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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Bank Of Georgia Group Plc | LSE:BGEO | London | Ordinary Share | GB00BF4HYT85 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 40.00 | 0.78% | 5,200.00 | 5,200.00 | 5,210.00 | 5,320.00 | 5,160.00 | 5,190.00 | 93,693 | 16:29:57 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMBGEO
RNS Number : 1025F
Bgeo Group PLC
16 February 2018
BGEO Group PLC
4(th) quarter and full year 2017
preliminary results
Name of authorised official of issuer responsible for making notification: Giorgi Alpaidze, Group CFO
www.bgeo.com
About BGEO Group
The Group: BGEO Group PLC ("BGEO"- LSE: BGEO LN) is a UK incorporated holding company of a Georgia-focused investment platform. BGEO invests, via its subsidiaries, in the banking and non-banking sectors in Georgia (BGEO and its subsidiaries, together the "Group"). BGEO aims to deliver on its strategy: (1) at least 20% ROAE from its Banking Business; (2) 15%-20% growth of its Banking Business loan book; (3) at least 25% IRR; and (4) up to 20% of the Group's profit from its Investment Business. On 3 July 2017 BGEO announced its intention to demerge BGEO Group PLC into a London-listed banking business (the "Banking Business"), Bank of Georgia Group PLC, and a London-listed investment business (the "Investment Business"), Georgia Capital PLC, by the end of the first half of 2018.
The Banking Business comprises: a) retail banking and payment services, b) corporate investment banking and wealth management operations and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("BOG" or the "Bank") is the core entity of the Group's Banking Business. The Banking Business will continue to target to benefit from the underpenetrated banking sector in Georgia primarily through its retail banking services.
The Investment Business, comprises the Group's stakes in Georgia Healthcare Group PLC ("Healthcare Business" or "GHG") - an LSE (a London Stock Exchange) premium-listed company, Georgia Global Utilities ("Utility and Energy Business" or "GGU"), m(2) Real Estate ("Real Estate Business" or "m(2) "), Teliani Valley ("Beverage Business" or "Teliani") and Aldagi ("Property and Casualty Insurance Business" or "Aldagi"). Georgia's fast-growing economy provides opportunities in a number of underdeveloped local markets and Georgia Capital PLC will target to capture growth opportunities in the Georgian corporate sector.
About this Announcement
BGEO Group PLC announces the Group's fourth quarter 2017 and full year 2017 preliminary consolidated results. Unless otherwise noted, numbers are for 4Q17 and comparisons are with 4Q16. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.
The information in this Announcement in respect of full year 2017 preliminary results, which was approved by the Board of Directors on 15 February 2018, does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. The financial statements for the year ended 31 December 2016 were filed with the Registrar of Companies, and the audit report was unqualified and contained no statements in respect of Sections 498 (s) and 495 (3) of the UK Companies Act 2006. The financial statements for the year ended 31 December 2017 will be included in the Annual Report and Accounts to be published in March 2018 and filed with the Registrar of Companies in due course.
CONTENT
Hot Features
Premium
4 4Q17 and FY17 Results Highlights
7 Chief Executive Officer's Statement
10 Financial Summary
12 Discussion of Results
12 Discussion of Banking Business Results
17 Retail Banking
21 Corporate Investment Banking
24 Discussion of Investment Business Results
26 Utility and Energy Business
30 Real Estate Business
33 Property and Casualty Insurance Business
36 Healthcare Business
38 Selected Financial and Operating Information
43 Annex
44 4Q17 and FY17 Results Conference Call
Details
45 Company Information
The Group has renamed its Investment Business as Georgia Capital. The two terms are used interchangeably in this report. In line with IFRS requirements, the Group reviewed the classification of its operating segments at 31 December 2017. Given the expectation, in line with Georgia Capital's strategy, that it is highly probable the Group will own less than a 50% stake in its healthcare business GHG at the end 2018(1) . As a result, and in line with IFRS, the Group classified GHG as "disposal group held for sale" and its results of operations are reported under "discontinued operations" line as a single amount in the consolidated income statement. Comparative periods have been restated accordingly to reflect reclassification of GHG from "continuing operations" into "discontinued operations." Assets and liabilities held by GHG are also presented separately in the consolidated balance sheet as of 31 December 2017 under "assets of disposal group held for sale" and "liabilities of disposal group held for sale."
BGEO HIGHLIGHTS
Record annual results driven by strong performance across all businesses
GEL thousands, except per share Change Change Change information 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y BGEO Profit 118,809 88,743 33.9% 112,841 5.3% 463,449 428,576 8.1% Basic earnings per share 3.05 2.29 33.2% 2.82 8.2% 11.61 10.41 11.5% Book value per share 65.22 56.61 15.2% 62.06 5.1% 65.22 56.61 15.2% Equity attributable to shareholders of the Group 2,420,602 2,131,867 13.5% 2,328,572 4.0% 2,420,602 2,131,867 13.5% Total assets 15,168,669 12,954,176 17.1% 13,927,773 8.9% 15,168,669 12,954,176 17.1% Banking Business Revenue 260,312 224,225 16.1% 223,196 16.6% 909,335 773,907 17.5% Cost of credit risk 42,428 70,608 -39.9% 36,832 15.2% 167,296 167,752 -0.3% Profit 107,134 71,504 49.8% 91,931 16.5% 369,522 295,696 25.0% Loans to customers and finance lease receivables 7,741,420 6,681,672 15.9%(2) 6,951,493 11.4%(2) 7,741,420 6,681,672 15.9%(2) Client deposits and notes 7,078,058 5,755,767 23.0%(3) 6,549,904 8.1%(3) 7,078,058 5,755,767 23.0%(3) ROAE 27.8% 20.0% 25.1% 25.2% 22.2% Net interest margin 7.3% 7.6% 7.3% 7.3% 7.4% Loan yields 14.3% 14.4% 14.3% 14.2% 14.2% Cost of funds 4.8% 4.6% 4.8% 4.7% 4.7% Cost / Income 38.3% 37.4% 38.2% 37.7% 37.7% Cost of risk 2.1% 4.2% 2.0% 2.2% 2.7% Leverage (times) 7.3 7.2 6.9 7.3 7.2 NBG (Basel II) Tier I Capital Adequacy Ratio 10.3% 9.1% 11.1% 10.3% 9.1% NBG (Basel III) Tier I Capital Adequacy Ratio(4) 12.4% n/a n/a 12.4% n/a Investment Business Revenue 44,558 39,244 13.5% 48,759 -8.6% 181,369 104,336 73.8% EBITDA 21,882 26,432 -17.2% 28,624 -23.6% 106,577 68,443 55.7% Profit before non-recurring items and income tax(5) 14,626 25,821 -43.4% 24,184 -39.5% 105,463 86,837 21.4% Profit from discontinued operations 12,270 5,898 108.0% 10,335 18.7% 47,352 60,100 -21.2%
Strong economic activity in Georgia has continued
-- Georgian economic growth has accelerated to 4.7% in 4Q17, from 4.4% in 3Q17. For the full year 2017, GDP growth strengthened to 4.8% from 2.8% in 2016
Bank of Georgia has delivered very strong franchise growth, particularly in the fourth quarter, with further improved returns
-- The Bank's loan book demonstrated 17.4% growth, on a constant currency basis, during 2017 (30.6% growth in Retail Banking); In 4Q17, the loan book growth amounted to 8.3% on a constant currency basis (8.7% growth in Retail and 9.2% growth in Corporate Investment Banking). The Bank's Return on average equity was 25.2% in 2017 and 27.8% in 4Q17
Strong strategic execution in the Investment Business
-- Each business within Georgia Capital continued to deliver on their strategic priorities ahead of the forthcoming demerger
Solid distributions to shareholders continue
-- $18.3mln was returned to shareholders during 4Q17 ($39.1mln returned in 2017)
(1) The Group held 57% of GHG's equity stake as of 31 December 2017 (65% as of 31 December 2016).
(2) As of 31 December 2017, loans and finance lease receivables growth on a constant currency basis was 17.4% and 8.3% on y-o-y and q-o-q basis, respectively.
(3) As of 31 December 2017, client deposits and notes growth on a constant currency basis was 24.8% and 4.7% on y-o-y and q-o-q basis, respectively.
(4) Refer to the Discussion of the Banking Business Results section for the background on NBG (Basel III) Tier I Capital Adequacy Ratio.
(5) Includes profit before non-recurring items and income tax of discontinued operations, GHG.
BANKING BUSINESS HIGHLIGHTS
Outstanding profitability and balance sheet growth momentum
-- The Banking Business generated a record quarterly profit of GEL 107.1mln in 4Q17 (up 49.8% y-o-y and up 16.5% q-o-q) and GEL 369.5mln in 2017 (up 25.0% y-o-y), while quarterly ROAE reached 27.8% in 4Q17 (up 780bps y-o-y and up 270bps q-o-q) and 25.2% in 2017 (up 300bps y-o-y)
-- Asset quality improved during 4Q17 and FY17. NPLs to gross loans ratio decreased to 3.8% at 31 December 2017 (4.2% at 31 December 2016 and 4.1% 30 September 2017). NPL coverage ratio was strong at 92.7% at 31 December 2017 (86.7% a year ago and 93.6% at 30 September 2017), while the NPL coverage ratio adjusted for discounted value of collateral stood at 130.6% at 31 December 2017 (132.1% at 31 December 2016 and 132.8% at 30 September 2017). The asset quality improvement positively impacted the cost of risk ratio, which stood at 2.1% in 4Q17 (4.2% in 4Q16 and 2.0% in 3Q17) and 2.2% in 2017 (2.7% in 2016)
-- Retail Banking ("RB") continued to deliver strong growth across all its business lines. Retail Banking revenue reached GEL 176.0mln in 4Q17, up 19.1% y-o-y and up 13.0% q-o-q, with full year 2017 revenue totalling GEL 614.7mln, up 24.4% y-o-y. The number of Retail Banking clients reached 2.3mln at the end of 4Q17, up 8.1% from 2.1mln at the end of 4Q16 and up 2.7% from 3Q17
-- Our Retail Banking product to client ratio increased to 2.2 in 4Q17 from 2.0 in 4Q16 and 2.1 in 3Q17. In 4Q17 we have completed the transformation of our retail banking operations from a product-based model into a client-centric model, as well as the implementation of the client-centric model in our branches. As of 31 December 2017, we had 86 transformed branches. We continue to see outstanding growth in sales volumes and the number of products sold to our clients in these branches, contributing to 29.3% y-o-y growth in the retail loan book
-- The loan book growth on a constant-currency basis reached 17.4% at 31 December 2017. As a result, Retail Banking's loan book share in the total loan portfolio was 68.0% at 31 December 2017 (60.9% at 31 December 2016 and 68.4% at 30 September 2017). The Retail Banking net loan book reached GEL 5,044mln at 31 December 2017, up 29.3% y-o-y and up 11.1% q-o-q. The growth on a constant-currency basis was 30.6% y-o-y and 8.7% q-o-q
-- Retail Banking client deposits increased to GEL 3,267.3mln at 31 December 2017, up 35.4% y-o-y and up 13.8% q-o-q. Growth on a constant-currency basis was 37.4% y-o-y and 10.2% q-o-q
-- Corporate Investment Banking ("CIB") resumed growth in 4Q17 after delivering on its risk de-concentration and loan portfolio repositioning targets in 3Q17. CIB's net loan book amounted to GEL 2,260.1mln at 31 December 2017, down 5.6% y-o-y, but up 13.4% q-o-q. The top 10 CIB client exposure was 10.7% at the end of 4Q17, down from 11.8% at 31 December 2016. Consequently, CIB's profit increased to GEL 27.7mln in 4Q17 (up 175.3% y-o-y and up 42.3% q-o-q) and GEL 105.9mln in 2017 (up 19.9% y-o-y) and CIB ROAE reached 18.1% in 4Q17 (6.2% a year ago and 13.3% in 3Q17) and 17.6% in 2017 (up from 14.7% in 2016)
-- Investment Management's Assets Under Management ("AUM") increased to GEL 1,857.5mln, up 17.9% y-o-y and up 2.2% q-o-q, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart
-- IFRS 9 implementation delivered - no impact on capital adequacy ratios. The Group has completed its IFRS 9 implementation programme and adopted IFRS 9, Financial Instruments from 1 January 2018. The Banking Business will recognise the estimated impact from IFRS 9 adoption of approximately GEL 31.5mln, gross of income tax, as a reduction to shareholders' equity at the transition date on 1 January 2018. As allowed by IFRS 9, the Group will not be restating prior-period data. IFRS 9 does not have any impact on regulatory capital and capital adequacy ratios. Through-the-cycle cost of risk is expected to remain unchanged. NPL coverage ratio, adjusted for additional IFRS 9 allowance, was 102.9% as at 31 December 2017
-- Amendments to Capital Adequacy requirements. In order to transition to Basel III, the National Bank of Georgia ("NBG") introduced new capital adequacy requirements in December 2017. As a result of the changes, Bank of Georgia became subject to the following minimum capital requirements at 31 December 2017:
-- Common Equity Tier 1 ratio 8.1%, expected to increase to 9.5% on 31 December 2018
-- Tier 1 ratio 9.9%, expected to increase to 11.4% on 31 December 2018
-- Total Capital ratio 12.4%, expected to increase to 15.6% on 31 December 2018
At 31 December 2017, Bank of Georgia's both Common Equity Tier 1 and Tier 1 ratios were 12.4%, while Total Capital ratio was 17.9%. Transition to Basel III is not expected to affect the Bank's growth prospects or its ability to maintain dividend distributions within the existing dividend policy payout range
INVESTMENT BUSINESS HIGHLIGHTS
-- Our utility and energy business, GGU, delivered a stable performance in 2017. In 4Q17, GGU continued its investments in water pipeline infrastructure, leading to continued growth in the regulated asset base and reduction of the respective water losses. Due to successfully implemented efficiency projects, GGU was able to significantly reduce its own electricity consumption in 2017. GGU also continued the construction works on the 50MW Mestiachala HPPs in north-western Georgia, while the 44.3MW Zoti HPPs entered their construction phase in 4Q17
-- In December 2017, the Georgian National Energy and Water Supply Regulatory Commission ("GNERC") approved new tariffs for water and waste-water services, which have been updated according to the new Regulatory Asset Base based methodology adopted by GNERC in August 2017. The new tariffs have been set for a three year regulatory period, effective from 1 January 2018. As a result, tariffs in Tbilisi have increased by 23.8% for residential customers and decreased by 0.4% for legal entities
-- Our real estate business, m(2) , achieved the best sales performance in its history during 2017. 2017 was record-breaking for m(2) in terms of square meters sold, number of apartments sold and sales revenue. m(2) sold a total of 165 apartments with a total sales value of US$ 14.5mln during 4Q17, compared to 112 apartments sold with total sales value of US$ 8.3mln in 4Q16 and 231 apartments with a total sales value of US$ 16.9mln in 3Q17. m(2) successfully completed the construction of its first luxury residential project - Skyline in 4Q17
-- In 4Q17, m(2) signed its largest ever franchise agreement as part of its "asset light" strategy and will construct and develop a residential complex under the m(2) brand name on a third-party land plot to generate construction fees, sales commissions and a share from the project's overall profit
-- In 4Q17, m(2) acquired a controlling stake in an upcoming lifestyle boutique hotel in a prime location of Tbilisi, which is expected to add at least 100 rooms to m(2) 's portfolio and is expected to complete in the first quarter of 2019. The acquisition is in line with m(2) 's strategy to increase its presence in the hospitality sector and capitalise on growing tourist activities in the country
-- In 4Q17, m(2) 's construction arm was awarded its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre located in Tbilisi. The total amount of the contract is US$ 11.6mln and completion is planned for the first half of 2019
-- Aldagi delivered its best ever year as it continued organic growth primarily in the motor insurance, property insurance and credit life lines, as Aldagi shifted its focus more to the retail market. New product development initiatives and enhancements of existing products resulted in more than 19,000 livestock insurance policies and 3,334 travel and trip insurance policies sold across the country in 2017
-- In 4Q17 Aldagi signed major third-party partnership agreements with two Georgian banks, JSC Liberty Bank and JSC Credo Bank to successfully diversify its multi-channel distribution network, which will enable Aldagi to successfully tap Georgia's underpenetrated retail insurance segment
-- Our beverage business, Teliani, achieved significant milestones during 2017 and launched its mainstream beer and lemonade production in June 2017 and August 2017, respectively. Teliani is on track to brew Heineken and Krusovice beers in 2018 under a ten-year exclusive license agreement to produce Heineken brands in Georgia, and to sell into the Caucasus region countries. Teliani also continued to diversify its distribution portfolio, with the addition of the exclusive right to import and distribute Lavazza coffee in Georgia, and winning other non-alcoholic beverage distribution contracts in 2017
-- In February 2018, we acquired a 100% equity stake in a leading Georgian craft beer producer, Black Lion LLC (Black Lion). Black Lion is the largest producer of a premium class craft beer in Georgia that launched sales in the beginning of 2016 and sold approximately 300,000 litres of craft beer in 2017, primarily targeting restaurants and bars in Tbilisi
-- Our healthcare business, GHG, continued to deliver on its strategic priorities across its healthcare services and pharmacy businesses, while medical insurance business maintained positive EBITDA in 4Q17. Healthcare services EBITDA margin was 26.8% in 4Q17, compared to 31.9% in 4Q16 and 26.0% in 3Q17 reflecting the planned significant investment in new hospitals and polyclinics during 2017. Pharmacy business generated a record EBITDA margin of 10.2% in 4Q17, compared to 6.0% in 4Q16 and 8.3% in 3Q17
-- In January 2018, GHG's medical insurance arm signed new medical insurance agreement with the Georgian Ministry of Internal Affairs, the country's largest insurance client by number of insured customers of c.65,000. As a result, the number of GHG's insured individuals reached approximately 155,000
CHIEF EXECUTIVE OFFICER'S STATEMENT
In the fourth quarter of 2017, the Group delivered another extremely strong performance that resulted in record profit for the year of GEL 463 million and earnings per share of GEL 11.61, an increase of 11.5% year-on-year. This strength reflects an excellent performance from our Banking Business as well as growth momentum and strategic delivery from our Investment Businesses, which were supported by Georgia's strong macroeconomic performance and business outlook.
Group revenue in 2017 increased by 23.7% year-on-year to GEL 1.1 billion, which supported a 23.5% year-on-year increase in profit before tax from continuing operations to GEL 435.8 million. Book value per share at the end of 2017 was GEL 65.22, up 15.2% year-on-year. The Return on Average Equity in the Banking Business increased from 22.2% in 2016 to 25.2% in 2017. During the fourth quarter, the Group delivered revenue of GEL 305.1 million, up 14.8% year-on-year and up 11.9% quarter-on-quarter, and profit of GEL 118.8 million, up 33.9% year-on-year and 5.3% quarter-on-quarter.
In the Banking Business, 2017 was characterised by strong franchise growth in the Retail Banking operations, particularly in the fourth quarter, reflecting the continued strong performance of our business in all segments, and an increase in retail lending during the year of 29.3%, or 30.6% on a constant currency basis. In addition, in 3Q17 we completed our three year progamme to reduce concentration risk in our Corporate Investment Banking and consequently, started to deliver corporate lending growth in the last quarter of the year. Loan yields have continued to remain stable, and net interest margins have therefore remained robust at 7.3%. Costs have remained well-controlled, whilst ensuring continued investment in building an increasingly strong customer franchise. The Banking Business cost to income ratio remained very efficient at 37.7% for the year. The Banking Business cost of risk ratio in 2017 was 2.2%, in line with our medium term cost of risk expectations, and a significant reduction from 2.7% in 2016. In addition, we have continued to improve our asset quality and provisions coverage ratios. The Return on Average Equity in the Banking Business continued to improve on a quarterly basis, and stood at 25.2% for the year, and 27.8% in the fourth quarter.
The Group's Investment Business continued to deliver strong growth and performance, with EBITDA growing 55.7% year-on-year, and profit before non-recurring items and income tax, including discontinued operations increasing by 21.4% over the same period. Overall, the impact of a number of non-recurring items in 2016 affected year-on-year comparisons resulting in a reduction of 29.3% in net profit, to GEL 93.9 million in 2017.
From a macroeconomic perspective Georgia continues to deliver strong GDP growth, estimated at 4.8% in 2017. Annual inflation was at 6.7%, reflecting the one-off effect of an excise tax increase, while core inflation remained well-contained at 4.7% in 2017. Foreign Direct Investment continues to flow into a wide variety of sectors, and tourist numbers - the most significant driver of US$ inflows for the country - continue to rise strongly, with tourism revenues totaling US$2.8 billion during the year, up 27.0% year-on-year. Despite Lari exchange rate volatility in the fourth quarter, the local currency regained value at the end of the year, as the external environment strengthened. The National Bank of Georgia (NBG) purchased approximately US$130 million in 2017, boosting reserves up 10.3% year-on year, to US$3.0 billion.
In the Banking Business, we have continued to deliver on all of our key strategic priorities. 2017 revenue growth of 17.5% was particularly supported by the strong Retail Banking franchise growth, where revenue increased by 24.4% and customer lending on a constant currency basis continues to grow at more than 20% per annum. This offsets the anticipated decline in the Corporate Investment Banking loan portfolio, as we wound down the banking relationship with a small number of significant corporate borrowers, earlier in 2017. More importantly, we have made strong progress in reducing concentration risk in the Corporate Investment Banking, and have reduced the concentration of our top 10 corporate borrowers to only 10.7% of our lending portfolio. We have now exceeded our targeted rebalancing of the retail/corporate portfolio mix to further improve the return profile of the Banking Business. Retail Banking now represents 68% of our customer lending and Corporate Investment Banking represents 32%.
In addition to the strong retail lending growth, the Retail Banking made strong progress in implementing its customer centric approach with the launch of its new loyalty reward program, Plus+ in July 2017 and continued investment in digital penetration growth. Our Retail Banking product to client ratio also improved from 2.0 to 2.2 products per client during the second half of 2017. In July 2017, we won the exclusive right to modernise the public transportation payment system in Tbilisi and continue as the sole provider of the Tbilisi Metro's payment support systems for the next ten years. In addition, Solo, our premium banking brand, has continued to deliver strong growth momentum, with customer numbers increasing to 32,104, up 12.7% during the fourth quarter and up 66.6% over the last twelve months. Solo is strongly on track to achieving its target of 40,000 Solo clients by the end of 2018.
The improving growth and strength of the Georgian economy continues to support asset quality. The annualised cost of risk ratio in 4Q17 was 2.1%, compared to 4.2% in 4Q16. In addition, we were able to reduce the ratio of NPLs to Gross Loans, which fell from 4.2% in December 2016, to 3.8% in December 2017. Our NPL coverage ratio also improved - from 86.7% at the end of December 2016, to 92.7% at the end of 2017.
In January 2018, the Bank adopted IFRS 9, which introduces a new three stage expected loss model, compared to the existing two-stage incurred loss model under the current International Accounting Standard 39. The introduction of IFRS 9 has not had an impact on the Banking Business financial position and capital ratios, which are calculated using local regulatory accounting standards. This change in accounting standards resulted in a one-off GEL 31.5 million reduction of the Banking Business shareholders equity. There is no change to the Banking Business expected 2.0% through-the-cycle cost of risk ratio.
The Group's capital and funding position continues to remain strong, with capital being held both in the regulated Banking Business and at the holding company level. At the end of 2017, liquid assets totaling GEL 310 million were held at the holding company level. Within the Banking Business, the NBG (Basel II) Tier 1 Capital Adequacy ratio increased by 120 basis points to 10.3% during the year, reflecting both the continued de-dollarisation of the Banking Business lending portfolio and the Banking Business' high return on average equity and internal capital generation.
The National Bank of Georgia is currently in the process of transitioning to Basel III standards, and introduced new capital adequacy requirements in December 2017. Further details of the new requirements are mentioned on Page 16 of this release. On the basis of new regulation, the NBG (Basel III) Tier 1 capital adequacy ratio was 12.4% at 31 December 2017, compared to a new minimum Tier 1 capital requirement of 9.9%, which is expected to increase to 11.4% at 31 December 2018. Bank of Georgia has strong capital ratios and high levels of internal capital generation. As a result, the transition to Basel III is not expected to affect the Bank's growth expectations or existing dividend payout policy.
Within our Investment Business, we now expect that, in line with our planned exit strategy for the business, it is highly probable that the Group will own less than a 50% stake in Georgia Healthcare Group ("GHG") at the end of 2018. As a result, GHG is now reported under "discontinued operations" in the Group's consolidated income statement. Within the business, GHG delivered a year of strong progress towards its planned investment and business roll-out in all the key areas in the Georgian healthcare system. GHG delivered net revenues of GEL 745.7 million during the year, an increase of 76.0%, reflecting a combination of solid organic growth and the impact of acquisitions. The healthcare services EBITDA margin continues to be strong at 26.4%, notwithstanding the dilutive effect of the significant roll-out of the two major hospital renovations - Tbilisi Referral Hospital and Deka - and the ongoing roll-out of a nationwide chain of polyclinics (outpatient clinics). In the pharmacy business, we have made significant progress towards the integration of our two recently acquired businesses, whilst avoiding any significant business disruption. As a result, the EBITDA margin of 8.6% for the year has already successfully exceeded our target of "more than 8%" margin.
Our water utility and energy business, GGU, continued to focus on improving efficiencies in the water utility business and delivered a 6.1% year-on-year growth in revenues, reaching GEL 135.0 million in 2017, compared to GEL 127.2 million last year, whilst achieving a 52% EBITDA margin. GGU has also continued to achieve efficiencies in its own energy consumption, to free up electricity for third-party sales, and has started a number of investments in additional capacity for electricity generation with the goal to establish a renewable energy platform. During 2017, GGU commenced construction of three hydro power plants, targeting c.100MW of planned additional capacity over the next few years.
