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GROUP
Capturing growth opportunities
A platform to develop talent
Outstanding results in 2015
Georgian economy: top
performer in the
region
Comple ted GHG IPO
on London Stock
Exchange
Bank of the year 2015
in Georgia and Central
and Eastern Europe
Solo launch –
a fundamentally different
approach to premium
banking
Re tail banking launches
multi-brand, customer
centric strategy
Exclusive partner
of SAXO Bank
Investment Business
Opportunities and
strategic partnerships
BGEO Group: updated
strategy, updated
structure
PrivatBank: a strategic acquisition
and flawless integration
Annual Report 2015
About us
BGEO Group PLC
BGEO Group PLC (BGEO or the
Company) is a UK incorporated
holding company of a Georgia-
based banking group with an
investment arm (BGEO and its
subsidiaries, the Group). It aims to
deliver on a 4x20 strategy: at least
20% ROAE and at least 20%
growth of retail loan book in banking
business, and at least 20% IRR and
up to 20% of the Group’s profit from
investment business.
Banking Business
Our Banking Business comprises at least 80% of the
Group’s profit and consists of Retail Banking, Corporate
Banking and Investment Management businesses at its
core and other banking businesses such as P&C
Insurance, Leasing, Payment Services and Banking
operations in Belarus (BNB). The Group strives to benefit
from the underpenetrated banking sector in Georgia
especially through its Retail Banking services.
Investment Business
Our Investment Business comprises up to 20% of the
Group’s profit and consists of Georgia Healthcare Group
(Healthcare Business) – an LSE (London Stock Exchange
PLC) premium segment listed company, m2 Real Estate
(Real Estate Business), Georgia Global Utilities (Utility
Business or GGU) and Teliani Valley (Beverage Business).
Georgia’s fast-growing economy provides opportunities
in a number of underdeveloped markets and the Group
is well positioned to capture growth opportunities in the
Georgian corporate sector.
See page 28 for our business model
and page 30 for our strategy
See pages 4 and 5 for the
structure of our business
Renaming the Group to reflect 4x20 strategy
Platform for
efficiently allocating
cash and human
capital
BGEO is a London-listed PLC focused on Georgian
banking, with an investment arm
BGEO aims to deliver on its 4x20 strategy by
allocating capital efficiently
GROUP
Changes in regulation in Georgia and our new strategy, both of
which were announced in 2014, created the need for a new legal
structure in Georgia. The National Bank of Georgia (NBG)
announced its intention to regulate banks in Georgia on a stand-
alone basis and thereby limit investments in non-banking
subsidiaries by locally regulated banking entities.
In order to comply with the regulation to separate the banking and
investment businesses as well as highlight our new strategy to
grow Bank of Georgia’s (BOG or the Bank) strong retail and
corporate banking franchise as well as capture compelling
investment opportunies, we established a fully owned subsidiary,
JSC BGEO Group, under Bank of Georgia Holdings PLC to serve
as the Georgian holding company for the Group. We then grouped
our subsidaries into separate banking and investment businesses
under JSC BGEO Group, which was completed in August 2015.
At the time of completion of the Georgian restructuring, we
announced our intention to change the name of Bank of Georgia
Holdings PLC to BGEO Group PLC to reflect the new Group
structure and strategy. The name change became effective in
November 2015.
Contents
Strategic report 2-85
Overview
2
3
4
6
9
Financial highlights
Operating highlights
BGEO at a glance
Chairman’s Statement
Chief Executive Officer’s Statement
A Platform to develop talent
Strategy
16
24 Market review
28 Our business model
30 Our strategy
42
44
46
48
52
60
About the GHG IPO
Key performance indicators
BGEO risk management
Principal risks and uncertainties
Bank risk management
Resources and responsibilities
Performance
70 Overview of financial results
71
Discussion of Banking Business
Results
Governance 86-127
86
Directors’ Governance Statement
– Leadership
Directors’ Governance Statement
Leadership and Effectiveness
Nomination Committee Report
Accountability
92
93
97
99
100 Audit Committee Report
104 Risk Committee Report
106 Shareholder engagment
107 Directors’ Remuneration Report
124 Statement of Directors’ Responsibilities
125 Directors’ Report
Financial statements 128-213
Independent Auditor’s Report
128
135 Separate statement of financial
position
136 Separate statement of changes
in equity
137 Separate statement of cash flows
138 Consolidated statement of financial
position
140 Consolidated income statement
142 Consolidated statement of
comprehensive income
143 Consolidated statement of changes in
equity
144 Consolidated statement of cash flows
145 Notes to consolidated financial
statements
Additional information 214-218
214 Abbreviations
216 Glossary
218 Shareholder information
Please note that long forms of abbreviated
terms can be found in the abbreviations
section on p.214
16-23
A platform to develop
talent
30-32
4x20 strategy
83-89
Board of Directors
128-213
Financial statements
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10
01
07
02
05
04
03
08
09
06
and augmenting the Group returns
through carefully targeted direct equity
investments, with a clear exit strategy and
targeted IRR above 20%, to contribute
up to 20% of the Group’s profits.
04. Nikoloz (Nick)
Gamkrelidze
CEO (Georgia Healthcare
Group)
With the Group since 2005.
Our healthcare business
story starts with Nick, who
started it in 2006, and has
successfully led it through
outstanding growth and
most recently the IPO on the
London Stock Exchange.
Holds an MA in international
healthcare management from
the Tanaka Business School
of Imperial College London.
4x20 strategy going forward
Going forward we plan to increase the relative size of our highly profitable Retail Banking business
and to generate additional non-interest income from advisory and other fee-generating businesses.
In addition, we plan to make further equity investments in areas outside our core banking operations.
09. George Baratashvhili
CEO (Insurance Company
Aldagi)
economy such as Georgia, we continue
With the Group since 2004.
to see a much better risk return profile
Joined as Junior Sales
when investing in Georgian companies
Manager of pension insurance
than when lending to those same
at Aldagi, selling insurance
at the time when the clients
corporates. We also believe that the
had little or no awareness
Group can add value for our shareholders
of insurance. Having held
by investing in opportunities, which
various managerial positions,
currently are not accessible to our
in 2009 was promoted to
shareholders, changing management
Head of Group Sales and
and governance, institutionalising and
Pension Fund at Aldagi. Has
scaling up the companies, and most
successfully led Aldagi as
a CEO since 2014. Holds a
importantly, unlocking value by exiting
Master’s in International law.
from these companies over time. BGEO’s
management has a proven track record
10. Lasha Khakhutaishvili
of creating value through successful
CFO (Insurance Company
business development and investments.
Aldagi)
With the Group since 2008.
Joined as a Financial Analyst
at Aldagi. Was promoted to
the Head of Budgeting and
Financial Controlling and
later to Finance Manager.
We are a Georgia-focused banking group with
Since August 2014, he has
been CFO of Aldagi.
an investment arm
01. Avtandil (Avto)
Namicheishvili
Group General Counsel
At the end of 2015, the Board updated
(BGEO Group)
our strategy with the aim of making it
With the Group since 2007.
more relevant. While we are committed to
Joined as a General Counsel at
growing our business while maintaining
the Bank, and has since played
a key role in all of the Group’s
our existing strong capitalisation, Tier I
equity and debt raises on the
c.20% became non-relevant, as regulation
capital markets, and over 25
moved to Basel 2/3. Additionally, in the
mergers and acquisitions.
context of excess capital of c.GEL 600
Prior, was a Partner at a
million at BGEO Group, we aim to have
leading Georgian law firm.
efficient capital management at the Bank.
Holds LLM in international
To reflect this, at the end of 2015, we
business law from Central
European University, Hungary.
have updated our 4x20 strategy, which is
focused on enhancing BGEO’s profitability
02. Michael Oliver
by optimising capital allocation. This
Advisor to the Group CEO
includes our continued commitment to
(BGEO Group)
the Bank’s highly profitable retail franchise
With the Group since 2012.
Prior, worked for over 25 years
in a number of management
and senior executive positions
in the UK banking industry,
in particular at Lloyds
Banking Group plc and its
We are a Georgia-focused
predecessor companies. Has
banking group with an
been extensively involved
in the IPOs and investor
investment arm
communication of both BGEO
and Georgia Healthcare Group.
07. Giorgi Vakhtangishvili
Chief Financial Officer
(GGU)
With the Group since 2007.
Joined as a CFO of BG Bank,
Ukrainian subsidiary of the
Bank, later to become a Chief
Risk Officer and play a key
role in restructuring large
corporate loans and eventual
disposal of the Ukrainian
Bank. Also, served as a CEO
of m2 Real Estate, the leading
real estate development
company in Georgia – a real
estate business of the Group.
Prior, Giorgi was a Senior
Auditor at EY and worked
for several European offices.
Holds a BBA from European
School of Management.
Our key goal is to continue producing
high returns in the long run for our
shareholders. Currently, we see that Retail
Banking is producing over 30% ROAE
while Corporate Banking is producing
c.15% ROAE. Therefore, we want to
increase the share of retail banking
portfolio to 65% over the next three years.
Due to the limited access to capital
and management in a small frontier
05. Irakli Gilauri
CEO (BGEO Group)
With the Group since 2004.
Formerly an EBRD (European
Bank for Reconstruction and
Development) banker, joined
the Bank as CFO. Over the last
decade, Irakli’s leadership has
been instrumental in creating
major players in a number of
Georgian industries, including
banking, healthcare, real
estate, insurance and wine.
Holds an MS in banking from
CASS Business School.
08. Natalia (Nato) Beridze
Head of HR (BOG)
With the Group since 2005.
Joined from the similar position
at Tbiluniversalbank, when it
was acquired by the Bank.
Developed and implemented
the Bank’s HR policies and
systems. Holds a Master’s
in Social Psychology from
Tbilisi State University.
4x20 strategy going forward
4x20 strategy in 2015
Banking Business
Investment Business
4. Min. IRR
of 20%
Investment
Business
Banking
03. Ekaterina (Eka)
Business
Shavgulidze
Head of Investor Relations
1. ROE
and Funding (BGEO
Group)
c.20%
With the Group since
2011. Joined as a CEO of
healthcare services business.
2. Tier I
Most recently Eka played
a key role in the GHG IPO
as Head of IR. Prior, she
was an Associate Finance
Director at AstraZeneca,
UK. Holds an MBA from
3. Retail
Wharton Business School.
c.20%
1. ROE c.20%
06. Murtaz Kikoria
CEO (BOG)
With the Group since 2008.
Joined as a Deputy CEO in
charge of compliance at the
Bank. He also led our banking
operations in Ukraine and
led several key acquisitions,
when he served as a CEO of
our healthcare business from
2012 until 2014. Prior, was
Head of Banking Supervision
and Regulation at the NBG
(National Bank of Georgia).
He is a former EBRD banker.
2. Growth c.20%
of retail loan book
growth
c.20%
3. Min. IRR of 20%
Target investments with min.
20% IRR and partial or full exit
in max. six years.
4. Profit up to 20% of
BGEO Group profit
(New target)
Annual Report 2015 BGEO Group PLC 17
Note: New strategic target.
Note: Tier I became not-relevant in 2016 as
explained above.
Ongoing dividends
• Ordinary dividends: linked to
recurring profit from banking
business
• Capital return: aiming for at
least three capital returns in
the next five years
• Aiming 25%-40% dividend
• Aiming for capital return to
payout ratio
represent at least 50% of regular
dividend from Banking Business
Annual Report 2015 BGEO Group PLC 31
Governance
Directors’ Governance Statement – Leadership
Our Board of Directors
We see our Board as a team comprised of individuals each having an area of expertise, but who
collectively engage in the full range of issues facing the Group.
07
09
02
06
08
05
01
03
04
01. Neil Janin
02. Irakli Gilauri
03. David Morrison
04. Alasdair
Non‑Executive
Chairman
CEO
Senior
Independent
Non‑Executive
Director
(Al) Breach
Independent
Non‑Executive
Director
05. Kakhaber (Kaha)
Kiknavelidze
Independent
Non‑Executive
Director
06. Kim Bradley
Independent
Non‑Executive
Director
07. Tamaz
Georgadze
Independent
Non‑Executive
Director
08. Bozidar Djelic
Independent
Non‑Executive
Director
09. Hanna Loikkanen
Independent
Non‑Executive
Director
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01. Neil Janin
Non‑Executive Chairman
Mr Janin was appointed Non‑Executive Chairman on 24 October 2011
and has been re‑elected by shareholders at each AGM thereafter.
Mr Janin serves as Chairman of BGEO’s Nomination Committee as
well as a member of BGEO’s Remuneration Committee. Mr Janin also
serves as a member of the Supervisory Board of the Bank, having
stepped down as Chairman in July 2015, a position he had held since
2010. Mr Janin continues to serve as a member of the Bank’s
Remuneration Committee, a position he has held since 2010. Mr Janin
also serves as a Non‑Executive Director of Georgia Healthcare Group
PLC and a member of the Supervisory Board of JSC Georgia
Healthcare Group.
03. David Morrison
Senior Independent Non‑Executive Director
David Morrison was appointed as the Senior Independent
Non‑Executive Director of BGEO on 24 October 2011 and has been
re‑elected by shareholders at each AGM thereafter. Mr Morrison
assumed the role of Chairman of BGEO’s Audit Committee in
December 2013, prior to which he served as a member of the
Committee. Mr Morrison is also a member of BGEO’s Remuneration
and Nomination Committees, and serves on the Bank’s Supervisory
Board and as a member of the Bank’s Audit and Remuneration
Committees, positions he has held since 2010. Mr Morrison is a
Non‑Executive Director of Georgia Healthcare Group PLC and a
member of the Supervisory Board of JSC Georgia Healthcare Group.
Skills and experience:
Mr Morrison is a member of the New York bar and worked for 28 years
at Sullivan & Cromwell LLP until he withdrew from the firm in 2007 to
pursue other interests. At Sullivan & Cromwell, he served as Managing
Partner of the firm’s Continental European offices. His practice focused
on advising public companies in a transactional context, including
capital raisings, IPOs and mergers and acquisitions. Key clients
included investment banks and a wide range of commercial and
industrial companies. He advised on a number of the largest
privatisations in Europe, and was advisor to Germany’s development
bank, Kreditanstalt für Wiederaufbau (KfW) for over 20 years (serving
on the Board of Directors of KfW’s finance subsidiary). Mr Morrison is
the author of several publications on securities law‑related topics, and
has been recognised as a leading lawyer in Germany and France.
In 2008, Mr Morrison turned his attention to nature protection
financing. He became the Founding CEO of the Caucasus Nature Fund
(CNF), a charitable trust fund dedicated to nature conservation in
Georgia, Armenia and Azerbaijan. He resigned as CEO in March 2016
and now serves on the Board of Directors of CNF. In 2015,
Mr Morrison helped to create a new conservation trust fund for the
Balkans, known as Prespa Ohrid Nature Trust (PONT). He now serves
as PONT’s CEO on an interim basis.
Education:
Mr Morrison received his undergraduate degree from Yale College,
received his law degree from the University of California, Los Angeles,
and was a Fulbright scholar at the University of Frankfurt.
Skills and experience:
Mr Janin serves as counsel to CEOs of both for‑profit and non‑profit
organisations and continues to provide consulting services to
McKinsey & Company. Prior to joining the Bank in 2010, Mr Janin was
a Director of McKinsey & Company, based in its Paris office, for over
27 years, from 1982 until his retirement. At McKinsey & Company, he
conducted engagements in the retail, asset management and
corporate banking sectors, and was actively involved in every aspect
of organisational practice, including design, leadership, governance,
performance enhancement and transformation. In 2009, while serving
as a member of the French Institute of Directors, Mr Janin authored a
position paper on the responsibilities of the board of directors with
regard to the design and implementation of a company’s strategy.
Before joining McKinsey & Company, Mr Janin worked for Chase
Manhattan Bank (now JP Morgan Chase) in New York and Paris, and
Procter & Gamble in Toronto. Mr Janin has practised in Europe, Asia
and North America.
Mr Janin is also a Director of Neil Janin Limited, a company through
which he provides consulting services.
Education:
Mr Janin holds an MBA from York University, Toronto, and a joint
honours degree in Economics and Accounting from McGill University,
Montreal.
02. Irakli Gilauri
CEO
Irakli Gilauri was appointed as an Executive Director of BGEO on
24 October 2011 and has been re‑elected by shareholders at each
AGM thereafter. Mr Gilauri has served as CEO of BGEO since his
appointment in 2011, and was appointed Chairman of the Bank in
September 2015, having previously served as CEO of the Bank since
May 2006. Mr Gilauri also serves as CEO of JSC BGEO Group and
Chairman of the Board of Georgia Healthcare Group PLC and
Chairman of the Supervisory Boards of JSC Georgia Healthcare
Group, insurance company Aldagi and the Tree of Life Foundation. He
is also a member of the Supervisory Board of the following
subsidiaries: Georgia Global Utilities, Agron Group, Belarusky Narodny
Bank, Galt & Taggart Holdings and m2 Real Estate.
Skills and experience:
Before his employment with the Bank, Mr Gilauri was a banker at the
EBRD’s Tbilisi and London offices for five years, where he worked on
transactions involving debt and private equity investments in Georgian
companies.
Education:
Mr Gilauri received his undergraduate degree in Business Studies,
Economics and Finance from the University of Limerick, Ireland, in
1998. He was later awarded the Chevening Scholarship, granted by
the British Council, to study at the CASS Business School of City
University, London, where he obtained his MSc in Banking and
International Finance.
86 BGEO Group PLC Annual Report 2015
Annual Report 2015 BGEO Group PLC 87
Separate Statement of Cash Flows
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Cash flows from (used in) operating activities
Interest income received
Fees and commissions paid
Salaries and other employee benefits paid
General and administrative expenses paid
Cash flows (used in) operating activities before changes in operating assets and liabilities
Net decrease in operating assets
Net increase (decrease) in operating liabilities
Net cash flows from (used in) operating activities
Net cash flows (used in) from investing activities
Purchase of investments in associates
Increase of investments in subsidiaries
Dividends received
Net cash flows (used in) from investing activities
Net cash flows (used in) financing activities
Proceeds from issue of share capital
Dividends paid
Net cash flows (used in) from financing activities
Effect of exchange rates changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, ending of the year
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Note
2015
2014
2013
1,146
(484)
(1,920)
(2,073)
(3,331)
56,658
2,976
–
(498)
(1,492)
(2,250)
(4,240)
–
(46,857)
–
(217)
(1,382)
(3,513)
(5,112)
–
(4,935)
56,303
(51,097)
(10,047)
15
(3,092)
(45,125)
–
(45,567)
(28,549)
69,856
–
–
54,589
(48,217)
(4,260)
54,589
–
(80,411)
215,659
(69,111)
–
(51,235)
(80,411)
146,548
(51,235)
16,755
(7,814)
(55,570)
83,377
88,005
32,435
4,628
88,005
(988)
(7,681)
12,309
4,628
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Read this report online
Find the digital version of this report
on our corporate website at:
www.bgeo.com
Annual Repor 2015 BGEO Group PLC 137
Annual Report 2015 BGEO Group PLC 1
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Financial highlights
The effectiveness of our strategy is reflected in the record 2015 financial results highlighted below.
Revenue (GEL million)
BGEO
861.6
+38.7% y-o-y
6
.
1
6
8
2
.
1
2
6
2
.
8
5
5
Client deposits (GEL million)
Banking Business
4,993.7
+43.4% y-o-y
7
.
3
9
9
,
4
7
.
0
4
1
,
3
0
.
2
8
4
,
3
2013
2014
2015
2013
2014
2015
Net loans (GEL million)
Banking Business
5,366.8
+20.9% y-o-y
8
.
6
6
3
,
5
0
.
8
3
4
,
4
3
.
7
6
5
,
3
Earnings per share (GEL)
BGEO
7.93
+18.0% y-o-y
3
9
.
7
2
7
.
6
3
9
.
5
2013
2014
2015
2013
2014
2015
Return on Equity
Banking Business
21.7%
+1.1ppts y-o-y
9
.
9
1
6
.
0
2
7
.
1
2
Cost to Income ratio
Banking Business
35.7%
-4.8ppts y-o-y
8
.
9
3
5
.
0
4
7
.
5
3
2013
2014
2015
2013
2014
2015
Tier 1 Capital ratio (Basel 2/3)
Net Interest Margin
Bank of Georgia
10.9%
-0.2ppts y-o-y
Profit (GEL million)
BGEO
310.9
+29.1% y-o-y
1
.
1
1
9
.
0
1
Banking Business
7.7%
+10bps y-o-y
9
.
7
6
.
7
7
.
7
2014
2015
2013
2014
2015
Investment Business profit (GEL million)
9
.
0
1
3
8
.
0
4
2
3
.
9
0
2
36.7
+81.1% y-o-y
7
.
6
3
3
.
0
2
8
.
6
1
2013
2014
2015
2013
2014
2015
2 BGEO Group PLC Annual Report 2015
Strategic report Overview
Operating highlights
2015 operating highlights reflect the expanding footprint of our banking and investment businesses
in Georgia.
Number of Retail Banking clients
Banking branches
1,999,869
+548,092 (over 2014)
266
+47 (over 2014)
Number of cards
1,958,377
+801,746 (over 2014)
Express Pay terminals
2,589
+350 (over 2014)
POS terminals
8,102
+1,782 (over 2014)
ATMs
746
+223 (over 2014)
Healthcare business: Number of hospital beds
Real estate business: Number of apartments sold
2,670
+530 (over 2014)
347
-226 (over 2014)
Annual Report 2015 BGEO Group PLC 3
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information BGEO Group at a glance
The structure of our business
We are a Georgia - focused banking group with an investment arm, aiming to deliver on 4x20
strategy. We are uniquely positioned to capture growth opportunities in the underpenetrated banking
sector and wider corporate landscape in Georgia.
Banking Business
Retail Banking
Corporate Banking
Investment Management
Client-centric, multi-brand strategy for
our c.2 million clients
Integrated solutions for our CB clients
At the forefront of capital markets
development in Georgia
We are the largest retail banking player in
Georgia, serving c.2.0 million customers
through the widest network of 266
branches, 746 ATMs and 2,589 Express
Pay (self-service) terminals, a salesforce
of more than 3,000 people, along with our
diverse products and services. Our Retail
Banking business, the prominent ingredient
of our business, runs a client-centric, multi-
brand strategy which reaches the entire
spectrum of retail customers through three
well-established and recognised brands:
1) Express – designed to magnetise
emerging retail customers with minimal
incremental operational costs through
cost-efficient distance channels such as
our Express Pay terminals, internet and
mobile banking and technology-intensive
Express branches;
2) Bank of Georgia – providing the
long-established traditional banking
services to our mass retail and MSME
clients;
3) Solo – targeting mass of affluent
customers and providing a unique blend
of banking and lifestyle products and
services.
Our bank is long-standing and the largest
corporate lender in the country with deep
sector knowledge and local expertise.
Our Corporate Banking business is
characterised by outstanding flexibility in
meeting our corporate clients’ needs and
offers the most comprehensive range of
products and services in the country. We
are proud to accommodate more than
5,000 businesses in Georgia and play our
part in developing various sectors of the
economy such as trade, energy, industry
and tourism, among others. Corporate
Banking additionally serves as the
country’s leading trade finance business
and provides leasing services through
the Group’s wholly owned subsidiary,
Georgian Leasing Company (GLC).
Note: In February 2016, we announced
combination of our Corporate Banking and
Investment Management businesses into
a Corporate Investment Banking business
(CIB). See page 37 for details about CIB.
Our Investment Management business
combines Wealth Management and our
brokerage arm, a wholly owned subsidiary
of Bank of Georgia, Galt & Taggart. An
established leader of investment banking
and investment management services in
Georgia, Galt & Taggart is at the forefront
of capital markets development in the
country, bringing corporate advisory, private
equity and brokerage services under one
brand. Accommodating international clients
from more than 70 countries, our Wealth
Management business provides private
banking services to our high-net-worth
individual clients and offers investment
management products internationally
through representative offices in London,
Budapest, Istanbul and Tel Aviv. These
businesses leverage our superior knowledge
and capabilities in the Georgian and
neighbouring markets both in terms of
reach and our expertise. Galt & Taggart
Research currently covers the Georgian
and Azeri economies and publishes
Georgian sector research (subscription to
the research on www.galtandtaggart.com).
4 BGEO Group PLC Annual Report 2015
Strategic report Overview
Share in Group’s revenue 2015
(%)
Share in Group’s profit 2015
(%)
Share in Group’s assets 2015
(%)
2.4
11.0
3.3
24.1
10.8
48.4
1.3
3.5
7.5
4.6
27.8
8.2
47.2
0.5
2.6
7.2
1.1
37.5
Investment Business
7.0
44.0
Investment Management
■ Retail Banking
■ Corporate Banking
■
■ GHG
■ m2
■ GGU
■ Teliani Valley
Note: Excludes inter-segment
eliminations
Georgia Healthcare
Group (GHG)
A long-term, high-growth
investment story
m2 Real Estate (m2)
A fast-growing, leading real
estate developer in Georgia
GHG is the largest healthcare
services and medical insurance
provider operating in the
fast-growing, predominantly
privately owned, Georgian
healthcare market, which is
characterised by low utilisation
and high fragmentation, leaving
significant room for medium
to long-term growth. Our
healthcare services business
had a 26.6% market share as
of 31 December 2015, with
2,670 hospital beds and it
has the widest geographic
coverage among its peers with
facilities located in six regions
that contain three-quarters
of the population of Georgia.
GHG is also the largest
medical insurer in Georgia with
a 38.4% market share as of
31 December 2015, based on
revenue and with approximately
234,000 people holding
GHG’s medical insurance
policies as of 31 December
2015. In November 2015,
GHG completed an initial
public offering on the premium
segment of the London Stock
Exchange (GHG:LN). BGEO
holds a 65% stake in GHG
as of the date of this report.
Our real estate business,
the Group’s wholly owned
subsidiary, m2 Real Estate,
develops residential property in
Georgia. For the past couple of
years it has established itself as
one of the most recognisable
and trustworthy residential
housing brands in the country.
m2 Real Estate outsources the
construction and architecture
works while focusing on project
management and sales. The
Group’s real estate business
was founded to meet the
unsatisfied demand for housing
through our well-established
branch network and salesforce,
while stimulating our mortgage
lending business. m2 Real
Estate completed sales of
1,660 apartments worth US$
142.3 million since 2011 with
85% of apartments sold in
six successfully completed
projects and 36% pre-sales
in two ongoing projects. The
number of apartments financed
with our mortgages in all m2
Real Estate projects as of the
date of this announcement
totalled 788, with an aggregate
amount of GEL 86.7 million.
Georgian Global
Utilities (GGU)
Major utility and energy
company, with more
efficiency and clear growth
opportunities
GGU, in which we acquired
a 25% minority interest in
December 2014, has two
main business lines - water
utility and electric power
generation—and is a major
player on both markets. In its
water utility business, GGU
is a natural monopoly that
supplies water and provides
a wastewater service to 1.4
million people (approximately
one-third of Georgia’s
population) in three cities:
Tbilisi, Mtskheta and Rustavi.
In electric power business,
GGU owns and operates three
hydropower generation facilities
with a total capacity of 143MW.
Generated power is primarily
used by GGU’s water business,
with the excess amount of
generated capacity sold to third
parties. GGU posted EBITDA
of GEL 63.2 million in 2015.
Since 2014, BGEO Group put
in place a strong management
team and streamlined
operations, however we see
room for further improvement.
Teliani Valley
Creating a leading
beverages producer and
distributor in Caucasus
We operate the largest
wine business in Georgia,
Teliani, where we have a 71%
shareholding. Teliani has a
strong existing franchise, being
a leading wine producer with
a wide distribution platform.
Teliani sells 3 million bottles
of wine annually, with 60% of
sales coming from exports.
Building on its existing
franchise of distribution,
Teliani is currently expanding
into a new business line
of beer and soft beverage
production, with ten-year
exclusivity from Heineken to
sell in three countries: Georgia,
Armenia and Azerbaijan
– a total population of 17
million people. With strong
management team and a
proven track record, Teliani
aims to become a leading
beverages producer and
distributor in the Caucasus.
Annual Report 2015 BGEO Group PLC 5
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Chairman’s statement
Through this letter, I would like to
cover four important points:
1. the current economic and political
situation in Georgia is solid and its
outlook promising;
2. the strategy announced last year is
more relevant than ever;
3. the role of corporate governance is a
keystone of our way of doing business;
and
4. talent management and incentives drive
our performance.
I will elaborate on each of these messages
below.
Politics and the economy
Last year we witnessed a democratic,
peaceful change of government. The
political situation in Georgia is still
complicated, but a helpful way to look
at it is across two levels: firstly, on a
domestic basis, and secondly, on an
international one, with a particular
emphasis on its relationship with Russia.
Let me start by going over a few facts
about the situation within the country.
The recent appointment of a strong
prime minister has brought about a
number of initiatives, including a four-
point plan to speed up economic
growth. Highlights include a reform of the
education system, which aims to create
professional higher education systems
in line with the demands of the labour
market, tax code amendments aimed
at further liberalizing tax and customs
procedures, policies to speed up the
implementation of infrastructure projects,
and governance reform to allow legal
entities to receive services based on a
single window principle, similarly to how
individuals currently receive services
at public service halls in Georgia.
In addition, governance of the country has
progressed. Firstly, the judiciary system
has been reformed, and the courts in
Georgia are now independent. Secondly,
the President has created an institutionally
distinct office for the Presidency, which
reinforces checks and balances. Thirdly,
the Central Bank now has a respected new
governor with an IMF background and an
independent board has been named to
check its power. Finally, the country enjoys
independent TV stations and newspapers,
representing many points of views.
We will have the next Parliamentary
elections in October 2016, which could
either lead to a more pluralistic political
situation or a reelection of the current
government. It is difficult to predict the
outcome, but on the whole the country
has been moving in the right direction
with a peaceful and democratic change
of government. The new government
favours competence over loyalty, and a
reaffirmation of its pro-Western position
with the signing and implementation of
an EU association agreement. Finally, the
assets of the country are being developed,
principally tourism and water. This points
to a promising path ahead, although
not necessarily a predictable one.
On the international front, relations
with Russia have improved and Russia
has been focusing on other fronts.
The majority of the population, 70% to
be precise, would not trade today for
yesterday. Georgia will continue its quest
for NATO membership, ensuring close
cooperation but probably not accession.
Most promising for Georgia is the entry
of Iran into the community of nations. On
the Iranian New Year in 2016, numerous
tourists could be seen in Tbilisi. One
can hope that investments might follow
and that Georgia could become an
important trade partner to this nation.
In fact, Georgia could do extremely well.
The country’s success will be built on
tourism, rich ecology and casinos. It will
require a service infrastructure of hotels,
banks and eventually hospitals. It will
also bring investment in transportation,
pipelines, railroads, and ports to connect
to its neighbours. The industrial strategy
of this country is right. It is pragmatic
and, if anything, it is too prudent. Most
importantly, BGEO plays a crucial role
in it. One could say that what is good
for Georgia is good for BGEO.
Our new strategy is promising
Last year we adopted a two-pronged
strategy. Firstly, we would continue to
make the Bank of Georgia a cost and
Neil Janin
Chairman
“I am proud to announce
that BGEO performed very
well, reporting GEL 310.9
million in profit, which
demonstrates year over year
growth of 29.1%. This is
particularly impressive
considering the challenges
we have faced in 2015,
including weak oil
prices, foreign exchange
fluctuations, and a
complex political context.
The Group’s results are
presented in our CEO’s
letter and in various
sections of this report.”
6 BGEO Group PLC Annual Report 2015
Strategic report Overview innovation leader. The Bank is our most
precious asset and it continues to perform
well and deliver as you will read later in this
report. Secondly, we aim to buy assets in
Georgia cheaply, grow them, and sell them
to investors at a higher price. This way
we will make money for our shareholders,
bring money in the local economy,
and provide foreign investors with an
opportunity to own high-yielding assets.
Let me start with the Bank. We appointed
a new CEO for Bank of Georgia, Murtaz
Kikoria, and promoted Irakli Gilauri to
Chairman of the Bank. We wanted to have
one person concentrate on minding the
day to day affairs of the Bank, allowing
Irakli Gilauri to focus on our new ventures.
Murtaz is the orchestra conductor we
need to lead and support the very strong
cast of top executives of the Bank. With
the support of Irakli Gilauri, his mission is
to make sure that the Bank continues to
perform and transform itself. The Bank’s
agenda is full. In the retail bank, we are
preparing to change the approach of our
main branches from a product to a client
one. This means that we will focus on
client needs in order to propose suitable
products, rather than push products to
all clients in an indiscriminate manner.
It involves a major cultural change and
a transformation of our processes, the
configuration of our branches and most
importantly the mindset of our employees.
We have also decided to merge the
areas of corporate banking, investment
banking, and wealth management. We
are well regarded in this domain, and have
accumulated a wealth of knowledge and
capital markets capabilities in the Georgian
and neighbouring markets during the
past several years through our corporate
advisory, research and brokerage
practices united under Galt & Taggart. Galt
& Taggart research aims to help decision
makers – policymakers, International
financial institutions, businesses and
foreign investors – appreciate the
opportunities of investing in Georgia and
the South Caucasus. In this context, our
wealth management/investment banking
business has plenty of room to grow.
Our 2015 highlight was the successful
IPO of Georgia Healthcare Group
PLC on the London Stock Exchange.
We were able to float c.35% of GHG
and raise US$ 100 million that we
will invest to grow GHG further.
What we are doing in health care is a
good illustration of the uniqueness of our
strategy, which has three components.
Firstly, we can buy assets cheaper than
others. Why? Assets in Georgia are small
and owned by individuals who need a lot of
hand-holding in Georgian - something that
foreign buyers have neither the ability nor
the time to do. We may have bought more
than 40 hospitals, but they were bought
one by one, often from local doctors who
made their own decisions, and would
not just sell to anyone with money.
Secondly, we provided our health care
subsidiary with very capable managers,
starting with its CEO Nikoloz Gamkrelidze.
Nick is a good example of a manager
who developed his skills over the course
of his career at the Bank of Georgia. We
grow this talent within the Bank, as it is
difficult to find local managers capable
of executing sophisticated strategies.
Otherwise, we sometimes attract Georgian
talent from Europe or the US. These
people will only return if they are offered a
sizeable challenge, a promise of personal
development, attractive incentives, and an
overall feeling that they are contributing to
the well-being of the country. Small, family
owned companies cannot do that, nor can
foreign investors. We are putting a special
emphasis on talent in this annual report.
Thirdly, we have implemented world class
governance systems including a robust
Board. If you look at the Board of GHG,
you will see a mixture of members who
have experience in Georgia, as well as new
independent members chosen for their
competence and judgment. In this specific
case: insurance, medicine, medical
supply, and hospital management. We
intend to replicate this set up in all areas
that we are committed to developing.
GHG is not our only investment. Irakli
Gilauri will give you a short description of
our portfolio investments, which include
real estate, utilities, power generation, and
consumer goods. We look at our portfolio
of investments as trees in a forest: some
are mature and solid, others are promising
saplings. When we see an opportunity to
create value, we will not hesitate to bet on
it. Similarly, if we cannot see potential, we
will hold back. Unlike a private equity firm,
we are under no pressure or obligation to
invest any of our reserves, and if we cannot
find interesting opportunities, we will
return the money to shareholders, either
through dividends or stock buybacks.
Corporate governance and talent
development
The Board plays an important role in
our companies. The BGEO board is
composed of an array of highly competent
individuals with complementary skill sets
needed to run our businesses. The board
works collectively with management to
set the strategy and review operations.
In fact, we set aside days every year to
review asset allocation and investments.
We encourage dialogue and discussion
before taking any decision.
Additionally, each member is encouraged
to interact with management members as
advisors. The nature of contribution varies,
from providing expertise and judgement to
coaching and development. Allow me to
introduce them to you: Hanna Loikkanen
is very experienced investor in Russia
and the CJS. She brings her wisdom
and judgment as an investment manager
to evaluating our investments. David
Morrison, the Board’s vice chairman, is
our guardian. He is aware of our fiduciary
responsibilities and regulatory obligations,
making sure we do the right things the
right way. His long tenure at Sullivan and
Cromwell in New York, Paris and Frankfurt
serves him well in this regard. Al Breach is
an outstanding macro-economic investor.
His point of view is invaluable in making
funding decisions and advising the Bank
on its asset and liability management.
Kaha Kiknavelidze is also a macro investor
who, as a Georgian, gives us an insight
into the local economy which we would
not otherwise have. Tamaz Georgadze is
the second Georgian on our Board with a
specialty in digital and retail banking. He
heads his own very successful FinTech
company based in Berlin, and was one
of the foremost retail banking experts
at McKinsey. Kim Bradley is our real
estate guru, with 25 years’ experience
behind him in multiple markets. One of
the contributions he made to m2, our
Annual Report 2015 BGEO Group PLC 7
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information I feel very fortunate and proud to be part
of the remarkable journey of this institution
and this country. I am proud of the work
accomplished by CEO Irakli Gilauri and his
entire management team. I am touched
by their desire to not only build a great
company, but also do well for the country.
Finally, I am grateful for the investors
who trust them with their money. I think
they too can be proud and take comfort
in the returns on their investment.
Neil Janin
Chairman
7 March 2016
Chairman’s statement continued
real estate subsidiary, was helping them
build their risk management system and
manage their liquidity risk. Last but not
least, Bozidar Djelic, with an extensive
experience in government, as a banker,
and as advisor to a number of countries,
helps us with government relations, capital
markets, and provides the group with a rich
perspective and judgment in this region.
My job is to manage the Board, ensure
that we have the right people on the
board and in leadership positions in
the key areas of the Bank, and facilitate
and frame discussions on all areas, but
especially on strategy and execution.
It is worth mentioning that the board
meets without the CEO at every board
meeting and that we run regular third
party evaluations of our effectiveness and
continue to rank very highly. We still lack
the diversity that we would like to see, but
we are working on it. We had promised to
onboard two women, but have only invited
one so far. We are actively searching.
Finally, the Board of course fulfils its
fiduciary duties. We have meaningful
discussions in the committees, as
you will see in the reports of the
Chairmen of each committee below.
Succession planning and Talent
management
This is a young company and the top
managers of the organization are the
ones who built it. The Board is aware and
concerned by the necessity of preparing
a new generation of leaders for the long
term. It is our highest priority today. We
have encouraged the bank to change the
scope of its human resources strategy
and to develop a pipeline of leaders at
an early stage. Promising employees
should be tracked and developed by
giving them appropriate opportunities and
timely leadership and technical training.
for executives to finesse the system
and play the short term. Above all, no
cash, just stock vesting in five years.
It is not an appropriate incentive
system for every company. For ours,
a young growing company, it works
and keeps everyone’s mind focused
on making money for shareholders.
Beyond top management, we are
committed to building a culture where
personal growth and development are
encouraged. We are making a point to
show you our top 100 executives in this
report. We have made changes to our
human resources management and
we intend to reinforce our capacity to
attract, develop and promote talent in
all areas of the group. We have named
one of our most creative executives as
head of HR, with a precise mandate.
Regarding succession, the Board has a
definite plan of what we would do in the
case that our current CEO is no longer
able to continue. He has been key to our
success. However, we are building the
bench behind Irakli Gilauri by promoting
more people to positions that cover duties
he was doing directly. We cannot replace
Irakli Gilauri, but we can build talent around
him and introduce a way of doing business
that will become BGEO’s trademark and
culture. Irakli is keen to see that happen
and is showing the way to all his team.
I hope this letter has helped inform our
shareholders of the current situation of
BGEO and its promising outlook. While the
strategy and future of group is solid and
the political context promising, investing
in operations in countries such as Georgia
can still feel daunting. Therefore as a final
point, I wanted to highlight our liquidity
situation which will allow us to weather
whatever storm may come in our path and
enable us to achieve long term success.
Irakli Gilauri elaborates on this below.
For those already at the top, the incentive
system is as follows: our partners, 15 in
total, take home the minimum they need
to live well, with the rest being stock
vesting in five years. If they make the
shareholders rich in the long term,
they too will be rich. There are no ways
At the 2016 Annual General Meeting, the
Board intends to recommend an annual
dividend of GEL 2.4 per share payable
in British Pound Sterling at the prevailing
rate. This is in the range of our payout
ratio target of 25-40% and represents a
14% increase over the 2014 dividend.
8 BGEO Group PLC Annual Report 2015
Strategic report Overview
Chief Executive Officer’s Statement
Irakli Gilauri,
Chief Executive Officer
“As a leitmotif to this letter I
would like to draw your
attention to people working
for your company and long
term vision we have for each
of our business lines.”
Dear Shareholders,
A key challenge for any company is how it
performs in a difficult macro-economic
environment. This challenge has been
successfully met by BGEO Group as your
Company managed to deliver a record
high profit in US Dollar terms despite the
backdrop of the Lari weakening by more
than 35% versus US dollar compared to
pre-depreciation levels and the uncertain
macro-economic environment in the region
throughout 2015. This success was mainly
driven by two major factors:
• People working for the Group; and
• Strategic decisions made by the
Board in the past 5-7 years.
These two factors – the people
working for your company and the
long term vision we have for each
of our business lines – will be a
leitmotif to this letter, in which I
focus on: strategy – for our Banking
and Investment Businesses as well
as for the Group in terms of capital
returns and allocations; and talent
development.
Banking Business:
Two key metrics we measure our
Banking Business performance against
are Return on Average Equity (ROAE) and
retail loan book growth, each targeted at
the 20% level. As outlined in detail later in
this report, both targets were achieved by
a considerable margin; we grew the retail
loan book by 35% and delivered c. 22%
ROAE. To further improve profitability we
set a 3-year target to increase the share
of Retail Banking lending in the overall loan
book, from the current 56% to a targeted
65% level. Bank of Georgia is also well
positioned in terms of both capital and
liquidity to deliver on its growth strategy.
Let me outline the background as well as
the strategy going forward for each of the
banking segments:
Retail Banking:
Retail Banking delivered a stellar
performance by reaching c. 2 million
clients, delivering loan book growth and
ROAE targets. The acquisition and
successful integration of PrivatBank
Georgia played a major role.
To further improve profitability
we set a 3-year target to increase
the share of Retail Banking lending
in the overall loan book, from the
current 56% to a targeted 65%
level. Bank of Georgia is also
well positioned in terms of both
capital and liquidity to deliver on
its growth strategy.
In order to better connect with the various
segments of the retail client base, we
operate a multi-brand strategy:
• Our Express Bank brand is aimed
at the emerging bankable population.
Express serves as a platform for
bringing the currently under-banked
population into banking and its main
focus is to enable its client base to
transact in a fast and easy way. We also
sell only a limited number of banking
products to our Express banking
clients. Currently, 77 out of a total of
114 Express branches are located in
Tbilisi and going forward we would
like to roll out Express branches in
regions to reach a wider population.
The all-in cost of opening a new
Express branch is just US$ 50,000.
• Under the Bank of Georgia brand,
we are serving mass retail clients.
We have historically been very much
a product-driven organisation, which
helped us in acquiring new clients.
However, we now have a relationship
with c. 2 million clients and our
challenge for the next three years is
to increase the product to client ratio
from a current low of 1.7 to 3.0. To this
end, we intend to shift our business
model from product to client centric.
In 2016, we would like to move to a
focused service model in 10 branches,
where clients have a single touch-
point to acquire products and receive
consultation. In the medium-term,
we intend to convert the Bank of
Georgia brand into a single touch-
point front office organisation.
Annual Report 2015 BGEO Group PLC 9
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Chief Executive Officer’s Statement continued
• Our new Solo model was introduced
in 2015 and the major part of our
planned lounge roll-out has now been
completed. The Solo brand is used for
servicing the emerging mass affluent
segment. To qualify for Solo services
one needs to have an income of GEL
3,000 per month. At Solo lounges,
clients are served by personal bankers
and, in addition to banking products,
are offered luxury goods at cost and
other lifestyle offers including a travel
magazine and entertainment. Recently,
Solo presented a Sting concert to its
clients at a concert that was limited
to Solo clients only, which created
further interest in the Solo franchise.
We intend to grow the number of
Solo clients to 40,000 by the end of
2018, from the current 12,000 level.
Net profit per Solo client stood at GEL
1,350 in 2015, over 20 times of what
we have in the mass retail segment
under the Bank of Georgia brand.
Another big project targeted for 2016 in
retail banking will be to plan and begin to
implement a new strategy for the
digitalization of banking services.
Digitalization will play a major part in
making our services more competitive and
at the same time more efficient.
Retail Banking is headed by Mikheil
Gomarteli, who joined the Bank 19 years
ago and his first job was to sell debit cards
door-to-door. Before heading Retail
Banking, Mikheil worked in almost every
position in the bank: teller, credit analyst,
and headed our reporting and budgeting,
marketing, and branch management
departments. Mikheil is leading a group of
excellent Retail Bankers and their inside-
out knowledge of Retail Banking and
detailed understanding of business are
invaluable for the further success of the
business line.
Corporate and Investment Banking:
Our Corporate Bank has increased its
ROAE from 12% in 2014 to 16% in 2015.
We believe the current risk return profile of
corporate business is not as attractive as
the Bank runs a relatively concentrated
loan book, with the top 10 exposures
accounting for 12.4% of total loan book.
Therefore, our major strategic goal is to de-
concentrate the corporate loan book, while
stepping up our investment Banking
Business by issuing corporate bonds in the
local market. We have already made
progress in this regard in 2015; we have
decreased concentration from 15.7% in
2014 to 12.4% in 2015, and at the same
time issued bonds worth US$ 63 million in
the local market. Going forward, we are
also targeting to syndicate out our large
exposures to local and international
players.
Georgia is becoming the service
hub of the region and we expect to
grow our business on the back of it.
Further growing our wealth
management platform is essential in
order for us to issue local corporate
bonds. This strategy should result
in further de-concentrating the loan
book, enhancing the fee-based
business, increasing ROAE and
improving the overall risk return
profile of the segment.
In order to further capture synergies
between the corporate banking and
investment management (investment
banking and wealth management
franchises) and expedite the process of
developing the local capital market,
we have decided to merge these two
business lines.
We have appointed Archil Gachechiladze
to head the merged entity. Archil joined the
Bank in 2009, and he has headed both the
corporate banking and the investment
management businesses. Archil has
delivered great results in both corporate
banking and investment management and
his obviously successful track record was
the key reason for the Board’s decision to
appoint Archil as head of Corporate and
Investment Banking. Archil is a Cornell
MBA and worked at Lehman Brothers’
Private Equity arm prior to returning to
Georgia. He has built an excellent team
around him. Archil’s superb strategic
vision, insights on both corporate banking
and the investment management
businesses, as well as his great execution
skills will be the key to deliver on the
merged CIB strategy.
The Bank’s cost discipline:
Identifying and eliminating unnecessary
costs is part of our DNA. We have been
running positive operating leverage for
quite some time. We also have a strong
history of successfully acquiring and
integrating other financial institutions and
delivering substantial cost synergies. The
most recent opportunity was the
successful integration of PrivatBank
Georgia in 2015, where we fully integrated
a bank with 400,000 active clients within 4
months while eliminating unnecessary
costs and delivering on annualised pre-tax
synergies of GEL 30 million, GEL 5 million
more than initially announced.
Our three-year target is to maintain
a 35% cost to income ratio.
Effective implementation of the
client-centric model in Retail
Banking as well as digitalisation
will have a positive contribution
to the low Cost to Income ratio
going forward.
Tornike Gogichaishvili heads our
operations overseeing operating and
capital expenditures and his contribution
to the 36% cost to income ratio is
tremendous. Tornike joined the Group in
2006 and soon became CEO of our
insurance business. Tornike also played a
crucial role in capturing efficiencies in our
Ukrainian banking subsidiary. Tornike has
been heading the Bank’s operations
business since 2010. His deep
understanding of business and processes
is the key to successfully capturing further
cost efficiencies going forward.
The Bank’s risk management:
In the year of a major depreciation against
the US Dollar, I would like to focus on
credit risk as it is by far the largest risk
category that any bank is exposed to.
Our risk department is best in class.
They have passed the test of
prudence and control both in 2008
during the global financial crisis,
when cost of risk stayed within the
Bank’s net interest margin, as well
as in 2015, when the currency lost
more than 35% of its value against
US dollar compared to pre-
depreciation levels.
Investors often ask me how we retained
such a low cost of risk (2.7%), in a year of
sharp depreciation in consideration that
72% of our loan book is denominated in
foreign currency, mostly US Dollars. The
simple answer to this question is that
Georgian bank balance sheets have been
mainly in US Dollars for the past 20 years
10 BGEO Group PLC Annual Report 2015
Strategic report Overview or so and we manage currency risk, just
as banks with local currency balance
sheets manage the interest rate risk.
(We have limited interest rate risk in our
balance sheet.)
How do we manage the foreign exchange
risk? Currency-wise, our balance sheet is
matched on both sides. Our clients who
have local currency income and loan in US
Dollars are exposed to currency risk, which
makes us consider carefully how to
manage their risk. We manage our clients’
risk in two ways: first, we issue these
clients 20% less loan compared to issuing
a Georgian Lari loan, in doing so we are
creating a depreciation buffer. Secondly,
we issue shorter-term loans than we would
have issued in the first place and at the
same time we keep a positive liquidity gap
in our balance sheet, so if there is a need
to prolong a loan to our client we have the
capability to do so. Under the above credit
conditions not many qualify for US Dollar
borrowing. One of the reasons for the low
penetration of loans compared to GDP is
due to this conservative underwriting policy
used by Georgian banks.
90% of our corporate loan book is
denominated in foreign currency, mainly
US Dollars - of which 50% have US Dollar
income and the rest do not. Because the
Georgian economy is dollarised and a US
Dollar proxy economy, when the Georgian
Lari weakens all corporate players behave
in a similar way: they adjust prices, capture
efficiencies and adjust to the new reality.
As Georgia is an oil-importing country,
Georgian corporates had a big saving from
lower oil prices, but the adjustment of
prices on their final goods was not as
dramatic as it could have been. Hence
inflation in the country was recorded below
5% in 2015. Weak corporates, whose
businesses were struggling even before
depreciation, go out of the business,
healthier companies will need some sort of
prolongation, but their business continues
to generate the cash and service the debt
on a monthly basis as they used to do,
and strong companies do not even need
prolongation. This is exactly what
happened during the recent depreciation.
On the retail side of the balance sheet we
have 54% of loans in foreign currency,
mostly US Dollar and the remaining in
Georgian Lari. Georgian Lari-denominated
loans are mainly issued as consumer loans
and credit cards to 400,000 customers. So
the mass population are not exposed to
currency risk. c. 21% of the retail loan book
is in foreign currency, mainly US Dollar
loans to SMEs and Micros and the
situation with these customers is very
similar to corporate clients, as described
above. C. 26% of the loan book is in
mortgages and the remaining c. 7% is
consumer loan and credit cards. When
underwriting the mortgages we use a 20%
buffer and issue shorter-term. So, the
maximum term of the mortgage in Georgia
is generally 10 years. With this pre-
condition not many qualify, and actually
only the best quality borrowers we have
are our mortgage borrowers. In total there
are only c. 38,000 mortgages outstanding
in the whole country. We announced the
automatic re-profiling of the mortgage
loans. Basically, we offered automatic
prolongation of the mortgage loans in
such a way that Georgian Lari monthly
payment stayed at a similar level as it was
before the depreciation. As we have top
quality mortgage borrowers, out of our
13,000 mortgage borrowers only 1,100
took the offer.
Giorgi Chiladze is Chief Risk Officer of the
Bank. Giorgi earned his PhD in physics
from Johns Hopkins University. He has
excellent judgement and a strong
understanding of the big picture that
serves all of our shareholders well. In
Giorgi’s hands we are much safer.
Leadership transition in Banking
Business:
One of our major challenges for 2015 was
to make sure that banking continued to
perform well as I was handing over the
leadership of Banking Business to
Murtaz Kikoria.
Murtaz is a seasoned banker
with more than 25 years’
experience in this sector. Murtaz
served as a banking regulator, who
institutionalised banking regulation
from the early 2000s and made the
Georgian banking sector extremely
resilient. He has occupied top
positions in leading Georgian banks
as well as a Senior Banker position
at EBRD.
Murtaz joined the Bank in 2008, his major
achievement was the successful
turnaround of our Ukrainian banking
subsidiary and its subsequent divestment.
Murtaz also served as CEO of our
healthcare business where he acquired a
number of different hospitals, contributing
in a major way to the successful GHG IPO.
Murtaz’s deep knowledge of banking, as
well as his great people skills, will be key
to the success of our Banking Business
going forward.
Investment Business:
In last year’s letter to shareholders, I
outlined in detail the way we invest in and
manage companies. In brief, I would say
that the strategy of our Investment
Business is very simple: we buy companies
or assets cheaply, institutionalising them by
allocating and developing top talent in
Georgia, eliminating unnecessary costs,
growing the companies as market leaders
in order to achieve scale-driven cost
advantage, and crystalising the value of the
them within six years. We invest in small
ticket sizes; usually we would not invest
more than US$ 25 million in any new
opportunity. We also like to stage
investments to limit the risks. Once we
make sure that an appropriate level of
institutionalisation has been achieved in the
portfolio company, we may invest in bigger
ticket sizes. To this end, we like bolt-on
acquisitions to expedite the market
leadership and scale-driven cost
advantage. Bolt-on acquisitions also
enable us to capture cost synergies and
eliminate unnecessary costs. The GHG
case study in this Annual Report outlines
our strategy of doing investments.
In pursuing this strategy, we aim to achieve
at least a 20% IRR. The limited access to
capital in this small frontier economy is one
of the reasons we are able buy cheaply.
So, the availability of cash at all times at
the Group level is critical to seize
opportunities quickly.
Overall, the performance of the
Investment Business was
exceptional in 2015. We have
delivered consolidated profit growth
of 81%. The growth was mainly
driven by GHG’s superb
performance and m2 Real Estate
completing its projects ahead of
deadline and within budget. The
IPO of GHG was the key milestone
in the Investment Business as we
managed to crystalise the value of
our investment and achieve a
triple-digit IRR.
Annual Report 2015 BGEO Group PLC 11
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Chief Executive Officer’s Statement continued
Let me speak to our portfolio companies
one by one:
Georgia Healthcare Group:
GHG’s main goal is to double its
2015 healthcare revenue in 2018
while producing c. 30% EBITDA
margin.
The Company targets to achieve this
revenue growth by growing its market
share by number of beds in the hospital
business from the current 27% level to
c.30% by the end of 2018. The Company is
also in the process of rolling out a national
chain of ambulatory clinics where its
market share by revenue is currently just
1% and GHG is targeting to grow this to
5% by the end of 2018.
At the beginning of 2016, GHG
made a strategic move to expand into
pharmaceuticals. Subject to regulatory
approvals, GHG has agreed to acquire
GPC, the third-largest retail and
wholesale pharmacy chain in Georgia.
This acquisition will enable GHG to
become the largest drug purchaser in
the country and be present in the entire
healthcare eco-system which amounts to
GEL 3.4 billion. The pharmacy business is
expected to be highly synergistic both to
reduce the cost of drugs for our hospitals
as well as to cross-sell through GPC’s
loyalty programme to ambulatories. GPC
has c. 12 million customer interactions
per annum. It is expected GHG will
open pharmacies on the premises of
approximately 40 hospitals and large
ambulatory clinics owned by GHG to boost
the revenue of GPC. The acquisition price
of GPC implies 5.7 times EV/EBITDA
before eliminating unnecessary costs
and capturing further cost and revenue
synergies. The post-synergy multiple is 3.3.
GHG is led by Nick Gamkrelidze, who
joined the Group’s insurance subsidiary
business in 2006, soon becoming its CEO,
and embarked on the healthcare strategy
in 2011. As part of our talent management
policy we have rotated Nick as CFO of the
Group in order to get him familiarised with
the working of a public company. Nick had
demonstrated outstanding performance
both running the healthcare business and
being CFO of the Group. Nick is a good
example of how one can become public
company CEO in our Group by constantly
learning and developing. Nick’s cost
discipline and strategic vision is the key to
the success of GHG and its IPO. Nick is
leading a highly capable team and I
strongly believe that under Nick’s
leadership, the GHG team will deliver
on its strategy.
You can find out more about GHG by
visiting its IR website at www.ghg.com.ge
m2 Real Estate:
After launching the Real Estate Business
in 2011, m2 has developed, or is in the
process of developing 2,500 units, of
which over 1,600 have already been sold.
In a very short period of time m2 has
become the largest residential developer in
the country, enjoying scale advantage to
be a lowest cost producer. To this end, in
the past four-year period, m2 has managed
to make housing more affordable in
Georgia, bring the price of a one-bedroom
apartment from US$ 40,000 to US$
29,000 in Tbilisi, while producing an
average 65% IRR on its housing projects.
The m2 housing business also
complements our Retail Banking and
helps to generate mortgages.
If you want to buy an apartment starting at
US$ 29,000 in Tbilisi and have it rented out
by m2, please email us: 29000@m2.ge.
m2 has a strong franchise, excellent
track record and solid balance sheet to
accelerate its growth. Currently, m2 has a
land bank with an estimated value of US$
34 million, where we can develop more
than 5,200 apartments. Demand for
apartments is expected to grow further
as the country is becoming service hub of
the region and urbanisation is expected to
continue. At the same time due to a
shortage of housing during Soviet-times
and the Georgian tradition of multi-
generations living in one apartment
resulted in 3.7 people living in one
apartment in Tbilisi. On top of this, c. 70%
of apartments are amortised in Tbilisi, as
they were built in the Soviet times.
The good news is that, alongside the
housing development, we can develop
commercial real estate, such as hotels and
retail real estate. Our intention is to develop
these projects over the next 4-5 years and
retain yielding assets on m2 books. The
number of visitors in Georgia grew from
560,000 in 2007 to nearly 6 million in 2015,
while branded hotel rooms had a marginal
growth to only 1,200 rooms in Tbilisi. Hotel
room growth was mainly attributed to
four-star hotels, while family-run small
hotels are servicing the rest of the visitors.
For the budget hotel segment, we observe
increasing prices and high utilisation levels.
We think with our m2 franchise we can add
value in this sector and, therefore, we have
signed a 7-year exclusivity with Wyndham
for the Ramada Encore brand to develop
three-star hotels. Due to the limited supply
of three star hotels, we see a significant
opportunity in this segment, especially
against the background of expected
further growth in the number of foreign
visitors. Georgia is truly becoming the
major destination in the region.
At the same time, we are starting the
development of third party land to earn
fees. Our customer-driven franchise,
sales channels and being a low-cost
producer puts us in a unique position
to generate fees, while not taking balance
sheet risk from re-investing m2 profit into
the development of the land bank. To
this end, on the back of performance
between now and 2019, m2 is targeting to
pay US$ 20-25 million in dividends to
BGEO Group.
Over the next 4-5 years, our
intention is to grow m2 into a Real
Estate Investment Trust with an
asset manager attached to it – in
addition to generating rental
income, m2 will be targeting to
generate fees from third party
land development.
Irakli Burdiladze heads our Real Estate
Business. Irakli joined Bank of Georgia as
CFO in 2006. In 2010, when we decided
to develop land which the Bank had
repossessed after the 2008/09 crises,
Irakli was assigned to spearhead our Real
Estate Business. I have met no one more
passionate about the Real Estate Business
12 BGEO Group PLC Annual Report 2015
Strategic report Overview in Georgia than Irakli. Irakli’s strategic
thinking, and his excellent people, sales
and execution skills enabled him to build
a strong cash flow generating institution
and I am confident in his ability, with the
help of his excellent team, to deliver on
our strategy.
Georgia Renewable Power Company
(the hydro business – GRPC):
Our investment so far in our hydropower
station business has been very small, but
its prospects are tremendous. We decided
to develop hydros in Georgia due to the
simple fact that the cost of developing one
MW of hydro is at least two times cheaper
than in neighbouring countries. At the
same time, domestic electricity
consumption in Georgia has grown by
3.6% CAGR from 2007 through 2015. As
we did not know how to develop hydros
ourselves, we have entered into a joint
venture with RP Global, an experienced
Austrian hydro development company.
BGEO Group owns 65% in the joint
venture and RP Global owns the
remaining equity interest.
Our intention is to build 4 hydro
stations by the end of 2019 with total
capacity of 105 MW. In addition, we
plan to do detailed feasibility studies
(ready to build) of additional hydros
with a total capacity of 150 MW. We
have earmarked US$ 25 million in
equity investment over the next 3
years to build the first four 105 MW
hydros. After launching the hydros in
2019, we expect to produce a ROAE
of 20%+.
One can build hydros cheaply in Georgia
for two main reasons: 1. Georgia has a lot
of hydro resources due to the Caucasus
mountains and climate; and 2. these
resources have not been tapped as access
to capital has been limited.
On the demand side, domestic energy
consumption will increase to match the
requirements of Georgia’s growing
economy, as well as increased external
demand from our neighbours such as
Turkey, Russia and Iran. Now that Iran is
opening-up, it needs energy to develop its
economy. The way our hydro licence is
structured is that we are obliged to sell
electricity during four months in autumn
and winter in Georgia, when hydro
generation (78% of energy produced in
Georgia is hydro) is at a low level in
Georgia, while we are free to sell energy
during 8 months in spring, summer and
autumn, when energy consumption is high
in Turkey and Iran, due to the heavy usage
of air conditioning. This way, throughout
the year, we should be able to capture the
most optimal sales price.
GRPC is led by Avto Namicheishvili,
who is also Group General Legal Counsel.
Avto joined the Group in 2007 and
executed all major M&A and IPO
transactions for our Group. While Avto
acted as the Group’s legal counsel, he
has accumulated tremendous business
experience and we would like to leverage
his knowledge in developing our hydro
business. Avto’s execution skills, excellent
people skills and out-of-the-box thinking
will be critical in institutionalising our hydro
development capabilities, which I believe
will create a lot of value for our
shareholders going forward. Through
ongoing Board participation, Avto also
helps me to manage our other Investment
Businesses. He is one of the key players
in executing our Investment Business
strategy.
Georgian Global Utilities (water utility
and hydro business – GGU):
After the acquisition of our 25% stake in
GGU in December 2014, we initiated senior
management changes, which triggered
substantial improvements in the operating
business.
As GGU is an infrastructure company we
closely follow cash flow generation
capabilities and want to make sure that by
eliminating water losses, which currently
stand at c. 50%, GGU delivers sustainable
cash flow growth. As GGU consumes its
own energy, generated by 135 MW hydro
stations, efficiency improvements will have
a double effect as freed-up energy can be
sold to third parties.
We are also developing hydro resources
using the existing infrastructure of the
Company. In 2015 we identified two
stations with a total capacity of 16 MW.
Building run-on hydros using the GGU
infrastructure decreases the cost of
development by 20-30%.
We aim to deliver GEL 80 million
EBITDA in 2018 by reducing water
losses and building new hydros.
GGU is expected to pay dividends
on the back of its 2016 performance
and step up the dividends to at
least GEL 20 million per annum
from 2018.
GGU is headed by Giorgi Tskhadadze,
formerly CFO of Borjomi, a leading
beverage company in Georgia. Giorgi has
demonstrated an excellent track record in
capturing efficiencies and streamlining
operations. Giorgi Vakhtangishvili is CFO of
GGU. He joined the Company in April 2015,
previously serving as the #2 person in m2
Real Estate. His contribution to the success
of the GGU turnaround is equally important.
Teliani Valley (beverage business):
Teliani Valley is one of the largest wine
producers in the country, selling c. 3 million
bottles a year. Its 2015 EBITDA was GEL
3.9 million, a decrease compared to 2014
as currencies lost values sharply, leading
to decreased demand in Teliani’s major
export markets, such as Ukraine and
Kazakhstan. Teliani also operates a leading
distribution company, distributing its own
as well as third party goods. Teliani is also
the distributor of imported Heineken beer.
In 2016, Teliani is launching a beer
and soft drinks production line,
which will be a major source for its
growth. Because of Teliani’s
distribution capabilities, Heineken
granted Teliani with a 10-year
licence to bottle beer for Georgia,
Azerbaijan and Armenia.
BGEO Group owns 71% of Teliani and
intends to invest US$ 10 million in equity to
build the Heineken brewery in Georgia. The
brewery will also produce other Heineken
brands, mainstream beer and local
lemonades. Teliani is targeting to launch
beer production by the end of 2016. The
Annual Report 2015 BGEO Group PLC 13
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Chief Executive Officer’s Statement continued
brewery will have a capacity of c. 300,000
hectolitres and will be scalable to 500,000
hectolitres. The total project cost is US$ 37
million. The beer market in Georgia is
highly concentrated; Efes Group owns
57% of the market share and 35% is
owned by a local producer. Going forward,
Teliani may become a diversified beverage
producer in Georgia.
Shota Kobelia heads Teliani Valley. Shota
joined Teliani in 2009. Prior to joining
Teliani, Shota was an executive in the
Pernod Ricard Group. Shota managed to
capture more than 30% market share in
bottled wine in Georgia, where competition
is much greater than in the beer market.
Shota’s leadership and sales skills will be
the key for the success of our new
investment. The Teliani team is very excited
and engaged with the project, together
with the Heineken team, to make it
successful.
Group strategy: capital returns and
allocations
The simple way to look at our strategy is
how much capital return we deliver to our
shareholders in relation to the cash
investment our shareholders make in the
Group. Therefore, our aim going forward is
not to issue new shares, rather deliver
capital returns in order to generate a high
return for already invested cash capital by
our shareholders.
Obviously sustainability of capital
returns over long period of time is
essential for the success of our
strategy. As you all know, we run
two forms of capital return: Ordinary
Dividends paid by the Banking
Business and Special Capital
Returns (SCR), generated by our
Investment Business. Let me
discuss each form of capital
return separately.
Ordinary Dividends:
Our Banking Business can be viewed as
the provider of Ordinary Dividends. On the
back of its 2015 financial performance we
will be paying GEL 2.4 per share, which
represents growth of 14% over 2014
dividends and a payout ratio of 34%
compared to 34% in 2014. Bank of
Georgia is by far the largest and most
valuable asset in our Group, which
provides a high quality, stable dividend
flow to our shareholders. Implementing the
strategy outlined earlier in this letter should
improve the quality of ordinary dividend
generation capabilities of Bank of Georgia
and make it more sustainable over a long
period of time.
Special Capital Returns:
We updated our strategy in December 2014
and introduced the Investment Business
and the concept of Special Capital Returns.
The Investment Business aims to deliver
CSRs from divestments of our portfolio of
companies. Our aim over a five-year period
is to deliver CSRs of at least 50% in
aggregate of the ordinary dividends
delivered by the Banking Business over
2015-2019 period. We view CSRs in three
different forms: cash dividends, BGEO
share buy-backs and the potential
distribution of shares in our listed portfolio
company. We are also aiming to buy-back
shares for our management trust, rather
than issue new ones – as we historically
used to do. The aim is not to increase the
Group’s outstanding number of shares from
the current 39.5 million level.
As a result of the successful IPO
of GHG and the high cash flow
generation of our Real Estate
Business, we have clear visibility of
SCR flow through 2019. The good
news is that our existing
investments can generate SCRs
beyond 2019.
However, we will need to improve the
quality of SCR flow over the longer period
of time. Therefore, holding a supply of
cash to invest in opportunities and wisely
re-allocating capital are important to
increase the quality and certainty of SCRs
over the longer run. That is why our plans
regarding our cash buffer and our capital
allocation strategy going forward are
important.
