   GE Commerce LTD                  3 Chavchavadze Avenue, 0128, Tbilisi, Georgia 
   Swoop JSC                        4 Chavchavadze Avenue, 0162, Tbilisi, Georgia 
   LLC Allproperty                  4 Besiki street,46/10, Tbilisi, Georgia 
   LLC TBC International            07 Marjanishvili Street, 0102, Tbilisi, Georgia 
   Inspired LLC                     Tashkent, 100100, Bobura street, 22A 
   BG LLC                           07 Marjanishvili Street, 0102, Tbilisi, Georgia 
 
 
 

[1] Excluding one-off items. Detailed information and effects are given in Annex 26 on pages 51-52

[2] Excluding one-off items. Detailed information and effects are given in Annex 26 on pages 51-52

[3] International Financial Institutions

[4] Market share figures are based on data from the National Bank of Georgia (NBG). The NBG includes interbank loans for calculating market share in loans

[5] Net Promoter Score

[6] Investment figures are converted into GEL using exchange rate of 2.8687 as of 30 June 2019

([7]) The difference between the underlying and reported net profit figures in the second quarter 2019 was caused by the one-off consulting costs in the amount of GEL 5.6 million related to the to the past events about TBC Bank

[8] See "Russian Sanctions: Manageable Impact on the Growth and Still Betting on the GEL" at www.tbcresearch.ge.

[9] See "Russian Sanctions: Manageable Impact on the Growth and Still Betting on the GEL" at www.tbcresearch.ge.

[10] CPI inflation excluding the prices of food and beverages, energy, transport and administered prices

[11] IMF WEO April 2019 update

[12]Gross insurance profit can be reconciled to the standalone net insurance profit (as shown in Annex 23 on page 49) as follows: gross insurance profit less credit loss allowance, administrative expenses and taxes, plus fee and commission income and net interest income

[13] Non-health insurance includes P&C and life insurance

[14] As at 1 January 2019, the group adopted IFRS 16, under which short term and low value lease contracts, also contracts that do not qualify for lease arrangements and taxes on lease contracts are expensed under this category of administrative expenses

[15] Gross insurance profit can be reconciled to the standalone net insurance profit as follows (as shown in Annex 23 on page 49): gross insurance profit less credit loss allowance, administrative expenses and taxes, plus fee and commission income net interest income

[16] Non-health insurance includes P&C and life insurance

[17] As at 1 January 2019, the group adopted IFRS 16, under which short term and low value lease contracts, as well as contracts that do not qualify for lease arrangements and taxes on lease contracts, are expensed under this category of administrative expenses

[18] TBC Bank Group PLC became the parent company of JSC TBC Bank on 10 August 2016

[19] Cross-sell ratio is defined as the number of active products divided by the number of active customers

[20]Based on internal estimates

[21]Or 17.9% and 27.1% respectively, with MTPL insurance. Starting from March 1, 2018 border MTPL was introduced and GWP was divided evenly between 17 insurance companies, therefore it has decreased our market share

[22] Non-health insurance includes P&C and life insurance

([23]) Net insurance claims plus acquisition costs and administrative expenses divided net earned premium

([24]) Net earned premium equals earned premium minus reinsurer's share of earned premium

[25] After taking into account USD 125 million Additional Tier 1 perpetual subordinated bond issued in June 2019

[26] After taking into account USD 125 million Additional Tier 1 perpetual subordinated bond issued in June 2019

[27] See "Russian Sanctions: Manageable Impact on the Growth and Still Betting on the GEL" at www.tbcresearch.ge.

[28] CPI inflation excluding the prices of food and beverages, energy, transport and administered prices.

[29] IMF WEO April 2019 update

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 rns@lseg.com or visit www.rns.com.

END

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