Our real estate business, m(2) Real Estate, continues to demonstrate its strong execution skills to unlock considerable value in the real estate development business. During 2017, m(2) sold a total of 629 apartments with a total sales value of $49.1 million, in addition to further increasing its portfolio of yielding assets. As a result, m(2) recorded a profit of GEL 23.7 million in 2017, up from GEL 10.9 million in the previous year. In addition, during the fourth quarter of 2017, the real estate business acquired a controlling stake in an upcoming lifestyle boutique hotel in a prime location in Tbilisi, signed its largest ever franchise agreement as part of its "asset light" strategy to construct and develop a residential complex under the m(2) brand name on a third-party land plot in a densely populated Tbilisi suburb, and m(2) 's construction arm gained its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre in Tbilisi's Saburtalo district. These developments underpinned an extremely successful year for the real estate business, and provide significant growth potential over the next few years.
Our property and casualty insurance business, Aldagi, continues development of a strong portfolio of new products, supporting 24.6% year-on-year growth in net earned premiums during 2017 and Aldagi's position as the clear market leader in the fast-developing Georgian P&C insurance market. Over the last few months, Aldagi has also enhanced its distribution capabilities by signing major third-party partnership agreements with two Georgian banks - Liberty Bank and Credo Bank - and this will support the further diversification of Aldagi's multi-channel distribution network.
Our beverage business, Teliani, increased its revenues by 102.5% year-on-year, excluding IFRS 15 impact, continued to diversify its distribution portfolio and launched its mainstream beer and lemonade production during 2017.
The Group Board expects to recommend a regular annual dividend for 2017 totaling c.GEL 120 million. This is in the range of our regular dividend payout ratio target of 25-40% paid from the Banking Business profits. Since 2010, the Group has grown its annual dividend per share by 40% CAGR on a GEL basis, and by 32% CAGR on a US Dollar basis. If the expected demerger is successfully implemented as planned, it is intended that Bank of Georgia PLC (the then new parent company of the Banking Business), will instead, shortly after the demerger is completed, declare and pay a dividend in a similar aggregate amount to shareholders then on the record. In the event that the demerger is for any reason not completed it is intended, subject to shareholder approval, that the Board would implement the payment of this dividend, which would represent a payment of GEL 3.1 per share, payable in British Pounds Sterling at the prevailing rate, a 19.2% increase over the 2016 dividend.
In addition to the regular annual dividend paid to shareholders, US$5.0 million was returned to shareholders by way of the buyback and cancellation of 115,608 shares during 2017, as part of the existing Board approved US$50 million buyback and cancellation programme. During 2017, the Group Employee Benefits Trust also purchased shares in the market totaling US$34.1 million.
In July 2017, the Group announced its intention to demerge BGEO Group PLC into two separately London-listed businesses: a banking business, Bank of Georgia Group PLC, and an investment business, Georgia Capital PLC. On 12 February, the Group announced that the Board has approved the implementation of the demerger, which is subject to shareholder approval at a General Meeting expected to be held in April 2018. The demerger is expected to complete before the end of June 2018. In its final year before the forthcoming demerger, supported by the continued macroeconomic performance of Georgia, BGEO Group has delivered another year of strong earnings momentum. Growth and returns in both the Banking Business and the Investment Businesses, now renamed Georgia Capital, continue to be high. Following the completion of the proposed demerger, I expect both companies independently to be extremely well positioned to continue their excellent recent track record for many years to come.
Irakli Gilauri,
Group CEO of BGEO Group PLC
FINANCIAL SUMMARY
INCOME STATEMENT BGEO Consolidated Banking Business(6) Investment Business6 (QUARTERLY) GEL thousands unless otherwise Change Change Change Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 4Q17 4Q16 y-o-y 3Q17 q-o-q 4Q17 4Q16 y-o-y 3Q17 q-o-q Net banking interest income 183,498 155,052 18.3% 168,603 8.8% 183,124 157,611 16.2% 167,788 9.1% - - - - - Net fee and commission income 36,483 35,196 3.7% 32,754 11.4% 36,738 36,769 -0.1% 33,141 10.9% - - - - - Net banking foreign currency gain 28,139 34,956 -19.5% 20,436 37.7% 27,464 27,707 -0.9% 19,614 40.0% - - - - - Net other banking income 12,708 1,704 NMF 2,375 NMF 12,986 2,138 NMF 2,653 NMF - - - - - Gross insurance profit 6,328 6,223 1.7% 6,862 -7.8% - - - - - 6,306 6,255 0.8% 6,846 -7.9% Gross real estate profit 5,544 979 NMF 3,922 41.4% - - - - - 5,773 1,560 NMF 4,179 38.1% Gross utility and energy profit 22,777 21,600 5.4% 25,853 -11.9% - - - - - 22,868 21,671 5.5% 25,942 -11.8% Gross other investment profit 9,621 9,974 -3.5% 11,800 -18.5% - - - - - 9,611 9,758 -1.5% 11,792 -18.5% Revenue 305,098 265,684 14.8% 272,605 11.9% 260,312 224,225 16.1% 223,196 16.6% 44,558 39,244 13.5% 48,759 -8.6% Operating expenses (121,146) (95,035) 27.5% (104,197) 16.3% (99,742) (83,840) 19.0% (85,354) 16.9% (22,676) (12,812) 77.0% (20,135) 12.6% Operating income before cost of credit risk / EBITDA 183,952 170,649 7.8% 168,408 9.2% 160,570 140,385 14.6% 137,842 16.5% 21,882 26,432 -17.2% 28,624 -23.6% Profit from associates 255 - NMF 147 73.5% 255 - NMF 147 73.5% - - - - - Depreciation and amortisation of investment business (9,056) (4,501) 101.2% (7,275) 24.5% - - - - - (9,056) (4,501) 101.2% (7,275) 24.5% Net foreign currency loss from investment business (5,797) (1,905) NMF (3,941) 47.1% - - - - - (5,797) (1,905) NMF (3,941) 47.1% Interest income from investment business 1,691 1,830 -7.6% 959 76.3% - - - - - 4,088 1,175 NMF 3,595 13.7% Interest expense from investment business (8,862) (4,654) 90.4% (6,961) 27.3% - - - - - (8,969) (6,523) 37.5% (7,049) 27.2% Operating income before cost of credit risk 162,183 161,419 0.5% 151,337 7.2% 160,825 140,385 14.6% 137,989 16.5% 2,148 14,678 -85.4% 13,954 -84.6% Cost of credit risk (43,045) (70,023) -38.5% (37,900) 13.6% (42,428) (70,608) -39.9% (36,832) 15.2% (617) 585 NMF (1,068) -42.2% Profit before non-recurring items and income tax 119,138 91,396 30.4% 113,437 5.0% 118,397 69,777 69.7% 101,157 17.0% 1,531 15,263 -90.0% 12,886 -88.1% Net non-recurring items (673) (1,324) -49.2% (1,441) -53.3% (213) (1,055) -79.8% (1,376) -84.5% (460) (269) 71.0% (65) NMF Profit before income tax (expense)/benefit 118,465 90,072 31.5% 111,996 5.8% 118,184 68,722 72.0% 99,781 18.4% 1,071 14,994 -92.9% 12,821 -91.6% Income tax (expense)/benefit (12,716) (871) NMF (10,096) 26.0% (11,050) 2,782 NMF (7,850) 40.8% (1,666) (3,653) -54.4% (2,246) -25.8% Profit from continuing operations 105,749 89,201 18.6% 101,900 3.8% 107,134 71,504 49.8% 91,931 16.5% (595) 11,341 NMF 10,575 NMF Profit from discontinued operations 13,060 (458) NMF 10,941 19.4% - - - - - 12,270 5,898 108.0% 10,335 18.7% Profit 118,809 88,743 33.9% 112,841 5.3% 107,134 71,504 49.8% 91,931 16.5% 11,675 17,239 -32.3% 20,910 -44.2% Earnings per share
(basic) 3.05 2.29 33.2% 2.82 8.2% 2.86 1.89 51.1% 2.43 17.8% 0.19 0.40 -52.3% 0.39 -51.7% Earnings per share (diluted) 2.90 2.21 31.2% 2.70 7.4% 2.72 1.83 48.9% 2.33 17.0% 0.18 0.38 -53.0% 0.37 -52.0% INCOME STATEMENT BGEO Consolidated Banking Business6 Investment Business6 (FULL YEAR) GEL thousands 2017 2016 Change 2017 2016 Change 2017 2016 Change unless otherwise y-o-y y-o-y y-o-y noted Net banking interest income 672,535 548,121 22.7% 672,100 553,611 21.4% - - - Net fee and commission income 130,050 122,477 6.2% 131,474 124,910 5.3% - - - Net banking foreign currency gain 79,106 89,480 -11.6% 86,060 83,203 3.4% - - - Net other banking income 18,645 10,667 74.8% 19,701 12,183 61.7% - - - Gross insurance profit 27,265 24,569 11.0% - - - 27,049 25,256 7.1% Gross real estate profit 34,390 18,485 86.0% - - - 35,367 19,066 85.5% Gross utility and energy profit 88,010 38,541 128.4% - - - 88,370 38,680 128.5% Gross other investment profit 30,630 21,288 43.9% - - - 30,583 21,334 43.4% Revenue 1,080,631 873,628 23.7% 909,335 773,907 17.5% 181,369 104,336 73.8% Operating expenses (413,045) (322,806) 28.0% (342,936) (291,548) 17.6% (74,792) (35,893) 108.4% Operating income before cost of credit risk / EBITDA 667,586 550,822 21.2% 566,399 482,359 17.7% 106,577 68,443 55.7% Profit from associates 1,311 4,074 -67.8% 1,311 - NMF - 4,074 NMF Depreciation and amortisation of investment business (28,235) (10,062) NMF - - - (28,235) (10,062) NMF Net foreign currency loss from investment business (4,937) (3,134) 57.5% - - - (4,937) (3,134) 57.5% Interest income from investment business 5,415 3,745 44.6% - - - 12,970 4,144 NMF Interest expense from investment business (29,660) (11,220) NMF - - - (30,014) (13,410) 123.8% Operating income before cost of credit risk 611,480 534,225 14.5% 567,710 482,359 17.7% 56,361 50,055 12.6% Cost of credit risk (170,711) (168,756) 1.2% (167,296) (167,752) -0.3% (3,415) (1,004) NMF Profit before non-recurring items and income tax 440,769 365,469 20.6% 400,414 314,607 27.3% 52,946 49,051 7.9% Net non-recurring items (4,923) (12,682) -61.2% (4,300) (45,355) -90.5% (623) 32,673 NMF Profit before income tax (expense)/benefit 435,846 352,787 23.5% 396,114 269,252 47.1% 52,323 81,724 -36.0% Income tax (expense)/benefit (32,340) 17,500 NMF (26,592) 26,444 NMF (5,748) (8,944) -35.7% Profit from continuing operations 403,506 370,287 9.0% 369,522 295,696 25.0% 46,575 72,780 -36.0% Profit from discontinued operations 59,943 58,289 2.8% - - - 47,352 60,100 -21.2% Profit 463,449 428,576 8.1% 369,522 295,696 25.0% 93,927 132,880 -29.3% Earnings per share (basic) 11.61 10.41 11.5% 9.76 7.66 27.4% 1.85 2.75 -32.7% Earnings per share (diluted) 11.07 10.09 9.7% 9.30 7.42 25.4% 1.77 2.67 -33.8%
(6) Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 38, 39 and 40.
BALANCE SHEET BGEO Consolidated Banking Business Investment Business
GEL thousands Dec-17 Dec-16 Change Sep-17 Change Dec-17 Dec-16 Change Sep-17 Change Dec-17 Dec-16 Change Sep-17 Change
unless otherwise y-o-y q-o-q y-o-y q-o-q y-o-y q-o-q
noted
Liquid assets 4,373,251 3,914,596 11.7% 4,128,332 5.9% 4,346,509 3,705,171 17.3% 4,068,147 6.8% 445,501 584,066 -23.7% 439,616 1.3%
Cash and cash
equivalents 1,582,435 1,573,610 0.6% 1,721,811 -8.1% 1,516,401 1,480,783 2.4% 1,648,098 -8.0% 374,301 401,969 -6.9% 345,137 8.4%
Amounts due
from
credit
institutions 1,225,947 1,054,983 16.2% 985,120 24.4% 1,216,349 940,485 29.3% 950,775 27.9% 38,141 178,425 -78.6% 60,565 -37.0%
Investment
securities 1,564,869 1,286,003 21.7% 1,421,401 10.1% 1,613,759 1,283,903 25.7% 1,469,274 9.8% 33,059 3,672 NMF 33,914 -2.5%
Loans to
customers
and finance
lease
receivables 7,690,450 6,648,482 15.7% 6,917,211 11.2% 7,741,420 6,681,672 15.9% 6,951,493 11.4% - - - - -
Property and
equipment 988,436 1,288,594 -23.3% 1,501,735 -34.2% 322,925 296,791 8.8% 309,769 4.2% 661,176 991,803 -33.3% 1,187,631 -44.3%
Assets of
disposal
group held for
sale 1,136,417 - NMF - NMF - - - - - 1,165,182 - NMF - NMF
Total assets 15,168,669 12,954,176 17.1% 13,927,773 8.9% 12,907,678 11,123,358 16.0% 11,779,718 9.6% 2,763,913 2,307,069 19.8% 2,573,427 7.4%
Client deposits
and notes 6,712,482 5,382,698 24.7% 6,252,228 7.4% 7,078,058 5,755,767 23.0% 6,549,904 8.1% - - - - -
Amounts due to
credit
institutions 3,155,839 3,470,091 -9.1% 2,774,525 13.7% 2,778,338 3,067,651 -9.4% 2,350,438 18.2% 377,501 435,630 -13.3% 459,158 -17.8%
Borrowings
from
DFI 1,624,347 1,403,120 15.8% 1,435,236 13.2% 1,297,749 1,281,798 1.2% 1,172,530 10.7% 326,598 121,323 NMF 262,707 24.3%
Short-term
loans
from NBG 793,528 1,085,640 -26.9% 590,014 34.5% 793,528 1,085,640 -26.9% 590,014 34.5% - - - - -
Loans and
deposits
from
commercial
banks 737,964 981,331 -24.8% 749,275 -1.5% 687,061 700,213 -1.9% 587,894 16.9% 50,903 314,307 -83.8% 196,451 -74.1%
Debt securities
issued 1,709,152 1,255,643 36.1% 1,691,260 1.1% 1,386,412 858,036 61.6% 1,298,641 6.8% 357,442 404,450 -11.6% 479,142 -25.4%
Liabilities of
disposal group
held for sale 516,663 - NMF - NMF - - - - - 619,026 - NMF - NMF
Total liabilities 12,436,299 10,565,963 17.7% 11,299,090 10.1% 11,354,976 9,770,856 16.2% 10,292,672 10.3% 1,584,245 1,271,358 24.6% 1,431,790 10.6%
Total equity 2,732,370 2,388,213 14.4% 2,628,683 3.9% 1,552,702 1,352,502 14.8% 1,487,046 4.4% 1,179,668 1,035,711 13.9% 1,141,637 3.3%
BANKING BUSINESS RATIOS 4Q17 4Q16 3Q17 2017 2016
ROAA 3.4% 2.8% 3.2% 3.2% 3.1%
ROAE 27.8% 20.0% 25.1% 25.2% 22.2%
Net Interest Margin 7.3% 7.6% 7.3% 7.3% 7.4%
Loan Yield 14.3% 14.4% 14.3% 14.2% 14.2%
Liquid assets yield 3.4% 3.3% 3.5% 3.4% 3.2%
Cost of Funds 4.8% 4.6% 4.8% 4.7% 4.7%
Cost of Client Deposits
and Notes 3.5% 3.6% 3.5% 3.5% 3.8%
Cost of Amounts Due to Credit
Institutions 6.5% 6.4% 6.5% 6.4% 6.2%
Cost of Debt Securities
Issued 7.8% 6.1% 7.9% 7.4% 6.8%
Cost / Income 38.3% 37.4% 38.2% 37.7% 37.7%
NPLs to Gross Loans to Clients 3.8% 4.2% 4.1% 3.8% 4.2%
NPL Coverage Ratio(7) 92.7% 86.7% 93.6% 92.7% 86.7%
NPL Coverage Ratio, Adjusted
for discounted value of
collateral 130.6% 132.1% 132.8% 130.6% 132.1% Cost of Risk 2.1% 4.2% 2.0% 2.2% 2.7% NBG (Basel II) Tier I Capital Adequacy Ratio 10.3% 9.1% 11.1% 10.3% 9.1% NBG (Basel II) Total Capital Adequacy Ratio 14.8% 14.4% 16.2% 14.8% 14.4% NBG (Basel III) Tier I Capital Adequacy Ratio 12.4% n/a n/a 12.4% n/a NBG (Basel III) Total Capital Adequacy Ratio 17.9% n/a n/a 17.9% n/a
(7) NPL Coverage Ratio adjusted for IFRS 9 was 102.9% at 31 December 2017.
DISCUSSION OF RESULTS
Discussion of Banking Business Results
The Group's Banking Business is primarily comprised of three segments. (1) Retail Banking operations in Georgia principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfer and settlement services, and handling customers' deposits for both individuals as well as legal entities. Retail Banking targets the emerging retail, mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate Investment Banking comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus.
REVENUE
GEL thousands, unless Change Change Change
otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y
Banking interest
income 312,950 258,010 21.3% 287,274 8.9% 1,140,292 932,063 22.3%
Banking interest
expense (129,826) (100,399) 29.3% (119,486) 8.7% (468,192) (378,452) 23.7%
Net banking interest
income 183,124 157,611 16.2% 167,788 9.1% 672,100 553,611 21.4%
Fee and commission
income 53,739 50,248 6.9% 49,155 9.3% 192,499 172,630 11.5%
Fee and commission
expense (17,001) (13,479) 26.1% (16,014) 6.2% (61,025) (47,720) 27.9%
Net fee and commission
income 36,738 36,769 -0.1% 33,141 10.9% 131,474 124,910 5.3%
Net banking foreign
currency gain 27,464 27,707 -0.9% 19,614 40.0% 86,060 83,203 3.4%
Net other banking
income 12,986 2,138 NMF 2,653 NMF 19,701 12,183 61.7%
Revenue 260,312 224,225 16.1% 223,196 16.6% 909,335 773,907 17.5%
Net Interest Margin 7.3% 7.6% 7.3% 7.3% 7.4%
Average interest
earning assets 10,008,954 8,234,098 21.6% 9,092,457 10.1% 9,234,600 7,441,186 24.1%
Average interest
bearing liabilities 10,824,561 8,633,475 25.4% 9,841,785 10.0% 9,922,414 7,984,426 24.3%
Average net loans
and finance lease
receivables, currency
blended 7,390,896 6,134,296 20.5% 6,727,963 9.9% 6,856,802 5,640,611 21.6%
Average net loans
and finance lease
receivables, GEL 2,818,150 1,780,650 58.3% 2,528,946 11.4% 2,414,121 1,592,987 51.5%
Average net loans
and finance lease
receivables, FC 4,572,746 4,353,646 5.0% 4,199,017 8.9% 4,442,681 4,047,624 9.8%
Average client deposits
and notes, currency
blended 6,891,147 5,260,121 31.0% 6,096,686 13.0% 6,146,052 5,040,486 21.9%
Average client
deposits and notes,
GEL 2,065,806 1,244,743 66.0% 1,811,206 14.1% 1,706,726 1,243,028 37.3%
Average client
deposits and notes,
FC 4,825,341 4,015,378 20.2% 4,285,480 12.6% 4,439,326 3,797,458 16.9%
Average liquid assets,
currency blended 4,279,369 3,300,588 29.7% 3,920,876 9.1% 3,854,019 3,099,731 24.3%
Average liquid
assets, GEL 1,660,337 1,320,304 25.8% 1,599,459 3.8% 1,527,420 1,205,982 26.7%
Average liquid
assets, FC 2,619,032 1,980,284 32.3% 2,321,417 12.8% 2,326,599 1,893,749 22.9%
Excess liquidity
(NBG) 289,942 418,016 -30.6% 843,299 -65.6% 289,942 418,016 -30.6%
Liquid assets yield,
currency blended 3.4% 3.3% 3.5% 3.4% 3.2%
Liquid assets yield,
GEL 7.1% 7.2% 7.1% 7.1% 7.3%
Liquid assets yield,
FC 1.0% 0.6% 0.9% 0.9% 0.5%
Loan yield, currency
blended 14.3% 14.4% 14.3% 14.2% 14.2%
Loan yield, GEL 21.3% 22.9% 21.6% 21.9% 23.3%
Loan yield, FC 10.0% 10.9% 9.9% 10.0% 10.6%
Cost of Funds, currency
blended 4.8% 4.6% 4.8% 4.7% 4.7%
Cost of Funds,
GEL 7.0% 6.0% 6.8% 6.9% 6.5%
Cost of Funds,
FC 3.7% 4.1% 3.8% 3.7% 4.2%
Cost / Income 38.3% 37.4% 38.2% 37.7% 37.7%
Performance highlights
-- Strong Banking Business revenue. We recorded quarterly revenue of GEL 260.3mln in 4Q17 (up 16.1% y-o-y and up 16.6% q-o-q), ending the 2017 with revenue of GEL 909.3mln (up 17.5% y-o-y). Y-o-y revenue growth both in 4Q17 and 2017 was primarily driven by a strong increase in net banking interest income, which resulted from strong loan book growth, and increase in net other banking income. Additionally, net fee and commission income contributed to increase of Banking Business revenues in 4Q17 q-o-q and in 2017 y-o-y
-- Net banking interest income. Our net banking interest income was up 16.2% y-o-y and up 9.1% q-o-q in 4Q17 and up 21.4% y-o-y in 2017. The q-o-q and y-o-y increases were primarily driven by the strong growth of our Retail Banking loan book, which experienced 30.6% constant currency growth during 2017
-- Our NIM was 7.3% in both 4Q17 and 2017. 4Q17 NIM was down 30bps y-o-y reflecting the 10bps y-o-y decrease in loan yield and 20bps y-o-y increase in cost of funds. Loan yield and cost of funds remained flat q-o-q in 4Q17, resulting in a stable NIM. For the full year 2017, while both loan yield and cost of funds stayed flat and liquid assets yield was up 20bps compared to 2016, NIM was down 10bps y-o-y as a result of the NBG's decision in 2Q16 mandating an increase in minimum reserve requirements
-- Loan yield. Currency blended loan yield was stable at 14.3% in 4Q17 (down 10bps y-o-y and flat q-o-q) and 14.2% in 2017 (flat y-o-y). While local and foreign currency loan yields decreased y-o-y and q-o-q, the overall stable trend in the loan yield primarily reflected a continued shift towards high-yielding local currency denominated loans in the total loan portfolio mix
-- Liquid assets yield. Our liquid assets yield was 3.4% (up 10bps y-o-y and down 10bps q-o-q) in 4Q17 and in 2017 (up 20bps y-o-y). The foreign currency denominated liquid assets yield increased by 40pbs y-o-y in 4Q17 and in 2017 as a result of the US Federal Reserve's decisions in December 2016, March 2017 and June 2017 to raise interest rates by 75bps in aggregate, which triggered similar increases on interest rates paid by a) The National Bank of Georgia (the "NBG") on the Bank's obligatory reserves (foreign currency only) and b) correspondent banks on deposits placed by the Bank. On the other hand, local currency denominated liquid assets yield decreased 10bps y-o-y in 4Q17 and decreased by 20bps y-o-y in 2017. The currency blended liquid assets yield increased only 10bps y-o-y in 4Q17 and 20bps y-o-y in 2017 on the back of decreasing yields on higher return local currency denominated liquid assets, while the total liquid assets portfolio composition remained largely the same during the periods
-- Cost of funds. Cost of funds stood at 4.8% in 4Q17 (up 20bps y-o-y and flat q-o-q) and at 4.7% (flat y-o-y) in 2017. Despite the significant increase in cost of debt securities issued in 4Q17 and 2017 following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 170bps y-o-y in 4Q17 and up 60bps y-o-y in 2017), cost of funds remained largely flat as a result of a decrease in the cost of client deposits and notes (down 10bps y-o-y and q-o-q in 4Q17 and down 30bps y-o-y in 2017)
-- Continued shift to the GEL denominated loan book, which increased to 38.3% of the total book at 31 December 2017, compared to 28.7% a year ago. The dollarisation of our loan book has decreased since last year as the demand for local currency denominated loans outpaced the demand for foreign currency denominated loans. The trend was supported by the Georgian government's de-dollarisation initiatives: a) a one-off programme, effective from 15 January 2017 until 25 March 2017, allowing qualified borrowers to convert eligible US dollar denominated loans into GEL, at a discount compensated by the government, at the client's election and b) a new regulation, effective from 15 January 2017, restricting issuance of new loans in foreign currency with amounts less than GEL 100,000 (equivalent)
-- Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 23.0% y-o-y and 8.1% q-o-q to GEL 7,078.1mln driven by strong deposit generation in both the Retail and Corporate Investment Banking operations. Retail banking client deposits and notes grew by 35.4% y-o-y and 13.8% q-o-q to GEL 3,267.3mln, while CIB client deposits grew by 13.0% y-o-y and 4.5% q-o-q to GEL 3,457.3mln. We also increased our borrowings from DFIs by 10.7% q-o-q to GEL 1,297.7mln. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, remained strong at 92.4% (94.9% at 31 December 2016 and 90.0% at 30 September 2017) despite the strong growth of the loan book
-- Net fee and commission income. Net fee and commission income performance is mainly driven by the strong performance in our settlement operations supported by the success of our Express banking franchise. This was partially offset by a decline in CIB's fees from guarantees and letters of credit reflecting the de-concentration of our corporate risk
-- Net banking foreign currency gain. In line with the volatility of the GEL exchange rate, the net banking foreign currency gain was down 0.9% y-o-y and up 40.0% q-o-q in 4Q17 and up 3.4% y-o-y in 2017. RB and CIB businesses together contributed 87.4% to both the total 4Q17 and 2017 net banking foreign currency gain
-- Net other banking income. Net other banking income increased y-o-y and q-o-q to GEL 13.0mln in 4Q17 and to GEL 19.7mln in 2017 (up 61.7% y-o-y). The y-o-y and q-o-q increases in 4Q17 and y-o-y increase in 2017 was largely driven by a) GEL 4.5mln and GEL 1.5mln net gains on derivative financial instruments recorded in 4Q17 and 2017, respectively, and b) GEL 7.3mln revaluation gain from investment properties recorded in 4Q17
OPERATING INCOME BEFORE NON-RECURRING ITEMS; COST OF CREDIT RISK; PROFIT FOR THE PERIOD GEL thousands, unless otherwise Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Salaries and other employee benefits (55,789) (47,883) 16.5% (50,638) 10.2% (198,213) (168,374) 17.7% Administrative expenses (32,245) (25,096) 28.5% (23,240) 38.7% (100,291) (82,113) 22.1% Banking depreciation and amortisation (10,514) (9,639) 9.1% (10,738) -2.1% (40,974) (37,207) 10.1% Other operating expenses (1,194) (1,222) -2.3% (738) 61.8% (3,458) (3,854) -10.3% Operating expenses (99,742) (83,840) 19.0% (85,354) 16.9% (342,936) (291,548) 17.6% Profit from associate 255 - NMF 147 73.5% 1,311 - NMF Operating income before cost of credit risk 160,825 140,385 14.6% 137,989 16.5% 567,710 482,359 17.7% Impairment charge on loans to customers (41,911) (69,920) -40.1% (34,202) 22.5% (155,210) (158,892) -2.3% Impairment charge on finance lease receivables 492 3,124 -84.3% (781) NMF (496) (777) -36.2% Impairment charge on other assets and provisions (1,009) (3,812) -73.5% (1,849) -45.4% (11,590) (8,083) 43.4% Cost of credit risk (42,428) (70,608) -39.9% (36,832) 15.2% (167,296) (167,752) -0.3% Profit before non-recurring items and income tax 118,397 69,777 69.7% 101,157 17.0% 400,414 314,607 27.3% Net non-recurring items (213) (1,055) -79.8% (1,376) -84.5% (4,300) (45,355) -90.5% Profit before income tax 118,184 68,722 72.0% 99,781 18.4% 396,114 269,252 47.1% Income tax (expense) benefit (11,050) 2,782 NMF (7,850) 40.8% (26,592) 26,444 NMF Profit 107,134 71,504 49.8% 91,931 16.5% 369,522 295,696 25.0%
-- Operating expenses increased to GEL 99.7mln in 4Q17 (up 19.0% y-o-y and up 16.9% q-o-q) and GEL 342.9mln in 2017 (up 17.6% y-o-y). The growth in operating expenses outpaced growth in revenues, and consequently y-o-y operating leverage was negative both in 4Q17 and 2017 at 2.9 percentage points and at 0.1 percentage points, respectively. 4Q17 y-o-y and q-o-q and 2017 y-o-y changes in operating expenses were driven by:
- an increase in salaries and employee benefits by 16.5% y-o-y and 10.2% q-o-q in 4Q17 and by 17.7% y-o-y in 2017, which mainly reflects the strong organic growth of Retail Banking operations
- an increase in administrative expenses by 28.5% y-o-y and 38.7% q-o-q in 4Q17 and by 22.1% y-o-y in 2017, primarily driven by increased marketing, personnel training, rent and repair and maintenance costs. The increase was attributable to the combined effect of the larger branch network and the higher average quarterly and annual exchange rate during 4Q17 and 2017 as the vast majority of branch rental agreements are denominated in US dollars
-- Cost of risk ratio. The Banking Business cost of risk ratio was 2.1% in 4Q17, down 210bps y-o-y and up 10bps q-o-q. RB 4Q17 cost of risk ratio was down 20bps both y-o-y and q-o-q, while CIB cost of risk ratio was down 340bps y-o-y and up 90bps q-o-q. On an annual basis, the Banking Business cost of risk ratio was 2.2%, down 50bps y-o-y, primarily driven by 160bps decrease in CIB cost of risk ratio driven by overall improvement in the CIB loan portfolio quality, offset by 20bps increase in the RB cost of risk ratio
-- Quality of the Banking Business loan book remains strong in 4Q17 as evidenced by following closely monitored metrics:
GEL thousands, unless otherwise Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Non-performing loans NPLs 301,268 294,787 2.2% 297,134 1.4% 301,268 294,787 2.2% NPLs to gross loans 3.8% 4.2% 4.1% 3.8% 4.2% NPLs to gross loans, RB 1.3% 1.4% 1.5% 1.3% 1.4% NPLs to gross loans, CIB 7.5% 8.0% 8.3% 7.5% 8.0% NPL coverage ratio 92.7% 86.7% 93.6% 92.7% 86.7% NPL coverage ratio adjusted for the discounted value of collateral 130.6% 132.1% 132.8% 130.6% 132.1% Past due dates Retail loans - 15 days past due rate 0.9% 1.2% 1.5% 0.9% 1.2% Mortgage loans - 15 days past due rate 0.6% 0.6% 1.0% 0.6% 0.6%
-- Income tax (expense) benefit. The 4Q17 and 2017 y-o-y movement in income taxes mostly reflects the impacts of changes in corporate taxation model, approved by the Parliament of Georgia in May 2016, which resulted in the write-off of Banking Business net deferred tax liabilities in 2016
-- BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 3.6mln in 4Q17 (up from GEL 4.1mln loss in 4Q16 and down 3.3% q-o-q) and GEL 10.3mln in 2017 (up from GEL 2.7mln in 2016); BNB's earnings were positively impacted by decreased levels of cost of risk in 4Q17. While Belarus experienced weak macro-economic conditions in 2016 and 1Q17, starting from 2Q17 the Belarus economy started to show early signs of stabilisation. As a result, BNB's cost of credit risk significantly improved in 2017
-- BNB's loan book reached GEL 399.5mln at 31 December 2017, up 10.3% y-o-y and up 5.0% q-o-q, mostly reflecting an increase in corporate and consumer loans. Client deposits were GEL 310.1mln at 31 December 2017, up 32.8% y-o-y and largely flat q-o-q. The y-o-y increase in client deposits was primarily attributable to the agreement signed with BelSwissBank in June 2017, which allowed BNB to manage and service current and term deposit accounts and card operations of BelSwissBank's customers
-- BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. At 31 December 2017, total CAR was 13.9%, well above the 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 8.1%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") was 18.5% in 4Q17 (negative 23.6% in 4Q16 and 21.1% in 3Q17) and 14.6% in 2017 (2.8% in 2016). Strong capitalisation and improved profitability allowed BNB to make a dividend payment in the amount of GEL 1.2mln in 3Q17, the first capital return to the Bank since the BNB acquisition in 2008
-- As a result, the Banking Business profit reached GEL 107.1mln in 4Q17 (up 49.8% y-o-y and up 16.5% q-o-q) and GEL 369.5mln in 2017 (up 25.0% y-o-y), while ROAE increased to 27.8% in 4Q17 (up 780bps y-o-y and 270bps q-o-q) and to 25.2% in 2017 (up 300bps y-o-y)
BANKING BUSINESS BALANCE SHEET HIGHLIGHTS
GEL thousands, unless otherwise Dec-17 Dec-16 Change Sep-17 Change
noted y-o-y q-o-q
Liquid assets 4,346,509 3,705,171 17.3% 4,068,147 6.8%
Liquid assets, GEL 1,791,708 1,450,269 23.5% 1,569,161 14.2%
Liquid assets, FC 2,554,801 2,254,902 13.3% 2,498,986 2.2%
Net loans and finance lease
receivables 7,741,420 6,681,672 15.9% 6,951,493 11.4%
Net loans and finance lease
receivables, GEL 2,968,832 1,920,422 54.6% 2,689,778 10.4%
Net loans and finance lease
receivables, FC 4,772,588 4,761,250 0.2% 4,261,715 12.0%
Client deposits and notes 7,078,058 5,755,767 23.0% 6,549,904 8.1%
Amounts due to credit institutions 2,778,338 3,067,651 -9.4% 2,350,438 18.2%
Borrowings from DFIs 1,297,749 1,281,798 1.2% 1,172,530 10.7%
Short-term loans from central
banks 793,528 1,085,640 -26.9% 590,014 34.5%
Loans and deposits from commercial
banks 687,061 700,213 -1.9% 587,894 16.9%
Debt securities issued 1,386,412 858,036 61.6% 1,298,641 6.8%
Liquidity and CAR ratios
Net loans / client deposits
and notes 109.4% 116.1% 106.1%
Net loans / client deposits
and notes + DFIs 92.4% 94.9% 90.0%
Liquid assets as percent of
total assets 33.7% 33.3% 34.5%
Liquid assets as percent of
total liabilities 38.3% 37.9% 39.5%
NBG liquidity ratio 34.4% 37.7% 44.4%
Excess liquidity (NBG) 289,942 418,016 -30.6% 843,299 -65.6%
NBG (Basel II) Tier I Capital
Adequacy Ratio 10.3% 9.1% 11.1%
NBG (Basel II) Total Capital
Adequacy Ratio 14.8% 14.4% 16.2%
NBG (Basel III) Tier I Capital 12.4% - -
Adequacy Ratio
NBG (Basel III) Total Capital 17.9% - -
Adequacy Ratio
Our Banking Business balance sheet remains highly liquid (NBG Liquidity ratio of 34.4%) and strongly capitalised (Tier I ratio, NBG Basel II of 10.3% and NBG Basel III of 12.4%) with a well-diversified funding base (Client Deposits and notes to Total Liabilities of 62.3%).
-- Liquidity. Liquid assets increased to GEL 4,346.5mln at 31 December 2017, up 17.3% y-o-y and up 6.8% q-o-q, largely driven by proceeds from the GEL 500mln Lari denominated bonds in June 2017 and increase in local currency bonds, which are used by the Bank as collateral for short-term borrowings from the NBG. Management successfully continued to deploy excess liquidity, accumulated as a result of proceeds from issuance of local currency Eurobond during the second half of the year. As a result, the NBG liquidity ratio stood at 34.4% at 31 December 2017, compared to 37.7% at 31 December 2016 and 44.4% at 30 September 2017, and above the regulatory minimum requirement of 30.0%
-- In addition, in May 2017, NBG introduced a Liquidity Coverage Ratio requirement for commercial banks, which became effective from 1 September 2017. Banks are required to maintain a liquidity coverage ratio, which is defined as the ratio of high quality liquid assets to net cash outflow over the next 30 days. The ratio should be in excess of 100% for assets denominated in all currencies, cumulatively, at all times. In addition, liquidity coverage ratio is applicable to local and foreign currency denominated assets, separately, and should be in excess of 75% and 100%, respectively, at all times. NBG liquidity coverage ratio was 112.4% at 31 December 2017 (129.8% at 30 September 2017)
-- Diversified funding base. Debt securities issued grew by 61.6% y-o-y and by 6.8% q-o-q primarily due to the issuance of GEL 500mln Lari denominated bonds in June 2017, which positively contributed to GEL liquidity, allowing the Banking Business to significantly reduce short-term borrowings from the NBG (down 26.9% y-o-y)
-- Loan book. Our net loan book and finance lease receivables reached GEL 7,741.4mln at 31 December 2017, up 15.9% y-o-y and up 11.4% q-o-q. As of 31 December 2017, retail book represented 68.0% of the total loan portfolio (60.9% at 31 December 2016 and 68.4% at 30 September 2017). While both local and foreign currency portfolios experienced y-o-y growth, the local currency loan portfolio demonstrated an outstanding increase of 54.6% y-o-y and 10.4% q-o-q, partially driven by the Georgian government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio
In 4Q17, we changed the Group accounting policy in relation to subsequent measurement for office buildings and service centres. Effective 31 December 2017, we switched to the cost model, whereby office buildings and service centres are carried at cost less accumulated depreciation and accumulated impairment. Prior to this change, we applied the revaluation model, where office buildings and service centres were carried at their fair value less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations were performed once every three years. We believe that cost model provides more reliable and more meaningful presentation to our investors as it (1) enhances comparability for the investors since the application of cost model is a market practice and global standard across the banking industry (2) more closely aligns the accounting with the business model around these asset categories. The switch to cost model resulted in GEL 33.3mln decrease to Banking Business equity attributable to shareholders. We have accordingly restated the balance sheet accounts for affected periods, while the change did not have any material impact on the income statement. Banking Business ratios have been updated for the prior periods.
On 13 September 2017, Moody's upgraded JSC Bank of Georgia's local-currency deposit rating to Ba2 from Ba3, and the Bank's foreign-currency deposit rating to Ba3 from B1. The Bank's senior unsecured foreign-currency rating was also upgraded to Ba2 from Ba3 with a stable outlook. The Bank's credit rating action followed Moody's upgrade of Georgia's sovereign local and foreign currency issuer ratings to Ba2 from Ba3 on 11 September 2017.
Amendments to Capital Adequacy requirements. To transition to Basel III, National Bank of Georgia ("NBG") introduced new capital adequacy requirements in December 2017. Bank of Georgia is required to maintain the following minimum capital requirements:
-- Common Equity Tier 1 ("CET1") ratio 4.5%
-- Tier 1 ratio 6%
-- Total Capital ratio at 8%
The combined buffer requirement has also been introduced and Bank of Georgia is required to hold the following:
-- Capital Conservation Buffer set at 2.5%
-- Countercyclical Buffer set at 0%
-- Systemic Capital Buffer of 0% for 2018, which will increase to 1% on 31 December 2018 and by additional 0.5% annually until it reaches 2.5% on 31 December 2021
NBG also introduced Pillar 2 requirements. The new regulation applicable to Bank of Georgia includes:
-- Currency Induced Credit Risk ("CICR") buffer, which substitutes current additional 75% weighting of FX denominated exposure. 56% of CICR buffer should be held on CET1 level, 75% on Tier 1 level and 100% on total capital
-- Net GRAPE buffer expected to be set at 2.2% according to NBG's annual General Risk Assessment Program ("GRAPE"). GRAPE buffer, which includes Credit Portfolio Concentration buffer and Net Stress Test buffer, will be reviewed annually and phased-in on different levels of capital according to the below schedule:
Feb-18 31-Dec-18 31-Dec-19 31-Dec-20 31-Dec-21
-------------- ------ --------- --------- --------- ---------
CET 1 0% 15% 30% 45% 56%
Tier 1 0% 20% 40% 60% 75%
Total Capital 100% 100% 100% 100% 100%
-------------- ------ --------- --------- --------- ---------
In the view of the above, the following overall capital requirements apply to Bank of Georgia at 31 December 2017:
-- CET 1 ratio 8.1%, expected to increase to 9.5%(8) on 31 December 2018
-- Tier 1 ratio 9.9%, expected to increase to 11.4%(8) on 31 December 2018
-- Total Capital ratio 12.4%, expected to increase to 15.6%(8) on 31 December 2018
Bank of Georgia's capital ratios calculated as of 31 December 2017 were at 12.4% CET1 and Tier 1 and 17.9% Total capital.
Transition to Basel III is not expected to affect Bank's growth prospects or its ability to maintain dividends distributions within the existing dividend policy payout range.
(8) Indicated minimum capital adequacy ratio contains CICR buffer estimate for 31 December 2018.
Discussion of Banking Business Segment Results
Retail Banking (RB)
Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is itself represented by the following four sub-segments: (1) the emerging retail segment (through our Express brand), (2) retail mass market segment; (3) SME and micro businesses - "MSME" (through our Bank of Georgia brand), and (4) the mass affluent segment (through our Solo brand).
GEL thousands, unless Change Change Change otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y INCOME STATEMENT HIGHLIGHTS Net banking interest income 134,517 111,109 21.1% 122,352 9.9% 480,955 374,022 28.6% Net fee and commission income 28,511 26,810 6.3% 25,064 13.8% 99,790 90,193 10.6% Net banking foreign currency gain 8,407 8,825 -4.7% 7,979 5.4% 28,937 26,086 10.9% Net other banking income 4,531 989 NMF 366 NMF 5,029 3,833 31.2% Revenue 175,966 147,733 19.1% 155,761 13.0% 614,711 494,134 24.4% Salaries and other employee benefits (35,778) (31,149) 14.9% (32,262) 10.9% (125,668) (106,396) 18.1% Administrative expenses (22,461) (17,287) 29.9% (17,084) 31.5% (72,464) (57,743) 25.5% Banking depreciation and amortisation (9,020) (8,052) 12.0% (9,087) -0.7% (34,741) (30,943) 12.3% Other operating expenses (843) (818) 3.1% (448) 88.2% (2,279) (2,545) -10.5% Operating expenses (68,102) (57,306) 18.8% (58,881) 15.7% (235,152) (197,627) 19.0% Profit from associate 255 - NMF 147 73.5% 1,311 - NMF Operating income before cost of credit risk 108,119 90,427 19.6% 97,027 11.4% 380,870 296,507 28.5% Cost of credit risk (23,122) (19,272) 20.0% (22,246) 3.9% (110,800) (75,690) 46.4% Profit before non-recurring items and income tax 84,997 71,155 19.5% 74,781 13.7% 270,070 220,817 22.3% Net non-recurring items (74) (1,921) -96.1% (1,041) -92.9% (2,358) (32,002) -92.6% Profit before income tax 84,923 69,234 22.7% 73,740 15.2% 267,712 188,815 41.8% Income tax (expense)/benefit (7,335) (1,235) NMF (5,342) 37.3% (18,046) 20,475 NMF Profit 77,588 67,999 14.1% 68,398 13.4% 249,666 209,290 19.3% BALANCE SHEET HIGHLIGHTS Net loans, Currency Blended 5,044,372 3,902,306 29.3% 4,541,302 11.1% 5,044,372 3,902,306 29.3% Net loans, GEL 2,582,677 1,530,661 68.7% 2,307,391 11.9% 2,582,677 1,530,661 68.7% Net loans, FC 2,461,695 2,371,645 3.8% 2,233,911 10.2% 2,461,695 2,371,645 3.8% Client deposits, Currency Blended 3,267,276 2,413,569 35.4% 2,869,921 13.8% 3,267,276 2,413,569 35.4% Client deposits, GEL 910,878 603,149 51.0% 815,611 11.7% 910,878 603,149 51.0% Client deposits, FC 2,356,398 1,810,420 30.2% 2,054,310 14.7% 2,356,398 1,810,420 30.2% of which: Time deposits, Currency Blended 1,829,433 1,437,644 27.3% 1,629,593 12.3% 1,829,433 1,437,644 27.3% Time deposits, GEL 361,775 228,047 58.6% 314,753 14.9% 361,775 228,047 58.6% Time deposits, FC 1,467,658 1,209,597 21.3% 1,314,840 11.6% 1,467,658 1,209,597 21.3% Current accounts and demand deposits, Currency Blended 1,437,843 975,925 47.3% 1,240,328 15.9% 1,437,843 975,925 47.3% Current accounts and demand deposits, GEL 549,103 375,102 46.4% 500,858 9.6% 549,103 375,102 46.4% Current accounts and demand deposits, FC 888,740 600,823 47.9% 739,470 20.2% 888,740 600,823 47.9% KEY RATIOS ROAE Retail Banking 36.6% 36.5% 34.1% 31.6% 31.2% Net interest margin, currency blended 8.4% 9.3% 8.5% 8.5% 9.2% Cost of risk 1.8% 2.0% 2.0% 2.5% 2.3% Cost of funds, currency blended 5.7% 5.1% 6.0% 5.7% 5.7% Loan yield, currency blended 15.9% 16.4% 16.3% 16.1% 16.8% Loan yield, GEL 22.7% 25.4% 23.1% 23.6% 25.4% Loan yield, FC 8.8% 10.1% 9.2% 9.1% 10.2% Cost of deposits, currency blended 2.8% 3.1% 2.9% 2.9% 3.3% Cost of deposits, GEL 4.5% 4.0% 4.4% 4.5% 4.5% Cost of deposits, FC 2.2% 2.7% 2.2% 2.3% 2.9% Cost of time deposits, currency blended 4.2% 4.5% 4.3% 4.3% 4.9% Cost of time deposits, GEL 8.9% 8.6% 8.8% 8.8% 9.3% Cost of time deposits, FC 3.1% 3.7% 3.2% 3.3% 4.0% Current accounts and demand deposits, currency blended 0.9% 0.8% 1.0% 1.0% 0.9% Current accounts and demand deposits, GEL 1.5% 1.1% 1.7% 1.6% 1.2% Current accounts and demand deposits, FC 0.5% 0.6% 0.5% 0.6% 0.6% Cost / income ratio 38.7% 38.8% 37.8% 38.3% 40.0%
Performance highlights
-- Retail Banking delivered another outstanding quarterly result across all of its segments and generated total revenues of GEL 176.0mln in 4Q17 (up 19.1% y-o-y and up 13.0% q-o-q) and revenue of GEL 614.7mln in 2017 (up 24.4% y-o-y)
-- RB's net banking interest income experienced 21.1% y-o-y and 9.9% q-o-q growth in 4Q17 and 28.6% y-o-y growth in 2017 as a result of the strong growth in the Retail Banking loan portfolio. Record quarterly net banking interest income also reflects the benefits from the increase in the local currency loan portfolio, which generated 13.9ppts and 14.5ppts higher yield than the foreign currency loan portfolio during 4Q17 and 2017, respectively
-- The Retail Banking net loan book reached GEL 5,044.4mln, up 29.3% y-o-y and up 11.1% q-o-q. Our local currency denominated loan book grew at a faster pace (up 68.7% y-o-y and up 11.9% q-o-q) than the foreign currency denominated loan book (up 3.8% y-o-y and up 10.2% q-o-q). As a result, the loan book dollarisation decreased to 48.8% at 31 December 2017 from 60.8% at 31 December 2016 and 49.2% at 30 September 2017
-- The loan book growth was a product of continued strong loan origination levels delivered across all major Retail Banking segments:
Retail Banking loan book by products GEL million, unless Change Change Change otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Loan Originations Consumer loans 383 313 22.5% 349 9.6% 1,384 1,019 35.8% Mortgage loans 359 239 50.3% 264 35.9% 1,062 718 48.0% Micro loans 309 272 13.6% 236 31.4% 1,018 800 27.2% SME loans 190 166 14.2% 152 25.0% 594 509 16.6% POS loans 80 69 15.5% 65 21.7% 244 221 10.4% Outstanding Balance Consumer loans 1,242 887 40.1% 1,148 8.2% 1,242 887 40.1% Mortgage loans 1,706 1,228 39.0% 1,459 16.9% 1,706 1,228 39.0% Micro loans 1,031 857 20.3% 966 6.7% 1,031 857 20.3% SME loans 607 490 23.9% 535 13.4% 607 490 23.9% POS loans 131 121 7.9% 114 14.6% 131 121 7.9%
-- Retail Banking client deposits increased to GEL 3,267.3mln, up 35.4% y-o-y and up 13.8% q-o-q, despite a decrease in the cost of deposits of 30bps y-o-y and 10bps q-o-q in 4Q17 and decrease of 40bps y-o-y in 2017. The dollarisation level of our deposits decreased to 72.1% at 31 December 2017 from 75.0% at 31 December 2016 and remained largely flat compared to 30 September 2017. This is in line with the current decreasing trend of cost on foreign currency denominated deposits (down 50 bps y-o-y and flat q-o-q in 4Q17 and down 60bps y-o-y in 2017). The spread between the cost of RB's client deposits in GEL and foreign currency widened to 2.3ppts during 4Q17 (GEL: 4.5%; FC: 2.2%) compared to 1.3ppts in 4Q16 (GEL: 4.0%; FC: 2.7%) and 2.2ppts in 3Q17 (GEL: 4.4%; FC: 2.2%). For 2017, the spread was 2.2ppts (GEL: 4.5%; FC: 2.3%) compared to 1.6ppts in 2016 (GEL: 4.5%; FC: 2.9%). Local currency denominated deposits increased at a faster pace to GEL 910.9mln (up 51.0% y-o-y), as compared to foreign currency denominated deposits that grew to GEL 2,356.4mln (up 30.2% y-o-y)
-- Retail Banking NIM was 8.4% in 4Q17, down 90bps y-o-y and down 10bps q-o-q. The lower NIM y-o-y in 4Q17 was attributable to a 50bps decrease in loan yield, while the cost of funds increased by 60bps. On a q-o-q basis, loan yield was down by 40bps and cost of funds was down only by 30bps. For 2017, the Retail Banking NIM was 8.5%, down 70bps y-o-y. The lower NIM was a result of a 70bps decrease in loan yield, as cost of funds remained flat in 2017
-- Strong growth in Retail Banking net fee and commission income. The 6.3% y-o-y and 13.8% q-o-q increase in 4Q17 and 10.6% y-o-y growth in 2017 was driven by an organic increase in our fee and commission income and the strong underlying growth in both our Express Banking and Solo platforms
-- RB cost to income ratio remained well-controlled at 38.7% in 4Q17 (down 10bps y-o-y and up 90bps q-o-q) and at 38.3% in 2017 (down 170bps y-o-y). The significant y-o-y improvement resulted from the increasing utilisation of our Solo lounges coupled with the growth of the Express Banking franchise, which has the most cost-efficient model among our four Retail Banking segments
-- RB cost of risk improved in 4Q17. RB cost of credit risk was GEL 23.1mln in 4Q17 (up 20.0% y-o-y and up 3.9% q-o-q) and GEL 110.8mln in 2017 (up 46.4% y-o-y). The cost of risk ratio was 1.8% in 4Q17, down from 2.0% in 4Q16 and 3Q17. 2017 cost of risk ratio was 2.5%, up from 2.3% in 2016 due to higher cost of risk levels in 1H17
-- The number of Retail Banking clients reached 2.3mln, up 8.1% y-o-y and up 2.7% q-o-q, while the number of total cards outstanding amounted to 2,227,000, up 8.3% y-o-y and up 2.3% q-o-q
-- Our Retail Banking business continues to deliver strong growth as we further develop our strategy, as demonstrated by the following performance indicators
Retail Banking performance indicators Volume information Change Change Change in GEL thousands 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Retail Banking Customers Number of new customers 65,712 69,091 -4.9% 42,028 56.4% 198,488 141,360 40.4% Number of customers 2,315,038 2,141,229 8.1% 2,254,584 2.7% 2,315,038 2,141,229 8.1% Cards Number of Cards issued 324,974 419,714 -22.6% 247,594 31.3% 1,022,283 955,549 7.0% Number of Cards outstanding 2,227,000 2,056,258 8.3% 2,176,761 2.3% 2,227,000 2,056,258 8.3% Express Pay terminals Number of Express Pay terminals 2,842 2,729 4.1% 2,823 0.7% 2,842 2,729 4.1% Number of transactions via Express Pay terminals 27,211,578 27,180,023 0.1% 25,264,823 7.7% 104,021,767 117,518,668 -11.5% Volume of transactions via Express Pay terminals 1,478,216 935,952 57.9% 1,292,582 14.4% 4,748,036 3,167,369 49.9% POS terminals Number of Desks 9,934 8,516 16.7% 9,609 3.4% 9,934 8,516 16.7% Number of Contracted Merchants 5,341 4,514 18.3% 5,334 0.1% 5,341 4,514 18.3% Number of POS terminals 13,291 10,357 28.3% 11,997 10.8% 13,291 10,357 28.3% Number of transactions via POS terminals 12,874,756 9,524,900 35.2% 12,143,991 6.0% 46,177,412 30,897,709 49.5% Volume of transactions via POS terminals 423,565 290,142 46.0% 392,229 8.0% 1,405,800 926,318 51.8% Internet Banking Number of Active Users 219,496 122,456 79.2% 188,087 16.7% 219,496 122,456 79.2% Number of transactions via Internet Bank 1,513,437 1,668,037 -9.3% 1,430,048 5.8% 6,415,427 5,797,851 10.7% Volume of transactions via Internet Bank 425,930 330,530 28.9% 321,297 32.6% 1,402,969 1,094,260 28.2% Mobile Banking Number of Active Users 177,243 74,796 137.0% 146,785 20.8% 177,243 74,796 137.0% Number of transactions via Mobile Bank 2,323,573 855,025 171.8% 1,812,353 28.2% 6,348,533 2,648,779 139.7% Volume of transactions via Mobile Bank 278,856 89,598 211.2% 190,020 46.8% 685,470 246,300 178.3%
- Growth in the client base was due to the increased offering of cost-effective remote channels. The strong increase to 2,315,038 customers in 4Q17 (up 8.1% y-o-y and up 2.7% q-o-q) reflects the sustained growth in our client base over recent periods and was the main driver of the increase in our Retail Banking net fee and commission income
- The number of outstanding cards increased in both 4Q17 and on a full year basis. The increase reflects the launch of new loyalty programme Plus+ in July 2017 (see details below). Since the programme launch the Bank customers who sign up for the programme, are issued Plus+ cards. We had 250,307 active Plus+ cards outstanding as at 31 December 2017
- The utilisation of Express Pay terminals continued to grow in 4Q17. The 4Q17 volume of transactions increased to GEL 1,478.2mln (up 57.9% y-o-y and up 14.4% q-o-q) and to GEL 4,748.0mln in 2017 (up 49.9% y-o-y), while the number of transactions was flat y-o-y in 4Q17 and down y-o-y in 2017. This trend was largely driven by the management's decision to introduce transaction fees on non-banking transactions processed through Express Pay terminals in 4Q16. However, while this introduction negatively affected the number of transactions, the decrease was more than offset by the fees charged to clients leading to a 31.2% y-o-y increase in 2017 in fee income from express pay terminals
- Digital penetration growth. For mobile banking application, the number of transactions and the volume of transactions continue to show outstanding growth, primarily due to the introduction of our new mobile banking application in May 2017. The new fully-transformed, user-friendly, multi-feature mobile banking application continues to gain popularity. Since its launch on 29 May 2017, and over the course of the following seven months, approximately 261,000 downloads were made by the Bank's customers, while the previous application had less than 120,000 downloads since its launch. During the same period c.3.88 million online transactions were performed using the new application
- Significant growth in loans issued and deposits opened through Internet Bank. During 2017, we started actively offering loans and deposit products to our customers through Internet Bank. As a result, 5,798 loans were issued with total value of GEL 15.1mln and 7,458 deposits were opened with total value of GEL 19.1mln through Internet Bank in 2017 (445 loans with total value of GEL 1.9mln and 3,546 deposits with total value of GEL 7.3mln in 2016)
-- On 15 September 2017, Bank of Georgia signed an agreement with Tbilisi City Hall for the exclusive right to operate the public transportation payment system in Tbilisi. In accordance with the agreement, Bank of Georgia will continue as the sole provider of payment support services to the public transportation network, and operate retail branches in Tbilisi metro stations for the next ten years. Bank of Georgia will implement a modern payments system for the public transportation network in Tbilisi, including payment processing using Visa and MasterCard cards, and create a digital platform for ticket reservations and purchases through mobile applications. This further strengthens the Bank's leading position in the express segment by maintaining branch network presence in Tbilisi's public transportation network
-- We launched new loyalty programme Plus+ on 5 July 2017. Plus+ is part of RB's customer-centric approach and offers different status levels to customers and reward points that accumulate based on the client's business with the Bank and can be redeemed into partner companies' products and/or services. We launched the programme as part of our efforts to increase the Mass Retail segment's product to client ratio from current 1.8 to 3.0
-- Solo, our premium banking brand, continues its strong growth momentum and investment in its lifestyle brand. The number of Solo clients reached 32,104 at 31 December 2017 (19,267 at 31 December 2016 and 28,492 at 30 September 2017), up 287.6% since its re-launch in April 2015. We are on track to achieving our target of 40,000 Solo clients by the end of 2018. We have now launched 12 Solo lounges, of which 9 are located in Tbilisi, the capital of Georgia, and 3 in major regional cities of Georgia. In 4Q17, annualised profit per Solo client was GEL 1,865 compared to a profit of GEL 101 and GEL 82 per Express and mass retail clients, respectively. Product to client ratio for Solo segment was 6.1, compared to 3.4 and 1.8 for Express and mass retail clients, respectively. While Solo clients currently represent 1.4% of our total retail client base, they contributed 24.3% to our retail loan book, 37.4% to our retail deposits, 14.9% and 19.0% to our net interest income and to our net fee and commission income, respectively, in 4Q17. The fee and commission income from Solo segment increased from GEL 8.3mln in 2016 to GEL 14.4mln in 2017. Solo Club, launched in 2Q17, a membership group within Solo, which offers exclusive access to Solo products and offers ahead of other Solo clients at a higher fee, continues to gain popularity. At 31 December 2017, Solo Club had 1,882 members, up 23.2% q-o-q
-- MSME banking delivered solid growth. The number of MSME segment clients reached 165,781 at 31 December 2017, up 30.7% y-o-y and up 5.1% q-o-q. MSME's loan portfolio was GEL 1,739.2mln at 31 December 2017 (up 29.2% y-o-y and up 9.7% q-o-q). MSME segment generated revenue of GEL 36.9mln in 4Q17 (up 51.0% y-o-y and up 12.8% q-o-q)
-- As a result, Retail Banking profit reached GEL 77.6mln in 4Q17 (up 14.1% y-o-y and up 13.4% q-o-q) and GEL 249.7mln in 2017 (up 19.3% y-o-y). Retail Banking continued to deliver an outstanding ROAE, which reached 36.6% in 4Q17 (36.5% in 4Q16 and 34.1% in 3Q17) and 31.6% in 2017 (31.2% in 2016)
Corporate Investment Banking (CIB)
CIB provides (1) loans and other credit facilities to Georgia's large corporate clients and other legal entities, excluding SME and micro businesses; (2) services such as fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits; (3) finance lease facilities through the Bank's leasing operations arm, the Georgian Leasing Company; (4) brokerage services through Galt & Taggart; and (5) Wealth Management private banking services to high-net-worth individuals and offers investment management products internationally through representative offices in London, Budapest, Istanbul and Tel Aviv.