Cash buffer and capital allocations:
Currently we hold c. US$ 52 million cash at
the BGEO Group level, of which US$ 35
million is allocated to our hydro and
beverage businesses. Over the medium-
term, we aim to increase the unallocated
cash buffer from the current US$ 17 million
level to a higher one of US$ 50 million, or
3.5% of market capitalisation of the Group.
We believe this large cash buffer will
be an important component to the
successful implementation of our
strategy and de-risking the Group in
case of unexpected crisis. The
unallocated cash buffer will be used
to seek opportunities either for new
ones or opportunities that capitalise
on our existing companies for new
projects or bolt-on acquisitions. The
buffer will also enable us to buy
back BGEO shares cheaply during
any global capital markets or
emerging market turmoil. As we use
cash from the buffer, we will be
disciplined to replenish it in a short
period of time.
As we will be increasing cash levels at the
Group level, we will be running a Group-
wide treasury management. Therefore, we
are in the process of setting up risk
management guidelines at the Group level.
The basic idea is to run an extremely
conservative liquidity management policy.
Allocated cash will be invested in Georgian
government treasuries and short-term local
bonds, while unallocated cash (e.g. US$
50 million) will be used to invest in
short-term US treasuries or EU
government bonds.
Growing the intrinsic value of our
portfolio companies will be one of my key
performance indicators going forward.
To this end, internally we are running
valuation models for each of the portfolio
companies. Valuation of the portfolio
companies will also be used when
deciding on BGEO share buybacks
as well.
14 BGEO Group PLC Annual Report 2015
Strategic report Overview The way we manage the Group:
We run a lean management structure at
the Group level. We have five senior people
working at the Group level, including me,
and all of us have multiple functions. I split
my time between helping the Bank
executives in strategic projects and
overlooking portfolio companies in
Investment Business by helping top
executives with strategic decisions. Levan
Kulijanishvili, a long-time veteran at the
Bank of Georgia, is a CFO of the Group
and Bank of Georgia. Levan’s ability to
constantly learn and develop, as well as
understand detail has no boundaries. Avto
Namicheishvili and Eka Shavgulidze help
me to overlook our portfolio companies by
active Board participations, monitoring
performance of the Group companies and
assessing new opportunities. As
mentioned above, Avto is also heading our
hydro business and helps the Group
company lawyers in case they need
advice. In addition to her Group role, Eka
handles production of all our investor
relation communication materials. Eka also
handles the Group’s debt capital funding
needs. Eka’s exceptional analytical and
strategic thinking skills are invaluable for
the Group. Michael Oliver is helping me
with investor relations. Mike has 25+ years
of experience in UK banking and served as
Director of IR of Lloyds Banking Group.
Mike attends the Group’s strategic
meetings and has a deep understanding of
Georgia and the BGEO Group, which helps
us to communicate the story effectively.
Mike’s understanding of our investors’ way
of thinking is very important for us in
setting up the strategy. He is very
passionate with great people skills.
Talent development:
Attracting the very best talent to our Group
has always been a top priority. This is how
the success of our Group has been built.
Good judgement, flawless execution and
excellent team spirit is part of our culture.
Bank of Georgia serves as a great platform
for developing talent within the Group and
the Board’s role in this development is
tremendous. In addition to their fiduciary
duties, Board members act as advisors/
coaches for all of our top executives.
We have a diverse Board with sector
specialists and we would like to further
enlarge it by bringing more sector
specialists to help our heads of
businesses to grow further.
As our businesses grow and the market
evolves, we are in constant need for
top talent to deliver on our strategy. We
have much more talent available in-house
than 11 years ago, when I joined the
Bank of Georgia. To this end, we would
like to further institutionalise the talent
development and formalise our
organisation culture. We would like to
use the Bank of Georgia University,
internal and external talent pools as
platforms to develop future leaders by
providing leadership, training and
coaching, and mentoring by senior
executives and the Board members.
We also want to attract young talent
through our Leadership Programs to
develop future leaders for this organisation.
“Helping each other to succeed by
learning and providing feedback” is
our leadership culture articulated in
one sentence. Indeed, we see
constant learning and development
of management and employees
as key to the success of your
organisation and we will be
investing time and money in it.
Sasha Katsman heads the HR and
Branding of the Bank. He has a Group-
wide responsibility to institutionalise our
talent development programme as well as
roll out our leadership culture throughout
the organisation. Sasha joined the Bank in
2010 to head the Bank’s marketing
department. His exceptional creativity,
execution skills and ability to develop has
already created substantial value for our
organisation. Sasha built our brand and
campaign machine. We decided to
promote Sasha to deputy CEO of Bank of
Georgia to head the Bank’s HR efforts in
addition to his branding responsibilities.
See page 16 for the overview of our
management platform.
Summary:
To summarise – at the Group level we want
to increase the unallocated cash buffer to
US$ 50 million to seize the opportunities in
our Investment Businesses as they arise,
potentially buy-back BGEO stock if it is
cheap, and de-risk the Group in case of
unexpected crisis. To improve efficiency in
Retail Banking, we will be focusing on
rolling out the client-centric model and
further digitalising our banking services. To
improve the risk-return profile of the
Corporate and Investment Banking we
want to de-concentrate the loan by issuing
local bonds and simultaneously stepping
up the wealth management business to
leverage Georgia becoming the service
hub of the region. In Investment Business,
our key goal is to institutionalise our
businesses by developing our talented
management teams, cutting unnecessary
costs, and scaling up the businesses
through bolt-on acquisitions to expedite
scale-driven cost advantage.
In order to succeed in the outlined strategy,
we need three things:
1. your continuous support, for which we
all at BGEO Group are very grateful
2. our continuous effort to develop and
grow talent
3. Georgia to continue on its successful
growth path, about which I am more
optimistic than ever
Irakli Gilauri
Chief Executive Officer
7 April 2016
This Strategic Report as set out on
pages 2 to 85 was approved by the
Board of Directors on 7 April 2016 and
signed on its behalf by
Irakli Gilauri
Chief Executive Officer
7 April 2016
Annual Report 2015 BGEO Group PLC 15
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information A platform to develop talent
Similarly to the limited access to capital in Georgia, the availability of management is limited and
our platform is designed to help our people develop, and by producing top business talent in the
country, we can add value for our shareholders. We understand that great management teams
make great companies, and investing time in growing people continues to be critical for the success
of our strategy.
At BGEO Group we have spent a lot of time building a top-class management team and we have a
deep bench of people who have grown and are ready to take on bigger responsibilities. One of the
reasons we are confident in our strategy is that we have human capital available both on the top and
mid-management levels. We spend a lot of time coaching and mentoring our talent.
We are growing fast in our banking businesses and our strategy for our investment businesses
implies selling the companies that we develop. Therefore we fully understand that our talent
producing machine must continue its work. For our top talent we have introduced a self-development
programme by hiring coaches to help them to better understand their strengths and weaknesses.
According to our policy, no matter how good the performance of our top executive is, they may
get limited bonuses if we do not see progress in the executive’s self-development and growing
their successor(s).
You have observed rotations in our top management every two to three years. We would like our top
talent to receive experience in different roles and learn and grow. Rotations will continue in the future.
transform conventional marketing
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from CFO to CEO
from salesman to deputy CEO
o
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joined as a micro loan officer
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young talents acquisition
i
from financial analyst to CFO
promoted
developing
implementing
completed over 15 mergers and acquisitions
from junior sales manager to CEO
from a loss making into a major player
Worked at our subsidiary
promoted
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16 BGEO Group PLC Annual Report 2015
Strategic report Strategy
01
02
03
04
05
06
07
08
09
10
07. Giorgi Vakhtangishvili
Chief Financial Officer
(GGU)
With the Group since 2007.
Joined as a CFO of BG Bank,
Ukrainian subsidiary of the
Bank, later to become a Chief
Risk Officer and play a key
role in restructuring large
corporate loans and eventual
disposal of the Ukrainian
Bank. Also, served as a CEO
of m2 Real Estate, the leading
real estate development
company in Georgia – a real
estate business of the Group.
Prior, Giorgi was a Senior
Auditor at EY and worked
for several European offices.
Holds a BBA from European
School of Management.
08. Natalia (Nato) Beridze
Head of HR (BOG)
With the Group since 2005.
Joined from the similar position
at Tbiluniversalbank, when it
was acquired by the Bank.
Developed and implemented
the Bank’s HR policies and
systems. Holds a Master’s
in Social Psychology from
Tbilisi State University.
09. George Baratashvhili
CEO (Insurance Company
Aldagi)
With the Group since 2004.
Joined as Junior Sales
Manager of pension insurance
at Aldagi, selling insurance
at the time when the clients
had little or no awareness
of insurance. Having held
various managerial positions,
in 2009 was promoted to
Head of Group Sales and
Pension Fund at Aldagi. Has
successfully led Aldagi as
a CEO since 2014. Holds a
Master’s in International law.
10. Lasha Khakhutaishvili
CFO (Insurance Company
Aldagi)
With the Group since 2008.
Joined as a Financial Analyst
at Aldagi. Was promoted to
the Head of Budgeting and
Financial Controlling and
later to Finance Manager.
Since August 2014, he has
been CFO of Aldagi.
01. Avtandil (Avto)
Namicheishvili
Group General Counsel
(BGEO Group)
With the Group since 2007.
Joined as a General Counsel at
the Bank, and has since played
a key role in all of the Group’s
equity and debt raises on the
capital markets, and over 25
mergers and acquisitions.
Prior, was a Partner at a
leading Georgian law firm.
Holds LLM in international
business law from Central
European University, Hungary.
02. Michael Oliver
Advisor to the Group CEO
(BGEO Group)
With the Group since 2012.
Prior, worked for over 25 years
in a number of management
and senior executive positions
in the UK banking industry,
in particular at Lloyds
Banking Group plc and its
predecessor companies. Has
been extensively involved
in the IPOs and investor
communication of both BGEO
and Georgia Healthcare Group.
03. Ekaterina (Eka)
Shavgulidze
Head of Investor Relations
and Funding (BGEO
Group)
With the Group since
2011. Joined as a CEO of
healthcare services business.
Most recently Eka played
a key role in the GHG IPO
as Head of IR. Prior, she
was an Associate Finance
Director at AstraZeneca,
UK. Holds an MBA from
Wharton Business School.
04. Nikoloz (Nick)
Gamkrelidze
CEO (Georgia Healthcare
Group)
With the Group since 2005.
Our healthcare business
story starts with Nick, who
started it in 2006, and has
successfully led it through
outstanding growth and
most recently the IPO on the
London Stock Exchange.
Holds an MA in international
healthcare management from
the Tanaka Business School
of Imperial College London.
05. Irakli Gilauri
CEO (BGEO Group)
With the Group since 2004.
Formerly an EBRD (European
Bank for Reconstruction and
Development) banker, joined
the Bank as CFO. Over the last
decade, Irakli’s leadership has
been instrumental in creating
major players in a number of
Georgian industries, including
banking, healthcare, real
estate, insurance and wine.
Holds an MS in banking from
CASS Business School.
06. Murtaz Kikoria
CEO (BOG)
With the Group since 2008.
Joined as a Deputy CEO in
charge of compliance at the
Bank. He also led our banking
operations in Ukraine and
led several key acquisitions,
when he served as a CEO of
our healthcare business from
2012 until 2014. Prior, was
Head of Banking Supervision
and Regulation at the NBG
(National Bank of Georgia).
He is a former EBRD banker.
Annual Report 2015 BGEO Group PLC 17
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11
12
13
14
15
16
17
18
19
20
21
20. Ekaterine (Eka)
Duchidze
Head of SOLO Lifestyle
(BOG)
With the Group since 2005.
Joined as a Corporate
Secretary. During the past
ten years she has carried
out number of crucial roles,
including Executive Assistant
to CEO and Head of Internal
Branding. Recently, oversaw
the development of SOLO
Banking and SOLO Lifestyle.
Prior, served eight years at the
World Bank Group of which
two years were at the World
Bank HQ in Washington DC
as a Programme Assistant
at OPIC Department.
21. David Bezhiashvili
Head of Cards and
Payments (BOG)
With the Group since 1994.
Joined as an IT developer at
the Bank. Was promoted and
rotated a number of times.
Played a key role in developing
our cards and payments
business – there were only a
handful of cards issued when
he joined our card business,
now the Bank is the leader in
card business and payment
technologies in Georgia.
11. Ilia Tamarashvili
Head of Internal Trainings,
Retail Banking (BOG)
With the Group since 2007.
Joined as a Deputy Head of
micro and small enterprise
lending at the Bank, having
previously advised the Bank
as part of EBRD’s Small
Enterprise Lending Program.
Promoted to his current role in
2009 and has led the Bank’s
internal trainings programmes
for seven years now.
Enrolled in MBA of Grenoble
Ecole De Management.
12. Eteri (Etuna) Iremadze
Head of Solo, Retail
Banking (BOG)
With the Group since 2006.
Joined as a Corporate
Banker at the Bank from
Intellectbank, which was
acquired by the Bank in 2004.
Prior to assuming her current
role, was Head of Blue Chip
Corporate Banking Unit
covering structured lending,
M&As, significant buyouts
in the country, and project
financing. Total of 18 years’
experience in banking. Holds
Dual MBA from Granoble
Graduate School of Business
& Caucasus University.
13. Merab Akhvklediani
Head of Mass Retail
Banking (BOG)
With the Group since 1995.
Joined as a Teller-Operator
at the Bank, progressed
to Branch Manager and
then to Head of Mortgage
and Consumer Lending
department. Assumed his
current role in 2015.
14. Irakli Gvaramadze
Head of Credit Risk,
Retail Banking (BOG)
With the Group since 2002.
Joined as a Credit Portfolio
Analyst at the Bank and then
focused on retail lending.
In 2006 he implemented
the first automated credit
application processing and
scoring system in Georgia.
Assumed his current role
in 2008, leading credit
underwriting, soft collection,
credit systems and analysis
divisions in Retail Banking.
15. Mikheil (Mikhako)
Gomarteli
Deputy CEO, Retail
Banking (BOG)
With the Group since 1997.
Mikhako is a textbook
professional growth story
made possible in our Group
– he developed his way from
selling debit cards door-to-
door to successfully leading
our Retail Banking franchise
for over ten years now.
16. Nino Khorguani
Head of Express Banking,
Retail Banking (BOG)
With the Group since 2006.
Joined as a Consumer Loan
Officer at the Bank. She
was promoted and rotated a
number of times in product
development, retail banking
credit risk management and
since 2011 worked as Deputy
Head of Retail Banking
Credit Risk Management
until assuming her current
role in 2016. Graduated
from Leadership and
Management Development
Programme at Manchester
Business School, UK.
18 BGEO Group PLC Annual Report 2015
17. Zurab Masurashvili
Head of MSME Banking,
Retail Banking (BOG)
With the Group since 2001.
Started his career in banking
at BOG, as a Micro Lending
Officer under the EBRD
Small Enterprise Lending
Programme. Played a key role
in the development of MSME
lending in several Georgian
banks. Most recently Zurab
was Deputy CEO at PrivatBank
(Georgia) and following
PrivatBank’s acquisition,
rejoined the Group as a Head
of Express Banking, later
promoted to his current role.
18. Annie Kapanadze
Head of Product
Development, Retail
Banking (BOG)
With the Group since 2006.
Joined as a Cashier at the
Bank when she was 19.
Assumed various front-
office roles from a Teller to
the Manager of the Service
Centre. She assumed her
current role in 2012.
19. Mikheil (Misha)
Gaprindashvili
Head of Merchants
Network Development,
Retail Banking (BOG)
With the Group since 2005.
Joined as Head of Merchants
Network Development at the
Bank, following its merger
with Tbiluniversakbank,
where he worked as a Head
of Business Development.
During his ten years at the
Bank, Misha led our efforts in
creating the country’s largest
merchant partners network.
Strategic report Strategy 22
23
24
25
26
27
28
29
30
31
28. Teona Chanturia
Head of Retail
Communications (BOG)
With the Group since 2010.
Joined as a Retail Banking
Brand Manager at the Bank.
Has eight years of experience
working as an Account
Manager and Consultant
for local and international
projects at leading advertising
agencies of Georgia –
Sarke and JWT Metro.
29. Alexander (Sasha)
Katsman
Deputy CEO, HRM and
Branding (BOG)
With the Group since 2010.
As Partner at the largest
communications group in
Georgia, Sarke, Sasha was
actively involved in marketing
of Georgia’s greatest reforms.
Sasha joined the Bank in
2010 after graduating from
the Berlin School of Creative
Leadership EMBA Programme
to transform conventional
marketing communication and
PR into a brand value creating
branding department. Sasha
led the development of a
new brand platform with the
eminent slogan Feel the Future
and is now on another journey
of transformation involving
HR and brand management.
30. David Birman
Chief Digital Officer (BOG)
With the Group since 2010.
Is a leading professional in
marketing in Georgia. Was in
charge of several branding and
rebranding projects within the
Group, including BGEO, GHG,
Galt & Taggart, Aldagi, Imedi L
and Evex. Currently leads the
digital team, responsible for
the digital banking initiatives
in mobile banking, internet
banking, remote devices,
websites and social media.
Prior, spent more than ten
years leading marketing
and branding activities for
several local and international
banks, cellular operator,
water utility company and
private consulting group.
31. Sophio (Sopo)
Balavadze
Brand Relations Director
(BOG)
With the Group since 2005.
A manager by education,
Sopo was at the heart of
creating the Bank’s internal
communications system
when she joined the Bank
in 2005. Today, she is
supervising both external
and internal communications
units, organisational culture
development and CSR.
22. Ekaterina (Eka)
Bekauri
Head of Call Centre (BOG)
With the Group since 2007.
Joined as a manager of
inbound calls. Later was
promoted to the Head of Call
Centre and leads the sales
of banking products through
the call centre as well as
customer service. Started her
career in banking as a teller
in TBC Bank in 2005. Holds
an MBA from the European
School of Management.
23. Tinatin Kutaladze
Deputy Head of HR
(BOG)
With the Group since 2005.
Supervises the consistency of
HR activities at our subsidiaries
in line with the Group’s HR
policies. Prior, was Head
of HR at TBC Bank. Holds
Master’s degree in Work and
Organisational Psychology
from Tbilisi State University.
24. Vakhtang Bobokhidze
Chief Information Officer
(BOG)
With the Group since 2005.
Joined as an IT Quality
Assurance Engineer at the
Bank. Since, he assumed
various roles in the IT
department and contributed to
all major projects undertaken
by the Bank. Holds a Master’s
in Applied Mathematics and IT.
25. Levan Jikia
Deputy Chief Information
Officer (BOG)
With the Group since 2007.
Joined as an IT Helpdesk
Specialist at the Bank. The
owner of a green badge
ITIL CEO EXIN in IT Service
Management. BSc in Statistics
and Probability Theory.
26. Vigen Bagdasarov
Deputy Chief Information
Officer (BOG)
With the Group since 1999.
Joined as an IT Specialist
at the Bank. Was promoted
and rotated a number
of times, most recently
assumed the role of Deputy
CIO in charge of Business
Analysis. Played key roles in
implementing BOG’s core
banking system, architectural
design and implementation
of Trade Finance, AML,
Custody platforms, as well
as successful integration
of four commercial banks,
including PrivatBank.
27. Ilia Revia
Deputy Chief Information
Officer (BOG)
With the Group since 2009.
Joined as a Strategic Projects
Manager at the Bank. Most
recently played a key role
in integration of PrivatBank.
Prior, worked as IT Project
Manager for TBC Bank and IT
Management Consultant for
Tetra Tech. Holds dual MSc
degree in IT and Business
from Jonkoping University
(Sweden) and MSc in Project
Management from George
Washington University (US).
Annual Report 2015 BGEO Group PLC 19
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32
33
34
35
36
37
38
39
40
41
42
32. Vasil Khodeli
Head of Corporate
Banking (BOG)
With the Group since 2004.
He has 20 years’ experience
in banking (working in various
positions). Actively involved
in shaping BOG’s Corporate
Banking business platform
from the very beginning.
Holds an MBA from Grenoble
Business School.
33. Otari Sharikadze
Head of Investment
Banking (Galt & Taggart)
With the Group since 2014.
Joined as Head of Corporate
Advisory at Galt & Taggart.
Most recently managed
corporate bond issuances
and assisted BGEO Group
in acquiring 25% stake in
Georgian Global Utilities.
Prior, was an Associate at
Altium Capital in Paris and
a Chief Investment Officer
at Partnership Fund in
Georgia. Holds Master’s
from Paris Graduate School
of Management and from
Pantheon-Sorbonne University.
34. Eva Bochorishvili
Head of Macroeconomic
Research (Galt & Taggart)
With the Group since
2014. Prior, worked at
Georgia’s Finance Ministry
on EU-sponsored reforms
based budget support
programmes and oversaw
the implementation of the
US$ 4.5 billion donor-pledged
funds. Eva is a guest lecturer
in public finance at University
of Georgia. Holds an MA in
economics from Bowling
Green State University in the
US and Tbilisi State University.
35. Goga Melikidze
Head of Brokerage
(Galt & Taggart)
With the Group since 2005.
Joined as Senior Financial
Analyst at Galt & Taggart,
and was promoted to DCM
Managing Director in 2009.
Left the Group in 2010 and
rejoined in 2015 as Head of
Brokerage. Prior to rejoining
the Group, Goga worked in
the Prime Minister’s Office of
the Government of Georgia,
serving as Senior Economic
Advisor to two successive
Prime Ministers of Georgia.
Completed executive
education programmes in
Private Equity from Harvard
Business School and in M&A
from London Business School.
36. Tamara (Tato)
Khisanishvili
Deputy Head of Corporate
Banking, Trade Finance
(BOG)
With the Group since 1998.
Joined as Correspondent
Banking Officer at the Bank,
and promoted to Head
of Trade Finance in 2002.
Left the Group in 2009 and
rejoined in 2011 as Deputy
Corporate Banking Director.
Prior to rejoining the Group,
Tato was Head of Trade at
HSBC Bank Georgia. Holds
PhD in Economics from
Tbilisi State University.
37. Archil Gachechiladze
Deputy CEO, Corporate
Investment Banking (BOG)
With the Group since 2009.
Joined as a Deputy CEO in
charge of corporate banking.
He launched the Bank’s
industry and macro research,
brokerage, and advisory
businesses, as well as leading
our investments in GGU and
launched Hydro Investments.
Prior, he was an Associate
at Lehman Brothers Private
Equity (currently Trilantic
Capital Partners) in London,
and also worked at Salford
Equity Partners, EBRD, KPMG
Barents, and the World Bank.
Holds MBA with distinction
from Cornell University and
is CFA charterholder
38. Tamar (Tamuna)
Janiashvili
Deputy Head of Corporate
Banking, Sectoral Lending
(BOG)
With the Group since 1999.
Joined as a Corporate
Banker at the Service
Centre of the Bank. She
was promoted and rotated
a number of times, and since
2009 manages sectorial
lending in the Corporate
Banking. Holds degrees
in Economics and Law.
39. Zurab Kokosadze
Head of FMCG Sector,
Corporate Banking (BOG)
With the Group since 2004.
Joined as an Account
Manager at the central branch
of the Bank. In 2005, after
creation of the Corporate
Banking department,
moved to SME division as
Corporate Banker. Since 2009
holds position of a FMCG
Sector Head in Corporate
Banking department.
20 BGEO Group PLC Annual Report 2015
40. Nino Papava
Head of Industry
Research (Galt & Taggart)
With the Group since 2014.
Joined as Head of Investor
Relations at Galt & Taggart.
Prior, was a Finance Manager
at AdGooroo, a Chicago-based
technology start-up. Holds
a BA from the University of
Indianapolis and is enrolled in
the Executive MBA programme
at the University of Chicago
Booth School of Business.
41. Meri Vashakidze
Head of Personnel
Planning and Recruitment
(BOG)
With the Group since 2005.
Joined as a Recruitment
Assistant at the Bank. She
has 13 years’ broad range
of experience in the areas of
recruiting, staffing, and talent
acquisition. Holds a Master’s
in Medical Psychology from
Institute of Anthropology
and Political Science.
42. David Matsaberidze
Head of Private Banking
(BOG)
With the Group since 2011.
Prior, was Head of Corporate
Banking at Bank Republic
(part of the Société Générale
Group) and also held leading
positions in Georgian insurance
companies. Holds a Master’s
degree in International Law
from Tbilisi State University and
has completed the Programme
for Leadership Development
from Harvard Business School.
Strategic report Strategy 43
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45
46
47
48
49
50
51
52
53
52. Irakli Khomasuridze
Head of Quantitative Risk
Management and Risk
Analytics (BOG)
With the Group since 2013.
Joined as a Financial Risk
Manager at the Bank. Worked
for All Options (Netherlands)
and ABN AMRO Bank
specialising in the field of
Quantitative Risk Management
and Risk Modelling. Master’s
in Financial Mathematics from
Twente University, Netherlands
and PhD in Theoretical
Physics (youngest PhD) from
Tbilisi State University.
53. Akaki Kheladze, PhD
Rector (BOG University)
With the Group since 2013,
when BOG University was
established. Has more than
12 years of management
experience. As a Professor of
Management, delivers lectures
at London School of Business
and Finance, London, UK and
Grenoble Graduate School of
Business, Grenoble, France.
43. Ekaterine Liluashvili
Head of International
Business, Wealth
Management (BOG)
With the Group since 2008.
Prior to assuming her current
role in 2015, served as a Senior
Private Banker at the Bank.
Before that, was a Private
Banker at Bank Republic
(part of the Société Générale
Group). Holds a degree in
Banking from Berufsakademie
Mosbach, Germany and
a bachelor’s degree in
Business Administration
from the European School
of Management.
44. Ana Kavtaradze
Head of Trade Finance,
Corporate Banking (BOG)
With the Group since 2003.
Joined as an Associate at the
Bank’s Funding Department
and worked her way up
to become Head of Trade
Finance in 2009. Prior,
worked at National Bank of
Georgia USAID/BANKWORLD
Bank Supervision and
Enforcement Project.
45. Constantine Tsereteli
CEO (BNB)
With the Group since 2006.
Since 2009, has led the
operations of the Bank’s
subsidiary, Belarusky Narodny
Bank, in Minsk (Belarus).
Prior to his current mission to
Minsk, he worked as Head of
Strategic Development and
later as Co-Head of Retail
Banking at the Bank in Tbilisi,
Georgia. Before joining the
Group, worked in microfinance
and development sectors.
46. George Chiladze
Deputy CEO, Chief Risk
Officer (BOG)
With the Group since 2008.
Joined as a Deputy CEO in
charge of finance at the Bank.
Left the Group in 2011 and
rejoined in 2013 as Deputy
CEO, Chief Risk Officer. Prior
to rejoining the Group, was
Deputy CEO at the Partnership
Fund. Prior to returning to
Georgia in 2003, worked at
the programme trading desk
at Bear Stearns in New York
City. Holds a PhD in physics
from Johns Hopkins University
in Baltimore, Maryland.
47. Tinatin Kotorashvili
Head of Personnel
Administration and
Compensation (BOG)
With the Group since 2001.
Joined as an Intern in the HR
Department of the Bank.
She has 15 years’ extensive
hands-on experience in
leading HR administration,
compensation, benefits
and reporting. Holds a
Master’s in Economics from
Tbilisi State University.
48. George Kukuladze
Head of Credit Risk
Analysis (BOG)
With the Group since 2003.
Joined as a Credit Risk
Officer at the Bank and
since contributed to the
implementation of the Bank’s
loan provisioning, risk rating
and social & environmental
risk management systems.
Prior, worked at the Ministry of
Finance of Georgia. Holds BBA
from Caucasus University and
Georgia State University (USA).
49. Vano Chachua
Head of Problem Assets
Management (BOG)
With the Group since 2012.
Joined as an attorney of the
Group, having previously
worked as a Prosecutor at
the Prosecutor’s Office of
Georgia, and an Investigator
at the Investigation Unit of The
Ministry of Finance. Assumed
his current role in 2015.
50. Nino Okruashvili
Head of Operational Risk
Management and Controls
(BOG)
With the Group since 1997.
Nino designed the Bank’s
operational risk management
framework and led
development of the Bank’s risk
management culture. Holds
an Undergraduate Degree in
applied mathematics from
Tbilisi State University.
51. Vasil Verulashvili
Head of Credit Risk
Management (BOG)
With the Group since 2000.
Joined as a Micro Loan
Officer at the Bank and has
been involved in credit risk
management function for
over 11 years. Was part of the
working team that executed
two IPOs in LSE and played a
key role in the Bank’s recovery
after war and financial crisis
in 2008. Holds Master’s in
Applied Mathematics from
Tbilisi State University.
Annual Report 2015 BGEO Group PLC 21
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information A platform to develop talent continued
54
55
56
57
58
59
60
61
62
63
64
54. Levan Kulijanishvili
Group CFO (JSC BGEO
Group) and Deputy CEO,
Finance (BOG)
With the Group since 1997.
Joined as a Junior Financial
Analyst at the Bank. Held
various senior positions,
including Head of Internal
Audit, Head of Financial
Monitoring, Head of Strategy
and Planning, and Head of
the Financial Analysis. Holds
an MBA from Grenoble
Graduate School of Business.
55. Lasha Nadareishvili
Head of Group Finance
(BOG)
With the Group since 2009.
Joined as Head of Group
Reporting, Budgeting &
Analysis, leading consolidated
reporting works through the
Bank’s Premium Listing and
Eurobond offerings. Most
recently took part in due
diligence and subsequent
merger of PrivatBank
Georgia. Prior, worked as
Senior Auditor at EY. Holds
a BBA from European
School of Management.
56. Tato Tomashvili
Head of Financial
Accounting, Reporting
and Budgeting (BOG)
With the Group since
2003. Joined as a Junior
Reporting Specialist at the
Bank, right after graduating
from college. Developed his
way from Junior Reporting
Specialist to the Head of
the Department, currently
overseeing the Bank’s
management reporting
and budgeting, as well as
regulatory reporting units.
57. Tamar Pkhakadze
Head of Information,
Corporate and
Infrastructure Security
(BOG)
With the Group since 2011.
Joined as a Fraud Risk Analyst
at the Bank. Established Know
Your Employee and anti-fraud
management frameworks
of the Bank. Prior, worked
at Société Générale as a
Compliance Officer in Risk
Management division, in Paris,
France. Tamar is a Certified
Fraud Examiner (CFE) and a
member of ACFE (Association
of Certified Fraud Examiners).
Holds Master’s from Grenoble
Graduate School of Business.
58. Kakhaber (Kakha)
Davitaia
Head of Treasury (BOG)
With the Group since 1995.
Joined as a Trainee in the
Cash-in-Transit department.
He paved his way to become
a Deputy Head of Treasury
in 1999. In 2003 he was
promoted to Head of Treasury
and has held this position
since then. Holds Master’s
in Applied Mathematics from
Tbilisi State University and
MBA degree from Grenoble
Graduate School of Business.
59. Nino Mishvelia
Head of Tax Reporting
and Tax Risk Management
(BOG)
With the Group since 2007.
After joining the Bank, was
in charge of the Group’s
tax reporting and tax risk
management. Prior, Nino
was a Senior Tax Advisor at
EY and Deloitte from 2004.
Holds Undergraduate Degree
in Business Administration
from European School
of Management.
60. Tamar Goderdzishvili
Deputy Head of AML
Compliance (BOG)
With the Group since 2014.
Joined as a Deputy Head of
AML Compliance Department.
Prior, worked as a Deputy
Head of Legal Department
at NBG (National Bank of
Georgia) and served as
a financial expert in the
evaluation of ML/TF measures
of Montenegro conducted by
MONEYVAL and a Consultant
on Payment System and
Services issues for the
National Bank of Tajikistan
in the WB funded project.
Holds LLM degree from the
University of Groningen.
61. Levan Dadiani
Group Senior Counsel
(BOG)
With the Group since 2012.
Prior was a partner at a
first tier Georgian law firm.
Holds LLM degree from the
University of Texas at Austin.
62. Aleksandre (Sandro)
Gamkrelidze
Head of Legal (BOG)
With the Group since 2007.
Joined as a Senior Lawyer
and in six months became the
Head of Legal Department
at the Bank. Prior, worked
as a Lawyer at our insurance
subsidiary, Aldagi. MBA
candidate from Grenoble
Graduate School of Business.
63. Nino Meskhi
Head of Business Process
Management and
Procedure Development
(BOG)
With the Group since 1993.
Joined as an assistant to
Chief Accountant at the Bank.
Prior to taking her current
role, she was promoted a
number of times and served
as a Head of Service Centre
and as a Head of Procedure
Standardization Unit. Played
a key role in re-engineering of
the Bank’s processes in 2004.
64. Davit Davitashvili
Head of Internal Audit
(CAE) (BOG)
With the Group since 2006.
Joined as an Auditor and
moved up to the Bank’s
CAE role. Has extensive
experience of leading and
managing internal audit to
provide assurance on controls
and risk management and
propose business process
improvement, cost saving and
change ideas. Holds EMBA
from CASS Business School.
22 BGEO Group PLC Annual Report 2015
Strategic report Strategy 65
66
67
68
69
70
71
72
73
74
75
65. Tamar Venetski
Head of AML Compliance
(BOG)
With the Group since 2010.
Joined as the Head of AML
Compliance Department
at the Bank. More than 14
years of experience in the
banking industry with ten
years of managerial positions.
Member of Certified Anti-
Money Laundering Specialists
(ACAMS). Holds MBA from
Caucasus School of Business.
66. Tornike Gogichaishvili
Deputy CEO, Operations
(BOG)
With the Group since 2006.
Joined as a CEO of our
insurance business. Prior
to his current position, was
Head of International Banking,
coordinating the activities
of the Group’s Ukraine and
Belarus subsidiaries. Holds
executive MBA from Said
Business School, Oxford.
67. Elene Tskhadaia
Head of Custody and
Securities Settlement
(BOG)
With the Group since 2006.
Joined as a Senior Back
Office Specialist at Galt &
Taggart. Played a key role in
developing and implementing
local and foreign custody
models at the Bank, advancing
issuer services, and enabling
foreign investors to access
the local market though the
Bank’s global custodian
and ICSD channels.
68. George (Gia) Pochkhua
Head of Settlements
(BOG)
With the Group since 1996.
Joined the Bank as a Money
Transfer System Operator
and since has worked in
various roles, including
Economist, Head Account
Manager, Senior Dealer, Head
of International Settlements.
Currently, manages the
back-office of the Bank.
69. Irakli Burdiladze
CEO (m2 Real Estate)
With the Group since 2006.
Joined as a CFO at the Bank.
Before taking leadership of our
real estate business in 2010,
he also served as the COO of
the Bank. Prior, was a CFO at
a leading real estate developer
and operator in Georgia.
Holds a graduate degree
in International Economics
and International Relations
from the Johns Hopkins
University School of Advanced
International Studies.
70. Emzar Otkhozoria
Head of Finance and
Operations (m2 Real
Estate)
With the Group since 2007.
Joined as a Chief Accountant
at m2 Real Estate and
assumed his current role
in 2015. In 2007, he was
awarded with the Order of
Honour by the president
of Georgia for his teaching
accomplishments, following
the success of Georgian
team in the international
Mathematics olympic.
He received a Master’s
degree in Mathematics from
Tbilisi State University.
71. Shorena Darchiashvili
Head of Sales and
Marketing (m2 Real Estate)
With the Group since 2010.
Joined as a Head of Internal
Brand Management Unit
at the Bank. Has over ten
years of experience in real
estate development. Holds a
graduate degree in Marketing
and International Business at
the BA Mosbach, Germany.
72. Shota Kobelia
CEO (Teliani Valley)
With the Group since 2009.
Having previously worked at
Pernod Ricard in the USA
and Easter Europe, joined
Teliani to build up Ukrainian
distribution. In 2010, became
CEO for Teliani Valley and
developed it from a small
and loss-making winery into
a major beverage group with
own distribution channels
on the main markets. Most
recently secured exclusive
trademark licence from Brau
Union for such well-known
beer brands as Heineken,
Amstel and Krušovice. Holds
MS in Sales & Marketing from
Bordeaux Business School.
73. Koba Chanturia
Deputy CEO, Finance and
Operations (Teliani Valley)
With the Group since 2007.
Joined as the Deputy CFO
at Liberty Consumer JSC –
Group’s subsidiary overseeing
non-banking investments.
Currently, he plays key
role in launching Heineken
brewery in Georgia. Holds
MBA from Ivane Javakhishvili
State University of Tbilisi.
74. Shota Milorava
Head of Distribution
(Teliani Valley)
With the Group since 2005.
More than ten years of
extensive work experience in
sales and distribution. Joined
as Sales Manager at Teliani
and later laid the foundation
for Teliani distribution efforts
and developed it into a leading
beverage distribution business
in Georgia. Prior, he worked
as a Brand Manager at
Borjomi (renowned Georgian
mineral water), where he
started his career as an
Assistant Distributor. Holds
a Master’s in Philosophy.
75. Elene Jimsheleishvili
Deputy Head of HR -
Personnel Development
(BOG)
With the Group since 2005.
Has 10+ years of human
resources management
experience including young
talents acquisition, personnel
development and training,
HRIS (360, PM). Member of
SHRM (Society for Human
Resources Management),
holds MPA (Master of
Public Administration) from
GIPA (Georgian Institute
of Public Affairs).
Annual Report 2015 BGEO Group PLC 23
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Market review
A fast-growing economy
Georgia – an open, diversified and easy emerging market in which to do business, committed to
further progress. One of the top performers globally in fighting corruption and business-enhancing
reforms, enabling the country to attract foreign investors to boost productivity and accelerate growth.
Ease of Doing Business ranked
Georgia in 2016
in registering property
3rd
6th
24th
in starting a business
Overall ranking
Up from 115 in 2005, ahead of France,
Netherlands and UAE
Source: World Bank-IFC Doing Business
Economic Freedom Index
ranked Georgia in 2016
23rd
Ahead of Hungary, France and Italy
Source: Heritage Foundation
Global Corruption Barometer
(% admitting having paid a bribe in 2013)
4%
Ahead of UK, US and Czech Republic
Source: Transparency International
24 BGEO Group PLC Annual Report 2015
Deepening economic integration with
the EU, prospects related to the silk road
route and Iranian market re-opening
create new investment opportunities, while
pursuing prudent monetary and fiscal
policies ensures macroeconomic stability
and enables the economy to adapt to
any changes in external environment.
Georgia’s key economic drivers
Reforms driven success. Georgia scored
higher in most of the indicators in the latest
Worldwide Governance Indicators report
by the World Bank, which captures six key
dimensions of governance – voice and
accountability, political stability and lack
of violence, government effectiveness,
and regulatory quality, rule of law and
control of corruption. In three out of these
six indicators Georgia is ahead of some
EU members and all five EU candidate
countries. Importantly, efforts to eliminate
corruption are widely acknowledged,
bringing Georgia ahead of 13 EU member
countries and all five candidate counties
in the control of corruption indicator.
The country is ranked 24th out of 189
economies in the World Bank’s 2016
Ease of Doing Business, 23rd out of 178
countries by Index of Economic Freedom
measured by Heritage Foundation in
2016, 11th out of 197 countries in the
Trace International’s 2014 Matrix of
Business Bribery Risk and only 4%
of people, less than in the UK and the US,
admitted having paid a bribe according
to the 2013 Global Corruption Barometer
study by Transparency International.
Georgia underscored its commitment to
European values by securing a democratic
transfer of political power in successive
parliamentary (October 2012), presidential
(October 2013), and local elections (June
2014) and showed that democratic
institutions are working effectively. Reforms
continue to maintain and boost Georgia’s
competitive advantage and enhance
business-supportive environment.
New prime-minister put forth a so called
4-pillar of reform initiatives to speed up
economic growth and to support business
climate. Namely, the proposed measures
include tax code amendments aimed
at further liberalizing tax and customs
procedures, Governance reform to allow
legal entities to receive services based
on a single window principle, speeding
up the implementation of infrastructure
projects and tailoring the education system
offerings to labour market demands.
While remaining committed to European
values, Georgia has also managed to
stabilise relations with Russia as the latter
lifted its embargo on Georgian products in
2013. The Georgian Government continues
low-regulation, low-tax, free market
policies, strengthening its anti-trust policy,
and amending the labour code (while still
remaining flexible and providing comfort
for private sector participants) to comply
with International Labour Standards.
The economic Liberty Act, effective since
January 2014, ensures continuation of a
credible fiscal and monetary framework
for Georgia, by capping consolidated
Government expenditures at 30% of GDP,
fiscal deficit at 3% of GDP and public
debt at 60% of GDP. The Liberty Act also
requires electorates’ approval through
a nationwide referendum for imposing
new taxes and raising existing tax rates,
subject to certain exceptions. Georgia
slashed the number of taxes from 21 in
2004 to just six now, becoming one of
the world’s most friendly tax regimes
according to Forbes Misery Tax Index.
Endorsement from the international
community. Imminent visa-free travel
to the EU is another major success in
Georgia’s foreign policy, following the
signing of the Association Agreement
and the related DCFTA with the EU in
2014. A progress report by the European
Commission released on 18 December
2015 praised Georgia’s achievement of
reform targets to become eligible for a
visa-free regime in the Schengen area.
The Russian side also made a move in
the direction of easing visa procedures for
Georgian citizens effective 23 December
2015, following the Russian President’s
statement at his annual press conference
on 17 December 2015. Rewards of the
DCFTA are already tangible – Georgian
exports to the EU posted growth in 2015.
Georgia is also benefiting from increased
Russian arrivals, as relations between the
two countries have improved. Visa-free
access to the EU and to Russia will further
improve business opportunities for small
and medium-sized entrepreneurs through
intensified direct contacts, affecting
positively on investors’ interest in Georgia,
the country already known for its business
friendly environment. The Government
continues maintaining strong relations
with international development partners,
focusing in the first place on infrastructure
development priorities. In 2015, Georgia
hosted the EBRD’s Annual Meeting and
Strategic report Strategy Impressive GDP growth
Broad-based structural reforms, liberalised trade, and enhanced trade and tourism infrastructure have
fed into robust – 5.1% annual average real GDP growth over 2006-2015 despite challenging external
environment; potential to generate annual average real growth of 5% over the next decade.
Business Forum, yet another sign of the
country’s strong international relations and
acknowledgment of its achievements.
A natural transport and logistics hub,
connecting important regions and
a market of 900 million customers
without customs duties. Georgia’s
favourable geographic location (between
land-locked energy-rich countries in the
East and European markets in the West)
and well-developed air, land and sea
transport networks position the country
to reap the benefits in transport, logistics,
and tourism. Continued public spending
on roads, energy, tourism and municipal
infrastructure is helping strengthen a
platform for businesses willing to trade
with and work in Georgia. Georgia is a
regional energy corridor that accounts for
approximately 1.6% of the world’s oil and
gas supply transit volumes. Travel inflows
are a significant source of foreign currency
for Georgia. The number of visitors to
Georgia increased at a 26.6% CAGR over
2005-2015 and tourism inflows stood at
US$ 1.9 billion (14% of GDP) in 2015.
Stable energy supply and electricity
transit hub potential. Georgia has a
developed, stable and competitively
priced energy sector. The country has
overcome the chronic energy shortages
of electricity and gas supply interruptions
of a decade ago by renovating and
building new hydropower plants,
improving transmission infrastructure
and increasingly relying on natural gas
imports from Azerbaijan instead of Russia.
Georgia became a net electricity exporter
in 2007-2011 (a net importer in 2012-2015
due to low precipitation and increased
domestic demand), after being a net
importer for more than a decade before
2007. Currently, only an estimated 20%
of Georgia’s hydro potential is utilised.
The pipeline of investment projects
in the energy sector is estimated at
about US$ 3.2 billion in next 5-7 years,
including the US$ 1 billion Nenskra
HPP. Currently, 53 hydropower plants
are in various stages of construction
or development (feasibility study with
construction rights, obtaining construction
permit), with 66 more in feasibility study
stage. A total installed capacity of
157MW was added to the grid in 2013-
2015 with a total investment value of
US$ 265 million. Georgia’s transmission
capacity is poised to increase and
accommodate an additional installed
capacity of 4,000MW by 2025 to meet the
export and domestic demand growth.
gains accounted for 66% of the
average 5.6% growth over 1999-2012.
Despite the gains, low relative levels of
productivity suggest further potential.
Robust GDP growth. Broad-based
structural reforms, liberalised trade, sound
public finances, and enhanced trade
and tourism infrastructure have fed into
robust GDP growth rates. Annual GDP
growth averaged 5.1% from 2006 to 2015,
despite the multiple hurdles Georgia has
faced – domestic and global crises, the
conflict with Russia in 2008, and recent
regional economic uncertainties
Moreover, a diversified growth structure
and economic base, affords economic
flexibility in the face of headwinds. With
the necessary institutions largely in place,
favourable geographic location and well-
developed air, land, and sea transport
networks, and Georgia’s real potential to
transform itself as a regional service hub,
Georgia is poised to generate 5% annual
average real growth over the next decade,
based on IMF’s 5-year growth forecast.
An influx of foreign investors on the
back of the economic reforms. Georgia’s
business-friendly environment coupled
with its sustainable growth prospects
continues to attract foreign investment.
On the downside, the massive FDI and
other capital inflows supported capital
goods imports growth. On the upside,
FDI inflows boosted productivity –
according to the World Bank, productivity
Georgia’s diversified export markets
and commodities are minimising
potential impact of turbulence
in any particular trading partner
economy. Georgia has active free trade
agreements with its neighbours and the
EU. These agreements grant Georgia
import duty-free access to a market
of 900 million consumers, including
the EU and Turkey. Exports more than
Comparative real GDP growth rates (%), 2006-2015
Gross domestic product (%)
1
.
5
9
.
3
8
.
3
6
.
3
7
.
2
6
.
2
5
.
2
0
.
2
9
.
1
9
.
1
12.6%
9.6%
9.4%
2
.
0
1
8
.
7
4
.
6
8
.
2
1
2.6%
11.1%
5.9%
1
.
5
0
.
4
8
.
5
1
1
.
6
1
5
.
6
1
4
.
4
1
0
.
4
1
6
.
1
1
8
.
0
1
6.2% 6.4%
4.6%
3.3%
2.8%
i
a
g
r
o
e
G
d
n
a
o
P
l
y
e
k
r
u
T
a
v
o
d
o
M
l
i
a
n
a
m
o
R
i
a
n
a
u
h
t
i
L
i
a
s
s
u
R
i
a
v
t
a
L
h
c
e
z
C
c
i
l
b
u
p
e
R
8
.
0
-
i
e
n
a
r
k
U
i
a
n
o
t
s
E
2003
2004
2005
2006
2007
-3.7%
2009
2008
2010
2011
2012
2013
2014
2015
Nominal GDP, US$bn
Real GDP growth, y-o-y %
Source: IMF, national statistics office
Source: GeoStat
Annual Report 2015 BGEO Group PLC 25
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Market review continued
Georgia maintained macroeconomic stability despite the challenging external environment
In 2015, the growth slowed to 2.8% y-o-y from 4.6% in 2014 due to weaker external demand.
The economic slowdown and currency depreciations experienced by its main trading partners
have lowered Georgia’s exports and remittances in 2015.
doubled over 2006-2015, but there is
still significant upside potential. Despite
nominal growth, exports share of GDP
has remained stable. On the other hand,
the services exports’ share of GDP
has almost doubled, driven by growth
in tourism and transport receipts. The
pending reforms related to the EU DCFTA
have the potential to enhance trade
and expand Georgia’s export potential.
One of the most significant changes in
exports was a shift away from the Russian
market after Russia’s 2006 embargo.
The share of exports to Russia in total
exports fell sharply from 18% in 2005 to
8% in 2006 and 2% in 2008-2012. The
embargo forced Georgian producers
to redirect exports to other countries.
Exports to Russia picked up in 2013, as
Russia opened its borders to Georgian
products, but accounted for only 6ppts
out of the 22% total export growth in 2013.
With the recent economic turbulence in
Russia, exposure to the Russian market
(wine, mineral water, and agricultural
products) is once again receding. In 2015,
Russia’s share in total Georgian exports
declined 2.2ppts y-o-y to 7.4%. Overall, in
2015, Georgian exports decreased 23%
y-o-y due to turbulence in CIS markets,
while exports to the EU increased 3.6%,
accounting for 29% of total. As no single
market and commodity accounts for
a significant share in total exports, this
minimises the potential negative impact
of the turbulence on any particular
market on Georgia’s trade balance.
Georgian economy – top performer in
the region in 2015
Georgia maintained macroeconomic
stability in 2015 despite the challenging
external environment. The growth
slowed to 2.8% y-o-y in 2015 from 4.6%
in 2014 due to challenging external
environment. The economic slowdown
and currency depreciations experienced
by its main trading partners have lowered
Georgia’s exports and remittances in
2015. The resulting shortfall in foreign
earnings, combined with the worldwide
strengthening of the US Dollars and
related pickup in deposit dollarisation,
caused the Georgian Lari to depreciate
by more than 20% against the US Dollars
in 2015. As the National Bank of Georgia
(NBG) allowed the Georgian Lari to float,
this depreciation helped to absorb
the external shock by reducing imports
(-15.2% y-o-y in 2015, excluding one-offs),
preserving FX reserves. Importantly,
adjustment in imports was on the back of
reduced demand on consumer goods, as
investments were driving the growth with
FDI hitting US$ 1.4 billion (9.7% of GDP).
The current account deficit stood at
11.8% of GDP in 2015, with FDI being
one of the major sources of its funding
(and at the same time the major factor
behind the deficit creation). Construction
posted strong double-digit growth
(15.2%) on the back of BP gas pipeline
expansion and increased government
capital expenditures, while manufacturing
(-4.9%) and trade (-0.3%) were the only
sectors posting declines. The tourism
industry recorded another year of
improvement, with arrivals up 6.9%
y-o-y to 5.9 million in 2015. Despite highly
dollarised economy, NPLs remained low at
2.7%, helped in part by strong job creation
in the private sector. While depreciation
spurred inflationary expectations, annual
inflation was 4.9% at the end of 2015,
slightly below the NBG’s target of 5.0%,
helped by lower fuel prices as well as
gradual monetary tightening. Public
debt stock increased to 41.5% of GDP
in 2015, up from 35.5% in 2014, as
Georgian Lari depreciation pushed the
external public debt to GDP ratio to
32.6%, up 5.8ppts y-o-y. Notably, the
bulk of the external public debt is owed
to IFIs, carrying very low interest rate
and long-term maturity profile, making
public debt service sustainable.
Growth outlook in 2016 remains
positive with expected strong rebound
thereafter. Sustained macro stability,
continuation of pro-business measures and
the EU DCFTA – related expected
Stronger Dollar, regional economic problems and
domestic expectations fed into GEL moves… (%)
… while Georgia used less reserve to support GEL
compared to peers (reserve loss, %)
6
.
9
4
1
.
0
5
0
.
7
4
2
.
4
5
0
.
2
5
3
.
0
6
.
9
-
6
.
5
1
-
0
.
7
1
-
1
.
0
2
-
2
.
9
2
-
0
.
6
3
-
5
.
6
3
-
5
.
9
2
2
.
5
2
4
.
6
2
6
.
6
1
3
.
7
1
o
r
u
E
i
a
n
e
m
r
A
i
a
g
r
o
e
G
y
e
k
r
u
T
a
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g
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e
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y
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k
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i
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a
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e
m
r
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s
u
r
a
e
B
l
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a
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o
d
o
M
l
3
.
3
7
-
n
a
j
i
a
b
r
e
z
A
Source: Bloomberg
Note: US Dollars per unit of national currency; 1 Aug 2014–15 Mar 2016
26 BGEO Group PLC Annual Report 2015
Source: IMF
Note: From Aug-2014 to Jan-2016, (Kazakhstan as of Dec-2015); Armenia’s reserves
exclude a US$ 500 million Eurobond issued in March 2015
Strategic report Strategy Looking at Georgia’s growth in 2016 and beyond, we believe external challenges can be
mitigated by coherent economic policies
Today’s Georgia – largely corruption-free, open, and flexible, with a clear political vector and signs that
democratic institutions are working – is well-placed to serve regional markets.
surge in FDI provide a solid base for the
robust growth potential in Georgia
in coming years. Importantly, the newly
elected NBG governor feeds trust in
the continuation of prudent monetary
policy-making, strengthening business
confidence. Fresh reforms from the
government are another upside, adding
stimulus to growth and attracting foreign
investors. Part of the deal includes the
introduction of the Estonian model, which
envisages applying corporate income tax
(a regular rate is 15% currently) to
only distributed profit; undistributed
profits, reinvested or retained, will
not be subject to corporate income
taxation. Proposed amendments to
the tax code, upon approval by the
Parliament, will go into force from
1 January 2017, adding an estimated GEL
1.5 billion to private sector investments,
inclusive of bank credit, in the medium
term. Along with public infrastructure
spending, ongoing and new large scale
private investment projects: BP gas
pipeline expansion (US$ 2 billion), Nenskra
HPP (US$ 1 billion), and Anaklia deep sea
port project (US$ 2.5 billion), create a solid
base for improved economic prospects.
The economy started 2016 sluggishly,
however starting from February it appears
to have turned the corner: tax revenues
exceeded the 1Q16 plan, despite a slight
dip in Jan-16, while tourism arrivals
delivered a stellar performance, increasing
15% y/y to 1.1mn visitors in 1Q, with
particularly upward trend since February.
Tourist arrivals are expected to increase
significantly in 2016, as Georgia is the
most viable alternative for tourists (mostly
Russians) who used to travel to countries
like Egypt, Turkey, and other destinations
in this region. Additionally, Georgia is
benefitting from an uptick in goods transit
from Ukraine and Turkey to Central
Asia and beyond, given the restrictions
imposed on these countries by Russia.
The IMF expects growth to be 3.0% y-o-y
in 2016, and to average 5.0% in 2017-2020.
The persistence of low fuel prices should
also help Georgia to improve its external
accounts, firm the exchange rate, and ease
inflation. Georgia’s increasing economic
integration with the EU, a bottoming out
of the recession in Russia and moderate
recovery in partner countries’ economies,
as well as new opportunities related to the
Iranian market and pick-up in transit
services as well as an anticipated surge
in tourism, should support Georgia’s
positive growth outlook in 2016-2018.
Well capitalised banking sector with
low NPLs
The Georgian banking sector has been
one of the faster growing sectors of
the Georgian economy, yet still has
one of the lowest penetration ratios
among peer countries, particularly in
retail. Amidst multiple downgrades across
the region, the Georgian banking sector
has remained profitable and maintained
credit ratings with a stable outlook. The
banking sector assets’ growth rate of
28% (ten-year CAGR) has far outstripped
the nominal GDP growth rate for the
same period. Although Lari depreciation
spurred loan and deposit ratios to GDP,
penetration rates still remain low (50% of
GDP and 45% of GDP, respectively) and
only c.50% of the population have bank
accounts, partly due to high interest rates
and the population’s low earnings, which
is evidenced by the lower penetration
of the retail segment compared to the
corporate segment. Penetration is also
low as the NBG requires banks to apply a
175% risk-weighting to FX loans (except for
export oriented borrower exposures). As
a result of the Central Bank’s conservative
regulations, banking sector liquidity and
capitalisation rates have been historically
high. Despite high levels of liquidity and
capitalisation, banking sector profitability
has remained robust at 17% ROE over
the past three years. The banking sector
is entirely privately owned and quite
concentrated with the two largest banks
accounting for 60% of total assets.
2.7
3.3
3.5
4.0
4.4
4.6
5.1
5.3
5.6
6.7
7.1
7.4
8.6
9.1
NPL’s 2015
Turkey
Georgia
Austria
Belgium
Denmark
Latvia
Belarus
Slovakia
C. Republic
Lithuania
Kosovo
Russia
Malta
Armenia
Macedonia
Slovenia
Kazakhstan
Hungary
Romania
Bos. & Herz.
Moldova
Croatia
Ukraine
Source: World Bank
11.0
11.5
12.4
12.7
13.9
14.1
14.4
17.1
24.3
Annual Report 2015 BGEO Group PLC 27
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Our business model
Our business model is simple and purpose-built to capture growth opportunities in Georgia
We are a Georgia – focused banking group with an investment arm. We have a successful track
record of delivering profitable growth for more than a decade, growing our market capitalisation by
more than 50 times to over US$ 1.0 billion.
Our banking business includes Retail Banking, Corporate Banking and Investment Management and
comprises at least 80% of our profit. Our investment business includes Healthcare, Real Estate, Utility
and Wine companies and comprises up to 20% of our profit. We are the number one player on the
market in all our business lines.
Investors
Regular dividends
Capital returns
GROUP
Cash buffer
BGEO
Group
Banking Business
Investment Business
Retail
Banking
Corporate
Banking
Investment
Management
GHG
(Healthcare)
m2
(Real Estate)
GGU
(Utilities)
Aldagi
(P&C Insurance)
BNB
(Bank in Belarus)
GRE
(Renewable
Energy)
Teliani Valley
(Wine &
Beer)
28 BGEO Group PLC Annual Report 2015
Strategic report Strategy At the core of our success, both in banking and investment businesses, lie our strengths and capabilities that we have built over the last
decade to create superior value for our shareholders as we follow – and in many ways lead – Georgia’s path to prosperity.
Our strengths and capabilities:
1. Unrivalled
strength of
the franchise
We are market leaders in all of our businesses offering the
most comprehensive range of products and services in
Georgia
• No.1 bank by market share in total assets – 33.4%
• No.1 bank by market share in client deposits – 33.0%
• No.1 bank by market share in total loans – 32.0%
• No.1 in healthcare services sector – 26.6% by beds
• No.1 insurance business – 38.4% (Health), 37.8% (P&C and Life)
• Largest real estate business
• Largest utilities business
• Largest wine business
Undisputed leader in retail banking with the widest
segment offering through our three well-established and
trusted brands with distinctive culture and values
• 1,999,869 total retail banking clients, of which:
• 376,700 Express clients (emerging retail segment)
• 1,611,300 Bank of Georgia clients (mass retail and MSME segment)
• 11,869 Solo clients (mass affluent segment)
See page 34 for more information on Retail Banking segments
2. Unmatched
scale and
distribution
Extensive reach through the largest distribution network in
the country translating into superior cross-selling ability,
significant economies of scale and efficiency gains
• c.2.0 million Retail Banking customers
• 1,390 wealth management clients from 68 different countries
• 266 bank branches, 746 ATMs, 8,102 POS terminals, 2,589 Express Pay terminals, 3,335 sales force
• 45 healthcare facilities and 2,670 hospital beds, located in six regions that contain two-thirds of the
population of Georgia
• 87 points of sale and more than 200 account managers servicing over 250,000 P&C insurance
clients
• m2 Real Estate developed 1,669 apartments in six completed projects and 838 apartments in two
ongoing projects
• Supplying water to over 1.2 million population in Georgia
• Selling 3 million bottles of wine in over 26 countries annually
3. Leader in
banking
technologies
Established leader in payment systems such as internet
banking, mobile banking and Express Pay terminals
complementing our Express Banking strategy
• 89,000 active internet banking users, up 22.6% y-o-y
• 48,000 mobile banking users, up 63.9% y-o-y
• Transactions executed through remote channels increased nearly twofold vs only 13.8%
increase through tellers
See page 34 for more information on Express Banking
Capturing more than half of the merchant-acquiring
network in the country
• 8,102 POS terminals
4. Comprehensive
local knowledge
Deep insight into the Georgian market through trusted
relationships with our extensive client base and coverage
across all sectors of the economy
• c.5,000 Corporate Banking customers
• c.90,000 SME and micro customers
Strong research capabilities through Galt & Taggart
Research, providing unmatched insight in the Georgian
macro and main sectors of the Georgian economy (www.
galtandtaggart.com)
• Georgian macroeconomic research
• Azerbaijan macroeconomic research
• Georgian sector research including: Energy, Real Estate, Agriculture, Tourism, Wine,
Healthcare
• Fixed income corporate research including: Georgian Railway and Georgian Oil and Gas
Corporation
• Weekly news coverage, including market data and economic updates
Loan collection systems and an in-house developed and
maintained credit scoring system, translates into deep
insight into bankable population and customer behaviour
– a distinctive competitive advantage of the Bank
Superior access to both equity and debt capital, provides
flexibility with liability management and is our key
competitive advantage in realising our ambition to capture
attractive investment opportunities in Georgia
See page 37 for more information on Galt & Taggart
• 531,350 individuals scored in 2015
IPO on the LSE in 2006 (first from Georgia and second from the CIS)
•
• US$ 200 million bond issue in 2007 (first from Georgia)
• Premium listing on the LSE in 2012 (first from Georgia)
• US$ 114 million capital raised in 2014
• US$ 363 million Eurobond outstanding (only private issue from the Caucasus)
• US$ 100 million IPO of GHG, our healthcare subsidiary, on the premium segment of the
London Stock Exchange (first non-financial company to list from the region)
Undisputed leader in the local capital market industry
through Galt & Taggart, and Bank of Georgia custody
• c.GEL 100 million local corporate bonds placed by Galt & Taggart in 2015
• The only international sub-custodian in the region through State Street, Citi and Deutsche Bank
• Exclusive partner of Saxo Bank since 2015
The strength of our franchise and brand name translates
into pricing power driving down Cost of Deposits. The
ability to replace more costly borrowings with cheaper
funding also leads to improved funding costs
• Lower deposit rates than offered on the market
• Cost of Client Deposits 4.3% in 2015, down from 7.5% in 2010
• Cost of Funds 5.1% in 2015, down from 8.2% in 2010
Culture of transparency and adherence to robust
governance
• Premium listed company on the LSE
• Component of FTSE 250 Index
• Fully independent Non-Executive Directors on the Board
See page 92 for Governance Report
Primarily deferred share-based compensation for top
executives of the Group, aligning long-term shareholder
interests with management reward
• More than 80% of total compensation for each Management Board member comprises shares
with a vesting period
• No cash bonuses for senior management since 2011
See page 107 for Remuneration Report
As an employer of choice, attracts top talent both at senior
and middle management levels
• Western educated professionals with work experience at leading financial institutions such as
Lehman Brothers, Bear Stearns, etc
Proven track record in creating superior value for its
shareholders through banking and investment businesses
• Market valuation at US$ 1.0 billion, up x50 since 2004
• As a result of GHG IPO, we achieved 121% IRR on our investment in GHG
•
IRR of >30% in completed real estate projects
Annual Report 2015 BGEO Group PLC 29
5. Access to capital
markets and
superiority in
liability
management
6. Robust
governance
aligned with the
UK Corporate
Governance
Code
7. Strong
management
skills with proven
track record
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Our strategy
Delivering on our 4x20 strategy
4x20 strategy – Georgia-focused banking group with an investment arm – reflects our competitive
strengths and opportunities in the market.
During 2015, our 4x20 strategy entailed
a 20% metric for our ROAE, Tier I CAR,
retail loan growth and IRR for investment
business. This strategy is built to allow
us to capture compelling investment
opportunities in Georgia’s corporate sector,
on top of our continued commitment to
growing our strong banking business.
Over the last few years we have made
strong progress in delivering growth in our
core Retail Banking, Corporate Banking
and Investment Management businesses.
This growth has been combined with
maintaining a solid capital and liquidity
position and consistently high returns on
shareholder equity, delivering dividends
that have increased by more than five-
times over the last three years and an
excellent total return to shareholders. In
addition, we have made great progress
in developing, profitably growing our
non-banking operations and delivering a
successful IPO of our healthcare business.
Throughout 2015, Georgia’s economic
development has remained robust
and was particularly resilient in the
context of the economic turbulence
in the region. The Company expects
this progress to be maintained in the
future. The banking sector in Georgia
remains relatively underpenetrated and
we expect our recent strong customer
lending growth, particularly in the Retail
Bank, to continue. Georgia’s capital
markets development, which remains
in its infancy, will create significant
opportunities over the next few years
to develop more capital efficient growth
opportunities throughout the business
and we expect to be at the forefront of
that capital market development in the
country, thereby producing value creation
opportunities for our shareholders.
Performance against strategy in 2015
Business
Strategic target
2015 performance
Banking
Business
c.20% Return on Equity in
the Banking Business
Record profitability:
• Revenue up 39.6% y-o-y to GEL 751.3 million in 2015
• Profit up 24.4% y-o-y to GEL 274.3 million in 2015
• Non-interest income up 31.8% y-o-y to GEL 238.4 million in 2015
• NIM stood at 7.7%
• ROAE stood at 21.7% in 2015
Operational efficiency and scale:
• Cost to Income ratio at 35.7% in 2015
• Positive operating leverage at 16.6 ppts in 2015
Prudent risk management:
• Cost of Risk of 2.7% in 2015
c.20% Retail loan book
growth
• Net retail banking loan book grew 35.3% y-o-y to GEL 2,796.5 million, while client deposits
increased 39.3% y-o-y to GEL 1,880.0 million. Growth on constant currency basis was 19.0% and
15.5% for retail net loan book and retail deposits, respectively
• Retail Banking Loan Yield increased to 17.6% in 2015 vs 17.4% in 2014, Retail Banking Cost of Client
Deposits increased to 3.9% in 2015 from 3.8% in 2014
c.20% Tier I capital
adequacy ratio
Strong internal cash generation to support loan growth without compromising capital ratios:
• BIS Tier I Capital Adequacy ratio (CAR) of 17.9% and BIS Total CAR of 24.9% as of 31 December
2015
• NBG (Basel 2/3) Tier I CAR and Total CAR stood at 10.9% and 16.7% as of 31 December 2015
Tier I c.20% became non-relevant, as regulation moved to Basel 2/3. Additionally, in the context of excess
capital of c.GEL 600 million at BGEO Group, we aim to have efficient capital management at bank. To reflect
this, at the end of 2015, we have updated our 4x20 strategy, which is laid out later on in this section.
Conservative regulation of National Bank of Georgia (NBG):
• Risk weighting of FX assets at 175%
• Bank’s leverage stood at 6.0x as of 31 December 2015
• GHG achieved 121% IRR and 3.9x-money on our investment in GHG at IPO
• 65% IRR from m2 Real Estate projects
Investment
Business
Internal rate of return of
minimum 20% for each of
the individual future
investments of the Company
Dividend
payout
Dividend payout
ratio of 25-40% from
banking business
• At the 2016 AGM the Board intends to recommend an annual dividend of GEL 2.40 per share
payable in British Sterling at the prevailing rate, representing 30.3% payout ratio. This represents an
increase of 14%, compared to the annual dividend of GEL 2.1 per share last year.
Capital return from
investment
• In addition, at least three capital returns over the next five years will be targeted in the light of
potential divestments, with the objective of ensuring that these three capital returns total at least
50% of the regular dividends from the banking business. These capital returns could take the form
of either special dividends, share buybacks and/or stock dividends
• As of January 2016/During 2015, we completed GEL 23.7/19.2 million worth of market purchases of
BGEO shares for Employee Benefit Trust. At the beginning of 2016, we announced additional US$
10 million worth of market purchase of shares for Employee Benefit Trust
30 BGEO Group PLC Annual Report 2015
Strategic report Strategy 4x20 strategy going forward
Going forward we plan to increase the relative size of our highly profitable Retail Banking business
and to generate additional non-interest income from advisory and other fee-generating businesses.
In addition, we plan to make further equity investments in areas outside our core banking operations.
At the end of 2015, the Board updated
our strategy with the aim of making it
more relevant. While we are committed to
growing our business while maintaining
our existing strong capitalisation, Tier I
c.20% became non-relevant, as regulation
moved to Basel 2/3. Additionally, in the
context of excess capital of c.GEL 600
million at BGEO Group, we aim to have
efficient capital management at the Bank.