GEL thousands, unless Change Change Change
otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y
INCOME STATEMENT
HIGHLIGHTS
Net banking interest
income 42,539 39,168 8.6% 38,550 10.3% 156,171 147,108 6.2%
Net fee and commission
income 5,859 8,133 -28.0% 5,891 -0.5% 22,717 27,963 -18.8%
Net banking foreign
currency gain 15,585 16,158 -3.5% 8,852 76.1% 46,276 48,643 -4.9%
Net other banking
income 7,710 2,518 NMF 2,359 NMF 14,256 10,170 40.2%
Revenue 71,693 65,977 8.7% 55,652 28.8% 239,420 233,884 2.4%
Salaries and other
employee benefits (15,271) (12,368) 23.5% (13,982) 9.2% (54,573) (47,731) 14.3%
Administrative expenses (5,439) (4,943) 10.0% (3,699) 47.0% (16,190) (15,214) 6.4%
Banking depreciation
and amortisation (1,316) (1,262) 4.3% (1,339) -1.7% (5,134) (5,124) 0.2%
Other operating expenses (228) (330) -30.9% (187) 21.9% (761) (1,031) -26.2%
Operating expenses (22,254) (18,903) 17.7% (19,207) 15.9% (76,658) (69,100) 10.9%
Operating income
before cost of credit
risk 49,439 47,074 5.0% 36,445 35.7% 162,762 164,784 -1.2%
Cost of credit risk (18,788) (42,172) -55.4% (14,887) 26.2% (47,403) (76,266) -37.8%
Profit before non-recurring
items and income
tax 30,651 4,902 NMF 21,558 42.2% 115,359 88,518 30.3%
Net non-recurring
items (134) 2,267 NMF (334) -59.9% (1,882) (11,934) -84.2%
Profit before income
tax 30,517 7,169 NMF 21,224 43.8% 113,477 76,584 48.2%
Income tax (expense)/benefit (2,840) 2,885 NMF (1,780) 59.6% (7,584) 11,698 NMF
Profit 27,677 10,054 175.3% 19,444 42.3% 105,893 88,282 19.9%
BALANCE SHEET HIGHLIGHTS
Net loans and finance
lease receivables,
Currency Blended 2,260,107 2,394,876 -5.6% 1,993,582 13.4% 2,260,107 2,394,876 -5.6%
Net loans and finance
lease receivables,
GEL 383,058 400,395 -4.3% 381,479 0.4% 383,058 400,395 -4.3%
Net loans and finance
lease receivables,
FC 1,877,049 1,994,481 -5.9% 1,612,103 16.4% 1,877,049 1,994,481 -5.9%
Client deposits,
Currency Blended 3,457,331 3,059,150 13.0% 3,308,347 4.5% 3,457,331 3,059,150 13.0%
Client deposits,
GEL 1,276,401 772,253 65.3% 1,242,933 2.7% 1,276,401 772,253 65.3%
Client deposits,
FC 2,180,930 2,286,897 -4.6% 2,065,414 5.6% 2,180,930 2,286,897 -4.6%
Time deposits, Currency
Blended 1,297,984 1,230,627 5.5% 1,316,612 -1.4% 1,297,984 1,230,627 5.5%
Time deposits, GEL 470,288 135,002 NMF 515,770 -8.8% 470,288 135,002 NMF
Time deposits, FC 827,696 1,095,625 -24.5% 800,842 3.4% 827,696 1,095,625 -24.5%
Current accounts
and demand deposits,
Currency Blended 2,159,347 1,828,523 18.1% 1,991,735 8.4% 2,159,347 1,828,523 18.1%
Current accounts
and demand deposits,
GEL 806,113 637,251 26.5% 727,163 10.9% 806,113 637,251 26.5%
Current accounts
and demand deposits,
FC 1,353,234 1,191,272 13.6% 1,264,572 7.0% 1,353,234 1,191,272 13.6%
Letters of credit
and guarantees, standalone* 644,750 511,615 26.0% 634,414 1.6% 644,750 511,615 26.0%
Assets under management 1,857,495 1,575,521 17.9% 1,817,843 2.2% 1,857,495 1,575,521 17.9%
RATIOS
ROAE, Corporate Investment
Banking 18.1% 6.2% 13.3% 17.6% 14.7%
Net interest margin,
currency blended 3.5% 3.6% 3.5% 3.4% 3.6%
Cost of risk 3.2% 6.6% 2.3% 1.5% 3.1%
Cost of funds, currency
blended 4.3% 5.1% 4.5% 4.6% 4.7%
Loan yield, currency
blended 11.2% 11.1% 10.6% 10.7% 10.4%
Loan yield, GEL 12.3% 13.0% 14.3% 12.8% 13.2%
Loan yield, FC 11.0% 10.8% 9.9% 10.3% 10.1%
Cost of deposits,
currency blended 4.0% 3.6% 3.9% 4.0% 3.9%
Cost of deposits,
GEL 6.6% 5.0% 6.2% 6.6% 6.3%
Cost of deposits,
FC 2.5% 3.2% 2.6% 2.7% 3.1%
Cost of time deposits,
currency blended 6.0% 5.8% 5.9% 5.8% 5.9%
Cost of time deposits,
GEL 8.0% 9.2% 8.3% 8.4% 9.5%
Cost of time deposits,
FC 4.8% 5.4% 4.9% 5.0% 5.3%
Current accounts
and demand deposits,
currency blended 2.8% 2.0% 2.6% 2.8% 2.6%
Current accounts
and demand deposits,
GEL 5.7% 3.9% 5.2% 5.9% 5.4%
Current accounts
and demand deposits,
FC 1.2% 1.0% 1.1% 1.0% 0.9%
Cost / income ratio 31.0% 28.7% 34.5% 32.0% 29.5%
Concentration of
top ten clients 10.7% 11.8% 10.4% 10.7% 11.8%
(*) Off-balance sheet item
Performance highlights
-- CIB resumes growth after achieving targets on loan portfolio risk de-concentration initiatives. During 4Q17 CIB started to rebound and resume growth after delivering on its risk de-concentration and loan portfolio repositioning targets in 3Q17
- Net loan book amounted to GEL 2,260.1mln at 31 December 2017, down 5.6% y-o-y and up 13.4% q-o-q. The y-o-y decrease was largely driven by winding down lending relationships with several large borrowers in 2017 as a result of risk de-concentration and loan portfolio repositioning targets. Starting from 4Q17 the CIB gradually resumed growth, resulting in a q-o-q increase in loan portfolio. The concentration of top 10 CIB clients stood at 10.7% at 31 December 2017, down from 11.8% at 31 December 2016
- CIB's net banking interest income increased by 8.6% y-o-y and by 10.3% q-o-q in 4Q17 and increased by 6.2% y-o-y in 2017. The y-o-y growth in both 4Q17 and 2017 net banking interest income reflects increases in the currency blended loan yields, as well as significant decline in cost of funds over the same periods. The q-o-q growth in CIB's 4Q17 net banking interest income was largely driven by the increase in CIB's loan portfolio size, coupled with increased currency blended loan yields and decreased cost of funds
- CIB's net fee and commission income was GEL 5.9mln in 4Q17, compared to GEL 8.1mln in 4Q16 and GEL 5.9mln in 3Q17. On a full year basis, CIB net fee and commission income was GEL 22.7mln in 2017, compared to GEL 28.0mln in 2016. The y-o-y decline in 4Q17 and 2017 was driven by decrease in net fee and commission income from guarantees and letters of credit. The 26.0% y-o-y increase in guarantees and letters of credit in 2017 was offset by decline in yields on these products during the same periods as a result of increased competition on the market and increased exposure to lower yielding cross guarantees of highly rated institutions to manage the risk, driving the y-o-y decline in the net fees and commission income from guarantees and letters of credit in 4Q17 and 2017
-- In 4Q17, dollarisation of our CIB deposits decreased to 63.1% as at 31 December 2017 from 74.8% a year ago, which was partially due to the State Treasury of Georgia's decision to place part of their GEL funds on deposits with local commercial banks in 3Q17. Another driver of GEL denominated deposits increase was the significant decrease in interest rates on foreign currency deposits (2.5% in 4Q17, down from 3.2% in 4Q16 and 2.7% in 2017, down from 3.1% in 2016). In contrast, the cost of deposits in local currency in 4Q17 reached 6.6%, up from 5.0% in 4Q16 and up from 6.2% in 3Q17, and remained well above foreign currency deposit yields. Consequently, total deposits amounted to GEL 3,457.3, up 13.0% y-o-y and up 4.5% q-o-q. On a constant currency basis, total deposits were up 14.5% y-o-y and up 1.6% q-o-q
-- CIB recorded a NIM of 3.5% in 4Q17 (down 10bps y-o-y and flat q-o-q) and 3.4% in 2017 (down 20bps y-o-y). Loan yield was up 10bps y-o-y and up 60bps q-o-q in 4Q17 and cost of funds was down 80bps y-o-y and 20bps q-o-q. On a full year basis, the loan yield was up 30bps y-o-y and cost of funds was down 10bps y-o-y. The flat q-o-q NIM in 4Q17 and y-o-y decrease in NIM in 4Q17 and 2017 were primarily driven by the increased share of liquid assets in the total interest earning assets portfolio during the same periods
-- Net banking foreign currency gain. In line with the volatility of the GEL exchange rate, CIB net banking foreign currency gain was GEL 15.6mln in 4Q17 (down 3.5% y-o-y and up 76.1% q-o-q) and amounted to GEL 46.3mln in 2017 (down 4.9% y-o-y)
-- Net other banking income. Net other banking income increased significantly y-o-y and q-o-q to GEL 7.7mln in 4Q17 and to GEL 14.3mln in 2017 (up 40.2% y-o-y). The y-o-y and q-o-q increases in 4Q17 and y-o-y increase in 2017 was largely driven by revaluation gain of investment properties recorded in 4Q17
-- Cost of credit risk. Cost of credit risk decreased significantly in 2017 (down 37.8% y-o-y), primarily driven by overall improvement in the CIB loan portfolio quality, as a result of successful risk de-concentration and loan portfolio repositioning initiatives
-- CIB's cost to income ratio increased to 31.0% in 4Q17 from 28.7% in 4Q16 but improved from 34.5% in 3Q17. 2017 cost to income ratio reached 32.0%, up from 29.5% in 2016. CIB's operating expenses were up 17.7% y-o-y and 15.9% q-o-q in 4Q17 and up 10.9% y-o-y in 2017. The increase in all periods was primarily driven by 23.5% y-o-y and 9.2% q-o-q increases in 4Q17 and 14.3% y-o-y increase in 2017 in staff costs, as a result of CIB's efforts to restructure its corporate recovery and sales teams. The benefits of these undertakings are positively reflected in CIB's lower cost of risk ratio of 3.2% in 4Q17 (down from 6.6% in 4Q16) and 1.5% in 2017 (down from 3.1% in 2016). Although the CIB cost of risk ratio in 4Q17 was up from 2.3% in 3Q17, the NPLs to gross loan decreased to 7.5% in 4Q17 from 8.3% in 3Q17
-- As a result, Corporate Investment Banking profit reached GEL 27.7mln in 4Q17 (up 175.3% y-o-y and up 42.3% q-o-q) and GEL 105.9mln in 2017 (up 19.9% y-o-y) and CIB ROAE reached 18.1% in 4Q17 compared to 6.2% a year ago and 13.3% in 3Q17. In 2017, CIB ROAE increased to 17.6% from 14.7% in 2016
Performance highlights of wealth management operations
-- The AUM of the Investment Management segment increased to GEL 1,857.5mln in 4Q17, up 17.9% y-o-y and up 2.2% q-o-q. This includes a) deposits of Wealth Management franchise clients, b) assets held at Bank of Georgia Custody, c) Galt & Taggart brokerage client assets, and d) Global certificates of deposit held by Wealth Management clients
-- Wealth Management deposits were GEL 1,111.0mln in 4Q17, up 0.8% y-o-y and up 1.8% q-o-q, growing at a compound annual growth rate (CAGR) of 12.9% over the last five-year period. The cost of deposits stood at 3.5% in 4Q17, down 100bps y-o-y and down 10bps q-o-q and at 3.8% in 2017, down 70bps y-o-y. Wealth Management deposit balances were negatively impacted by clients switching from deposits to local bonds, as Galt & Taggart has offered a number of local bond issuances, yielding higher rates than deposits
-- We served 1,434 wealth management clients from 75 countries as of 31 December 2017 as compared to 1,383 clients from 68 countries as of 31 December 2016 and 1,416 clients from 74 countries as of 30 September 2017
-- Galt & Taggart, which brings under one brand corporate advisory, debt and equity capital markets research and brokerage services, continues to develop local capital markets in Georgia
-- During 2017 Galt & Taggart acted as:
- a co-manager of the Bank's inaugural GEL 500mln Lari denominated international bond issuance in June 2017
- a lead manager of GEL 108mln local bonds due 2020 of International Finance Corporation in June 2017
- a lead manager for Evex Medical Corporation, a subsidiary of Georgia Healthcare Group, facilitating a private placement of GEL 90mln local bonds due 2022, in July 2017
- a lead manager for Georgian Water and Power, a subsidiary of Georgia Global Utilities, facilitating a private placement of GEL 40mln local bonds with a maturity of six months, in August 2017
- a lead manager for Georgian Leasing Company, a subsidiary of JSC Bank of Georgia, facilitating a public placement of USD 10mln bonds due 2020, in September 2017
- a lead manager of GEL 135mln local bonds due 2022 of European Bank for Reconstruction and Development in December 2017
- a lead manager for JSC MFO Crystal, facilitating a public placement of GEL 10mln unsubordinated unsecured notes due 2019, in December 2017
-- During 2Q17 Galt & Taggart was mandated through a competitive tender process to actively manage the private pension fund of a corporate client. This is the first private pension fund ever established in Georgia by a non-financial institution. The fund is expected to accumulate approximately GEL 3mln contributions annually
-- Galt & Taggart was mandated by a blue chip corporate to restructure its liabilities and the project was successfully completed in 4Q17
-- Quarterly update on recent developments in Georgian economy. In August 2017, Galt & Taggart launched new research report covering the quarterly macro-economic developments in Georgian economy. The report was followed by a conference call hosted by Galt & Taggart for interested stakeholders to discuss the developments. 2Q17 and 3Q17 reports are available on Galt and Taggart website at www.galtandtaggart.com. Additionally, Galt & Taggart continues to provide full coverage of various sectors of the Georgian economy and developments taking place in regional economies through Regional Fixed Income Market Watch and Galt & Taggart macro portal, available on its website
Discussion of Investment Business Results
The Group's Investment Business is primarily comprised of five segments: Utility & Energy Business (GGU), Real Estate Business (m(2) ), Property and Casualty Insurance Business (Aldagi), Beverage Business (Teliani) and Healthcare Business (GHG). The Group has renamed its Investment Business as Georgia Capital.
In line with IFRS requirements, the Group reviewed the classification of its operating segments at 31 December 2017. Given the expectation, in line with Georgia Capital's strategy, that it is highly probable the Group will own less than a 50% stake in its healthcare business GHG at the end 2018(9) . As a result, and in line with IFRS, the Group classified GHG as "disposal group held for sale" and its results of operations are reported under "discontinued operations" line as a single amount in the consolidated income statement. Comparative periods have been restated accordingly to reflect reclassification of GHG from "continuing operations" into "discontinued operations." Assets and liabilities held by GHG are also presented separately in the consolidated balance sheet as of 31 December 2017 under "assets of disposal group held for sale" and "liabilities of disposal group held for sale."
INCOME STATEMENT GEL thousands, unless Change Change Change
otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Gross insurance profit 6,306 6,255 0.8% 6,846 -7.9% 27,049 25,256 7.1% Gross real estate profit(10) 5,773 1,560 NMF 4,179 38.1% 35,367 19,066 NMF Gross utility and energy profit 22,868 21,671 5.5% 25,942 -11.8% 88,370 38,680 128.5% Gross other investment profit 9,611 9,758 -1.5% 11,792 -18.5% 30,583 21,334 43.4% Revenue 44,558 39,244 13.5% 48,759 -8.6% 181,369 104,336 73.8% Operating expenses (22,676) (12,812) 77.0% (20,135) 12.6% (74,792) (35,893) 108.4% EBITDA 21,882 26,432 -17.2% 28,624 -23.6% 106,577 68,443 55.7% Profit from associates - - - - - - 4,074 NMF Depreciation and amortisation (9,056) (4,501) 101.2% (7,275) 24.5% (28,235) (10,062) 180.6% Net foreign currency loss (5,797) (1,905) NMF (3,941) 47.1% (4,937) (3,134) 57.5% Interest income 4,088 1,175 NMF 3,595 13.7% 12,970 4,144 NMF Interest expense (8,969) (6,523) 37.5% (7,049) 27.2% (30,014) (13,410) 123.8% Operating income before cost of credit risk 2,148 14,678 -85.4% 13,954 -84.6% 56,361 50,055 12.6% Cost of credit risk (617) 585 NMF (1,068) -42.2% (3,415) (1,004) NMF Profit before non-recurring items and income tax 1,531 15,263 -90.0% 12,886 -88.1% 52,946 49,051 7.9% Net non-recurring items (460) (269) 71.0% (65) NMF (623) 32,673 NMF Profit before income tax 1,071 14,994 -92.9% 12,821 -91.6% 52,323 81,724 -36.0% Income tax expense (1,666) (3,653) -54.4% (2,246) -25.8% (5,748) (8,944) -35.7% (Loss) / profit from continuing operations (595) 11,341 NMF 10,575 NMF 46,575 72,780 -36.0% Profit from discontinued operations 12,270 5,898 108.0% 10,335 18.7% 47,352 60,100 -21.2% Profit 11,675 17,239 -32.3% 20,910 -44.2% 93,927 132,880 -29.3% Earnings per share (basic) 0.19 0.40 -52.3% 0.39 -51.7% 1.85 2.75 -32.7% Earnings per share (diluted) 0.18 0.38 -53.0% 0.37 -52.0% 1.77 2.67 -33.8%
Performance highlights
-- As a result of strong performance across all segments, Investment Business recorded EBITDA from continuing operations of GEL 106.6mln in 2017 (up GEL 55.7% y-o-y). Investment Business EBITDA, adjusted to include EBITDA of the discontinued operations, was GEL 54.2mln in 4Q17 (up 7.6% y-o-y and down 4.0% q-o-q) and GEL 220.0mln in 2017 (up 48.2% y-o-y)
-- Aldagi recorded gross insurance profit of GEL 6.3mln in 4Q17 (flat y-o-y and down 7.9% q-o-q) and GEL 27.0mln in 2017 (up 7.1% y-o-y). 4Q17 results were negatively affected by insurance claims expenses resulting from bad weather conditions, which triggered a number of accidents in Georgia. However, on a full year basis, growth in revenues from introduction of new products, enhancements of the existing products and strong growth in the retail segment more than outpaced the increased levels of insurance claims expense, driving gross profit up 7.1% y-o-y
-- Gross real estate profit increased significantly as a result of m(2) 's strong sales record and revaluation gains from commercial properties during 2017. 165 apartments were sold with a total sales value of US$ 14.5mln in 4Q17 compared to 112 apartments sold with a total sales value of US$ 8.3mln in 4Q16 and 231 apartments with a total sales value of US$ 16.9mln in 3Q17. In 2017, gross real estate profit was GEL 35.4mln, which was attributable to record sales of apartments on a full year basis and GEL 22.6mln gain from revaluation of investment properties, of which, GEL 21.4mln was the revaluation of three under construction investment properties (high street retail)
-- GGU delivered stable organic growth with a 52% EBITDA margin in 2017 (54% in 2016). The y-o-y increase in gross utility and energy profit in 2017 was driven by higher water supply revenues across both commercial and residential customers, which was slightly offset by decreased revenues from electric power generation and sales as a result of exceptionally low levels of water inflow during the year. The q-o-q decline in 4Q17 was largely attributable to water consumption seasonality factors. In addition, 2016 results include consolidation of GGU's gross utility and energy profit since 21 July 2016, while 2017 results include a full year of operations
-- Gross other investment profit increased by 43.4% y-o-y on a full year basis. The growth was largely attributable to significant growth in Teliani's gross profit due to the launch of mainstream beer and lemonade production in 2017, as well as outstanding performance of wine business, where revenues reached GEL 60.3mln in 2017 (up 102.5% y-o-y), excluding the IFRS 15 impact. Additionally, Teliani's 2017 gross profit was positively impacted by continued diversification of its distribution portfolio, whereby Teliani tapped the exclusive right to import and distribute Lavazza coffee in Georgia and won other non-alcoholic beverage distribution contracts in 2017. We expect to begin reporting separately the results of our beverage business operations in 2018
-- Increases in operating expenses during all periods presented were significantly impacted by Teliani's launch of beer operations and consolidation of GGU's results for a full year
-- Net non-recurring items in 2016 primarily relates to GEL 31.8mln gain from the purchase of GGU, while no such material non-recurring items were noted in 2017
-- 4Q17 profit from discontinued operations, which relates to results of GHG's operations, more than doubled on a y-o-y basis and increased by 18.7% on a quarterly basis. The strong performance was driven by a seasonally strong quarter in Pharmacy and Healthcare Services businesses. As a result GHG achieved a record full year EBITDA of GEL 108.1mln (up 38.6% y-o-y), while full year net profit was GEL 45.9mln, down 25.1% y-o-y, due to the absence of GEL 24.0mln one-off income tax gains recorded in 2016 from the change in Georgian corporate tax legislation
(9) The Group held 57% of GHG's equity stake as of 31 December 2017 (65% as of 31 December 2016).
(10) The gross real estate profit trend between the fourth quarter and full year 2017 and 2016 is not comparable given the early adoption of IFRS 15 from 1 January 2017. Prior to 1 January 2017, m(2) recognised revenues from sales of residential units upon completion and handover of the units to customers in line with IAS 18, while under IFRS 15 revenue is recognised according to the percentage of completion method. Accordingly, we will not comment on y-o-y comparisons.
Investment Business Segment Result Discussion
The segment results discussion is presented for Utility & Energy Business (GGU), Real Estate Business (m(2) ), Property and Casualty Insurance Business (Aldagi) and Healthcare Business (GHG(11) ).
Utility & Energy Business (Georgia Global Utilities - GGU)(12)
Natural monopoly in the water business, with upside in electricity generation. Our utility and energy business is operated through the Group's wholly-owned subsidiary Georgia Global Utilities (GGU). GGU has two main business lines - water utility and electric power generation. In its water utility business, GGU is a natural monopoly that supplies water and provides a wastewater service to 1.4mln people (more than one-third of Georgia's population) in three cities: Tbilisi, Mtskheta and Rustavi.
Portfolio of 3 hydropower generation facilities (an additional facility under management) with a total capacity of 149.3MW. Average annual production is c.400GWh, depending on the level of rainfall during the year. GGU's average annual electricity self-consumption is up to 300GWh with a decreasing trend, which provides GGU with sufficient internally generated power for water transportation purposes and additional revenue from third-party electricity sales. Over the course of the last three years, GGU has managed to achieve efficiencies in its own energy consumption, thus freeing up electricity for third-party sales. The involvement in hydro power production also provides revenue diversification.
Invests in additional capacity for electricity generation with the goal to establish a renewable energy platform. GGU is developing hydro power plants (HPP) as well as solar and wind power sources in Georgia. During 2Q17, GGU commenced construction of 50MW Mestiachala HPPs in the north-western part of Georgia (Svaneti region) with a target to have the HPPs operational in December 2018. In 4Q17, GGU commenced construction of a 2.5MW Bodorna HPP on its own infrastructure near Tbilisi, which is expected to become fully operational from September 2018. Additionally, a 44.3MW Zoti HPPs, located in the western part of Georgia (Guria region), officially entered its construction phase based on the construction agreement signed with the Government of Georgia during 4Q17. GGU targets completion of Zoti HPP construction in 4Q20. 100MW wind projects are currently at the feasibility stage and once complete, GGU expects to commence construction works.
Room for efficiencies in water business from improving the worn-out infrastructure. The poor condition of pipeline infrastructure is the main reason for leaks and accidents, causing on average 70% water loss annually, out of which 50% is attributable to technical losses and 20% to commercial losses. The current level of water losses is higher than the international peer average and represents a strong potential efficiency upside for the business. GGU owns and operates a water supply network of around 3,150km and about 2,000km of wastewater pipelines. It also has 55 pumping stations, 101 service reservoirs with a total capacity of 305,000 m(3) and a water treatment plant. Around 560 million m(3) of potable water is supplied from water production/treatment facilities annually. By investing in the pipeline infrastructure, the depreciated asset base is replaced over time leading to continuous growth in the regulated asset base. Moreover, through the reduction of the water supplied to its customers and respective water losses, GGU expects to reduce its own electricity consumption, which can be sold to third parties.
Water tariff & regulation. In December 2017, GNERC (Georgian National Energy and Water Supply Regulatory Commission), the independent body that regulates GGU's water and wastewater tariffs, has approved new tariffs for GGU for a three year regulatory period, effective from 1 January 2018. This is the first time the tariff has been set based on the new water and wastewater services tariff methodology adopted by GNERC in August 2017, which is based on international best practice and represents a hybrid method of "cost plus" and "incentive based" methodologies. Revenue is determined based on a company's Regulatory Asset Base (RAB) and compensates for investment and maintenance of new and existing regulatory assets, stimulates efficiency in the network through incentivising reduction in controllable operating expenses and delivers fair returns to investors in the utility business. The return on investment, referred to as WACC in the methodology, for the first regulatory period is set at 15.99% (up from 13.54% in 2017). As a result, new water and wastewater tariffs for residential customers in Tbilisi, the largest contributor to water utility revenue, increased by 23.8% to GEL 3.89 (per month, per capita) for non-metered customers and to GEL 0.33 (per m(3) ) for metered customers. New tariffs for GGU's commercial customers, all of which are metered, decreased by 0.4% to GEL 4.40 (per m(3) ).
Strong and stable cash flow generation has enabled GGU to distribute dividends of GEL 28.0mln (US$ 11.0mln) from its water utility business to the Investment Business during 4Q17. This was the first dividend distribution since the acquisition of a controlling stake in GGU in July 2016, which has decreased the Group's net investment in GGU, excluding the renewable energy business, to US$ 84.0mln.
GWP, a wholly owned subsidiary of GGU, which operates the water business in Tbilisi, has a credit rating of BB- with stable outlook from Fitch.
(11) Healthcare Business (GHG) is classified as discontinued operations.
(12) Prior to 2Q17, GGU's standalone results excluded the Group's renewable energy business results due to its absence from GGU's legal structure and insignificant size. Effective from 2Q17, we are reporting GGU results on a pro-forma basis together with renewable energy business and have retrospectively revised the comparable information accordingly. The Group owns 65% of renewable energy business.
Standalone results
The Investment Business acquired the 75% of GGU's equity interests it did not own on 21 July 2016 and has consolidated its results since then. Prior to this, the net income from the Group's 25% stake in GGU was reported under "profit from associates". The results below refer to GGU's standalone numbers. GGU's stand-alone results, including the related comparative information, reflect the energy & utility business performance.
INCOME STATEMENT GEL thousands; unless otherwise Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Revenue from water supply to legal entities 22,215 19,598 13.4% 24,840 -10.6% 85,983 78,140 10.0% Revenue from water supply to individuals 8,529 8,636 -1.2% 8,340 2.3% 32,921 31,263 5.3% Revenue from electric power sales 2,873 3,641 -21.1% 3,788 -24.2% 9,755 10,112 -3.5% Revenue from technical support 396 2,056 -80.7% 796 -50.3% 2,604 4,571 -43.0% Other income 1,887 2,312 -18.4% 757 149.3% 3,738 3,161 18.3% Revenue 35,900 36,243 -0.9% 38,521 -6.8% 135,001 127,247 6.1% Provisions for doubtful trade receivables 338 687 -50.8% (888) -138.1% (1,675) (2,198) -23.8% Salaries and benefits (5,386) (3,673) 46.6% (3,880) 38.8% (19,125) (16,760) 14.1% Electricity and transmission costs (4,319) (3,748) 15.2% (5,099) -15.3% (18,303) (17,746) 3.1% Raw materials, fuel and other consumables (910) 85 NMF (940) -3.2% (3,077) (2,856) 7.7% Infrastructure assets maintenance expenditure (803) (402) 99.8% (793) 1.3% (2,254) (2,402) -6.2% General and administrative expenses (1,155) (387) NMF (971) 18.9% (3,881) (3,125) 24.2% Operating taxes (1,312) (1,168) 12.3% (1,308) 0.3% (4,457) (3,312) 34.6% Professional fees (998) (967) 3.2% (641) 55.7% (2,698) (2,502) 7.8% Insurance expense (323) (269) 20.1% (252) 28.2% (1,104) (793) 39.2% Other operating expenses (2,043) (2,119) -3.6% (1,989) 2.7% (7,586) (7,400) 2.5% Operating expenses (16,911) (11,961) 41.4% (16,761) 0.9% (64,160) (59,094) 8.6% EBITDA 18,989 24,282 -21.8% 21,760 -12.7% 70,841 68,153 3.9% EBITDA Margin 53% 67% 56% 52% 54% Depreciation and amortisation (5,229) (3,771) 38.7% (5,299) -1.3% (20,419) (17,911) 14.0% EBIT 13,760 20,511 -32.9% 16,461 -16.4% 50,422 50,242 0.4% EBIT Margin 38% 57% 43% 37% 39% Net interest expense (3,718) (2,616) 42.1% (3,299) 12.7% (12,354) (10,201) 21.1% Net non-recurring expenses (579) - NMF (501) 15.6% (1,332) - NMF Foreign exchange (loss) gain (386) (424) -9.0% 276 NMF (580) (1,076) -46.1% EBT 9,077 17,471 -48.0% 12,937 -29.8% 36,156 38,965 -7.2% Income tax expense (210) (1,565) -86.6% (334) -37.1% (934) (3,671) -74.6% Profit 8,867 15,906 -44.3% 12,603 -29.6% 35,222 35,294 -0.2% Attributable to: - Shareholders of the Group 8,484 15,705 -46.0% 12,701 -33.2% 35,306 35,275 0.1% - Non-controlling interests 383 199 92.5% (101) NMF (84) 18 NMF
Performance highlights
-- GGU recorded total revenue of GEL 35.9mln in 4Q17 (largely flat y-o-y and down 6.8% q-o-q) and GEL 135.0mln in 2017 (up 6.1% y-o-y)
- Revenue from the water supply to legal entities and individuals reached GEL 30.7mln in 4Q17 (up 8.9% y-o-y and down 7.3% q-o-q) and GEL 118.9mln in 2017 (up 8.7% y-o-y). Water supply revenue represented 85.6% of the total revenue in 4Q17 (77.9% in 4Q16 and 86.1% in 3Q17) and 88.1% of the total revenue in 2017 (86.0% in 2016). The q-o-q decrease in 4Q17 revenue from the water supply services is attributable to water consumption seasonality, whereby sales in the third quarter are normally the highest throughout the year. Revenue from legal entities is generally the largest element of GGU's total revenue and their water consumption pattern is reflected in GGU's quarterly revenues. The y-o-y increase in revenue from water supply to both legal entities and individuals in 2017 reflects enhanced measurement results based on efficient new metering programme (the new metering programme entails replacement of amortised or obsolete meters for legal entities, metering of residential customers and detection of illegal connections)
- Revenue from electricity power sales amounted GEL 2.9mln in 4Q17 (down 21.1% y-o-y and down 24.2% q-o-q) and GEL 9.8mln in 2017 (down 3.5% y-o-y). 2017 was characterised with exceptionally low levels of water inflows in Zhinvali reservoir (the lowest over the past 5 years), resulting in low electricity generation and respective decline in revenue from electricity power sales, compared to 2016. The q-o-q decrease in 4Q17 in revenue from electricity power sales was driven by the seasonality of electricity production
- The significant y-o-y decrease in the technical support revenue in 4Q17 and 2017 was due to the early adoption of IFRS 15 from 1 January 2017 which led to deferral of revenues from technical support services. The accounting change was applied prospectively from 1 January 2017 in line with IFRS
-- GGU's operating expenses continued to be well-contained. Operating expenses amounted GEL 16.9mln in 4Q17 (up 41.4% y-o-y and largely flat q-o-q) and GEL 64.2mln in 2017 (up 8.6% y-o-y):
- Salaries and employee benefits were up 46.6% y-o-y and up 38.8% q-o-q in 4Q17, and up 14.1% y-o-y in 2017. The increase was primarily driven by recruitment of additional and more qualified personnel in technical support department as well as increased performance related compensation in water utility segment as a result of successfully delivering on all key operational and financial targets for 2017
- Starting from 1Q17, as part of an ongoing process of reviewing receivable provisioning methodology, GGU revisited certain estimates to enhance the method of provision estimation. Under the enhanced method GGU was able to identify the customers who were able to pay all their monthly bills on time, i.e. who tended to have no overdue bill balance. This change in accounting estimate had a positive impact on the provision of doubtful receivables in 1Q17, resulting in lower receivables provision expenses in 2017. The q-o-q decline in provisions for doubtful trade receivables in 4Q17 was primarily driven by seasonally higher collection rates before the end of the year
- Electricity and transmission costs were down 15.3% q-o-q in 4Q17, as a result of the seasonal decrease in water consumption, while due to increased electricity transmission fee (guaranteed capacity fee) effective from 1 January 2017, the costs were up 15.2% y-o-y in 4Q17 and up 3.1% y-o-y in 2017. The lower y-o-y growth rate on a full year basis is attributable to the savings from electricity consumption throughout the year
- The y-o-y and q-o-q increase in 4Q17 and y-o-y increase in 2017 in general and administrative expenses is primarily driven by the expenditures on new marketing campaign targeted at raising the awareness of the importance of potable water resources in the population
- Operating taxes were up 12.3% y-o-y and up 0.3% q-o-q in 4Q17, and up 34.6% y-o-y in 2017, reflecting an increase in GGU's property tax base due to the company's continued investments in its own infrastructure
- Professional fees increased in all reporting periods in 2017 primarily due to the advisory services received from independent subject matter experts in relation to the assessment of certain operational parameters
- The y-o-y decline in income taxes in 2017 reflects the impact of changes in corporate income tax model
-- As a result of the developments described above, GGU reported a) EBITDA of GEL 19.0mln in 4Q17 (down 21.8% y-o-y and down 12.7% q-o-q) and GEL 70.8mln in 2017 (up 3.9% y-o-y) and b) a profit of GEL 8.9mln in 4Q17 (down 44.3% y-o-y and down 29.6% q-o-q) and GEL 35.2mln in 2017 (flat y-o-y)
STATEMENT OF CASH FLOW GEL thousands; unless Change Change Change otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Cash received from customers 44,768 41,042 9.1% 42,950 4.2% 153,937 139,886 10.0% Cash paid to suppliers (11,387) (7,882) 44.5% (12,901) -11.7% (46,069) (46,106) -0.1% Cash paid to employees (3,265) (6,241) -47.7% (4,565) -28.5% (16,737) (18,608) -10.1% Interest received 800 30 NMF 223 NMF 1,593 216 NMF Interest paid (4,486) (2,653) 69.1% (3,078) 45.7% (12,831) (10,388) 23.5% Taxes paid 2,256 (2,072) NMF (2,944) NMF (6,272) (11,087) -43.4% Restricted cash in Bank (1,362) (2,729) -50.1% - NMF - (2,355) NMF Cash flow from operating activities 27,324 19,495 40.2% 19,685 38.8% 73,621 51,558 42.8% Maintenance capex (3,068) (8,803) -65.1% (5,934) -48.3% (23,203) (22,432) 3.4% Operating cash flow after maintenance capex 24,256 10,692 126.9% 13,751 76.4% 50,418 29,126 73.1% Purchase of PPE and intangible assets (86,947) (12,349) NMF (56,777) 53.1% (190,169) (35,552) NMF Restricted cash in Bank 5,876 - NMF 3,974 47.9% (2,399) - NMF Total cash used in investing activities (81,071) (12,349) NMF (52,803) 53.5% (192,568) (35,552) NMF Proceeds from borrowings 226,572 27,341 NMF 19,462 NMF 314,284 45,226 NMF Repayment of borrowings (107,616) (6,565) NMF (6,227) NMF (122,837) (14,032) NMF Contributions under share-based payment plan (2,596) - NMF (2,345) 10.7% (4,941) - NMF Dividends paid (28,244) 151 NMF - NMF (28,244) (13,008) 117.1% Capital increase 2,653 2,394 10.8% 4,315 -38.5% 16,801 7,331 129.2% Total cash flow from financing activities 90,769 23,321 NMF 15,205 NMF 175,063 25,517 NMF Effect of exchange rates changes on cash 5,650 1,004 NMF 295 NMF 4,969 (69) NMF Total cash inflow/(outflow) 39,604 22,668 74.7% (23,552) NMF 37,882 19,022 99.1% Cash balance Cash, beginning balance 30,657 9,711 NMF 54,209 -43.4% 32,379 13,357 142.4% Cash, ending balance 70,261 32,379 117.0% 30,657 129.2% 70,261 32,379 117.0%
-- GGU has an outstanding receivables collection rate within the 95-98% range from water supply. During 2017, the collection rate for legal entities and households was 98% and 95%, respectively. As a result, GGU had only GEL 6.9mln overdue receivables outstanding at 31 December 2017. While the Georgian water utility sector has historically had low receivables collection rates, as a result of GGU's arrangement with electricity suppliers since 2011, which allows disconnection of non-paying water customers from the electricity network, GGU's collection rates remain very strong at around 96% level. In return, electricity suppliers receive flat monetary compensation from GGU
-- In 4Q17, GGU drew-down less expensive funding from international financial institutions in order to finance capital expenditures and refinance more expensive funding from local financial institutions totaling GEL 101.8mln
BALANCE SHEET GEL thousands; unless Dec-17 Dec-16 Change Sep-17 Change otherwise noted y-o-y q-o-q Cash and cash equivalents 70,261 32,379 117.0% 30,657 129.2% Trade and other receivables 23,754 26,402 -10.0% 25,176 -5.6% Prepaid taxes other than income tax 4,053 3,115 30.1% 6,740 -39.9% Prepayments 3,305 288 NMF 9,414 -64.9% Inventories 3,787 3,048 24.2% 3,780 0.2% Other current assets 4,339 240 NMF 1,694 156.1% Current income tax prepayments 62 735 -91.6% 1,256 -95.1% Total current assets 109,561 66,207 65.5% 78,717 39.2% Property, plant and equipment 489,509 335,877 45.7% 410,835 19.1% Investment Property 11,286 18,728 -39.7% 18,371 -38.6% Intangible assets 2,222 1,383 60.7% 1,170 89.9% Restructured trade receivables 133 307 -56.7% 141 -5.7% Restricted Cash 7,657 5,094 50.3% 11,449 -33.1% Other non-current assets 44,118 1,757 NMF 25,127 75.6% Total non-current assets 554,925 363,146 52.8% 467,093 18.8% Total assets 664,486 429,353 54.8% 545,810 21.7% Current borrowings 3,832 22,617 -83.1% 62,498 -93.9% Trade and other payables 33,618 25,625 31.2% 22,887 46.9% Provisions for liabilities and charges 3,102 706 NMF 803 NMF Other taxes payable 391 7,101 -94.5% 4,119 -90.5% Total current liabilities 40,943 56,049 -27.0% 90,307 -54.7% Long term borrowings 308,373 83,651 NMF 122,624 151.5% Deferred income 20,753 - NMF 18,290 13.5% Total non-current liabilities 329,126 83,651 NMF 140,914 133.6% Total liabilities 370,069 139,700 NMF 231,221 60.0% Share capital 17,561 8,070 117.6% 15,873 10.6% Additional paid-in-capital (2,837) (588) NMF 1,623 NMF Retained earnings 87,229 96,564 -9.7% 106,968 -18.5% Other reserve 182,338 182,417 0.0% 181,735 0.3% Total equity attributable to shareholders of the Group 284,291 286,463 -0.8% 306,199 -7.2% Non-controlling interest 10,126 3,190 NMF 8,390 20.7% Total equity 294,417 289,653 1.6% 314,589 -6.4% Total liabilities and equity 664,486 429,353 54.8% 545,810 21.7%
-- The increase in property, plant and equipment is primarily due to the additional investments into the company's infrastructure carried out during 2016 and 2017 in order to upgrade the network, further reduce water losses and achieve cost efficiencies. Additionally, c.GEL 40.0mln increase is attributable to the development and construction of renewable energy projects
-- c.GEL 7.4mln y-o-y and q-o-q decrease in investment property in 4Q17 is related to reclassification of investment properties into property, plant and equipment, as well as the sale of a land plot
-- The significant q-o-q increase in other non-current assets in 4Q17 is driven by additional prepayments to suppliers in relation to the development and construction of 50MW Mestiachala HPPs
-- The increase in borrowings and cash and cash equivalents at 31 December 2017 is due to additional funding obtained from international financial institutions and local banks in order to support the capital expenditures for developments of water supply network and renewable energy projects
-- During 2017, GGU secured long-term financing from international financial institutions (IFIs) for efficiency-related capital expenditures purposes. In 3Q17, GWP signed long-term loan facility agreements with European Investment Bank (EIB), The Netherlands Development Finance Company (FMO) and German Investment Corporation (DEG) and attracted c.EUR 81.5mln in total, of which, c.40% is denominated in local currency. This was the first IFI financing for GGU's water utility arm and a significant milestone for GGU, as it enables the company to develop and modernise the water infrastructure by tapping efficiencies in the network. GGU utilized the IFI funding starting from October 2017
-- In 4Q17, GGU distributed dividends totaling GEL 28.0mln (US$ 11.0mln) from its water utility business to the Investment Business
Real estate business (m(2) Real Estate or m(2) )
Standalone results(13)
Our Real Estate business is operated through the Group's wholly-owned subsidiary m(2) , which develops residential and commercial properties and hotel properties in Georgia. m(2) Real Estate has historically outsourced the construction and architecture works, whilst itself focusing on project management and sales. In June 2017, m(2) acquired BK Construction LLC, a local real estate construction company, with the aim to bring the construction works in-house to achieve cost and project development efficiencies. m(2) targets to meet the unsatisfied demand in Tbilisi for housing through its well-established branch network and sales force. Additionally, in line with its "assets light" strategy, m(2) targets to transition into the franchise platform for developing third-party land plots and generate fee income.