To reflect this, at the end of 2015, we
have updated our 4x20 strategy, which is
focused on enhancing BGEO’s profitability
by optimising capital allocation. This
includes our continued commitment to
the Bank’s highly profitable retail franchise
and augmenting the Group returns
through carefully targeted direct equity
investments, with a clear exit strategy and
targeted IRR above 20%, to contribute
up to 20% of the Group’s profits.
Our key goal is to continue producing
high returns in the long run for our
shareholders. Currently, we see that Retail
Banking is producing over 30% ROAE
while Corporate Banking is producing
c.15% ROAE. Therefore, we want to
increase the share of retail banking
portfolio to 65% over the next three years.
Due to the limited access to capital
and management in a small frontier
economy such as Georgia, we continue
to see a much better risk return profile
when investing in Georgian companies
than when lending to those same
corporates. We also believe that the
Group can add value for our shareholders
by investing in opportunities, which
currently are not accessible to our
shareholders, changing management
and governance, institutionalising and
scaling up the companies, and most
importantly, unlocking value by exiting
from these companies over time. BGEO’s
management has a proven track record
of creating value through successful
business development and investments.
4x20 strategy in 2015
4x20 strategy going forward
We are a Georgia-focused
banking group with an
investment arm
Banking
Business
Investment
Business
We are a Georgia-focused banking group with
an investment arm
Banking Business
Investment Business
1. ROE
c.20%
4. Min. IRR
of 20%
1. ROE c.20%
3. Min. IRR of 20%
Target investments with min.
20% IRR and partial or full exit
in max. six years.
2. Tier I
c.20%
3. Retail
growth
c.20%
2. Growth c.20%
of retail loan book
4. Profit up to 20% of
BGEO Group profit
(New target)
Note: Tier I became not-relevant in 2016 as
explained above.
Note: New strategic target.
Ongoing dividends
• Ordinary dividends: linked to
recurring profit from banking
business
• Capital return: aiming for at
least three capital returns in
the next five years
• Aiming 25%-40% dividend
• Aiming for capital return to
payout ratio
represent at least 50% of regular
dividend from Banking Business
Annual Report 2015 BGEO Group PLC 31
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Our strategy continued
4x20 strategy going forward
1. At least 20% Return on Equity in the
Banking Business
Profitability is expected to be driven
by further growth in both the retail
and corporate banking businesses with
an increased focus on the significantly
more profitable retail franchise, as we
aim to increase our share in retail loans.
2. At least 20% retail loan book growth
Our net loan book has grown at a
CAGR of 23.6% from 2010 to 2015 and
we remain committed to at least 20%
growth in our retail customer lending.
Our focus is on increasing retail loan
portfolio to 65%, from its current 55%,
over the next three years. Specifically,
we are looking to further grow our
Express (self-service) Banking network
as well as our payments business,
transform our retail mass market
operations, through the Bank of Georgia
brand, into a customer-centric bank and
significantly increase our market share
in the mass affluent segment, with our
premium brand Solo.
3. Internal rate of return of minimum
20% for each of the individual future
investments of the Company
We will target investments with a
minimum of 20% IRR and partial or full
exit in a maximum of six years. We will
acquire only businesses that we believe
have a well-defined exit path, to which
end we will target companies with
potential EBITDA of at least US$ 30
million within three to four years post
acquisition with a view to potential
future exits, including by way of stock
market listings or trade sale.
4. A maximum 20% profit contribution,
of the Group’s profits, from our
investments in non-banking
businesses
We aim to remain primarily a banking
group, with an investment arm. No
matter how well our non-banking
companies do in terms of operating
results, we want to see their exit to
unlock the value and with the generated
profit return capital to our shareholders
and pursue new opportunities – in the
event that we see one.
Dividends: Our future dividend policy is
expected to comprise recurring
dividend payments linked to recurring
profits from the banking group, with a
targeted dividend payout ratio of
25–40%. In addition, we will aim to
provide capital return upon the
realisation of our financial investments
and are targeting at least three capital
returns in the next five years. Some of
the profits may be reinvested if further
attractive investment opportunities
arise.
The way we invest and manage the companies
Due to the limited access to capital and
management in a small frontier economy
such as Georgia, we see a much better
risk return profile when investing in
Georgian companies than when lending to
those same corporates. We also believe
that the Group will be adding value for our
shareholders by investing in opportunities,
which currently are not accessible to our
shareholders, changing management and
governance, institutionalising and scaling
up the companies, and most importantly,
unlocking value by exiting from these
companies over time. Our Plan A in exit is
to take the company public. This way, as
far as possible, it is our firm intention to
create an opportunity for our shareholders
to participate in such offerings.
Our key principles around investing and
managing the companies at BGEO:
1. Be opportunistic and disciplined
Georgia was born ten years ago and
different sectors and businesses are in the
process of formation, access to capital
and management is limited, owners of
businesses are cash poor and therefore
good opportunities can be captured
cheaply. At the same time, we are under no
pressure to make new investments and we
are extremely selective and opportunistic
and will not commit more than US$ 25
million in a single investment in a sector
where we are not already present. Our
dividend policy is the natural self-discipline
mechanism for our investment business.
2. In scale we trust
Achieving superior economies of
scale in a small frontier economy is an
essential part of the success. It actually
significantly diminishes the risk of failure.
3. Get our hands dirty
Similarly to limited access to capital in this
country, the availability of management
is limited and by being a machine of
producing top talent in the country we
can add value for our shareholders. We
understand that great management teams
make great companies, and investing
time in growing people continues to be
critical for the success of our strategy.
4. Good governance makes good
returns
We are big believers that robust
governance is the source of value creation
for our shareholders. The natural and
simple alignment of interest between
shareholders and management by
awarding long-term stock works well for
value creation and, finally, we want to have
good balance by having separate people
as the Chairman and CEO of the Company.
5. Liquidity is king
In order for our strategy to work we
need to be disciplined in unlocking the
value of companies in which we invest
and manage. Taking companies public
is our preferred option for exit, as it is
our intention to give our shareholders
an opportunity to participate.
32 BGEO Group PLC Annual Report 2015
Strategic report Strategy
How we are going to achieve our targets over the next two to three years
Banking Business – crown jewel in our Group and the key driver of profitability
We have three segments in the banking business, of which Retail Banking will drive most of our
Banking Business growth, Corporate Banking and Investment Management will improve our
ROAE, with the latter also contributing an increasing share of our fee and commission income.
Strategic goal
How we are doing this
Bank of Georgia aims to shift the mix of its
customer lending to become 65% retail and
35% corporate with the product per client
ratio in the Retail Bank targeted to increase to
3.0 products, from a current 1.7 products.
• Expand our product offering through continuous innovation to remain at the forefront of meeting the
growing funding and investment needs of our extensive retail customer and corporate client base.
• Expand our Express Banking strategy to increase our number of customers by attracting the currently
unbanked population and by means of a shift towards transactional banking.
• Expand on our market-leading payments business in Georgia through our Express Banking strategy.
• Leverage our superior distribution network and local expertise across various business lines to step up our
The Bank will continue to reduce
concentration risk in the corporate lending
portfolio, with the support of the Investment
Management business, to target the top ten
borrowers to represent less than 10% of the
total loan portfolio.
cross-selling strategies.
• Shift from current segment approach to client-centric approach with an aim to capture growth
opportunities and increase penetration through cross-selling, to be measured primarily by an improvement
in product/client ratio.
• With Solo strategy, we aim to significantly increase our market share in the mass affluent segment over the
next three to four years.
• Continued investment in our IT and payment business.
• In February 2016, we announced combination of the Bank’s Corporate Banking and Investment
Management businesses into a Corporate Investment Banking business (CIB). The merged business will
leverage our superior knowledge and capital markets capabilities in the Georgian and neighbouring
markets both in terms of reach and the expertise that we have accumulated during the past several years
through our corporate advisory, research and brokerage practices united under Galt & Taggart – a wholly
owned subsidiary of Bank of Georgia at the forefront of capital markets development in the country.
• As a result, we expect to grow our fee income, improve the Bank’s ROAE and reduce concentration risk in
the corporate lending portfolio. Reflecting this change, the Group will report CIB business results
separately starting in the first quarter 2016.
The net interest margin is expected to be
c.7.25% – 7.75%.
• Leverage the Bank’s pricing power stemming from its market leadership to maintain strong loan yield
levels and continue optimising its Cost of Deposits without compromising deposit growth.
• Access international capital markets to attract cheaper international funding.
The Bank aims to manage to a Cost/Income
ratio of around 35% over the medium term.
• Continued cost control measures and implementation of technologies aimed at improving workflow
efficiency.
• Leverage the strength of our scope and franchise to increase the cost-efficiency benefit for the underlying
businesses and the Group as whole.
• Expansion of Express Banking strategy and investing in express technologies to enable us to further scale
up the business with minimal incremental operating costs.
• Education platform to contribute further to lowering operating costs over the medium and long term.
The Bank will continue to enhance its already
prudent risk management practice, and the
Bank’s cost of risk ratio is expected to be in the
1.5%-2.0% range.
• Risk management system is based on the principle of continually assessing risk throughout the life of any
operation.
• Ongoing monitoring and control allowing efficient adjustments in case of any negative changes in the
conditions on which the preliminary risk assessment was made.
• Determination of an acceptable risk level.
• Continuous analysis of efficiency of the risk management system.
Investment Business
The planned capital allocations in the Investment Businesses during the 2015-2018 period are
expected to total approximately US$ 35 million.
Investment Business
Strategic goal
Healthcare business – Georgia Healthcare
Group
• At least double 2015 revenues in 2018.
• Achieve a 20% return on average equity and start paying dividends by 2019.
• Launch two hospitals with a total of 700 hospital beds by 2017, and achieve a market share of hospital
revenue in excess of 30% in the medium to long term.
• Roll out a network of ambulatory clinics to achieve a 17% market share by revenues in the medium to
long term.
Real Estate business – m2 Real Estate
• To target an internal rate of return of c.40%+, while delivering a capital return to the Group of US$ 20-25
million over the next five years.
Utility business – Georgia Global Utilities
• To achieve EBITDA of GEL 80 million in 2018, from GEL 51 million in 2014.
Hydro business – Georgian Renewable Power
Company
• We aim to establish a renewable energy platform, targeting 100MW+ in four medium-sized hydro power
plants by 2019, while targeting an IRR in excess of 25%.
Beverages business – Teliani Valley
• To launch beer production, within a budget of US$ 37 million, by the end of 2016.
Annual Report 2015 BGEO Group PLC 33
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Our strategy continued
Retail banking – client-centric, multi-brand strategy
We began implementing our Express Banking strategy
in 2012 by rolling out small-format, Express branches
offering predominantly transactional banking services to
clients through ATMs and Express Pay Terminals.
The aim was to make banking relationships simple, faster, cheaper and
convenient for both our existing customers and for the emerging bankable
population.
A Self-Service Terminal can be described as a small bank by itself as it
allows a wide array of payment services ranging from current account
top-ups and loan repayments to utility bill payments and metro ticket
purchases. In 2015, we had installed 350 new Express Pay Terminals,
resulting in 2,589 total Express Pay Terminals as of the end of the year. We
are now leaders in Georgia in the payment systems market. We have
combined our travel card for the Tbilisi bus and metro (of which we are the
sole provider) and our contactless card with a loyalty programme linked to
the customer’s current account to create an “Express Card” and have issued
over 469,919 such cards in 2015. At the end of the year we had more than
1,191,828 Express cards outstanding.
Nowadays, express is the major growth driver in our fee and commission
income from Retail Banking segment and a strong franchise attracting the
unbanked population to the Bank, eventually growing them into a mass retail
customers.
Express – capturing emerging retail banking clients
Brands
& target
segments
Selected
Financial &
Operating
Data
(FY2015)
Emerging Retail
Net Fee & Commission Income
GEL 64 million
9%
69%
22%
Express Bank
Mass Retail & MSME
Solo
2.1
P/C ratio:
Number of branches: 114
Profit/client:
GEL 71
Focus
Grow transactions
34 BGEO Group PLC Annual Report 2015
Strategic report Strategy Brands
& target
segments
Selected
Financial &
Operating
Data
(FY2015)
Mass Retail and MSME
Total loans
GEL 2,854 million
18%
3%
79%
Express Bank
Mass Retail & MSME
Solo
1.9
P/C ratio:
Number of branches: 139
Profit/client:
GEL 56
Focus
Product/client ratio
Product/client ratio growth
growth
Under the Bank of Georgia brand we target the mass
retail segment. This is our flagship brand and most
significant profit contributor.
With 2.0 million individual clients and 100,000 SME and Micro clients, this
segment is very much product driven and our biggest challenge is to change
the business model to become more client-centric and therefore increase the
1.9 current product to client ratio over time. We are currently working on
three main areas to achieve our goal of higher product to client ratio in this
segment.
• Client-centric physical environment: we recognise that our current
branches (pictured below) are built around products and they are not
convenient to our clients. We have separate corners for various products
and clients need to navigate the branch space to get all the services they
need – the client now comes to the product, rather than vice versa. To
address this, we have worked with McKinsey to redesign the branches to
build them around the client and make their experience comfortable. We
will be launching our first client-centric branch in September 2016 and
aim to complete the redesign of most branches by the end of 2017.
• Client-centric service: we train our front-office personnel to sell and
service across the product range. We also free up their time from
processes that do not involve client interaction, by moving those
processes to the back-office.
• Client-centric digital channels: our clients extensively use digital
channels. This includes both personal computer and mobile applications.
And the digital channel utilisation has grown strongly for the past couple
of years. We recognise that developing client-centric digital channels is no
less important than redesigning our branches. We have established a
digital banking division, with a team of marketing and IT professionals to
lead our online transformation. We aim to launch the new digital channels
by the end of 2016.
Bank of Georgia – unparalleled mass retail banking franchise
Annual Report 2015 BGEO Group PLC 35
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Our strategy continued
Retail banking – client-centric, multi-brand strategy continued
Brands
& target
segments
Selected
Financial &
Operating
Data
(FY2015)
Mass affluent
Clients
11,869
1%
19%
81%
Express Bank
Mass Retail & MSME
Solo
P/C ratio:
Number of branches: 8
Profit/client:
7.5
GEL 1,374
Focus
Client growth
In April 2015, we launched Solo - a fundamentally
different approach to premium banking. As part of the
new strategy, the Bank’s Solo clients are given access to
exclusive products and the finest concierge-style
environment at our newly designed Solo lounges and
are provided with new lifestyle opportunities, such as
exclusive events and handpicked lifestyle products.
In our Solo lounges, Solo clients are offered, at a cost, a selection of luxury
products and accessories that are currently not available in the country. Solo
clients enjoy tailor-made solutions including new financial products such as
bonds, which pay a significantly higher yield compared to deposits, and
other securities developed by Galt & Taggart, the Bank’s Investment Banking
arm.
With Solo we are targeting the mass affluent retail segment and aim to build
brand loyalty through exclusive experiences offered through the new Solo.
We currently have only 11,869 Solo clients and an estimated market share of
less than 13% in this segment. We have already opened two new Solo
lounges and will increase the number of lounges in line with the increasing
number of clients. Our goal with the new strategy is to significantly increase
our market share in this segment over the next three to four years.
Solo – a fundamentally different approach to premium banking
36 BGEO Group PLC Annual Report 2015
Strategic report Strategy Corporate Investment Banking – unrivalled platform for profitable growth
In February 2016, we announced
the combination of our Corporate
Banking and Investment Management
businesses into a Corporate Investment
Banking business (CIB). The merged
Corporate Banking and Investment
Management business will leverage
our superior knowledge and capital
markets capabilities in the Georgian and
neighbouring markets both in terms of
reach and the expertise that we have
accumulated during the past several
years through our corporate advisory,
research and brokerage practices
united under Galt & Taggart – a wholly
owned subsidiary of Bank of Georgia,
which is at the forefront of capital
markets development in the country.
Reflecting this change, the Group will
report CIB business results separately
starting in the first quarter 2016.
One critical goal in the Corporate
Banking business is to increase
ROAE and we plan to do this by de-
concentrating our loan book and
decreasing the cost of risk through:
a. Syndicating loans out.
b. Selling risk.
c. Helping our large corporate clients to
access capital by issuing debt securities
on the local capital market.
We will focus on further building
our fee business through the trade
finance franchise, which we believe
is the strongest in the region.
As Georgia has a pay-as-you-go pension
system, we believe that our international
wealth management franchise can
benefit by focusing on the distribution
of local debt. So far we see that c.70%
of the demand in local paper issuances
comes from our international wealth
management clients. Further enlargement
of the footprint of our international wealth
management franchise will be critical
for the success of our strategy to build
local capital markets. Therefore, we
will be investing more in this area.
As a result, we expect to grow our
fee income, improve the Bank’s
ROAE and reduce concentration risk
in the corporate lending portfolio.
1. Wealth management
• Strong international
presence:
Israel (since 2008), UK
(2010), Hungary (2012) and
Turkey (2013). Planned
expansion – Cyprus,
Singapore, USA.
• AUM of GEL 1,373 million,
up 34% y-o-y
• Diversified funding sources:
• Georgia 44%
• Israel & MENA 12%
• UK 4%
• Germany 3%
• Other 35%
4. Brokerage
• Wide product coverage
• Exclusive partner of
SAXO Bank
via While Label structure,
that provides highly adaptive
trading platform with
professional tools, insights
and world-class execution
5. Wealth management
Breakdown by category
15.4%
4.2%
4.6%
2.8%
5.4%
3.3%
5.7%
5.1%
Manufacturing
Trade
Real estate
Hospitality
Transport and communication
Electricity, gas and water supply
Construction
Financial intermediation
Mining and quarrying
Health and social work
Other
2. Research
• Sector, macro and fixed
income coverage
• International distribution
27.1%
16.3%
10.1%
3. Corporate advisory
• Bond placement
GEL 63.6 million and US$ 35
million bonds placement at
year-to-date. c.US$ 15 million
bonds placement planned
until the end of this year
• Corporate advisory platform
• Team with sector expertise
and international M&A
experience
• Proven track record of
more than 15 completed
transactions over the
past eight years with an
accumulated transaction
value of more than GEL
200 million
Annual Report 2015 BGEO Group PLC 37
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Our strategy continued
Investment business strategies
GHG – a long-term, high-growth story (GHG:LN)
GHG is the largest healthcare services and medical insurance provider operating in the fast-
growing, predominantly privately-owned, Georgian healthcare market, which is characterised by
low utilisation and high fragmentation, leaving significant room for medium to long-term growth.
The healthcare services market (including
hospitals and ambulatory clinics) is
estimated at GEL 2.1 billion for 2015, with
a strong compound growth momentum
of 13.5% between 2011 and 2014, which
is expected to continue growing at 13.3%
during the period 2014-2018. Healthcare
services spending per capita is currently at
a very low base of only US$ 217, with annual
outpatient encounters of only 3.5 per capita
and hospital bed utilisation of only 50%, all
significantly lower than many comparable
countries. Supportive government reforms
and the engagement of private players
in the sector have resulted in significant
improvements in the overall standard of
infrastructure and greatly boosted demand
for quality healthcare services. With GHG’s
scale, efficient operations, breadth and
quality of service offering and proven
management team, the management of
GHG believes that GHG is ideally positioned
to take advantage of the expected long-
term macroeconomic and structural
growth drivers favourably influencing the
Georgian healthcare services market.
Reflecting these long-term growth
prospects, the management of GHG is
targeting at least doubling of 2015 revenues
by 2018 through a combination of:
• Expanding through the further
development of both existing and
recently acquired hospitals, focusing
predominantly on the higher revenue
referral hospital segments in Tbilisi.
The addressable hospital market is GEL
1.2 billion in 2015 and is forecasted to
grow at a compound annual growth
rate of 11.3% during the period 2014 to
2018. GHG’s market share was 14.0%
and 22.1% by revenue and bed capacity,
respectively, at 30 June 2015. Following
the acquisition of High Technology Medical
Centre University Clinic in August 2015,
GHG’s market share by beds grew to
26.6%, and (on a pro forma basis) market
share by revenue increased to 17.6%.
• Launching of a network of new
ambulatory clinics across Tbilisi and in
other major cities in Georgia.
The addressable ambulatory clinic market
is GEL 0.9 billion in 2015 and is forecasted
to grow at a compound annual growth
rate of 15.9% during the period 2014 to
2018. GHG’s market share was under
1% at 30 June 2015, with the rest of the
market similarly fragmented, with no single
player having more than 1% market share
and no other player having comparable
access to capital and management,
allowing GHG a unique first mover
advantage in this highly fragmented and
underpenetrated outpatient segment.
• Continuing to grow over the medium
term by developing new services and
investing in medical technology to fill
existing medical service gaps in the
country and improve efficiencies.
Currently service gaps exist in a
number of basic diagnostics areas
and treatments, such as MRI,
laparoscopic surgeries, oncology,
pediatrics, neonatology, intensive care,
cardiology, and rehabilitation services.
• Continued focus on improving
operational efficiency and utilisation
to further improve margins.
GHG’s healthcare services EBITDA
margin was 27.4% at 31 December
2015, improving compared to 24.3%
for the same period last year toward a
target of approximately 30%. GHG is
in the process of integrating its newly
acquired hospital facilities, and is
targeting a second wave of integration
which among other things will include
the centralisation of engineering,
archiving, and ERP roll-out.
In March 2016, GHG signed a binding
memorandum of understanding,
subject to relevant regulatory
approvals, to acquire a 100% equity
stake in JSC GPC, one of the top
three pharmaceutical retailers and
wholesalers in Georgia. This move
clearly fits GHG’s strategy to be
the leading integrated player in the
Georgian healthcare ecosystem
GHG – long-term, high-growth story
GHG is targeting to double 2015 healthcare revenue by 2018 with 30% EBITDA margin
2015-2018
Georgia 2014 or most recent year
Medium-term target (5-10 year horizon)
Georgia medium term
Long-term target (Beyond 10-year horizon)
EM 2014 or most recent year
Spending per capita (US$)
217 (Georgia)
Price inflation
(heart surgery, US$)
6,500 (GHG)
GHG revenue
per bed (US$)
32,000 (GHG)
Outpatient encounters
per capita
3.5 (Georgia)
Nurse to doctor ratio
1:1.3 (Georgia)
Pharmaceuticals’ share in
total healthcare spending
38% (Georgia)
i
n
o
s
n
a
p
x
e
t
n
a
c
fi
n
g
S
i
i
5
2
0
2
y
b
y
t
i
c
a
p
a
c
f
o
502
9,000
99,000
5.4
4:1 (Georgia,
WHO recommendation)
25%
o
t
m
o
o
r
l
a
i
t
n
a
t
s
b
u
S
5
2
0
2
d
n
o
y
e
b
w
o
r
g
1,076
25,000
280,000
8.9
3.4:1
15.4%
Sources: Bed utilisation for referral hospitals; World Bank; GHG internal reporting;
Management Estimates; Ministry of Finance of Georgia; Frost & Sullivan 2015 WHO: Average of countries: Chile, Costa Rica, Czech Republic, Estonia, Croatia, Hungary,
Lithuania, Latvia, Poland, Russian Federation, Slovak Republic; BAML Global Hospital Benchmark, August 2014.
38 BGEO Group PLC Annual Report 2015
Strategic report Strategy
Opportunity: Georgian healthcare market and GHG market share evolvement
Hospitals
Ambulatories
Pharmaceuticals
GHG
strategy
Maintain dominant market
share in hospitals by capacity
and revenue
GHG replicating hospital
consolidation experience in
outpatient segment, with a first
mover advantage in a fragmented
market
Margin enhancement and growth
alongside with nominal GDP
e
u
n
e
v
e
R
y
t
i
c
a
p
a
C
GHG
market
shares
18.0%
33.0%
2015
Long-term
target
Bed market
share
26.6%
33.0%
2015
Long-term
target
1.0%
2015
17.0%
Long-term
target
15%
2015
>15%
Long-term
target
GEL 1.2 billion1
GEL 0.9 billion1
GEL 1.3 billion1
Hospitals (GEL million)
Ambulatories (GEL million)
GDP nominal (GEL billion)
CAGR 2003-2014: 13.7%
2014-2018: 11%
1
4
3
,
1
3
2
0
,
1
5
7
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1
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1
7
4
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6
3
4
6
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6
,
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9
8
4
,
1
CAGR 2003-2014: 17.9%
2014-2018: 16%
8
4
4
,
1
0
5
2
,
1
9
7
0
,
1
0
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7
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2
7
2
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4
2
5
.
7
4
2
.
3
4
6
.
9
3
CAGR 2003-2014: 1.8%
2015-2020: 9%
2
.
6
3
2
.
3
3
7
.
0
3
2
.
9
2
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.
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.
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.
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.
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%
6
.
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8
.
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0
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• Low utilisation (50-60%)
• Low equipment penetration
• Fragmented market
• System inefficiency (e.g. low
• Low outpatient encounters
• Fragmented market
• New prescription policy
nurse-to-doctor ratio)
• GHG: replicating hospital
• GHG: accelerated revenue
market share growth on
the back of well-invested
asset base
cluster model and
consolidation experience
in highly fragmented
ambulatory sector
Growth opportunities:
• Growing wholesale revenue
• Enhancing retail margin
• Expanding pharmacy footprint
GHG:
• Decreasing cost of
goods sold/services
• Enhancing retail margin
• Expanding pharmacy footprint
Market
Growth
drivers
1. Frost & Sullivan analysis, 2015
Annual Report 2015 BGEO Group PLC 39
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Our strategy continued
Investment business strategies
m2 Real Estate – a fast-growing, leading real estate developer in Georgia
Over the past several years, m2 Real
Estate has established itself as one of the
most recognisable and trustworthy
residential housing brands in the country.
For the next three years, the main priority
for m2 is to deliver capital return of US$
20-25 million by 2019 by:
• Continuing residential
developments – continuing to unlock
land value by developing housing
projects and liquidating existing land
plots, as well as to start development
of third-party lands. Currently, m2
owns land bank of US$ 43.4 million*,
with a capacity of c.5,200 apartments
(in addition to 2,510 apartments in
existing eight projects, both completed
and ongoing).
• the Growing yielding asset portfolio
– m2 will enhance its yielding asset
portfolio through two sources:
– Commercial space: accumulating
yielding assets, by mainly retaining
commercial real estate in residential
developments and acquiring
opportunistically and/or developing
high street retail, commercial and
office space, with capital gain upside
and c.10-12% annual yield.
– 3-star hotel development: m2 has
3-star hotel opportunity in Tbilisi
Ramada Encore exclusivity for
seven years and aims to develop
three hotels (3-star, select service
mixed-use hotels) in the next seven
years in Tbilisi and Kutaisi with
minimum room-count of 370 in
total, catering to budget travellers.
As hotels are mixed-use, m2
finances equity needs of the hotel
from the profits and land value
unlocked through sale of the
apartments in the same
development.
* Excludes hotel lands.
Develop three hotels in next seven years
in Tbilisi catering to budget travellers
Visitors in Georgia
25% CAGR 2003-2015
Limited supply
Last branded hotel opening in Tbilisi in 2012
• Wyndham Ramada
Anchor exclusivity
for seven years
• Equity investment
US$ 7 million
• Number of rooms – 370
• Investment per
room – US$ 70k
• Occupancy rate – 65%
(third-year stabilised)
• ADR – US$ 100
• ROE – 20%
8
9
8
,
5
2
9
3
,
5
6
1
5
,
5
8
2
4
,
4
Distribution of rooms in Tbilisi
by accommodation type, 2011
Other
accommodation
units (local)
74%
Internationally
branded hotels
26%
2
2
8
,
2
2
3
0
,
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
0
9
2
,
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0
,
1
3
6
7
0
6
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0
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2
3
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6
3
4
0
0
2
Foreign visitors (thousand persons)
Hydro business – complete 100MW, 4 HPPs with cost per MW not more than US$ 1.5 million by 2019
We aim to tap the renewable energy
opportunity that exists in Georgia by
investing in hydro power plant
development. The industry is highly
underpenetrated, with only 20-25% of
Georgia’s hydro resources being utilised.
It is relatively cheap to develop hydro
power stations in Georgia, at
approximately US$ 1.5 million, compared
to at least US$ 3.0 in central Europe.
diligence, but so far have actually spent
only about US$ 1 million. In the process,
we have established a strategic
partnership with industry specialists – RP
Global (Austria), who have more than 25
years of experience in the development,
financing and operation of Small Hydro
Power Plants in an international context.
BGEO has 65% share in the business, with
the remaining 35% owned by RP Global.
For the past two years we have been
actively engaged in planning and due
Our goal for the next five years is to
complete development of 100MW capacity
and identify additional 100MW
development capacity. We currently have
four hydropower plant projects, two of
which will start in the beginning of 2017,
with the launch scheduled in 2018.
Construction of the other two
hydropower plants will start later in 2017
and complete in 2019. Exit opportunities
include sale in parts or scaling up
(through second stage) and doing public
listing or strategic sale. We expect to
realise IRR of at least 25%.
Renewable Energy – five-year roadmap
Pipeline
2 ongoing projects – 105MW, 4 HPPs
Projects
Mestiachala 1 & 2
Estimated Capacity 100MW
50MW
Estimated Project Timeline
2017-2018
Zoti 1 & 2
55MW
2017-2019
Note: Project timeline includes only construction period. In general, construction period is preceded by a one to two-year pre-construction
period. On average 5% of total project cost is spent during this period on due diligence.
40 BGEO Group PLC Annual Report 2015
Strategic report Strategy Utility business – achieve EBITDA of GEL c.80 million in 2018 (from GEL 51 million in 2014)
Our utility business, GGU, where we acquired a minority 25%
stake in 2014, has ample room for efficiency improvements and
opportunities to grow. The primary source for the growth is cost
saving from reduction in water delivery losses to 40%, from current
50%; and double effect from water delivery loss reduction – selling
freed-up energy.
GGU EBITDA Dynamics (GEL millions)
CAGR 2014-2018
+10.6%
3
.
7
7
1
.
9
6
5
.
6
6
2
.
3
6
6
.
1
5
2014
2015
2016F
2017F
2018F
Beverages business – to launch beer production, within budget of US$ 37 million, by end of 2016
Teliani Valley is a leading wine producer in
Georgia, selling over three million bottles
of wine in 26 countries globally per annum,
with about 60% of its revenue coming from
exports. Teliani has a strong production and
distribution franchise, and we aim to leverage
this expertise in launching beer production in
partnership with Heineken. Teliani will produce
beer in Georgia and sell throughout the Caucasus
(c.20 million population). Note that Heineken
does not produce in either Caucasus or Turkey.
Of the c. US$ 38 million investment in beer
project, US$ 15 million is equity of which US$ 11
million is BGEO’s share. We project that our post
investment equity value in the entire business
of c. US$ 14 million will grow 5x in seven years,
targeting 25%+ IRR in five to seven years’ time.
We expect EBITDA to grow to US$ 12.3 million
in 2020, up from current US$ 1.9 million, with
growth primarily driven by the expansion into beer
segment. A trade sale seems the most likely exit.
Goal
Become leading beverages producer and distributor in Caucasus
Teliani
business
Strong existing franchise
New business line
Leading wine producer
With wide distribution platform
Launch beer production
• 3 million bottles sold annually
• US$ 8 million revenue in 2015
• US$ 1.7 million EBITDA in 2015
• 60% of sales from export
• 4,400 sales points
• Exporting to 26 countries,
including all FSU, Poland,
Sweden, Finland, USA,
Canada, Brazil, China,
Thailand, Singapore
• Launch beer production facility in Georgia
• 10-year exclusivity with Heineken
to sell in Georgia, Armenia and
Azerbaijan (17 million population)
Exclusive Heineken producer in Caucasus
Investment
Rationale
Strong management with proven
track record
l o s s - m a k i n g b u s i n e s s
i n 5 y e a r s
T u r n e d a r o u n d
a n d
i n c r e a s e d E B I T D A 3 x
4
.
3
1
.
3
5
.
2
0
.
1
0
.
2
7
.
1
3
.
1
7
.
0
-
9
.
0
-
2
.
0
3
.
0
Highly concentrated market
Domestic market segmentation
(Q1 2015)
7%
9%
5
.
1
9
.
0
9
.
0
31%
53%
2008
2009 2010 2011 2012 2013 2014
Net income, $mn
EBITDA, $m
Effes Georgia
Zedazeni
Argo
Other
Low consumption per capita
compared to peers
Beer consumption in peer countries
2014 (l/capita)
9
4
1
c
i
l
b
u
p
e
R
h
c
e
z
C
2
0
1
i
a
n
o
t
s
E
Peer average 71
3
8
0
8
7
7
4
7
3
7
8
6
5
6
2
6
i
a
n
a
m
o
R
i
a
n
e
v
o
S
l
i
a
s
s
u
R
a
i
r
a
g
u
B
l
i
a
n
a
u
h
t
i
L
i
n
a
p
S
i
e
n
a
r
k
U
l
d
n
a
a
e
Z
w
e
N
0
2
i
a
g
r
o
e
G
9
4
a
n
i
t
n
e
g
r
A
Annual Report 2015 BGEO Group PLC 41
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
About the GHG IPO
BGEO listed its healthcare subsidiary on the premium segment of the London Stock
Exchange (GHG:LN) in November 2015
GHG IPO was an important transaction for BGEO, as it represented the first realisation of BGEO’s
investment in non-banking businesses, and demonstrated the potential to unlock the significant value
described when the Group announced its new corporate strategy in December 2014. Following the
GHG IPO, BGEO holds a 65% stake in the company.
GHG story: creating single largest
healthcare player in Georgia
GHG is an exemplary story about how
we seize opportunities and unlock the
value in the Georgian corporate sector.
In five years, we created the single
largest healthcare player in Georgia and
established a clear exit path through
its IPO on the premium segment of the
London Stock Exchange in November
2015, achieving 121% IRR and 3.9x
money on our investment at IPO.
GHG’s story really started in 2011, when
the government reforms in the healthcare
sector created real opportunity for private
players. Until 2011, we primarily focused
on the medical insurance market and also
owned several ambulatory clinics, which
would service our insured clients. In 2007,
the government launched the first stage
of its targeted healthcare financing reform,
by purchasing medical insurance from
private insurance companies on behalf
of c.0.8 million economically vulnerable
citizens, giving boost to the medical
insurance industry. However, despite
growth in spending, the vast majority of
healthcare facilities in the country were
in very poor condition, seeing little to
no investment since the Soviet-era. We
had invested less than GEL 0.5 million in
the healthcare business at this stage.
GHG roadmap – creating single largest healthcare player
Year
Milestone
EV/EBITDA
Investment per bed
BGH investment
GEL million
Facilities and beds
i
s
s
e
n
s
u
b
e
h
t
g
n
s
i
i
l
a
n
o
i
t
u
t
i
t
s
n
I
Decision
to invest
Accelerate
growth
i
s
i
l
i
b
T
o
t
n
i
i
g
n
d
n
a
p
x
E
State infrastructure reform starts
2011
Started investing in hospitals
2012
2013
2014
2015
Merged with Block Georgia (non cash)
3.1x, GEL 74k
Imedi L acquisition
4.9x, GEL 47k
Investment to support organic growth
GEL 56k
State Universal Healthcare Programme starts
Acquired Caraps
6.0x, GEL 142k
0
9.6
22.9
0
32.5
Acquired Avante
3.7x, GEL 73k
82.4
Acquired Sunstone
GEL 99k
Acquired Traumatology
3.9x, GEL 134k
Acquired Block minority
Acquired HTMC
Acquired Deka
Launched ambulatory expansion strategy
IPO-ed
6.4x, GEL 206k
27.5
GEL 183k
110.0
145
530
206
409
60
578
152
60
450
80
6
9
8
10
1
4
1
1
1
1
3
Total (as of December 2015)
142.4
45
2,670
42 BGEO Group PLC Annual Report 2015
Strategic report Strategy
In 2011, the government launched
its healthcare infrastructure reform,
introducing incentives for private
companies to invest in renovation or
greenfield development of healthcare
facilities. At that time, having been
on both sides, in insurance and in
healthcare services, we already had
valuable insights into the industry and
were well-positioned and fast to take
advantage of the growth opportunity.
Hence, in 2011, the Board made a decision
to scale-up our healthcare operations, with
a synergistic business model of three types
of healthcare facilities (referral hospitals,
community hospitals and ambulatory
clinics) and medical insurance under one
umbrella, capturing patient flow along
the treatment pathway. In the next five
years, we grew our business through
greenfield developments, acquisitions and
renovations, investing a total of GEL 142.4
million. Most importantly, we were very
disciplined in our investments, investing
small at the beginning and always buying
cheap. We invested only GEL 32.5 million
during the first three years. Our first major
acquisition, Block Georgia was a non-
cash transaction at 3.1x-EBITDA valuation,
followed by the Imedi L acquisition for
GEL 9.6 million at 4.9x-EBITDA valuation,
achieving unparalleled scope relative to our
competition by the end of 2012. During the
first three years of investment, we tested
the concept and worked on our longer-
term business development strategy; spent
time on launching newly built or renovated
healthcare facilities, restructured and
integrated the acquired healthcare facilities
and researched other acquisition targets.
In 2012 and then in 2013, the government
launched two other stages of its financing
reform, eventually settling on the Universal
Healthcare Programme, which covers
the basic healthcare needs for the entire
population of Georgia. Enhanced financing
from the government gave a further boost
to the healthcare industry and as GHG
was already an established and major
player in the industry, we accelerated
investments and executed several key
transactions, investing another GEL
110.0 million between 2014 and 2015.
Since 2011, we have established a core
senior management team, hiring from
leading healthcare institutions in Georgia
and abroad, as well as promoting
internally and rotating key employees
within the Group to accomplish a robust
and diverse senior management team at
GHG. Furthermore, to create a natural
and long-term alignment of interest
between management and shareholders,
we replicated BGEO’s management
compensation structure at GHG level. We
award long-term vesting shares (up to five
years) to GHG’s management and make
compensation in shares a large proportion
of total annual compensation (e.g. 85-
90%). By putting strong management
in place, with the right incentives and
providing capital to fund growth, we
further widened the gap between GHG
and its competition. By the end of 2015,
GHG operated 2,670 hospital beds,
with a market share of 26.6% based on
number of beds, and insured 234,000
clients, with 38.4% market share based
on net insurance premium revenue.
In 2014, we started working on the GHG
IPO, in line with our strategy to fully or
partially exit from our investments in non-
banking businesses, with ultimate goal
to return the capital to our shareholders.
We replicated BGEO’s governance
structure at GHG, by putting a first class
Board in place, with diverse skill-sets and
expertise of the industry and the region.
Our experience of similar transactions at
BGEO, as well as constant engagement
with the investor community proved
essential in executing the GHG IPO – an
important milestone in the realisation of
BGEO’s investment business strategy.
Raising money for further development
of GHG’s business and crystallising the
value of GHG were our main goals, both
of which were successfully achieved
through GHG’s IPO in November 2015.
In November 2015, GHG successfully
priced its IPO and completed the premium
listing, raising a total of approximately
US$ 100 million in primary proceeds and
valuing GHG at a market capitalisation
of £218 million at the admission, with a
35% free float, following the exercise of
The Group achieved 121% IRR at GHG IPO
over-allotment option that represented
approximately 10% shareholding.
GHG received strong support from
a diversified and extremely high-
quality institutional investor base and
welcomed more than 100 new investors,
as it embarked on the next phase of
development. Following completion of
the IPO, the company was included in
the FTSE All-Share Index in 1Q 2016.
A public listing enhances GHG’s ability
to take advantage of the significant
market growth prospects of the Georgian
healthcare sector. Most of the primary
proceeds of approximately US$ 100 million
are being used to fund GHG’s immediate
growth plans, aimed at helping it to
achieve at least a doubling of 2015 revenue
by 2018. GHG’s clear growth vision,
combined with hospital expansion potential
and first mover advantage in the highly
fragmented and relatively underpenetrated
ambulatory segment, creates a highly
attractive investment opportunity in the
Georgian healthcare services industry.
BGEO has been a strong and committed
shareholder to the development of the
healthcare business for many years
and we intend to maintain this support
over the next few years, as GHG will be
working on delivering on its goal to more
than double 2015 healthcare services
revenue by 2018, while achieving 30%
EBITDA margin and capturing ample
growth opportunities beyond 2018.
GHG IPO project
name was
“iBolyt”
Doctor “iBolyt” is a
fictional character
from the Soviet
children’s poems.
The name may be
translated as “Ouch,
[it] hurts!”
2011-2015
2015
Invested
142
Investment (GEL million)
Valued
553
Valued (GEL million)
Achieved 3.9x money at IPO
Annual Report 2015 BGEO Group PLC 43
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Key performance indicators
A strong performance
Our KPIs for 2015 reflect a continuing strong performance in each
of our Banking and Investment Businesses, demonstrating
excellent customer lending growth with improving margins,
balance sheet strength and strong profitability, together with
substantial further progress in our Investment Businesses.
For more information on our financial
results, see page 70
Returns KPIs
Diversified revenue sources, a growing loan book and efficient
cost performance were the main drivers of the exceptional results
in terms of profitability against the backdrop of a weaker external
environment in 2015.
The resilience of NIM is a function of our distribution capabilities
and pricing power. The substantial growth of the loan book during
2015 enabled our NIM to withstand downward pressures and high
excess liquidity levels than in 2014. The resulting robust growth in
interest income, the further increased contribution of non-interest
income to our revenue, strong margins and improving cost
efficiency translated into 29.1% growth in profit.
In 2016 and beyond, we will continue to focus on profitable
earnings growth, to be driven by good levels of customer lending
growth without compromising asset quality, an increase in the
share of income from fee-generating operations and an expansion
of our investment businesses.
Profit (BGEO) (GEL million)
Return on Average Equity (Banking Business) (%)
310.9
21.7%
Profit is calculated in accordance with IFRS
and represents revenue less operating
expenses, cost of credit risk, net non-
recurring expenses and tax expense.
9
.
0
1
3
8
.
0
4
2
3
.
9
0
2
2013
2014
2015
Profit attributable to shareholders divided
by monthly average total equity attributable
to shareholders. Total equity attributable to
shareholders is made up of share capital,
additional paid-in capital, treasury shares,
retained earnings and other reserves.
9
.
9
1
6
.
0
2
7
.
1
2
2013
2014
2015
Earnings per share (BGEO) (GEL)
Net Interest Margin (Banking Business) (%)
7.93
7.7%
3
9
.
7
2
7
.
6
3
9
.
5
9
.
7
6
.
7
7
.
7
Profit attributable to shareholders
divided by weighted average
number of outstanding shares.
2013
2014
2015
Net interest income of the period (adjusted
for the gains or losses from revaluation of
interest rate derivatives) divided by average
interest-earning assets for the same period
2013
2014
2015
Dividend per share (BGEO) (GEL)
Dividend per share (BGEO) (GBP)*
2.40
0.68
0
4
.
2
0
0
.
2
0
1
.
2
2013
2014
2015
* The following GEL/GBP exchange rates are
used for presenting GBP amounts: 2015:
3.5492 as of 31 December 2015 (the actual
currency conversion date: 11 July 2016), 2015
dividends to be approved by shareholders at
the 2016 AGM; 2014: 3.5110/GBP as of 8 June
2015, the currency conversion date for the year
2014; 2013: 2.9815/GBP as of 9 June 2014, the
currency conversion date for the year 2013.
7
6
.
0
0
6
.
0
8
6
.
0
2013
2014
2015
44 BGEO Group PLC Annual Report 2015
Strategic report Strategy Efficiency KPIs
The shift to Express Banking, a technology-intensive remote
channel banking, together with integration of PrivatBank, is the
main driver of efficiency strategy for our Banking Business. Other
measures such as various investments in IT aimed at optimisation
of workflow processes and the introduction of cost centre
reporting procedures represent the cost control measures we
continue to deploy across the board in order to keep a tight grip
on costs.
Cost to Income ratio (Banking Business) (%)
Operating leverage (Banking Business) (%)
35.7%
16.6%
8
.
9
3
5
.
0
4
7
.
5
3
6
.
6
1
Operating expenses divided by revenue.
2013
2014
2015
Operating leverage is measured as the
percentage change in revenue less the
percentage change in operating expenses.
9
.
3
8
.
1
-
2013
2014
2015
Growth KPIs
The 20.9% loan book growth was mainly driven by our Retail
Banking business, which posted a 35.3% growth in the loan book
in 2015. Corporate Banking loan book decreased slightly at -1.4%
in 2015. We are targeting at least 20% growth of our Retail
Banking loan book over the medium term.
Net loan book (Banking Business) (% growth, y-o-y)
20.9%
5
.
4
2
9
.
0
2
1
.
4
1
Net loans to customer funds and DFIs
(Banking Business) (%)
90.8%
6
.
8
0
1
8
.
6
9
8
.
0
9
Net loans to customers and net finance
leases receivables at the end of the
year compared to the last year.
2013
2014
2015
Net loans to customers and net finance
leases receivables divided by amounts
due to customers and DFIs.
2013
2014
2015
Asset quality KPIs
Our asset quality worsened in 2015 as a result of the local
currency devaluation and overall economic turbulence in the
region, however retail loan book quality was resilient, as a result of
our continued prudent risk management policies. Cost of risk
stood at 2.7%. NPL coverage ratio adjusted for the discounted
value of collateral stood at a comfortable level of 120.6%.
Cost of Risk (Banking Business) (%)
2.7%
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.
7
.
2
3
.
1
2
.
1
2013
2014
2015
NPL Coverage Ratio adjusted for discounted value
of collateral (Banking Business) (%)
120.6%
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).
6
.
9
0
1
6
.
0
1
1
6
.
0
2
1
2013
2014
2015
Capital KPIs
In 2015, our Tier I Capital Adequacy ratio (Basel 2/3) stood at
10.9%, above the minimum 8% requirement. The risk weighted
assets increased by 16.1%, reflecting the 24.7% increase in interest
earning assets during the year. In 2016 and beyond, we intend to
maintain strong capital ratios, above the regulatory requirements.
Tier I Capital Adequacy ratio, Basel 2/3 (%)
Leverage (BGEO) (times)
10.9%
3.9
1
.
1
1
9
.
0
1
3
.
4
9
.
3
6
.
3
Basel 2/3 Tier I Capital Adequacy ratio: Tier
I Capital divided by risk weighted assets.
2014
2015
Leverage is calculated as total
liabilities divided by total equity.
2013
2014
2015
Annual Report 2015 BGEO Group PLC 45
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information BGEO risk management
We are exposed to risk and uncertainty which could have a material adverse effect on our business,
financial position, operational results and reputation as well as the value and liquidity of our shares.
We are committed to safeguarding the interests of our shareholders and understand that in order to
do this, a robust system of risk management and internal control is essential.
Overview
We identify, evaluate, manage and
monitor the risks that we face through an
integrated control framework consisting
of formal policies and procedures,
clearly delegated authority levels and
comprehensive reporting. The Board
confirms that our framework has been
in place throughout the year under
review and to the date of approval of
this Annual Report and Accounts and is
integrated into both our business planning
and viability assessment processes.
Our Board, supported by our Audit and
Risk Committees and senior management,
is ultimately responsible for the Group’s
risk management and internal controls.
We believe that in order to have an
effective risk management framework there
needs to be a strong risk management
culture within the Group. We have worked
to ensure that managing risk is engrained
in our everyday business activities. We
seek to create an environment where there
is openness and transparency in how we
make decisions and manage risks and
where business managers are accountable
for the risk management and internal
control processes associated with their
activities. Our culture also seeks to ensure
that risk management is responsive,
forward-looking and consistent.
Our framework
The Board’s mandate includes determining
the Group’s risk appetite and risk tolerance
as well as monitoring risk exposures to
ensure that the nature and extent of the
main risks we face are consistent with our
overall goals and strategic objectives. We
develop risk management strategies which
address the full spectrum of risks that
the Group faces. We are accountable for
reviewing the effectiveness of the systems
and processes of risk management and
internal control, with the Audit and Risk
Committees assisting in the discharge of
this responsibility. We also focus on the
resolution of any internal control failures
that may arise, although no significant
failures occurred during 2015 and the
period up to the date of this Annual Report.
The Group’s risk appetite is the amount
and type of risk that we are prepared
to seek, accept or tolerate. Our risk
appetite evolves over time to reflect new
risks and changes in external market
developments and circumstances.
46 BGEO Group PLC Annual Report 2015
Our control framework is the foundation
for the delivery of effective risk
management. At the Board, Committee
and senior management levels, we
develop formal policies and procedures
which explain the way in which risks
need to be systematically identified,
assessed, quantified, managed
and monitored. We clearly delegate
authority levels and reporting lines
throughout the management hierarchy.
Each business participates in the risk
management process by identifying
the key risks applicable to its business.
Through senior management, we
ensure that our employees are given
the appropriate training and knowledge
to perform their roles in line with the
framework we have developed.
On a day-to-day basis, management is
responsible for the implementation of
the Group’s risk management and other
internal control policies and procedures.
Based on our risk culture, managers
“own” the risks relevant to their respective
function. For each risk identified at any
level of the business, the risk is measured,
mitigated (if possible) in accordance
with our policies and procedures and
monitored. Managers are required to
report on identified risks and responses
to such risks on a consistent basis.
Senior management regularly review
the output from the bottom-up process
by providing independent challenge
and assessing the implementation
of the risk management and internal
control policies and procedures.
Comprehensive reporting forms an integral
part of our framework. Our reporting
process enables key risks to be escalated
to the appropriate level of authority and
provides assurance to the Committees and
the Board. Key developments affecting our
principal risks and associated mitigating
actions are reviewed quarterly (or more
often if necessary on an ad hoc basis if
outside of the regular reporting process)
by the Audit and Risk Committees, as
appropriate, and the Board. The principal
risks and uncertainties faced by the Group
are identified through this process.
A description of these principal risks
and uncertainties in addition to recent
trends and outlook as well as
mitigation efforts can be found on
pages 48 to 51.
Since the Bank is the Group’s largest
business and operates in the complex
financial services sector, its risk
management and internal control
framework is key to that of the Group.
A detailed description of the Bank’s
risk management and internal
control framework can be found
on page 99.
Internal control
As mentioned above, our Board is
responsible for reviewing and approving
the Group’s system of internal control
and its adequacy and effectiveness.
Controls are reviewed to ensure
effective management of strategic,
financial, operational and compliance
risk issues. Certain matters, such as the
approval of major capital expenditure,
significant acquisitions or disposals
and major contracts, among others,
are reserved exclusively for the Board.
The full schedule of matters specifically
reserved for the Board can be found on
our website, at http://bgeo.com/page/
id/67/schedule-of-matters-reserved-
for-the-board. With respect to other
matters, the Board is often assisted by
both the Audit and Risk Committees.
With respect to internal control over
financial reporting, including over the
Group’s consolidation process, our
financial procedures include a range of
system, transactional and management
oversight controls. Our businesses prepare
detailed monthly management reports
that include analyses of their results along
with comparisons to relevant strategic
plans, budgets, forecasts and prior results.
These are presented to and reviewed
by senior management. Each quarter,
the CFO of JSC BGEO Group and the
Bank as well as the finance team discuss
financial reporting and associated internal
controls with the Audit Committee, which
reports significant findings to the Board.
The Audit Committee also reviews the
quarterly, half-year and full-year financial
statements and corresponding press
releases and provides feedback to the
Board. The external and internal auditors
attend each Audit Committee meeting and
the Audit Committee meets regularly both
with and without management present.
Our Audit and Risk Committees monitor
internal control over operating and
compliance risk through discussions
Strategic report Strategy with the Chief Risk Officer and Head of
Compliance and other senior management
on a quarterly basis. Any key issues
identified are escalated to the Board. The
Board also receives regular presentations
directly from the head of each business.
Important risk and internal control issues
are addressed in such presentations.
The Group’s internal audit function
reviews a number of areas of risk
pursuant to a programme approved by
the Audit Committee. Any issues or risks
arising from an internal audit review are
reviewed by the Audit Committee and
appropriate actions are undertaken to
ensure satisfactory resolution. The Head
of Internal Audit has a direct reporting line
to the Chairman of the Audit Committee.
Although we did not identify any significant
weaknesses or failings, we continuously
strive to improve our framework as
circumstances change and new risks
emerge. With the assistance of the
Audit Committee, external consultants
were engaged in 2015 to perform an
audit of the Group’s IT and IS systems,
which included a review of our cyber-
security controls. The report concluded
that our IT and IS controls overall are
strong. We discussed the results and
recommendations of the audit report with
the Audit Committee and management,
who subsequently developed a plan to
address the main recommendations.
With the assistance of the Audit
Committee, we will continue to monitor
management’s implementation of this plan.
Our systems of internal control are
also supported by our Whistleblowing
Policy, which allows employees to
report concerns on an anonymous
basis. The Audit Committee approves
the Whistleblowing Policy on an
annual basis and receives quarterly
reports from the Head of Compliance
on any significant issues raised.
Effectiveness review
Each year, we review the effectiveness
of our risk management processes
and internal control systems, with
the assistance of the Audit and Risk
Committees. This review covers all material
systems, including financial, operational
and compliance controls. The latest review
covered the financial year to 31 December
2015 and the period to the approval of
this Annual Report and Accounts.
We obtained assurance from
management, Internal Audit, our external
auditors and other external specialists.
The Board is able to conclude with
reasonable assurance that the appropriate
internal control and risk management
systems were maintained throughout
the year and operated effectively. The
review did not identify any significant
weaknesses or failings in the systems. We
are satisfied that our risk management
processes and internal control systems
processes comply with the UK Corporate
Governance Code 2014 (the Code)
and the FRC’s (Financial Reporting
Council) guidance on Risk Management,
Internal Control and Related Financial
and Business Reporting.
Committee reports
As noted throughout this discussion,
both the Audit and Risk Committees
play an essential role in implementing
effective risk management and internal
control. Each Committee has described
this work in their Committee report.
The Audit and Risk Committee
Reports can be found on pages 100
to 103 and pages 104 to 105,
respectively.
Going concern statement
The Group’s business activities, together
with the factors likely to affect its
future development, performance and
position are set out on pages 2 to 85.
After making enquiries, the Directors
confirm that they have a reasonable
expectation that BGEO and the Group,
as a whole, have adequate resources
to continue in operational existence for
the foreseeable future. Accordingly, they
continue to adopt the going concern
basis in preparing the accompanying
consolidated financial statements.
Viability statement
In accordance with provision C.2.2 of
the Code, the Directors have assessed
the viability of the Group over a three-
year period beginning 1 January 2016,
being the first day after the end of the
financial year to which this report relates.
This assessment has taken into
account the:
• Group’s current financial and
operational condition, including
capital allocation;
• Group’s future prospects;
• Board’s risk appetite;
• Group’s strategy as set out
on pages 30 to 41;
• Group’s principal risks and
uncertainties, principally those
related to the devaluation of the
Lari and dollarisation of our loan
book, and how they are managed,
as set out on pages 48 to 51;
• effectiveness of our risk
management framework and
internal control process; and
• downside stress testing performed
for the assessment period, which
involved modelling the impact of a
combination of severe and plausible
adverse scenarios as well as the
availability and likely effectiveness of
the mitigating actions that could be
taken to avoid or reduce the impact or
occurrence of the identified underlying
risks to which the Group is exposed.
The Directors have determined that a
three-year period to 31 December 2018
is an appropriate period over which
to provide its viability statement as
the Board considers its strategic plan,
financial budgets and forecasts annually
and on a rolling three-year basis.
Based on the analysis described
above, the Directors confirm that they
have a reasonable expectation that the
Company will be able to continue in
operation and meet its liabilities as they
fall due over the three-year period from
1 January 2016 to 31 December 2018.
Annual Report 2015 BGEO Group PLC 47
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Principal risks and uncertainties
The risks identified below are those that the Board considers to be the most relevant to the Group in
relation to their potential impact on achievement of its strategic objectives.
All of the risks set out below could materially affect the Group, its businesses, future operations and financial condition and could
cause actual results to differ materially from expected or historical results. The risks below are not the only ones that the Group will
face. Some risks are not yet known and some currently not deemed to be material could later become so. In accordance with the
provisions of the Code, the Board has taken into consideration the principal risks in the context of determining whether to adopt the
going concern basis of accounting and when assessing the prospects of the Group for the purposes of the Viability Statement.
The Viability Statement can be found
on page 47 of this Strategic Report.
Risks and uncertainties
Trend and outlook
Mitigation
We may be adversely affected by
continued devaluation of the Lari
in addition to general deterioration
of global, regional and Georgian
economic conditions.
In 2015, the Lari depreciated against the
US Dollar by 22%. Our Banking Business
NPLs to gross loans increased to 4.3%
as of 31 December 2015, compared to
3.4% as of 31 December 2014, and our
cost of risk ratio increased to 2.7% in
2015 compared to 1.2% in 2014. There
is a risk that any future devaluation of the
Lari against the US Dollar may adversely
affect the quality of our loan portfolio, as
our corporate loan book and mortgage
portfolio is heavily US Dollar-denominated
and many of our customers earn Lari.
We are also affected by other
macroeconomic and market conditions
globally, regionally and in Georgia. Global
markets conditions remain volatile and
growth has recently slowed in many
emerging economies, including Georgia.
In addition to currency exchange rates,
other macroeconomic factors relating
to Georgia, such as GDP, inflation and
interest rates, may have a material impact
on loan losses, our margins and customer
demand for our products and services.
In the last quarter of 2015, the GEL/
US$ exchange rate stabilised. Since
1 January 2016, the Lari has appreciated
against the US Dollar. We are, however,
unable to predict future changes in
the GEL/US$ exchange rate.
We continuously monitor market conditions
and review market changes. We also
perform stress and scenario testing to
test our financial position in adverse
economic conditions, which includes
a GEL/US$ exchange rate of 2.7/1.
Global and regional economic
conditions remain volatile and there is
significant economic uncertainty.
We also establish limits on possible
losses for each type of operation and
monitor compliance with such limits.
Given our strong liquidity position,
we believe that we will be able
to manage risk related to our US
Dollar-denominated loan book.
In addition, the NBG requires banks to
hold additional capital to mitigate potential
risk associated with foreign currency
loans to customers that earn Lari.
Real GDP growth in Georgia decreased to
2.8% in 2015 from 4.6% in 2014, according
to Geostat. This decrease was due to a
weaker external economic environment,
which was reflected in weaker remittances,
lower net exports from Georgia and lower
FDI. Despite lower GDP growth in Georgia
in 2015, we believe that Georgia was
particularly resilient in the context of the
economic turbulences in the region.
The IMF has predicted that GDP growth in
the region is expected to be 0.5% in 2016,
increasing to approximately 2.0% in 2017.
With respect to Georgia alone, the IMF has
predicted that GDP growth is expected to
be 3.0% in 2016 and to average 5.0% in
2017-2020. We believe that real GDP growth
in Georgia will be in the range of 3.0% to
4.5% in 2016 as a result of healthy market
fundamentals, new investment opportunities,
increased tourism and government reform
aimed at tax and customs liberalisation.
Average annual inflation was 4.0% in 2015
and is expected to improve in 2016.
48 BGEO Group PLC Annual Report 2015
Strategic report Strategy Principal risks and uncertainties
Risks and uncertainties
Trend and outlook
Mitigation
Our loan book is heavily US Dollar-
denominated, the quality of which
may deteriorate as a result of slower
economic growth and Lari devaluation.
As at 31 December 2015, approximately
90% and 54% of our corporate loan
book and retail loan book, respectively,
was denominated in foreign currency
(predominantly US Dollars), while US
Dollar income covered approximately
50% of the total loan book.
The quality of our loan book is affected
by changes in the creditworthiness of our
customers, the ability of our customers
to repay their loans on time, the statutory
priority of claims against customers, our
ability to enforce our security interests
on customers’ collateral and the value of
such collateral should such customers
fail to repay their loans, as well as factors
beyond our control such as economic
instability. Depreciation of the Lari against
the US Dollar may result in customers
having difficulty repaying their loans.
Our impairment charges and, in turn,
our cost of credit risk, may increase if a
single large borrower defaults or a material
concentration of smaller borrowers default.
In 2015, we saw an increase in foreign
currency (predominantly US Dollar) NPLs in
both our retail and corporate loan portfolios,
principally as a result of slower economic
growth opposed to the Lari devaluation.
During the same period, we also saw a
47.9% and 15.1% increase in foreign currency
denominated deposits on a nominal basis
and constant currency basis, respectively.
Foreign currency NPLs as a % of gross
loans in retail banking and corporate
banking increased by 0.3% and 2.2%,
respectively, as of 31 December 2015
compared to 31 December 2014.
In 2015, we saw significant retail loan
growth of 35.3%, as a result of the success
of our Express Banking strategy and the
acquisition of PrivatBank. The acquisition of
PrivatBank increased the number of retail
banking NPLs, but we do not view this as
significant when compared to loan book
growth. Retail banking default rates remain
relatively low as our retail banking clients
prefer to save in US Dollars and also receive
remittances in US Dollars, which constitute
a principal source of income for our clients.
We have credit policies and procedures
in place which incorporate prudent
lending criteria aligned with our risk
appetite to effectively manage risk.
These policies and procedures are
reviewed frequently and amended as
necessary to account for changes in the
economic environment or other factors.
Our Credit Committees set counterparty
limits by the use of a credit risk
classification and scoring system and
approve individual transactions. The credit
quality review process is continuous and
provides early identification of possible
changes in the creditworthiness of
customers, potential losses and corrective
actions needed to reduce risk.
We also stress test our loan book to
estimate the size of the portfolio that
may be impaired. In light of the Lari to
US Dollar devaluation, we will continue to
stress test using a GEL/US$ exchange
rate of 2.7/1. We allocate 75% more capital
to the foreign currency loans of clients
who earn income in Lari and discount
real estate collateral values by 20%.
The increase in foreign currency NPLs in
our corporate banking business resulted
from slower economic growth and our
strategic decision in the second half of 2015
to decrease corporate banking lending in
order to reduce our exposure and improve
our ROAE, which we successfully did.
Given our strong liquidity position, we
believe that we will be able to manage risk
related to our US Dollar-denominated loan
book by reprofiling such loans. Potential
reprofiling may include extending maturities
and/or converting US Dollar-denominated
loans into Euro-denominated loans.
In 2015, we also significantly increased
our NPL coverage ratio (83.4% as
of 31 December 2015 compared to
67.5% as of 31 December 2014).
The quality of our loan book and our future
cost of risk is dependent on macroeconomic
conditions and may deteriorate if conditions
worsen. Devaluation of the Lari against the
US Dollars may cause our customers to face
difficulty in meeting their payment obligations.
We will also continue to expand our
Lari and Euro-denominated loan book
in order to offset risk associated with
our US Dollar-denominated loan book.
In particular, we actively work with
IFIs to raise long-term Lari funding to
increase our Lari-denominated loans.
Annual Report 2015 BGEO Group PLC 49
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Principal risks and uncertainties continued
Risks and uncertainties
Trend and outlook
Mitigation
The local economy and our business
may be adversely affected
by regional tensions.
Georgia shares borders with Russia,
Azerbaijan, Armenia and Turkey and
has had ongoing disputes in the
breakaway regions of Abkhazia and
the Tskhinvali Region/South Ossetia,
and with Russia. These disputes have
led to sporadic violence and breaches
of peacekeeping operations. Regional
tensions could have an adverse effect on
the local economy and our business.
Despite tensions in the breakaway territories,
Russia has opened its market to Georgian
exports. Russia and Ukraine’s relationship
has continued to deteriorate. As a result,
there is significant uncertainty as to how
and when the conflict between Russia
and Ukraine will be resolved. During 2015,
Georgia delivered real GDP growth of 2.8%,
whilst inflation was maintained below the
5% target range. Foreign Direct Investment
continued to be strong, tourist numbers
– a significant driver of US Dollar inflows
for the country – continue to rise and,
as a result, the Georgian Government’s
fiscal position continues to be strong.
One of the most significant changes in
exports was a shift away from the Russian
market after Russia’s 2006 embargo.
In 2014, Georgia and the EU signed an
association agreement introducing the deep
and comprehensive free trade agreement
(DCFTA), effective since 1 September 2014,
which is intended to simplify Georgia’s
access to the EU market. The Government
continues to maintain strong relationships
with international development partners.
An ongoing IMF programme, introduced in
July 2014, is intended to help implement the
government’s economic reform programme
and aims to reduce macroeconomic
vulnerabilities, increase policy buffers
and support growth, while making the
economy more resilient to external shocks.
Risks and uncertainties
Trend and outlook
Mitigation
Our businesses are currently in compliance
with all applicable laws and regulations.
Compliance with changes in capital adequacy
requirements and other regulatory ratios may
be affected by factors outside of our control,
including but not limited to a weakening
of the global and Georgian economies.
In October 2014, an anti-monopoly agency
was established and anti-monopoly
legislation was implemented in respect of
certain non-banking operations. We expect
that such legislation may have an impact on
our non-banking operations acquisitions as
we will be required to seek permission to
proceed with certain future acquisitions.
As healthcare legislation is continuously
evolving, we expect that additional regulations
will be adopted. We, however, cannot predict
what additional regulatory changes will be
introduced in the future or their effect.
Continued investment in our people and
processes is enabling us to meet our
regulatory requirements and places us
well to respond to changes in regulation.
In line with our integrated control
framework, we carefully evaluate the impact
of legislative and regulatory changes
as part of our formal risk identification
and assessment processes and, to the
extent possible, proactively participate
in the drafting of relevant legislation.
As part of this process, we engage in
constructive dialogue with regulatory
bodies, where possible, and seek external
advice on potential changes to legislation.
We then develop appropriate policies,
procedures and controls as required
to fulfil our compliance obligations.
Our compliance framework, at all levels,
is subject to regular review by internal
audit and external assurance providers.
We face regulatory risk.
Our businesses are highly regulated.
Our banking operations must comply
with capital adequacy and other
regulatory ratios set by our regulator, the
NBG, including reserve requirements
and mandatory financial ratios.
Our ability to comply with these
regulations may be affected by a number
of factors, including but not limited to
increases in minimum capital adequacy
ratios imposed by the NBG, our ability
to raise capital, losses resulting from
a deterioration in our asset quality, an
increase in expenses and a decline in
the values of our securities portfolio.
We also provide other regulated financial
services and offer financing products,
including brokerage and pension fund
operations, insurance and services such as
asset management, all of which are subject
to governmental supervision and regulation.
With respect to our healthcare operations,
there have been a number of reforms in
the Georgian healthcare services market,
including but not limited to the introduction
of a Universal Healthcare Programme
(UHC). It is possible that the Government
may amend the UHC to enhance coverage
and it may introduce new licensing or
accreditation requirements, which may
adversely affect our healthcare services
and health insurance businesses.
50 BGEO Group PLC Annual Report 2015
Strategic report Strategy Principal risks and uncertainties continued
Risks and uncertainties
Trend and outlook
Mitigation
We are subject to operational risk.
The proper functioning of our systems, risk
management, internal controls, accounting,
customer service and other information
technology systems, are critical to our
operations. We are highly dependent on
our information technology systems. Cyber
threats show an increasing trend. We are
also subject to the risk of incurring losses
or undue costs due to human error, criminal
activities (including fraud and electronic
crimes), unauthorised transactions,
robbery and damage to assets.
Over the past few years, as our operations
have expanded, we have seen an increase
in external fraud, although losses from such
frauds have not increased significantly.
Cyber-security threats have also increased
year on year, but have not affected our
operations. It is expected that such threats
will continue to increase, which will require
us to closely monitor such threats.
Money laundering has also increased
globally and will be continuously monitored
by our AML compliance department.