INCOME STATEMENT(14) GEL thousands, unless Change Change Change otherwise noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Revenue from sale of apartments 30,788 9,356 NMF 27,530 11.8% 92,643 96,347 NMF Cost of sold apartments (26,890) (7,811) NMF (25,532) 5.3% (84,607) (82,403) NMF Gross profit from sale of apartments 3,898 1,545 NMF 1,998 95.1% 8,036 13,944 NMF Revenue from operating leases 986 859 14.8% 833 18.4% 3,599 2,778 29.6% Cost of operating leases (135) (44) NMF (142) -4.9% (557) (224) 148.7% Gross profit from operating leases 851 815 4.4% 691 23.2% 3,042 2,554 19.1% Revaluation of commercial property (519) 1,430 -136.3% 1,297 -140.0% 22,563 2,381 NMF Gross real estate profit 4,230 3,790 11.6% 3,986 6.1% 33,641 18,879 78.2% Gross other profit 56 48 16.7% 163 -65.6% 277 29 NMF Gross profit 4,286 3,838 11.7% 4,149 3.3% 33,918 18,908 79.4% Salaries and other employee benefits (1,195) (374) NMF (712) 67.8% (2,818) (1,498) 88.1% Administrative expenses (1,500) (1,202) 24.8% (1,784) -15.9% (5,761) (4,364) 32.0% Operating expenses (2,695) (1,576) 71.0% (2,496) 8.0% (8,579) (5,862) 46.3% EBITDA 1,591 2,262 -29.7% 1,653 -3.8% 25,339 13,046 94.2% Depreciation and amortisation (315) (65) NMF (64) NMF (508) (243) 109.1% Net foreign currency gain / (loss) 94 (58) NMF 73 28.8% (117) 1,143 -110.2% Interest income 145 410 -64.6% 192 -24.5% 816 715 14.1% Interest expense (47) (30) 56.7% (44) 6.8% (186) (210) -11.4% Net operating income before non-recurring items 1,468 2,519 -41.7% 1,810 -18.9% 25,344 14,451 75.4% Net non-recurring items (197) (96) 105.2% (48) NMF (128) (73) 75.3% Profit before income tax 1,271 2,423 -47.5% 1,762 -27.9% 25,216 14,378 75.4% Income tax expense (481) (2,949) -83.7% (1,073) -55.2% (1,554) (3,474) -55.3% Profit 790 (526) NMF 689 14.7% 23,662 10,904 117.0%
Performance highlights
-- During 4Q17 m(2) continued to unlock value through real estate development and recorded net revenue from sales of apartments of GEL 3.9mln, up 152.3% y-o-y and up 95.1% q-o-q
-- Gross profit from the sale of apartments is by its nature variable and depends on the number of projects underway at a given time. We also adopted a new accounting treatment in 2017, which applies a completely different basis for recognising revenue. Accordingly, y-o-y comparisons are not meaningful and will not be commented upon
-- During 2017, m(2) sold a total of 629 apartments with total sales value of US$ 49.1mln, compared to 407 apartments sold with total sales value of US$ 34.4mln during 2016. During 4Q17, m(2) sold a total of 165 apartments with total sales value of US$ 14.5mln, compared to 112 apartments sold with total sales value of US$ 8.3mln during 4Q16 and 231 apartments with total sales value of US$ 16.9mln in 3Q17
-- Net revenue from operating leases increased by 4.4% y-o-y and 23.2% q-o-q in 4Q17 and by 19.1% y-o-y in 2017, supported by the growth in the commercial real estate portfolio. Consequently, the portfolio of yielding assets represented 22.0% of m(2) Real Estate's total assets at 31 December 2017, compared to 11.2% a year ago and 20.3% at 30 September 2017
-- During 2017, m(2) recorded a gain from the revaluation of investment property under construction of GEL 21.4mln. As a result, its portfolio of yielding assets, including the revaluation gain, increased by 85.8% y-o-y and 6.8% q-o-q to GEL 77.2mln at 31 December 2017. Revaluation of commercial property increased materially in 2Q17 primarily due to the GEL 21.4mln revaluation of three under construction investment properties (high street retail). m(2) previously measured investment property under construction at cost, as allowed by IFRS, on the basis that fair value determination was difficult due to lack of comparable data and reliability of alternative fair value measurements. During 2Q17, management reassessed the approach and concluded that given a) the recent transactions of under construction properties on the local market, b) management's track record in building and renting out commercial properties and c) availability of increased statistical information, reliable measurement of fair value was warranted. Accordingly, management hired an independent, internationally recognised, valuation company to determine the fair values of under construction properties as of 31 December 2017 and recorded a total revaluation gain of GEL 22.6mln on investment properties during 2017
-- As a result, m(2) recognised total gross profit of GEL 4.3mln and net profit of GEL 0.8mln in 4Q17. Total gross profit reached GEL 33.9mln in 2017, while profit totalled GEL 23.7mln
-- The y-o-y and q-o-q movements in income tax expense relate to previous period tax return adjustment as a result of submission of final 2016 tax returns during 3Q17
13 Prior to 1Q17, m(2) Real Estate results presented were segment results, i.e. including Group elimination and consolidation adjustments. Effective 1Q17, and similar to other investment business entities, we are reporting stand-alone results for m(2) Real Estate.
(14) The gross profit trend between the fourth quarter and full year 2017 and 2016 is not comparable given the early adoption of IFRS 15 from 1 January 2017. Prior to 1 January 2017, m(2) recognised revenues from sales of residential units upon completion and handover of the units to customers in line with IAS 18, while under IFRS 15 revenue is recognised according to the percentage of completion method. Accordingly, we will not comment on y-o-y comparisons.
BALANCE SHEET
GEL thousands, unless Dec-17 Dec-16 Change Sep-17 Change
otherwise noted y-o-y q-o-q
Cash and cash equivalents 34,751 93,210 -62.7% 51,434 -32.4%
Amounts due from credit
institutions 114 - NMF 50 128.0%
Investment securities 3,329 2,842 17.1% 2,974 11.9%
Accounts receivable 1,338 703 90.3% 13,749 -90.3%
Prepayments 34,932 20,746 68.4% 35,265 -0.9%
Inventories 59,683 113,009 -47.2% 68,967 -13.5%
Investment property,
of which: 150,143 113,829 31.9% 137,197 9.4%
Land bank 72,902 72,251 0.9% 64,868 12.4%
Commercial real estate 77,241 41,578 85.8% 72,329 6.8%
Property and equipment 49,641 7,050 NMF 22,429 121.3%
Other assets 16,898 20,839 -18.9% 23,683 -28.6%
Total assets 350,829 372,228 -5.7% 355,748 -1.4%
Amounts due to credit
institutions 58,992 42,818 37.8% 59,643 -1.1%
Debt securities issued 65,122 103,077 -36.8% 63,288 2.9%
Deferred income 46,660 77,925 -40.1% 72,249 -35.4%
Other liabilities 15,425 14,725 4.8% 11,957 29.0%
Total liabilities 186,199 238,545 -21.9% 207,137 -10.1%
Share Capital 4,180 4,180 - 4,180 -
Additional paid-in
capital 82,793 85,467 -3.1% 84,788 -2.4%
Other reserves 14,460 15,538 -6.9% 7,251 99.4%
Retained earnings 52,779 28,498 85.2% 52,392 0.7%
Total equity attributable
to shareholders of
the Group 154,212 133,683 15.4% 148,611 3.8%
Non-controlling interest 10,418 - NMF - NMF
Total equity 164,630 133,683 23.1% 148,611 10.8%
Total liabilities
and equity 350,829 372,228 -5.7% 355,748 -1.4%
-- m(2) continued to have a strong, diversified and well managed balance sheet. At 31 December 2017, total assets were GEL 350.8mln (down 5.7% y-o-y and down 1.4% q-o-q), comprised of 9.9% cash, 10.0% prepayments, 17.0% inventories (apartments in development), 42.8% investment property (land bank and commercial real estate), 14.1% property, plant and equipment (including hotel) and 6.2% all other assets. Borrowings, which consist of debt raised from Development Financial Institutions ("DFIs") and debt securities issued on the local market, represent 35.4% of the total balance sheet
-- m(2) currently has a land bank with a total value of GEL 72.9mln on its balance sheet. We do not expect the land bank to grow, as the company's strategy is to utilise its existing land plots within three to four years and, in parallel, start development of third party land plots under franchise agreements
-- In December 2017, m(2) acquired a 60% stake from a third-party in an upcoming lifestyle boutique hotel in Tbilisi for a total cash consideration of US$ 6.0 million, of which US$ 4.1 million was paid to acquire a 50% stake from a third-party and US$ 1.9 million was injected into the Hotel's capital in exchange for an additional 10% stake
Operating highlights
2017 was record breaking for m(2) with regard to the number of apartments sold, square meters sold and sales revenue. In 4Q17, all remaining apartments of the Optima line project on Moscow Avenue were sold. Moreover, m(2) continued to build up its portfolio of yielding assets, including hotels, to match the growing demand for accommodation generated by the robust growth of the tourism sector. In 3Q17 m(2) commenced construction works on a mixed-use development on Melikishvili Avenue, where it plans to open a four-star Ramada hotel, which is expected to be the first construction project undertaken in-house by m(2) subsidiary, BK Construction LLC. Existing income-generating properties are successfully leased at an 88% occupancy rate with an average yield of 9.1%. m(2) continued its outstanding performance in construction with more than 180,000 square meters (more than 95,700 square meters of net sellable area) currently under construction across four ongoing projects, all of which are on schedule.
As noted above, in 4Q17 m(2) acquired a controlling stake in an upcoming lifestyle boutique hotel in a prime location of Tbilisi. The hotel is expected to add at least 100 rooms to m(2) 's portfolio and the construction works are being carried out by m(2) 's construction arm. The skeleton of the building is already finished and the full construction completion is expected in the first quarter of 2019.
In December 2017, m(2) signed its largest ever franchise agreement as part of its "asset light" strategy to construct and develop a residential complex under the m(2) brand name on a third-party land plot in a densely populated Tbilisi suburb. m(2) plans to build a residential complex, with a total of 190,000 square meters and 3,600 residential units, in ten phases over the course of four to five years and generate construction fees, sales commissions and share profits from the project's overall economics.
Finally, in December 2017, m(2) 's construction arm was awarded its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre located in Tbilisi's Saburtalo district. Total amount of the contract is US$ 11.6mln and is planned to be carried out over the sixteen months following the planned project commencement in January 2018.
-- m(2) has started eleven projects since its establishment in 2010, of which, seven projects have already been completed, while the construction of four projects is ongoing. m(2) has completed all of its projects on or ahead of scheduled time and within budget. The four on-going projects have the following characteristics:
- Kartozia Street project: the largest ever project carried out by m(2) , with a total of 801 apartments in a central location in Tbilisi, of which, 703 units are sold
- Kazbegi Avenue II project - a mixed-use development with 303 residential apartments and a hotel (m(2) has the exclusive right to develop Wyndham Ramada Encore hotels in Georgia) with a capacity of 152 rooms. The construction started in June 2016, with 217 apartments sold to date
- 50 Chavchavadze Avenue project - the project is located in the central part of Tbilisi with a total of 82 apartments, of which, 69 are sold
- Melikishvili Avenue project - a mixed-use four-star development with a capacity of 125 hotel rooms and 16 residential apartments, of which, 11 are already sold
-- m(2) has a very good track record of selling apartments. Out of the 1,691 apartments completed to date since inception, only 15 or 0.9% remain in stock as available for sale. m(2) retains ownership of some of the apartments leased out to high quality strategic tenants, such as the US Embassy in Georgia. The four ongoing projects have a total capacity of 1,202 apartments, of which, 1,000 apartments or 83.2% are sold as of 31 December 2017. A total of 217 units remain available for sale, out of the total of 2,893 apartments either already developed or under development phase
OPERATING DATA
for completed and on-going projects, as of 31 December
2017
--------------------------------------------------------------------------------------------------------------------------
# Project Number Number Number Number Start Actual Construction
name of of of of date / Planned completed
apartments apartments apartments apartments (construction) Completion %
sold sold available date
as % for (construction)
of total sale
--- -------------- ----------- ----------- ----------- ----------- --------------- --------------- -------------
Completed
projects 1,691 1,676 99.1% 15
------------------- ----------- ----------- ----------- ----------- --------------- --------------- -------------
Chubinashvili
1 Street 123 123 100.0% - Sep-10 Aug-12 100%
Tamarashvili
2 Street 525 523 99.6% 2 May-12 Jun-14 100%
Kazbegi
3 Street 295 295 100.0% - Dec-13 Feb-16 100%
Nutsubidze
4 Street 221 221 100.0% - Dec-13 Sep-15 100%
Tamarashvili
5 Street II 270 266 98.5% 4 Jul-14 Jun-16 100%
6 Moscow Avenue 238 238 100.0% - Sep-14 Jun-16 100%
7 Skyline 19 10 52.6% 9 Dec-15 Dec-17 100%
On-going projects 1,202 1,000 83.2% 202
------------------- ----------- ----------- ----------- ----------- --------------- --------------- -------------
Kartozia
8 Street 801 703 87.8% 98 Nov-15 Oct-18 78%
Kazbegi
9 Street II 303 217 71.6% 86 Jun-16 Nov-18 43%
50
Chavchavadze
10 Ave. 82 69 84.1% 13 Oct-16 Oct-18 61%
Melikishvili
11 ave. 16 11 68.8% 5 Sep-17 May-19 6%
Total 2,893 2,676 92.5% 217
--- -------------- ----------- ----------- ----------- ----------- --------------- --------------- -------------
-- Since its inception, m(2) Real Estate unlocked US$ 19.5mln in total land value from the seven completed projects, while an additional US$ 14.2mln in land value is expected to be unlocked from the four ongoing projects
FINANCIAL DATA
for completed and on-going projects, as of 31 December
2017
-----------------------------------------------------------------------------------------------
# Project Total Recognised Deferred Deferred Land Realised
name Sales as revenue revenue revenue value & Expected
(US$ (US$ (US$ expected unlocked IRR
mln) mln) mln) to be (US$)
recognised
as revenue
in 2017
--- ---------------- ------- ------------ --------- ------------ ---------- ------------
Completed
projects 144.3 144.3 0.0 0.0 19.5
--------------------- ------- ------------ --------- ------------ ---------- ------------
Chubinashvili
1 street 9.9 9.9 - - 0.9 47%
Tamarashvili
2 street 48.6 48.6 - - 5.4 46%
Kazbegi
3 Street 27.2 27.2 - - 3.6 165%
Nutsubidze
4 Street 17.4 17.4 - - 2.2 58%
Tamarashvili
Street
5 II 24.3 24.3 - - 2.7 71%
Moscow
6 avenue 12.3 12.3 - - 1.6 31%
7 Skyline 4.6 4.6 - - 3.1 329%
On-going projects 78.0 50.2 27.9 21.5 14.2
--------------------- ------- ------------ --------- ------------ ---------- ------------
Kartozia
8 Street 48.8 33.4 15.3 13.0 5.8 60%
Kazbegi
Street
9 II 18.6 10.7 8.0 5.5 4.3 51%
50 Chavchavadze
10 ave. 8.1 5.1 3.0 2.8 3.3 75%
Melikishvili
11 ave. 2.5 1.0 1.5 0.2 0.8 101%
--- ---------------- ------- ------------ --------- ------------ ---------- ------------
Total 222.3 194.5 27.9 21.5 33.7
--- ---------------- ------- ------------ --------- ------------ ---------- ------------
-- The number of apartments financed with BOG mortgages in all m(2) projects reached 1,181 or GEL 148.6mln at 31 December 2017
Property and Casualty Business (Aldagi or P&C)
Standalone results
Our Property and Casualty (P&C) insurance business is operated through the Group's wholly-owned subsidiary Aldagi, which is a leading player in the local P&C insurance market with a market share of 38.6% based on gross premiums earned at 30 September 2017. The company offers a wide range of insurance products in Georgia to corporate and retail clients, covering more than 47,000 customers through five business lines: motor, property, credit life, liability and other insurance services. Aldagi's insurance products(15) are offered through its offices in Tbilisi and large cities across Georgia, a network of insurance agents, partner local banks and non-financial institutions (such as major car dealerships), insurance brokers and online portals.
INCOME STATEMENT GEL thousands, unless otherwise Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y Gross premiums written 17,962 16,664 7.8% 21,322 -15.8% 88,474 75,379 17.4% Earned premiums, gross 21,891 18,638 17.5% 24,610 -11.0% 85,922 70,937 21.1% Earned premiums, net 16,578 13,811 20.0% 16,707 -0.8% 62,770 50,390 24.6% Insurance claims expenses, gross (13,452) (6,848) 96.4% (8,088) 66.3% (40,652) (25,227) 61.1% Insurance claims expenses, net (7,207) (5,113) 41.0% (6,348) 13.5% (25,098) (17,858) 40.5% Acquisition costs, net (2,662) (2,221) 19.9% (2,845) -6.4% (9,100) (6,744) 34.9% Net underwriting profit 6,709 6,477 3.6% 7,514 -10.7% 28,572 25,788 10.8% Investment income 814 761 7.0% 786 3.6% 2,965 3,118 -4.9% Net Fee and commission income 142 128 10.9% 171 -17.0% 525 436 20.4% Net investment profit 956 889 7.5% 957 -0.1% 3,490 3,554 -1.8% Salaries and other employee benefits (2,258) (2,170) 4.1% (2,304) -2.0% (8,701) (7,907) 10.0% Selling, general and administrative expenses (830) (1,007) -17.6% (876) -5.3% (3,263) (3,201) 1.9% Depreciation & Amortisation (135) (202) -33.2% (245) -44.9% (855) (774) 10.5% Impairment charges (82) (265) -69.1% (157) -47.8% (671) (808) -17.0% Net other operating income 163 225 -27.6% 144 13.2% 495 698 -29.1% Operating profit 4,523 3,947 14.6% 5,033 -10.1% 19,067 17,350 9.9% Foreign exchange gain / (loss) 452 809 -44.1% 327 38.2% 208 (294) NMF Pre-tax profit 4,975 4,756 4.6% 5,360 -7.2% 19,275 17,056 13.0% Income tax expense (806) (952) -15.3% (819) -1.6% (2,975) (3,318) -10.3% Net profit 4,169 3,804 9.6% 4,541 -8.2% 16,300 13,738 18.6%
Performance highlights
-- Aldagi recorded net underwriting profit of GEL 6.7mln in 4Q17 (up 3.6% y-o-y and down 10.7% q-o-q) and GEL 28.6mln in 2017 (up 10.8% y-o-y) as a result of the following:
-- Net earned premiums. Net premiums earned reached GEL 16.6mln in 4Q17 (up 20.0% y-o-y and down 0.8% q-o-q) and GEL 62.8mln in 2017 (up 24.6% y-o-y). The y-o-y increase in 2017 was supported by organic growth of the motor insurance, property insurance and credit life insurance businesses lines (representing approximately 35.0%, 24.0% and 10.0% of Aldagi's total insurance portfolio, respectively), which contributed to approximately 23.0%, 21.0% and 15.0% y-o-y increase in net premiums earned in 2017, respectively. New product introductions and enhancements of existing products described under Operating Highlights below resulted in a further 4.0% y-o-y increase to net premiums earned in 2017. The slight q-o-q decrease in net earned premiums was primarily driven by seasonality of the agricultural insurance programme that ran from the mid 2Q17 to the mid of 4Q17. Net premiums earned from agricultural insurance increased by approximately 44.0% on a y-o-y basis in 2017, leading to a 54.0% market share in this product (37.0% market share in 2016)
-- Net insurance claims. The net insurance claims amounted to GEL 7.2mln in 4Q17 (up 41.0% y-o-y and up 13.5% q-o-q) and GEL 25.1mln in 2017 (up 40.5% y-o-y). The y-o-y increase in net insurance claims expenses in 2017 were primarily driven by property insurance claims following a major fire incident in 1H17 and number of accidents from flooding and bad weather conditions in 4Q17. Additionally, the motor insurance business also experienced an overall increase in loss severity and frequency in 2017. These increases were partially compensated by improved loss ratios in liability insurance, life insurance and other insurance products in 2017. Finally, the increase in insurance claims expenses was also driven by the business shift towards the retail segment, which is historically characterised by a higher loss ratio than the corporate segment
-- Net acquisition costs were GEL 2.7mln in 4Q17 (up 19.9% y-o-y and down 6.4% q-o-q) and GEL 9.1mln in 2017 (up 34.9% y-o-y). The y-o-y increase was attributable to introduction of new insurance product lines and enhancements of the existing ones in 2017, which led to higher average commission rates. Overall, commission ratio was up by 1ppts y-o-y in 2017. Q-o-q decrease of 6.4% in net acquisition costs was attributable to decrease in net premiums earned
(15) Aldagi's P&C products principally include the following: a) motor insurance covering vehicle damage and third-party liability with 23,646 active clients and a 41% market share, b) property insurance including commercial property coverage, contractor's performance and damage risks coverage with 12,317 active clients and a 37% market share, c) credit life insurance covering loan-linked life insurance services with a group of three active clients and a 30% market share, d) liability insurance covering financial risks, employer's liability, professional indemnity, general third party liability, etc. with 1,026 active clients and a 44% market share. Aldagi's other products include agro insurance, cargo insurance, livestock insurance, bankers blanket bond insurance, and directors' and officers' liability insurance services with 13,314 active clients and a 38% market share.
-- Aldagi's key ratios remain healthy despite increased number of accidents during 2017 as evidenced by the following closely monitored metrics:
Key Ratios 4Q17 4Q16 3Q17 2017 2016 Combined ratio 78.5% 77.9% 75.6% 75.2% 72.6% Expense ratio 35.0% 40.8% 37.6% 35.2% 37.2% Loss ratio 43.5% 37.0% 38.0% 40.0% 35.4%
-- Net investment profit. Investment income amounted to GEL 0.8mln in 4Q17 (up 7.0% y-o-y and up 3.6% q-o-q) and GEL 3.0mln in 2017 (down 4.9% y-o-y). Y-o-y decrease in investment income in 2017 was primarily driven by the dividend payouts of GEL 7.1mln in 3Q16 and GEL 7.0mln in 2Q17, which were partially compensated by 20.4% y-o-y increase in AUM fees in 2017. Investment yield remained high at 10.0% in 2017
-- Salaries and employee benefits reached GEL 2.3mln in 4Q17 (up 4.1% y-o-y and down 2.0% q-o-q) and GEL 8.7mln in 2017 (up 10.0% y-o-y) primarily as a result of establishment of new Strategic Development department as described under Operating Highlights below, as well as the organic growth of the property and casualty insurance business and the related increase in headcount
-- Corporate income tax expense. The y-o-y decrease in income taxes in 2017 reflects the absence of one-off impact from changes in the corporate taxation model, which were recorded in 2016 (GEL 0.8mln write off in 2016)
-- Aldagi's operating profit reached GEL 4.5mln in 4Q17, up 14.6% y-o-y and down 10.1% q-o-q, and GEL 19.1mln in 2017, up 9.9% y-o-y. Aldagi's net profit was GEL 4.2mln in 4Q17 (up 9.6% y-o-y and down 8.2% q-o-q) and GEL 16.3mln in 2017 (up 18.6% y-o-y)
BALANCE SHEET GEL thousands, unless Dec-17 Dec-16 Change Sep-17 Change otherwise noted y-o-y q-o-q Cash and cash equivalents 4,186 4,349 -3.7% 4,200 -0.3% Amounts due from credit institutions 25,968 24,928 4.2% 24,989 3.9% Investment securities: available-for-sale 4,180 3,389 23.3% 4,344 -3.8% Insurance premiums receivable, net 28,491 22,997 23.9% 27,500 3.6% Ceded share of technical provisions 20,671 13,161 57.1% 21,219 -2.6% Premises and equipment, net 10,627 8,717 21.9% 9,309 14.2% Intangible assets, net 1,272 1,409 -9.7% 1,363 -6.7% Goodwill 13,051 13,051 0.0% 13,051 0.0% Deferred acquisition costs 3,047 1,611 89.1% 1,906 59.9% Pension fund assets 18,536 16,441 12.7% 17,808 4.1% Other assets 5,129 4,867 5.4% 5,521 -7.1% Total assets 135,158 114,920 17.6% 131,210 3.0% Gross technical provisions 50,272 41,542 21.0% 52,567 -4.4% Other insurance liabilities 11,147 8,612 29.4% 10,751 3.7% Current income tax liabilities 30 1,273 -97.6% 110 -72.7% Pension benefit obligations 18,536 16,441 12.7% 17,808 4.1% Other Liabilities 6,426 7,611 -15.6% 5,395 19.1% Total liabilities 86,411 75,479 14.5% 86,631 -0.3% Share Capital 1,889 1,889 0.0% 1,889 0.0% Additional paid-in capital 5,405 5,405 0.0% 5,405 0.0% Retained earnings 25,153 18,409 36.6% 25,153 0.0% Net profit 16,300 13,738 18.6% 12,132 34.4% Total equity 48,747 39,441 23.6% 44,579 9.3% Total liabilities and equity 135,158 114,920 17.6% 131,210 3.0%
-- Aldagi continued to have a very strong balance sheet. As of 31 December 2017, total assets reached GEL 135.2mln. The y-o-y growth in assets was largely driven by 23.9% y-o-y increase in net insurance premiums receivable and 57.1% y-o-y increase in ceded share of technical provisions. The 14.5% y-o-y increase in total liabilities was driven by two large claims incurred as a result of a) major fire incident in 1Q17 and b) floods in 4Q17, both of which contributed to 21.0% y-o-y increase in gross technical provisions as of 31 December 2017
-- Aldagi has demonstrated outstanding dividend payment track record. Aldagi has distributed dividends totaling GEL 14.1mln since 1H16, of which, GEL 7.1mln was paid in 3Q16 and GEL 7.0mln in 2Q17
-- Insurance companies in Georgia are subject to regulatory requirements. Since 31 December 2016, Aldagi is required to maintain a solvency ratio in excess of 100%. At 31 December 2017, Aldagi's solvency ratio was 180% as compared to 195% at 30 September 2017 and 160% at 31 December 2016
Operating Highlights
Aldagi achieved significant milestones in 2017 as the company managed to exceed its annual targets for new product developments. Along with tapping regional markets through launching livestock insurance, Aldagi introduced online Travel insurance with a unique combination coverage and competitive pricing. Aldagi's product development initiatives resulted in more than 19,000 livestock insurance and 3,334 travel and trip insurance policies sold across the country.
Aldagi established the Strategic Development department in 2017 in order to focus on improving market intelligence through more direct communication and targeting of the Georgian insurance market's emerging trends and demands. These efforts led to a major milestone, whereby Aldagi signed an exclusive memorandum with Public Service Hall in 3Q17, which allows customers of the Public Service Hall to electronically acquire affordable insurance products for any type of property registered in the public registry.
Aldagi targets solidifying its market leadership position in digital insurance over the next 5 years by aiming to have all its processes and procedures, including issuance of e-policies, remote claims regulation and building web/mobile customer profiles, executed principally through digital channels. As at 31 December 2017, Aldagi had 11,044 online agents, who sell and promote retail insurance products through unique web-portal onjob.ge, a digital platform that helps Aldagi attract new customers.
Through extensive cooperation with the Insurance State Supervision Service of Georgia (ISSSG), the insurance market regulator in Georgia, the Parliament of Georgia approved Border Motor Third Party Liability Insurance (MTPL insurance for vehicles visiting Georgia either on a temporary or on transit basis) in December 2017. Compulsory MTPL insurance will become mandatory from 1 March 2018. Aldagi expects that MTPL insurance will increase the size of the existing property and casualty market by approximately GEL 30-50mln (15-25% of the existing P&C insurance market). Aldagi is working closely with ISSSG to support drafting of the new law requiring mandatory local MTPL for all vehicles registered in Georgia. The new law is expected to be launched in 2019 and will be a major boost to retail market penetration. The current low level of insurance market penetration of 1.1% in Georgia (of which, 0.6% relates to P&C insurance market penetration and 0.5% to medical insurance market) provides highly untapped retail growth potential.