We have an integrated control framework
encompassing operational risk
management and control, information
technology and information security,
AML compliance and physical
security, each of which is managed
by a separate department.
We identify and assess operational risk
categories within our risk management
framework and internal control processes,
identifying critical risk areas or groups of
operations with an increased risk level. In
response to these risks, we develop and
implement policies and security procedures.
We carry out regular IT and IS checks
internally and with the assistance
of external consultants. We have
sophisticated anti-virus and firewalls,
regularly conduct penetration testing
and have back-up disaster recovery
and business continuity plans in place
across the Group. Access control and
password protections are also in place.
Our internal audit function provides
assurance on the adequacy and
effectiveness of our risk management
internal controls. Operational risk is a
regular agenda for the Audit Committee.
Annual Report 2015 BGEO Group PLC 51
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Bank risk management
Overview
The banking business is the principal driver of the Group’s revenue and operates in the complex
financial services sector – its risk management and internal control framework is fundamental to that
of the Group.
The BGEO Board, supported by our
BGEO Audit and Risk Committees
and senior management, is ultimately
responsible for the Group’s risk
management and internal controls.
Formal policies and procedures have
been developed at the BGEO level, with
the help of senior management, which
explain the way in which risks need to
be systematically identified, assessed,
quantified, managed and monitored.
Clearly delegated authority levels and
reporting lines have been established
and comprehensive reporting forms an
integral part of the BGEO risk management
framework and internal control processes.
Each business participates in the risk
management process by identifying the
key risks applicable to its business.
A detailed description of the BGEO
risk management control framework
can be found on pages 46 to 47 of
the Strategic Report.
The work undertaken by the Bank’s
risk management bodies feeds back
directly to BGEO and certain banking
related risks have been identified
in the Group’s Principal Risks and
Uncertainties, which can be found on
pages 48 to 51 of the Strategic Report.
Given the significance of the banking
business, the risk management and
internal control framework in place at
the Bank is described in this section.
The role of the Bank in the overall risk
management structure
Management of risk is fundamental to
the banking business and is an essential
element of the Group’s operations.
The main risks inherent in the Bank’s
operations are credit risk, liquidity risk,
market risk (including currency and
foreign exchange rate risks), operational
risk and legal risk. The following is a
description of the Bank’s risk management
policies and procedures in respect to
those risks. Business risks such as
changes in the environment, technology
and industry are monitored through the
Group’s strategic planning process.
The Bank’s risk management system
is based on the principle of continually
assessing risk throughout the life of any
operation and includes such stages as:
• risk identification;
• quality and quantity assessment
of a particular risk;
• determination of an acceptable risk
level;
• placement of authority limits and
creation of reserves;
• use of collateral;
• ongoing monitoring and control
allowing efficient adjustments in
case of any negative changes in the
conditions on which the preliminary
risk assessment was made; and
• analysis of efficiency of the
risk management system.
Bank risk management bodies
The principal risk management bodies
of the Bank are the: Supervisory Board,
Audit Committee, Management Board,
Risk Committee, Internal Audit, Treasury
Committee, Credit Committee, Asset
and Liability Management Committee
(the ALCO), Compliance and the
Bank’s Legal Department. Each of the
Supervisory Board, Audit Committee
and Risk Committee perform similar
roles as the BGEO Board, BGEO
Audit Committee and BGEO Risk
Committee, but on the Bank level.
Management Board. The Management
Board has overall responsibility for
the Bank’s asset, liability and risk
management activities, policies and
procedures. In order to effectively
implement the risk management system,
the Management Board delegates
individual risk management functions
to each of the various decision-making
and execution bodies within the Bank.
Internal Audit Department. The
Internal Audit Department is responsible
for the annual audit of the Bank’s risk
management, internal control and
corporate governance processes,
with the aim of reducing the levels of
operational and other risks, auditing the
Bank’s internal control systems, and
detecting any infringements or errors on
the part of the Bank’s departments and
divisions. It examines both the adequacy
of and the Bank’s compliance with those
procedures. The Bank’s Internal Audit
Department discusses the results of all
assessments with management, and
reports its findings and recommendations
to the Bank’s Audit Committee.
The Bank’s Internal Audit Department is
independent of the Bank’s Management
Board. The Head of the Bank’s Internal
Audit Department is appointed by the
Bank’s Supervisory Board and reports
directly to the Bank’s Audit Committee.
The Bank’s Internal Audit Department
has 13 employees. The Bank’s Internal
Audit Department audits all of the Bank’s
subsidiaries, apart from BNB, which
has its own internal audit department.
As part of its auditing procedures,
the Bank’s Internal Audit Department
is responsible for the following:
•
identifying and assessing potential
risks regarding the Bank’s operations;
• reviewing the adequacy of the
existing controls established in
order to ensure compliance with the
Bank’s policies, plans, procedures
and business objectives, as well as
to current legislation and regulation
and professional norms and ethics;
• developing internal auditing
standards and methodologies;
• carrying out planned and random
inspections of the Bank’s
branches and subdivisions and
auditing its subsidiaries;
• analysing the quality of the
Bank’s products;
• reviewing the reliability of the
Bank’s information technology
systems in accordance with a
predetermined schedule;
• assessing the reliability and
security of financial information;
• monitoring the Bank’s internal
controls and reporting procedures;
• participating in external audits
and inspections by the NBG;
• making recommendations to
management and the Audit Committee
on the basis of external and internal
audits to improve internal controls;
• monitoring the compliance of the
Bank with the NBG regulations; and
• monitoring the implementation of
auditors’ recommendations.
52 BGEO Group PLC Annual Report 2015
Strategic report Strategy
Risk management bodies of Bank of Georgia
Supervisory Board
of Bank of Georgia
Risk Committee
Audit Committee
Internal Audit
Credit Committee
Management Board
Asset and Liability Management
Committee
Credit risk
management
Operational risk
management
Treasury
Anti-money
laundering
Legal
Quantitive risk
management and
risk analytics
in the Bank’s overall exposure to a
borrower up to US$ 100,000. The third
tier Micro and SME Credit Committee
approves loans resulting in the Bank’s
overall exposure to a borrower in the range
of US$ 100,000 to US$ 1,200,000. The
Committee is chaired by the Risk Manager,
with mandatory participation from either
the Head of the Credit Risk Analysis Unit or
the Head of the Credit Risk Management
Department (or his or her deputy) for
exposures exceeding US$ 500,000.
Treasury. Treasury is responsible for
managing the Bank’s assets and liabilities
and its overall financial structure and is
also primarily responsible for managing
funding and liquidity risks of the Bank.
Credit Committee. The Bank has three
credit committees (together, the Credit
Committees), each one supervising and
managing the Bank’s credit risks in respect
of retail and investment management
loans, corporate loans and counterparty
loans. These three committees are:
the Retail Banking Committee, the
Corporate Banking Credit Committee
and the Financial and Governmental
Counterparty Risk Management
Committee (FGCRMC), established in
April 2014. FGCRMC manages, monitors
and controls counterparty risk of financial
and governmental counterparties of
Bank of Georgia. Each Credit Committee
approves individual loan transactions.
Each Credit Committee is comprised of
tiers of subcommittees. The FGCRMC
comprises two tiers of subcommittees.
The Committee consists of five members
– Chief Risk Officer, Chief Financial
Officer, Head of Quantitative Risk
Management, Head of Treasury and
Head of Trade Finance, and a majority
of votes is enough for approval. If the
potential exposure exceeds US$ 10.0
million, then the decision is deferred
to the Asset and Liability Management
Committee (ALCO). The Credit Committee
for retail loans comprises four tiers of
subcommittees. (For risk management
purposes, investment management loans
are classified as retail loans.) The Credit
Committee for corporate loans comprises
three tiers of subcommittees. Participation
of the CEO is required for exposures
exceeding US$ 8.0 million. All exposures
to single group borrowers over US$ 25.0
million require approval by the Supervisory
Board. Lower tier subcommittees meet
on a daily basis, whereas higher tier ones
typically meet three to four times a week.
Each of the subcommittees of the Credit
Committees makes its decisions by a
majority vote of its respective members.
Furthermore, the Credit Committee for
Micro and SME loans comprises three
tiers of subcommittees, and falls under
the Credit Committee for retail loans. The
first tier Micro and SME Credit Committee
is chaired by the Head of the Group of
the Micro and SME Lending Department
and approves loans resulting in the Bank’s
overall exposure to a borrower of up to
US$ 15,000. A loan officer, who submits
a loan application/project to the Credit
Committee, does not have right to vote
for the approval of the loan. The second
tier Micro and SME Credit Committee is
chaired by the Micro and SME Department
representative (Head of the Micro and SME
Department, Deputy Head of department,
coordinator) and approves loans resulting
Annual Report 2015 BGEO Group PLC 53
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Bank risk management continued
Credit Committee tiers of subcommittees for Retail and Corporate Banking loans
Subcommittee Chair
Approval limit for Corporate Banking loans (US$)
Tier I
Risk Manager of the relevant Credit Risk Management
Less than US$ 500,000 for existing and new borrowers
Tier II
Head of the Credit Risk Analysis unit
Tier III
CEO/CRO
Between US$ 500,000 and US$ 1.5 million for existing and new
borrowers
Greater than US$ 1.5 million for existing and new borrowers
Subcommittee Chair
Approval limit for Retail Banking loans (US$)
Tier I
Risk Manager of the relevant Credit Risk Management
Less than US$ 150,000
Tier II
Deputy Head of Credit Risk Management department
Between US$ 150,000 and US$ 300,000 for retail loans
Tier III
Director of the Credit Risk Management department
Between US$ 300,000 and US$ 2.0 million
Tier IV CEO/CRO
Greater than US$ 2.0 million
The Problem Assets Committee is
chaired by one of the following: (1st
level) the Head of the Problem Loan
Management Department; (2nd and
3rd level) the Deputy CEO (Chief Risk
Officer). The Problem Loan Management
Department manages the Bank’s
exposures to problem loans and reports
to the Deputy CEO (Chief Risk Officer).
The Litigation Team Committee is chaired
by one of the following: (1st level) Deputy
Head of the Legal Department/Head of
the Litigation Team; (2nd level) Head of the
Legal Department; (3rd level) Head of the
Credit Risk Management Department; (4th
level) Deputy CEO (Chief Risk Officer). This
Committee is responsible to take decisions
on the cases which are managed by the
Litigation Team and are subject of litigation.
The Corporate Recovery Committee is
chaired by the Deputy CEO (Chief Risk
Officer) and is responsible for monitoring
all of the Bank’s exposures to loans that
are being managed by the Corporate
Recovery Department. The Corporate
Recovery Department reports to the
Deputy CEO (Corporate Banking).
Asset and Liability Management
Committee (ALCO). The ALCO is the core
risk management body that establishes
policies and guidelines with respect
to capital adequacy, market risks and
respective limits, funding liquidity risk
and respective limits, interest rate and
prepayment risks and respective limits,
money market general terms and credit
exposure limits, designs and implements
respective risk management and stress
testing models in practice and regularly
monitors compliance with the pre-set risk
limits, and approves treasury deals with
non-standard terms. Specifically, ALCO:
• sets money-market credit
exposure/lending limits;
• sets open currency position
limits with respect to overnight
and intraday positions;
• establishes stop-loss limits for foreign
currency operations and securities;
• monitors compliance with the
established risk management models
for foreign exchange risk, interest
rate risk and funding liquidity risk;
• sets ranges of interest rates for
different maturities at which the
Bank may place its liquid assets
and attracts funding; and
• reviews different stress tests and
capital adequacy models prepared
by the Finance Department.
The ALCO is chaired by the CEO and
sits at any time deemed necessary, with
decisions made by a majority vote of its
members. ALCO members include the
CEO, Deputy CEO Finance, Deputy CEO,
Chief Risk Officer, Deputy CEO Corporate
and Investment Banking, Deputy CEO,
Retail Banking, the Head of the Finance
Department, the Head of the Treasury
Department and the Head of the Funding
Department. The ALCO reviews financial
reports and indices including the Bank’s
limits/ratios, balance sheet, statement
of operations, maturity gap, interest rate
gap, currency gap, foreign exchange risk,
interest rate risk and funding liquidity risk
reports, total cash flow analyses, customer
cash flow analysis, and concentration
risk analysis, for the past periods as
well as future projections and forecasts,
other financial analysis and further
growth projections on a monthly basis.
Regulatory capital requirements in
Georgia are set by NBG and are applied
to the Bank on a stand-alone basis. NBG
requires the Bank to maintain a minimum
Total Capital Adequacy ratio of 10.5%
of risk-weighted assets and a minimum
Tier I Capital Adequacy ratio of 8.5% of
risk-weighted assets, both computed
based on the Bank’s stand-alone special
purpose financial statements prepared
in accordance with NBG regulations and
pronouncements. On 30 June 2014, the
NBG introduced new regulation aimed
at replacing its old regulation, which was
developed independently from international
committees and organisations and was
not based on the Basel Accord. The new
capital regulation is based on the Basel
Accord 2/3, with material regulatory
discretions applied by the NBG. Pillar
1 requirements of the new regulation
came into force on 30 June 2014. The
period starting 30 June 2014 through
31 December 2017 was declared as a
transition period. During the transition
period the Bank will be required to comply
with both old and new capital regulations
of the NBG. Pillar II of the Basel Accord
2/3, which entails implementation of
the Internal Capital Adequacy Process
(ICAAP), is planned to be introduced in
2016. The old regulation will be completely
phased out by 1 January 2018.
ALCO is the key governing body for the
capital adequacy management as well
as for the respective risks identification
and management. ALCO establishes
limits and reviews actual performance
over those limits for both NBG as well
as Basel I capital adequacy regulations.
The Finance Department is in charge of
regular monthly monitoring and reporting
over NBG and Basel I capital adequacy
compliance with original pronouncements
as well as with ALCO policies. Capital
adequacy management is an integral part
of the Bank’s actual monthly reporting
as well as the Bank’s annual and semi-
annual budget approval and budget review
processes. The Finance Department
prepares NBG and Basel I and Basel
II – III capital adequacy actual reports
as well as their forecasts and budgets,
as well as different stress scenarios for
both regulations, while ALCO and the
Management Board regularly review them,
identify risks, issue recommendations
or propose amendment measures.
54 BGEO Group PLC Annual Report 2015
Strategic report Strategy Legal Department. The Legal
Department’s principal purposes are to
ensure that the Bank’s activities conform
to applicable legislation and to minimise
losses from the materialisation of legal
risks. The Legal Department is responsible
for the application and development of
mechanisms for identifying legal risks in
the Bank’s activities in a timely manner,
the investigation of the Bank’s activities
in order to identify any legal risks, the
planning and implementation of all
necessary actions for the elimination
of identified legal risks, participation
in legal proceedings on behalf of
the Bank where necessary and the
investigation of possibilities for increasing
the effectiveness of the Bank’s legal
documentation and its implementation
in the Bank’s daily activities. The Legal
Department is also responsible for
providing legal support to structural units
of the Bank and/or its subsidiaries.
Anti-Money Laundering (AML)
Compliance. The Bank’s AML
Compliance Department is responsible
for the implementation of the Bank’s AML
programme (including the development of
AML policies and procedures, transaction
monitoring and reporting and employee
training) throughout the Bank and its
subsidiaries. The AML programme
is based on recommendations and
requirements of international organisations
including FATF and OFAC, as well as local
regulations. The Bank’s Internal Audit
Department makes annual assessments
of the Bank’s AML systems and provides
independent assurance of internal controls.
The Bank has adopted risk-based
approach in its policies and procedures
aimed at preventing money laundering
and terrorist financing, including a general
anti-money laundering policy and rules
on counteracting money laundering and
financing of individuals and legal entities
engaged in terrorist activities, as well as
procedures for reporting to the Financial
Monitoring Service of Georgia (FMS),
a legal entity of public law. The Bank’s
risk-based approach means that it applies
enhanced due diligence procedures if it
determines that there is a significant risk
that particular customers are engaged in
money laundering or financing terrorism.
The Bank is obliged to notify the FMS
of all transactions that are subject
to monitoring. These reports are
currently filed in electronic form in an
offline mode by the AML Compliance
Department, the reporting process is
fully automated, and is supported by
the special software application.
Bodies implementing the risk
management system
The Bank’s risk management system is
implemented by the Finance Department,
Quantitative Risk Management and Risk
Analytics Department, Treasury, Credit
Risk Management, Operational Risk
Management and Control, Legal, AML
Compliance and Security departments
and other departments. The Reporting
and Analysis Unit reports to the Head of
the Finance Department. The Finance
Department and the Treasury Department,
as well as AML Compliance Department
report to the Deputy CEO (Finance). The
Credit Risk Management (CB Portfolio
Analysis), Quantitative Risk Management
and Risk Analytics Department and
Operational Risk Management and Control
departments also Legal Department report
to the Deputy CEO (Chief Risk Officer)
and the Credit Risk Management (Retail
Banking Portfolio Analysis) Department
reports to the Deputy CEO (Retail Banking).
The Quantitative Risk Management and
Risk Analytics Department, in coordination
with the Treasury, implements the
Bank’s market risk policies by ensuring
compliance with established open
currency position limits, counterparty
limits, VAR limits on possible losses and
the interest rate policy set by the ALCO.
The Treasury Department manages
foreign currency exchange, money
market, securities portfolio and derivatives
operations and monitors compliance
with the limits set by the ALCO for these
operations. The Treasury Department
is also responsible for management of
short-term liquidity and treasury cash flow
and monitors the volumes of cash in the
Bank’s ATMs and at its service centres.
The Credit Risk Management department
manages credit risks with respect to
particular borrowers and assesses overall
loan portfolio risks. It is responsible for
ensuring compliance with the Bank’s
Credit Policies, management of the
quality of the Bank’s loan portfolio
and filing and loan administration.
The Operational Risk Management
and Control Department identifies and
assesses operational risk categories within
the Bank’s processes and operations. It
also detects critical risk areas or groups of
operations with an increased risk level and
develops internal control procedures to
address these risks, through (among other
things) business-process optimisation
schemes, including document circulation,
information streams, distribution of
functions, permissions and responsibility.
The Legal Department monitors
all changes in relevant laws and
regulations, and ensures that those
changes are properly reflected in
the Bank’s procedures, instructions,
manuals, templates and other relevant
documentation. It also disseminates
information on legislative changes to
all relevant departments within the
Bank. The Legal Department also
participates in drafting laws and regulatory
documents upon request of legislators
and regulators, certain associations
and other professional bodies.
The Tax Compliance Unit of the Finance
Department focuses on the Bank’s
relationship with the tax authorities and
provides practical advice and monitors
tax compliance across the Group.
Each of the foregoing departments is
provided with policies and/or manuals that
are approved by the Bank Management
Board and/or the Bank Supervisory Board
(as required). The manuals and policies
include comprehensive guidance for each
stage of a transaction, including, but not
limited to, manuals outlining asset and
liability management policies, foreign
exchange operations procedures, fixed
income investment guidelines, Retail
Banking operations procedures, the
deposit policy and the Credit Policies.
Risk measurement and reporting
The Bank measures risk using a method
which reflects both the expected loss
likely to arise in normal circumstances
and unexpected losses, which are an
estimate of the ultimate actual loss based
on different forecasting models. These
models use probabilities derived from
historical experience, adjusted from time to
time to reflect the economic environment.
The Bank also runs worst case scenarios
that could arise in the event that extreme
events, however unlikely, do, in fact, occur.
Monitoring and controlling risks is primarily
performed based on limits established
by the Bank. These limits reflect the
business strategy and market environment
of the Bank as well as the level of risk
that it is willing to accept, with additional
emphasis on selected industries. The
Bank also conducts ongoing monitoring
and control, allowing efficient adjustments
in case of any unexpected changes in
the conditions on which the preliminary
risk assessment was made. In addition,
the Bank monitors and measures
the overall risk-bearing capacity in
relation to the aggregate risk exposure
across all risk types and activities.
Annual Report 2015 BGEO Group PLC 55
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Bank risk management continued
The Group maintains a management
reporting system which requires the
Credit Risk Management, Finance and
Funding Departments to prepare certain
reports on a daily and monthly basis. On
a daily basis, a statement of operations,
balance sheet and treasury report (which
includes the Bank’s open foreign exchange
positions, cash flows, limits and balances
on NOSTRO and LORO correspondent
accounts) and confirmation that there
has been compliance with mandatory
financial ratios must be provided by each
department. On a monthly basis, a report
on the structural liquidity gap, a report
on interest rate risk, monthly financial
statements, and a Bank Supervisory
Board quarterly report containing
analysis of the Bank’s performance
against its budget are provided.
Information compiled from all the
businesses is examined and processed
in order to analyse, control and identify
early risks. This information is presented
and explained to the Management
Board, and the head of each business
division. The report includes aggregate
credit exposure, liquidity ratios and risk
profile changes. Senior management
assesses the appropriateness of the
allowance for credit losses on a monthly
basis. The Bank Management Board
and Supervisory Board receive a
comprehensive risk report once a quarter
which is designed to provide all the
necessary information to assess and draw
conclusions on the Bank’s risk exposure.
Specifically tailored risk reports are
prepared and distributed for all levels
throughout the Bank in order to ensure
that all business divisions have access
to extensive, relevant and up-to-date
information. A daily briefing is given
to the Bank Management Board and
all other relevant employees of the
Bank on the utilisation of market limits,
proprietary investments and liquidity,
plus any other risk developments.
Risk mitigation and excessive risk
concentration
As part of its overall risk management,
the Bank uses derivatives and other
instruments to manage exposures resulting
from changes in interest rates, foreign
currencies, credit risks, and exposures
arising from forward transactions. While
these derivatives are intended for hedging,
they do not qualify for hedge accounting.
The Bank actively uses collateral to reduce
its credit risks.
In order to avoid excessive concentrations
of risks, the Bank focuses on maintaining
a diversified portfolio. Concentrations
arise when a number of counterparties,
or related shareholders, are engaged in
similar business activities, or activities
in the same geographic region, or have
similar economic features that would
cause their ability to meet contractual
obligations to be similarly affected by
changes in economic, political or other
conditions. Concentrations also involve
combined, aggregate exposures of large
and significant credits compared to total
outstanding balance of the respective
financial instrument. Concentrations
indicate the relative sensitivity of the Bank’s
performance to developments affecting a
particular industry or geographical location.
Identified concentrations of credit risks
are controlled and managed accordingly.
Credit risk
Definition: Credit risk is the risk that a
borrower or counterparty will be unable
to pay amounts in full or in part when
due. Credit risk arises mainly in the
context of the Bank’s lending activities.
Mitigation: The general principles of the
Bank’s credit policy are outlined in the
Credit Policies. The Credit Policies also
outline credit risk control and monitoring
procedures and the Bank’s credit risk
management systems. The Credit
Policies are reviewed annually or more
frequently if necessary. As a result of
these reviews, new loan restructuring
tools were introduced. The Bank also uses
the NBG’s provisioning methodology in
order to comply with NBG requirements.
The Bank manages its credit risk by
placing limits on the amount of risk
accepted with respect to individual
corporate borrowers or groups of
related borrowers, liability of insurance
companies, types of banking operations
and by complying with the exposure
limits established by the NBG. The
Bank monitors the market value of
collateral, requests additional collateral
in accordance with the underlying
agreement, and monitors the market value
of collateral obtained during its review of
the adequacy of the allowance for the loan
impairment. The Bank also mitigates its
credit risk by obtaining collateral and using
other security arrangements. The exposure
to financial institutions is managed by
limits covering on and off-balance sheet
exposures and by settlement limits with
respect to trading transactions such
as foreign exchange contracts, etc.
The Credit Committees approve
individual transactions and the Credit Risk
Management Department establish their
credit risk categories and provisioning
rates, which are set as per provisioning
methodology. The Deputy CEO (Chief Risk
Officer) and the Credit Risk Management
Department reviews the credit quality of
the portfolio and sets provisioning rates,
in consultation with the Bank’s CEO and
Deputy CEO (Finance), on a monthly basis.
The Bank’s credit quality review process
provides early identification of possible
changes in the creditworthiness of
counterparties, including regular collateral
revaluations. Counterparty limits are
established by the use of a credit risk
classification system, which assigns each
counterparty a risk rating. Risk ratings
are subject to regular revision. The credit
quality review process allows the Bank
to assess the potential loss as a result
of the risks to which it is exposed and
take corrective action. The Bank makes
available to its customers guarantees/
letters of credit which may require that the
Bank make payments on their behalf. Such
payments are collected from customers
based on the terms of the guarantee/letter
of credit. They expose the Bank to similar
risks to loans and these are mitigated by
the same control processes and policies.
Loan approval procedures
The procedures for approving loans,
monitoring loan quality and for extending,
refinancing and/or restructuring existing
loans are set out in the Bank’s Credit
Policies that are approved by the
Supervisory Board of the Bank and/or
the Management Board of the Bank. The
Credit Committees approve individual
transactions. The Bank evaluates
Corporate Banking clients on the basis
of their financial condition, credit history,
business operations, market position,
management, level of shareholder support,
proposed business and financing plan
and on the quality of the collateral offered.
The appropriate level of the relevant
Credit Committee is responsible for
making the decision for loan approval
based on credit memorandum, and
where appropriate, Credit Risk Manager’s
report. The loan approval procedures
for Retail Banking loans depend on
the type of retail lending product.
Applications for consumer loans, including
credit cards and auto loans, are treated
under the “scoring” approval procedure.
While certain loans of up to GEL 6,000
are approved by the scoring system,
the appropriate Credit Committee
will determine the amount, terms and
56 BGEO Group PLC Annual Report 2015
Strategic report Strategy conditions of other loans. Applications
for mortgage loans by Retail Banking
clients are completed by the mortgage
loan officer and submitted to the Credit
Risk Manager, who evaluates the credit
risks and determines the amount, terms
and conditions of the loan, which must
be approved at the appropriate Credit
Committee level. In the case of micro
financing loans, officers evaluate loan
applications, prepare a project analysis
and submit proposals to the appropriate
Credit Committee which makes the final
decision. Credit Committee members have
equal voting authority and decisions are
approved by a simple majority of votes.
Collateral
The Bank typically requires credit support
or collateral as security for the loans and
credit facilities that it grants. The main
forms of credit support are guarantees and
rights to claim amounts on the borrower’s
current account with the Bank or other
assets. The main forms of collateral for
corporate lending are charges over real
estate properties, equipment, inventory
and trade receivables and the main
form of collateral for retail lending is a
mortgage over residential property. In the
case of corporate loans, the Bank usually
requires a personal guarantee (surety)
from the borrower’s shareholders. Under
the Bank’s internal guidelines, collateral
should be provided (where it is required)
to cover outstanding liabilities during the
entire duration of a transaction. As of
31 December 2015, 84.4% of the Group’s
loans to clients were collateralised. An
evaluation report of the proposed collateral
is prepared by the Asset Appraisal and
Disposal Department and submitted
to the appropriate Credit Committee,
together with the loan application and
Credit Risk Manager’s report. When
evaluating collateral, the Bank discounts
the market value of the assets to reflect
the liquidation value of the collateral.
Measurement
Exposure and limits are subject to annual
or more frequent review. The Bank’s
compliance with credit risk exposure
limits is monitored by the Credit Risk
Management Department on a continuous
basis. The Bank establishes provisions
for impairment losses of financial assets
on collective basis and on individual basis
when there is objective evidence that a
financial asset or group of financial assets
is impaired. The Bank creates provisions
by reference to the particular borrower’s
financial condition and the number of
days the relevant loan is overdue. If in
a subsequent period the amount of
the impairment loss decreases and the
decrease can be related objectively to an
event occurring after the impairment was
recognised, the previously recognised
impairment loss is reversed by an adjusted
provision account. The determination
of provisions for impairment losses is
based on an analysis of the assets at
risk and reflects the amount which, in the
judgement of the Bank’s management, is
adequate to provide for losses incurred.
Provisions are made against gross loan
amounts and accrued interest. Under
the Bank’s internal loan loss allowance
methodology, which is based upon IFRS
requirements, the Bank categorises its loan
portfolio into significant and non-significant
loans. Significant loans are defined as
loans in the amount of US$ 150,000 or
more and non-significant loans are defined
as loans less than US$ 150,000. The
Credit Risk Management Department
makes an individual assessment of all
defaulted significant loans. Non-defaulted
significant loans are given a collective
assessment rate. All loans are divided into
different groups (for example mortgage,
consumer, microfinancing loans).
Since 2004, the Bank, jointly with certain
other Georgian banks and with the Credit
Information Group, a provider of credit
information solutions, established JSC
Credit Info Georgia (CIG) that serves a
centralised credit bureau in Georgia. Since
2009, all the participating banks, insurance
companies and microfinance organisations
share and contribute positive and negative
customer credit information with CIG.
As of 1 January 2014, the Bank
implemented a new loan loss provisioning
methodology. The new provisioning
methodology is based on statistical
assessment of Probability of Default
(PD) and Loss Given Default (LGD) for
each of the loan type. The management
believes that the new methodology is a
refinement of the existing methodology
and will allow better allocation of Cost
of Risk between different products. The
new methodology was developed in
consultation with Deloitte. Deloitte was
a provider of IT solution – fineVare.
Non-corporate loans which are overdue
for more than 150 days are written off
automatically, except for mortgage
loans which, since June 2009, are
written-off once overdue for more than
365 days. Significant loans may be
written-off following an assessment
by the Deputy CEO, Chief Risk Officer
and the Credit Risk Management
Department, in consultation with the
Bank’s CEO and Deputy CEO, Finance.
Liquidity risk
Definition: Liquidity risk is the risk that the
Bank will be unable to meet its payment
obligations when they fall due under
normal and stress circumstances.
Monitoring: Liquidity risk is managed
through the ALCO-approved liquidity
framework. Treasury manages liquidity on
a daily basis. In order to manage liquidity
risk, it performs daily monitoring of future
expected cash flows on customers’ and
banking operations, which is a part of the
assets/liabilities management process.
The Finance Department prepares and
submits monthly reports to the ALCO.
The ALCO monitors the proportion of
maturing funds available to meet deposit
withdrawals and the amounts of inter-
bank and other borrowing facilities that
should be in place to cover withdrawals
at unexpected levels of demand.
The liquidity risk management framework
models the ability of the Bank to meet its
payment obligations under both normal
conditions and during a crisis situation.
The Bank has developed a model based
on the Basel III liquidity guidelines. This
approach is designed to ensure that
the funding framework is sufficiently
flexible to ensure liquidity under a wide
range of market conditions. The liquidity
management framework is reviewed from
time to time to ensure it is appropriate to
the Bank’s current and planned activities.
Such review encompasses the funding
scenarios modelled, the modelling
approach, wholesale funding capacity,
limit determination and minimum holdings
of liquid assets. The liquidity framework
is reviewed by the ALCO prior to approval
by the Bank Management Board.
The Finance Department also
undertakes an annual funding review
that outlines the current funding
strategy for the coming year.
This review encompasses trends in
global debt markets, funding alternatives,
peer analysis, estimation of the Bank’s
upcoming funding requirements, estimated
market funding capacity and a funding
risk analysis. The annual funding plan
is reviewed by the Bank Management
Board and approved by the Bank
Supervisory Board as part of the annual
budget. The Funding and Treasury
Departments also review, from time to
time, different funding options and assess
the refinancing risks of such options.
Annual Report 2015 BGEO Group PLC 57
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Bank risk management continued
This review encompasses trends in
global debt markets, funding alternatives,
peer analysis, estimation of the Bank’s
upcoming funding requirements, estimated
market funding capacity and a funding
risk analysis. The annual funding plan
is reviewed by the Bank Management
Board and approved by the Bank
Supervisory Board as part of the annual
budget. The Funding and Treasury
Departments also review, from time to
time, different funding options and assess
the refinancing risks of such options.
Mitigation: The Bank’s capability to
discharge its liabilities is dependent on
its ability to realise an equivalent amount
of assets within the same period of time.
The Bank maintains a portfolio of highly
marketable and diverse assets that it
believes can be easily liquidated in the
event of an unforeseen interruption of
cash flow. It also has committed lines
of credit that it can access to meet its
liquidity needs. Such lines of credit are
available through the NBG’s refinancing
facility. In addition, the Bank maintains
a cash deposit (obligatory reserve) with
the NBG, the amount of which depends
on the level of customer funds attracted.
As of 31 December 2015, in line with the
NBG’s requirements, 15% of customer
deposits in foreign currencies were set
aside as minimum reserves. In addition,
the Bank maintains a minimum average
balance of 10% of its customers’ deposits
in Georgian Lari at its correspondent
account at the NBG. For wholesale
funding, the NBG requires the Bank to set
aside 15% of its unsubordinated foreign
currency wholesale funding for borrowings
with a remaining maturity of less than one
year, 5% for borrowings with a remaining
maturity of one to two years and 10%
of its unsubordinated Georgian Lari
wholesale funding for borrowings with a
remaining maturity of less than one year.
Funding: In the Georgian marketplace,
the majority of working capital loans
are short term and granted with the
expectation of renewal at maturity. As
such, the ultimate maturity of assets
may be different from the analysis
presented elsewhere. In addition, the
maturity gap analysis does not reflect the
historical stability of current accounts.
The Bank’s principal sources of liquidity
are as follows:
• deposits;
• borrowings from international
credit institutions;
inter-bank deposit agreement;
•
• debt issuances;
• proceeds from sale of securities;
• principal repayments on loans;
•
•
interest income; and
fee and commission income.
As of 31 December 2015, the Group’s total
consolidated amounts due to customers
was GEL 4,751.4 million (US$ 1,984.0
million) (as compared to GEL 3,338.7
million and GEL 3,117.7 million as of
31 December 2014 and 2013, respectively)
and represented 59.0% (as compared
to 56.2% and 59.0% as of 31 December
2014 and 2013, respectively) of the
Group’s total liabilities. In accordance with
Georgian legislation, the Bank is obliged
to repay such deposits upon demand of a
depositor. In the case of early withdrawal,
the interest on the deposit is foregone or
reduced. As of 31 December 2015, total
amounts due to credit institutions and
debt securities issued were GEL 2,828.9
million (US$ 1,181.2 million) (as compared
to GEL 2,265.9 million and GEL 1,886.1
million as of 31 December 2014 and 2013,
respectively) and represented 35.1% (as
compared to 38.1% and 35.7% as of
31 December 2014 and 2013, respectively)
of the Group’s total liabilities. Amounts due
to credit institutions and debt securities are
taken from a wide range of counterparties.
The Bank Management Board believes
that both the Group’s and the Bank’s
liquidity is sufficient to meet each of their
present requirements. For information on
the Group’s liquid assets, liabilities and
maturity profile of the Group’s financial
liabilities as well as further information on
the liquidity risk of the Group see Note 30
of the Notes to the consolidated financial
statements of this Annual Report.
Market risk
Definition: The Bank is exposed to market
risk (including currency exchange rate
risk and interest rate risk), which is the
risk that the fair value or future cash flows
of financial instruments will fluctuate due
to changes in market variables. Market
risk exposure arises from mismatches
of maturity and currencies between
the assets and liabilities, all of which
are exposed to market fluctuations.
Mitigation: The general principles of the
Bank’s market risk management policy are
set by the ALCO. The Bank aims to limit
and reduce the amount of possible losses
on open market positions which may
be incurred by the Bank due to negative
changes in currency exchange rates
and interest rates. The Bank classifies
exposures to market risk into either
trading or non-trading positions. Trading
and non-trading positions are managed
and monitored using different sensitivity
analyses. In order to address these
risks, the ALCO specifically establishes
VAR limits on possible losses for each
type of operation (currently the VAR limit
is set for foreign currency exchange
operations only) and the Quantitative
Risk Management and Risk Analytics
monitors compliance with such limits.
Currency exchange rate risk: Currency
exchange rate risk is the risk that the
value of a financial instrument will fluctuate
due to changes in foreign currency
exchange rates. The Bank is exposed to
the effects of fluctuation in the prevailing
foreign currency exchange rates on its
financial position. The Bank’s currency
risk is calculated as an aggregate of open
positions and is controlled by setting a VAR
calculation (established by the ALCO) with
respect to the Bank’s currency basket.
The Bank uses the historical simulation
method based on 400-business-day
statistical data. Its open currency positions
are managed by the Treasury Department
on a day-to-day basis and are monitored
by the Quantitative Risk Management and
Risk Analytics Department. The ALCO
sets open currency position limits with
respect to both overnight and intra-day
Borrowed funds maturity breakdown (Business Banking)
31 December 2015
Repayment schedule,
US$ million
Eurobonds
Senior loans
Subordinated loans
Total
2016
–
65.3
–
65.3
2017
363.5
68.5
–
432.0
2018
–
40.4
10.0
50.4
2019
–
23.4
–
23.4
2020
–
2.3
–
2.3
2021
–
2.1
–
2.1
2022
–
2.1
–
2.1
2023
–
–
65.0
65.0
% of total assets
1.7%
11.3%
1.3%
0.6%
0.1%
0.1%
0.1%
1.7%
2024
–
–
–
–
–
2025
–
–
90.0
90.0
2.3
58 BGEO Group PLC Annual Report 2015
Strategic report Strategy The Bank has an integrated control
framework encompassing operational
risk management and control,
AML compliance, corporate and
information security and physical
security, each of which is managed
by a separate department.
The Operational Risk Management
and Control Department is responsible
for identification and assessment of
operational risk categories within the
Bank’s processes and operations,
detecting critical risk areas or groups
of operations with an increased risk
level, developing response actions and
the imposition of restrictions in critical
risk zones to mitigate identified risk and
developing business-process optimisation
schemes, including document circulation,
information streams, distribution of
functions, permissions and responsibilities.
The Operational Risk Management and
Control Department is also responsible
for developing and updating policies
and procedures and ensuring that these
policies and procedures meet legal and
regulatory requirements and help to
ensure that material operating risks are
within acceptable levels. It also monitors
and periodically reviews the Bank’s
internal control systems to detect errors or
infringements by the Bank’s departments
and divisions. The Head of the Operational
Risk Management Department, who
reports to the Deputy CEO (Chief Risk
Officer), is responsible for the oversight
of the Bank’s operational risks.
positions and stop-loss limits. Currently,
the Bank’s proprietary trading position
is limited by the ALCO to a maximum of
15.0% of the Bank’s NBG total regulatory
capital. The open currency position is
also limited by ALCO to a VAR of seven
basis points of its NBG regulatory capital
for a one-day trading period with a
95.0% “tolerance threshold”. The ALCO
limits are more conservative than NBG’s
requirements, which allow banks to
keep open positions of up to 20.0% of
regulatory capital. The Bank additionally
limits open foreign currency positions
other than US Dollar and Lari to 1% of the
regulatory capital. The Bank also applies
sensitivity stress tests to its open currency
positions to estimate potential negative
impact on its net assets and earnings.
Interest rate risk: The Bank has exposure
to interest rate risk as a result of lending at
fixed and floating interest rates in amounts
and for periods which differ from those
of term borrowings at fixed and floating
interest rates. Interest margins on assets
and liabilities having different maturities
may increase or decrease as a result
of changes in market interest rates.
Similarly to other Georgian banks,
the majority of the Bank’s assets and
deposits have fixed interest rates. In
order to minimise interest rate risk,
the Bank monitors its interest rate
(repricing) gap and maintains an interest
rate margin (net interest income before
impairment of interest-earning assets
divided by average interest-earning
assets) sufficient to cover operational
expenses and risk premium. Within
limits approved by the Bank Supervisory
Board, the ALCO approves ranges of
interest rates for different maturities at
which the Bank may place assets and
attract liabilities. Compliance with the
Bank’s interest rate policy is monitored
by the Quantitative Risk Management
and Risk Analytics Department.
As of 31 December 2015, the Group’s
floating rate borrowings accounted for
10.5% of the Group’s total liabilities.
The Bank is also subject to prepayment
risk, which is the risk that the Bank
will incur a financial loss because its
customers and counterparties repay or
request repayment earlier than expected,
such as fixed rate mortgages when
interest rates fall. The Group reviews
the prior history of early repayments by
calculating the weighted average effective
rate of early repayments across each
credit product, individually, applying
these historical rates to the outstanding
carrying amount of each loan product as
of the reporting date and then multiplying
the product by the weighted average
effective annual interest rates for each
product. This allows the Bank to calculate
the expected amount of unforeseen
losses in the case of early repayments.
For further information on the Group’s
market risk see Note 30 of the Notes
to consolidated financial statements
of this Annual Report.
Operational risk
Definition: Operational risk is the risk of
loss arising from systems failure, human
error, fraud or external events. When
controls fail to perform, operational
risks can cause damage to reputation,
have legal or regulatory implications, or
lead to financial loss. The Bank cannot
expect to eliminate all operational risks,
but through a control framework and by
monitoring and responding to potential
risks, the Bank aims to manage the risks.
Controls include effective segregation
of duties, access, authorisation and
reconciliation procedures, staff education
and training and assessment processes,
including the use of internal audit.
Mitigation: The Bank manages its
operational risks by establishing,
monitoring and continuously improving
its policies and procedures relating
to the various aspects of the Bank’s
cash, payments, accounting, trading
and core processing operations
and data back-up and disaster
recovery arrangements.
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Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Resources and responsibilities
Sustainability lies at the heart of our business
As a leading financial institution in Georgia, we understand our responsibility not only to shareholders
but to society at large.
The concept of sustainability lies at
the heart of our business and reflects
our contribution to sustainable
development – development that
meets the needs of the present without
compromising the ability of future
generations to meet their own needs.
We consider sustainability to be integral
to the growth of our business. Our
sustainability agenda allows us to be
profitable as well as environmentally and
socially responsible at the same time. By
implementing a sustainability approach
in our activities, we foster long-term
relationships with our main stakeholders
by providing high return on investment for
shareholders, satisfying the financial needs
of customers, developing employees and
contributing to the economic and social
welfare of local communities, while taking
into account our environmental footprint.
In order to effectively manage the Group’s
direct and indirect impact on society
and the environment, the Board of
Directors adopted an Environmental and
Social Policy in 2012. This policy defines
the Group’s strategy to develop solid
management controls which will conserve
natural resources, minimise health and
safety risks, and provide employees
with equal development opportunities,
fair compensation and benefits. We are
pioneering sustainability practices in our
operations and are constantly seeking
new ways to improve our performance.
Social matters
The Group considers the interests
of its main stakeholders, which
include customers, shareholders,
employees, lenders, and society,
in the development of strategy and
operations improvement processes.
We strive to positively contribute to
society through the entire scope of
our business activities by developing
socially oriented products and services,
implementing responsible approaches
to our business operations, and carrying
out sponsorship and charity activities.
Socially oriented products and
services
Corporate Banking. In order to efficiently
manage its indirect environmental and
social impact, the Bank prioritised
the integration of sustainable finance
principles into its credit risk management
procedures. In 2013, the Bank updated
its Environmental and Social Risk
Management Procedures in order
to ensure the proper application of
appropriate, risk-based and sector-
specific environmental and social risk
assessment practices to its commercial
lending activities. In 2014, the Bank
actively started to put the procedures into
practice, which have been carried on in
2015. The Bank defined priority targets and
promotes environmental and social risk
management activities accordingly. Since
then the Bank ensures it has a consistent
approach to evaluating and managing
environmental, human health and safety
risks of the financed projects. These
procedures are now being integrated
into the Bank’s credit risk management
process and will soon be routinely applied
to all commercial transactions. In all that
the Bank does, it strives to find sustainable
solutions that make good business sense
to clients and minimise their impact on
the social and natural environment.
The main objective of the Environmental
and Social Policy is to increase the
environmental and social benefits for our
clients. Through Environmental and Social
Risk Management Procedure, the Bank
enhances the clients’ opportunities to be
in compliance with national environmental
and social regulations and to adopt
best international practices in this area.
The Environmental and Social Policy
and Risk Management Procedures,
along with other tools necessary for
their implementation, comprise the core
components of the Bank’s Environmental
and Social Risk Management System
(ESMS). Under this concept, the Bank
endeavours to become an environmentally
friendly financial institution.
The Bank has appointed an Environmental
and Social Coordinator, responsible
for ensuring the proper operation
and maintenance of the ESMS, and
will appoint an Environmental and
a Social Risk Manager, responsible
for the practical, day-to-day
implementation of the Bank’s ESMS.
We implement the following
procedures to ensure the operation
and maintenance of the ESMS:
• We refrain from financing
environmentally or socially sensitive
business activities mentioned in the
exclusion lists of such Development
Finance Institutions as EBRD, IFC,
DEG, FMO, ADB and others.
• We aim at assessing the relative
level of environmental and social risk
associated with clients’ businesses.
We require certain customers to
implement specific environmental
or social action plans to avoid or
mitigate their environmental and
social impact and adhere to specific
monitoring and reporting requirements
that we set in order to minimise
environmental and social risk. These
requirements are included as covenants
in agreements between certain of
our customers and the Bank.
• We aim at regular monitoring of
environmental and social risks
associated with the Bank’s activities,
and assessing clients’ compliance with
the terms of respective agreements.
Through ensuring comprehensive
environmental and social assessment
and action plans, as part of the stable
due diligence, the Bank encourages
the customers in fulfilment of their
environmental and social obligations and
has established a framework for them to
achieve good environmental and social
standards. In many cases, the Bank’s
proper and timely management of the
customers’ environmental and social risks
facilitate them to avoid financial and legal
sanctions during inspections conducted
by the state enforcement agency.
60 BGEO Group PLC Annual Report 2015
Strategic report Strategy Training activities are also an important
element for enhancing capacity for
policy implementation. In 2015, the
Bank provided full opportunities for
the development and enhancement
of the Environmental and Social Risk
Coordinator’s capacity. The Coordinator
participated in the 9th Annual Community
of Learning which was organised by IFC
and took place in Washington DC on
22-23 October 2015. The Community of
Learning is a knowledge-sharing forum
aimed at strengthening the implementation
of environmental and social standards by
financial institutions in emerging markets.
The event provided an opportunity
to exchange experiences, learn from
investment case studies, and engage
in dialogue among environmental and
social risk management specialists from
all over the globe. More generally, the
Bank has delivered several trainings in
this area and more than 100 employees
were trained during the last two years.
Leading experts and state inspectors
were invited as trainers. It is envisaged
to continue training activities.
Other highlights of the year included a
review of the ESMS. The purpose of the
review was to ensure that policy remains
fit for purpose, taking into account
lessons learned from experience and
changes in the relevant legislation. The
review process began at the end of
2014 and the revised policy document
has been adopted and approved by the
Board of Directors in 2015. In particular,
the change in categorisation of the
transactions took place, assessment
procedures of low, medium and high-
risk projects were renewed, monitoring
procedures of projects were refined,
and also capacity building and staff
training activities were defined.
Environmental and social issues are
tracked at the project site in cooperation
with the facility staff, providing ongoing
advice and guidance on good practice and
standards and monitoring compliance with
the requirements. For environmental and
social due diligence of certain high-risk
and A category projects, the Bank has
contracted independent external experts.
As part of monitoring, the Bank requires
each of its high-risk clients to provide
the Bank with the annual report on their
environmental and social performance
and the implementation of applicable
Environmental and Social Action Plans
or each client is visited by the Bank staff
on a regular basis. During 2015, the Bank
held extensive ESDD (Environmental and
Social Due Diligence), monitored the
clients and developed action plans for
non-compliant clients. It has to be noted
that due to the Bank’s efforts, a few
clients conducted environmental audit
and obtained the environmental impact
permits to continue implementation of their
business activity legally. They have started
taking measures to mitigate the impact
on natural and social environment as has
been required by the permitting body.
According to Association Agreement
between the European Union and Georgia,
Georgia has commitment to progressively
approximating its legislation in the
relevant sectors with that of the EU and
to implementing it effectively. Through
this approximation process, Georgia is
very actively developing and amending its
national legislation in the relevant sectors.
Therefore, the Bank regularly checks legal
developments and updates with regard
to environmental, health and safety and
labour issues and places great emphasis
on improvement of ESDD opportunities.
It should be noted that with the aim to
strengthen the clients’ knowledge and
capacity in the area of environmental
and social protection the Bank staff very
intensively introduces the information
about existing and new regulations and
laws to the clients during the ESDD.
As for direct impact on the environment,
JSC Bank of Georgia carried out the
inventarisation of the air pollution sources
of heating systems and pollutants emitted
from these sources. The objective of
the inventarisation was identification of
the exhaustion and emission sources
of pollutants, evaluation of quantitative
indices and constituent of emitted
pollutants as well as identification of other
emission parameters. The main pollutants
of heating systems working on the diesel
and natural gas are hydrocarbons, nitrogen
dioxide, sulphur dioxide, carbon monoxide,
soot and carbon acid. The inventarisation
reports were submitted to the Ministry
of Environment and Natural Resources
Protection of Georgia and approved.
In 2015, the Bank also obtained mining
licence for obtaining fresh water in one
of the regional branches. As for efficient
waste management, the Bank is regularly
taking measures for waste minimisation
and reduction in the environmental impact
of waste. Concerning new initiative,
green boxes were placed for separate
collection of everyday paper waste.
Paper waste is taken to the relevant
facilities with the aim of recycling.
The Bank is committed to respecting the
principles of sustainable development, to
protecting the environment, and willing
to improve the level of public health and
safety and protection of human health
as an essential element for sustainable
development and economic growth.
The Bank continues to make progress
towards its objective and to ensure efficient
implementation of the Environmental
and Social Management System. The
Bank will continue to conduct business
with due consideration to environmental
protection and contribute to the creation
of a sustainable society. The Bank will
help increase clients’ benefits through
proper and highly active implementation
of the Environmental and Social Policy.
The Bank also continues to support
Georgia’s emerging economy by financing
industries that are strategically important
for the development of the entire nation.
Annual Report 2015 BGEO Group PLC 61
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minded people. Construction of a five star
worldwide brand hotel was also financed
by the Bank in amount of US$ 13.0 million.
The Bank endeavours to finance the
projects that provide millions of people
with access to safe drinking water, sanitary
waste water disposal services, well-
maintained urban roads and other types of
projects that provide important sustainable
development benefits to households
and enterprises across the country.
Hydropower sector. Georgia’s
hydropower sector holds significant
development potential. The Bank is
committed to enhancing the security
of energy supply, including the
development of energy sector, promoting
the development of appropriate
projects in Georgia facilitating the
development of relevant infrastructure
and promoting energy efficient and the
use of renewable energy sources.
In 2015, the bank financed construction of
HPPs and equipment purchase in the total
amount of US$ 3.8 million. In particular,
the Bank financed construction of small-
scale HPP with installed capacity of
1.5MW using the water and infrastructure
of an existing irrigation system outside
the irrigation period. The annual power
generation is estimated to amount to
6.77GWh with a good upside potential in
case the water supply is higher than the
minimum flow as stipulated in the supply
contract with Georgian melioration. Small-
scale hydro power plants are of paramount
importance, as it is a renewable and
clean energy option and improves the
sustainability of decentralised electricity.
Another financed project was construction
of small run-of-river HPP. This is a hydro
power plant with an installed capacity
of 3.07MW and an expected yearly
generation of 20GWh. The total budget of
the project is US$ 4.1 million, out of which
US$ 2.88 million was financed by the bank,
with a long-term credit facility and the
letters of credit to purchase the equipment.
The project was financed through the
KFW credit line for renewable energy.
Healthcare and education support.
Continuous improvement in medical
services in Georgia remains a top priority
for the country’s strategic development.
In 2015, JSC Bank of Georgia financed
construction of a multifunctional high-
tech medical centre and purchase of
equipment in amount of US$ 5.5 million.
The clinic’s main areas of work include
neurosurgery, gynecology, traumatology
and general surgery. The clinic has 7,000
square metres of space and is equipped
with the latest medical technology. It
has eight operational blocks, 30 bed
reanimation and a 70 spot hospital. The
clinic also has a high-tech diagnostic
centre. This project is very important
step forward in Georgian healthcare
industry, as it gives Georgian citizens
more access to high-quality service and
creates more than 300 working places.
Information and communications
technology. In 2015, the Bank
continued financing the leading fixed-line
telecommunication service provider in
Georgia. The Company invested about
US$ 3 million for LTE infrastructure
development, out of which US$ 1.2
million was LC financing from the Bank
to increase its internet penetration
in low density populated areas.
Other. In 2015, Bank of Georgia financed
the construction of a data centre,
specialised in Bitcoin mining, BFDC
Georgia (Bitcoin Mining Data Centre). A
free industrial zone was created in Tbilisi,
which hosts the data centre and provides
a tax-free zone for the entities working
in the information technology industry.
The data centre was founded by Bitfury,
a world leader in Bitcoin mining. The
construction was concluded in 2015 and
the data centre started its operations in
December 2015. Total financing need
was US$ 32.0 million, out of which Bank
of Georgia financed US$ 5.0 million.
Retail banking
Bank of Georgia continues to innovate
and come up with a wide range of socially
oriented financial products and services
that bring added value to individuals and
small and medium-sized businesses
(SMEs) and meet their respective needs.
Express Banking. The Georgian banking
sector still experiences difficulties in
overcoming economic and geographical
barriers on its way to expanding financial
services in remote regions and among
low-income parts of the population.
Our Express Banking service plays an
important role in addressing this issue:
• As at 31 December 2015, a network
of 2,589 Express Pay terminals, 90
Express and 24 Metro branches
which are located all over the country
including in remote mountain regions.
• Express financial products such as
Express card, Express deposit and
Express loan. These financial products
are uncomplicated, easily accessible
and affordable to a segment of the
population that would not have access
to banking products and services
otherwise. Since the beginning of the
Express Banking service in December
2011, the Bank has attracted 425,350
Infrastructure development.
Infrastructure development continued to
be a key financing and guarantee granting
theme for the Bank, with almost US$ 36.15
million committed to the construction
and rehabilitation of the land-reclamation
system, the rehabilitation of water supply
and wastewater systems, the construction
of refugee settlements, the construction
and rehabilitation of highways, local
municipal roads and bridges, the
construction of a new multipurpose
shopping centre, and the construction
and rehabilitation of recreational/sport
facilities and historical buildings.
From US$ 36.15 million, US$ 12.5 million
was committed to construction and
rehabilitation of roads with the aim to
provide easy access to one of the biggest
hydro plant in Georgia and to construction
of permanent operators’ village.
US$ 5.55 million was committed to
rehabilitation and reconstruction of
Vere highway and Mziuri Park after
disastrous flood in June 2015. Another
significant financed project was
renovation and construction of water
systems throughout the whole country of
Georgia in amount of US$ 10.0 million.
With regard to construction of apartment
complex for refugees, refugees who
lost their own houses in Samachablo
and Apkhazia will soon have their own
apartments in Gori. The Bank financed
construction of 450 apartments
in amount of US$ 4.0 million.
The tourism sector has become a vital part
of the Georgian economy as demonstrated
by its significant growth since 2000. The
Bank continues to finance the hospitality
sector of Georgia by providing loans
for hotel construction. Besides the
above-mentioned US$ 36.15 million, the
bank financed construction of hotels in
amount of US$ 28.5 million. In particular,
US$ 24.0 million Loan Agreement was
signed between the client and the Bank
regarding financing more than 200 room
internationally branded hotel in Tbilisi. It
is co-financed with European Bank for
Reconstruction and Development out of
which the Bank financed US$ 12.0 million.
Also US$ 3.5 million Loan was approved
for construction of 272 bed hostel and 57
room local brand hotel. The place is going
to be a combination of inclusive bars,
sound and art studios, co-working space,
inner courtyard for events and exhibitions.
It is believed to be the space for
socialising, inspiration and collaboration,
where you can implement new ideas, meet
the artists and their art, have interesting
conversations with foreign travellers
and connect with free and rebellious
62 BGEO Group PLC Annual Report 2015
Strategic report Strategy clients by 31 December 2015, of which
58,669 were attracted in 2015 alone.
As part of the Express Banking service, we
prioritise development of self-service skills
to our clients. We plan to expand services
in Express Pay terminals, develop web-
based application processing tools and
implement a new instalment credit product.
All these changes will provide more
accessible banking service to our client.
Youth support. We have developed
a wide range of financial products to
support young people in Georgia. For
example, through the special conditions
of the Child Deposit we provide parents
with an opportunity to secure the future
of their children. Starting from a minimal
amount of GEL 10, a deposit can be
opened for two years minimum at any
time from a child’s birth until the age of
18. The annual interest rate (12.00% for
Georgian Lari and 2.25-4.25% for foreign
currency) is added to the initial deposit.
In 2015, we opened approximately
3,505 Child Deposit accounts.
The Bank also offers special products
that allow the youth to receive secondary
and higher education. Examples of
such products are school and student
loans with favourable terms that do not
require any financial guarantees and
collateral. The total amount of school and
student loans granted in 2015 was GEL
130,148 and GEL 176,578 respectively.
Another example of a product supporting
youth is a student card which provides
special benefits for students of Georgian
universities. The benefits include discounts
for public transportation, a 2% interest
rate for savings on the card Georgian Lari
accounts and 1% for foreign currency, free
distance banking services and others. In
2015, the Bank issued 82,722 of these
cards. In addition, every three months,
the Bank awards 20 holders of student
cards with three-month scholarships
to encourage the student population to
use financial instruments and support
them financially during their study.
One more example of supporting youth
is a project called sCool Card – a
multifunctional card for school children.
The project is in its starting process. The
main objective of this social-educational
project is to make children get accustomed
to a financial culture and improve their
financial literacy. sCool Card is available
for free and all of the transactions and
card services are also free of charge.
sCool Card provides special benefits for
school children in Georgian schools. The
benefits include public transportation
(in Tbilisi), discounts for educational and
entertaining centres popular among
children, bookstores, cafes, as well as the
accumulation of bonuses (sCoola) for each
transaction. To accustom children to use
the card and motivate school canteens in
non-cash payments, there is a discount
for POS terminals set up in schools. As
a result, more and more children use
the card for payments and children/
bartenders’ contact with cash is limited.
SME support. We continue to provide
financing to SMEs, a backbone of
the Georgian economy that ensures
sustainable development of our country.
Apart from our own micro-financing and
SME loan programmes, we also participate
in various programmes that support
entrepreneurs. In 2015, the Bank partnered
with a non-profit Agricultural Projects
Management Agency which supports
agricultural SMEs. Together, we co-
financed agricultural loans at fixed annual
interest rates which were significantly lower
than previous loans SMEs received by
other institutions. In 2015, the total amount
of Bank loans issued to SMEs was GEL
934.1 million, of which GEL 257.1 million
was issued to female entrepreneurs.
Combined with supporting SMEs
financially, the Bank also plans to
organise educational events and provide
financial and business knowledge
related advice to entrepreneurs in order
to enhance their finance management
skills and ensure the sustainable
development of their businesses.
For example, the planned events in
flagship service centres mentioned
above will provide entrepreneurs with
knowledge and skills in accounting, the
drafting of legal documents, business
development, sales and marketing.
Also the environmental and social risk
management process of SME clients
is embedded throughout the Bank’s
activities. Through ensuring comprehensive
environmental and social risk assessment
and action plans, we encourage the SME
clients to be in compliance with national
environmental and social legislation and
achieve good environmental and social
standards. During site visits, we provide
advice and guidance on good practice
and standards in this area, update the
clients with regard to environmental, health
and safety and labour issues and monitor
compliance with the E&S legislation.
In many cases of non-compliance, our
proper and timely management of the
SME clients’ environmental and social risks
facilitate avoidance of financial and legal
sanctions during inspections conducted
by the state enforcement agency.
EnergoCredit loans were provided to SME
clients. The aim of such loans is to help
companies reduce their energy intensity
and increase their competitiveness
through the following means:
• reduction of operating costs for energy;
increased production with the same
•
cost for energy; and
increased awareness among business
operators and management staff/
employees.
•
By the use of EnergoCredit the company
has the chance to receive a 10-15%
subsidy and get an energy audit for
free (if required). The total amount of
EnergoCredit SME loans was US$ 43,642.
Mass retail. EnergoCredit residential loans
were also provided to various groups of
retail customers, the aim of which is to
help households reduce their energy costs
by purchasing energy efficient products,
such as boilers and central heating,
double glazing, insulation for walls, roofs
and floors, solar water heating, solar
photovoltaic systems, air-conditioning
systems, home appliances (electric ovens,
refrigerators, washing machines). A client
applying for energy efficient loan is entitled
to receive a 10% subsidy, calculated on
the sub-loan amount disbursed to the
client. The project started In November
2013 and the total amount of EnergoCredit
residential loans was US$ 4.3 million.
Affordable housing
Currently, the Georgian real estate
market is vulnerable to various economic
and financial uncertainties. Numerous
construction projects remain unfinished
for long periods of time while there is a
strong growing demand for housing from
the Georgian population. In response
to this increasing demand, the Group’s
real estate development business, m2
Real Estate was established in order to
offer affordable housing to the emerging
middle class in Georgia, especially
young families. Currently, m2 Real Estate
has completed its third successful
project for the development and sale
of affordable residential apartments.
The company uses an innovative approach
to design and construction processes
so that each square metre is distributed
efficiently and fits customers’ needs and
wishes. As few customers can afford to
buy large flats with an area exceeding 100
square metres, the company continuously
works to optimise the size of the
apartments to meet the current demand
of its customers without compromising
the apartments’ convenience and
Annual Report 2015 BGEO Group PLC 63
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Resources and responsibilities continued
Extensive Geographic Coverage
Network of healthcare facilities
N
N
+
+
Referral and specialty hospitals
Community hospitals
Ambulatory clinics
Regions of presence
15
Tsalenjikha
15
Chkhorotsku
15
Tskaltubo
186
Zugdidi
15
Martvili/Khoni
15
Tkibuli
15
Terjola
15 +
Khobi Chakvi 15
Abasha
70 +
Poti
70
Kobuleti
134
Batumi
120
Batumi
19
Keda
+
Kutaisi
220
Kutaisi
45
Kutaisi
20
Tskaltubo
124
Kutaisi
50
Akhaltsikhe
21
Adigeni
35
Akhalkalaki
25
Ninotsminda
26
Khulo
15
Shuakhevi
15
Akhmeta
25
Kvareli
70 +
Telavi
266
110
60
450
60
80
152
82
1,260 +++
+++
Tbilisi
usability. A large segment of the Group’s
customers is represented by young
Georgian families. We believe that by
continuing to offer affordable housing
products, we are helping to significantly
enhance the quality of their lives.
Georgia Healthcare Group PLC (GHG)
is the largest private healthcare services
provider in the Georgian market. The
Group operates a network of medical
centres and hospitals through healthcare
services business. It covers more than
67% of the Georgian population with clinics
located across the county and provides
access to high-quality medical services
to the population including those living in
remote mountain regions. The accessibility
of medical services is ensured by
scheduling regular visits by specialists to
small towns and villages and by providing
patients with transportation to larger clinics
in urgent cases and in cases when more
sophisticated treatment is required.
The healthcare services business of
GHG also provides free regular medical
examinations at various locations across
the country including Batumi, Khulo,
Keda, shuakhevi, Poti, Kvareli, Telavi and
others. In addition, GHG’s specialists
deliver free medical services, including
examinations and treatments for socially
and economically disadvantaged parts of
the population. In cooperation with other
healthcare institutions, Georgia Healthcare
Group arranges free blood transportation
and donations for its patients.
Apart from healthcare services business,
the Group operates a medical insurance
business, which participated in the state
insurance programme in 2015. Through
this programme, it served more than
400,000 policyholders represented
by people below the poverty level, the
elderly, children below five years of age,
students, teachers and refugees.
Sponsorship and charity
Within its sponsorship and charity
activities, the Group continues to focus
on promoting and enhancing access
to education, conserving nature and
supporting children with disabilities. The
Group’s Sponsorship and Charity Policy
implies partnering with Foundations
and NGOs to deliver sustainable results
and bring about positive change. Our
priority is to help solve a cause, not the
symptom. The Group chose to focus on
the three areas bearing utmost importance
for Georgian society. Sponsorship and
charity funds are channelled through
the Tree of Life Foundation that in its
turn distributes funding via means of
grants competitions thus assuring a
transparent and fair way of financing.
64 BGEO Group PLC Annual Report 2015
Strategic report Strategy Promoting and enhancing access to
education. Bank of Georgia University,
established in 2014, welcomed its second
intake of MBA in Finance students in
autumn 2015. Cost of studies in 2015
were again in big part subsidised by
the Bank, GEL 244,500 in total giving
a possibility to up to 10 top students to
study free of charge while the next 20
can enjoy a 0% loan and start repaying
one year after graduation. Besides
providing high-quality education, Bank
of Georgia University offers its students
hands-on experience by offering them a
possibility to observe various business
processes at the Group’s companies.
In summer 2014, Bank of Georgia’s start-
up incubator, Vegalab, started to operate.
In total GEL 300,467 was spent on setting
up and running the Lab which allows its
incumbents to use a centrally located office
and its facilities, training and mentoring free
of charge. Since then, authors (individuals
and groups) of 12 business ideas were
selected to join the incubator out of
which three projects were nominated
for the next stage – capital financing.
In 2013, the Bank became the first
Georgian company to cooperate with
one of the most prestigious scholarship
programmes in the world, the Chevening
scholarship, in order to provide Georgian
students with an opportunity to pursue
education in the UK. The Group provided
GEL 293,555 in total and funded three
students in 2015. The partnership with
Chevening has been extended for the next
year and the Group is looking forward
selecting students who will continue
their Master’s studies in the UK.
In 2014, the Bank signed a partnership
agreement with the prestigious US
Fulbright scholarship scheme. Thanks
to Bank of Georgia’s contribution two
students from Georgia were able to enrol
in a two-year Master’s degree programme
at a US University in 2015. Funding
provided to the students for their first year
of studies amounts to GEL 225,450.
on a predetermined topic and present
in front of a competent jury. The winner
is granted a fully paid trip to London,
to attend the global Public Speaking
competition. We aim to be part of this
competition during 2016 as well.
The Bank has been supporting every
single TEDxTbilisi conference from
when it was first organised, in 2012. A
TEDx conference is a locally organised
TED format event, where communities,
organisations and individuals join to
initiate a conversation and connect
with each other on different matters
which are important for the society.
In 2015, Bank of Georgia provided funding
in the amount of GEL 40,646 to a local
NGO (Non-governmental Organisation),
Educate Georgia to translate into Georgian
one of the most widespread and popular
free online educational platforms in the
world, the Khan Academy. The project
will allow some 200,000 Georgian pupils
with internet access, 65% of who live
outside Tbilisi to read and listen to the
highest quality education materials.
Conserving nature. Another priority of the
Group’s charity activities is the preservation
of wildlife diversity. Since 2010, the
Bank has granted US$ 300,000 to the
Caucasus Nature Fund (CNF) to cover the
maintenance costs of Borjomi-Kharagauli
National Park (BKNP), one of the most
treasured national parks in Georgia.
Supporting children. Since 2014, the
Bank has been focusing its efforts on
supporting children with disabilities
– one of the most vulnerable social
groups in Georgia. In 2015, the Bank
donated GEL 103,904 to the Tree of
Life Foundation which distributed the
funds through two grants competition
for relevant NGOs. In order to qualify
for the competition, proposals had
to focus on sustainable results and
causing change in one of the following
areas: providing education, developing
infrastructure for disabled children, or
fostering integration into the society.
For the past three years the Bank has
been supporting a Public Speaking
competition organised by the English
Speaking Union, Georgia. The competition
allows top students who are in their
senior year at a high school, or freshmen
year at a university, to prepare a speech
Some of the projects financed through the
grants’ competition entailed: providing 119
wheelchairs to children with disabilities or
special needs, creation of a paraorchestra,
setting up of a social taxi service for the
disabled, organising adapted playground
in one of the largest districts in Tbilisi.
On 13 June 2015, Tbilisi experienced one
of the worst floods in its recent history.
With one of the highways and several
homes destroyed, casualties and loss
caused by the disaster amounted to
around GEL 200 million. The Group was
one of the first to come up with an initiative
to raise funds to help the flood victims.
The Group donated GEL 1 million in total
to fund provision of new housing for those
who were left without one. In addition,
GEL 300,000 was donated by corporate
and individual clients of the Bank to an
account swiftly opened and promoted by
Bank of Georgia within days of the flood.
Healthcare services business of GHG
runs a wide range of charitable activities
on a permanent basis for children
with leukaemia. It also regularly gifts
personal computers to children from
socially and economically disadvantaged
large families. Additionally, on religious
holidays business delivers presents to the
newborns across the patient network.
Employee matters
A key factor to our success is a cohesive
and professional team, capable of
accomplishing the Group’s objectives.
We are committed to attracting and
identifying the best professionals,
caring and planning for their needs,
investing in their development and
fostering their commitment.
The HR department and the management
system it implements play a vital role in
managing our most valuable resources
- our employees. The HR department
develops HR policies and procedures
which determine key principles, areas,
approaches and methods that are
crucial for building HR management
systems for all our businesses.
Examples of some our HR policies and
procedures include, but are not limited to:
• employee planning and recruiting;
• staff administration;
• compensation and benefits;
• code of conduct;
• employee development and training;
• human rights;
• grievances;
• whistleblowing;
• retrenchment; and
• anti-nepotism.
Annual Report 2015 BGEO Group PLC 65
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Resources and responsibilities continued
Total headcount per employee category broken down by gender
2013
Female
Male
Total
2014
Female
Male
Total
2015
Female
Male
Total
Directors
Senior
managers
Employees
Total
6
23
29
53
72
8,448
3,109
8,507
3,204
125
11,557
11,711
Directors
Senior
managers
Employees
Total
7
41
48
57
81
9,722
3,487
9,786
3,609
138
13,209
13,395
Directors
Senior
managers
16
47
63
75
111
186
Employees
Total
11,623
4,083
11,714
4,241
15,706
15,955
The Bank’s HR management department
works closely with HR managers and
executives from our subsidiaries in order
to ensure proper implementation of the
main principles and provision of necessary
support in all HR-related matters.
We recognise the importance of observing
human rights and are committed to
implementing socially responsible business
practices. Our Human Rights Policy
establishes priorities and puts control
procedures in place to provide equal
opportunities and prevent discrimination
or harassment on any grounds, including
disability. Our Human Rights Policy
applies to all employees (including the
disabled) and includes procedures related
to employment processes (including
continued employment for employees who
have become disabled while employed
by us), training and development.
We are committed to employee
engagement. We believe that knowledge
of our Group is key and we strive to
provide our employees with a continuous
flow of information which includes but
is not limited to information about our
corporate culture, the Group’s strategy
and performance, risks relating to its
performance, such as financial and
economic factors, and our policies and
procedures. We provide information
in a number of ways, including via
departmental managers, presentations,
our intranet, email and regular town-hall
and off-site meetings. We also value
the views of our employees. We consult
with our employees regularly and have
implemented feedback systems, such as
frequent employee satisfaction surveys,
which ensure that our employees opinions
are taken into account when making
decisions which are likely to affect their
interests. Employee feedback also
helps to improve our customer focused
orientation and client servicing approach.
Talent attraction
Sustained development of the Group’s
businesses requires the strengthening
of the teams of our subsidiaries both by
using the Group’s own significant internal
resources through staff development
and rotation, and by attracting external
candidates. Our recruitment policy and
relevant control procedures ensure an
unbiased hiring process that provides
equal opportunities for all candidates.
According to the HR Policy, internal
candidates have priority when filling
vacant positions, especially in situations
where there are vacancies in top
and middle management. Thus, in
2015, 175 Group employees were
promoted to managerial positions.
In order to attract young talent, we actively
partner with leading Georgian business
schools and universities, participate in
job fairs and run extensive internship
programmes aimed at the professional
development of young professionals and
their further employment. In 2012, Bank
Total headcount by age
category
Over 51 years old
41-50 years old
31-40 years old
21-30 years old
Less than 20 years old
9,649
2,833
2,028
2,237
2,389
162
242
9
17
65
160
1,112
104
200
402
722
46
Aldagi
GHG
Others
4,523
185
411
1,427
2,455
45
Bank
58
6
22
30
m2
66 BGEO Group PLC Annual Report 2015
Strategic report Strategy of Georgia established a new format for
its traditional internship programme. It
attracts promising graduates and provides
them with the opportunity to participate
in a major professional training and
leadership development programme.
Interns are directly coached by the
Bank’s executives to help them on their
path to gaining their first management
positions in the near future. In 2015,
the number of young professionals
(under 30 years old) increased by
21% compared to 2014 and currently
represents 36% of total headcount.
Training and development
To manage our employees in a way that
best supports our business strategy, we
seek to help our employees contribute to
business performance through personal
and professional development.
Following our aspiration to develop
strong leaders, we have developed an
extensive programme for leadership
development. We provide a standard
Induction Training course for employees
appointed to managerial positions. This
programme covers a wide range of topics
including corporate values, strategy and
objectives, organisational structure, HR
management policies, history of the Group,
and specific courses for development
of communication, presentation,
management and leadership skills, among
others. Selected mid-level and senior-level
employees are given the opportunity to
receive external training in well-known
training institutions outside of Georgia.
The Group’s corporate learning system
is comprised of a wide range of internal
and external training sessions specifically
designed to meet the needs of front and
back-office employees at the Group’s
subsidiaries including banking, healthcare,
insurance and real estate development.
In 2014, Bank of Georgia launched
a Leadership Development online
programme for senior managers and some
of our key employees. The programme
was provided by a UK company and aimed
to support the individual development of
participants’ leadership capabilities. The
programme was running successfully
throughout this year as well and benefited
all participants with a personally tailored
development experience and gave
them a greater awareness of their
leadership strengths and opportunities
for further growth and effectiveness.
Each of the Group’s businesses
has developed an extensive training
programme for front office employees
in order to provide them with relevant
skills, such as effective communication
and building strong and valued client
relationships. For example, the Bank’s
mentoring programme is part of a front
office training process. Every new
employee is provided with regular advice,
guidance and practical instructions
from an appointed mentor who later
participates in the new employee’s
performance appraisal. Through
this programme, we aim to provide
individual support to our employees in
achieving their professional results and
improving their personal effectiveness.
GHG’s healthcare services business
provides additional training to its
employees that work in the specialised
field of healthcare. The company
remains the only healthcare institution
in Georgia to have in-house training of
personnel. Since the beginning of 2014,
GHG has invested over GEL 3.0 million
in training and has a dedicated staff
of 45 trainers, largely focusing on the
areas of nursing and critical care. The
business recently established a unique
training centre in the Kutaisi region that
will enhance the professional knowledge
and skills of local medical personnel.
Occupational health and safety
Ensuring the safety of the workplace and
providing healthy working conditions
are among the Group’s fundamental
HR management principles. The Group
pays particular attention to preventive
measures, such as conducting
regular staff training and medical
check-ups, certifying workplaces,
and promoting a healthy lifestyle.
The Group’s real estate development
business is associated with high health
and safety risks for contractors on sites.
In order to minimise such risks, m2 Real
Estate established a Health and Safety
Policy and management procedures
ensuring implementation of the health and
safety measures at all worksites. The policy
contains a range of precautions that seek
to prevent any accidents related to the
m2’s contractors or injuries to community
members, as well as property damage and
incidents caused by equipment failure.
In order to enhance the awareness of
employees and contractors regarding
health and safety risks associated with
the construction process the company
conducts regular training and educational
seminars. In 2015, 2014 and 2013, the
number of health and safety training hours
amounted to approximately 110, 1,008
and 500 respectively. In addition, the m2
publishes brochures and booklets with
warnings and special rules to be followed
when working on sites. Respective control
procedures include quarterly audits by
external health and safety consultants
and internal monthly inspections of m2
Real Estate worksites. In addition, m2 Real
Estate has a comprehensive reporting
procedure for health and safety concerns.
In 2015, 2014 and 2013, no work-related
fatalities or injury incidents occurred at
the company’s construction sites.
With regard to emergency preparedness
and response, m2 Real Estate established
an Emergency Management Plan. It
outlines possible scenarios during
emergency situations and determines
specific strategies for the company’s
employees, contractors and visitors on
how to react when in a crisis situation.
Environmental matters
The Group recognises that its operations
have both an indirect and direct impact on
the environment and therefore seeks to
establish management approaches which
will help it become a more environmentally
friendly institution. Being the largest
financial institution in Georgia, the Bank
produces significant indirect environmental
impact through the projects which it
finances. In order to properly manage
this impact, the Bank has implemented
an Environmental and Social Policy
and Risk Management Procedures, as
described in the “Social matters” section.
As for direct environmental impact, we
believe that the impact of the banking and
insurance businesses is not significant.
Nevertheless, we undertake a number
of measures to reduce electricity, paper,
water, and fuel consumption. For example,
in 2013 we upgraded our lighting system
in the Bank’s headquarters by installing
energy-saving bulbs and implemented
KNX (EIB) System management, which not
only helped us minimise our environmental
impact but also reduced our energy
costs by GEL 4,000-5,000 per month.
We implemented this system in all of the
Bank’s branches during 2014. In addition
to our energy saving efforts, in 2015 we
started a project “Green Box”. With this
initiative the Bank continues its work
towards minimising the paper waste.
“Green Boxes” are placed on every floor
of the Bank’s headquarters and are
designated to collect paper for recycling
purposes. The Group is also in the process
of automating its operational processes
in order to reduce the volume of printed
documents and consequently minimise
the overall use of paper. The Bank
continues to acquire new printers which
offer double-sided printing by default.
We are considering replacing part
of our car fleet, which runs on
petrol, with electric vehicles.
Annual Report 2015 BGEO Group PLC 67
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Resources and responsibilities continued
We aim to reduce greenhouse gas
emissions resulting from our operations.
Refer to the Directors’ Report for more
detailed information on the issue.
The most significant direct impact on
the environment within the Group is
created by our real estate development
business, m2 Real Estate. The
company addresses industry-specific
environmental issues and undertakes
appropriate measures to manage them.
Focusing on enhancing resource efficiency
of its apartment buildings, m2 Real
Estate started two new development
projects with financial support from
IFC. The company not only follows high
environmental standards that IFC imposes
on its borrowers but has also become
a participant of the IFC-Canada Climate
Change Programme1 and thus meets all
mandatory requirements of the programme
regarding green building construction.
Aiming at increasing the efficient use
of energy, water and materials, m2 Real
Estate installs energy efficient lighting
systems and uses double glazed windows
and other modern insulation materials
thus reducing the U-value of constructed
buildings to 0.21W/m2K. It is expected
that utility costs for these buildings will
be reduced up to 43% compared to an
average residential building in Georgia.
In order to minimise the negative impact
to the environment caused by the
construction process, m2 Real Estate
has adopted an Environmental and
Social Management Plan which helps
identify the environmental impacts of
its activities and define measures to
prevent them as outlined below.
GHG’s direct environmental impact is
mainly characterised by medical waste
which needs special treatment and safe
disposal. GHG implemented procedures
that are in line with the Georgian legislation
which defines risk categories of medical
waste and establishes appropriate
procedures for its treatment, storage
Environmental aspect
Dust
Spills and leaks during refuelling
Air emissions
Preventive measures
Introducing speed limits on unmade roads
•
• Damping down using water bowsers with spray bars
• Sheeting of construction materials and storage piles
• Using defined moving routes and reductions in vehicle speed limits where required
Installing a sealed drainage system at refuelling areas
•
• Providing suitable tanks (e.g. double skinned), bunds and impermeable liners at fuel
stores and refuelling points
• Using drip trays for static plant (e.g. generators and pumps)
• Training staff in refuelling and pump operations
• Shortening the refuelling line as much as possible
• Performing regular maintenance checks of hoses and valves
• Conducting follow-up procedures for proper and safe refuelling by operators
• Ensuring that new vehicles comply with the current European Union (EU) emissions
•
standards at the time of purchase
Implementing a regular maintenance programme to ensure all new vehicles continue to
comply with relevant EU emissions standards
• Ensuring that older vehicles are maintained in order to eliminate extra emissions as
much as reasonably practicable
• Strictly enforcing speed limits in order to optimise fuel consumption and production of
exhaust fumes, and minimise dust generation on unpaved surfaces
Water contamination
• Locating fuel stores and refuelling points further away from watercourses and aquifers
Fire
Noise
• Providing a fire extinguisher adjacent to each item of mobile plant and equipment
• Fitting effective silencers at all plant and machinery, and providing ear defenders and/
or plugs on sites
• No idling or revving of plant engines and all vehicles
• Using controlled venting, silenced equipment and absorbing screens
• Working at preferred times of day (daylight hours Monday to Saturday, otherwise
communicated to the local community and authorities)
Vibration
• Operating the equipment within the manufacturer specification limits and limiting any
overuse
Depletion of the stratospheric ozone layer
• Ensuring that no ozone depleting substances (ODS) such as chlorofluorocarbons
(CFCs) and hydro-chlorofluorocarbons (HCFCs) or products with known global
warming potential are used
1. The IFC-Canada Climate Change Programme,
established in 2011, is a partnership between the
Government of Canada and IFC to promote private
sector financing for clean energy projects, through
the use of concessional funds to catalyse
investments in renewable, low-carbon technologies
that would not otherwise happen (www.ifc.org).
68 BGEO Group PLC Annual Report 2015
Strategic report Strategy OECD Europe and Eurasia (average)
conversion from the UK Government’s
Greenhouse Gas Conversion Factors
for Company Reporting 2014.
• Used heat and steam (only
applies to one site of Imedi L).
Scope 3 includes emissions from:
• Air business travel (short haul and
long haul); information on the class of
travel is unavailable hence we used an
“average passenger” conversion factor.
• Ground transportation, including
taxis, coaches and car hire.
Data on emissions resulting from travel
is reported for business-related travel
only, and excludes commuting travel.
Data from joint ventures, investments,
or sub-leased properties have not been
included within the reported figures.
The data is provided by on-site delegates,
invoices and meter readings.
and disposal. GHG strives to improve its
efficiency and thus outsources medical
waste management to a company
specialising in medical waste disposal.
The total amount of generated medical
waste in 2015 amounted to 125 tonnes
compared with 159 tonnes in 2014
and 55 tonnes in 2013, an increase
which correlated with the significant
expansion of GHG’s hospital network.
Methodology
We have reported on all of the emission
sources required under the Companies
Act 2006 (Strategic Report and Directors’
Reports) Regulations 2013 (Scope 1
and 2) and additionally have reported on
those emissions under Scope 3 that are
applicable to our business. All reported
sources fall within our consolidated
financial statements which can be found
on pages 135 to 215 of this Annual Report.
We do not have responsibility for any
emission sources that are not included in
our consolidated financial statements.
In preparing this emissions data,
we have used the World Resources
Institute/World Business Council
for Sustainable Development (WRI/
WBCSD) Greenhouse Gas Protocol: A
Corporate Accounting and Reporting
Standard (revised edition) and emissions
factors from the UK Government’s
Greenhouse Gas Conversion Factors
for Company Reporting 2014.
The reported data is collected and
reported for the boundaries of four
of the Group’s main businesses:
• Banking (represented by the Bank),
which includes all of its offices
and retail branches where the
Bank has operational control.
• Real estate development (represented
by m2 Real Estate), which includes
its offices and construction sites.
• P&C insurance (represented by
Aldagi), which includes all of its
offices and retail branches where the
company has operational control.
• Georgia Healthcare Group (represented
by Evex and Imedi L), which includes
its main office and hospitals where the
company has operational control.
Scope 1 (combustion of fuel and operation
of facilities) includes emissions from:
• Combustion of natural gas, diesel
and petrol in stationary equipment
at owned and controlled sites.
• Combustion of petrol, diesel and
aviation fuel in owned transportation
devices (cars and aeroplane).
Scope 2 (electricity, heat, steam and
cooling purchased for own use) includes
emissions from:
• Used electricity at owned and controlled
sites; to calculate the emissions, we
used the conversion factor for Non-
Total greenhouse gas emissions data for the period beginning 1 January 2015 and ended 31 December 2015
(tonnes of CO2e)
Scope 1 (emissions from combustion of fuel and operation of facilities)
Scope 2 (emissions from electricity, heat, steam and cooling purchased for own use)
Scope 3 (emissions from air travel and land transportation)
Total greenhouse gas emissions
FTEs
Total greenhouse gas emissions per FTE
2013
2014
2015
8,453
5,457
2,165
16,075
11,711
7,614
11,034
3,822
22,470
13,395
6,679
12,183
4,487
23,349
15,955
1.37
1.68
1.46
Annual Report 2015 BGEO Group PLC 69
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results
Executing our strategy
We have once again leveraged our distinctive capabilities and strengths, and managed to beat the
38% Lari devaluation by delivering an all-time high net profit in US Dollar terms during 2015.
Consolidated results discussion
The Group’s profit of GEL 310.9 million was driven by the outstanding performance of our Banking Business, with its superior customer-
driven franchise, sound bank risk management policy and double-digit positive operating leverage, combined with an excellent
performance from our portfolio of companies in the Investment Business. Obviously, Georgian GDP growth of c.3% was instrumental in
keeping asset quality in check and delivering strong growth and record profitability. Georgian macroeconomic growth of c.3% was
particularly resilient in the context of the economic turbulence in the region. Our base case scenario for GDP growth in 2016 is c.3% in
real terms with inflation of up to 5%.
BGEO Consolidated
2015
2014 Change y-o-y
501,390
118,406
76,926
18,528
29,907
80,938
14,688
20,777
349,958
99,792
52,752
9,270
29,430
53,483
13,566
12,991
861,560
621,242
(314,732)
546,828
4,050
(14,225)
651
2,340
(10,337)
(155,377)
(257,031)
364,211
–
(9,164)
(3,169)
1,309
(6,558)
(59,020)
310,945
240,767
7.93
6.72
BGEO Consolidated
Dec 2015
Dec 2014
3,068,166 1,898,137
5,322,117 4,347,851
10,115,739 7,579,145
4,751,387 3,338,725
1,789,062 1,409,214
856,695
1,039,804
8,042,101 5,945,052
2,073,638 1,634,093
43.3%
18.7%
45.8%
99.9%
1.6%
51.3%
8.3%
59.9%
38.7%
22.4%
50.1%
–
55.2%
NMF
78.8%
57.6%
163.3%
29.1%
18.0%
Change
y-o-y
61.6%
22.4%
33.5%
42.3%
27.0%
21.4%
35.3%
26.9%
Full year income statement
GEL thousands, unless otherwise noted
Net banking interest income
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Operating income before cost of credit risk/EBITDA
Profit from associates
Depreciation and amortisation of investment business
Net foreign currency gain/(loss) from investment business
Interest income from investment business
Interest expense from investment business
Cost of credit risk
Profit
Earnings per share basic and diluted
Balance sheet
GEL thousands, unless otherwise noted
Liquid assets
Loans to customers and finance lease receivables
Total assets
Client deposits and notes
Amounts due to credit institutions
Debt securities issued
Total liabilities
Total equity
70 BGEO Group PLC Annual Report 2015
Strategic report Performance Discussion of Banking Business results
Our Banking Business delivered all-time high annual revenue of GEL 751.3 million (up 39.6% y-o-y).
The revenue growth was driven by strong growth across all revenue lines.
Revenue
GEL thousands, unless otherwise noted
Banking interest income
Banking interest expense
Net banking interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Net insurance premiums earned
Net insurance claims incurred
Gross insurance profit
Revenue
Net Interest Margin
Average interest earning assets
Average interest bearing liabilities
Average net loans, currency blended
Average net loans, GEL
Average net loans, FC
Average client deposits, currency blended
Average client deposits, GEL
Average client deposits, FC
Average liquid assets, currency blended
Average liquid assets, GEL
Average liquid assets, FC
Excess liquidity (NBG)
Liquid assets yield, currency blended
Liquid assets yield, GEL
Liquid assets yield, FC
Loan yield, total
Loan yield, GEL
Loan yield, FC
Cost of funding, total
Cost of funding, GEL
Cost of funding, FC
2015
2014 Change y-o-y
872,299
(359,372)
600,925
(243,654)
512,927
357,271
161,891
(40,302)
134,488
(32,643)
121,589
101,845
76,926
19,837
40,161
(20,114)
52,752
9,890
28,129
(11,707)
20,047
16,422
751,326
538,180
7.7%
7.6%
6,667,220 4,725,688
7,069,269 5,081,994
5,200,650 3,767,973
1,527,852 1,164,713
3,672,798 2,603,260
4,379,707 3,173,826
919,857
1,203,167
3,176,540 2,253,969
45.2%
47.5%
43.6%
20.4%
23.5%
19.4%
45.8%
100.6%
42.8%
71.8%
22.1%
39.6%
41.1%
39.1%
38.0%
31.2%
41.1%
38.0%
30.8%
40.9%
2,540,310 1,843,538
833,854
1,153,425
1,386,885 1,009,684
177,917
789,311
37.8%
38.3%
37.4%
343.6%
3.2%
6.5%
0.5%
14.8%
22.6%
11.4%
5.1%
5.5%
4.9%
2.5%
5.0%
0.4%
14.3%
19.9%
11.6%
4.8%
4.0%
5.1%
Our net banking interest income
increased to GEL 512.9 million in 2015,
showing strong double-digit growth
of 43.6% y-o-y. This reflects the strong
performance of interest income which
outgrew interest expense. On a constant
currency basis, growth in our full year
interest income (up 32.1% y-o-y) outpaced
growth in interest expense (28.7%). Our
strong interest income performance was
a result of robust growth in our average
interest earning assets and improved Loan
Yield, which was primarily driven by the
PrivatBank acquisition. The y-o-y growth
in interest earning assets was driven
by the weakening Georgian Lari, which
increased the Georgian Lari value of our
foreign currency denominated interest
earning assets, the PrivatBank acquisition
and a slight 1.5% y-o-y growth in the net
loan book on a constant currency basis.
Our average net loans increased to GEL
5,401.9 million in 2015, up 30.5% y-o-y
in nominal terms and up 1.5% y-o-y
on a constant currency basis. Primarily
driven by outstanding performance of
our Retail Banking operations as well
as the PrivatBank acquisition, which
added GEL 245.6 million to our Banking
Business net loan book at time of the
PrivatBank integration in May 2015.
The increase in our interest expense
was driven by a two-fold effect: Strong
growth in our average interest bearing
liabilities and growth in cost of funding.
This reflects a strong growth in average
client deposits for 2015, which represent
a more expensive source of funding. The
growth was driven mainly by the growth
in foreign currency deposits which again
reflected in large part the weakening
of the Georgian Lari. For the full-year,
average interest bearing liabilities grew
at 39.1% and cost of funding increased
from 4.8% in 2014 to 5.1% this year.
Average client deposits and notes grew
38.0% y-o-y for 2015 to GEL 4,379,707.
Our net fee and commission income
reached GEL 121.6 million in 2015, up
19.4% y-o-y. On a constant currency
basis, growth in our full year fee and
Annual Report 2015 BGEO Group PLC 71
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
commission income (up 16.0% y-o-y)
outpaced growth in fee and commission
expense (13.1%). Growth was primarily
driven by the ongoing success of our
Express Banking service, which has
expanded during the year partially driven
by the integration of PrivatBank, whose
clients were a mainly target segment for
our Express products. We have added
58,669 Express Banking customers in
2015, representing 16.0% growth y-o-y in
Express client base. The growth in client
base has triggered a significant increase
in the volume of banking transactions.
The growth of transactions was achieved
largely through the more cost-effective
remote channels. Net gain from foreign
currencies increased to GEL 76.9 million
in 2015 (up 45.8% y-o-y). Growth reflected
increased client activity as a result of
the increased Georgian Lari volatility.
Our P&C insurance business, Aldagi,
continued its strong yearly performance
and posted gross insurance profit of GEL
20.0 million (up 22.1% y-o-y). This increase
was mainly driven by growth in Motor
insurance and Life & Disability insurance.
Our NIM stood at 7.7% (up 10bps
y-o-y). NIM was adversely affected by the
high liquidity levels that we purposefully
maintained during 2015. Pro forma NIM,
adjusted for excess liquidity levels, was
8.2% for full-year 2015. NIM reflected
strong Loan Yield which stood at 14.8% for
2015 (up 50 bps y-o-y), largely driven by
the addition of PrivatBank’s high yielding
Loan Portfolio. PrivatBank’s higher margin
is primarily driven by its mono-product of
an all-in-one debit and credit card. Liquid
Assets Yield stood at 3.2% in 2015 (up
70 bps y-o-y), largely reflecting higher
yield on Government issued securities.
This was partially offset by a 30 bps
increase in Cost of Funds, which stood
at 5.1%. The increase in Cost of Funds
was primarily driven by an increase in
the cost of local currency funding as the
local currency financing reference rate of
the National Bank of Georgia increased
gradually during 2015 to 8.0% at the year
end, up from 4.0% at the end of 2014.
As of 1 September 2015, we decreased
the interest rates on one-year Dollar
deposits from 5% to 4% in the retail
segment, which is expected to drive our
Cost of Funds down and decrease the
dollarisation of our balance sheet. On the
other hand, as of 1 September 2015, we
increased the interest rates on one-year
local currency deposits from 9% to 11%
in the retail segment, which affected
the increase in our cost of funds. Our
liquidity levels as a percentage of total
assets increased to 32.7% by the end of
2015, compared to 26.6% a year ago as
a result of an increased liquidity pool.
Our efficiency further improved in 2015,
with double-digit operating leverage
and an all time low cost to income ratio.
Operating leverage was positive at 16.6%.
The Cost/Income ratio stood at 35.7%
in 2015 (down 480 bps y-o-y). Improved
efficiency was a result of the integration
of PrivatBank and the resulting synergies
realised during the year, and our ongoing
efforts to keep a tight grip on costs.
Operating expenses increased to GEL
267.9 million (up 23.0%). In 2015, y-o-y
revenue growth largely outpaced growth
in operating expenses, which reflected
the PrivatBank acquisition and an organic
growth of the business. The salaries and
employee benefits increase was driven
by the increased revenue base and
PrivatBank acquisition. The administrative
expenses increase was largely driven by
expenses on rent, predominantly due
to the appreciation of the US Dollar, the
listing currency of rentals in Georgia, in
addition to an increase in the number of
leased branches following the PrivatBank
acquisition, which also drove the increase
in depreciation and amortisation.
For the full year 2015, Banking
Business like-for-like Cost of Risk ratio
(excluding devaluation effect) stood at
2.4% (1.2% in 2014) and the like-for-
like cost of credit risk was GEL 133.6
million (GEL 55.7 million for the year
2014). Devaluation added 0.3% and GEL
17.9 million to Cost of Risk and cost of
credit risk, respectively, for the year 2015,
resulting in Cost of Risk ratio of 2.7% and
cost of credit risk of GEL 151.5 million.
NPLs to gross loans increased by 30
bps to 4.3% as of 31 December 2015,
compared to 4.0% as of 30 September
2015 and 90 bps from 3.4% as of
31 December 2014. The increase was
mainly due to Georgian Lari devaluation
against US Dollar. NPLs increased to GEL
241.1 million, up 57.0% y-o-y, reflecting
the inclusion of PrivatBank’s NPLs, local
currency devaluation against the US Dollar
and overall 20.9% growth in net loan book.
The NPL coverage ratio stood at 83.4%
as of 31 December 2015 compared to
68.0% as of 31 December 2014. NPL
coverage ratio adjusted for the discounted
value of collateral stood at 120.6% as of
31 December 2015, compared to 110.6%
as of 31 December 2014. Our 15 days
past due rate for retail loans stood at
0.9% as of 31 December 2015 compared
to 0.8% as of 31 December 2014.
Non-recurring items increased to GEL
13.1 million from GEL 11.8 million a year
ago, which was largely driven by costs
associated with the PrivatBank integration.
ROAE
21.7%
20.6% in 2014
Net Interest Margin (NIM)
7.7%
7.6% in 2014
Tier 1 Capital Ratio
(Basel 2/3)
10.9%
11.1% in 2014
Retail loan book growth
(y-o-y)
35.3%
72 BGEO Group PLC Annual Report 2015
Strategic report Performance Operating income before non-recurring items; cost of credit risk; profit for the period
GEL thousands, unless otherwise noted
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
Operating expenses
Operating income before cost of credit risk
Impairment charge on loans to customers
Impairment charge on finance lease receivables
Impairment charge on other assets and provisions
Cost of credit risk
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax
Income tax expense
Profit
Banking Business balance sheet highlights
GEL thousands, unless otherwise noted
Liquid assets
Liquid assets, GEL
Liquid assets, FC
Net loans
Net loans, GEL
Net loans, FC
Client deposits and notes
Amounts due to credit institutions, of which:
Borrowings from DFIs
Short-term loans from central banks
Loans and deposits from commercial banks
Debt securities issued
Liquidity and CAR Ratios
Net Loans/Customer Funds
Net Loans/Customer Funds + DFIs
Liquid assets as percent of total assets
Liquid assets as percent of total liabilities
NBG liquidity ratio
Excess liquidity (NBG)
Tier I Capital Adequacy Ratio (NBG Basel 2/3)
Total Capital Adequacy Ratio (NBG Basel 2/3)
2015
2014
(155,744)
(74,381)
(34,199)
(3,535)
(130,060)
(58,833)
(25,641)
(3,230)
(267,859)
(217,764)
483,467
320,416
Change
y-o-y
19.7%
26.4%
33.4%
9.4%
23.0%
50.9%
(142,819)
(1,958)
(6,740)
(45,088)
(476)
(10,168)
NMF
NMF
-33.7%
(151,517)
(55,732)
171.9%
331,950
264,684
(13,046)
(11,837)
318,904
(44,647)
252,847
(32,343)
274,257
220,504
31 Dec 2015
31 Dec 2014
3,006,991 1,874,769
1,191,353 1,028,833
845,936
1,815,638
5,366,764 4,438,032
1,502,888 1,269,613
3,863,876 3,168,419
4,993,681 3,482,001
1,692,557 1,324,609
605,480
400,771
318,358
827,721
917,087
307,200
468,270
961,944
107.5% 127.5%
90.8% 108.6%
26.6%
32.8%
32.3%
38.3%
35.0%
46.2%
177,917
789,311
11.1%
10.9%
14.1%
16.7%
25.4%
10.2%
26.1%
38.0%
24.4%
Change
y-o-y
60.4%
15.8%
114.6%
20.9%
18.4%
21.9%
43.4%
27.8%
51.5%
-23.3%
47.1%
16.2%
343.6%
As a result of the foregoing, the
Banking Business reported record
profit of GEL 274.3 million in 2015 (up
24.4% y-o-y) and achieved a ROAE of
21.7% compared to 20.6% in 2014.
The Banking Business profit was
supported by its banking subsidiary in
Belarus – BNB, which added GEL 17.5
million profit in 2015 (up 11.4% y-o-y). The
growth was primarily driven by strong
y-o-y growth in the BNB loan book to
GEL 320.1 million, up 20.4% y-o-y, mostly
consisting of an increase in SME loans.
BNB client deposits increased to GEL
277.6 million, up 37.6% y-o-y and reflecting
BNB’s strong franchise in Belarus. BNB
is well capitalised, with Capital Adequacy
Ratios well above the requirements of its
regulating Central Bank. For 2015, Total
CAR was 16.5%, above the 10% minimum
requirement by the National Bank of the
Republic of Belarus (NBRB) and Tier I
CAR was 8.1%, above the 5% minimum
requirement by NBRB. Return on Average
Equity (ROAE) for BNB was 23.5%.
Our Banking Business balance
sheet remained very liquid (NBG
Liquidity ratio of 46.2%) and well-
capitalised (Tier I Capital Adequacy
ratio, NBG Basel 2/3 of 10.9%) with a
well-diversified funding base (Client
Deposits and Notes to Liabilities of
63.4%). The NBG Liquidity ratio stood at
46.2% as of 31 December 2015 compared
to 35.0% as of 31 December 2014, against
a regulatory requirement of 30.0%. Liquid
assets increased to GEL 3,007.0 million,
up 60.4% y-o-y. Additionally, liquid assets
as a percentage of total assets increased
to 32.7% y-o-y, up from 26.6% a year
ago, and liquid assets as a percentage
of total liabilities also increased to 38.2%
y-o-y, up from 32.3% a year ago. Our
share of amounts due to credit institutions
to total liabilities decreased slightly y-o-y
from 22.8% to 21.5%, with the share of
client deposits and notes to total liabilities
increasing y-o-y from 59.9% to 63.4%. Net
Loans to Customer Funds and DFIs ratio,
a ratio closely observed by management,
stood at 90.8%, down from 108.6% as
of 31 December 2014. The decrease
was mainly due to the slower growth in
net loans and an increase in deposits.
Annual Report 2015 BGEO Group PLC 73
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
Discussion of segment results
The segment results discussion is presented for Retail Banking (RB), Corporate Banking (CB),
Investment Management, Healthcare Business (GHG), Real Estate Business (m2 Real Estate).
Retail Banking (RB)
Net loan book
(GEL million)
2,796.5
+35.3% y-o-y, +19.0% y-o-y on
constant currency basis
Revenue
(GEL million)
427.4
+44.0% y-o-y
74 BGEO Group PLC Annual Report 2015
Bank of Georgia is the largest Retail
Banking services provider in Georgia,
offering a wide range of products and
services including consumer loans,
mortgage loans, overdrafts, credit card
facilities and other credit facilities as well
as funds transfer and settlement services
and handling customer multicurrency
deposits for both individuals and legal
entities. In order to better serve the
needs of our customers, in addition
to the traditional banking services,
Retail Banking offers differentiated
products and services through the well-
recognised Solo Banking and Express
Banking service, which aims to expand
transactional banking coverage through
various distance channels. Retail Banking
serves c.2 million customers through
266 branches, 746 ATMs and 2,589
Express Pay terminals. Retail Banking
also encompasses SMEs and micro
businesses, serving approximately 90,000
small and medium-sized companies.
Income statement highlights
GEL thousands, unless otherwise noted
Net banking interest income
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Revenue
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
2015
2014
322,879
78,218
17,108
9,159
215,795
58,858
18,622
3,564
427,364
296,839
(92,091)
(50,398)
(27,714)
(2,093)
(69,299)
(37,339)
(19,525)
(1,464)
Change
y-o-y
49.6%
32.9%
-8.1%
157.0%
44.0%
32.9%
35.0%
41.9%
43.0%
Operating expenses
(172,296)
(127,627)
35.0%
Operating income before cost of credit risk
255,068
169,212
Cost of credit risk
Net non-recurring items
Profit before income tax
Income tax expense
Profit
(75,407)
(8,945)
170,716
(23,994)
(9,241)
(5,797)
154,174
(19,295)
146,722
134,879
50.7%
NMF
54.3%
10.7%
24.4%
8.8%
Strategic report Performance Balance sheet highlights
GEL thousands, unless otherwise noted
Net loans, stand-alone, currency blended
Net loans, stand-alone, GEL
Net loans, stand-alone, FC
Client deposits, stand-alone, currency blended
Client deposits, stand-alone, GEL
Client deposits, stand-alone, FC
Time deposits, stand-alone, currency blended
Time deposits, stand-alone, GEL
Time deposits, stand-alone, FC
Current accounts and demand deposits, stand-
alone, currency blended
Current accounts and demand deposits,
stand-alone, GEL
Current accounts and demand deposits,
stand-alone, FC
Key ratios
2015
2014
2,796,479 2,066,973
1,279,286 1,023,756
1,517,193 1,043,217
1,880,018 1,349,556
437,712
911,844
486,806
1,393,212
1,156,382
192,178
964,204
789,413
174,552
614,861
Change
y-o-y
35.3%
25.0%
45.4%
39.3%
11.2%
52.8%
46.5%
10.1%
56.8%
723,636
560,143
29.2%
294,628
263,160
12.0%
429,008
296,983
44.5%
GEL thousands, unless otherwise noted
2015
2014
Net interest margin, currency blended
Cost of risk
Loan yield, currency blended
Loan yield, GEL
Loan yield, FC
Cost of deposits, currency blended
Cost of deposits, GEL
Cost of deposits, FC
Cost of time deposits, currency blended
Cost of time deposits, GEL
Cost of time deposits, FC
Current accounts and demand deposits, currency
blended
Current accounts and demand deposits, GEL
Current accounts and demand deposits, FC
Cost/income ratio
9.6%
2.6%
17.6%
24.2%
10.6%
3.9%
4.7%
3.5%
5.5%
8.7%
4.7%
1.2%
1.5%
0.9%
40.3%
9.8%
0.4%
17.4%
21.5%
12.4%
3.8%
4.2%
3.6%
5.7%
8.2%
4.9%
1.0%
1.0%
1.0%
43.0%
Performance highlights
Retail Banking revenue in 2015
increased to GEL 427.4 million, up
44.0% y-o-y. Net banking interest income
reached a record level of GEL 322.9
million, up 49.6%. Impressive growth in
net banking interest income for Retail
Banking was mostly a result of PrivatBank
integration, which was primarily a credit
card business, and the significant growth
(partly attributable to the devaluation
effect) of the Retail Banking loan book,
particularly the mortgage, micro and SME
loan portfolios, and a fairly stable NIM.
The Retail Banking net loan book
reached a record level of GEL 2,796.5
million, up 35.3% y-o-y; with robust
growth on constant currency basis of
19.0% y-o-y. The growth was a result of
strong loan origination delivered across
all Retail Banking segments: consumer
loan originations of GEL 671.2 million
in 2015 resulted in consumer loans
outstanding totalling GEL 626.8 million as
of 31 December 2015, up 19.2% y-o-y;
micro loan originations of GEL 572.0
million in 2015 resulted in micro loans
outstanding totalling GEL 546.7 million as
of 31 December 2015, up 27.2% y-o-y;
SME loan originations of GEL 346.9
million in 2015 resulted in SME loans
outstanding totalling GEL 357.1 million as
of 31 December 2015, up 51.2% y-o-y;
Mortgage loans originations of GEL 288.1
million in 2015 resulted in mortgage loans
outstanding of GEL 809.0 million as of
31 December 2015, up 34.6% y-o-y;
point of sale (POS) loan originations of
GEL 200.3 million in 2015 resulted in POS
loans outstanding of GEL 119.4 million as
of 31 December 2015, up 28.2% y-o-y.
Retail Banking client deposits increased
to GEL 1,880.0 million, up 39.3% y-o-y;
growth on constant currency basis
was 15.5% y-o-y. The growth of client
deposits on a y-o-y basis was due to
the increase in the number of Express
Banking clients, who bring with them the
cheapest source of deposits for the Bank
– current accounts and demand deposits.
Our Retail Banking net fee and
commission income increased to a
record level of GEL 78.2 million, up
32.9% y-o-y. Net fee and commission
income reflects continued growth of our
Express Banking franchise, which has
attracted 425,350 previously unbanked
emerging mass market customers
since its launch three years ago; it grew
58,669 y-o-y in 2015, alongside the
addition of c.400,000 customers as a
result of the PrivatBank acquisition. This
has driven the number of client-related
foreign currency and other banking
transactions substantially higher.
Retail Banking recorded NIM of 9.6%,
down 20 bps y-o-y, reflecting an
increased Loan Yield of 17.6%. Increase
of 20 bps y-o-y was largely a result of
PrivatBank’s high yielding loan portfolio
which was consolidated in 2Q15 and had
a loan yield of 29.3% at the moment of
acquisition and Cost of Client Deposits of
3.9%, up 10 bps y-o-y, which is a resilient
performance notwithstanding the increase
in local currency denominated deposits.
Annual Report 2015 BGEO Group PLC 75
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
Operating expenses increased to
GEL 172.3 million, up 35.0% y-o-y,
resulting in a Cost to Income ratio of
40.3% and positive operating leverage
of 9.0 percentage points, which reflects
increases in salaries and other employee
benefits, principally driven by the
growth in headcount that reflects the
growing revenue base and increase
in administrative expenses which was
largely driven by expenses on rent,
predominantly due to the appreciation of
the US Dollar and the listing currency of
rentals in Georgia. Increased number of
leased branches also drove the increase
in depreciation and amortisation.
The cost of credit jumped significantly to
GEL 75.4 million in 2015, compared to GEL
9.2 million in 2014. The increase was a
result of a combination of factors including
the 35.3% growth of the Retail Banking
loan book, the devaluation and the new
portfolio acquired with the PrivatBank
acquisition. Consequently, Retail Banking
Cost of Risk was 2.6% compared to 0.4%
a year ago. The following factors contribute
to what we consider to be a relatively
low default rate in Retail Banking: a large
number of our Retail Banking borrowers
(approximately 500,000 borrowers),
whose loans are in local currency, are not
affected by the US Dollar appreciation
against Georgian Lari; although our
mortgage borrowers are affected by the
devaluation as most mortgages are US
Dollar denominated, they represent a very
small portion of our clients (approximately
13,000). Additionally, these customers
are relatively high earners, with a bigger
capacity to bear the effects of devaluation;
our Retail Banking clients prefer to save in
US Dollars as indicated by the dollarisation
levels of our client deposits; thus their
interest income in nominal Georgian Lari
terms has increased with the Georgian
Lari devaluation against the US Dollar.
These also represent clients who either
have local currency or mortgage loans; US
Dollar is the main currency for remittances,
a major source of hard currency inflows
to Georgia, which represent the main
income for a large number of families
in Georgia. Therefore, their income
increased in nominal local currency
terms with the US Dollar appreciation.
As a result, Retail Banking profit
reached GEL 146.7 million in 2015,
up 8.8% y-o-y and achieved a
strong ROAE of 24.6% in 2015.
Operating highlights
Our Express Banking continues to deliver
strong growth as we follow our mass
market Retail Banking strategy. 1,191,828
Express Cards have been issued since
their launch in September 2012, in essence
replacing the pre-paid Metro cards which
were previously used. Of this, 469,919
Express Cards have been issued in
2015. Increased number of Express Pay
terminals to 2,589 from 2,239 a year ago.
Express Pay terminals are an alternative to
tellers, placed at bank branches as well as
various other venues (groceries, shopping
malls, bus stops, etc.), and are used for
bank transactions such as credit card
and consumer loan payments, utility bill
payments and mobile telephone top-ups.
In 2015, utilisation of Express Pay
terminals increased significantly, with
the number of transactions growing to
GEL 113.1 million, up 13.8%. Increased
Point of Sale (POS) footprint to 308
desks and 3,335 contracted merchants
as of 31 December 2015, up from 305
desks and 2,709 contracted merchants
as of 31 December 2014. POS terminals
outstanding reached 8,103 up 28.2%
y-o-y, including 1,016 PrivatBank
operated POS terminals. The volume of
transactions through the Bank’s POS
terminals grew to GEL 710.6 million, up
22.7% y-o-y. This represents the number
of POS transactions of 20.6 million, up
40.7% y-o-y for full year 2015. POS loans
outstanding reached GEL 119.4 million as
of 31 December 2015, up 28.2% y-o-y.
Since we launched Solo – a fundamentally
different approach to premium banking
– in April 2015, the number of Solo
clients has reached 11,869, up 48.9%
y-o-y from 7,971 a year ago. With Solo
we are targeting the mass affluent retail
segment and aim to build brand loyalty
through exclusive experiences offered
through the new Solo Lifestyle. Through
Solo Lifestyle, our Solo clients are given
access to exclusive products and the finest
lounge-style environment at our newly
designed Solo lounges and are provided
with new lifestyle opportunities, such as
exclusive events and handpicked lifestyle
products. In our Solo lounges, Solo
clients are offered, at a cost, a selection
of luxury products and accessories that
are currently not available in the country.
Solo clients enjoy tailor-made solutions
including new financial products such as
bonds, which pay a significantly higher
yield compared to deposits, and other
securities developed by Galt & Taggart,
the Bank’s Investment Banking arm.
The number of Retail Banking clients
totalled 1,999,869, up 37.8% y-o-y. This
includes PrivatBank’s c.400,000 clients.
The total number of cards increased
significantly to 1,958,377, up 69.3%
y-o-y. The total number of debit cards
outstanding increased to 1,204,103,
up 15.8% y-o-y. The total number of
outstanding credit cards amounted
to 754,274, up 6.5 times y-o-y, with
PrivatBank contributing significantly
to this growth. Of this, 100,515 were
American Express cards, down 8.9%
y-o-y. A total of 259,288 American
Express cards have been issued since
the launch in November 2009.
76 BGEO Group PLC Annual Report 2015
Strategic report Performance PrivatBank story: strategic acquisition and flawless integration execution
In December 2014 – the Board made
the decision to acquire PrivatBank as it
represented a strong strategic fit with
our target to increase our share of retail
loans. PrivatBank was essentially a credit
card business with retail loans making
up 85% of its loan book. In addition,
PrivatBank with its vast branch network
(43% of the Bank’s network at that time)
represented a particularly strong fit for
the Bank’s Express branch (self-service)
format. This was also complemented with
PrivatBank’s strong payment platform.
In January 2015 – we completed the
acquisition of PrivatBank for c.GEL 92
million cash consideration for 100% of
PrivatBank (1.11x P/BV), of which 10%
or GEL 9.2 million will be paid on the
first anniversary of the closing (January
2016), subject to representations and
warranties/holdback provisions. During
the five months following the acquisition,
our integration team focused on IT
integration, optimisation of costs and
number of branches, PrivatBank product
development and relevant trainings. Our
IT integration team spent two months in
Dnepropetrovsk, Ukraine at PrivatBank
headquarters to migrate PrivatBank’s
information systems into our banking
software, which we completed with just
24 hours of downtime for PrivatBank
clients. This represents an exceptionally
short period of time for full IT integration
in the banking industry. All of the data
associated with the customers and
transaction histories, including the
data of c.800,000 customers (of which
c.400,000 are active customers), over 1.1
million cards with respective transaction
histories, c.150,000 loans and c.75,000
deposits, have been successfully
migrated onto our banking software.
During this period, we rebranded 35
PrivatBank branches into our self-service
format Express Banking branches, and
completed the in-house development of
PrivatBank’s trademark mono-product of
an all-in-one debit and credit card to add
the transport and payment capabilities of
our Express card. PrivatBank customers
continue to use PrivatBank cards, which
are now serviced by our card processing
platform, without the need to change
them into Bank of Georgia cards. In order
to optimise PrivatBank’s branch network,
we pilot tested utilisation of our Express
Pay terminals by PrivatBank’s clients.
The results showed that the terminals,
which act as a self-service substitute
to branches, had proved very popular
with PrivatBank clients. Consequently,
we closed more branches than initially
expected – 58 out of 93 – and reduced
PrivatBank employee numbers by c.50%,
which contributed to a significant reduction
in PrivatBank operating costs, down
44.6% q-o-q in 2Q15 despite only having
effect for last 50 days in 2Q15. Active
liability optimisation measures resulted in
a significantly reduced Cost of Funding
to 5.3% in 2Q15 (7.5% in 1Q15). We
reported PrivatBank stand-alone figures
until its full integration in May 2015.
In May 2015 – we announced the
completion of the full integration of
PrivatBank, in under five months
compared to our initial integration
estimate of nine to 12 months. Integration
costs totalled GEL 2.6 million as of
30 June 2015, less compared to our
expectation of up to GEL 3 million.
We anticipate annualised pre-tax
administrative and funding cost synergies
to reach c.GEL 29 million – above our
pre-announced GEL 25 million – as a
result of GEL 18.5 million synergy in
operating expenses compared to pre-
announced GEL 15 million and GEL
10.5 million synergy in cost of funds,
slightly above the pre-announced GEL
10 million. PrivatBank, which at the
time of acquisition was the ninth largest
bank in Georgia by assets, increased
our market share in retail loans by
4.3 percentage points and in retail
deposits by 2.5ppts (Market data as of
31 March 2015). The acquisition added
c.400,000, predominantly emerging
mass market, customers. We plan to
leverage the enhanced capabilities
of our Express Banking franchise to
capture increased revenue from cross-
selling banking products to these newly
acquired customers, who currently
have very low product to client ratios.
PrivatBank acquisition
project name was “Salo”
Salo is a traditional Ukrainian food
consisting of cured slabs of fatback
(rarely pork belly), with or without skin.
Strategic
acquisition
Business highlights
Transaction highlights
• Primarily a credit card business, with mono-product
• Loan book GEL 245.6 million
• Deposits GEL 266.8 million
• Total clients 400k
• NIM 20.5%
• Cost of funding 8.1%
• Cost of risk 10.1%
• A strong strategic fit with our target to increase our
share of retail loans
• c.GEL 92 million cash consideration for 100% of
PrivatBank (1.11x P/BV), resulting in P/E of 3.2x
Integration costs totalled GEL 2.6 million as of
30 June 2015, less compared to our expectation of up
to GEL 3 million
•
• Completed integration in under five months compared
to our initial integration estimate of 9 to 12 months
• We anticipate annualised pre-tax administrative and
funding cost synergies to reach c.GEL 29 million –
above our pre-announced GEL 25 million
Flawless
integration
execution
(Georgia)
December 2014
Decision
to acquire
20 January 2015
Completed
the acquisition
IT integration
four months following the acquisition
Product
developement
Optimisation of costs and
number of branches
Trainings
9 May 2015
Completed
integration
Annual Report 2015 BGEO Group PLC 77
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
Corporate Banking (CB)
Net loan book
(GEL million)
2,130.4
-1.4% y-o-y, -21.0% y-o-y on constant
currency basis
Revenue
(GEL million)
213.3
+33.5% y-o-y
The Corporate Banking business in
Georgia comprises of loans and other
credit facilities to the country’s large
corporate clients as well as other legal
entities, excluding SME and micro
businesses. The services include fund
transfers and settlements services,
currency conversion operations, trade
Income statement highlights
GEL thousands, unless otherwise noted
Net banking interest income
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Revenue
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
finance services and documentary
operations as well as handling savings
and term deposits for corporate and
institutional customers. The Corporate
Banking Business also includes
finance lease facilities provided by
the Bank’s leasing operations (the
Georgian Leasing Company).
2015
2014
134,883
31,142
38,136
9,178
103,158
24,811
24,848
6,996
213,339
159,813
(33,828)
(13,207)
(4,126)
(727)
(33,196)
(10,963)
(3,812)
(1,014)
Change
y-o-y
30.8%
25.5%
53.5%
31.2%
33.5%
1.9%
20.5%
8.2%
-28.3%
Operating expenses
(51,888)
(48,985)
5.9%
Operating income before cost of credit risk
161,451
110,828
Cost of credit risk
Net non-recurring items
Profit before income tax
Income tax expense
Profit
Balance sheet highlights
GEL thousands, unless otherwise noted
Letters of credit and guarantees, stand-alone1
Net loans, stand-alone, currency blended
Net loans, stand-alone, GEL
Net loans, stand-alone, FC
Client deposits, stand-alone, currency blended
Client deposits, stand-alone, GEL
Client deposits, stand-alone, FC
Time deposits, stand-alone, currency blended
Time deposits, stand-alone, GEL
Time deposits, stand-alone, FC
Current accounts and demand deposits, stand-
alone, currency blended
Current accounts and demand deposits,
stand-alone, GEL
Current accounts and demand deposits,
stand-alone, FC
1 Off-balance sheet items.
78 BGEO Group PLC Annual Report 2015
(55,678)
(4,539)
101,234
(14,928)
(41,750)
(2,672)
66,406
(9,493)
86,306
56,913
2015
2014
511,399
552,661
2,130,362 2,160,767
284,987
1,910,774 1,875,780
219,588
1,848,039 1,186,026
575,882
610,144
777,287
1,070,752
461,731
175,738
285,993
391,514
197,222
194,292
45.7%
33.4%
69.9%
52.4%
57.3%
51.6%
Change
y-o-y
-7.5%
-1.4%
-22.9%
1.9%
55.8%
35.0%
75.5%
17.9%
-10.9%
47.2%
1,386,308
794,512
74.5%
601,549
378,660
58.9%
784,759
415,852
88.7%
Strategic report Performance Ratios
GEL thousands, unless otherwise noted
2015
2014
Net interest margin, currency blended
Cost of risk
Loan yield, currency blended
Loan yield, GEL
Loan yield, FC
Cost of deposits, currency blended
Cost of deposits, GEL
Cost of deposits, FC
Cost of time deposits, currency blended
Cost of time deposits, GEL
Cost of time deposits, FC
Current accounts and demand deposits,
currency blended
Current accounts and demand deposits, GEL
Current accounts and demand deposits, FC
Cost/income ratio
4.5%
2.3%
10.7%
12.6%
10.4%
3.4%
5.2%
1.8%
6.3%
7.9%
4.7%
2.1%
4.0%
0.4%
24.3%
4.5%
1.7%
10.6%
10.5%
10.6%
2.9%
3.4%
2.4%
6.4%
7.9%
5.6%
1.5%
2.2%
0.8%
30.7%
Performance highlights
Corporate Banking revenue increased
to GEL 213.3 million, up 33.5% y-o-y.
Annual growth was diversified across all
revenue lines, with net banking interest
income driving the majority of the increase
since the same period last year.
Net banking interest income was GEL
134.9 million, up 30.8%. While the net loan
book and the loan yield for CB were largely
flat y-o-y, the growth in net interest income
was primarily driven by the appreciation of
the US Dollar, as almost 90% of corporate
banking loans are foreign currency
denominated, primarily in US Dollars.
The Corporate Banking net loan
book was GEL 2,130.4 million, down
1.4% y-o-y. On a constant a currency
basis, the corporate loan book declined
by 21.0% y-o-y. Foreign currency
denominated loans grew slightly by 1.9%
y-o-y, while local currency denominated
loans decreased considerably by
22.9% y-o-y, reflecting the appreciation
of the US Dollar during the year.
Corporate Banking client deposits
increased significantly to GEL 1,848.0
million, up 55.8% y-o-y. Growth on
a constant currency basis was 34.2%
y-o-y. The mix of client deposits by
currency showed the same dynamics
and drivers in 2015, as for our loan
book, resulting in 35.0% increase in local
currency denominated deposits, reaching
GEL 777.3 million, compared to 75.5%
increase in foreign currency denominated
deposits, reaching GEL 1,070.8 million.
Our current account balances have
increased significantly during 2015,
reflecting our focused efforts on
maintaining high liquidity levels, particularly
in local currency. This is also reflected in
increased cost of current accounts and
demand deposits to 2.1% in 2015, up
from 1.5% a year ago. The increase was
primarily driven by an increase in cost
of local currency denominated current
accounts and demand deposits to 4.0%,
up from 2.2% a year ago, while we reduced
cost on foreign currency denominated
current accounts and demand deposits.
As a result, at the end of 2015, total current
accounts and demand deposits reached
GEL 1,386.3 million, up 74.5% y-o-y, of
which local currency denominated current
accounts and demand deposits were GEL
601.5 million, up 58.9% y-o-y and foreign
currency denominated, mostly US Dollar,
current accounts and demand deposits
were GEL 784.8 million, up 88.7% y-o-y.
Our Corporate Banking net fee and
commission income increased to GEL
31.1 million, up 25.5% y-o-y. Our net
banking foreign currency gain increased
significantly in 2015, reflecting increased
volatility of the GEL/US Dollar exchange
rate during these periods. As a result, we
recorded net banking foreign currency
gain of GEL 38.1 million, up 53.5%
Corporate banking recorded NIM 4.5%,
flat y-o-y. NIM reflected a growing Loan
Yield, which was 10.7% in 2015, up 10
bps y-o-y. This was partially offset by the
increasing Cost of Client Deposits, which
was 3.4% in 2015, up 50 bps y-o-y, largely
as a result of a more expensive Georgian
Lari deposits as described above.
Operating expenses were well
contained in 2015, increasing slightly
to GEL 51.9 million, up only 5.9% y-o-y.
With the devaluation driven increase in
revenue, this resulted in a very strong
Cost to Income ratio of 24.3% in 2015
and positive operating leverage of 27.6
percentage points y-o-y. Slight increase
in operating expenses was partially driven
by salaries and other employee benefits
of GEL 33.8 million in 2015, up GEL 0.6
million or 1.9% y-o-y, mainly reflecting 2.0%
y-o-y decrease in cash bonuses and ESOP,
related to lower loan origination during
the year and administrative expenses
which increased to GEL 13.2 million
in 2015, up GEL 2.2 million or 20.5%,
reflecting increase in occupancy and
rent expenses mostly driven by US Dollar
appreciation against the local currency.
Cost of credit risk was GEL 55.7 million in
2015, up 33.4%, and Corporate Banking
Cost of Risk was 2.3% compared to
1.7% a year ago. As a result, Corporate
Banking profit reached GEL 86.3 million
in 2015, up 51.6% y-o-y. Our strategic
goal for Corporate Banking in 2015
was to reduce concentration risk in the
corporate lending and improve its ROAE.
As a result of this strategy, concentration
of top ten corporate banking clients
was reduced to 12.4% in the end of
2015, down from 15.7% a year ago.
Corporate Banking achieved ROAE
of 16.4% as of 31 December 2015, a
significant improvement compared to
11.7% a year ago. This result reflects
our continuous efforts to increase ROAE
of Corporate Banking business, as
well as the effect of the devaluation.
As a result of the recently announced
combination of our Corporate Banking
and Investment Management businesses
into a Corporate Investment Banking
business (CIB), we expect to grow our
fee income, further improve the Bank’s
ROAE and reduce the concentration
risk in the corporate lending portfolio.
Reflecting this change, the Group will
report CIB business results separately
starting in the first quarter 2016.
Annual Report 2015 BGEO Group PLC 79
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
Investment Management
AUM
WM client deposits, Galt & Taggart brokerage
client assets, WM clients’ assets held at
Bank of Georgia custody and Aldagi pension
scheme assets
(GEL million)
1,373.1
+33.7% y-o-y
Client deposits
(GEL million)
1,023.3
+27.1% y-o-y,
on constant currency basis -0.6% y-o-y
Investment Management consists of
Bank of Georgia Wealth Management
and the brokerage arm of the Bank,
Galt & Taggart. Bank of Georgia Wealth
Management provides private banking
services to high-net-worth individuals and
offers investment management products
internationally through representative
offices in London, Budapest, Istanbul
and Tel Aviv. Galt & Taggart brings
under one brand corporate advisory,
private equity and brokerage services.
Investment Management financial highlights (includes Galt & Taggart)
Income statement highlights
GEL thousands, unless otherwise noted
Net banking interest income
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Revenue
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
Operating expenses
2015
2014
20,941
3,193
3,627
1,178
14,613
8,760
1,432
789
Change
y-o-y
43.3%
-63.6%
153.3%
49.3%
28,939
25,594
13.1%
(9,506)
(1,367)
(486)
(111)
(9,560)
(1,737)
(413)
(100)
(11,470)
(11,810)
-0.6%
-21.3%
17.7%
11.0%
-2.9%
26.7%
NMF
22.8%
13.9%
23.0%
14.7%
24.5%
Operating income before cost of credit risk
17,469
13,784
Cost of credit risk
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax
Income tax expense
Profit
(480)
16,989
(337)
16,652
(2,328)
47
13,831
(296)
13,535
(2,029)
14,324
11,506
80 BGEO Group PLC Annual Report 2015
Strategic report Performance
Wealth Management financial highlights (excludes Galt & Taggart)
Balance sheet highlights
GEL thousands, unless otherwise noted
Client deposits, stand-alone, currency blended
Client deposits, stand-alone, GEL
Client deposits, stand-alone, FC
Time deposits, stand-alone, currency blended
Time deposits, stand-alone, GEL
Time deposits, stand-alone, FC
2015
2014
1,023,284
19,951
1,003,333
786,989
11,699
775,290
805,266
22,115
783,151
596,366
13,882
582,484
Change
y-o-y
27.1%
-9.8%
28.1%
32.0%
-15.7%
33.1%
Current accounts and demand deposits, stand-alone,
currency blended
Current accounts and demand deposits,
stand-alone, GEL
Current accounts and demand deposits,
stand-alone, FC
Assets under management
236,295
208,900
13.1%
8,252
8,233
0.2%
228,043
200,667
1,373,112 1,027,085
13.6%
33.7%
Ratios
GEL thousands, unless otherwise noted
Cost of deposits, currency blended
Cost of deposits, GEL
Cost of deposits, FC
Cost of time deposits, currency blended
Cost of time deposits, GEL
Cost of time deposits, FC
Current accounts and demand deposits, currency
blended
Current accounts and demand deposits, GEL
Current accounts and demand deposits, FC
2015
5.2%
5.7%
5.2%
6.3%
8.6%
6.2%
2.3%
1.5%
2.3%
2014
6.0%
6.3%
6.0%
7.4%
9.0%
7.3%
2.4%
1.3%
2.5%
Performance highlights
The AUM of the Investment
Management segment increased to
GEL 1,373.1 million, up 33.7% y-o-y.
This includes Wealth Management clients’
deposits and assets held at Bank of
Georgia Custody, Galt & Taggart brokerage
client assets and Aldagi pension scheme
assets. Investment Management posted
GEL 14.3 million profit in 2015 compared
to GEL 11.5 million in 2014. Net fee and
commission income of GEL 3.2 million
compared to GEL 8.8 million in 2014.
Wealth Management deposits
increased to GEL 1,023.3 million, up
27.1% y-o-y, growing at a compound
annual growth rate (CAGR) of 31.4% over
the last five-year period. On a constant
currency basis, deposits decreased by
0.6% y-o-y on the back of a 70 bps decline
in the Cost of Client deposits to 4.8% in
4Q15. The decrease was partially due
to Wealth Management focus switching
from deposits to bonds, as a number
of bond issuances, yielding higher rates
than deposits by Galt & Taggart, were
offered to Wealth Management clients.
As of 31 December 2015, the amount
of the Bank’s Certificates of Deposits
issued to Investment Management
clients increased to GEL 589.8 million,
up 28.0% compared to 31 December
2014. We served over 1,390 Wealth
Management clients from 68 countries
as of 31 December 2015.
Galt & Taggart is succeeding in
developing local capital markets, and
acted as a placement agent for:
• GEL 25 million floating rate notes
issued by the European Bank for
Reconstruction and Development
(EBRD) and GEL 30 million bonds
issued by IFC (International Finance
Corporation). Both transactions
were completed in February 2015.
• US$ 20 million two-year bonds for
m2 Real Estate, the largest non-
IFI issue to date. The transaction
was met with considerable
interest, particularly from Wealth
Management clients. The transaction
was completed in March 2015.
• US$ 15 million two-year bonds for the
Group’s wholly owned subsidiary Evex,
the healthcare services company of
healthcare business GHG. This was the
first bond placement by our healthcare
subsidiary. The proceeds from the
transaction were intended to be used
by the healthcare subsidiary to invest
in organic growth opportunities. The
transaction was completed in May 2015.
• Galt & Taggart (G&T) acted as a Co-
Leader Manager for the US$ 100 million
IPO of Georgia Healthcare Group on the
London Stock Exchange (GHG:LN) in
November 2015. This marks a landmark
transaction for G&T in helping Georgian
companies raise equity financing from
local and international investors.
• Since its launch in June 2012, Galt
& Taggart Research has initiated
research coverage of the Georgian
and Azeri economies, including a
report analysing the impact of Russia-
Ukraine standoff on the Georgian
economy, the Georgian Retail Real
Estate Market, the Georgian Wine
Sector, Georgian Agricultural Sector,
Georgian Electricity Sector, Georgian
Oil and Gas Corporation, Georgian
Railway, and has issued notes on the
Georgian State Budget and the Tourism
Sector. Galt & Taggart reports are
available at www.galtandtaggart.com.
Annual Report 2015 BGEO Group PLC 81
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Overview of financial results continued
Healthcare business (Georgia Healthcare Group – GHG)
Revenue
(GEL million)
242.7
+22.5% y-o-y
EBITDA
(GEL million)
56.1
+52.3% y-o-y
Organic revenue growth
17.3%
Healthcare business (Georgia Healthcare Group – GHG)
Income statement
GEL thousands, unless otherwise noted
Revenue, gross
Corrections and rebates
Revenue, net
Cost of services
Gross profit
Total operating expenses
Other operating income/(expenses)
EBITDA
EBITDA margin
Depreciation and amortisation
Net interest (expense)/income
Net (losses)/gains from foreign currencies
Net non-recurring (expense)/income
Profit before income tax expense
Income tax (expense)/benefit
Profit for the period
Attributable to:
– shareholders of GHG PLC
– non-controlling interests
2015
2014
242,673
(3,608)
239,065
(145,936)
93,129
(40,480)
3,490
198,148
(1,816)
196,332
(126,066)
70,266
(34,387)
983
Change
y-o-y
22.5%
98.7%
21.8%
15.8%
32.5%
17.7%
255.0%
56,139
36,862
52.3%
23.1%
18.6%
(12,665)
(20,281)
2,097
(1,682)
23,608
9
(7,630)
(12,806)
(2,494)
578
14,510
(1,246)
23,617
13,264
66.0%
58.4%
NMF
NMF
62.7%
NMF
78.1%
19,651
3,966
10,207
3,057
92.5%
29.7%
Note: For the purposes of the results discussion, healthcare business refers to the Group’s healthcare business,
Georgia Healthcare Group (GHG), which includes healthcare services and medical insurance. The results are based
on management accounts and refer to standalone numbers.
82 BGEO Group PLC Annual Report 2015
Strategic report Performance GHG’s margins improved as a result of
the increased utilisation and scale of
the business, as well as management’s
continued focus on efficiency and the
ongoing integration of recently acquired
healthcare facilities, with a 15.8% increase
in COGS lagging behind 22.5% growth
in revenues. In 2015 operating expenses
increased only 17.7% y-o-y, resulting
in a positive operating leverage of 4.8
percentage points y-o-y. GHG delivered on
its EBITDA margin target three years ahead
of time (GHG targeted c.30% healthcare
services business EBITDA margin by
2018). Healthcare services EBITDA
margin reached 27.4% for the full year.
As a result, strong margin performance
translated into GHG EBITDA of GEL 56.1
million in full year 2015, up 52.3% y-o-y.
The increase in depreciation and
amortisation costs was primarily driven
by the acquisitions completed during the
past year. The increase in net interest
expense was a result of increased
borrowings throughout the year raised
for financing acquisitions and growth
projects. However, net interest expense
is expected to decrease significantly, as
a total of GEL 104.4 million of borrowings
were prepaid at year end 2015 and
beginning of 2016 from IPO proceeds,
reducing borrowings to GEL 105.6 million
by the end of January 2016. As a result
of prepaying the borrowings, GHG’s net
debt to EBITDA was zero, due to cash and
bank deposits exceeding borrowings.
As a result, GHG’s 2015 profit reached
GEL 23.6 million, up 78.1% y-o-y for the
period. The adjusted profit1 was GEL 28.0
million, which reflects currency exchange
adjustment relating to the proceeds
received from the capital raise and the
positive impact of utilising some of the
proceeds to reduce the Group’s existing
indebtedness by GEL 104.4 million to GEL
105.6 million as at 31 January 2016.
By the end of 2015, GHG operated 45
healthcare facilities, of which 16 were
referral hospitals, 19 were community
hospitals, and 10 were ambulatory clinics.