-- Based on the latest available market data as of 30 September 2017, Aldagi continues to be the most profitable insurance company in the local market with 89.4% share of the insurance industry profit
-- Aldagi continues to lead the market with a powerful distribution network of 284 points of sale and 547 sales agents as of 31 December 2017
-- At 31 December 2017, Aldagi had 47,702 insured customers (up 36.5% y-o-y and down 7.4% q-o-q). The y-o-y increase in number of insured customers was mainly driven by organic growth of motor insurance business line and introduction of new product lines in 2017. The number of new insurance policies written reached 36,983 in 4Q17 (27,013 and 46,768 new policies written in 4Q16 and 3Q17, respectively) and 155,332 in 2017 (112,430 policies written in 2016). The 7.4% q-o-q decrease in number of insured customers was primarily due to seasonality of the agricultural insurance program that ran from the mid 2Q17 to the mid of 4Q17. Excluding the agricultural program effect, the number of customers were up 6.7% q-o-q in 4Q17
Aldagi signed major third-party partnership agreements with two Georgian banks, JSC Liberty Bank and JSC Credo Bank to successfully diversify its multi-channel distribution network. The partnership agreement between Aldagi and JSC Liberty Bank, the third largest bank in Georgia by total assets and with the largest branch and service outlet network in the country, will enable Aldagi to enhance its distribution capabilities of its motor third party liability insurance business. The three-year partnership agreement with JSC Credo Bank marks a continuation of an already established successful relationship between the companies. Aldagi will have rights to offer its retail insurance products to the bank's retail and small and medium-sized business clients through its wide network of branches, which will enable Aldagi to successfully tap Georgia's underpenetrated retail insurance segment.
Healthcare business (Georgia Healthcare Group or GHG)(16)
Standalone results
GHG is the largest integrated player in the fast-growing predominantly privately-owned Georgia Healthcare ecosystem with an aggregated value of GEL 3.5 billion. GHG is comprised of three different business lines: healthcare services business (consisting of a hospital business and polyclinics (ambulatory clinics)), pharmacy business and medical insurance business. BGEO Group owns 57.0% of GHG at 31 December 2017, with the remaining shares being held by the public (largely institutional investors). GHG's shares are listed on the London Stock Exchange. The results below refer to GHG standalone numbers and are based on GHG's reported results, which are published independently of the Group and available on GHG's web-site: ghg.com.ge
INCOME STATEMENT
GEL thousands;
unless otherwise Change Change Change
noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y
Revenue, gross 197,637 136,031 45.3% 179,065 10.4% 747,750 426,439 75.3%
Corrections &
rebates (349) (790) -55.8% (407) -14.3% (2,039) (2,686) -24.1%
Revenue, net 197,288 135,241 45.9% 178,658 10.4% 745,711 423,753 76.0%
Revenue from healthcare
services 68,094 66,814 1.9% 63,598 7.1% 263,357 243,453 8.2%
Revenue from pharmacy 121,367 56,586 114.5% 106,607 13.8% 450,315 133,002 NMF
Net insurance
premiums earned 12,376 16,312 -24.1% 13,959 -11.3% 53,710 61,494 -12.7%
Eliminations (4,549) (4,471) 1.7% (5,506) -17.4% (21,671) (14,196) 52.7%
Costs of services (134,252) (89,626) 49.8% (123,467) 8.7% (517,712) (277,735) 86.4%
Cost of healthcare
services (38,227) (34,802) 9.8% (36,916) 3.6% (150,572) (130,369) 15.5%
Cost of pharmacy (90,743) (44,498) 103.9% (80,237) 13.1% (340,210) (105,472) NMF
Cost of insurance
services (11,163) (14,997) -25.6% (11,968) -6.7% (48,583) (55,772) -12.9%
Eliminations 5,882 4,671 25.9% 5,653 4.1% 21,653 13,878 56.0%
Gross profit 63,036 45,615 38.2% 55,191 14.2% 227,999 146,018 56.1%
Salaries and other
employee benefits (20,519) (12,757) 60.8% (18,759) 9.4% (75,430) (39,750) 89.8%
General and administrative
expenses (12,266) (8,340) 47.1% (11,600) 5.7% (48,618) (26,149) 85.9%
Impairment of
receivables (1,133) 56 NMF (918) 23.4% (4,175) (2,332) 79.0%
Other operating
income 1,761 (285) NMF 2,200 -20.0% 8,372 240 NMF
EBITDA 30,879 24,289 27.1% 26,114 18.2% 108,148 78,027 38.6%
Depreciation and
amortisation (6,967) (5,316) 31.1% (6,384) 9.1% (25,704) (19,577) 31.3%
Net interest expense (8,303) (4,773) 74.0% (7,691) 8.0% (30,941) (13,736) 125.3%
Net (losses) from
foreign currencies (2,825) (3,170) -10.9% (1,336) NMF (397) (5,657) NMF
Net non-recurring
(expense)/ income (638) 1,982 NMF (872) -26.8% (4,780) 1,118 NMF
Profit before
income tax expense 12,146 13,012 -6.7% 9,831 23.5% 46,326 40,175 15.3%
Income tax (expense)/
benefit (187) (6,682) -97.2% (92) 103.3% (386) 21,156 NMF
of which: Deferred
tax adjustments - (5,319) NMF - - - 23,992 NMF
Profit for the
period 11,959 6,330 88.9% 9,739 22.8% 45,940 61,331 -25.1%
Attributable to:
- shareholders
of GHG 7,785 5,401 44.1% 6,261 24.3% 29,050 50,203 -42.1%
- non-controlling
interests 4,174 929 349.3% 3,478 20.0% 16,890 11,128 51.8%
of which: Deferred
tax adjustments - (516) NMF - - - 4,541 NMF
Performance highlights
-- GHG delivered gross revenue of GEL 197.6mln in 4Q17 (up 45.3% y-o-y and up 10.4% q-o-q) and GEL 747.8mln in 2017 (up 75.3% y-o-y). The q-o-q revenue increase was driven by strong growth in both healthcare services and pharmacy business as a result of the seasonally strong quarter. The y-o-y revenue growth in 4Q17 and in 2017 was mainly attributable to the pharmacy business (GPC and Pharmadepot were acquired in and consolidated from May 2016 and January 2017, respectively)
-- GHG achieved a well-diversified revenue mix, spread across all three segments of the Georgian healthcare ecosystem. In 2017, 34% of the GHG's revenue came from the healthcare services business, 59% from pharmacy business and the remaining 7% from medical insurance business. The high level of diversification was achieved through GHG's entrance and further expansion into the pharmacy business, which is funded almost entirely out-of-pocket and therefore, helped GHG to further diversify its revenue by payment sources. As a result, 54% of total revenue was received from out-of-pocket payments, 24% from Georgia's Universal Health Programme and 22% from other sources in 2017
-- In 4Q17, GHG continued to focus on extracting operating efficiencies and synergies across the business lines. The gross margin in the pharmacy business continued to improve q-o-q as well as y-o-y on a full year basis, mainly as a result of realising previously announced procurement synergies as the largest purchaser of pharmaceuticals in Georgia. Due to a seasonally busy quarter in terms of claims, the loss ratio in GHG's medical insurance business was up q-o-q in 4Q17, although it had significantly improved on a y-o-y basis. The y-o-y improvement in loss ratio in 4Q17 primarily reflected the successful implementation of new initiatives to refocus on more profitable clients starting from 2Q17. The loss ratio of medical insurance business remained largely flat y-o-y in 2017. As anticipated, healthcare services business margins are temporarily reduced due to launches of new healthcare facilities and services, which are currently in their rapid build-out phase. In 2018, main goal will be the continued successful roll-out of newly launched hospitals and services, while, at the same time, focusing on implementing efficiency measures across healthcare facilities, as well as GHG-wide
(16) GHG is classified as a disposal group held for sale and as a discontinued operation within BGEO's 4Q17 and full year 2017 results. Refer to page 4 for additional background.
-- GHG reported strong EBITDA of GEL 30.9mln in 4Q17 (up 27.1% y-o-y and up 18.2% q-o-q) and GEL 108.1mln in 2017 (up 38.6% y-o-y). The EBITDA margin for healthcare services business was 26.8% in 4Q17 (31.9% in 4Q16 and 26.0% in 3Q17) and 26.4% in 2017 (30.2% in 2016). The temporary y-o-y reduction in the EBITDA margin in 4Q17 and 2017 was due to the launch of new healthcare facilities and services, which are currently in their initial roll-out phase. Excluding the dilutive effects of roll-outs, the healthcare services business EBITDA margin was 29.3% in 4Q17 and 29.2% in 2017. GHG expects further margin improvement gradually. The healthcare services business was the main contributor to GHG's EBITDA, contributing 60% in total EBITDA in 4Q17, followed by pharmacy business, contributing 40% in total EBITDA during 4Q17. Pharmacy business EBITDA margin was 10.2% in 4Q17, well ahead of its target of 8%. Medical insurance business also reported positive EBITDA in 4Q17, despite the seasonally weak quarter
-- GHG's profit amounted to GEL 12.0mln in 4Q17 (up 2.7% y-o-y on a normalized basis(17) and up 22.8% q-o-q) and GEL 45.9mln in 2017 (up 16.1% y-o-y on a normalised(17) basis). The healthcare services business was the main driver of 4Q17 and 2017 profit by contributing GEL 6.4mln and GEL 27.4mln, followed by pharmacy business with GEL 5.8mln and GEL 21.2mln contribution, respectively
-- GHG's balance sheet increased substantially over the last twelve months, reaching GEL 1,167.8mln as at 31 December 2017 (up 27.6% y-o-y and up 3.9% q-o-q). The 27.6% y-o-y growth in total assets was largely driven by the increase in property and equipment, reflecting investments in the renovation of hospitals, roll-out of polyclinics and the consolidation of the pharmacy business, Pharmadepot. The pharmacy businesses consolidation primarily affected inventories and goodwill. Out of the GEL 118.8mln inventory balance at 31 December 2017, GEL 98.9mln was attributable to the pharmacy business, while the balance of goodwill from the acquisitions of the pharmacy businesses amounted to GEL 77.8mln at 31 December 2017.. Borrowed funds increased y-o-y and q-o-q in 4Q17 and 2017 as a result of following factors: 1) From the first quarter of 2017, GHG sourced longer-term and less expensive funding from both local commercial banks and Development Financial Institutions ("DFIs") and used the proceeds for the development of healthcare facilities; 2) At the beginning of 2017, GHG raised GEL 33.0mln from a local commercial bank to pay the first tranche of consideration payable for the Pharmadepot acquisition; 3) In 4Q17 GHG raised additional funds from local commercial banks to finance ongoing capital expenditures, as well as to pay the second tranche of consideration payable for the Pharmadepot acquisition in the beginning of January 2018. The y-o-y increase in accounts payable is also attributable to the pharmacy business. Out of the GEL 92.9mln accounts payable balance, GEL 63.4mln relates to the pharmacy business. The y-o-y increase in other liabilities related to recognition of put option liability (GEL 55.0 million present value liability) to purchase the remaining 33% shares of Pharmadepot
-- During 4Q17, GHG continued to invest in the development of its healthcare facilities. Healthcare services business spent a total of GEL 17.8mln in 4Q17 and GEL 89.3mln in 2017 on capital expenditures, primarily on the extensive renovations of Deka and Tbilisi Referral (formerly Sunstone) hospitals, as well as enhancing the service mix and introducing new services to cater for previously unmet patient needs. Of this, maintenance capex was GEL 2.1mln in 4Q17 and GEL 9.6mln in 2017
-- In July 2017, healthcare service business acquired referral and community hospitals in the Khashuri and Qareli regions (together the "Hospitals"), respectively. The acquisition is in line with the healthcare services business strategy to expand its presence across the country, especially in underrepresented regions of Georgia. Following the acquisition of the Hospitals, the number of referral and community hospitals increased to 16 and 21, respectively. The Hospitals are located in the Khashuri and Kareli regions, which have a combined population of c.100,000 people, and operate with 65 and 25 beds, respectively. These acquisitions further enable GHG to direct patients to its referral hospitals, primarily in Kutaisi and Tbilisi, thus providing potential for revenue synergies. The integration of both hospitals is already completed
-- In 4Q17 GHG launched a district polyclinic in Marneuli and acquired two district polyclinics in Tbilisi, with total of c.50,000 registered patients. Polyclinics acquisitions and launches are consistent with the Group's strategy to grow its healthcare services business through rolling-out a network of polyclinics across Tbilisi and in other major cities in Georgia. As a result, GHG currently operates a total of 12 polyclinic clusters, of which, eight are located in Tbilisi and four in the regions
-- GHG's healthcare services market share based on the number of beds was 24.5% at 31 December 2017
(17) Comparison on a normalised basis - 4Q16 and 2016 net profit was normalised and adjusted for one-off non-recurring gain/loss due to deferred tax adjustments (in the amount of GEL 5.3mln loss in 4Q16 and GEL 24.0mln gain in 2016). The full year 2016 profit is also adjusted for one-off currency translation loss in June (in the amount of GEL 2.1mln), which resulted from settlement of the US dollar denominated payable for the acquisition of GPC, GHG's pharmacy business.
SELECTED FINANCIAL INFORMATION
INCOME STATEMENT BGEO Consolidated Banking Business Investment Business Eliminations (QUARTERLY) GEL thousands, unless otherwise Change Change Change Change Change Change noted 4Q17 4Q16 y-o-y 3Q17 q-o-q 4Q17 4Q16 y-o-y 3Q17 q-o-q 4Q17 4Q16 y-o-y 3Q17 q-o-q 4Q17 4Q16 3Q17 Banking interest income 310,589 256,106 21.3% 284,988 9.0% 312,950 258,010 21.3% 287,274 8.9% - - - - - (2,361) (1,904) (2,286) Banking interest expense (127,091) (101,054) 25.8% (116,385) 9.2% (129,826) (100,399) 29.3% (119,486) 8.7% - - - - - 2,735 (655) 3,101 Net banking interest income 183,498 155,052 18.3% 168,603 8.8% 183,124 157,611 16.2% 167,788 9.1% - - - - - 374 (2,559) 815 Fee and commission income 53,290 48,447 10.0% 48,594 9.7% 53,739 50,248 6.9% 49,155 9.3% - - - - - (449) (1,801) (561) Fee and commission expense (16,807) (13,251) 26.8% (15,840) 6.1% (17,001) (13,479) 26.1% (16,014) 6.2% - - - - - 194 228 174 Net fee and commission income 36,483 35,196 3.7% 32,754 11.4% 36,738 36,769 -0.1% 33,141 10.9% - - - - - (255) (1,573) (387) Net banking foreign currency gain 28,139 34,956 -19.5% 20,436 37.7% 27,464 27,707 -0.9% 19,614 40.0% - - - - - 675 7,249 822 Net other banking income 12,708 1,704 NMF 2,375 NMF 12,986 2,138 NMF 2,653 NMF - - - - - (279) (433) (278) Net insurance premiums earned 13,535 11,316 19.6% 13,210 2.5% - - - - - 13,513 11,348 19.1% 13,194 2.4% 22 (32) 16 Net insurance claims incurred (7,207) (5,093) 41.5% (6,348) 13.5% - - - - - (7,207) (5,093) 41.5% (6,348) 13.5% - - - Gross insurance profit 6,328 6,223 1.7% 6,862 -7.8% - - - - - 6,306 6,255 0.8% 6,846 -7.9% 22 (32) 16 Real estate revenue 32,753 9,453 NMF 29,710 10.2% - - - - - 32,982 10,034 NMF 29,967 10.1% (229) (581) (257) Cost of real estate (27,209) (8,474) NMF (25,788) 5.5% - - - - - (27,209) (8,474) NMF (25,788) 5.5% - - - Gross real estate profit 5,544 979 NMF 3,922 41.4% - - - - - 5,773 1,560 NMF 4,179 38.1% (229) (581) (257) Utility revenue 33,195 31,608 5.0% 36,526 -9.1% - - - - - 33,286 31,679 5.1% 36,615 -9.1% (91) (71) (89) Cost of utility (10,418) (10,008) 4.1% (10,673) -2.4% - - - - - (10,418) (10,008) 4.1% (10,673) -2.4% - - - Gross utility profit 22,777 21,600 5.4% 25,853 -11.9% - - - - - 22,868 21,671 5.5% 25,942 -11.8% (91) (71) (89) Gross other investment profit 9,621 9,974 -3.5% 11,800 -18.5% - - - - - 9,611 9,758 -1.5% 11,792 -18.5% 11 215 8 Revenue 305,098 265,684 14.8% 272,605 11.9% 260,312 224,225 16.1% 223,196 16.6% 44,558 39,244 13.5% 48,759 -8.6% 228 2,215 650 Salaries and other employee benefits (65,570) (52,213) 25.6% (59,051) 11.0% (55,789) (47,883) 16.5% (50,638) 10.2% (10,426) (4,827) 116.0% (8,997) 15.9% 645 497 584 Administrative expenses (43,443) (31,383) 38.4% (33,227) 30.7% (32,245) (25,096) 28.5% (23,240) 38.7% (11,824) (7,407) 59.6% (10,695) 10.6% 626 1,120 708 Banking depreciation and amortisation (10,514) (9,639) 9.1% (10,738) -2.1% (10,514) (9,639) 9.1% (10,738) -2.1% - - - - - - - - Other operating expenses (1,619) (1,800) -10.1% (1,181) 37.1% (1,194) (1,222) -2.3% (738) 61.8% (426) (578) -26.3% (443) -3.8% 1 - - Operating
expenses (121,146) (95,035) 27.5% (104,197) 16.3% (99,742) (83,840) 19.0% (85,354) 16.9% (22,676) (12,812) 77.0% (20,135) 12.6% 1,272 1,617 1,292 Operating income before cost of credit risk / EBITDA 183,952 170,649 7.8% 168,408 9.2% 160,570 140,385 14.4% 137,842 16.5% 21,882 26,432 -17.2% 28,624 -23.6% 1,500 3,832 1,942 Profit from associates 255 - NMF 147 73.5% 255 - NMF 147 73.5% - - - - - - - - Depreciation and amortisation of investment business (9,056) (4,501) 101.2% (7,275) 24.5% - - - - - (9,056) (4,501) 101.2% (7,275) 24.5% - - - Net foreign currency loss from investment business (5,797) (1,905) NMF (3,941) 47.1% - - - - - (5,797) (1,905) NMF (3,941) 47.1% - - - Interest income from investment business 1,691 1,830 -7.6% 959 76.3% - - - - - 4,088 1,175 NMF 3,595 13.7% (2,397) 655 (2,636) Interest expense from investment business (8,862) (4,654) 90.4% (6,961) 27.3% - - - - - (8,969) (6,523) 37.5% (7,049) 27.2% 107 1,869 88 Operating income before cost of credit risk 162,183 161,419 0.5% 151,337 7.2% 160,825 140,385 14.6% 137,989 16.5% 2,148 14,678 -85.4% 13,954 -84.6% (790) 6,356 (606) Impairment charge on loans to customers (41,911) (69,920) -40.1% (34,202) 22.5% (41,911) (69,920) -40.1% (34,202) 22.5% - - - - - - - - Impairment charge on finance lease receivables 492 3,124 -84.3% (781) NMF 492 3,124 -84.3% (781) NMF - - - - - - - - Impairment charge on other assets and provisions (1,626) (3,227) -49.6% (2,917) -44.3% (1,009) (3,812) -73.5% (1,849) -45.4% (617) 585 NMF (1,068) -42.2% - - - Cost of credit risk (43,045) (70,023) -38.5% (37,900) 13.6% (42,428) (70,608) -39.9% (36,832) 15.2% (617) 585 NMF (1,068) -42.2% - - - Profit before non-recurring items and income tax 119,138 91,396 30.4% 113,437 5.0% 118,397 69,777 69.7% 101,157 17.0% 1,531 15,263 -90.0% 12,886 -88.1% (790) 6,356 (606) Net non-recurring items (673) (1,324) -49.2% (1,441) -53.3% (213) (1,055) -79.8% (1,376) -84.5% (460) (269) 71.0% (65) NMF - - - Profit before income tax 118,465 90,072 31.5% 111,996 5.8% 118,184 68,722 72.0% 99,781 18.4% 1,071 14,994 -92.9% 12,821 -91.6% (790) 6,356 (606) Income tax (expense) benefit (12,716) (871) NMF (10,096) 26.0% (11,050) 2,782 NMF (7,850) 40.8% (1,666) (3,653) -54.4% (2,246) -25.8% - - - Profit from continuing operations 105,749 89,201 18.6% 101,900 3.8% 107,134 71,504 49.8% 91,931 16.5% (595) 11,341 NMF 10,575 NMF (790) 6,356 (606) Profit from discontinued operations 13,060 (458) NMF 10,941 19.4% - - - - - 12,270 5,898 108.0% 10,335 18.7% 790 (6,356) 606 Profit 118,809 88,743 33.9% 112,841 5.3% 107,134 71,504 49.8% 91,931 16.5% 11,675 17,239 -32.3% 20,910 -44.2% - - - Attributable to: - shareholders of BGEO 113,729 87,136 30.5% 106,278 7.0% 106,687 72,060 48.1% 91,545 16.5% 7,042 15,076 -53.3% 14,733 -52.2% - - - - non-controlling interests 5,080 1,607 NMF 6,563 -22.6% 447 (556) NMF 386 15.8% 4,633 2,163 114.2% 6,177 -25.0% - - - Profit from continuing operations attributable to: - shareholders of BGEO 108,042 90,166 19.8% 101,327 6.6% 106,687 72,060 48.1% 91,545 16.5% 2,145 11,750 -81.7% 10,388 -79.4% (790) 6,356 (606) - non-controlling interests (2,293) (965) 137.6% 573 NMF 447 (556) NMF 386 15.8% (2,740) (409) NMF 187 NMF - - - Profit from discontinued operations attributable to: - shareholders of BGEO 5,687 (3,030) NMF 4,951 14.9% - - - - - 4,897 3,326 47.2% 4,345 12.7% 790 (6,356) 606 - non-controlling interests 7,373 2,572 NMF 5,990 23.1% - - - - - 7,373 2,572 NMF 5,990 23.1% - - - Earnings per share (basic) 3.05 2.29 33.2% 2.82 8.2% - earnings per share from continuing operations 2.90 2.37 22.4% 2.69 7.8% - earnings per share from discontinued operations 0.15 (0.08) NMF 0.13 15.4% Earnings per share (diluted) 2.90 2.21 31.2% 2.70 7.4% - earnings per share from continuing operations 2.76 2.28 21.1% 2.58 7.0% - earnings per share from discontinued operations 0.14 (0.07) NMF 0.12 16.7% INCOME STATEMENT BGEO Consolidated Banking Business Investment Business Eliminations GEL thousands, 2017 2016 Change 2017 2016 Change 2017 2016 Change 2017 2016 Change unless y-o-y y-o-y y-o-y y-o-y otherwise noted Banking interest income 1,131,914 926,029 22.2% 1,140,292 932,063 22.30% - - - (8,378) (6,034) 38.8% Banking interest expense (459,379) (377,908) 21.6% (468,192) (378,452) 23.70% - - - 8,813 544 NMF Net banking interest income 672,535 548,121 22.7% 672,100 553,611 21.4% - - - 435 (5,490) NMF Fee and commission income 190,392 169,581 12.3% 192,499 172,630 11.5% - - - (2,107) (3,049) -30.9% Fee and commission expense (60,342) (47,104) 28.1% (61,025) (47,720) 27.9% - - - 683 616 10.9% Net fee and commission income 130,050 122,477 6.2% 131,474 124,910 5.3% - - - (1,424) (2,433) -41.5% Net banking foreign currency gain 79,106 89,480 -11.6% 86,060 83,203 3.4% - - - (6,954) 6,277 NMF Net other banking income 18,645 10,667 74.8% 19,701 12,183 61.7% - - - (1,056) (1,516) -30.3% Net insurance premiums earned 52,363 42,407 23.5% - - - 52,147 43,094 21.0% 216 (687) NMF Net insurance claims incurred (25,098) (17,838) 40.7% - - - (25,098) (17,838) 40.7% - - - Gross insurance profit 27,265 24,569 11.0% - - - 27,049 25,256 7.1% 216 (687) NMF Real estate revenue 120,155 99,583 20.7% - - - 121,132 100,164 20.9% (977) (581) 68.2% Cost of real estate (85,765) (81,098) 5.8% - - - (85,765) (81,098) 5.8% - - - Gross real estate profit 34,390 18,485 86.0% - - - 35,367 19,066 85.5% (977) (581) 68.2% Utility revenue 127,208 56,347 125.8% - - - 127,568 56,486 125.8% (360) (139) 159.0% Cost of utility (39,198) (17,806) 120.1% - - - (39,198) (17,806) 120.1% - - - Gross utility