This compares to 28 healthcare facilities,
of which five were referral hospitals, 20
were community hospitals, and five were
ambulatory clinics as of 31 December
2012 – a remarkable three-year growth
story. Total beds operated were 2,670,
of which 2,209 were beds at referral
hospitals and 461 were beds at community
hospitals and market share by number
of beds was 26.6%. The number of
insured clients was 234,000 and GHG’s
market share in medical insurance was
38.4% based on net insurance premium
revenue, as at 30 September 2015.
1. Adjusted net profit excludes the effect of the IPO.
The adjusted profit includes add back for a
non-recurring one-off FX loss as well as an add
back of one quarter interest expense released
through prepayment of debt at the end of 2015
and in January 2016.
Performance highlights
For full year 2015, GHG reported record
results and strong growth, supported both
organically and as a result of a number of
acquisitions completed in 2014 and 2015.
Revenue reached GEL 242.7 million,
implying growth of 22.5% y-o-y. The
revenue growth was primarily driven by
healthcare services business, which
reported revenue of GEL 195.0 million, up
32.5% y-o-y with impressive 17.3% organic
growth, and the remaining 15.2% growth
was contributed from recent acquisitions.
The medical insurance business also
contributed GEL 55.3 million to total
revenue, while recording a decrease of
20.8% y-o-y which was primarily driven
by an anticipated shift in the structure of
State-financed healthcare programmes.
Healthcare services revenue growth
of 32.5% y-o-y was primarily driven by
referral hospitals, which posted GEL
168.5 million revenue in 2015, up 36.6%
y-o-y and driven by strong organic
growth and acquisitions. Organic revenue
growth of 17.3% was largely sourced
from government-funded healthcare
programmes. Medical insurance claims
increased as Georgian Lari devaluation
against the US Dollar drove the prices of
drugs up, which represent c.21% of our
medical insurance claims. To address
the second driver, GHG has adjusted the
pricing of medical insurance products
and it is expected to have positive impact
gradually, with the renewal of existing
contracts or new sales at adjusted
prices. Additionally, GHG is renegotiating
prices for drugs with pharmaceutical
distributors, leveraging its combined
scale from claims on drugs in its medical
insurance business and purchases of
drugs and other medical disposables
for its healthcare services business.
Annual Report 2015 BGEO Group PLC 83
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information
Overview of financial results continued
Real estate business (m2 Real Estate)
Sales during 2015
(US$ million)
29.7
total of 347 apartments sold
Sales in completed projects
since 2011
(US$ million)
123.2
six completed projects
Sales in ongoing projects
since 2011
(US$ million)
19.3
two ongoing projects
Performance highlights
Following completion of its Tamarashvili
Street project with 522 apartments in 2014,
m2 Real Estate completed another project
on Nutsubidze Street with 221 apartments,
in 2015. At the beginning of 2016 m2
additionally completed three projects with
the total capacity of 803 apartments.
m2 Real Estate recorded strong revenue
growth in 2015, increasing to GEL 21.6
million, up 57.3% y-o-y, driven by strong
project execution and sales performance.
Gross real estate profit, which reflects
residential property development and sales
operations of m2 Real Estate, increased to
GEL 14.1 million, up 3.6% y-o-y, primarily
driven by strong sales performance in
relation to the Nutsubidze Street project.
m2 Real Estate sold a total of 347
apartments with a sales value of US$
29.7 million in 2015, compared to 573
apartments sold with a sales value of US$
46.7 million in 2014. At its three projects
which have already been completed
at the end of 2015 with a total of 866
apartments, m2 Real Estate had a stock
of only 21 apartments unsold at the end
of 2015. At the beginning of 2016 m2
additionally completed three projects with
the total capacity of 803 apartments,
of which 603 or 75% of apartments
84 BGEO Group PLC Annual Report 2015
Our real estate business is operated
through the Bank’s wholly owned
subsidiary m2 Real Estate, which develops
residential property in Georgia. m2 Real
Estate outsources the construction
and architecture works while itself
focusing on project management
and sales. The Bank’s Real Estate
business serves to meet the unsatisfied
demand in Tbilisi for housing through
its well-established branch network
and sales force, while stimulating the
Bank’s mortgage lending business.
Income statement
GEL thousands, unless otherwise noted
2015
2014
Real estate revenue
Cost of real estate
Gross real estate profit
Gross other investment profit
Revenue
Salaries and other employee benefits
Administrative expenses
Operating expenses
EBITDA
Depreciation and amortisation of investment business
Net foreign currency loss from investment business
Interest income from investment business
Interest expense from investment business
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax
Income tax (expense) benefit
Profit
were already sold by the date of this
report. At its two ongoing projects with
a total capacity of 838 apartments, 232
apartments or 28% are already sold.
Pursuant to m2 Real Estate’s current
revenue recognition policy (in line with
IAS 18), revenue is recognised at the full
completion of the project. Because of its
revenue recognition policy, m2 Real Estate
had accumulated US$ 57.1 million sales
from its ongoing projects by the end of
2015, which will be recognised as revenue
upon completion of the ongoing projects
in 2016-2018 (of which c.US$ 43 million
is expected to be recognised in 2016).
m2 Real Estate has completed all of its
projects on or ahead of time and within
budget. Additionally, m2 Real Estate
started construction of two new projects
in 2015 with a total of 838 apartments.
One of these projects is the largest ever
carried out by m2 Real Estate, with a total
of 819 apartments in a central location in
Tbilisi. Another project is also a new type
of project for m2 Real Estate, representing
a luxury residential building in Old Tbilisi
neighbourhood with few apartments (19
in total) and relatively high price tag.
53,852
(39,721)
14,131
7,502
21,633
(1,150)
(4,710)
(5,860)
15,773
(191)
(1,534)
386
(1,566)
12,868
(137)
12,731
(1,974)
10,757
60,455
(46,810)
13,645
107
13,752
(1,177)
(3,959)
(5,136)
8,616
(332)
(896)
254
(778)
6,798
18
6,816
(1,022)
5,794
Change
y-o-y
-10.9%
-15.1%
3.6%
NMF
57.3%
-2.3%
19.0%
14.1%
83.1%
-42.5%
71.2%
52.0%
101.3%
89.3%
NMF
86.8%
93.2%
85.7%
In summary, m2 Real Estate has started
eight projects since its establishment
in 2010, of which six have already been
completed, and construction of two is
ongoing. One of these is expected to
be completed in 2016 and one more
is expected to be completed in 2018.
Currently, only 825 units are available
for sale out of total of 2,507 apartments
developed or being at different stages of
development. We are unlocking a total
land value of US$ 16.6 million from the six
completed projects and remaining US$ 8.9
million is expected to be unlocked upon
completion of the on-going two projects.
The number of apartments financed
with BOG mortgages in all m2 Real
Estate projects as of 31 December
2015 totalled 788, with an aggregate
amount of GEL 86.7 million.
m2 Real Estate recognised significant
increase in gross other investment profit
to GEL 7.5 million, up from GEL 0.1 million
a year ago. This is the net effect of the
general property revaluation of the land-
plots and buildings owned by m2 Real
Estate. Growth in revenue largely outpaced
growth in operating expenses, resulting in
83.1% y-o-y growth in EBITDA to GEL 15.8
million in 2015, which eventually translated
into GEL 10.8 million profit, up 85.7% y-o-y.
Strategic report Performance Project performance highlights
Completed projects
Chubinishvili Street
Tamarashvili Street
Nutsubidze Street
Kazbegi Street
IRR realised: 47%
•
• Start date:
September 2010
• Completion: August 2012
• Apartments sold:
123/123, 100%
• Sales: US$ 9.9 million
• Recognised as revenue
by the end of 2015:
US$ 9.9 million
• Land value unlocked:
US$ 0.9 million
•
IRR realised: 46%
• Start date: May 2012
• Completion: June 2014
• Apartments sold:
522/522, 100%
• Sales: US$ 48.0 million
• Recognised as revenue
by the end of 2015:
US$ 47.6 million
• Land value unlocked:
US$ 5.4 million
IRR realised: 58%
•
• Start date:
December 2013
• Completion:
September 2015
• Apartments sold:
202/221, 91%
• Sales: US$ 16.2 million
• Recognised as revenue
by the end of 2015:
US$ 14.1 million
• Unlocking land value
of : US$ 2.2 million
• Expected IRR: 165%
• Start date:
December 2013
• Completion: March 2016
• Apartments sold:
266/295, 90%
• Sales: US$ 24.4 million
• Recognised as revenue
by the end of 2015:
US$ 9.4 million
• Unlocking land value
of: US$ 3.6 million
Completed projects
Ongoing projects
Tamarashvili Street II
Moscow Avenue
Kartozia Street
Skyline
• Expected IRR: 71%
• Start date: July 2014
• Completion: April 2016
• Apartments sold:
193/270, 71%
• Sales: US$ 17.9 million
• Unlocking land value
of: US$ 2.7 million
• Expected IRR: 31%
• Start date:
September 2014
• Completion: March 2016
• Apartments sold:
144/238, 61%
• Sales: US$ 6.8 million
• Unlocking land value
of: US$ 1.6 million
• Expected IRR: 31%
• Start date:
November 2015
• Expected IRR: 329%
• Start date:
December 2015
• Completion expected:
• Completion expected:
September 2018
December 2016
• Construction progress:
• Construction progress:
8% completed as
of February 2016
• Apartments sold:
223/819, 27%
• Sales: US$ 15.7 million
• Expected land value
to be unlocked:
US$ 5.8 million
5% completed as
of February 2016
• Apartments sold:
9/19, 47%
• Sales: US$ 3.7 million
• Expected land value
to be unlocked:
US$ 3.1 million
Annual Report 2015 BGEO Group PLC 85
Strategic reportOverviewStrategic reportStrategyStrategic reportPerformanceGovernanceFinancial statementsAdditional information Directors’ Governance Statement – Leadership
Our Board of Directors
We see our Board as a team comprised of individuals each having an area of expertise, but who
collectively engage in the full range of issues facing the Group.
07
09
02
06
08
05
01
03
04
01. Neil Janin
02. Irakli Gilauri
03. David Morrison
04. Alasdair
Non-Executive
Chairman
CEO
Senior
Independent
Non-Executive
Director
(Al) Breach
Independent
Non-Executive
Director
05. Kakhaber (Kaha)
Kiknavelidze
Independent
Non-Executive
Director
06. Kim Bradley
Independent
Non-Executive
Director
07. Tamaz
Georgadze
Independent
Non-Executive
Director
08. Bozidar Djelic
Independent
Non-Executive
Director
09. Hanna Loikkanen
Independent
Non-Executive
Director
86 BGEO Group PLC Annual Report 2015
Governance 01. Neil Janin
Non-Executive Chairman
Mr Janin was appointed Non-Executive Chairman on 24 October 2011
and has been re-elected by shareholders at each AGM thereafter.
Mr Janin serves as Chairman of BGEO’s Nomination Committee as
well as a member of BGEO’s Remuneration Committee. Mr Janin also
serves as a member of the Supervisory Board of the Bank, having
stepped down as Chairman in July 2015, a position he had held
since 2010. Mr Janin continues to serve as a member of the Bank’s
Remuneration Committee, a position he has held since 2010. Mr Janin
also serves as a Non-Executive Director of Georgia Healthcare Group
PLC and a member of the Supervisory Board of JSC Georgia
Healthcare Group.
03. David Morrison
Senior Independent Non-Executive Director
David Morrison was appointed as the Senior Independent
Non-Executive Director of BGEO on 24 October 2011 and has been
re-elected by shareholders at each AGM thereafter. Mr Morrison
assumed the role of Chairman of BGEO’s Audit Committee in
December 2013, prior to which he served as a member of the
Committee. Mr Morrison is also a member of BGEO’s Remuneration
and Nomination Committees, and serves on the Bank’s Supervisory
Board and as a member of the Bank’s Audit and Remuneration
Committees, positions he has held since 2010. Mr Morrison is a
Non-Executive Director of Georgia Healthcare Group PLC and a
member of the Supervisory Board of JSC Georgia Healthcare Group.
Skills and experience:
Mr Janin serves as counsel to CEOs of both for-profit and non-profit
organisations and continues to provide consulting services to
McKinsey & Company. Prior to joining the Bank in 2010, Mr Janin was
a Director of McKinsey & Company, based in its Paris office, for over
27 years, from 1982 until his retirement. At McKinsey & Company, he
conducted engagements in the retail, asset management and
corporate banking sectors, and was actively involved in every aspect
of organisational practice, including design, leadership, governance,
performance enhancement and transformation. In 2009, while serving
as a member of the French Institute of Directors, Mr Janin authored a
position paper on the responsibilities of the board of directors with
regard to the design and implementation of a company’s strategy.
Before joining McKinsey & Company, Mr Janin worked for Chase
Manhattan Bank (now JP Morgan Chase) in New York and Paris, and
Procter & Gamble in Toronto. Mr Janin has practised in Europe, Asia
and North America.
Mr Janin is also a Director of Neil Janin Limited, a company through
which he provides consulting services.
Education:
Mr Janin holds an MBA from York University, Toronto, and a joint
honours degree in Economics and Accounting from McGill University,
Montreal.
02. Irakli Gilauri
CEO
Irakli Gilauri was appointed as an Executive Director of BGEO on
24 October 2011 and has been re-elected by shareholders at each
AGM thereafter. Mr Gilauri has served as CEO of BGEO since his
appointment in 2011, and was appointed Chairman of the Bank in
September 2015, having previously served as CEO of the Bank since
May 2006. Mr Gilauri also serves as CEO of JSC BGEO Group and
Chairman of the Board of Georgia Healthcare Group PLC and
Chairman of the Supervisory Boards of JSC Georgia Healthcare
Group, insurance company Aldagi and the Tree of Life Foundation.
He is also a member of the Supervisory Board of the following
subsidiaries: Georgia Global Utilities, Agron Group, Belarusky Narodny
Bank, Galt & Taggart Holdings and m2 Real Estate.
Skills and experience:
Before his employment with the Bank, Mr Gilauri was a banker at the
EBRD’s Tbilisi and London offices for five years, where he worked on
transactions involving debt and private equity investments in Georgian
companies.
Education:
Mr Gilauri received his undergraduate degree in Business Studies,
Economics and Finance from the University of Limerick, Ireland, in
1998. He was later awarded the Chevening Scholarship, granted by
the British Council, to study at the CASS Business School of City
University, London, where he obtained his MSc in Banking and
International Finance.
Skills and experience:
Mr Morrison is a member of the New York bar and worked for 28 years
at Sullivan & Cromwell LLP until he withdrew from the firm in 2007 to
pursue other interests. At Sullivan & Cromwell, he served as Managing
Partner of the firm’s Continental European offices. His practice focused
on advising public companies in a transactional context, including
capital raisings, IPOs and mergers and acquisitions. Key clients
included investment banks and a wide range of commercial and
industrial companies. He advised on a number of the largest
privatisations in Europe, and was advisor to Germany’s development
bank, Kreditanstalt für Wiederaufbau (KfW) for over 20 years (serving
on the Board of Directors of KfW’s finance subsidiary). Mr Morrison is
the author of several publications on securities law-related topics, and
has been recognised as a leading lawyer in Germany and France.
In 2008, Mr Morrison turned his attention to nature protection
financing. He became the Founding CEO of the Caucasus Nature
Fund (CNF), a charitable trust fund dedicated to nature conservation
in Georgia, Armenia and Azerbaijan. He resigned as CEO in March
2016 and now serves on the Board of Directors of CNF. In 2015,
Mr Morrison helped to create a new conservation trust fund for the
Balkans, known as Prespa Ohrid Nature Trust (PONT). He now serves
as PONT’s CEO on an interim basis.
Education:
Mr Morrison received his undergraduate degree from Yale College,
received his law degree from the University of California, Los Angeles,
and was a Fulbright scholar at the University of Frankfurt.
Annual Report 2015 BGEO Group PLC 87
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Governance Statement – Leadership continued
04. Alasdair (Al) Breach
Independent Non-Executive Director
Al Breach was appointed as an Independent Non-Executive
Director of BGEO on 24 October 2011 and has been re-elected by
shareholders at each AGM thereafter. Mr Breach serves as Chairman
of BGEO’s Remuneration Committee and serves as a member of
BGEO’s Risk and Nomination Committees. Mr Breach also serves as
a member of the Bank’s Supervisory Board and Chairman of the
Bank’s Remuneration Committee, positions he has held since 2010,
and has also been a member of the Bank’s Risk Committee since
December 2014.
Skills and experience:
In 2013, Mr Breach co-founded Gemsstock Limited, a UK FCA-
regulated fund manager, where he also serves as an Executive
Director. In 2010, Mr Breach founded Furka Advisors AG, a Swiss-
based asset management firm, and served as an Executive Director
until founding Gemsstock Limited, which manages the Gemsstock
Fund, which was previously called the Gemsstock Growth Fund and
managed by Mr Breach at Furka Advisors AG. His previous career
was in research in investment banks, principally in Russia. In January
2003, Mr Breach joined Brunswick UBS (later UBS Russia) as Chief
Economist, and later was appointed Head of Research and Managing
Director until October 2007. From 1998 to 2002, Mr Breach was a
Russia and FSU (Former Soviet Union) economist at Goldman
Sachs, based in Moscow. Mr Breach is also the co-founder of The
Browser.com, a web-based curator of current affairs writing,
established in 2008.
Mr Breach serves as a Director of Gemsstock Limited, the Gemsstock
Fund, The Browser and Furka Holdings AG, all of which are private
entities. He is also an advisor to East Capital.
Education:
Mr Breach obtained an MSc in Economics from the London School of
Economics and an undergraduate degree in Mathematics and
Philosophy from Edinburgh University.
05. Kakhaber (Kaha) Kiknavelidze
Independent Non-Executive Director
Kaha Kiknavelidze was appointed as an Independent Non-Executive
Director of BGEO on 24 October 2011 and has been re-elected by
shareholders at each AGM thereafter. Mr Kiknavelidze serves as a
member of BGEO’s Audit, Risk and Nomination Committees.
Mr Kiknavelidze also serves as a member of the Bank’s Supervisory
Board and Audit Committee, positions he has held since 2008, and
has also been a member of the Bank’s Risk Committee since
December 2014.
Skills and experience:
Mr Kiknavelidze is the founder and Managing Partner of Rioni Capital
Partners LLP and an Executive Director of Rioni Capital Services Ltd,
an investment management company he continues to operate from
London. Mr Kiknavelidze has over 15 years of experience in the equity
markets, including serving as an Executive Director of UBS, where he
supervised the Russian oil and gas research team. Prior to joining
UBS, he spent eight years at Troika Dialog, initially covering metals and
mining and the utilities sectors and, later, as Deputy Head of Research
and Associate Partner, leading the oil and gas team. Mr Kiknavelidze
began his career at the Bank as a Financial Manager in 1994.
Mr Kiknavelidze also serves as an Executive Director of Scholae Mundi
Foundation, a charity, and as a Non-Executive Director of the Georgian
Stock Exchange and OAS Zontik SICAV, a Luxembourg-based fund.
Education:
Mr Kiknavelidze received his undergraduate degree in Economics with
honours from the Georgian Agrarian University in Tbilisi, Georgia, and
received his MBA from Emory University.
06. Kim Bradley
Independent Non-Executive Director
Kim Bradley was appointed as an Independent Non-Executive
Director of BGEO on 19 December 2013 and has been re-elected
by shareholders at each AGM thereafter. Mr Bradley serves as
Chairman of the BGEO Risk Committee and a member of BGEO’s
Audit and Nomination Committees. Mr Bradley was also appointed to
the Bank’s Supervisory Board in December 2013 and serves as
Chairman of the Bank’s Risk Committee and as a member the Bank’s
Audit Committee.
Skills and experience:
Mr Bradley retired from Goldman Sachs in early 2013, following 15
years as a professional in the Real Estate Principal Investments and
Realty Management divisions, where he focused on investment in both
European real estate and distressed debt.
In addition to his investment activities, Mr Bradley led Goldman’s asset
management affiliates in France, Italy and Germany, where he was
involved in financial and tax audits as well as management of internal
audit activities. He has also served as President of Societa Gestione
Crediti, a member of the Board of Directors of Capitalia Service Joint
Venture in Italy and Chairman of the Shareholders Board at Archon
Capital Bank Deutschland in Germany. Prior to Goldman Sachs, he
served as a Senior Executive at GE Capital for seven years in both the
United States and Europe, where his activities included real estate
workouts and restructuring, as well as acquisitions. Prior to GE
Capital, Mr Bradley held senior executive positions at Manufacturers
Hanover Trust (now part of JP Morgan) and Dollar Dry Dock Bank. He
has also served as a Peace Corps volunteer and as a consultant with
the US Agency for International Development in Cameroon.
Education:
Mr Bradley holds an MA in International Affairs from the Columbia
University School of International Affairs and an undergraduate degree
in English Literature from the University of Arizona.
07. Tamaz Georgadze
Independent Non-Executive Director
Tamaz Georgadze was appointed as an Independent Non-Executive
Director of BGEO on 19 December 2013 and has been re-elected by
shareholders at each AGM thereafter. Mr Georgadze serves as a
member of BGEO’s Risk and Nomination Committees. Mr Georgadze
was also appointed to the Bank’s Supervisory Board in December
2013 and serves as a member of the Bank’s Risk Committee.
Skills and experience:
In 2013, Mr Georgadze founded SavingGlobal GmbH, a company
which launched the first global deposit intermediation in Europe and
he continues to serve as its Executive Director. Prior to founding this
company, Mr Georgadze had a 10-year career at McKinsey &
Company in Berlin, where he served as a Partner from 2009 to 2013.
At McKinsey & Company, he conducted engagements with banks in
Germany, Switzerland, Russia, Georgia and Vietnam, focusing on
strategy, risk identification and management, deposit and investment
products, operations and sales. Prior to joining McKinsey & Company,
Mr Georgadze worked as an aide to the President of Georgia in the
Foreign Relations Department from 1994 to 1995.
Save for his role at SavingGlobal GmbH, Mr Georgadze does not hold
any other directorships.
Education:
Mr Georgadze holds two PhDs, one in Economics from Tbilisi State
University and the other in Agricultural Economics from Justus-Liebig
University Gießen, Germany. Mr Georgadze also studied Law at
Justus-Liebig Universität Gießen and graduated with honours.
88 BGEO Group PLC Annual Report 2015
Governance 08. Bozidar Djelic
Independent Non-Executive Director
Bozidar Djelic was appointed as an Independent Non-Executive
Director of BGEO on 19 December 2013 and has been re-elected by
shareholders at each AGM thereafter. Mr Djelic serves as a member of
BGEO’s Risk and Nomination Committees. Mr Djelic was also
appointed to the Bank’s Supervisory Board in December 2013 and
serves as a member of the Bank’s Risk Committee.
Skills and experience:
Since January 2014, Mr Djelic has served as Managing Director in the
Sovereign Advisory Department of Lazard, based in Paris. Mr Djelic
also currently serves as a member of EBRD’s “Transition to Transition”
Senior Advisory Group. Prior to this, he served as Deputy Prime
Minister for European Integration and as Minister of Science and
Technological Development of Serbia from 2008 to 2011. From 2007
to 2008, Bozidar served as sole Deputy Prime Minister of Serbia, and
as Governor of the World Bank Group and Deputy Governor of the
EBRD. From 2005 to 2007, he was Crédit Agricole Group’s Director for
Eastern Europe and the FSU (Former Soviet Union), leading the
acquisition and management of several banks in the region. From
2001 to 2004, Mr Djelic served as Minister of Finance and Economy of
Serbia, leading the country’s macro and banking reform. From 1993 to
2000, he worked at McKinsey & Company in Paris and Silicon Valley,
specialising in financial institutions, asset management and media. He
has also held various advisory positions, including advisor to the Polish
and Romanian Governments.
Mr Djelic does not hold any other directorships.
Education:
Mr Djelic holds an MBA from the Harvard Business School, an MPA
from Harvard’s J.F. Kennedy School of Government and an MA in
Economics from the École de Hautes Études in Social Sciences.
09. Hanna Loikkanen
Independent Non-Executive Director
Hanna Loikkanen was appointed as an Independent Non-Executive
Director of BGEO by the Board in June 2015 and will be proposed for
election by shareholders at the upcoming AGM. Ms Loikkanen is also
a member of BGEO’s Nomination Committee and was appointed to
BGEO’s Audit Committee in March 2016. Ms Loikkanen was also
appointed to the Bank’s Supervisory Board in August 2015.
Ms Loikkanen previously served as a Non-Executive Director of BGEO
from 2011 until 2013 and as a member of the Bank’s Supervisory
Board from 2010 until 2013.
Skills and experience:
Ms Loikkanen has over 20 years of experience working with financial
institutions in Russia and Eastern Europe. She currently serves as an
advisor to East Capital Private Equity AB. Prior to this, she served from
2010 until 2012 as the Chief Representative and Head of the Private
Equity team at East Capital, a Swedish asset management company
in Moscow, with a special focus on financial institutions. Prior to joining
East Capital, Ms Loikkanen held the position of Country Manager and
Chief Executive Officer at FIM Group in Russia, a Finnish investment
bank, where she was responsible for setting up and running FIM
Group’s brokerage and corporate finance operations in Russia. During
her tenure at FIM Group, the company advised several large foreign
companies in their M&A activities in Russia. Earlier in her career,
Ms Loikkanen worked for Nordea Finance in various management
positions in Poland, the Baltic States and Scandinavia with a focus on
business development, strategy and business integration; for SEB in
Moscow where she was responsible for the restructuring of SEB’s
debt capital market operations in Russia; and for MeritaNordbanken in
St Petersburg where she focused on trade finance and correspondent
banking.
In addition to her directorships at BGEO Group and the Bank,
Ms Loikkanen serves as a Non-Executive Director and a member of
the Audit and Risk Committee of Locko Bank, an SME focused
Russian bank and as a Non-Executive Director of Locko Invest, Locko
Bank’s investment banking subsidiary. She is also a Non-Executive
Director of AKI Bank in Tatarstan. Since 2014, she has acted as
Non-Executive Chairman of the Board of T&B Capital, an independent
regulated wealth management company based in Helsinki.
Education:
Ms Loikkanen holds a Master’s degree in Economics and Business
Administration from the Helsinki School of Economics, and was a
Helsinki School of Economics scholar at the University of New
South Wales.
Annual Report 2015 BGEO Group PLC 89
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Governance Statement – Leadership
Our Group management
01. Irakli Gilauri
CEO of BGEO and
JSC BGEO Group
02. Murtaz Kikoria
CEO of Bank of
Georgia
03. Levan
04. Avto
Kulijanishvili
CFO of JSC BGEO
Group and Deputy
CEO (Finance) of
Bank of Georgia
Namicheishvili
General Counsel of
JSC BGEO Group
05. Mikheil Gomarteli
Deputy CEO (Retail
Banking) of Bank of
Georgia
01. Irakli Gilauri
Group CEO
See details on page 87.
02. Murtaz Kikoria
CEO of Bank of Georgia
Mr Kikoria was appointed as CEO of the Bank in September 2015.
Prior to this appointment, Mr Kikoria served as Deputy CEO (Finance)
from December 2014, having previously served as the CEO of JSC
Georgia Healthcare Group since August 2014, following its split from
Aldagi, where Mr Kikoria had served as the CEO since October 2012.
Prior to this, Mr Kikoria served as Deputy CEO (Finance) of the Bank
since June 2011. Before this, Mr Kikoria served as acting CEO of BG
Bank (currently Bank Pershyi) since June 2009. Mr Kikoria also serves
as a member of the Supervisory Board of Bank Pershyi. Mr Kikoria
joined the Bank as Deputy CEO (Compliance) in August 2008. From
2005 to 2007, Mr Kikoria served as a Senior Banker at EBRD. Prior to
joining EBRD, Mr Kikoria served as Head of Banking Supervision and
Regulation at the NBG from 2001 to 2005, having previously held
various senior positions at United Georgian Bank and SilkRoad Bank.
Mr Kikoria received an undergraduate degree from Tbilisi State
University in Economics, specialising in Finance and Credit.
03. Levan Kulijanishvili
CFO of JSC BGEO Group and Deputy CEO (Finance) of
Bank of Georgia
Mr Kulijanishvili was appointed as CFO of JSC BGEO Group in
February 2016. This role is in addition to his appointment as Deputy
CEO (Finance) of the Bank in September 2015, having previously
served as Head of Compliance and Internal Control since 2009.
Mr Kulijanishvili has been with the Bank since 1997. During his 18
years of service, Mr Kulijanishvili has held various senior positions,
including Head of the Internal Audit department (from 2000 to 2009),
Manager of the Financial Monitoring department (from 1999 to 2000)
and Head of the Financial Analysis division (from 1997 to 1999). He has
an undergraduate degree in Economics and Commerce from Tbilisi
State University and received his MBA from Grenoble Graduate School
of Business.
04. Avto Namicheishvili
General Counsel of JSC BGEO Group
Avto Namicheishvili was appointed as General Counsel of JSC BGEO
Group in September 2015. He previously served as Deputy CEO
(Legal) of the Bank since July 2008, prior to which he served as the
Bank’s General Counsel from March 2007. Before joining the Bank,
Mr Namicheishvili was a partner at Begiashvili & Co. Limited, a leading
Georgian law firm, where he acted as external legal advisor for Bank of
Georgia from 2004. He has undergraduate degrees in Law and
International Economic Relations from Tbilisi State University and a
graduate degree (LLM) in International Business Law from Central
European University, Hungary.
05. Mikheil Gomarteli
Deputy CEO (Retail Banking) of Bank of Georgia
Mr Gomarteli was appointed as Deputy CEO (Retail Banking) of the
Bank in February 2009. Mr Gomarteli has been with the Bank since
December 1997. During his 18 years of service with the Bank,
Mr Gomarteli has held various senior positions, including Co-Head of
Retail Banking (from March 2007 to February 2009), Head of Business
Development (from March 2005 to July 2005), Head of Strategy and
Planning (from 2004 to 2005), Head of Branch Management and Sales
Coordination (from 2003 to 2004), Head of Branch Management and
Marketing (from 2002 to 2003) and Head of Banking Products and
Marketing (from 2000 to 2002). Mr Gomarteli received an
undergraduate degree in Economics from Tbilisi State University.
06. Archil Gachechiladze
Deputy CEO (Corporate Investment Banking) of Bank of
Georgia
Mr Gachechiladze was appointed Deputy CEO (Corporate and
Investment Banking) in February 2016, following the combination of
the Bank’s Corporate Banking and Investment Management
businesses, having previously served as CFO of JSC BGEO Group
since September 2015 and Deputy CEO (Investment Management) of
the Bank since May 2013. Prior to these appointments, he served as
Deputy CEO (Corporate Banking) of the Bank. Prior to joining the
Bank, Mr Gachechiladze served as Deputy Director in charge of
Corporate Recovery at TBC Bank, Georgia, a position he held since
August 2008. From 2006 to 2008, Mr Gachechiladze was an
Associate at Lehman Brothers Private Equity (currently Trilantic Capital
90 BGEO Group PLC Annual Report 2015
Governance 06. Archil
07. Sulkhan Gvalia
Gachechiladze
Deputy CEO
(Corporate
Investment
Banking) of Bank of
Georgia
Former Deputy CEO
(Corporate Banking)
of Bank of Georgia
08. Giorgi Chiladze
Deputy CEO
(Chief Risk Officer)
of Bank of Georgia
09. Nikoloz
Gamkrelidze
CEO of Georgia
Healthcare Group
10. Irakli Burdiladze
CEO of m2 Real
Estate
Partners) in London. From 1998 to 2004, Mr Gachechiladze served as
a Senior Associate at Salford Equity Partners, a Senior Analyst at
EBRD in Tbilisi and London, a Senior Financial Analyst at KPMG
Barents in Tbilisi and as a Team Leader for the World Bank’s CERMA
Project in Tbilisi. Mr Gachechiladze received his undergraduate degree
in Economics and Law from Tbilisi State University and his MBA with
distinction from Cornell University. He is also CFA Charterholder and a
member of the CFA Society in the United Kingdom.
07. Sulkhan Gvalia
Former Deputy CEO (Corporate Banking) of Bank of
Georgia1
Mr Gvalia retired from his position of Deputy CEO (Corporate Banking)
of the Bank in January 2016 and left the Bank on 1 February 2016 to
pursue other interests. He had held this position since May 2013, prior
to which he served as Deputy CEO (Chief Risk Officer) since January
2005, following the Bank’s acquisition of TUB, a mid-sized bank in
Georgia co-founded by him in 1995. Mr Gvalia has 22 years of banking
experience, holding management positions in risk, credit finance,
strategy and treasury. Mr Gvalia received his undergraduate Law
degree from Tbilisi State University.
Note:
1. Please note that in February 2016, the Corporate Banking and Investment
Management businesses were combined into a Corporate Investment Banking
business, which is now led by Archil Gachechiladze (please see his biography on
the previous page and this page).
08. Giorgi Chiladze
Deputy CEO (Chief Risk Officer) of Bank of Georgia
Mr Chiladze was appointed as Deputy CEO (Chief Risk Officer) in
September 2013. He re-joined the Bank having already served as
Deputy CEO (Finance) from 2008 to 2011. From 2011 to 2013,
Mr Chiladze worked at the Partnership Fund in the capacity of Deputy
CEO. Mr Chiladze served as General Director of BTA Bank (Georgia)
from 2005 to 2011. Prior to joining BTA Bank, he was an executive
member of the Supervisory Board of JSC Europace Insurance
Company and a founding partner of the management consulting firm,
Altergroup Ltd. Mr Chiladze had previously worked in the US at the
Program Trading Desk at Bear Stearns in New York City, prior to
returning to Georgia in 2003. Mr Chiladze received a PhD in Physics
from Johns Hopkins University in Baltimore, Maryland and an
undergraduate degree in Physics from Tbilisi State University.
09. Nikoloz Gamkrelidze
Group CEO, Georgia Healthcare Group
Mr Gamkrelidze was appointed as CEO of JSC Georgia Healthcare
Group on 4 December 2014 and CEO of Georgia Healthcare Group
PLC in August 2015, having previously served as Deputy CEO
(Finance) of the Bank since October 2012. Prior to this appointment,
Mr Gamkrelidze served as CEO of Aldagi. Prior to joining Aldagi,
Mr Gamkreldize served as CEO of joint stock company My Family
Clinic from October 2005 to October 2007. Before this,
Mr Gamkrelidze served as a consultant at Primary Healthcare
Development Project (The World Bank Project) and worked on the
development of pharmaceutical policy and regulation in Georgia. Prior
to joining Primary Healthcare Development Project, he served at BCI
Insurance Company as Head of the Personal Risks Insurance
Department from 2002 to 2003. Mr Gamkrelidze started his career at
the State Medical Insurance Company in 1998, where he worked for
two years. He graduated from the Faculty of General Medicine of
Tbilisi with distinctions, and holds an MA in International Healthcare
Management from the Tanaka Business School of Imperial College
London.
10. Irakli Burdiladze
CEO, m2 Real Estate
Mr Burdiladze was appointed as CEO of JSC m2 Real Estate in 2010.
He previously served as Chief Operating Officer of the Bank from
March 2007 to June 2010, after spending a year as CFO of the Bank.
Prior to joining the Bank, Mr Burdiladze served as CFO of the GMT
Group, a leading real estate developer and operator in Georgia. As
CFO, Mr Burdiladze was responsible for the Group’s capital-raising
efforts and transaction structuring. Mr Burdiladze received a graduate
degree in International Economics and International Relations from the
Johns Hopkins University School of Advanced International Studies
and an undergraduate degree in International Relations from Tbilisi
State University.
Annual Report 2015 BGEO Group PLC 91
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Governance Statement
and internal control, assisted by our Audit and Risk
Committees.
• We retained Lintstock Ltd. (Lintstock) to conduct a formal
evaluation of each Director’s skills and contribution and that of
the Board as a whole and its Committees. We used the
independent review to compare last year’s results to this year’s
in order to ensure that the priorities set last year were followed
through in 2015.
• Our Board and management continued to engage extensively
with our investors, reflecting our commitment to transparent
reporting and dialogue.
We see maintaining good governance and improving it as an
ongoing process, and plan to continue to adapt our governance
framework as our business, strategy and the environment in which
we operate evolves. We view new regulations and guidance as an
opportunity for our Board and Committees to upskill and expand
their capabilities.
Neil Janin
Non-Executive Chairman
David Morrison
Senior Independent
Non-Executive Director
Dear Shareholders,
Our Board is committed to excellence in corporate governance.
We see robust corporate governance as fundamental to the
effective management of the business and a principal contributor
to the long-term success of the Group, creating trust and
engagement between the Group and our stakeholders.
Neil Janin
Non-Executive Chairman
7 April 2016
David Morrison
Senior Independent Non-Executive Director
7 April 2016
Compliance Statement
Responsibility for good governance lies with the Board.
Throughout the year ended 31 December 2015 and to the
date of this Annual Report, we applied the Main Principles
and complied with the Provisions of the UK Corporate
Governance Code 2014 save for Section D.1.1, which
recommends a three-year vesting period for all shares
granted as part of remuneration. As described in the
Directors’ Remuneration Report and Directors’ Remuneration
Policy on pages 107 to 123, shares granted as discretionary
compensation vest over a two-year period following the work
year for which the discretionary compensation was earned.
However, our overall remuneration package is weighted
heavily to deferred share compensation and includes deferred
salary shares which vest over a five-year period following the
work year. As a result, the average vesting period for deferred
share compensation exceeds the Code’s recommended
minimum of three years.
The Code and associated guidance is published by the
Financial Reporting Council and is available at
www.frc.org.uk.
Set out on our website at
http://bgeo.com/page/id/72/compliance-with-the-main-
principles-of-the-corporate-governance-code
is the Board’s assessment of its application of the
Main Principles of the Code, as required by LR 9.8.6.
The Board provides leadership of the Group within a framework of
controls which enables risks to be assessed which allows us to
put the human and financial resources in place that we believe will
optimise the Group’s ability to meet its strategic objectives and
increase shareholder value. We seek to create an environment in
which transparency, honesty, integrity and fairness are valued and
practised by our employees every day. This inclusive environment
helps us attract, retain and develop the best talent. The Group is
committed to its customers and clients and works hard to act
ethically and responsibly in all of its business dealings.
In this part of the Annual Report, we explain our governance
policies and practices and the measures that we have taken to
ensure that the Group continues to apply high standards of
corporate governance.
The key themes of the UK Corporate Governance Code 2014 form
the framework for discussing our corporate governance structure.
As such, our approaches to Leadership and Effectiveness are
outlined on pages 93 to 96, Accountability on page 99 of this
Governance Report, Shareholder engagement on page 106 and
Remuneration on pages 107 to 123. Given the importance of the
work of the Nomination, Audit, Risk and Remuneration
Committees, each Committee presents a separate report, which
can be found within this section.
Our governance framework is reviewed and benchmarked against
recent Code developments, FRC guidance and best practice each
year.
Among the key corporate governance actions taken during the
year, we would like to highlight the following:
• We continued our focus on Board succession planning and
strengthened our Board with the appointment of a new
Independent Non-Executive Director, Hanna Loikkanen, in June
2015 in line with our Board Diversity Policy. We see our Board
as a team comprised of individuals each having an area of
expertise, but who collectively engage in the full range of issues
facing the Group.
• We successfully completed our Group restructuring and
implemented our executive management development plan,
which has been a principal focus for us over the past several
years. Succession planning is developing talent that can
succeed.
• We continued our focus on our systems of risk management
92 BGEO Group PLC Annual Report 2015
Governance Leadership and Effectiveness
Our governance structure
Board of Directors
The Board is responsible for the long-term success of the Group. It sets the Group’s core values and strategy and oversees its
implementation by management. It ensures that there is a strong risk management and internal control framework in place that
allows risk to be assessed and managed effectively. It provides leadership and direction and is responsible for the corporate
governance and financial performance of the Group.
The Board is comprised of nine Directors, eight of whom are Independent Non-Executive Directors.
Details of the individual Directors and
their biographies are set out on pages 86 to 89.
Audit Committee
Risk Committee
It assists the Board in
relation to the oversight of
risk. It reviews the Group’s
risk appetite in line with
strategy, monitors risk
exposure and the risk
management infrastructure,
oversees the implementation
of strategy to address risk,
and in conjunction with the
Audit Committee, assesses
the effectiveness of the risk
management and internal
control framework.
It assists the Board in
relation to the oversight
of the Group’s financial
and reporting processes.
It monitors the integrity of
the financial statements
and supervises both the
internal and external audit
processes, reporting back
to the Board. It reviews
the effectiveness of the
policies, procedures and
systems in place related to,
among other operational
risks, compliance, IT and
IS (including cyber-security)
and works closely with
the Risk Committee in
connection with assessing
the effectiveness of the risk
management and internal
control framework.
Remuneration
Committee
It reviews and recommends
to the Board the executive
remuneration policy to
ensure that remuneration
is designed to promote
the long-term success of
BGEO. It determines the
remuneration packages of
the Executive Directors,
Chairman and executive
management.
Nomination
Committee
It assists the Board to
ensure that the Board
continues to have the right
balance of skills, experience,
independence and Group
knowledge necessary to
discharge its responsibilities
in accordance with the
highest standards of
governance, the strategic
direction of the Group and
the diversity aspirations
of the Board. It is also
responsible for both Director
and executive management
succession planning.
See pages 100 to
103 for the Audit
Committee Report
See pages 104 to
105 for the Risk
Committee Report
See pages 97 to 98
for the Nomination
Committee Report
See pages 107 to 123
for the Remuneration
Committee Report
Annual Report 2015 BGEO Group PLC 93
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Leadership and Effectiveness continued
The role of the Board
Our principal duty, collectively, is to promote the long-term
success of the Group by directing management in creating and
delivering sustainable shareholder value. We do this by setting the
Group’s core values and strategy and overseeing its
implementation by management. We also set the Group’s key
policies and review management and financial performance. The
framework of controls and procedures that we have established
allow risk to be assessed and managed effectively. While our
ultimate focus is long-term growth, the Group also needs to deliver
on short-term objectives and we seek to ensure that management
strikes the right balance between the two.
We are mindful of our wider obligations and consider the impact
our decisions will have on the Group’s various stakeholders, such
as our employees, our shareholders, our customers and clients,
the environment and our community as a whole.
In order to ensure that we meet our responsibilities, specific
key decisions have been reserved for approval by the Board.
A full formal schedule of matters specifically reserved for
the Board can be found on our website, at
http://bgeo.com/page/id/67/schedule-of-matters-reserved-for-the-
board.
Clearly defined roles of the Chairman, CEO and
Non-Executive Directors
Each of the Chairman, CEO and Non-Executive Directors
has clearly defined roles within our Board structure.
A description of these roles can be found on our website,
at http://bgeo.com/page/id/66/roles-and-responsibilities.
Operation of the Board
We schedule in person Board meetings at least four times a year
in Georgia, for a period of two to three days each time. We also
hold meetings at our London offices, with Directors either
attending in person or via teleconference. Matters which require
decisions outside the scheduled meetings are dealt with through
additional ad hoc meetings and conference calls. In addition, in
2015, all Directors attended our annual investor day. In total, we
met formally as a Board 12 times during the year. The Board also
passed written resolutions on five separate occasions.
There is an annual schedule of rolling agenda items to ensure that
all matters are given due consideration and are reviewed at the
appropriate point in the financial and regulatory cycle, although
this is flexible to enable pressing matters, when they arise, to be
dealt with in a timely manner.
The Chairman and BGEO CEO seek input from the Non-Executive
Directors ahead of each Board meeting in order to ensure that any
particular matters raised by Non-Executive Directors are on the
agenda to be discussed at the meeting. In addition, the Chairman
meets with the CEO after each meeting to agree the actions to be
followed up and to discuss how effective the meeting was.
The Chairman and CEO also maintain frequent contact (in person
or otherwise) with each other and the other Board members
throughout the year outside of the formal meetings.
Board Committees
To assist the Board in carrying out its functions and to ensure
there is independent oversight of financial, audit, internal control
and risk issues, review of remuneration as well as oversight and
review of Board and executive succession planning, the Board has
delegated certain responsibilities to Board Committees.
In 2015, the Board had four Committees, comprised solely of
Independent Non-Executive Directors: the Nomination Committee,
the Audit Committee, the Risk Committee and the Remuneration
Committee. Each Board Committee has agreed Terms of
Reference, which are approved by each Committee and the Board
and reviewed annually. Each Committee’s Terms of Reference can
be found on our website at
http://bgeo.com/page/id/70/terms-of-reference.
The Chairman of each Board Committee reports to the Board on
the matters discussed at Board Committee meetings. You will find
later in this section reports from the Chairman of each Board
Committee on the Committee’s activities in 2015 and priorities for
2016.
In addition, each Board Committee provides a standing invitation
for any Non-Executive Director to attend Committee meetings
(rather than just limiting attendance to Committee members).
At each regularly scheduled meeting, we receive reports from the
Group Chairman, BGEO CEO, CFO of JSC BGEO Group and the
Bank, Bank CEO on the performance and results of the Group.
The CEOs of our principal subsidiaries and the Deputy CEOs of
the Bank regularly update the Board on the performance, strategic
developments and initiatives in their respective segment
throughout the year. The Bank’s Chief Risk Officer, Group General
Counsel and Group Head of Investor Relations also regularly
present to the full Board. The Board also receives updates from
Group operating functions on internal control and risk
management, compliance, internal audit, human resources and
corporate responsibility matters.
2015 Committee membership
Neil Janin
David Morrison
Alasdair Breach
Kim Bradley
Kaha Kiknavelidze
Tamaz Georgadze
Bozidar Djelic
Hanna Loikkanen1
Audit
Committee
Risk
Committee
Nomination
Committee
Remuneration
Committee
Chairman
Chairman Member
Member Member
Member Member Chairman
Member Chairman Member
Member Member Member
Member Member
Member Member
Member
Note:
1 Ms Loikkanen was appointed to the Audit Committee in March 2016.
94 BGEO Group PLC Annual Report 2015
Governance
Board and Committee meeting attendance
Details of Board and Committee meeting attendance in 2015 are as follows:
Board attendance
Neil Janin (Chairman)1
Irakli Gilauri (Executive Director)
Non-Executive Directors
David Morrison
Alasdair Breach
Kim Bradley
Kaha Kiknavelidze
Tamaz Georgadze2
Bozidar Djelic
Hanna Loikkanen
Board meetings
eligible to
attend/attended
Audit Committee
meetings eligible to
attend/attended
Risk Committee
meetings eligible to
attend/attended
Nomination Committee
meetings eligible to
attend/attended
Remuneration Committee
meetings eligible to
attend/attended
10/12
12/12
12/12
11/12
12/12
12/12
7/12
9/12
7/12
9/9
9/9
9/9
4/4
4/4
4/4
3/4
3/4
4/4
4/4
4/4
3/3
3/3
3/3
3/3
3/3
3/3
3/3
2/3
1. When Mr Janin was unable to attend the meetings, he discussed all matters on the agenda with the Senior Independent Director and the CEO and provided feedback on
materials, as required, in advance of the meetings.
2. Although Mr Georgadze was unable to attend several Board meetings, he conducted two in person full-day workshops with the Deputy CEO of Retail Banking in relation to
the development of our retail strategy and participated in several subsequent teleconferences to discuss the same.
Please further note that the Non-Executive Members of the Board of BGEO are identical to the Members of the Supervisory Board of the
Bank.
Board size, composition, tenure and independence
We consider that a diversity of skills, backgrounds, knowledge,
experience, geographic location, nationalities and gender is
important to effectively govern the business.
The Board and its Nomination Committee work to ensure that the
Board continues to have the right balance of skills, experience,
independence and Group knowledge necessary to discharge its
responsibilities in accordance with the highest standards of
governance.
During 2015, our Board comprised nine members: the Chairman,
the CEO and seven Independent Non-Executive Directors. We
believe our overall size and composition to be appropriate, having
regard in particular to the independence of character and integrity
of all of the Directors as well as the key technical expertise and
skills in banking, risk, finance, technology and international
business the Directors bring to their duties. No individual or group
of individuals is able to dominate the decision-making process and
no undue reliance is placed on any individual. The average tenure
of our Non-Executive Directors is 3½ years. We value diversity and
are committed to increasing the proportion of female
representation on our Board in accordance with our Board
Diversity Policy, adopted last year. In 2015, when we refreshed our
Board, we appointed Hanna Loikkanen as an Independent
Non-Executive Director and we continue to interview female
candidates for independent Non-Executive Board appointments.
We have assessed the independence of each of the seven
Non-Executive Directors and are of the opinion that each acts in
an independent and objective manner and therefore, under the
Code, is independent and free from any relationship that could
affect their judgement. Each Non-Executive Director has an
ongoing obligation to inform the Board of any circumstances
which could impair his or her independence.
Details of the individual Directors and their biographies
are set out on pages 86 and 89.
Evaluation of Board performance
The Board continually strives to improve its effectiveness and
recognises that its annual evaluation process is an important tool
in reaching that goal. As mentioned in the Governance Statement,
in 2015, we engaged Lintstock, an external effectiveness
evaluation specialist, for the second year in a row to conduct an
evaluation of the Board, each of our Committees, our Chairman
and our CEO. In 2015, we added a dedicated succession planning
questionnaire.
The first stage of the review involved Lintstock engaging with the
Chairman and the Company Secretary to set the context for the
evaluation and to tailor the content of the surveys distributed to the
Board. All Directors were requested to complete an online survey.
The anonymity of all respondents was ensured throughout the
process in order to promote the open and frank exchange of
views.
Annual Report 2015 BGEO Group PLC 95
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Leadership and Effectiveness continued
Lintstock subsequently produced a report which was shared with
all members of the Board, addressing the following areas of Board
performance:
• the composition of the Board, taking into account the Group’s
strategic goals and diversity priorities;
• the relationships between the members of the Board and
between the Board and management, as well as the
atmosphere in the boardroom;
• the management of time of the Board, including the annual
number of meetings, work cycle, the Board’s agenda, as well
as the content, format and timeliness of the Board packs;
• the support and training needs of the Directors;
• the clarity of the Group’s strategy, the Board’s testing and
development of the strategy and the effectiveness with which
the opinions of stakeholders are considered when drawing up
the strategic plan;
• the risk appetite of the Board, the information provided to the
Board to support its oversight of risk, and performance of the
Board in identifying and managing the main risks facing the
Group;
• the structure of the Group at senior level, the succession
planning for the CEO and key management positions beneath
the Board;
• the Board’s exposure to management and the ability of the
Board to evaluate senior management; and
• the composition and performance of the Committees, the
performance of the Chairman and CEO.
Lintstock also provided the Chairman with feedback received in
respect of the performance of other Directors. Mr Janin
subsequently met individually with each of the Directors to discuss
the results and set strategic goals for improvement where
necessary. The performance of Mr Janin was also reviewed, with
the results discussed openly with the Board.
The results of the evaluation confirmed that the Board and the
Committees were operating effectively, promote open and
challenging debate and is well supported by information flow.
Progress had been made in improving gender diversity on the
Board, executing the Group’s strategy and succession planning for
executive management, enhancing our systems of risk
management and internal control and successfully integrating the
Risk Committee. No significant changes to the commitments of
the Chairman or Non-Executive Directors were identified.
As a result of Lintstock’s report and subsequent Board discussion
of the findings, we have set the following objectives for 2016:
continued monitoring of the execution of our Investment Business
strategy, development of a longer-term strategy, the appointment
of one additional female member to our Board and continued
oversight of risk management and internal controls.
We have found the external evaluation process to be helpful in
improving the performance of our Board and it is envisaged that
Lintstock will conduct a follow-up review next year, in order to
build upon the issues raised in this year’s process in greater depth.
The review content for each subsequent evaluation is designed to
build upon learning gained in the previous year to ensure that the
recommendations agreed in the review are implemented and that
y-o-y progress is measured.
The CEO also has his performance individually reviewed by the
Remuneration Committee against KPIs which are set annually
(further details of the KPIs can be found on pages 44 to 45).
Succession planning and Board appointments
We believe that effective succession planning mitigates the risks
associated with the departure or absence of well-qualified and
experienced individuals. We recognise this, and our aim is to
ensure that the Board and management are always well resourced
with the right people in terms of skills and experience, in order to
effectively and successfully deliver our strategy. We also recognise
that continued tenure brings a depth of Group-specific knowledge
that is important to retain.
The Board Nomination Committee is responsible for both Director
and executive management succession planning. There is a
formal, rigorous and transparent procedure for the appointment of
new Directors to the Board. More detail on the role and
performance of the Nomination Committee is on pages 97 and 98.
Non-Executive Directors’ terms of appointment
On appointment, our Non-Executive Directors are given a letter of
appointment that sets out the terms and conditions of their
directorship, including the fees payable and the expected time
commitment. Each Non-Executive Director is expected to commit
approximately 25 to 35 days per year to the role. An additional
time commitment is required to fulfil their roles as Board
Committee members and/or Board Committee Chairmen, as
applicable. We are confident that all Non-Executive Directors
dedicate the amount of time necessary to contribute to the
effectiveness of the Board. The Letters of Appointment for our
Non-Executive Directors are available for inspection at our
Company’s registered office during normal business hours.
Board induction, ongoing training, professional
development and independent advice
On appointment, each Director takes part in an induction
programme, during which he meets members of senior
management below the Board level, receives information about
the role of the Board and individual Directors, each Board
Committee and the powers delegated to these Committees. He is
also advised of the legal and other duties and obligations of a
Director of a premium listed company.
We are committed to the continuing development of our Directors
in order that they may build on their expertise and develop an
ever-more detailed understanding of the business and the markets
in which Group companies operate. All of our Directors
participated in ongoing training and professional development
throughout 2015, which included briefings, site visits, development
sessions and presentations by our Company Secretary, members
of management, external speakers and our professional advisors.
We also ensure that all of our Directors have access to
independent professional advice, at the Company’s expense, on
any matter relating to their responsibilities.
Re-election of Directors
All of our Directors seek re-election every year and accordingly all
Directors will stand for re-election in 2016 (with the exception of
Hanna Loikkanen, who is standing for election, as she was
appointed in June 2015). The Board has set out in its Notice of
Annual General Meeting the qualifications of each Director and
support for re-election and election, as applicable.
96 BGEO Group PLC Annual Report 2015
Governance Nomination Committee Report
Neil Janin
Chairman of the
Nomination Committee
Dear Shareholders,
Succession planning for the Board, taking into account
gender diversity; succession planning for senior
management; and the facilitation of an external valuation of
the effectiveness of our Board as a whole, our Committees
and individual Directors were again the key areas of focus of
the work of the Nomination Committee during 2015.
In 2015, we made significant progress in implementing our
senior management succession plan in line with our revised
strategy. We also appointed a female Independent
Non-Executive Director to the Board in line with the Board
Diversity Policy we adopted in 2014, making good on our
commitment to increase female representation on our Board.
Details of these changes are discussed below.
As discussed on pages 95 and 96, we appointed Lintstock as
our external evaluator for the second year in a row. This
appointment assisted us to measure our performance y-o-y
and set priorities for continued improvement.
Neil Janin
Chairman of the Nomination Committee
7 April 2016
The role of the Nomination Committee
The role of the Nomination Committee is to assist in ensuring that
the Board comprises individuals who are best able to discharge
the responsibilities of Directors, having regard to the highest
standards of governance, the strategic direction of the Group and
diversity aspirations of the Board. We also help to ensure that the
Group appoints excellent senior managers capable of successfully
executing the Group’s strategic objectives.
In summary, the Nomination Committee is responsible for:
• reviewing the composition of the Board and Board Committees
to ensure they are appropriately constituted and balanced in
terms of size, skills, experience, independence and knowledge;
identifying suitable candidates for appointment to the Board
based on clearly set criteria which takes into account the skills,
experience and diversity required by the Board, and the
attributes required of Directors;
•
• developing succession plans for the Chairman, CEO,
Non-Executive Directors and key senior managerial roles;
• evaluating the suitability of Directors standing for election and
re-election at the AGM;
• evaluating the independence of the Non-Executive Directors
and time required from Non-Executive Directors;
• organising the process for the annual Board and Committee
effectiveness reviews and implementing any plan required to
address issues identified; and
• preparing the report by the Nomination Committee to be
included in the Annual Report.
The Nomination Committee’s full Terms of Reference are available
on our website, http://bgeo.com/uploads/pages/nomination-
committee-terms-of-reference-2.pdf.
The composition of the Committee and the members’ meeting
attendance during the year is listed on page 95.
Succession planning, Board Diversity Policy and Board
recruitment and appointment process
Succession planning
With respect to Board succession planning, the Nomination
Committee continued to search for suitable candidates for Board
positions in 2015, taking into account technical expertise and our
Board Diversity Policy, outlined later in this section. In June 2015,
we appointed one additional Independent Non-Executive Director,
Hanna Loikkanen, to the Board. Ms Loikkanen brings in a wealth
of experience in banking and investment management and we are
pleased to welcome her to the Board. Her biography can be found
on page 89.
Upon completion of our Group restructuring in August 2015 to
separate our banking and non-banking businesses, we
implemented changes in our senior management structure in
order to complement the new strategy announced in December
2014. As succession planning is a continuous process, in
December 2015, the Committee further analysed the Group’s
execution of strategy and the skills of management and made
additional changes, effective 1 February 2016, in order to best
utilise management talent.
Annual Report 2015 BGEO Group PLC 97
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Directly below is a summary of the implementation of our senior
management succession plan.
Board recruitment and appointment process
The Board has formal, thorough and transparent procedures in
place for Board recruitment and appointment.
•
Irakli Gilauri was appointed as Group CEO and resigned from
his position as CEO of the Bank;
• Murtaz Kikoria resigned from his position as CFO of the Bank
and assumed the position of CEO of the Bank;
• Levan Kulijanishvili was appointed as CFO of JSC BGEO Group
and the Bank (in addition to his role as Head of Internal Control,
Security and AML Compliance);
• Archil Gachechiladze was appointed as Deputy CEO
(Corporate and Investment Banking) following the combination
of the Bank’s Corporate Banking and Investment Management
businesses;
• Avto Namicheishvili was appointed as General Counsel of JSC
BGEO Group;
• Tornike Gogichaishvili was promoted to the role of Deputy CEO
(Operations), having previously served as Chief Operating
Officer of the Bank; and
• Alexander (Sasha) Katsman was promoted to the role of Deputy
CEO (Human Resources and Brand Management), having
previously served as Head of Brand Management.
We believe our internal promotions reflect the increasing strength
of our executive management team and strong results of the
coaching and development programmes we have implemented
over the past few years.
Board Diversity Policy
The statement and objectives of our Board Diversity Policy are as
follows:
Statement
Our Board embraces diversity in all its forms. Diversity of skills,
background, knowledge, technical expertise, and gender,
amongst other factors, will be taken into consideration when
seeking to appoint a new Director to the Board. Notwithstanding
the foregoing, any Board appointment will always be made based
on merit.
Objectives
• The Board should ensure the appropriate mix of skills and
experience to ensure an effective Board.
• The Board should ensure that it comprises a majority of
Directors who are independent in character and judgement.
• The Board aims to increase the number of women on the
Board to two within the next two years and further increase this
number thereafter.
In identifying suitable candidates, we typically seek
recommendations from trusted advisors but may also use open
advertising or external search services to facilitate the recruitment.
We carefully assess each candidate against our objectives and
Board Diversity Policy, and take care that appointees have enough
time available to devote to the position.
Short-listed candidates are generally seen first by the Chairman,
the BGEO CEO and Senior Independent Non-Executive Director. If
the selection process progresses further, each potential candidate
is invited to meet other members of the Nomination Committee as
well as members of management. We then decide whether to
recommend an appointment to the Board and the Board decides
whether to make the appointment.
Committee effectiveness review
It is the Nomination Committee’s responsibility to organise the
Board, Committee and individual Director performance reviews. In
2015, the Nomination Committee recommended, and the Board
approved, the re-appointment of Lintstock. Details of the process,
results and 2016 action plan can be found on pages 95 and 96.
Lintstock also performed the effectiveness review of the
Nomination Committee in respect of 2015. The evaluation
principally addressed how effectively the Nomination Committee
reviews the composition of the Board and the Board Committees
as well as how the Nomination Committee develops and
implements succession plans for both the Board and executive
management. The evaluation concluded that the Nomination
Committee continues to operate and perform effectively.
For 2016, the Nomination Committee will continue its focus on
Board succession planning by monitoring the needs of the Board
and its Committees to ensure that both new additions and
successions are managed in line with the evolving business,
strategic objectives, the Board’s gender diversity and regulatory
requirements. In particular, we have identified accounting or IFRS
experience and additional female representation as key priorities in
our Board successon plan.
We will also continue to grow the talent of our management
through coaching and development programmes, which we have
found to enhance self-development and mentoring skills, resulting
in the further development of potential future leaders within the
Group. The Nomination Committee will also continue to meet with
senior managers in order to gain greater understanding of the
breadth and depth of management talent.
98 BGEO Group PLC Annual Report 2015
Governance Accountability
Directors’ responsibilities
Statements explaining our responsibilities as Directors for
preparing the Annual Report and consolidated and stand-alone
financial statements can be found on page 124. A further
statement is provided on page 124 confirming that the Board
considers the Annual Report and Accounts, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s and BGEO’s
performance, business model and strategy. The statement of
disclosure of information to our auditor is also set out on page 124.
Risk management and internal control
The BGEO Board is ultimately responsible for the Group’s risk
management and internal control framework. The BGEO Board,
which is assisted by the Audit Committee and Risk Committee,
confirms that it monitors the Group’s risk management and internal
control systems and carries out a review of their effectiveness, at
least annually. The monitoring and review covers all material
controls, including financial, operational and compliance controls.
A discussion of BGEO’s risk management and internal control
framework can be found on pages 46 to 47.
The BGEO Board also confirms that it has carried out a robust
assessment of the principal risks facing the Group, including those
that would threaten its business model, future performance,
solvency and liquidity.
The Group’s principal risks and uncertainties and how we
mitigate these risks and uncertainties are outlined on pages
48 to 51.
The BGEO Board has determined that having separate Audit and
Risk Committees, each with specific Terms of Reference, assists it
in creating an effective risk management framework and provides
the challenge and review necessary across the Group. The
Committees collaborate with one another, as appropriate, to
ensure that matters of mutual interest raised in either of the
Committees are discussed.
The Audit Committee Report and Risk Committee Report can
be found on pages 100 to 105 of this section. In addition, Note
29 of the accompanying consolidated financial statements
provides additional detail regarding risk management and
internal control procedures.
Since the Bank is the Group’s largest business and operates in the
complex financial services sector, its risk management framework
and internal control processes are key to that of the Group.
A detailed description of the Bank’s risk management
framework and internal control processes can be found on
pages 52 to 59.
Annual Report 2015 BGEO Group PLC 99
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Audit Committee Report
David Morrison
Chairman of the
Audit Committee
Dear Shareholders,
Our activities focus on the integrity of the Group’s financial
reporting and processes. In 2015, both our Group and the
environment in which it operates continued to evolve. The
devaluation of the Lari in the first half of the year required our
focus on loan loss allowances and the provisioning process, the
most important and significant area of judgement affecting our
results.
In light of the updates to the Code in respect of risk management
and internal controls, we spent time last year ensuring that
additional requirements introduced by the Code were met by the
Group. We improved the risk management framework and
processes and systems of internal control. We worked closely
with the Risk Committee to ensure that the responsibility for the
oversight of our risk management processes and internal
controls were appropriately covered between the two
Committees. We also dedicated particular attention to our IT and
information security controls and instructed EY to perform an
audit of our IT and information security systems, which included
a review of our cyber-security controls.
I am also pleased to announce that Hanna Loikkanen was
appointed to the Committee in March 2016. She has served on
audit committees of other financial institutions and will be a great
asset to our Committee going forward.
I invite you to read about the results of these and the other main
activities of the Committee in the report below.
David Morrison
Chairman of the Audit Committee
7 April 2016
Composition of the Audit Committee and meetings
The composition of the Audit Committee and the members’
attendance during the year is listed on page 95. Our Audit
Committee is solely comprised of Independent Non-Executive
Directors.
With respect to the Audit Committee’s qualifications and
background, Mr Morrison is a trained securities lawyer who
specialised in financial disclosure for over 25 years;
Mr Kiknavelidze is a trained financial analyst skilled in financial
statement analysis who manages his own investment fund;
Mr Bradley served as a Managing Director at Goldman Sachs,
where, immediately prior to joining the Company’s Board and
Audit Committee, he sat on various audit committees within the
organisation and assessed internal audit functions and internal
controls. Our Audit Committee believes that each member has
recent and relevant financial experience in satisfaction of the
requirements of the Code.
100 BGEO Group PLC Annual Report 2015
The biographies of the members of the Audit Committee are set
out on pages 86 and 89.
The Audit Committee works to a planned programme of activities
focused on key events in the annual financial reporting cycle and
standing items that it considers regularly under its Terms of
Reference. Our meetings are regularly attended by the CFO of JSC
BGEO Group and the Bank, head of Internal Audit, head of Internal
Control, Security and AML Compliance and Risk departments,
Chief Risk Officer of the Bank and occasionally by the BGEO and
JSC BGEO Group CEO and Bank CEOs. The external auditor also
attends the regularly scheduled Audit Committee meetings.
Separately, we had regular private sessions with the heads of
Internal Audit and Internal Control, Security and AML Compliance
departments and the external auditor. These sessions, which are
not attended by management, allow us to discuss any issues of
concern in more detail and directly with the audit teams. From time
to time, other members of management are invited to attend
meetings in order to provide a deeper level of insight into key
issues and developments.
Meetings of the Audit Committee take place prior to the Board
meeting in order for the Audit Committee to report its activities and
matters of particular relevance to the Board.
Mr Morrison attends the AGM to respond to any shareholder
questions that may be raised on the Audit Committee’s activities.
Key purpose and responsibilities
On behalf of the Board, the Audit Committee encourages and
seeks to safeguard high standards of integrity and conduct in
financial reporting, internal control and risk management (together
with the Risk Committee), internal audit and the supervision of our
external auditor. The Audit Committee reports to the Board on
how it discharges its responsibilities and makes recommendations
to the Board, all of which have been accepted during the year.
The primary roles and responsibilities of the Audit Committee
remained the same as in 2014, save for changes adopted in
response to amendments to the Code. The Audit Committee’s full
Terms of Reference are available on our website at http://bgeo.
com/uploads/pages/audit-committee-terms-of-reference3-64.pdf.
Financial reporting
We carried out our primary responsibilities to monitor the integrity
of the financial statements of the Group and formal
announcements relating to the Group’s financial performance as
well as review the appropriateness of the Group’s accounting
policies and their quality and consistency. We assessed the clarity
and consistency of disclosures, including compliance with relevant
financial reporting standards and other reporting requirements. We
also reviewed and challenged the going concern assessment and
viability statement.
In addition to analysing and discussing reports received by
management throughout the year, the Audit Committee met
frequently with management and the external auditors. Meetings
with the external auditors often occurred without management
present. In these meetings, we discussed accounting and
reporting matters affecting the Group, including the new
presentation of the Group’s income statement, the change in
functional currency and the upcoming adoption of IFRS 9.
In addition, the meetings with the external auditors involved
discussions of the key risks identified by the external auditors as
being significant to the 2015 audit. Taking into account the key
audit risks identified by our external auditors, but also using our
own independent knowledge of the Group, we reviewed and
challenged where necessary, the actions, estimates and
judgements of management in relation to the financial statements.
Governance The primary areas of judgement considered by the Audit
Committee in relation to the financial statements are addressed
below.
Please see pages 46 to 47 for a description of the BGEO risk
management framework and internal control processes.
Appropriateness of allowance for loan losses
In 2015, we continued to scrutinise the appropriateness of the
allowance for loan losses. As mentioned in last year’s Annual
Report, the Bank introduced a new loan loss provisioning
methodology on 1 January 2014, which was developed in
consultation with Deloitte. This provisioning methodology,
which the Bank continued to use in 2015, is based on a
statistical assessment of probability of default and loss given
default.
In 2015, slower economic growth, the devaluation of the Lari
and the acquisition of PrivatBank led to deterioration in our loan
book quality. These factors led to increases in our Banking
Business Cost of Risk ratio and cost of credit risk. In response,
provisioning levels were increased on both the corporate and
retail loan books to account mainly for the increased post-
devaluation risk. The main judgements in respect of the
appropriateness of the allowance for loan losses involved the
timing of the recognition of any given impairment and the size of
the loan loss. Throughout the year, management reported on
the Bank’s principal borrowers as well as on the largest
impaired and non-performing loans. Management also reported
to us on the methodologies for identifying assets at risk,
categorising the loan portfolio and determining provisioning
rates, as well as the assumptions applied in calculating the
provisions for loan losses. In connection with these reports, we
challenged the underlying assumptions made by management
with respect to individually and collectively impaired loans and
the system of controls to prevent and detect errors in the
estimation for loan losses.
In conclusion, we were satisfied that the impairment provisions
were appropriate. The disclosures relating to impairment
provisions are set out in Note 10 of the consolidated financial
statements.
Valuation of own premises and investment properties
We received reports from management on the assumptions to
be used in valuing the Group’s premises and investment
properties. The Group engaged Colliers International Georgia
(Colliers), an independent external valuer, to value 52 of our
properties, which covered approximately 60% of our portfolio.
EY tested the Colliers valuation of our premises and investment
properties and reported its findings. We discussed the results
of the Colliers and EY findings. We scrutinised and challenged
management assumptions and judgements and were satisfied
with the assumptions and judgements applied. The disclosures
relating to the valuation of own premises and investment
properties are set out in Note 30 of the consolidated financial
statements.
In addition to the primary judgements discussed above, we also
discussed accounting and financial reporting matters relating to:
our M&A/transactional activity, including valuation of options,
convertible shares and goodwill; revenue recognition in our
healthcare business; the new presentation of the Group’s income
statement; the change in functional currency; the classification of
non-recurring income and expenses; GHG listing costs; and the
upcoming adoption of IFRS 9.
Risk management and internal controls
The Audit Committee recognises that a strong and effective
system of risk management and internal control. Although the
Board assumes the ultimate responsibility for the Group’s risk
management and internal control framework, its work is supported
by both our Committee and the Risk Committee.
Since the Bank is the Group’s largest business and operates in the
complex financial services sector, its risk management framework
and internal control processes are key to that of the Group.
A detailed description of the Bank’s risk management
framework and internal control processes can be found on
pages 52 to 59.
The Risk Committee Report is set out on pages 104 to 105.
In relation to risk management and internal control, the Audit
Committee:
• ensures that there are clearly defined lines of accountability and
delegation of authority;
• reviews the effectiveness of the policies and procedures and
systems for risk management and internal control related to:
– financial reporting, which includes challenge of management
judgements and estimates;
– whistleblowing;
– conflicts of interest (including assistance to the Board with
reviewing the permissibility of such conflicts; and
– anti-bribery and anti-corruption policies and procedures.
• monitors various areas of operational risk, including
investigations into control weaknesses and management’s
response to such findings, including:
– IT and information security (including cyber-security);
– corporate security and similar areas of operational risk; and
– internal and external fraud or misconduct.
The Audit Committee is supported by a number of sources of
internal assurance within the Group in order to discharge its
responsibilities, including reports from and regular discussions
with the Group executives with whom it regularly meets as
described earlier in this Report. We receive internal audit’s reports
on the control environment and, as mentioned later in this Report,
we approve the internal audit plan which, for 2015, included a
thorough risk management and internal control assessment.
During 2015 and up to the date of this Annual Report and
Accounts, internal audit did not find any significant weaknesses in
risk management or internal controls. We challenged the reports
by management and internal audit and requested data regarding
the application of controls for various types of transactions
affecting the relevant account balances in the financial statements.
With respect to external assurance, the Audit Committee reviews
the external auditors’ observations on risk management and
internal financial controls identified as part of its audit. As the
quality of the Group’s financial statements are dependent on the
effectiveness of our internal IT and information security control
systems, we approved the engagement of EY to perform an
external audit of our IT governance, IT processes and information
security controls in order to obtain external assurance on the
design and operating effectiveness of these systems. This audit
also confirmed that our IT and information security control systems
are effective. Data security and privacy procedures were found to
be strong, although cyber-security was noted as (and continues to
be) a significant risk.
Based on the above, we are satisfied that our overall internal
control framework is effective.
Annual Report 2015 BGEO Group PLC 101
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We have asked management to implement a plan to further
improve our IT strategy and architecture in order to make sure that
the data and reports produced by our IT and information security
systems continue to ensure that our financial statements are
prepared to a high quality. There will be ongoing focus on controls
to prevent an information security breach or cyber-attack given the
changing nature of potential threats. We will continue to monitor
these systems in 2016.
The Audit Committee has also considered and confirmed to the
Board that its work is performed in accordance with the provisions
in the Code and the Financial Reporting Council’s (FRC)
associated Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting.
Internal audit
The Audit Committee monitors the scope, extent and effectiveness
of the Group’s internal audit function and the internal audit
programme and we seek to ensure it is adequately resourced, has
the correct standing within the Group and is focused on the
correct issues. Following the assessment of the internal audit
function in 2014, the Audit Committee approved a larger budget
for 2015, which allowed our IT audit function to be partially
outsourced, staff to be hired and continued training and
development to be provided for the internal audit team.
We also review and approve the internal audit policy and annual
internal audit plan. The 2015 internal audit plan focused on
assessed risks and internal controls and we reviewed the plan on
a regular basis, including any changes proposed to the scope of
work. We also discuss and approve changes to the internal audit
methodology.
Although the Board retains overall responsibility for the internal
control and the identification of and management of risk, the
internal audit function provides independent assessment on the
robustness and effectiveness of the systems and processes of risk
management and control across the Group.
In 2015, 66 audit assignments were undertaken by the Internal
Audit Department, covering a wide range of financial reporting and
operational controls, IT and IS systems and risk management
processes. We received regular reports from internal audit on its
audit activities, progress of the internal audit plan, the results of
any unsatisfactory audits and the action plans to address these
issues and resource requirements of the Internal Audit
Department. We also reviewed and monitored management’s
responsiveness to internal audit’s findings through follow-up
reports provided by internal audit. The Head of Internal Audit has
direct access to the Audit Committee and the opportunity to
discuss matters with the Audit Committee without other members
of management present.
We reviewed internal audit’s self-assessment of its performance
and independently formed our own view of the internal audit
function by considering the progress of internal audit against the
agreed plan, the quality of the reporting by internal audit to the
Audit Committee and the ability of internal audit to address
unsatisfactory results. On this basis, we concluded that the
internal audit function is effective and respected by management
and conforms to the standards set by the Institute of Internal
Auditors.
External audit
With respect to our responsibilities for the external audit process
on behalf of the Board, we:
• approve the annual audit plan, which includes setting the areas
of responsibility, scope of the audit and key risks identified;
• supervise the audit engagement, including the degree to which
the external auditor was able to assess key accounting and
audit judgement;
102 BGEO Group PLC Annual Report 2015
• review the findings of the external audit with the external
auditor, including the level of errors identified during the audit;
• monitor management’s responsiveness to the external auditor’s
findings and recommendations;
• review the content of the management letter issued by the
external auditor;
• review the qualifications, expertise and resources of the
external auditor;
• monitor the external auditor’s independence, objectivity and
compliance with ethical, professional and regulatory
requirements;
• review audit fees and the cost effectiveness of the audit;
• monitor the rotation of key partners in accordance with
applicable legislation; and
• recommend the appointment, re-appointment or removal, as
applicable, of the external auditor.
We have an established framework for assessing the effectiveness
of the external audit process. This includes:
• a review of the audit plan, including the materiality level set by
the auditors and the process they have adopted to identify
financial statement risks and key areas of audit focus;
• regular papers and communications with the external auditor to
both the Committee and management;
• regular discussions with EY (without management present) and
management (without EY present) in order to discuss the
external audit process;
• a review of the final audit report, noting key areas of auditor
judgement and the reasoning behind the conclusions reached;
• a review of EY’s 2015 Transparency Report and the annual FRC
Audit Quality Inspection Report of EY; and
• a formal questionnaire issued to all Committee members and
senior management of the Group who are involved in the audit
(including internal audit) which covers among other items things
the quality of the audit and audit team, the audit planning
approach and execution, the presence and capabilities of the
lead audit partner, the audit team’s communication with the
Committee and management and the auditor’s independence
and objectivity.
In 2015, we received an Audit Quality Inspection Report from the
Audit Quality Review team of the FRC in respect of EY’s 2014 audit
of the Group. The FRC provided us with a copy of their report
which has been reviewed and discussed by the Audit Committee
and separately with the external auditor. The Audit Committee is
satisfied that the matters raised do not give it concerns over the
quality, objectivity or independence of the audit and believe that
the matters raised in the FRC Report have been appropriately
addressed by EY in the 2015 audit.
Following our assessment of the external auditor, we formed our
own judgement (which was consistent with management’s view)
and reported to the Board that:
• the audit team was sound and reliable, providing high-quality
execution and service;
• the quality of the audit work was of a high standard;
• EY’s independence and objectivity were affirmed;
• EY was in a position to challenge management on its approach
to key judgements; and
• appropriate discussions were held with the Audit Committee
during the audit planning process.
We have sought assurance and are comfortable that no undue
pressure has been asserted on the level of audit fees so as to
ensure that there is no risk to audit work being conducted
effectively.
Governance Lead audit partner rotation and audit tendering
The external auditor is required to rotate the audit partner
responsible for the Group every five years. The current lead audit
partner, Andrew McIntyre, has been in place for four years. He has
confirmed that he will not be returning as our lead auditor in
respect of the 2016 audit.
We have been monitoring audit regulatory developments from the
FRC, Competition Commission and EU, which require us to put
our external audit contract out to tender no later than 2022. EY
was appointed as our Group statutory auditor by shareholders at
our 2012 AGM, following a competitive tender process. The Audit
Committee and Board have recommended the re-appointment of
EY each year since 2012, which has been approved by
shareholders. We fully support the re-tendering requirements and
will carry out a competitive tender process prior to the 2022
deadline. The Committee has complied with the relevant parts of
the Competition and Market Authority Final Order on the statutory
audit market for the year ended 31 December 2015.
Non-audit services
We have a long-established policy in relation to the supply of
non-audit services by external auditors and, in particular, we
refrain from using our external auditors to provide tax advisory
services unless there is a very strong case for not seeking an
alternative supplier. We engage external advisors to provide
non-audit services based on the skills and experience required for
the work. When engaging our external auditors under the limited
circumstances detailed in our policy, prior to the engagement
commencing, BGEO is required to satisfy itself that the external
auditor’s objectivity and independence would not be compromised
in any way as a result of supplying non-audit services. All non-
audit services are pre-approved by the Audit Committee and
communicated to the Board. Any permissible non-audit service
that exceeds £100,000 must be robustly justified and, if
appropriate, tendered, before it is approved. If non-audit services
are undertaken by the external auditor, the Audit Committee
receives regular reports on such non-audit services so that it can
monitor the types of services being provided and the fees
incurred. The Group’s current Non-Audit Services Policy was
reviewed and approved in March 2016 and can be found on our
website at http://bgeo.com/uploads/pages/policy-on-nonaudit-
services-32.pdf.
In 2015, EY provided certain non-audit services to the BGEO
Group including: assurance services in respect of our IT
processes; FATCA advice; the provision of comfort letters for
creditor covenants; and employee training. The value of these
non-audit services was US$ 155,000. In preparation for GHG’s
listing, due to EY’s extensive knowledge of GHG, the GHG Board
decided that EY was best placed to undertake the considerable
amount of work required in the short time-frame in the preparation
for listing. As a result of this, for the year ended 31 December
2015, a total of US$ 1,295,000 non-audit fees were incurred for
EY’s services in relation to the listing of GHG which are not
expected to re-occur in the future. Therefore, both EY and the
Audit Committee do not consider that this work
compromises the independence of the external auditors.
EY has expressed its willingness to continue as auditor of the
Group. Separate resolutions proposing its re-appointment and
determination of its remuneration by the Audit Committee will be
proposed at the 2016 AGM.
Whistleblowing, conflicts of interest and anti-bribery and
anti-corruption policies and procedures
The Audit Committee ensures that there are effective procedures
relating to whistleblowing. In particular, we have developed a
Whistleblowing Policy which allows staff to confidentially raise any
concerns about business practices. We keep this policy under
review and receive regular updates from management as to any
issues raised by employees.
We have also developed a Conflicts Authorisation Policy through
which we assess actual and potential conflicts of interest and
assist the Board in its review of the permissibility of such conflicts.
The Audit Committee also keeps under review the Group’s
Anti-Bribery and Anti-Corruption Policy and procedures and
receives reports from management on a regular basis in relation to
any actual or potential wrong-doing. There were no significant
findings in 2015.
Viability statement
In accordance with the revised Code, the Directors are required to
assess the viability of the Group. In collaboration with the Risk
Committee, we spent time considering the timeframe over which
the viability statement should be made as well as an assessment
underlying the period of coverage, which we agreed should be
three years, which corresponds to the Group’s business planning
cycle. In particular, we looked closely at the Group’s current
financial position, including allocated capital expenditure and
funding requirements, future prospects, the principal risks and
uncertainties related to financial reporting, risk management and
internal control as well as the downside stress testing. We
discussed our analysis with the Risk Committee, management and
full Board. The viability statement is set out on page 47.
Fair, balanced and understandable reporting
Having been tasked by the Board to advise it, we examined the
2015 Annual Report and Accounts to consider whether they are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group’s performance,
business model and strategy.
We did this by satisfying ourselves that there was a robust process
of review and challenge at different levels within the Group to
ensure balance and consistency. We reviewed several drafts of the
2015 Annual Report and Accounts and directly reviewed the
overall messages and tone of the Annual Report with the CEO and
CFO. We also considered other information regarding the Group’s
performance and business presented to the Board during the
period, both from management and the external auditor. After
consideration of all of this information, we are satisfied that, when
taken as a whole, the Annual Report and Accounts is fair,
balanced and understandable, and provides the information
necessary for shareholders to assess the Group’s performance,
business model and strategy.
Committee effectiveness review
For the second year in a row, the performance review of the Audit
Committee was externally facilitated by Lintstock. The 2014
Committee evaluation identified that Committee members would
like to enhance the review of internal and external auditor
effectiveness, finalise the division of responsibilities with the Risk
Committee and continue to focus on loan loss provisioning and
our internal controls relating to information security (including
cyber-security) and IT risk. The 2015 Committee effectiveness
evaluation, performed in March 2016, largely mirrored the 2014
review in order to allow a direct comparison of performance. In
addition, the 2015 evaluation added quality of financial reporting,
the assessment of the Group’s IT and information security systems
and internal financial reporting controls as well as risk
management within the scope of the Audit Committee’s
responsibilities. The effectiveness evaluation concluded that the
Audit Committee operates and performs effectively.
In 2016, we will work with the Nomination Committee and seek to
appoint an individual with accounting or IFRS expertise to the
Board and Audit Committee as well as continue to remain focused
on the Group’s IT and information security systems, in particular,
cyber-security.
Annual Report 2015 BGEO Group PLC 103
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Risk Committee Report
Kim Bradley
Chairman of the
Risk Committee
Dear Shareholders,
I am pleased to present the Group’s Risk Committee Report.
As our Group continues to grow, our Risk Committee and the
Group leadership recognise that the risks facing the Group
need to be supported by an increasingly robust and dynamic
system of risk management and internal controls.
As mentioned in the Accountability section on page 99, the
Board determined in early 2014 that having separate Audit
and Risk Committees, each with specific Terms of Reference,
would provide additional scope and breadth necessary to
better measure and address risk across the Group. In 2015,
we continued to work closely with the Audit Committee.
Some topics are considered by both Committees from their
different perspectives, which we believe enhances our
governance and risk oversight. Two of our Risk Committee
members are also members of the Audit Committee.
In 2015, our focus followed our mandate. We assisted the
Board in setting the Group’s risk appetite and exposure in
order for the Group to achieve its strategic objectives and in
making any necessary modifications to the strategy given
changing economic conditions and risk environment. We also
monitored the Group’s risk exposure and actions to address
risk, which included oversight and support of our senior
management risk team. We recognise that risk evolves, and
since its formation, the Committee has sought to create a
dynamic environment whereby Committee members, other
Board members and senior management are encouraged to
escalate any concerns they may have and propose issues for
discussion. As you will read in the following pages, a key risk
addressed directly by our Committee during the year was the
decline in the value of the Lari and its effect on our loan book.
Together with the Audit Committee, we also devoted time
ensuring that the new requirements introduced by the Code in
respect of risk management and internal controls were met by
the Group and reviewed the processes supporting the
assessment of the Group’s longer-term solvency and liquidity
which underlie the new viability statement.
Our Committee is comprised of five Independent
Non-Executive Directors. I invite you to read more about our
work in the following report.
Kim Bradley
Chairman of the Risk Committee
7 April 2016
104 BGEO Group PLC Annual Report 2015
Key purpose and responsibilities
The purpose of the Risk Committee is to assist the Board in
fulfilling its responsibilities in relation to the oversight of risk and to
provide advice in relation to current and potential future risk
exposures. This includes reviewing the Group’s risk appetite and
risk profile and assessing the effectiveness of the risk
management framework.
The key responsibilities of the Risk Committee are to:
• support the Board to ensure that risk appetite and exposure
are addressed as part of strategy;
• oversee the risk management infrastructure and process and
its effectiveness;
• support the Board in monitoring risk exposure and the
implementation of our strategy to address risk;
• oversee, support and evaluate the risk management roles of
our senior management risk team;
• encourage and ensure open and broad discussion on
perceived risk concerns and responsive efforts to mitigate
when necessary; and
• assess the adequacy and quality of the risk management
function in conjunction with the Audit Committee and the
effectiveness of risk reporting within the Group.
The principal risk categories overseen by the Risk Committee
include reputational, geopolitical, macro-economic and market,
liquidity and capital, credit and certain operational risks (other than
those overseen by the Audit Committee) within the Group. As to
credit risk, our focus is principally on forward-looking matters.
The Risk Committee’s full Terms of Reference are available on our
website at http://bgeo.com/uploads/pages/risk-committee-terms-
of-reference2-48.pdf.
Composition of the Risk Committee and meetings
The composition of the Risk Committee and the members’
attendance during the year is listed on page 95. Our Risk
Committee is solely comprised of Independent Non-Executive
Directors.
The biographies of the members of the Risk Committee are set out
on pages 86 and 89.
Our meetings are regularly attended by the Chairman of the Board,
the Chairman of the Audit Committee, BGEO and JSC BGEO
Group CEO, Bank CEO, JSC BGEO Group and Bank CFO, Chief
Risk Officer and occasionally by our head of Internal Audit and our
external auditor. From time to time, other members of
management are invited to attend meetings in order to provide a
deeper level of insight into key issues and developments. In
addition, non-Committee Board members are also invited to
attend.
At each meeting, the Risk Committee receives detailed reporting
which provides an analysis of: the Group’s overall risk profile using
both quantitative models and risk analytics, key risk exposures
and management actions, performance against risk appetite, the
emerging and potential risks the Group may face, the drivers of
risk throughout the Group as well as analyses of down-side stress
testing scenarios. The underlying assumptions, methodology
applied and results of such stress testing are challenged by the
Risk Committee. In 2014, we recommended changes to the
content of reporting by management and also requested additional
stress scenarios and key assumptions, which were all
implemented in early 2015.
Governance In 2014, the Committee recommended changes to the content of
reporting by management, management responsibilities and
reporting lines to the Committee, all of which were adopted. In
2015, we reviewed these changes and were pleased with the
outcomes.
We have also assisted in formulating the Group viability statement
in conjunction with the Audit Committee and management.
The viability statement can be found on page 47.
We also carefully reviewed the principal risks and uncertainties
disclosure and other relevant risk management disclosures for
inclusion in this Annual Report.
The Group’s principal risks and uncertainties and a discussion
of how we mitigate these risks and uncertainties are outlined
on pages 48 to 51.
Committee effectiveness review
In 2014, due to the Risk Committee’s recent formation, we decided
to assess our own effectiveness internally. However, in 2015, an
externally facilitated review of the Risk Committee was performed
by Lintstock. The evaluation principally addressed the composition
of the Risk Committee, the division of responsibilities between the
Risk and Audit Committees, the alignment of risk appetite with
Group strategy, the oversight of the risk management
infrastructure and process and the effectiveness of the risk
management function. The evaluation concluded that the
Committee operates and performs effectively.
Our priorities for 2016 include ensuring that both the reduction of
our corporate loan book exposure and operational risks in our
investment business are monitored and executed in keeping with
our Group strategy. We will also continue to focus on loan quality
in relation to the US Dollar-denominated loan book.
Meetings of the Risk Committee take place prior to the Board
meeting in order for the Risk Committee to report its activities and
matters of particular relevance to the Board.
Risk Committee activities during 2015
In addition to our regular responsibilities, we spent time focusing
on the evaluation of the design, completeness and effectiveness of
the risk management framework focusing on the requirements of
the Code, the FRC guidance in respect of risk management and
the needs of our businesses.
As mentioned in last year’s Annual Report, our priorities in 2015
included close monitoring of the US Dollar-denominated loan book
covered by Lari income; the integration of PrivatBank; and the
implementation of investment business strategy. We monitored
each of these risks very closely throughout the year with the rest of
the Board and management. We also ensured that the Audit
Committee assessed operational risk associated with IT and
cyber-security in accordance with our agreed division of
responsibilities.
In 2015, the Group saw an increase in NPLs in respect of US
Dollar-denominated loans covered by Lari income as a result of
slower economic growth, the devaluation of the Lari and the
PrivatBank acquisition. We monitored this very closely. For our
retail loan book (especially mortgage loan), we discussed with
management actions that might be taken to reduce our risk,
including the offering of loan restructuring options to certain retail
customers, and followed closely the evolution of NPLs. In the end,
very few customers chose to restructure their loans and default
rates were not materially affected, principally due to relatively low
loan to value ratios in our mortgage book, retail customers’
preference to save in US Dollars and the increase in US Dollar
foreign remittances.
Despite approximately 85% of our corporate loan book being
denominated in US Dollars, more than 50% of customers with US
Dollar loans have income in US Dollars. We saw that the majority
of our corporate customers were able to continue servicing their
loans due to increased oil prices and stable inflation rates, despite
the devaluation in the Lari. We closely monitored NPL levels and
management’s actions to assure adequate coverage of our loan
loss exposure, including the increase in our NPL coverage ratio
during the year, from 67.5% as of 31 December 2014 to 83.4% as
of 31 December 2015. In the second half of 2015, we discussed
and agreed with management a plan to decrease our corporate
lending as well as reduce the concentration of our top 10
corporate banking clients as part of our strategy to rebalance our
loan book in favour of lower-risk retail loans.
We closely followed management’s work on the integration of
PrivatBank and were pleased that it was executed so smoothly –
five months ahead of schedule and at a cost that was significantly
less than expected. We also monitored the development of NPLs
in the PrivatBank portfolio and were satisfied that increasing NPLs
and provisions did not materially impact the important overall
benefits of the acquisition.
We monitored execution risk associated with the GHG IPO on the
premium segment of the London Stock Exchange and were
pleased that, in the face of turbulent market conditions, the
transaction was successfully completed in November 2015, raising
gross proceeds of approximately US$ 100 million, which is critical
to GHG’s development plans. For the real estate business, we
monitored completion risk and pre-sales to ensure that projects
were proceeding as planned.
Annual Report 2015 BGEO Group PLC 105
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Shareholder engagement
The Company has a comprehensive shareholder engagement
programme and maintains an open and transparent dialogue with
existing and potential shareholders, a responsibility that the
Company takes very seriously.
The Board’s primary contact with institutional shareholders is
through the Chairman, Senior Independent Non-Executive
Director, CEO and Head of Investor Relations, each of whom
provide a standing invitation to shareholders to meet and discuss
any matters they wish to raise. Our Committee Chairmen also
make themselves available to answer questions from investors.
We formally communicate with our shareholders via our AGM,
Annual Report and Accounts, Half-Year Report and Interim
Management Statements. These are supported by a combination
of presentations and telephone briefings. Over the course of the
year, we met with over 200 institutional investors, and participated
in more than 20 investor conferences and road shows around the
world. Our Directors and management met with shareholders in
the United Kingdom, Europe, the United States, Singapore and
South Africa.
At our 2015 AGM, we received just over 12% of votes against our
resolution to authorise the Company to call general meetings on
not less than 14 days’ clear notice. We have decided that we will
not propose this resolution to our shareholders at our 2016 AGM.
In November 2015, BGEO hosted an investor day in London,
which was open to all investors. This investor day provided the
opportunity for investors to receive an update from the Board and
executive management on strategy and performance as well as
meet informally with the full Board and raise matters of interest.
BGEO was pleased to host 50 investors at our investor day.
In addition to our shareholders, we meet and present to analysts
throughout the year and hold regular meetings with the Group’s
existing lenders and actively engage with potential lenders to
discuss our funding strategy. Our Company Secretary also has
ongoing communication with the shareholders’ advisory groups.
The Chairman has overall responsibility for ensuring that the Board
understands the views of major stakeholders. The full Board is
regularly kept informed of these views by the Chairman as well as
executive management and the Investor Relations team and, to the
extent deemed appropriate, issues raised at these meetings have
been adopted by the Group. Informal feedback from analysts and
the Group’s corporate advisors is also shared with the Board.
In December 2015, we replaced our previous website,
www.bogh.co.uk with a new and enhanced website,
www.bgeo.com, which ensures that our stakeholders can access
the Group’s results, press releases, investor presentations, analyst
reports, details on our corporate governance and corporate and
social responsibility framework, our leadership, as well as other
information relevant to our stakeholders. We also ensure that
shareholders can access details of the Group’s results and other
news releases through the London Stock Exchange’s Regulatory
News Service.
106 BGEO Group PLC Annual Report 2015
Governance Directors’ Remuneration Report
Annual Statement by the Chairman of the
Remuneration Committee
Alasdair (Al) Breach
Chairman of the
Remuneration Committee
Dear Shareholders,
The discretionary remuneration of our CEO, Irakli Gilauri, is always
one of our Committee’s most important decisions. It conveys to
our shareholders our sense of the Group’s performance and
prospects, how Mr Gilauri has performed, and of course, how the
Committee rewards that performance. Although the discretionary
compensation of senior management is not part of our formal
Directors’ Remuneration Policy, our views of the Group’s
performance and prospects are generally also reflected in senior
management discretionary compensation decisions, of course
always dependent on how each senior manager performs in
respect of his KPIs.
As mentioned in last year’s Directors’ Remuneration Report,
although the Committee and the Board rated the overall
performance of Mr Gilauri as excellent, which would have meant a
discretionary bonus award at or near maximum opportunity as per
our Directors’ Remuneration Policy, Mr Gilauri requested that his
actual bonus should be notably less. Mr Gilauri was concerned that
2015 could be a considerably more difficult year than 2014, so as a
demonstration to the Group of the need for cost discipline, he felt
that he and the group of senior officers he leads should take a lower
discretionary bonus. His suggestion was met with overwhelming
support by the senior officers. The Committee also accepted that
view. As a result, the Committee ultimately awarded Mr Gilauri
discretionary compensation of 25,000 shares, representing 27% of
total salary and 55% of his maximum opportunity.
Despite the Lari devaluation and challenging macro-economic
conditions, 2015 was another record year for the Group. It met or
exceeded its strategic objectives as described in the Strategic
Report of this Annual Report and achieved an all-time low cost to
income ratio. Mr Gilauri also met or exceeded all of his objective
and non-tangible KPIs. The Committee and the Board again rated
Mr Gilauri’s overall performance in 2015 as excellent and although
Mr Gilauri’s austerity in 2014 was commendable, the Committee
strongly felt that he deserved a discretionary award near maximum
opportunity. As a result, the Committee agreed to award Mr Gilauri
47,000 shares, representing 46% of total salary and 92% of his
maximum opportunity.
Annual Report 2015 BGEO Group PLC 107
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Remuneration Report continued
I am also pleased to report that the Committee met all of its
priorities set for 2015, as set out below:
• the Bank signed a new Service Agreement with Mr Gilauri on
24 August 2015, which will become effective on 1 May 2016.
The new Service Agreement reflects the terms of our Directors’
Remuneration Policy and ensures that the combination of the
substantial number of deferred salary shares and the potential
to earn discretionary shares of a significant value keeps
Mr Gilauri highly motivated and aligned with shareholders;
• new contracts were signed with six of our senior officers whose
contracts were coming up for renewal. Although not required,
the terms of the contracts are also in line with our Directors’
Remuneration Policy;
• we increased the number of our Committee meetings and
implemented a more formal review cycle;
• we enhanced our review of the performance of senior and
middle management; and
• we improved the exchange of information with the full Board.
At the 2015 AGM, our Directors’ Remuneration Report was
approved by nearly 94% of shareholders, further affirming that our
Directors’ Remuneration Policy is the right one – striking a balance
between rewarding achievement and aligning the interest of
executive management with our shareholders in order to promote
the long-term success of the Group.
What is in this report?
This Directors’ Remuneration Report describes the
implementation of BGEO’s remuneration policy for Executive
and Non-Executive Directors and discloses the amounts
earned relating to the year ended 31 December 2015.
The report complies with the provisions of the Companies Act
2006 and Schedule 8 of The Large and Medium-sized
Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013. The report has been
prepared in line with the recommendations of the Code and
the requirements of the UKLA Listing Rules.
The Directors’ Remuneration Policy was approved by
shareholders in a binding vote at the 2014 AGM and took
formal effect from the date of approval and will apply until the
2017 AGM, at which time we will be required to submit our
Directors’ Remuneration Policy for approval by shareholders.
A summary of our policy has again been included in this
report (set out on pages 117 to 123) for the purposes of clarity
and transparency.
The Annual Statement by the Chairman of the Remuneration
Committee (set out on pages 107 to 108) and the Directors’
Remuneration Report (set out on pages 109 to 123) will be
subject to an advisory vote at the AGM.
Al Breach
Chairman of the Remuneration Committee
7 April 2016
108 BGEO Group PLC Annual Report 2015
Governance 1. The Remuneration Committee and its advisors
The Remuneration Committee considers matters relating to executive management remuneration and remuneration for other senior
management. The Remuneration Committee’s full Terms of Reference are available on our website at
http://bgeo.com/uploads/pages/remuneration-committee-terms-of-reference-29.pdf.
The composition of the Committee and the members’ attendance at meetings during 2015 is listed on page 95.
In addition to the formal meetings held during the year, the Committee participated in various discussions by telephone outside of
these meetings.
Other attendees at Committee meetings who provided advice or assistance to the Committee on remuneration matters from time to time
included the CEO, Bank CEO, the other Board members and General Counsel. Attendees at Committee meetings do not participate in
discussions or decisions related to their own remuneration.
The Committee seeks advice from time to time from independent remuneration advisers. In 2015, we again engaged H2Glenfern to
review our disclosure and advise on our discussions with shareholder advisory groups. H2Glenfern voluntarily operates in accordance
with the Code of Conduct of the Remuneration Consultants’ Group in relation to executive remuneration consulting in the United
Kingdom. H2Glenfern has confirmed that it has adhered to the Remuneration Consultant Group’s Code of Conduct throughout the year
for all remuneration services provided to BGEO and the Committee has therefore satisfied itself that all advice provided by H2Glenfern
was objective and independent. H2Glenfern was paid a fixed fee of £5,880 for its remuneration consultancy services and does not
provide services to the Group other than remuneration advice.
The Committee also received advice from Baker & McKenzie LLP, its legal advisors, on compliance and best practice.
2. Shareholder context
At our AGM on 28 May 2014, the Directors’ Remuneration Report (including the Directors’ Remuneration Policy and the implementation
report) received the following votes from shareholders:
Resolution
Votes for
% for
Votes against
% against
Total votes cast
Votes
withheld
Approval of the Directors’ Remuneration Policy
Approval of the Directors’ Remuneration Report
26,121,743
25,901,873
91.91 2,300,144
93.59 1,773,857
8.09
6.41
28,421,887
27,675,730
128,908
875,065
At our AGM on 21 May 2015, the Directors’ Remuneration Report (including the Annual Statement of the Chairman of the Remuneration
Committee) received the following votes from shareholders:
Resolution
Votes for
% for
Votes against
% against
Total votes cast
Votes
withheld
Approval of the Directors’ Remuneration Report
28,081,250
93.98 1,799,042
6.02
29,880,292
87,002
We were of course pleased with both of these outcomes.
Annual Report 2015 BGEO Group PLC 109
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Remuneration Report continued
3. Directors’ remuneration
3.1 Single total figure of remuneration for the sole Executive Director (audited)
The table below sets out the remuneration received by BGEO’s sole Executive Director, Irakli Gilauri, for 2015 and 2014 in respect of his
employment with BGEO and the Bank. Mr Gilauri is not entitled to any remuneration in respect of his role as Chairman of either GHG PLC
or JSC GHG or any other subsidiary within the Group.
Mr Gilauri’s February 2013 contract provides for cash and deferred share salary compensation fixed at 2013 levels. In addition, Mr Gilauri
is entitled to discretionary deferred share compensation up to a maximum of 50% of total salary (including both the cash and deferred
salary components). This figure was agreed in connection with the increase in the absolute market value of Mr Giauri’s fixed
compensation (cash and deferred share salary) in 2013.
Approximately 83% of Mr Gilauri’s compensation for 2015 set forth in the table below is in the form of deferred shares, for which the
average vesting period exceeds three years.
BGEO and
Bank cash
salary (US$)1
Bank deferred
share
salary (US$) 2
Total
salary
(US$)
Discretionary
deferred share
compensation
(US$)3
Taxable
benefits (US$)4
Pension
benefits (US$)5
Dividend
equivalents
(US$)6
Total
(US$)
2015
2014
437,500
1,954,157
2,391,657
1,099,473
437,500
1,954,157
2,391,657
654,250
1,252
961
1,801
1,785
196,459
3,690,642
93,368
3,142,021
Notes:
1 BGEO and Bank cash salaries are expressed in US Dollars but paid in GBP and Lari, converted into the respective currency as described in Note 2 of the table in section 1 of
the Directors’ Remuneration Policy on page 109 of this Annual Report. Accordingly, there may be variations in the numbers above and those provided in the accounts.
2 Deferred share salary. The figures show the value of the BGEO shares underlying nil-cost options granted in respect of service in the relevant year. For both 2014 and 2015,
the award was 90,000 BGEO shares. The value is calculated by reference to the share price of US$ 21.71 (based on the official share price of £14.06 per share converted
into US Dollars using an exchange rate of 1.5443, being the official exchange rate published by the Bank of England) as at 19 February 2013, the date the 2013 contract was
signed. Under the deferred share programme, the option awards in respect of deferred share salary are formally granted in January of the year following the year to which the
award relates (the “work year”) even though the number of deferred salary shares is fixed in the contract. The terms and conditions applying to deferred share salary, and an
explanation of why it is not subject to performance measures, are described in section 1(a) of the Directors’ Remuneration Policy on page 119 of this Annual Report.
3 Discretionary deferred share compensation. The figures show the value of BGEO shares underlying nil-cost options granted in respect of bonus awards in the relevant year.
For 2015, options were awarded over 47,000 BGEO shares. The value is calculated by reference to the share price on 12 February 2016 which was US$ 23.39 (based on
the official share price of £16.18 per share converted into US Dollars using an exchange rate of 1.4458, being the official exchange rate published by the Bank of England on
the same date). For 2014, options were awarded over 25,000 BGEO shares. The value is calculated by reference to the share price on 19 March 2015 which was US$ 26.17
(based on the official share price of £17.77 per share converted into US Dollars using an exchange rate of 1.4727, being the official exchange rate published by the Bank of
England on the same date). The discretionary compensation in respect of the relevant years is deferred and vests as to 50% in January two years following the work year
and 50% in January of the following year, subject to the leaver provisions described in section 8 of the Directors’ Remuneration Policy on page 121 of this Annual Report. The
means of determining the number of shares underlying this compensation and the terms and conditions are described in section 1(b) of the Directors’ Remuneration Policy
on page 119 of this Annual Report. The basis for determining Mr Gilauri’s 2015 discretionary awards is described in section 3.2 below.
4 Benefits. The figures show the gross taxable value of health and disability insurance and Directors’ and Officers’ liability insurance.
5 Pensions. The figures show the aggregate employer contributions for the relevant years into the Group’s defined contribution pension scheme.
6 Dividend equivalents. The figure shows the dividend value paid in respect of nil-cost options exercised in the relevant years.
7 Mr Gilauri was reimbursed for reasonable business expenses, on provision of valid receipts.
8 No money or other assets are received or receivable by Mr Gilauri in respect of a period of more than one financial year, where final vesting is determined by reference to
achievement of performance measures or targets relating to the relevant period.
The following table sets out details of total remuneration for Mr Gilauri for the period from 1 January 2010 to 31 December 2015 and his
discretionary compensation as a percentage of maximum opportunity. The Company does not have a LTIP and therefore the table does
not include long-term incentive vesting rates against maximum opportunity.
Single figure of total remuneration (US$)
Discretionary compensation as a percentage of maximum
opportunity (%)
2010
2011
2012
2013
2014
2015
1,707,425 1,827,674 2,002,386 3,488,463 3,142,021 3,690,642
31.7%
41.1%
94.9%
83.2%
54.7%
91.9%
Notes:
1 Single figure of total remuneration for 2013, 2014, and 2015 has been calculated in accordance with the table above. In 2013, 2014 and 2015, the maximum opportunity for
2
Mr Gilauri was 50% of salary.
In 2012, Mr Gilauri’s cash salary was US$ 437,500 and the value of the salary deferred shares was calculated by reference to the global depositary receipt (GDR) price on
25 May 2010 of US$ 10.20 per GDR. The award of discretionary deferred shares was 30,000 BGEO shares in respect of 2012. The value is calculated by reference to the
share price on 15 February 2013 which was US$ 21.49 per share (based on the official share price of £13.84 per share converted into US Dollars using an exchange rate
of 1.5525, being the official exchange rate published by the Bank of England on the same date). The maximum opportunity in 2012 was less than 50% of Mr Gilauri’s total
remuneration.
3 For 2011, Mr Gilauri’s cash salary was US$ 375,000 and the value of the salary deferred shares was calculated on the same basis as 2012. The award of discretionary
deferred shares was 34,000 BGEO shares in respect of 2011. The value is calculated by reference to the share price on 6 March 2012 which was US$ 15.61 per share (based
on the official share price of £9.92 per share converted into US Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England
on the same date). The maximum opportunity in 2011 was 100% of Mr Gilauri’s salary, being US$ 1,293,000.
4 For 2010, Mr Gilauri’s cash salary was US$ 375,000 and the value of the salary deferred shares was calculated on the same basis as 2011 and 2012. The award of
discretionary deferred shares was 20,000 GDRs in respect of 2010. The value is calculated by reference to the GDR price on 21 February 2011 which was US$ 20.50. The
maximum opportunity in 2011 was 100% of Mr Gilauri’s salary, being US$ 1,293,000.
110 BGEO Group PLC Annual Report 2015
Governance 3.2 Basis for determining Mr Gilauri’s discretionary deferred share compensation in respect of 2015
Mr Gilauri’s KPIs include both objective and non-tangible components. The objective elements largely track the Group’s KPIs as he is
expected to deliver on the Group’s strategy, but the KPIs also include non-tangible factors such as leadership, strategy development and
implementation as well as corporate and social responsibility.
The following table sets out the objective KPIs set for Mr Gilauri in respect of 2015 as well as Mr Gilauri’s performance against them.
Key performance measure
2015 target
2015 performance
Committee evaluation
Banking Business
Return on Average
Equity (ROAE)
Retail loan book
growth
20.0%
20.0%
21.7%
35.3%
Operating leverage
Positive
16.6%
Investment
Business
GHG IPO
Successful
completion
Met in November
2015
Investment Business
strategy
Successful delivery
Exceeded
expectations
Investment
companies
Effective oversight
Met
Group structure, management team and self-development
New Group
management
structure
Successful
implementation
Met in September
20151
Management team
Coaching and
mentoring
Met
Self-development
Continued self-
development
Exceeded
Target met, driven by the strong retail banking segment.
Target exceeded, driven by the PrivatBank acquisition (integration
was seamless) and the strong execution of the Express Banking and
Solo strategies as well as an enhanced and motivated retail banking
management team.
Expectations exceeded; operating leverage increased significantly in
2015 compared to 2014.
Given the difficult market conditions, the successful completion of
the GHG IPO was outstanding and extremely beneficial to the Group
as a whole.
All of the investment businesses delivered on budget and the net
profit for the Investment Business grew by more than 80% year on
year.
The investments in the water, hydro and beverages businesses are
proceeding as planned.
The new management structure is in place, performing well and
resulting in greater efficiencies. Recent promotions have also served
to motivate management generally.
Mr Gilauri has taken this responsibility very seriously. He has
enhanced opportunities for promotion within the Group for
members of management that continue to upskill – in performance,
management of others and self-development. Mr Gilauri has
provided guidance to those members of the management team with
the potential and drive to further grow their talent.
Mr Gilauri has prioritised self-development, principally through
analysis of his own management style. He identified weaknesses
and began to successfully address them. His increased self-
awareness has resulted in him improving his own leadership skills
and has had a very positive effect on the wider management culture.
Note:
1 As management succession planning is a continuous process, additional changes were made in February 2016 to best utilise management talent. The February 2016
changes included the promotion of several members of management.
In terms of objective KPIs, Mr Gilauri met or exceeded all KPIs, as described above. In terms of non-tangible factors, the Committee also
considered Mr Gilauri’s performance very strong. In 2015, Mr Gilauri continued to progress the Group’s social and environmental agenda,
which is described on pages 60 to 69. Under Mr Gilauri’s leadership, an Environmental and Social Coordinator was hired in 2015 and
sponsorship and charitable contributions increased, most notably to: (i) enhance access to education through Bank of Georgia University
as well as the Chevening and Fulbright scholarship funds; (ii) support the disabled, both through increased access to the Bank’s
branches and charitable contributions; and (iii) fund nature conservation within the country. In his personal capacity, Mr Gilauri has also
established an education fund, sending a strong message that personal charitable contributions can also make a difference.
For 2015, the Committee found that Mr Gilauri’s performance was excellent. He met and exceeded his KPIs as outlined above. As a
result, the Committee determined that Mr Gilauri should be awarded discretionary deferred share compensation near maximum
opportunity. As a result, the Committee agreed to award Mr Gilauri 47,000 shares, representing 46% of total salary and 92% of his
maximum opportunity. See section 1(b) of the summary of the Directors’ Remuneration Policy on page 118 which describes why the
Remuneration Committee steers away from a strict weighting of the performance measures and the discretion it retains in respect of
determining the number of discretionary shares that may be granted.
Annual Report 2015 BGEO Group PLC 111
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Remuneration Report continued
For 2016, in respect of objective KPIs, we plan to measure Mr Gilauri’s performance against KPIs which reflect the separation of our
Banking and Investment Businesses as well as the strategy of the Group as a whole as outlined below. Strict weighting is not imposed on
the KPIs below for the reasons mentioned in section 1(b) of the summary of the Directors’ Remuneration Policy on page 119.
Banking Business
• ROAE of 20%.
• Retail loan book growth of 20%.
Investment Business
• Growth of the value of our Investment Businesses.
• Continued enhancement of our Investment Business management teams.
Group-wide
• Continued coaching and mentoring of the management team.
• Continued self-development.
3.3 Further details of fixed and discretionary contingent deferred share compensation granted during 2015 (audited)
The following table sets out details of the nil-cost options over BGEO shares which have been granted to Mr Gilauri in 2015 in respect of
the year ended 31 December 2014.
Number of underlying shares and basis on
which award was made
90,000 granted on the basis described in
the table in section 1 and section 1(a) of
the Remuneration Policy.
25,000 granted on the basis described in
the table in section 1 and section 1(b) of the
Remuneration Policy.
Deferred share salary
Discretionary deferred share compensation
Type of interest
Cost to Group (as reflected
in accounts)
Face value
Nil-cost option
US$ 1,954,1571
US$ 1,954,1571
Nil-cost option
US$ 654,2502
US$ 654,2502
Percentage of award receivable if
minimum performance achieved
Exercise price
Vesting period
Performance measures
Cash payments equal to the dividends paid
on the underlying shares will be made upon
vesting.
Cash payments equal to the dividends paid
on the underlying shares will be made upon
vesting.
100% of the award will be receivable, since
the award is part of the executive’s salary
set out in the 2013 contract and accordingly
is not subject to performance measures or
targets over the vesting period.
100% of the award will be receivable, since
the award is based on 2014 performance
(and is not a LTIP award) and accordingly
is not subject to performance measures or
targets over the vesting period.
Nil. The options form part of the Executive
Director’s salary under the policy and so no
payment is required upon exercise.
Nil. The options make up the entirety of the
Executive Director’s performance-based
compensation and so no payment is required
upon exercise.
Five (5) years, with full vesting in January
2019.
Two (2) years, with full vesting in January
2017.
None. See section 1(a) of the Remuneration
Policy.
See section 3.2 above and section 1(b) of the
Remuneration Policy.
Notes:
1 Figures calculated as described in Note 2 to the table in section 3.1.
2 Figures calculated as described in Note 3 to the table in section 3.1.
112 BGEO Group PLC Annual Report 2015
Governance 3.4 Percentage change in remuneration of CEO
The following table sets out details of the percentage change in the remuneration awarded to the CEO between 2014 and 2015,
compared with the average percentage change in the per capita remuneration awarded to the Group’s employees as a whole between
2014 and 2015. See section 3.1 for an explanation of cash salary, deferred share salary, taxable benefits and discretionary deferred
compensation of Mr Gilauri.
Total cash salary (combined BGEO and Bank)1
Total deferred share salary (Bank)2
Taxable benefits3
Total bonus (discretionary deferred share compensation, in the case of Mr Gilauri,
and deferred discretionary share compensation plus cash bonus, in the case of other
employees of the Group)
Percentage change for the
CEO between 2014 and 2015
Average percentage change
for the Group’s employees as
a whole (excluding Mr Gilauri)
between 2014 and 2015
0.0%
0.0.%
30.3%
1.4%
4.6%
-0.8%
68.1%
13.3%
Notes:
1 Figures calculated as described in Note 1 to the table in section 3.1.
2 Figures calculated as described in Note 2 to the table in section 3.1.
3 The value of Mr Gilauri’s taxable benefits increased to US$ 1,252 in 2015 from US$ 961 in 2014, as a result of an amendment to Mr Gilauri’s medical insurance policy.
3.5 Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out the remuneration received by each Non-Executive Director in 2015 and 2014.
Neil Janin (Chairman)1
David Morrison2
Al Breach
Kaha Kiknavelidze
Kim Bradley
Bozidar Djelic
Tamaz Georgadze
Hanna Loikkanen3
Total
BGEO fees (US$)
Bank fees (US$)
Total fees (US$)
2015
2014
2015
2014
2015
2014
107,500
83,500
67,000
67,000
70,500
56,000
56,000
20,714
107,500
83,500
67,000
67,000
70,500
56,000
56,000
N/A
107,500
72,500
56,000
56,000
59,500
45,000
45,000
12,500
107,500
72,500
56,000
56,000
59,500
45,000
45,000
N/A
215,000
156,000
123,000
123,000
130,000
101,000
101,000
33,214
215,000
156,000
123,000
123,000
130,000
101,000
101,000
N/A
528,214
507,500
454,000
441,500
983,214
950,000
Notes:
1 On 4 September 2015, Mr Janin was appointed as an Independent Non-Executive Director of GHG PLC. He also serves as Chairman of both the Nomination and
Remuneration Committees of GHG PLC. In 2015, Neil Janin received remuneration of US$ 89,706 from GHG PLC in respect of his services. Mr Janin has no entitlement to
fees in respect of his position on the Supervisory Board of JSC Georgia Healthcare Group.
2 On 4 September 2015, Mr Morrison was appointed as an Independent Non-Executive Director of GHG PLC. He also serves as Chairman of the Audit Committee and
a member of both the Nomination and Critical Quality and Safety Committees. In 2015, Mr Morrison received US$ 102,664 from GHG PLC in respect of his services.
Mr Morrison has no entitlement to fees in respect of his position on the Supervisory Board of JSC Georgia Healthcare Group.
3 Ms Loikkanen was appointed to the Board of BGEO and the Supervisory Board of the Bank on 12 June 2015 and 27 August 2015, respectively, and therefore the fees
reflected above have been pro-rated from the date of appointment until 31 December 2015. Ms Loikkanen’s yearly remuneration for BGEO and the Bank is US$ 37,500 and
US$ 37,500, respectively.
In 2015, no payments were made to past Directors, nor were payments made for loss of office.
3.6 Total Shareholder Return
BGEO Group PLC TSR vs. the FTSE indices TSR
The following graph compares the Total Shareholder Return (TSR) of BGEO Group PLC with the companies comprising the FTSE
All-Share Index, the FTSE 250 Index and FTSE 100 Index for the period since BGEO’s listing on the Premium Segment of the LSE on
28 February 2012 until 31 March 2016.
350
300
250
200
150
100
50
Feb 12
Aug 12
Feb 13
Aug 13
Feb 14
Aug 14
Feb 15
Aug 15
Feb 16
BGEO
FTSE 100
FTSE 250
FTSE All Share
Source: Thomson Datastream
Annual Report 2015 BGEO Group PLC 113
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Remuneration Report continued
3.7 Relative importance of spend on pay
The following table shows the difference in remuneration paid to all employees of the Group between 2014 and 2015 as well as the
difference in value of distributions paid to shareholders by way of dividends between 2014 and 2015.
Year ended 31 December 2014 (US$) (dividend for year 2013)
Year ended 31 December 2015 (US$) (dividend for year 2014)
Percentage change
Remuneration paid to all
employees of the Group
Distributions to shareholders
by way of dividends
82,532,004
77,384,819
-6.2%
38,437,970
33,575,932
-12.6%
3.8 Directors’ interests in shares (audited)
The following table sets forth the respective holdings of BGEO shares of each Director as at 31 December 2014 and 2015.
As at 31 December 2014
As at 31 December 2015
Number of vested
but unexercised
BGEO shares
held under option
through deferred
share salary and
discretionary
deferred share
compensation
(all nil-cost
options with no
performance
conditions)
Number of
unvested and
unexercised
BGEO shares
held under option
through deferred
share salary and
discretionary
deferred share
compensation
(all nil-cost
options with no
performance
conditions)
Number of vested
but unexercised
BGEO shares
held under option
through deferred
share salary and
discretionary
deferred share
compensation
(all nil-cost
options with no
performance
conditions)
Number of
unvested and
unexercised
BGEO shares
held under option
through deferred
share salary and
discretionary
deferred share
compensation
(all nil-cost
options with no
performance
condition)
Total number
of interests in
BGEO shares
Total number
of interests in
BGEO shares
Number of
BGEO shares
held directly
–
N/A
N/A
N/A
N/A
N/A
N/A
N/A
322,000
N/A
N/A
N/A
N/A
N/A
N/A
N/A
483,131
35,729
26,357
16,400
26,337
1,250
0
0
250,319
35,729
26,357
16,400
26,337
1,250
0
0
–
N/A
N/A
N/A
N/A
N/A
N/A
N/A
289,500
N/A
N/A
N/A
N/A
N/A
N/A
N/A
539,819
35,729
26,357
16,400
26,337
1,250
0
0
Number of
BGEO shares
held directly
161,131
35,729
26,357
16,400
26,337
1,250
0
0
Irakli Gilauri1
Neil Janin2
David Morrison
Al Breach3
Kaha Kiknavelidze
Kim Bradley
Tamaz Georgadze
Bozidar Djelic
Notes:
1
In 2015, Mr Gilauri exercised options in respect of 174,500 BGEO shares. Mr Gilauri’s unvested and unexercised shares include the shares granted on 2 March 2016 in
respect of the 2014 work year.
2 At year-end 2015, NeilCo Limited, a company wholly-owned by Mr Janin, held 10,000 BGEO shares.
3 At year-end 2015, Gemsstock Growth Fund, which Mr Breach manages, held 20,000 BGEO shares.
The Directors’ Remuneration Policy is heavily weighted towards remuneration in deferred salary shares and discretionary compensation
in deferred shares. The long vesting periods, particularly for deferred salary shares (five years), result in executive management having
large holdings of unvested shares. Accordingly, the Group does not apply a shareholding guideline or impose a holding period on
Mr Gilauri’s or executive management’s shares. The policy naturally results in our executives holding a significant number of unvested
shares and achieves a delay between performance and vesting. We believe these results are consistent with the principles of the
Investment Management Association.
As at the date of this Annual Report, Mr Gilauri’s shareholding remains 539,819 BGEO shares, representing approximately 1.4% of the
share capital of BGEO. The vesting period for the majority of unvested shares exceeds four years.
None of Mr Gilauri’s connected persons have interests in any BGEO shares.
The Group does not require Non-Executive Directors to hold a specified number of shares in BGEO. Notwithstanding this, some
Non-Executive Directors have chosen to become shareholders. There have been no changes in the Non-Executive Directors’ BGEO
shareholdings since 31 December 2015.
Several of our Directors chose to subscribe for shares in the GHG IPO, which closed on 12 November 2015. The following table sets forth
the respective holdings of GHG shares of each Director as at 31 December 2015.
As at 31 December 2015
Irakli Gilauri
Neil Janin
David Morrison
Al Breach
Kim Bradley
114 BGEO Group PLC Annual Report 2015
Number of
GHG shares
held directly
411,700
88,000
116,600
30,000
19,000
Governance
3.9 Mr Gilauri’s interests in Group debt securities and real estate
Directors and senior management of the Group from time-to-time will purchase debt securities or real estate from Group entities on an
arms-length basis. In the interest of transparency, such transactions entered into by our sole Executive Director, Mr Gilauri, are described
below.
Mr Gilauri participated in the US$ 20 million two-year bond offering by m2 Real Estate and the US$ 15 million two-year bond offering by
Evex, each of which are described on page 81 of this Annual Report and Note 18 of the Accounts on page 188. Both bonds are listed on
the Georgian Stock Exchange. As at the date of this Annual Report, Mr Gilauri has purchased US$ 243,900 worth of m2 Real Estate
bonds and US$ 281,390 worth of Evex bonds.
On 24 December 2015, Mr Gilauri purchased an apartment in the m2 Real Estate Skyline Project (described on page 85 of this Annual
Report) in the amount of US$ 519,220. Mr Gilauri purchased this apartment during the pre-sales phase on an arms-length basis.
Pre-sales were offered to potential clients that have either requested to receive direct marketing from m2 Real Estate or through direct
marketing to Solo and private wealth customers of the Bank.
3.10 Details of Non-Executive Directors’ terms of appointment
Letters of appointment are entered into by BGEO with each Non-Executive Director, generally for three-year terms. The letters of
appointment require Non-Executive Directors to provide one month’s notice prior to termination. New BGEO letters of appointment for
each Non-Executive Director, save for Hanna Loikkanen, were signed on 10 April 2014. Ms Loikannen signed her letter of appointment on
12 June 2015. Ms Loikkanen will be proposed for election at the AGM and all other Non-Executive Directors will be proposed for annual
re-election at the AGM.
A succession plan adopted by the Board provides for an initial term of six years, with a maximum tenure of nine years, if their skills and
experience continue to enhance the effectiveness of the Group and their continued appointments are deemed to be in the best interests
of the Group. As the Group continues to evolve, the Board has and will continue to enhance its skills and will continue to improve gender
diversity in line with its Board Diversity Policy.
The table below shows each Non-Executive Director’s date of appointment to the Board of BGEO and the Supervisory Board of the Bank.
Neil Janin
David Morrison
Al Breach
Kaha Kiknavelidze
Kim Bradley
Bozidar Djelic
Tamaz Georgadze
Hanna Loikkanen
Date of appointment to BGEO
Date of appointment to the Bank
December 2011
December 2011
December 2011
December 2011
December 2013
December 2013
December 2013
June 2015
June 2010
June 2009
June 2010
February 2009
December 2013
December 2013
December 2013
August 2015
4. Senior officer remuneration
In addition to the CEO of BGEO and the Bank, in 2015, there were seven senior officers. These individuals include the Bank’s Deputy
CEOs responsible for the following divisions: Finance, Retail Banking, Corporate Banking and Investment Management as well as the
CEOs of GHG and m2 and the Group General Counsel.
Key information regarding remuneration for senior officers is disclosed below in the interests of transparency, but the remuneration of
senior officers is not subject to the Regulations or to the Directors’ Remuneration Policy. The principles and remuneration structure
described in the Directors’ Remuneration Policy are currently applied in broadly the same way to senior officers. This means that, as for
Mr Gilauri, senior officers receive remuneration based on two components:
• salary, which includes both a modest cash sum and deferred share compensation which vests over a five-year period; and
• a discretionary award, payable 100% in deferred share compensation vesting over a two-year period, which is dependent on both
Group performance and the executive achieving his KPIs.
Unlike previous years, we have not combined the table reflecting senior officer remuneration for a two-year period due to additional
disclosure required in respect of 2015 in respect of deferred share salary. Certain senior officers signed new contracts upon expiration of
their previous contracts and increases in deferred share compensation for these senior officers occurred during the year, which has
required us to calculate the value of 2015 deferred share compensation using different share values. In addition, certain senior officers
received a portion of their deferred share salary from entities within the Group other than BGEO. Details for each senior officer are listed in
the footnotes to the 2015 table.
With respect to both 2015 and 2014, the following applies to remuneration for both years:
• Cash salary. Values are expressed in US Dollars but paid in Lari.
• Deferred share salary. Under the deferred share programme, the option awards in respect of deferred share salary are formally
granted in January of the year following the work year even though the number of deferred salary shares is fixed in the contract. The
terms and conditions applying to deferred share salary, and an explanation of why it is not subject to performance measures, are
described in section 1(a) of the Directors’ Remuneration Policy.
• Discretionary deferred share compensation. The means of determining the number of shares underlying this compensation and the
terms and conditions are described in section 1(b) of the Directors’ Remuneration Policy.
• Taxable benefits, pension and dividend equivalents. See footnotes 4, 5 and 6 in the table provided in section 3.1.
Annual Report 2015 BGEO Group PLC 115
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Directors’ Remuneration Report continued
4.1 Single total figure of remuneration for senior officers
The following tables below set out the remuneration received by each of the senior officers for 2014 and 2015 in respect of his
employment within the Group.
2015
Murtaz Kikoria3
Levan Kulijanishvili4
Mikheil Gomarteli5
Sulkhan Gvalia6
Archil Gachechiladze7
Avto Namichieshvili8
Nikoloz Gamkrelidze9
Irakli Burdiladze10
Cash salary
(US$)
Fixed deferred
share salary (US$)1
150,000
150,000
150,000
150,000
175,000
150,000
150,463
150,000
618,835
477,439
576,448
576,448
683,260
661,223
1,617,049
593,407
Total fixed
compensation
(US$)
768,835
627,439
726,448
726,448
858,260
811,223
1,767,512
743,407
Discretionary
deferred share
compensation
(US$)2
Taxable benefits,
pension and
dividend
equivalents (US$)
643,309
327,503
666,702
350,896
701,791
748,577
600,946
748,577
57,626
12,351
61,684
72,990
68,043
68,281
48,157
57,224
Total
(US$)
1,469,770
967,293
1,454,834
1,150,334
1,628,094
1,628,081
2,416,615
1,549,208
Notes:
1 For all senior officers (save for Mr Gamkrelidze, who was also granted GHG PLC shares (see footnote 9)), fixed deferred share salary is granted in respect of BGEO shares.
2 For all senior officers, save for Mr Gamkrelidze (see footnote 9), discretionary deferred share compensation granted in 2016 in respect of the 2015 work year is in the form of
BGEO shares, the value of which is calculated by reference to the BGEO share price on 12 February 2016 which was US$ 23.39 (based on the official share price of £16.18
per share converted into US Dollars using an exchange rate of 1.4458, being the official exchange rate published by the Bank of England on the same date).
3 The value of deferred salary share compensation is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share (based on the official
share price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of England on the same
date). Mr Kikoria’s deferred share salary was increased from 25,000 to 35,000 in July, which became effective 1 September 2015. The value of the additional 10,000 deferred
salary shares is calculated by reference to the share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted into US
Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England on the same date). Options in respect of discretionary deferred
compensation were awarded over 27,500 BGEO shares (see footnote 1).
4 Prior to being appointed as CFO of the Bank in September 2015, Mr Kulijanishvili served as Head of Compliance and Internal Control Head of Compliance. The value of
deferred share compensation is calculated by reference to the share price on 25 February 2014 which was US$ 39.79 per share (based on the official share price of £23.85
per share converted into US Dollars using an exchange rate of 1.6682, being the official exchange rate published by the Bank of England on the same date). Options in
respect of discretionary deferred compensation were awarded over 14,000 BGEO shares (see footnote 1).
5 The value of deferred share compensation is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share (based on the official share
price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of England on the same date).
Mr Gomarteli’s deferred share salary was increased from 25,000 to 30,000 in July, which became effective 1 September 2015. The value of the additional 5,000 deferred
salary shares is calculated by reference to the share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted into US
Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England on the same date). Options in respect of discretionary deferred
compensation were awarded over 28,500 BGEO shares (see footnote 1).
6 The value of deferred share compensation is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share (based on the official share
price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of England on the same date).
Mr Gvalia’s deferred share salary was increased from 25,000 to 30,000 in July, which became effective 1 September 2015. The value of the additional 5,000 deferred salary
shares is calculated by reference to the share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted into US
Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England on the same date). Options in respect of discretionary deferred
compensation were awarded over 15,000 BGEO shares (see footnote 1).
7 The value of deferred share compensation is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share (based on the official share
price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of England on the same
date). Mr Gachechiladze’s deferred share salary was increased from 30,000 to 35,000 in July, which became effective 1 September 2015. The value of the additional 5,000
deferred salary shares is calculated by reference to the share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted
into US Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England on the same date). Options in respect of discretionary
deferred compensation were awarded over 30,000 BGEO shares (see footnote 1).
8 The value of deferred share compensation for the first 10 months of the year is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share
(based on the official share price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of
England on the same date). Mr Namichieshvili’s service agreement with the Bank expired on 31 October 2015. He accepted a new service agreement with JSC BGEO Group
on the same terms as his previous agreement with the Bank, which became effective 1 November 2015. As a result, the value of his deferred share salary for the last two
months of the year is calculated by reference to the share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted
into US Dollars using an exchange rate of 1.5738, being the official exchange rate published by the Bank of England on the same date). Options in respect of discretionary
deferred compensation were awarded over 32,000 BGEO shares (see footnote 1).
9 Mr Gamkrelidze’s deferred salary share compensation is comprised of 175,000 GHG PLC shares in respect of his employment at GHG and 55,000 BGEO shares in respect
of services rendered to the Group in relation to the GHG IPO. The value of the 175,000 GHG shares is calculated by reference to a share price US$ 1.16 per share, which
corresponds to EY’s determination of the value of such shares as at 1 April 2015 (prior to the listing of GHG PLC). The value of the 55,000 BGEO shares is calculated by
reference to two different share prices. The value of 25,000 BGEO shares is calculated by reference to the share price on 18 February 2013 which was US$ 21.36 per share
(based on the official share price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of
England on the same date) and the value of 30,000 BGEO shares is calculated by reference to the share price on 17 December 2014 which was US$ 29.34 per share (based
on the official share price of £18.76 per share converted into US Dollars using an exchange rate of 1.5643, being the official exchange rate published by the Bank of England
on the same date). Options in respect of discretionary deferred compensation were awarded over 237,500 GHG shares, the value of which is calculated by reference to the
GHG PLC share price on 15 February 2016 which was US$ 2.53 per share (based on the official share price of £1.74 per share converted into US Dollars using an exchange
rate of 1.4552, being the official exchange rate published by the Bank of England on the same date).
10 On 1 September 2015, Mr Burdiladze’s 2013 service contract with the Bank was transferred to m2 and on 1 November 2015, he accepted a new service agreement with
m2 on the same terms as his previous agreement with the Bank, save for the increase in deferred salary shares to 30,000, as described below. The value of deferred share
compensation in respect of 25,000 salary shares for the first 10 months of the year is calculated by reference to the share price on 18 February 2013 which was US$ 21.36
per share (based on the official share price of £13.80 per share converted into US Dollars using an exchange rate of 1.5480, being the official exchange rate published by
the Bank of England on the same date). Mr Burdiladze’s deferred share salary was increased from 25,000 to 30,000 in July, which became effective 1 September 2015. The
value of the additional 5,000 deferred salary shares prior to commencement of his new service agreement with m2 on 1 November 2015 is calculated by reference to the
share price on 24 August 2015, which was US$ 25.43 per share (the official share price of £16.16 per share converted into US Dollars using an exchange rate of 1.5738, being
the official exchange rate published by the Bank of England on the same date). The value of his 30,000 deferred salary shares for the remaining two months of the year is also
calculated by reference to the share price on 24 August 2015 as described directly above. Options in respect of discretionary deferred compensation were awarded over
32,000 BGEO shares (see footnote 1).
116 BGEO Group PLC Annual Report 2015
Governance Murtaz Kikoria
Mikheil Gomarteli
Sulkhan Gvalia
Archil Gachechiladze
Avto Namichieshvili
Nikoloz Gamkrelidze
Irakli Burdiladze
Bank cash salary
(US$)
Bank deferred share
salary (US$)1
150,000
150,000
150,000
175,000
150,000
150,000
150,000
534,060
534,060
534,060
640,872
640,872
640,872
534,060
2014
Total salary
(US$)
684,060
684,060
684,060
815,872
790,872
790,872
684,060
Discretionary deferred
share compensation
(US$)2
Taxable benefits,
pension and dividend
equivalents (US$)
549,570
549,570
314,040
497,230
457,975
497,230
497,230
29,332
36,762
36,524
40,461
42,611
24,669
29,820
Total
(US$)
1,262,962
1,270,392
1,034,624
1,353,563
1,291,458
1,312,771
1,211,110
Notes:
1 Deferred share salary. The value is calculated by reference to the share price as of US$ 21.36 per share (based on the official share price of £13.80 per share converted into
US Dollars using an exchange rate of 1.5480, being the official exchange rate published by the Bank of England on the same date) as at 18 February 2013, the date of the
service contracts.
2 Discretionary deferred share compensation. The value of discretionary deferred share compensation granted in 2015 in respect of the 2014 work year iis calculated by
reference to the share price on 19 March 2015, which was US$ 26.17 per share (based on the official share price of £17.77 per share converted into US Dollars using an
exchange rate of 1.4727, being the official exchange rate published by the Bank of England on the same date). The number of BGEO shares granted to the senior officers in
respect of discretionary share compensation in 2014 is as follows: Murtaz Kikoria: 21,000; Mikheil Gomarteli: 21,000; Sulkhan Gvalia: 12,000; Archil Gachechiladze: 19,000;
Avto Namicheishvili: 17,500; Nikoloz Gamkrelidze: 19,000; and Irakli Burdiladze: 19,000.