profit 88,010 38,541 128.4% - - - 88,370 38,680 128.5% (360) (139) 159.0% Gross other investment profit 30,630 21,288 43.9% - - - 30,583 21,334 43.4% 47 (46) NMF Revenue 1,080,631 873,628 23.7% 909,335 773,907 17.5% 181,369 104,336 73.8% (10,073) (4,615) 118.3% Salaries and other employee benefits (230,542) (182,853) 26.1% (198,213) (168,374) 17.7% (34,548) (16,279) 112.2% 2,219 1,800 23.3% Administrative expenses (136,177) (97,029) 40.3% (100,291) (82,113) 22.1% (38,350) (17,751) 116.0% 2,464 2,835 -13.1% Banking depreciation and amortisation (40,974) (37,207) 10.1% (40,974) (37,207) 10.1% - - - - - - Other operating expenses (5,352) (5,717) -6.4% (3,458) (3,854) -10.3% (1,894) (1,863) 1.7% - - - Operating expenses (413,045) (322,806) 28.0% (342,936) (291,548) 17.6% (74,792) (35,893) 108.4% 4,683 4,635 1.0% Operating income before cost of credit risk / EBITDA 667,586 550,822 21.2% 566,399 482,359 17.4% 106,577 68,443 55.7% (5,390) 20 NMF Profit from associates 1,311 4,074 -67.8% 1,311 - NMF - 4,074 NMF - - - Depreciation and amortisation of investment business (28,235) (10,062) NMF - - - (28,235) (10,062) NMF - - - Net foreign currency loss from investment business (4,937) (3,134) 57.5% - - - (4,937) (3,134) 57.5% - - - Interest income from investment business 5,415 3,745 44.6% - - - 12,970 4,144 NMF (7,555) (399) NMF Interest expense from investment business (29,660) (11,220) NMF - - - (30,014) (13,410) 123.8% 354 2,190 -83.8% Operating income before cost of credit risk 611,480 534,225 14.5% 567,710 482,359 17.7% 56,361 50,055 12.6% (12,591) 1,811 NMF Impairment charge on loans to customers (155,210) (158,892) -2.3% (155,210) (158,892) -2.3% - - - - - - Impairment charge on finance lease receivables (496) (777) -36.2% (496) (777) -36.2% - - - - - - Impairment charge on other assets and provisions (15,005) (9,087) 65.1% (11,590) (8,083) 43.4% (3,415) (1,004) NMF - - - Cost of credit risk (170,711) (168,756) 1.2% (167,296) (167,752) -0.3% (3,415) (1,004) NMF - - - Profit before non-recurring items and income tax 440,769 365,469 20.6% 400,414 314,607 27.3% 52,946 49,051 7.9% (12,591) 1,811 NMF Net non-recurring items (4,923) (12,682) -61.2% (4,300) (45,355) -90.5% (623) 32,673 NMF - - - Profit before income tax 435,846 352,787 23.5% 396,114 269,252 47.1% 52,323 81,724 -36.0% (12,591) 1,811 NMF Income tax (expense) benefit (32,340) 17,500 NMF (26,592) 26,444 NMF (5,748) (8,944) -35.7% - - - Profit from continuing operations 403,506 370,287 9.0% 369,522 295,696 25.0% 46,575 72,780 -36.0% (12,591) 1,811 NMF Profit from discontinued operations 59,943 58,289 2.8% - - - 47,352 60,100 -21.2% 12,591 (1,811) NMF Profit 463,449 428,576 8.1% 369,522 295,696 25.0% 93,927 132,880 -29.3% - - - Attributable to: - shareholders of BGEO 437,615 398,538 9.8% 367,832 293,173 25.5% 69,783 105,365 -33.8% - - - - non-controlling interests 25,834 30,038 -14.0% 1,690 2,523 -33.0% 24,144 27,515 -12.3% - - - Profit from continuing operations attributable to: - shareholders of BGEO 405,626 367,625 10.3% 367,832 293,173 25.5% 50,385 72,641 -30.6% (12,591) 1,811 NMF - non-controlling interests (2,120) 2,662 NMF 1,690 2,523 -33.0% (3,810) 139 NMF - - - Profit from discontinued operations attributable to: - shareholders of BGEO 31,989 30,913 3.5% - - - 19,398 32,724 -40.7% 12,591 (1,811) NMF - non-controlling interests 27,954 27,376 2.1% - - - 27,954 27,376 2.1% - - - Earnings per share (basic) 11.61 10.41 11.5% - earnings per share from continuing operations 10.76 9.61 12.0% - earnings per share from discontinued operations 0.85 0.80 6.2% Earnings per share (diluted) 11.07 10.09 9.7% - earnings per share from continuing operations 10.26 9.31 10.2% - earnings per share from discontinued operations 0.81 0.78 3.8% BALANCE SHEET BGEO Consolidated Banking Business Investment Business Eliminations GEL thousands, Dec-17 Dec-16 Change Sep-17 Change Dec-17 Dec-16 Change Sep-17 Change Dec-17 Dec-16 Change Sep-17 Change Dec-17 Dec-16 Sep-17 unless otherwise y-o-y q-o-q y-o-y q-o-q y-o-y q-o-q noted Cash and cash equivalents 1,582,435 1,573,610 0.6% 1,721,811 -8.1% 1,516,401 1,480,783 2.4% 1,648,098 -8.0% 374,301 401,969 -6.9% 345,137 8.4% (308,267) (309,142) (271,424) Amounts due from credit institutions 1,225,947 1,054,983 16.2% 985,120 24.4% 1,216,349 940,485 29.3% 950,775 27.9% 38,141 178,425 -78.6% 60,565 -37.0% (28,543) (63,927) (26,220) Investment securities 1,564,869 1,286,003 21.7% 1,421,401 10.1% 1,613,759 1,283,903 25.7% 1,469,274 9.8% 33,059 3,672 NMF 33,914 -2.5% (81,949) (1,572) (81,787) Loans to customers and finance lease receivables 7,690,450 6,648,482 15.7% 6,917,211 11.2% 7,741,420 6,681,672 15.9% 6,951,493 11.4% - - - - - (50,970) (33,190) (34,282) Accounts receivable and other loans 38,944 128,506 -69.7% 177,658 -78.1% 3,572 55,377 -93.5% 7,681 -53.5% 35,446 125,962 -71.9% 174,493 -79.7% (74) (52,833) (4,516) Insurance premiums receivable 30,573 46,423 -34.1% 53,998 -43.4% - - - - - 30,854 48,390 -36.2% 54,326 -43.2% (281) (1,967) (328) Prepayments 149,558 76,277 96.1% 164,911 -9.3% 61,501 18,716 NMF 54,808 12.2% 88,057 58,161 51.4% 110,135 -20.0% - (600) (32) Inventories 100,194 188,344 -46.8% 230,661 -56.6% 20,086 8,809 128.0% 20,893 -3.9% 80,108 179,535 -55.4% 209,768 -61.8% - - - Investment property 353,565 288,227 22.7% 319,059 10.8% 202,533 152,597 32.7% 175,071 15.7% 155,367 135,630 14.6% 148,323 4.7% (4,335) - (4,335) Property and equipment 988,436 1,288,594 -23.3% 1,501,735 -34.2% 322,925 296,791 8.8% 309,769 4.2% 661,176 991,803 -33.3% 1,187,631 -44.3% 4,335 - 4,335 Goodwill 55,276 106,986 -48.3% 159,570 -65.4% 33,351 33,453 -0.3% 33,351 0.0% 21,925 73,533 -70.2% 126,219 -82.6% - - - Intangible assets 60,980 58,907 3.5% 79,573 -23.4% 55,525 39,941 39.0% 53,939 2.9% 5,455 18,966 -71.2% 25,634 -78.7% - - - Income tax
assets 2,293 24,043 -90.5% 6,826 -66.4% 919 19,325 -95.2% 1,582 -41.9% 1,374 4,718 -70.9% 5,244 -73.8% - - - Other assets 188,732 184,791 2.1% 188,239 0.3% 119,337 111,506 7.0% 102,984 15.9% 73,468 86,305 -14.9% 92,038 -20.2% (4,073) (13,020) (6,783) Assets of disposal group held for sale 1,136,417 - NMF - NMF - - - - - 1,165,182 - NMF - NMF (28,765) - - Total assets 15,168,669 12,954,176 17.1% 13,927,773 8.9% 12,907,678 11,123,358 16.0% 11,779,718 9.6% 2,763,913 2,307,069 19.8% 2,573,427 7.4% (502,922) (476,251) (425,372) Client deposits and notes 6,712,482 5,382,698 24.7% 6,252,228 7.4% 7,078,058 5,755,767 23.0% 6,549,904 8.1% - - - - - (365,576) (373,069) (297,676) Amounts due to credit institutions 3,155,839 3,470,091 -9.1% 2,774,525 13.7% 2,778,338 3,067,651 -9.4% 2,350,438 18.2% 377,501 435,630 -13.3% 459,158 -17.8% - (33,190) (35,071) Debt securities issued 1,709,152 1,255,643 36.1% 1,691,260 1.1% 1,386,412 858,036 61.6% 1,298,641 6.8% 357,442 404,450 -11.6% 479,142 -25.4% (34,702) (6,843) (86,523) Accruals and deferred income 132,669 130,319 1.8% 160,530 -17.4% 42,207 21,778 93.8% 31,332 34.7% 90,462 161,893 -44.1% 132,783 -31.9% - (53,352) (3,585) Insurance contracts liabilities 46,402 67,871 -31.6% 77,695 -40.3% - - - - - 46,402 67,871 -31.6% 77,695 -40.3% - - - Income tax liabilities 20,959 27,718 -24.4% 16,166 29.6% 20,100 22,528 -10.8% 14,697 36.8% 859 5,190 -83.4% 1,469 -41.5% - - - Other liabilities 142,133 231,623 -38.6% 326,686 -56.5% 49,861 45,096 10.6% 47,660 4.6% 92,553 196,324 -52.9% 281,543 -67.1% (281) (9,797) (2,517) Liabilities of disposal group held for sale 516,663 - NMF - NMF - - - - - 619,026 - NMF - NMF (102,363) - - Total liabilities 12,436,299 10,565,963 17.7% 11,299,090 10.1% 11,354,976 9,770,856 16.2% 10,292,672 10.3% 1,584,245 1,271,358 24.6% 1,431,790 10.6% (502,922) (476,251) (425,372) Share capital 1,151 1,154 -0.3% 1,151 0.0% 1,151 1,154 -0.3% 1,151 0.0% - - - - - - - - Additional paid-in capital 106,086 183,872 -42.3% 138,144 -23.2% - 45,072 NMF - - 106,086 138,800 -23.6% 138,144 -23.2% - - - Treasury shares (66) (54) 22.2% (54) 22.2% (66) (54) 22.2% (54) 22.2% - - - - - - - - Other reserves 122,082 74,399 64.1% 124,092 -1.6% (74,046) (57,485) 28.8% (49,407) 49.9% 196,128 131,884 48.7% 173,499 13.0% - - - Retained earnings 2,180,415 1,872,496 16.4% 2,065,239 5.6% 1,618,775 1,344,144 20.4% 1,528,751 5.9% 561,640 528,352 6.3% 536,488 4.7% - - - Reserves of disposal group held for sale 10,934 - NMF - NMF - - - - - 10,934 - NMF - NMF - - - Total equity attributable to shareholders of the Group 2,420,602 2,131,867 13.5% 2,328,572 4.0% 1,545,814 1,332,831 16.0% 1,480,441 4.4% 874,788 799,036 9.5% 848,131 3.1% - - - Non-controlling interests 311,768 256,346 21.6% 300,111 3.9% 6,888 19,671 -65.0% 6,605 4.3% 304,880 236,675 28.8% 293,506 3.9% - - - Total equity 2,732,370 2,388,213 14.4% 2,628,683 3.9% 1,552,702 1,352,502 14.8% 1,487,046 4.4% 1,179,668 1,035,711 13.9% 1,141,637 3.3% - - - Total liabilities and equity 15,168,669 12,954,176 17.1% 13,927,773 8.9% 12,907,678 11,123,358 16.0% 11,779,718 9.6% 2,763,913 2,307,069 19.8% 2,573,427 7.4% (502,922) (476,251) (425,372) Book value per share 65.22 56.61 15.2% 62.06 5.1%
BELARUSKY NARODNY BANK (BNB)
INCOME STATEMENT, Change Change Change
HIGHLIGHTS 4Q17 4Q16 y-o-y 3Q17 q-o-q 2017 2016 y-o-y
GEL thousands,
unless otherwise
stated
Net banking
interest income 6,021 8,043 -25.1% 6,729 -10.5% 29,397 30,773 -4.5%
Net fee and
commission income 2,421 1,993 21.5% 2,287 5.9% 9,336 7,462 25.1%
Net banking
foreign currency
gain 3,457 2,696 28.2% 2,780 24.4% 10,852 8,452 28.4%
Net other banking
income 1,295 (1,064) NMF 212 NMF 1,773 (738) NMF
Revenue 13,194 11,668 13.1% 12,008 9.9% 51,358 45,949 11.8%
Operating expenses (8,185) (6,483) 26.3% (7,845) 4.3% (29,664) (20,905) 41.9%
Operating income
before cost of
credit risk 5,009 5,185 -3.4% 4,163 20.3% 21,694 25,044 -13.4%
Cost of credit
risk (518) (9,163) -94.3% 299 NMF (9,093) (15,797) -42.4%
Net non-recurring
items (4) (1,402) -99.7% - NMF (60) (1,418) -95.8%
Profit before
income tax 4,487 (5,380) NMF 4,462 0.6% 12,541 7,829 60.2%
Income tax (expense)/benefit (876) 1,289 NMF (728) 20.3% (2,256) (5,141) -56.1%
Profit 3,611 (4,091) NMF 3,734 -3.3% 10,285 2,688 NMF
BALANCE SHEET, HIGHLIGHTS Dec-17 Dec-16 Change Sep-17 Change
y-o-y q-o-q
GEL thousands, unless
otherwise stated
Cash and cash equivalents 104,309 70,211 48.6% 105,475 -1.1%
Amounts due from credit
institutions 10,499 3,560 NMF 10,146 3.5%
Investment securities 73,415 84,725 -13.3% 120,521 -39.1%
Loans to customers
and finance lease
receivables 399,516 362,100 10.3% 380,326 5.0%
Other assets 37,096 24,131 53.7% 28,468 30.3%
Total assets 624,835 544,727 14.7% 644,936 -3.1%
Client deposits and
notes 310,050 233,501 32.8% 316,413 -2.0%
Amounts due to credit
institutions 202,492 212,495 -4.7% 221,712 -8.7%
Debt securities issued 28,512 24,126 18.2% 29,685 -4.0%
Other liabilities 4,261 5,134 -17.0% 4,828 -11.7%
Total liabilities 545,315 475,256 14.7% 572,638 -4.8%
Total equity attributable
to shareholders of
the Group 79,520 55,736 42.7% 72,298 10.0%
Non-controlling interests - 13,735 NMF - -
Total equity 79,520 69,471 14.5% 72,298 10.0%
Total liabilities
and equity 624,835 544,727 14.7% 644,936 -3.1%
BANKING BUSINESS KEY
RATIOS 4Q17 4Q16 3Q17 Dec-17 Dec-16
Profitability
ROAA, Annualised 3.4% 2.8% 3.2% 3.2% 3.1%
ROAE, Annualised 27.8% 20.0% 25.1% 25.2% 22.2%
RB ROAE 36.6% 36.5% 34.1% 31.6% 31.2%
CIB ROAE 18.1% 6.2% 13.3% 17.6% 14.7%
Net Interest Margin,
Annualised 7.3% 7.6% 7.3% 7.3% 7.4%
RB NIM 8.4% 9.3% 8.5% 8.5% 9.2%
CIB NIM 3.5% 3.6% 3.5% 3.4% 3.6%
Loan Yield, Annualised 14.3% 14.4% 14.3% 14.2% 14.2%
RB Loan Yield 15.9% 16.4% 16.3% 16.1% 16.8%
CIB Loan Yield 11.2% 11.1% 10.6% 10.7% 10.4%
Liquid Assets Yield,
Annualised 3.4% 3.3% 3.5% 3.4% 3.2%
Cost of Funds, Annualised 4.8% 4.6% 4.8% 4.7% 4.7%
Cost of Client Deposits
and Notes, Annualised 3.5% 3.6% 3.5% 3.5% 3.8%
RB Cost of Client Deposits
and Notes 2.8% 3.1% 2.9% 2.9% 3.3%
CIB Cost of Client Deposits
and Notes 4.0% 3.6% 3.9% 4.0% 3.9%
Cost of Amounts Due
to Credit Institutions,
Annualised 6.5% 6.4% 6.5% 6.4% 6.2%
Cost of Debt Securities
Issued 7.8% 6.1% 7.9% 7.4% 6.8%
Operating Leverage,
Y-O-Y -2.9% -7.3% -2.6% -0.1% -6.4%
Operating Leverage,
Q-O-Q -0.2% 0.0% -0.4% 0.0% 0.0%
Efficiency
Cost / Income 38.3% 37.4% 38.2% 37.7% 37.7%
RB Cost / Income 38.7% 38.8% 37.8% 38.3% 40.0%
CIB Cost / Income 31.0% 28.7% 34.5% 32.0% 29.5%
Liquidity
NBG Liquidity Ratio 34.4% 37.7% 44.4% 34.4% 37.7%
Liquid Assets To Total
Liabilities 38.3% 37.9% 39.5% 38.3% 37.9%
Net Loans To Client
Deposits and Notes 109.4% 116.1% 106.1% 109.4% 116.1%
Net Loans To Client
Deposits and Notes +
DFIs 92.4% 94.9% 90.0% 92.4% 94.9%
Leverage (Times) 7.3 7.2 6.9 7.3 7.2
Asset Quality:
NPLs (in GEL) 301,268 294,787 297,134 301,268 294,787
NPLs To Gross Loans
To Clients 3.8% 4.2% 4.1% 3.8% 4.2%
NPL Coverage Ratio 92.7% 86.7% 93.6% 92.7% 86.7%
NPL Coverage Ratio,
Adjusted for discounted
value of collateral 130.6% 132.1% 132.8% 130.6% 132.1%
Cost of Risk, Annualised 2.1% 4.2% 2.0% 2.2% 2.7%
RB Cost of Risk 1.8% 2.0% 2.0% 2.5% 2.3%
CIB Cost of Risk 3.2% 6.6% 2.3% 1.5% 3.1%
Capital Adequacy:
NBG (Basel II) Tier
I Capital Adequacy Ratio 10.3% 9.1% 11.1% 10.3% 9.1%
NBG (Basel II) Total
Capital Adequacy Ratio 14.8% 14.4% 16.2% 14.8% 14.4%
NBG (Basel III) Tier
I Capital Adequacy Ratio 12.4% n/a n/a 12.4% n/a
NBG (Basel III) Total
Capital Adequacy Ratio 17.9% n/a n/a 17.9% n/a
Selected Operating Data:
Total Assets Per FTE,
BOG Standalone 1,832 1,730 1,732 1,832 1,730
Number Of Active Branches,
Of Which: 286 278 283 286 278
- Express Branches
(including Metro) 156 128 153 156 128
- Bank of Georgia Branches 118 139 119 118 139
- Solo Lounges 12 11 11 12 11
Number Of ATMs 850 801 829 850 801
Number Of Cards Outstanding,
Of Which: 2,227,000 2,056,258 2,176,761 2,227,000 2,056,258
- Debit cards 1,553,427 1,255,637 1,431,859 1,553,427 1,255,637
- Credit cards 673,573 800,621 744,902 673,573 800,621
Number Of POS Terminals 13,216 10,357 11,997 13,216 10,357
FX Rates:
GEL/US$ exchange rate
(period-end) 2.5922 2.6468 2.4767
GEL/GBP exchange rate
(period-end) 3.5005 3.2579 3.3158
Dec-17 Dec-16 Sep-17
Full Time Employees,
Group, Of Which: 25,795 22,080 25,425
Total Banking Business
Companies, of which: 7,045 6,431 6,801
- Full Time Employees,
BOG Standalone 5,501 5,016 5,293
- Full Time Employees,
BNB 702 611 679
- Full Time Employees,
BB other 842 804 829
Total Investment Business
Companies, of which: 18,750 15,649 18,624
- Full Time Employees,
Georgia Healthcare Group 15,070 12,720 15,075
- Full Time Employees,
Aldagi 328 289 319
- Full Time Employees,
GGU 2,631 2,379 2,501
- Full Time Employees,
m(2) 156 80 115
- Full Time Employees,
IB Other 565 181 614
Shares Outstanding Dec-17 Dec-16 Sep-17
Ordinary Shares Outstanding 37,116,399 37,657,229 37,520,410
Treasury Shares Outstanding 2,268,313 1,843,091 1,864,302
Total Shares Outstanding 39,384,712 39,500,320 39,384,712
Annex:
In this announcement the Management uses various alternative performance measures ("APMs"), which they believe provide additional useful information for understanding the financial performance of the Group. These APMs are not defined by International Financial Reporting Standards, and also may not be directly comparable with other companies who use similar measures. We believe that these APMs provide the best representation of our financial performance as these measures are used by management to evaluate our operating performance and make day-to-day operating decisions.
Glossary
1. Return on average total assets (ROAA) equals Banking
Business Profit for the period divided by monthly
average total assets for the same period;
==================================================================
2. Return on average total equity (ROAE) equals Banking
Business Profit for the period attributable to shareholders
of BGEO divided by monthly average equity attributable
to shareholders of BGEO for the same period;
------------------------------------------------------------------
3. Net Interest Margin (NIM) equals Net Banking Interest
Income of the period divided by monthly Average Interest
Earning Assets Excluding Cash for the same period;
Interest Earning Assets Excluding Cash comprise: Amounts
Due From Credit Institutions, Investment Securities
(but excluding corporate shares) and net Loans To
Customers And Finance Lease Receivables;
------------------------------------------------------------------
4. Loan Yield equals Banking Interest Income From
Loans To Customers And Finance Lease Receivables divided
by monthly Average Gross Loans To Customers And Finance
Lease Receivables;
------------------------------------------------------------------
5. Cost of Funds equals banking interest expense of
the period divided by monthly average interest bearing
liabilities; interest bearing liabilities include:
amounts due to credit institutions, client deposits
and notes, and debt securities issued;
------------------------------------------------------------------
6. Operating Leverage equals percentage change in
revenue less percentage change in operating expenses;
------------------------------------------------------------------
7. Cost / Income Ratio equals operating expenses divided
by revenue;
------------------------------------------------------------------
8. NBG Liquidity Ratio equals daily average liquid
assets (as defined by NBG) during the month divided
by daily average liabilities (as defined by NBG) during
the month;
------------------------------------------------------------------
9. Liquid assets include: cash and cash equivalents,
amounts due from credit institutions and investment
securities;
------------------------------------------------------------------
10. Liquidity Coverage Ratio equals high quality liquid
assets (as defined by NBG) divided by net cash outflow
over the next 30 days (as defined by NBG)
------------------------------------------------------------------
11. Leverage (Times) equals total liabilities divided
by total equity;
------------------------------------------------------------------
12. NPL Coverage Ratio equals allowance for impairment
of loans and finance lease receivables divided by
NPLs;
------------------------------------------------------------------
13. NPL Coverage Ratio adjusted for discounted value
of collateral equals allowance for impairment of loans
and finance lease receivables divided by NPLs (discounted
value of collateral is added back to allowance for
impairment)
------------------------------------------------------------------
14. Cost of Risk equals impairment charge for loans
to customers and finance lease receivables for the
period divided by monthly average gross loans to customers
and finance lease receivables over the same period;
------------------------------------------------------------------
15. NBG (Basel II) Tier I Capital Adequacy ratio equals
Tier I Capital divided by total risk weighted assets,
both calculated in accordance with the requirements
the National Bank of Georgia instructions;
------------------------------------------------------------------
16. NBG (Basel II) Total Capital Adequacy ratio equals
total capital divided by total risk weighted assets,
both calculated in accordance with the requirements
of the National Bank of Georgia instructions;
17. NBG (Basel III) Tier I Capital Adequacy ratio
equals Tier I Capital divided by total risk weighted
assets, both calculated in accordance with the requirements
the National Bank of Georgia instructions;
18. NBG (Basel III) Total Capital Adequacy ratio equals
total capital divided by total risk weighted assets,
both calculated in accordance with the requirements
of the National Bank of Georgia instructions;
------------------------------------------------------------------
19. Loss ratio equals net insurance claims expense
divided by net earned premiums
20. Expense ratio equals sum of acquisition costs
and operating expenses divided by net earned premiums
21. Combined ratio equals sum of the loss ratio and
the expense ratio
22. NMF - Not meaningful
------------------------------------------------------------------
-------------------------------------------------------------------------------
BGEO Group PLC 4Q17 and FY17 Results Conference Call Details
BGEO Group PLC ("BGEO" or the "Group") will publish its financial results for the 4(th) quarter 2017 and the full year 2017 at 07:00 London time on Friday, 16 February 2018. The results announcement will be available on the Group's website at www.bgeo.com. An investor/analyst conference call, organised by BGEO, will be held on, 16 February 2018, at 13:00 UK / 14:00 CET / 08:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 15-minute update and a 45-minute Q&A session.
Dial-in numbers: 30-Day replay: Pass code for replays/Conference Pass code for replays ID: 8755969 / Conference ID: 8755969 International Dial-in: International Dial in: +44 (0) 2071 928000 +44 (0)1452550000 UK: 08445718892 UK National Dial In: 08717000145 US: 16315107495 UK Local Dial In: 08443386600 Austria: 019286559 USA Free Call Dial In: Belgium: 024009874 1 (866) 247-4222 Czech Republic: 228881424 Denmark: 32728042 Finland: 0942450806 France: 0176700794 Germany: 06924437351 Hungary: 0614088064 Ireland: 014319615 Italy: 0687502026 Luxembourg: 27860515 Netherlands: 0207143545 Norway: 23960264 Spain: 914146280 Sweden: 0850692180 Switzerland: 0315800059
FORWARD LOOKING STATEMENTS
This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although BGEO Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: currency fluctuations, including depreciation of the Georgian Lari, and macroeconomic risk; corporate loan portfolio exposure risk; regional tensions; regulatory risk; cyber security, information systems and financial crime risk; investment business strategy risk; and other key factors that we have indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports, including the 'Principal Risks and Uncertainties' included in BGEO Group PLC's Annual Report and Accounts 2016 and in its Half Year 2017 Results announcement. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in BGEO Group PLC or any other entity, including any future entity such as Georgia Capital PLC or Bank of Georgia Group PLC, and must not be relied upon in any way in connection with any investment decision. BGEO Group PLC undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast.
COMPANY INFORMATION
BGEO Group PLC
Registered Address
84 Brook Street
London W1K 5EH
United Kingdom
www.BGEO.com
Registered under number 7811410 in England and Wales
Incorporation date: 14 October 2011
Stock Listing
London Stock Exchange PLC's Main Market for listed securities
Ticker: "BGEO.LN"
Contact Information
BGEO Group PLC Investor Relations
Telephone: +44(0)2031784052; +995322444190
E-mail: ir@BGEO.com
Auditors
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London E14 5EY
United Kingdom
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
United Kingdom
Please note that Investor Centre is a free, secure online service run by our Registrar, Computershare, giving you convenient access to information on your shareholdings.
Investor Centre Web Address - www.investorcentre.co.uk.
Investor Centre Shareholder Helpline - +44 (0)370 873 5866
Share price information
BGEO shareholders can access both the latest and historical prices via our website, www.BGEO.com
This information is provided by RNS
The company news service from the London Stock Exchange
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February 16, 2018 02:00 ET (07:00 GMT)
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