4.2 Shareholdings of senior officers
The following table sets forth the respective holdings of BGEO shares of the senior officers as at 31 December 2014 and 2015.
Murtaz Kikoria
Levan Kulijanishvili
Mikheil Gomarteli
Sulkhan Gvalia
Archil Gachechiladze
Avto Namichieshvili
Nikoloz Gamkrelidze
Irakli Burdiladze
As at 31 December 2014
As at 31 December 2015
Number
of vested
BGEO
shares
Number
of unvested
BGEO
shares
5,000
–
30,851
42,022
–
61,664
1,082
–
98,000
15,180
99,000
96,500
112,000
112,000
83,542
98,000
Total
vested and
unvested
BGEO
shares
103,000
15,180
129,851
138,522
112,000
173,664
84,624
98,000
Number
of vested
BGEO
shares
Number
of unvested
BGEO
shares1
100,000
200
25,918
9
98,750
27,851
89,750
37,022
50,750
110,250
58,139 108,750
95,250
98,000
–
–
Total
vested and
unvested
BGEO
shares
100,200
25,927
126,601
126,772
161,000
166,889
95,250
98,000
Note:
1
Includes shares granted on 2 March 2016 in respect of the 2014 work year.
5. Committee effectiveness review
An externally facilitated review of the Committee was performed by Lintstock. The evaluation principally addressed the composition of the
Committee, the structure and effectiveness of the Remuneration Policy and the performance evaluation process. The effectiveness
evaluation concluded that the Committee continues to operate and perform effectively.
Our priorities for 2016 include the commencement of discussions regarding the terms of the Directors’ Remuneration Policy to be
proposed to shareholders for approval at the 2017 AGM. We are also carefully monitoring the performance of senior management against
expanded self-development and mentoring KPIs and are enhancing the scope of management performance evaluations.
Directors’ Remuneration Policy
Our Directors’ Remuneration Policy was approved by our shareholders at the 2014 AGM. The approved Directors’ Remuneration Policy
(which has not been amended) is valid for three years from the date of the 2014 AGM and will not be presented to shareholders for
approval at the 2016 AGM. In the pages that follow, we have provided a summary of the key provisions of the Directors’ Remuneration
Policy in order to provide context to the discussion of the implementation of the policy in the Directors’ Remuneration Report on pages
107 to 123. Please refer to the 2013 Annual Report for the full text of the approved Directors’ Remuneration Policy, which is also available
on our website, http://bgeo.com/page/id/1/annual-reports. There will be no significant changes between the Directors’ Remuneration
Policy and its implementation in 2016.
Mr Gilauri entered into a new contract with the Bank, which will take effect on 1 May 2016. The terms of the contract are consistent with
the Directors’ Remuneration Policy.
Annual Report 2015 BGEO Group PLC 117
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1. Executive Director remuneration policy
Component
Purpose and link to strategy
Operation and opportunity
Salary in the
form of cash and
deferred shares
Discretionary
deferred share
compensation
Cash salary
• Modest yet sufficient to cover
reasonable living expenses
and, when combined with the
other elements of the package,
competitive enough to attract,
retain and develop high-calibre
talent.
• Reflective of the Executive
Director’s duties to each of BGEO
and the Bank, respectively.
Deferred share salary
• Fixed compensation in the form of
nil-cost options over BGEO shares
which vest over a five-year period
promotes the long-term success
of the Group by closely aligning
the Executive Director’s and
shareholders’ interests.
• Annual performance-based
compensation paid entirely in the
form of nil-cost options over BGEO
shares which vest over a two-year
period in lieu of a cash bonus or
LTIP.
• Promotes the Group’s long-
term success by closely aligning
the Executive Director’s and
shareholders’ interests.
Pension
The provision of retirement benefits
helps to attract and retain high-
calibre talent.
Cash salary
• Cash salary payable under the terms of the separate service contracts with
BGEO and the Bank2. The total amount payable under Mr Gilauri’s current
contracts is US$ 437,500.
• Reviewed upon renewal of the service contract.
• There is no provision for the recovery or withholding of cash salary.
Deferred share salary
• Awarded annually over the number of BGEO shares under the terms of the
service contract with the Bank (currently 90,000 per annum for Mr Gilauri
under his contract with the Bank).
• Reviewed upon renewal of the service contract.
• Awards are formally granted in January of the first year following the work
year, and vest as to 20% in January of each of the second, third and fourth
years following the work year, and as to 40% in January of the fifth year
following the work year.
• Dividend equivalent payments are made upon vesting (exercise of the nil-
cost options)3.
• Unvested deferred share salary lapses upon termination by BGEO or the
Bank “for cause” or by the Director other than for “good reason” or if the
Director does not remain employed by the Group or serve as a Director of a
subsidiary of the Group (each as defined in the relevant service contract).
• There is no provision for the recovery or withholding of deferred share salary.
• May be awarded annually from a pool of shares made available for such
awards based on the performance of the Group and the Bank and the
achievement of the KPIs set for the Executive Director by the Remuneration
Committee for the work year.
• For Mr Gilauri, the maximum value of an award in a given year for the
remainder of his service contract with the Bank is capped at 50% of total
salary. For an Executive Director other than Mr Gilauri, an award will not
comprise more than 125% of total salary, save that the Remuneration
Committee has the discretion to increase such award to a maximum 150%
of total salary for performance that has resulted in outstanding benefits for
shareholders.
• Awards vest as to 50% in January of each of the second and third years
following the work year.
• Dividend equivalent payments are made upon vesting exercise of the nil-cost
options3.
• Unvested deferred share compensation lapses on the same terms as
deferred share salary, save that the Board has reserved the right to permit
unvested discretionary deferred shares to vest irrespective of the Executive
Director’s departure when such Executive Director departs on good terms
with the Group.
• If at any time after awarding discretionary deferred share compensation, it
has been determined that there was a material misstatement in the financial
results for the financial year in respect of which the award was formally
granted, the Board has the right to cause some or all of the award for that
financial year or for any subsequent financial year that is unvested at the time
of its determination, not to vest and to lapse.
• The Bank operates a defined contribution pension scheme.
• The Executive Director and the Bank each contribute a minimum of 1% of
the Executive Director’s gross monthly cash salary payable under his service
contract with the Bank.
• The Bank will match in additional contributions in a proportion of 0.2 to one,
up to a maximum additional Bank contribution of 1% of gross monthly salary
where the Director makes additional contributions up to 5% of gross monthly
salary.
• There is no provision for the recovery or withholding of pension payments.
Benefits
Non-cash benefits are in line with
Georgian market practice and are
designed to be sufficient to attract and
retain high-calibre talent.
• Benefits consist of health insurance, disability insurance and Directors’ and
officers’ liability insurance, mobile phone (including contract charges and
costs of calls made during business trips abroad) and personal security
arrangements (if requested by the Executive Director).
• A tax equalisation payment may be paid to a Director if any part of his
remuneration becomes subject to double taxation.
• There is no provision for the recovery or withholding of benefits.
118 BGEO Group PLC Annual Report 2015
Governance Notes:
1 A discussion of how we implemented the Directors’ Remuneration Policy in 2015 is set out on pages 107 and 123.
2 BGEO cash salary is converted from US Dollars to Sterling at the exchange rate published by the Bank of England on each monthly payment date. Bank cash salary is
converted from US Dollars to Lari at the exchange rate published by the National Bank of Georgia on each bi-weekly payment date.
3 At vesting (upon exercise of the nil-cost options), the Executive Director receives (in addition to the vested shares) cash payments equal to the dividends paid on the
underlying shares between the date the award was made and the vesting date. Dividend equivalents are paid in Lari as at the date dividends were paid to other shareholders.
4 Work year refers to the year following the year to which the award relates.
(a) Salary
The deferred share salary comprises the most important element of the Executive Director’s fixed annual remuneration and is
commensurate with his role within the Group. By heavily weighting the base salary to deferred share compensation rather than cash, the
Executive Director’s day-to-day actions are geared towards sustained Group performance over the long term. The deferred share salary
component is neither a bonus nor a LTIP: it is salary fixed at the outset of each three-year service contract and is therefore not subject to
performance targets or measures. That salary, however, increases or declines in value depending on Group performance over the
five-year vesting period, aligning the Executive Director’s interests directly and naturally with those of shareholders.
(b) Discretionary deferred share compensation
The Group does not operate a LTIP because it believes there is sufficient long-term incentive built into its deferred share salary and
discretionary deferred share compensation. No cash bonuses are paid to Executive Directors. Instead, individual and Group performance
is rewarded through an award of discretionary deferred share compensation that vests over the two years following the work year. As
discretionary deferred share compensation is awarded to reward past performance over the work year, it is not subject to any
performance measures over the period from award to vesting.
The aggregate pool of shares available each year for awards of discretionary deferred share compensation for the Executive Director and
all other members of executive management is determined annually by the Remuneration Committee in its discretion, based on a number
of factors including:
• financial objectives (e.g. ROAE, operating leverage and Cost to Income ratio);
• business growth objectives (e.g. net loan book growth and deposit growth and fee and commission generation);
• risk management objectives (e.g. capital strength, liquidity management and cost of credit risk);
• the performance of the Bank relative to its competitors in Georgia and in the light of overall global market conditions; and
• the market value of the shares at the time the discretionary share award is determined.
The number of shares over which an individual Executive Director’s discretionary deferred share compensation will be granted is
determined by the Remuneration Committee by reference to the performance of the Group and the Executive Director’s KPIs, which are
set for the Executive Director by the Remuneration Committee at the start of the financial year and which reflect the Executive Director’s
required contribution to the Group’s overall key strategic and financial objectives for the financial year. A description of the KPIs set for
Mr Gilauri in respect of 2015 and his performance against these targets can be found on pages 111 and 112.
While the Remuneration Committee has defined the set of factors to determine the aggregate pool of discretionary shares and evaluate an
Executive Director’s performance, it seeks to steer away from defining a series of narrow objectives for its Executive Directors and does not
utilise strict weighting of performance measures. A high level of discretion is intentionally maintained when determining the quantum of
discretionary deferred shares awarded to each Executive Director. Even in a “good” year for an Executive Director (e.g. achievement of most
of his KPIs), in a “bad” year for the Group (e.g. poor financial performance by it) the Executive Director could receive little or no discretionary
share compensation.
As mentioned in the table on the previous page, the maximum value of discretionary deferred share remuneration that Mr Gilauri may be
awarded in a given year for the remainder of his service contract with the Bank is capped at 50% of his total salary.
(c) Equity compensation trust and dilution limits
An equity compensation trust, the Rubicon Executive Equity Compensation Trust (Trust), was established for the purposes of satisfying
deferred share compensation awarded to Executive Directors and persons discharging managerial responsibility. In 2015, Sanne Fiduciary
Services Limited, acting as trustee of the Trust, purchased 282,657 shares in the market. The BGEO shares currently committed to the
Trust will partially satisfy awards in respect of the 2015 work year. We intend for Sanne to continue purchasing additional shares in the
market, but may need to issue new shares, in order to ensure that there are a sufficient number of shares committed to the Trust in order to
satisfy awards. However, the Group has committed to shareholders that new shares issued in satisfaction of deferred share compensation
from the time of the Company’s listing on the Premium Segment of the LSE will not exceed 10% of BGEO’s ordinary share capital over any
10-year period.
(d) Business expenses
Executive Directors are reimbursed for reasonable business expenses incurred in the course of carrying out duties under their service
contracts, on provision of valid receipts.
2. Legacy arrangements
It is a provision of this Policy that the Group will honour all pre-existing obligations and commitments that were entered into prior to this
Policy taking effect. The terms of those pre-existing obligations and commitments may differ from the terms of the Policy and may include
(without limitation) obligations and commitments under service contracts, deferred share compensation schemes and pension and
benefit plans.
Annual Report 2015 BGEO Group PLC 119
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Directors’ Remuneration Report continued
3. Consideration of shareholder views
The Remuneration Committee considers shareholder feedback
received on our remuneration structure each year as well as
guidance from shareholder representative bodies, as we view
shareholder input as key when shaping remuneration policy. We
frequently meet with our shareholders to discuss our remuneration
structure and engage directly with several shareholder advisory
groups. The feedback we received is positive and our
shareholders are widely supportive of our executive remuneration
structure, understanding that although it varies from a typical UK
remuneration structure in that we do not operate a LTIP or give
cash bonuses, the absence of cash bonuses and the dominance
of deferred share compensation in the overall remuneration
package creates a direct and natural alignment of shareholder and
executive management interests.
4. Consideration of employment conditions elsewhere in
the Group
The Remuneration Committee considers the pay and employment
conditions of executive management (other than Directors) when
determining an Executive Director’s remuneration as well as
changes in pay and employment conditions across the Group as a
whole in relation to the proposed pay for Directors. The
Remuneration Committee consults with the Human Relations
department, executive management and other employees during
the year to seek feedback on the executive remuneration structure
and takes such views into account when analysing its Policy. In
2015, the employees consulted confirmed that they were satisfied
with the manner in which they were compensated. In taking this
information into account in determining an Executive Director’s
remuneration, the Remuneration Committee relies on its
judgement, particularly given that international comparisons are
the most relevant for senior management and the Georgian labour
market is more relevant for other employees.
5. Comparison with Remuneration Policy for employees
generally
The components of the remuneration package for Executive
Directors (as provided for by the Policy) are broadly the same as
those for non-Board members of the executive management team.
Other members of senior management and middle management
receive their entire salary in cash and do not receive a deferred
share salary. Their bonuses may be either in the form of cash and/or
shares which vest over a three-year period following the award. All
other employees within the Group receive a cash salary and may be
eligible to receive cash bonuses, portions of which may be deferred
until the publication of the audited annual results for the work year
and/or based on continuous employment with the Group. The
deferred portion of the cash bonus may also be reduced if it is
revealed, upon completion of the annual audit, that the annual
results published by the department where the employee works
were incorrect in any material respect. All employees receive a
competitive benefit package in line with Georgian market practice
and are entitled to participate in the pension scheme on the same
terms as applicable to Executive Directors.
120 BGEO Group PLC Annual Report 2015
6. Total remuneration opportunity for our sole Executive
Director
The chart below shows the remuneration which Mr Gilauri, our
sole Executive Director, could receive in respect of 2016 under the
Policy at three different performance levels. It should be noted
that, at the maximum level, 89% of Mr Gilauri’s 2016 compensation
will be in the form of deferred shares for which the average vesting
period exceeds three years. At the minimum level, 85% of
Mr Gilauri’s 2016 compensation will be in the form of deferred
shares for which the average vesting is just under four years.
Total remuneration opportunity for our sole
Executive Director (%)
US$4,285,502
10%
US$3,856,951
11%
US$2,857,001
15%
56%
63%
85%
33%
26%
Maximum
(thousands)
Target
(thousands)
Minimum
(thousands)
■ Discretionary deferred share compensation
■ Fixed share salary ■ Fixed cash salary
Notes:
1 Salary is comprised of cash, deferred share salary, benefits and pension
contributions. Mr Gilauri’s total cash salary in 2016 in respect of both his service
contract with BGEO and the JSC BGEO Group will be US$ 437,500. In 2016,
Mr Gilauri’s new contract with the JSC BGEO Bank, which was approved on
13 July 2015, will become effective on 1 May 2016. From 1 January 2016 until
30 April 2016, the value of the deferred share salary payable is calculated by
reference to the share price as at the date Mr Gilauri’s 2013 service contract at the
Bank was signed, being US$ 21.71 per share (the official share price of £14.06 per
share as at 19 February 2013 converted into US Dollars using an exchange rate of
1.5503, being the official exchange rate published by the Bank of England on the
same date). From 1 May 2016 until 31 December 2016, the value of the deferred
share salary payable is calculated by reference to the share price as at the date
Mr Gilauri’s new service contract with JSC BGEO Group was approved, being
US$ 29.44 per share (the official share price of £18.96 per share as at 13 July
2015 converted into US Dollars using an exchange rate of 1.5526, being the
official exchange rate published by the Bank of England on the same date). The
price is the value at which the shares were committed to the Trust and underlies
the determination of compensation expense in the Group’s income statement
for the year. Deferred share salary in respect of 2016 will be formally granted in
January 2017 and will vest from January 2018 to January 2021. For the purposes
of this graph, we have used the value of pension and benefits for 2015 as we
assume that pension and benefits in 2016 will be substantially the same.
2 The means of determining the number of shares underlying the discretionary
deferred share compensation and terms and conditions applying to this
compensation are described in section 1(b) above. Discretionary deferred shares
in respect of 2016 will be formally granted in January 2017 and will vest in January
2018 and 2019.
3 Minimum opportunity reflects a scenario whereby Mr Gilauri receives only
fixed remuneration, comprised of cash salary, deferred share salary, pension
contributions and benefits and the Remuneration Committee considers that the
Group’s and/or the Director’s performance in 2016 does not warrant any award of
discretionary deferred share compensation.
4 On-target opportunity reflects a scenario whereby Mr Gilauri receives fixed
remuneration (as described above) and assumes a discretionary deferred share
compensation award at 70% of the maximum opportunity for Group and individual
performance which is in line with the Group’s expectation, which is excellent
performance.
5) Maximum opportunity reflects a scenario whereby Mr Gilauri receives fixed
remuneration (as described above) and a discretionary deferred share
compensation award of 50% of total salary (i.e. the Remuneration Committee
considers that the Group’s and the individual’s performance in 2016 warrant the
highest possible level of discretionary deferred share compensation).
6) The value of deferred shares does not take into account any increase or decrease
in share price over the vesting period or any dividend equivalents payable on
vesting (upon exercise of the nil-cost options).
Governance
7. Non-Executive Director Remuneration Policy
In 2015, each member of the Board of BGEO, with the exception of
Mr Gilauri, served as a member of the Supervisory Board of the
Bank. Fees for Non-Executive Directors on both the Board of BGEO
and the Supervisory Board of the Bank are paid solely in cash. Each
member received a base fee and was further remunerated for
membership on the Audit Committee, Remuneration Committee
and/or Nomination Committee, if applicable.
The Policy provides for a Non-Executive Director’s remuneration
package to be comprised of the following elements:
Component
Base cash
fee
Purpose and link to
strategy
Operation and opportunity
• Combined
• Cash payment on a quarterly
BGEO and Bank
base cash fee
is competitive
enough to
attract and retain
experienced
individuals.
• The Chairman
and Senior
Independent
Non-Executive
Director receive
higher base
fees which
reflect increased
responsibilities
and time
commitment.
basis.
• Reviewed every three years by
the Remuneration Committee.
The next review will be in 2017.
• The combined BGEO and Bank
base cash fee currently payable
to Non-Executive Directors and
Supervisory Board members
is US$ 75,000 per year (US$
37,500 for each of BGEO and
the Bank).
• The Remuneration Committee
reserves the right, in its sole
discretion, to amend and
vary the fees if there are
genuinely unforeseen and
exceptional circumstances
which necessitate such review
and in such circumstances any
significant increase shall be the
minimum reasonably required.
• The maximum aggregate BGEO
Cash fee
for each
Committee
member-
ship
Additional fee to
compensate for
additional time
spent discharging
Committee duties
for BGEO and the
Bank.
fees for all Non-Executive
Directors which may be paid
under BGEO’s Articles of
Association is £ 750,000.
• Cash payment on a quarterly
basis.
• Reviewed every three years by
the Remuneration Committee.
The next review will be in 2017.
• Fees for committee membership
range from US$ 7,500 to
US$ 15,000 per Committee,
depending on the Committee
and whether the Non-Executive
Director is a Committee
chairman or member.
8. Payments for loss of office of the current Directors
The following paragraphs (a) to (d) summarise the termination
provisions of Mr Gilauri’s service contracts with BGEO, the Bank
and JSC BGEO Group, all of which are consistent with the
Directors’ Remuneration Policy. In 2015, and as of the date of this
Annual Report, Mr Gilauri remained the sole Executive Director on
the BGEO Board.
The Group’s policy for payments for loss of office for
Non-Executive Directors is described in paragraph (e) below and
its approach to payments for loss of office for future Executive and
Non-Executive Directors is described in section 9 below.
The Directors’ service contracts and letters of appointment are
kept for inspection by shareholders at BGEO’s registered office.
(a) Termination of BGEO service contract dated 15 December
2011
Mr Gilauri’s service contract with BGEO is for an indefinite term
(subject to annual re-election at the AGM) and is terminable by
either party on four months’ written notice. Where the service
contract is terminated on notice, BGEO may put Mr Gilauri on
garden leave for some or all of the notice period and continue to
pay his cash salary under the BGEO service contract, provided
that any accrued and unused holiday entitlement shall be deemed
to be taken during the garden leave period.
BGEO may terminate Mr Gilauri’s employment early with
immediate effect and without notice and pay in lieu of notice in
the case of, among other circumstances, his dishonesty, gross
misconduct, conviction of an offence (other than traffic-related)
or becoming of unsound mind. BGEO may also terminate the
agreement with immediate effect by payment in lieu of notice, in
which case the payment in lieu of notice shall be solely in respect
of cash salary due under the BGEO service contract as at the date
of termination of employment.
(b) Termination of Bank service contract dated 19 February
2013
Mr Gilauri’s service contract with the Bank is for an initial term of
three years expiring on 1 May 2016, which may be renewed by
agreement between the parties or terminated prior to the expiry of
the term by either Mr Gilauri or the Bank. A further service contract
has been agreed effective from 1 May 2016 and the termination
provisions of it are described further at paragraph (c) below. The
current agreement was subject to variations on 26 February 2014
and 24 August 2015. The latter variation was in connection with
Mr Gilauri’s change of role to Chairman of the Supervisory Board
of the Bank. The Bank may terminate the service contract
immediately without notice (subject to the terms set out below),
whereas Mr Gilauri may terminate the contract upon three months’
written notice or such shorter period as is agreed with the
Supervisory Board and CEO of the Bank.
Notes:
1 Non-Executive Directors do not receive any deferred share salary or discretionary
deferred share compensation, pensions, benefits or any variable or performance-
linked remuneration or incentives.
2 Non-Executive Directors are reimbursed for reasonable business expenses,
including travel expenses, incurred in the course of carrying out duties under their
letters of appointment, on provision of valid receipts.
3 Non-Executive Directors who are appointed to the Board and/or to the
Supervisory Board of the Bank by shareholders of BGEO are required to waive
any entitlements to fees which would otherwise be payable to them under the
Policy for so long as they are appointees of a shareholder.
Separation payments
Mr Gilauri is entitled only to:
• accrued and unpaid cash salary;
• accrued but not yet paid dividend equivalents;
• benefits;
• holiday pay; and
• reimbursement of business expenses,
Annual Report 2015 BGEO Group PLC 121
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if his contract is terminated in the following circumstances:
• termination by the Bank for “cause” (cause being defined as
Any unvested deferred share compensation of Mr Gilauri will vest
immediately if:
gross and wilful misconduct in the course of his duties having a
material adverse effect on the Group, material repeated failure
to perform his duties or breach of his obligations or conviction
of a felony, among other circumstances);
• his service contract is terminated by the Bank other than for
cause; is terminated by him for good reason; or expires and
neither a renewed agreement nor Board membership is offered;
or
• termination by reason of death or disability (in which case he
• he ceases to be an Executive Director by reason of death,
receives life or disability insurance benefits); or
• termination by Mr Gilauri other than for “good reason” (meaning
uncorrected material breach of a material provision of the
service contract by the Bank which is not cured within 45 days
upon Mr Gilauri serving notice of breach, or material and
unremedied illegal or unethical behaviour by Bank employees
which has been notified to the Board by Mr Gilauri and the
Board fails to react and cooperate with Mr Gilauri in addressing
the behaviour).
If Mr Gilauri’s service contract is terminated for any other reason,
or is not renewed on substantially similar terms on expiry of the
terms of the service contract, he is entitled to a separation
payment equal to 12 months’ cash salary plus any accrued and
outstanding unpaid cash bonus, holiday pay and reimbursement
of business expenses. He will not be entitled to any additional
severance or leaving allowance, reimbursements, pay in lieu of
notice, benefits, compensation for sick leave or other similar
payments other than in respect of his deferred share salary and
discretionary deferred share compensation (as described below).
Any separation payments are intended to include a severance
allowance and any additional payments would be decided by
shareholders at a general meeting.
The Bank may restrict Mr Gilauri from being employed in the
financial industry and/or providing consulting or similar services to
a competing financial institution (based in a country in which the
Bank operates) for a period of up to four months following the
termination of his employment, and will continue to pay him his full
cash salary under the Bank service contract as compensation for
his unemployment. In addition, the Bank may impose a two-year
non-compete period in exchange for accelerated vesting of his
deferred share compensation (as described below). These
non-competition covenants are subject to a materiality threshold.
Deferred share compensation on termination
Mr Gilauri will be entitled to an award of his deferred share salary in
respect of any incomplete calendar year which he has worked. He
may also be awarded discretionary deferred share compensation if:
• his service contract expires and is not renewed upon
substantially similar terms;
• he is or is not offered a new service contract but is offered and
accepts continued membership of the BGEO and/or Bank
Board; or
• his service contract is terminated before its expiry date but he
continues as a member of the BGEO and/or Bank Board.
Mr Gilauri will not be entitled to any deferred share salary for
calendar years covered by the contract period during which he
has not worked.
Vesting and lapse of existing awards
If Mr Gilauri’s service contract is terminated for cause or by
him other than for good reason, his unvested deferred share
compensation will, unless otherwise agreed with the Board, lapse
on the termination date.
disability, injury, redundancy or retirement at normal retirement
age; or
• there is a change of control of the Bank, BGEO or any
intermediary holding company of the Company (as appropriate).
If Mr Gilauri’s service contract expires and he is offered but refuses
membership of the board of a company within the Group, 50% of
his unvested deferred share compensation will vest immediately
and the remaining 50% will, at his discretion, either continue to
vest as normal or he may acquire some or all of the underlying
shares for a specified price based on the price of the shares on
their respective grant dates in accordance with the terms of the
service contract plus a 10% annual increase from the respective
grant date until the date of purchase (if any) by Mr Gilauri. In
consideration for this vesting treatment, Mr Gilauri will be bound by
a two-year non-compete period during which he may not be
employed by, provide consultancy services to or otherwise found
or be a partner or associate of a commercial bank in Georgia (save
that he may hold less than 5% of shares of a publicly listed bank).
If it is found that either an interim or annual statement, following an
audit, requires a material adjustment, and such adjustment is due
to the inaccuracies of a department under Mr Gilauri’s control,
then the Board may decide that all or any unvested securities
may lapse.
If Mr Gilauri’s service contract expires and is not renewed upon
substantially similar terms but he is offered and accepts continued
or renewed membership of the BGEO and/or Bank Board, 50% of
his unvested shares vest immediately and the remaining 50% shall
continue to vest as normal.
If he subsequently ceases to be a member of the Bank and/or
BGEO Board, at Mr Gilauri’s discretion, unvested shares either
continue to vest as normal or he may acquire some or all of the
underlying shares for the specified price as described above.
Mr Gilauri will be paid cash payments equivalent to the dividends
accrued on his deferred share compensation. Such payments
will be made on the vesting date in respect of dividends paid from
the date the award was made to the vesting date. Such cash
payments shall accrue and be payable on any vested shares, even
if Mr Gilauri’s service contract with the Bank has been terminated
prior to vesting. The Bank will not pay any cash equivalent in
respect of dividends on any deferred share compensation that
has lapsed.
(c) Termination provisions in Bank service contract dated
24 August 2015
As disclosed in paragraph (b) above, on 24 August 2015, Mr Gilauri
entered into a new service agreement with JSC BGEO Group. This
will be effective from 1 May 2016 and is on the same terms as the
contract described in (b).
122 BGEO Group PLC Annual Report 2015
Governance Any payment upon termination of a new Executive Director’s
service contract would not exceed 12 months’ cash salary
under the relevant service contract, plus any accrued and unpaid
cash salary, benefits and holiday pay and reimbursement of any
business expenses. The Group may also continue to pay a former
Executive Director his full cash salary for any period following the
termination of his appointment during which he is prohibited from
competing with the Group.
It is expected that the following vesting provisions will apply to
deferred share compensation in the case of termination of a new
Executive Director’s service contract:
• Unvested deferred share compensation would lapse upon
termination of the service contract by BGEO or the Bank for
cause, termination by the Executive Director other than for
good reason or if the Executive Director’s employment is
terminated for any other reason and he is not offered continued
membership of the Board or the Bank’s Supervisory Board.
• Unvested deferred share compensation would continue to vest
in the normal way during the respective vesting period(s) upon
termination by BGEO or the Bank without cause, if the
Executive Director’s service contract expires and he is not
offered a new service contract on substantially similar terms on
expiration or if the Executive Director ceases to be an Executive
Director by reason of injury, disability, redundancy or retirement
(at normal retirement age).
• Unvested deferred share compensation would vest immediately
upon death of the Executive Director, termination of the service
contract by the Executive Director for good reason or a change
of control.
Notwithstanding the above, the Board reserves the right to permit
unvested deferred share compensation to vest irrespective of the
Executive Director’s departure when such Executive Director
departs on good terms with the Group.
If an existing employee of the Group is appointed as an Executive
or Non-Executive Director, any obligation or commitment entered
into with that individual prior to his appointment will be honoured
by the Group in accordance with the terms of those obligations or
commitments, even where they differ from the terms of the Policy.
Signed on behalf of the Board of Directors.
Al Breach
Chairman of the Remuneration Committee
7 April 2016
(d) Previous service contract with the Bank dated 25 May
2010
Any unvested awards granted under Mr Gilauri’s previous service
contract with the Bank (for the period from 25 May 2010 until and
including 30 April 2013) shall vest immediately on termination of his
current service contract for any reason, except that (i) if his current
agreement is terminated by the Bank for cause, any unvested
awards shall (unless the Board determines otherwise) lapse, and
(ii) if it is terminated by Mr Gilauri for any reason other than for
good reason (and unless the Board determines otherwise to his
advantage), 50% of the unvested awards will vest immediately and
the remaining 50% will, at his discretion, either continue to vest as
normal or the underlying shares may be acquired for the specified
price as above.
(e) Termination of Non-Executive Directors’ appointments
The letters of appointment for Non-Executive Directors provide for
a one-month notice period although BGEO may terminate the
appointment with immediate effect without notice or pay in lieu of
notice if the Non-Executive Director has committed any serious
breach or non-observance of his or her obligations to BGEO, is
guilty of fraud or dishonesty, brings BGEO or him/herself into
disrepute or is disqualified as acting as a Non-Executive Director,
among other circumstances. Upon termination, the only
remuneration a Non-Executive Director is entitled to is accrued
fees as at the date of termination together with reimbursement of
properly incurred expenses incurred prior to the termination date.
9. Policy on the appointment of external hires and internal
appointments
Any arrangement specifically established to recruit a new
Executive Director would take the form of deferred shares. The
value of these deferred shares would be capped to be no higher,
on recruitment, than the awards which the individual had to
surrender in order to be recruited and the vesting period of such
deferred shares would be a similar timeframe to the awards being
bought out. The application of performance conditions and/or
clawback provisions may also be considered, where appropriate.
The remuneration package offered to any new Executive Director
would comprise the components described in section 1 above.
A new Executive Director would be paid no more than the
Remuneration Committee considers reasonably necessary to
attract a candidate with the relevant skills and experience but such
package would be capped at the annual total monetary value or
the total number of shares currently awarded to executives at the
equivalent level of seniority pursuant to existing contractual
arrangements. The terms and conditions attaching to any
component of the remuneration might be varied insofar as the
Remuneration Committee considers it necessary or desirable to
do so in all the circumstances.
Relocation support for an incoming Executive Director and,
where relevant, his or her family may be provided depending on
the individual’s circumstances. BGEO has not set a maximum
aggregate amount that may be paid in respect of any individual’s
relocation support, but it will aim to provide support of an
appropriate level and quality on the best terms that can
reasonably be obtained.
Annual Report 2015 BGEO Group PLC 123
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Statement of Directors’ Responsibilities
Statement
We are responsible for preparing the Annual Report, the Director’s
Remuneration Report, the Strategic Report and the accompanying
consolidated and separate financial statements in accordance with
applicable law and regulations. Company law requires us to
prepare financial statements for each financial year. As required,
we have prepared the accompanying consolidated and separate
statements in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union and
applicable law.
We must not approve the accompanying consolidated and
separate financial statements unless we are satisfied that they give
a true and fair view of the state of affairs of the Group and the
Company and of the profit or loss of the Group and the Company
for that period.
In preparing the accompanying consolidated and separate
financial statements, we are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are
reasonable and prudent;
• state whether they have been prepared in accordance with
IFRS as adopted by the European Union, subject to any
material departures disclosed and explained in the financial
statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
We are also responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s and the
Group’s transactions, to disclose with reasonable accuracy at any
time the financial position of the Company and the Group, and to
enable us to ensure that the consolidated and separate financial
statements and the Directors’ Remuneration Report comply with
the Companies Act 2006 and, as regards the consolidated and
separate financial statements, Article 4 of the IAS Regulation.
Statement of disclosure of information to the auditor
We confirm that, so far as we are aware, there is no relevant audit
information of which the Company’s auditors are unaware and we
have taken all steps that we reasonably should have taken as
Directors in order to make ourselves aware of any relevant audit
information and to establish that the Company’s statutory auditors
are aware of such information.
Directors’ responsibility statement
We confirm that to the best of our knowledge:
• the consolidated and separate financial statements, prepared in
accordance with IFRS as adopted by the European Union, give
a true and fair view of the assets, liabilities, financial position
and profit or loss of the Company and the Group taken as a
whole;
• the Strategic Report and the Directors’ Report include a fair
review of the development and performance of the business
and the position of the Company and Group taken as a whole,
together with a description of the principal risks and
uncertainties that they face; and
• the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position
and performance, business model and strategy.
In arriving at this position the Board was assisted by a number of
processes that form part of its internal control and risk
management systems, including the following:
• the Annual Report is drafted by appropriate senior
management with overall coordination by the Head of Investor
Relations to ensure consistency across sections;
• an extensive verification process is undertaken to ensure
factual accuracy;
• comprehensive reviews of drafts of the Annual Report are
undertaken by the CEO and other senior executive
management; and
• the final draft is reviewed by the Audit Committee and Risk
Committee prior to consideration by the Board.
We have further responsibility for safeguarding the assets of the
Company and the Group and for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
By order of the Board
We are also responsible for the maintenance and integrity of
the Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Kate Bennett Rea
on behalf of KB Rea Ltd.
Company Secretary
7 April 2016
124 BGEO Group PLC Annual Report 2015
Governance
Directors’ Report
Strategic Report
The Strategic Report on pages 2 to 85 was approved by the Board
of Directors on 7 April 2016 and signed on its behalf by Irakli
Gilauri, Chief Executive Officer.
Management Report
This Directors’ Report together with the Strategic Report on pages
2 to 85 form the Management Report for the purposes of DTR
4.1.5 R.
Information contained elsewhere in the Annual Report
Information required to be part of this Directors’ Report can be
found elsewhere in the Annual Report as indicated in the table
below and is incorporated into this report by reference:
Information
Location in Annual Report
Future developments
Pages 2 to 85
BGEO Risk Management
Pages 46 to 47
Going concern statement
Viability statement
Page 47
Page 47
Bank Risk Management
Pages 52 to 59
Principal Risks and Uncertainties
Pages 48 to 51
Directors’ Governance Statement Page 92
The Board of Directors
Pages 86 and 89
Nomination Committee Report
Pages 97 and 98
Audit Committee Report
Pages 100 to 103
Risk Committee Report
Pages 104 to 105
Greenhouse gas emissions
Pages 68 to 69
Employee matters
Environmental matters
Pages 65 to 66
Pages 67 to 69
Share capital
Note 20 on page 189
Information on the Group’s financial
risk management objectives and
policies, and its exposure to credit
risk, liquidity risk, interest rate risk,
foreign currency risk and financial
instruments
Note 29 on pages 195
and 202
Articles of Association
BGEO’s Articles of Association may only be amended by a special
resolution at a general meeting of shareholders. The process for
the appointment and removal of Directors is included in our
Articles of Association. The BGEO Articles of Association are
available on BGEO’s website:
http://bgeo.com/uploads/pages/bgeo-group-plc-articles-of-
association-91.pdf.
Share capital and rights attaching to the shares
Details of the movements in share capital during the year are
provided in Note 20 to the consolidated financial statements on
page 189 of this Annual Report.
As at the date of this Annual Report, there was a single class of
39,500,320 ordinary shares of one pence each in issue, each with
one vote. The rights and obligations attaching to BGEO’s ordinary
shares are set out in its Articles of Association. Holders of ordinary
shares are entitled, subject to any applicable law and BGEO’s
Articles of Association, to:
• have shareholder documents made available to them including
the notice of any general meeting;
• attend, speak and exercise voting rights at general meetings,
either in person or by proxy; and
• participate in any distribution of income or capital.
In accordance with a request issued by BGEO, Sanne Fiduciary
Services Limited, acting as trustee of the Trust, has waived its right
to receive any dividends. This waiver will remain in place
indefinitely, unless otherwise instructed by BGEO.
BGEO is permitted to make market purchases of its own shares
provided it is duly authorised by its members in a general meeting
and subject to and in accordance with section 701 of the
Companies Act 2006. Such authority was given at the 2015
AGM but no purchases were made during this financial year.
None of the ordinary shares carry any special rights with regard to
control of BGEO.
There are no restrictions on transfers of shares other than:
• certain restrictions which may from time to time be imposed by
laws or regulations such as those relating to insider dealing;
• pursuant to the Group Share Dealing Code, whereby the
Directors and designated employees require approval to deal in
BGEO’s shares; and
• where a person with an interest in BGEO’s shares has been
served with a disclosure notice and has failed to provide BGEO
with information concerning interests in those shares.
All employees (including Directors) that are deemed by BGEO to
be insiders have complied with the Group’s Share Dealing Code.
There are no restrictions on exercising voting rights save in
situations where BGEO is legally entitled to impose such a
restriction (for example under the Articles of Association where
amounts remain unpaid in the shares after request, or the holder is
otherwise in default of an obligation to BGEO). BGEO is not aware
of any arrangements between shareholders that may result in
restrictions on the transfer of securities or voting rights.
Results and dividends
The Group made a profit before taxation of GEL 359.4 million (year
ended 31 December 2014: GEL 276.6 million). The Group’s profit
after taxation for the year was GEL 310.9 million (year ended
31 December 2014: GEL 240.8 million).
BGEO may by ordinary resolution declare dividends provided that
no such dividend shall exceed the amount recommended by
BGEO’s Directors. The Directors may also pay interim dividends
as appear to be justified by the profits of BGEO available for
distribution.
As BGEO is a holding company, BGEO relies primarily on dividends
and other statutorily (if any) and contractually permissible payments
from its subsidiaries to generate the funds necessary to meet its
obligations and pay dividend to its shareholders.
As a result of the Bank’s strong financial performance and
condition, the BGEO Board intends to recommend an annual
dividend of GEL 2.4 payable in British Pounds Sterling, which is
subject to shareholders’ approval at the 2016 AGM. If approved,
the dividend will be paid on 22 July 2016 to shareholders on
the UK register of members at the close of business in the UK
(6:00 pm London time) on 8 July 2016.
Annual Report 2015 BGEO Group PLC 125
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Directors’ Report continued
Powers of Directors
The Directors may exercise all powers of BGEO subject to
applicable legislation and regulation and BGEO’s Articles of
Association.
Conflicts of interest
In accordance with the Companies Act 2006, the Directors have
adopted a policy and procedure for the disclosure and
authorisation (if appropriate) of conflicts of interest, and these have
been followed during 2015. BGEO’s Articles of Association also
contain provisions to allow the Directors to authorise potential
conflicts of interest so that a Director is not in breach of his duty
under company law.
Directors’ remuneration
Directors’ fees are determined by the Board from time to time.
The remuneration of our Directors’ must be in accordance with the
Directors’ Remuneration Policy approved by our shareholders in
2014. Fees for Non-Executive Directors (as distinct from any salary,
remuneration or other amount payable to a Director pursuant to
other provisions of the Articles of Association or otherwise) may
not exceed £750,000 per annum in aggregate or such higher
amounts as may from time to time be determined by ordinary
resolution of BGEO. The fees paid to the Non-Executive Directors
in 2015 pursuant to their letters of appointment are shown on page
113. The fees paid to our sole Executive Director in 2015 pursuant
to his service agreements with BGEO and the Bank are shown on
page 110.
Directors’ interests
The Directors’ beneficial interests in ordinary shares of BGEO as at
31 December 2015 are shown on page 114.
Indemnity
Subject to applicable legislation, every current and former
Director or other officer of BGEO (other than any person engaged by
the Company as auditor) shall be indemnified by BGEO against any
liability in relation to BGEO, other than (broadly) any liability to BGEO
or a member of the Group, or any criminal or regulatory fine.
Related party disclosures
Details of related party disclosures are set out in Note 32 to the
consolidated financial statements on pages 211 to 212 of this
Annual Report.
Significant agreements
On 23 October 2015, BGEO entered into a Relationship
Agreement with GHG and JSC BGEO Investments which regulates
the degree of control that BGEO and its associates may exercise
over the management and business of GHG. The principal
purpose of the Relationship Agreement is to ensure that GHG
and its subsidiaries are capable at all times of carrying on their
business independently of BGEO and its associates. The
Relationship Agreement took effect on 12 November 2015 and will
continue until the earlier of: (i) GHG shares ceasing to be admitted
to listing on the Official List; and (ii) BGEO, together with its
associates, ceasing to own or control (directly or indirectly) 20% or
more of the voting share capital of GHG. If BGEO ceases to be a
controlling shareholder (within the meaning of LR 6.1.2A of the
Listing Rules), it may terminate the Relationship Agreement by
giving one month’s written notice to GHG.
126 BGEO Group PLC Annual Report 2015
Under the Relationship Agreement, for so long as BGEO and its
associates together hold 20% or more of the voting share capital
of GHG, BGEO and its associates shall amongst other things:
• conduct all transactions, agreements or arrangements entered
into between (i) BGEO and its associates and (ii) GHG or any of
its subsidiaries on an arm’s length basis and on normal
commercial terms and in accordance with the related party
transaction rules set out in the Listing Rules;
• not take any action that has or would have the effect of
preventing GHG or any of its subsidiaries from complying with
their obligations under the Listing Rules;
• not propose or procure the proposal of any resolution of the
shareholders (or any class thereof) which is intended, or
appears to be intended, to circumvent the proper application of
the Listing Rules; and/or
• abstain from voting on any resolution required by LR 11.1.7R(3)
of the Listing Rules to approve a transaction with a related party
involving BGEO.
The Relationship Agreement entitles BGEO to appoint one person
to be a Non-Executive Director of GHG for so long as it (together
with its associates) holds at least 20% of the voting share capital of
GHG.
The Relationship Agreement also provides that (subject to
permitted exceptions) neither BGEO nor its associates shall
compete with the business of GHG nor use any names associated
with GHG and that GHG shall not use any names associated with
BGEO or its associates.
A copy of the Relationship Agreement is available to view at the
BGEO’s registered office.
At no time during 2015 did any Director hold a material interest in
any contracts of significance with BGEO or any subsidiary of the
Group. BGEO is not party to any significant agreements that would
take effect, alter or terminate following a change of control of
BGEO.
Presence outside of Georgia
We have representative offices in London, Budapest, Istanbul and
Tel Aviv. See page 4.
Payment of creditors
We value our suppliers and acknowledge the importance of paying
invoices in an orderly and timely manner. It is the Group’s practice
to agree terms on an individual basis when entering into contracts
and meet obligations accordingly. The Group does not follow any
specific published code or standard on payment practice.
Employee disclosures
Our disclosures relating to the number of women in senior
management, employee engagement and policies as well as
human rights, including employment of the disabled, are included
in “Employee matters” on pages 65 to 66.
Political donations
The Group did not make any political donations or expenditures
during 2015.
Code of Conduct and ethics
The Board has adopted a Code of Conduct relating to the lawful
and ethical conduct of the business, supported by the Group’s
core values. The Code of Conduct has been communicated to all
Directors and employees, all of whom are expected to observe
high standards of integrity and fair dealing in relation to customers,
staff and regulators in the communities in which the Group
operates. Our Code of Conduct is available on our website:
http://bgeo.com/uploads/pages/code-of-conduct-and-ethics-91.pdf.
Governance Independent auditors
A resolution to reappoint Ernst & Young LLP as auditors of BGEO will be put to shareholders at the upcoming AGM.
Major interests in shares
The table below lists shareholders with voting rights of more than 3% as of 31 December 2015. A description of changes in voting rights
which have been notified to BGEO for the period 1 January 2016 up to and including 31 March 2016 are disclosed below the table.
Shareholder
Number of voting rights
% of voting rights
As of 31 December 2015
Schroders Investment Management
Harding Loevner Management LLP
Westwood International Advisors
Artemis Investment Management
Sanne Fiduciary Services Limited1
Firebird Management LLC2
Source: Georgeson, Computershare
4,067,716
3,592,183
1,600,964
1,409,248
1,201,406
1,199,541
10.30
9.09
4.05
3.57
3.04
3.04
Notes:
1 Sanne Fiduciary Services Limited as trustee of The Rubicon Executive Equity Compensation Trust. BGEO was notified on 21 March 2016 that it decreased its number of
voting rights to 1,183,020 (2.99% of voting rights).
2 BGEO was notified on 18 February 2016 that Firebird Management LLC decreased its number of voting rights to 1,168,650 (2.96% of voting rights).
BGEO was notified on 7 January 2016 that Frank Russell Company held 1,391,322 voting rights (3.52% of voting rights). This was the first
notification received from Frank Russell Company, which disclosed that it was previously exempt from notifying an issuer of its holdings
due to being an asset manager.
The respective regulatory filings by shareholders are available on the BGEO website: http://bgeo.com/regulatoryannouncements and the
London Stock Exchange website: www.londonstockexchange.com/news/news/finance.htm.
Post balance sheet events
In March 2016, the Group signed a binding Memorandum of Understanding, subject to relevant regulatory approvals, to acquire a 100%
equity stake in JSC GPC, one of the three leading pharmaceutical retailers and wholesalers in Georgia.
By order of the Board
Kate Bennett Rea
on behalf of KB Rea Ltd.
Company Secretary
7 April 2016
Annual Report 2015 BGEO Group PLC 127
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Independent Auditor’s Report
To the members of BGEO Group PLC
Our opinion on the financial statements
In our opinion:
• BGEO Group PLC’s Group financial statements and parent company financial statements (the “financial statements”) give a true and
fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s profit for the year
then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
What we have audited
BGEO Group PLC’s financial statements comprise:
Group
Parent company
Consolidated statement of financial position as at 31 December 2015
Separate statement of financial position as at 31 December 2015
Consolidated income statement for the year then ended
Separate statement of changes in equity for the year then ended
Consolidated statement of comprehensive income for the year then ended
Separate statement of cash flows for the year then ended
Consolidated statement of changes in equity for the year then ended
Related notes 1 to 34 to the financial statements
Consolidated statement of cash flows for the year then ended
Related notes 1 to 34 to the financial statements
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act
2006.
Overview of our audit approach
Risks of material misstatement
• Monitoring of credit quality and appropriateness of allowance for loan losses
• Risk of fraud in recognition of healthcare revenue
• Valuation of land and buildings and investment properties
• Accounting for complex or one-off transactions
•
IT general and automated controls over financial reporting
In executing our audit response to the above risks of material misstatement, we also considered the risk of
fraud in relation to management override of controls particularly post close adjustments and significant areas
of accounting estimate.
Audit scope
• We performed an audit of the complete financial information of two components and audit procedures
on specific balances for a further four components.
• The components where we performed full or specific audit procedures accounted for more than 91% of
Group’s pre-tax profit, revenue and total assets.
Materiality
• Overall Group materiality is GEL 18.0 million which represents 5% of pre-tax profit.
128 BGEO Group PLC Annual Report 2015
Financial statements Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the
allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the
procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any
opinion on these individual areas.
What we concluded to the Audit Committee
Based on the results of our
audit procedures, we concluded
that the loan loss provision is
within a reasonable range as at
31 December 2015.
Based on the results of our audit
procedures, we concluded that
the healthcare revenue for the
year ended 31 December 2015 is
materially correct.
Risk
Our response to the risk
Monitoring of credit quality and
appropriateness of allowance for loan losses
We performed a walkthrough of the loan loss provision process
and assessed the design and operating effectiveness of key
controls.
Balance of GEL 198.9 million, prior year
comparative GEL 103.8 million
JSC Bank of Georgia, which is the principal
subsidiary of BGEO Group PLC, is the largest
credit institution in Georgia. There is a risk that
the Group’s management may be under pressure
to report strong financial performance in order
to meet the expectations of internal and external
stakeholders, particularly in light of lowered
economic growth forecasts in Georgia, the
devaluation of the Georgian Lari against the US
Dollar and the acquisition of PrivatBank.
The allowance for loan losses is calculated using
a collective provisioning model or discounted
cash flow analysis and this involves a high level
of subjectivity and reliance on the provisioning
models and assumptions therein. Specifically,
for individually impaired loans, management
judgement is involved in the process of assessing
the impairment charge.
As a consequence, there is a greater risk of
misstatement in these balances, either by fraud or
error, including through the potential override of
controls by management.
Refer to the Audit Committee Report (page 101);
Accounting policies (page 153); and Notes 4, 10
and 29 of the Consolidated Financial Statements
(pages 164, 175 to 177 and 196 to 199)
We tested key controls over collective loan loss provisioning,
which included controls over the process of identifying the loans
to be included in the collective provisioning and management’s
review of key assumptions. For each of significant risk group, we
tested application controls (including loss given default, probability
of default, loan loss allowance and probability of default migration
controls).
We tested key controls over the specific loan loss provision, which
addressed aspects such as the classification of borrowers into
their respective risk grades, calculation of days past due, and the
recalculation of the loan loss allowance, including the valuation of
collateral.
For the specific loan loss provision, we selected loan exposures on
a sample basis and tested the appropriateness of the specific loan
loss provision as at the balance sheet date, including reviewing
the Group’s documented credit assessment of the borrowers,
challenging assumptions around future cash flow projections and
the valuation of collateral held.
For the collective loan loss provision, we critically assessed the
appropriateness of the collective provisioning methodology as
well as the key assumptions and data inputs (including probability
of default rates, cure rates, efficiency factor and average workout
time) into the model with reference to our understanding of the
business, relevant accounting standards and market practices.
We also recalculated the collective loan loss provision and
performed sensitivity analysis to changes in key inputs (including
probability of default rates, efficiency factor, average workout time
and collateral value) to the collective provisioning model.
The risk has increased in the current year as a
result of lowered economic growth forecasts in
Georgia, the devaluation of Georgian Lari against
the US Dollar and the acquisition of PrivatBank.
We inspected a sample of restructured loans and the Group’s
documented assessment to provide assurance that any loans
that have been subject to forbearance have been appropriately
provided for, classified and reported.
Risk of fraud in recognition of healthcare
revenue
We performed a walkthrough of the healthcare revenue process and
assessed the design and operating effectiveness of key controls.
We performed full scope audit procedures over this risk area in
one component, which covered 89% of the risk amount.
We increased our standard sample size for transactional testing by
at least 1.7 times according to our statistical sampling methodology,
to respond to this risk of fraud. We agreed transactions on a sample
basis back to supporting audit evidence, such as receipt of cash and
invoices; where appropriate, we also recalculated the fees charged.
We performed analytical procedures and journal entry testing in order
to identify and test the risk of misstatement arising from management
override of controls. We performed substantive analytical review to
consider unusual trends that could indicate material misstatements,
and we considered changes in key drivers of healthcare revenue, such
as bed occupancy, number of patients and number of beds.
We also performed cut-off testing to obtain evidence that revenue is
recognised in the correct period.
We performed specific scope audit procedures over this risk area in
one component, which covered 100% of the risk amount.
Balance of GEL 184.0 million, prior year
comparative GEL 125.7 million
Georgia Healthcare Group (“GHG”) is one of the
largest healthcare providers in Georgia. There is a
risk that the Group’s management may be under
pressure to report strong financial performance
in order to meet the expectations of internal and
external stakeholders, particularly following the
listing of Georgia Healthcare Group PLC and in
light of lowered economic growth forecasts in
Georgia and the devaluation of the Georgian Lari
against the US Dollar. Further, compensation tied
to the performance of the Group may create an
incentive for management to manipulate results.
As a consequence, there is a greater risk of
misstatement in these balances, either by fraud or
error, including through the potential override of
controls by management.
This is a new risk this year. Our audit approach and
assessment of key areas of audit focus changes in
response to circumstances affecting the Group.
Refer to the Audit Committee Report (page 101);
Accounting policies (page 159); and Note 24 of the
Consolidated Financial Statements (page 192)
Annual Report 2015 BGEO Group PLC 129
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Independent Auditor’s Report continued
To the members of BGEO Group PLC
Risk
Our response to the risk
Valuation of land and buildings and
investment properties
We performed a walkthrough of the real estate valuation process and
assessed the design effectiveness of key controls.
Balance of GEL 474.8 million, prior year
comparative GEL 414.4 million
The Group adopted the revaluation model for the
measurement of its land and buildings and the fair
value model for investment properties.
Real estate valuation is inherently uncertain and
subject to an estimation process. Furthermore, the
Group’s real estate properties are located primarily
in Georgia, where the secondary market is relatively
illiquid.
Although the valuations are performed by a
combination of internal and external, appropriately
qualified valuers, there remains a risk that individual
assets might be inappropriately valued.
Refer to the Audit Committee Report (page 101);
Accounting policies (pages 155 to 156); and Notes
4, 11, 12 and 30 of the Consolidated Financial
Statements (pages 164, 178 to 180 and 205 to 206)
The risk has neither increased nor decreased in the
current year.
We engaged our Real Estate specialists to evaluate the
appropriateness of the Group’s real estate valuations. This
assessment included evaluating the competence and objectivity of the
external valuers engaged by the Group, challenging the methods and
assumptions used and testing the data provided by the valuers.
In respect of properties which were not subject to individual
valuation by the external valuers, we ascertained management’s
basis for conclusion, challenged management’s assumption that
property prices in certain categories and locations had not changed
significantly during the year, and corroborated these by reference to
our understanding of the Group’s real estate portfolio and market
information.
We ensured the appropriate recognition of the results of real estate
valuation in accordance with IAS 16 ‘Property, Plant and Equipment’
and IAS 40 ‘Investment Property’.
We performed full and specific scope audit procedures over this risk
area in four components, which covered 80% of the risk amount.
Accounting for complex or one-off
transactions
We assessed management’s processes for identifying and accounting
for complex and one-off transactions.
We reviewed significant complex and one-off transactions, including
transactions relating to business combinations and valuation
of options and convertible shares. We critically challenged the
assumptions and judgements made by management in determining
the appropriate accounting treatment in accordance with applicable
IFRSs. We assessed whether the conclusions reached by
management were consistent with the underlying agreements and
commercial factors applicable to each of the transactions.
Complex and one-off transactions were subject to full scope audit
procedures by the Primary audit team.
The Group has experienced significant levels of
growth and change in recent years. The Group has
expanded its investment business over the years as
part of the Group’s strategy to capture compelling
investment opportunities.
From time to time, the Group has entered into a
number of complex and one-off transactions and
agreements, including transactions relating to
business combinations and valuation of options
and convertible shares, for which determining the
appropriate accounting treatment is inherently
subjective, requires the exercise of a high
degree of judgement, is subject to significant
levels of estimation uncertainty, or requires
the re-assessment of fair values arising from
historic transactions on a periodic basis. We
focused on this area due to the complexity of the
accounting considerations and the involvement of
management’s judgement.
This is a new risk this year. Our audit approach and
assessment of key areas of audit focus changes in
response to circumstances affecting the Group.
Refer to the Audit Committee Report (page 101)
What we concluded to the Audit Committee
Based on the results of
our audit procedures, we
concluded that the valuations
of land and buildings and
investment properties are
within a reasonable range as at
31 December 2015.
We highlighted to the Audit
Committee the need for the
Group to continue to improve
its internal controls to match
the growth in the business,
particularly in relation to complex
and one-off transactions.
Based on the results of our
audit procedures, we concluded
that the complex and one-off
transactions are materially
correct as at 31 December 2015
and for the year then ended.
IT general and automated controls over
financial reporting
We evaluated the design and operating effectiveness of the key IT
systems that are relevant to financial reporting.
The integrity of the Group’s financial statements
is dependent on the integrity of data and reports
produced by the Group’s IT systems and the
effectiveness of IT-dependent controls in the
processes underlying the preparation of the
financial statements. There is a risk that IT general
and automated controls over financial reporting are
not designed and operating effectively.
Refer to the Audit Committee Report (pages 101
to 102)
The risk has neither increased nor decreased in the
current year.
We examined the controls over program development and changes,
access to programs and data and IT operations in respect of those IT
systems, and embedded application controls.
We engaged our IT specialists to perform sufficient audit procedures
to enable us to place reliance on the IT applications and relevant
controls identified as having a material impact on the financial
reporting process. Where exceptions were observed in our testing,
we identified compensating controls and tested those to address the
identified risk. In addition, we performed substantive audit procedures
to cover the additional risks associated with the ineffective controls
over logical access.
We performed full scope audit procedures over this risk area in one
component, which covered 100% of the risk.
The results of our audit
procedures on the IT general
and automated controls over
financial reporting, including
the results of our testing of
compensating controls and the
procedures performed to cover
the additional risks associated
with the ineffective controls
over logical access, provided us
with sufficient audit evidence to
enable us to place reliance on
the IT applications and relevant
controls identified as having a
material impact on the financial
reporting process.
130 BGEO Group PLC Annual Report 2015
Financial statements The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into
account size, risk profile, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment
and other factors such as recent Internal Audit findings when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to make sure we had adequate quantitative
coverage of significant accounts in the financial statements, we selected six components. Of the six components selected, we performed
an audit of the complete financial information of two components (“full scope components”) which were selected based on their size or
risk characteristics. For the remaining four components (“specific scope components”), we performed audit procedures on specific
accounts within the components that we considered had the potential for the greatest impact on the significant accounts in the financial
statements either because of the size of these accounts or their risk profile.
Scope
Full
Specific
Specific
Total
Procedures performed by
Primary team
Primary team
Component team
Details of the specific scope component which was audited by a component team are set out below:
Component
JSC Medical Corporation EVEX
Location
Georgia
Scope
Specific
Number of components
2
3
1
6
Auditor
EY
Components subject to a full scope audit account for over 84% (2014: over 89%) of the Group’s revenue, over 88% (2014: over 84%) of
the Group’s pre-tax profit and over 90% (2014: over 92%) of the Group’s total assets. Components subject to a specific scope audit
account for over 7% (2014: over 1%) of the Group’s revenue, over 6% (2014: over 2%) of the Group’s pre-tax profit and over 6% (2014:
over 5%) of the Group’s total assets. The audit scope of these components may not have included testing of all significant accounts of the
components but will have contributed to the coverage of significant accounts tested for the Group.
Of the remaining 22 components that together represent 6% of the Group’s pre-tax profit, none are individually greater than 5% of the
Group’s pre-tax profit. For these components, we performed other procedures, including analytical review and testing of consolidation
journals and intercompany eliminations to respond to any potential risks of material misstatement to the Group financial statements.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Profit before tax
6%
6%
88%
Revenue
7%
Total assets
9%
6%
84%
4%
90%
Full scope components
Specific scope components
Other procedures
Full scope components
Specific scope components
Other procedures
Full scope components
Specific scope components
Other procedures
Changes from the prior period
In the prior year, we identified one full scope component and one specific scope component which represented 85% and 5%,
respectively, of the Group’s profit before tax in the prior year. Full and specific scope components have been re-assessed as the
contribution of such components to the Group consolidated financial statements varies each year.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the
components by us, as the primary audit engagement team, or by component auditors operating under our instruction.
For the one specific scope component, where the work was performed by component auditors, we determined the appropriate level of
involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a
whole.
Annual Report 2015 BGEO Group PLC 131
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Independent Auditor’s Report continued
To the members of BGEO Group PLC
The Group audit team continued to follow a programme of planned visits that has been designed to make sure that the Senior Statutory
Auditor visits the principal components of the Group. The Senior Statutory Auditor is based in the UK, but since Group management and
operations reside in Georgia, the Group audit team operates as an integrated primary team including members from the UK, Georgia and
Russia. The Senior Statutory Auditor visited Georgia four times during the current year’s audit and there was regular interaction between
team members in each jurisdiction.
These visits involved discussing the audit approach with the Georgian primary team and the component team and any issues arising from
their work, as well as meeting with Group and local management. In addition, we participated in planning and closing meetings and
reviewed selected audit working papers. The primary team interacted regularly with the component team where appropriate during
various stages of the audit and were responsible for the scope and direction of the audit process. This, together with the additional
procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit
procedures.
We determined materiality for the Group to be GEL 18.0 million (2014: GEL 13.8 million), which is 5% (2014: 5%) of pre-tax profit.
We consider the basis of our materiality to be one of the principal considerations for shareholders of the Company in assessing the
financial performance of the Group. It is linked to the key earnings measures discussed when the Group presents the financial results.
This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of
material misstatement and determining the nature, timing and extent of further audit procedures. Our evaluation of materiality requires
professional judgement and necessarily takes into account qualitative as well as quantitative considerations implicit in the definition.
During the course of our audit, we reassessed initial materiality and made adjustments based on the final financial performance of the
Group.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 50% (2014: 50%) of our planning materiality, namely GEL 9.0 million (2014: GEL 6.9 million). We have set
performance materiality at this percentage (which is the lowest in the range) due to misstatements which were identified in the prior year
audit. Our approach is designed to have a reasonable probability of ensuring that the total of uncorrected and undetected misstatements
does not exceed our materiality of GEL 18.0 million for the Group financial statements as a whole.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the
relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In
the current year, the range of performance materiality allocated to components was as follows:
BGEO Group PLC
JSC Bank of Georgia
All specific scope components
GEL 9.0 million
GEL 7.5 million
GEL 2.2 million
Reporting threshold
An amount below which identified misstatements are considered to be clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of GEL 0.9 million
(2014: GEL 0.7 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other
relevant qualitative considerations in forming our opinion.
132 BGEO Group PLC Annual Report 2015
Financial statements Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the
overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report
2015 to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially
incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become
aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 124, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion
on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006; and
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
ISAs (UK and Ireland) reporting
We are required to report to you if, in our opinion, financial and non-
financial information in the annual report is:
We have no exceptions to report.
• materially inconsistent with the information in the audited financial
statements; or
• apparently materially incorrect based on, or materially inconsistent
with, our knowledge of the Group acquired in the course of
performing our audit; or
• otherwise misleading.
In particular, we are required to report whether we have identified any
inconsistencies between our knowledge acquired in the course of
performing the audit and the directors’ statement that they consider
the annual report and accounts taken as a whole is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the entity’s performance, business model
and strategy; and whether the annual report appropriately addresses
those matters that we communicated to the Audit Committee that we
consider should have been disclosed.
Companies Act 2006 reporting
We are required to report to you if, in our opinion:
We have no exceptions to report.
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
•
• certain disclosures of directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we
require for our audit.
Listing Rules review requirements
We are required to review:
We have no exceptions to report.
•
•
the directors’ statement in relation to going concern, set out on
page 47, and longer-term viability, set out on page 47; and
the part of the Corporate Governance Statement relating to the
Company’s compliance with the provisions of the UK Corporate
Governance Code specified for our review.
Annual Report 2015 BGEO Group PLC 133
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Independent Auditor’s Report continued
To the members of BGEO Group PLC
Statement on the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity
ISAs (UK and Ireland) reporting
We are required to give a statement as to whether we have anything
material to add or to draw attention to in relation to:
We have nothing material to add
or to draw attention to.
•
•
•
•
the directors’ confirmation in the annual report that they have
carried out a robust assessment of the principal risks facing the
entity, including those that would threaten its business model,
future performance, solvency or liquidity;
the disclosures in the annual report that describe those risks and
explain how they are being managed or mitigated;
the directors’ statement in the financial statements about whether
they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any
material uncertainties to the entity’s ability to continue to do so
over a period of at least twelve months from the date of approval
of the financial statements; and
the directors’ explanation in the annual report as to how they have
assessed the prospects of the entity, over what period they have
done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation
that the entity will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Andrew McIntyre (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
7 April 2016
Notes:
1.
The maintenance and integrity of the BGEO Group PLC web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented
on the web site.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
2.
134 BGEO Group PLC Annual Report 2015
Financial statements Separate Statement of Financial Position
As at 31 December 2015 (Thousands of Georgian Lari)
Assets
Cash and cash equivalents
Amounts due from credit institutions
Investments in subsidiaries
Investments in associates
Other assets
Total assets
Liabilities
Other liabilities
Total liabilities
Equity
Share capital
Additional paid-in capital
Other reserves
Retained earnings
Total equity
Total liabilities and equity
Notes
2015
2014
2013
7
2
15
20
32,435
–
950,290
53,458
305
88,005
46,368
896,253
48,659
591
4,628
–
858,205
–
550
1,036,488
1,079,876
863,383
9,740
9,740
11,151
11,151
8,441
8,441
1,154
208,621
–
816,973
1,143
206,884
(328)
861,026
1,028
–
4,943
848,971
1,026,748
1,068,725
854,942
1,036,488
1,079,876
863,383
The financial statements on page 135 to 213 were approved by the Board of Directors on 7 April 2016 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
BGEO Group PLC
7 April 2016
Registered No. 07811410
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Annual Report 2015 BGEO Group PLC 135
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Separate Statement of Changes in Equity
For the year ended 31 December 2015 (Thousands of Georgian Lari)
31 December 2012
Total comprehensive income
GBP-GEL translation effect
Dividends to shareholders of BGEO (Note 20)
31 December 2013
Total comprehensive income
Issue of share capital
Transactions costs recognised directly in equity
GBP-GEL translation effect
Dividends to shareholders of BGEO (Note 20)
31 December 2014
Total comprehensive income
GBP-GEL translation effect
Dividends to shareholders of BGEO (Note 20)
31 December 2015
Share
capital
Additional paid-
in capital
Other reserves
Retained
earnings
Total
equity
957
–
71
–
1,028
–
108
–
7
–
–
–
–
–
–
–
218,921
(3,370)
(8,667)
–
416
796,344
797,717
–
4,527
–
49,865
53,997
(51,235)
49,865
58,595
(51,235)
4,943
848,971
854,942
–
–
–
(5,271)
–
64,685
–
–
16,481
(69,111)
64,685
219,029
(3,370)
2,550
(69,111)
1,143
206,884
(328)
861,026
1,068,725
–
11
–
–
1,737
–
–
328
–
23,576
12,782
(80,411)
23,576
14,858
(80,411)
1,154
208,621
–
816,973
1,026,748
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
136 BGEO Group PLC Annual Report 2015
Financial statements Separate Statement of Cash Flows
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Cash flows from (used in) operating activities
Interest income received
Fees and commissions paid
Salaries and other employee benefits paid
General and administrative expenses paid
Cash flows (used in) operating activities before changes in operating assets and liabilities
Net decrease in operating assets
Net increase (decrease) in operating liabilities
Net cash flows from (used in) operating activities
Net cash flows (used in) from investing activities
Purchase of investments in associates
Increase of investments in subsidiaries
Dividends received
Net cash flows (used in) from investing activities
Net cash flows (used in) financing activities
Proceeds from issue of share capital
Dividends paid
Net cash flows (used in) from financing activities
Effect of exchange rates changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, ending of the year
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Note
2015
2014
2013
1,146
(484)
(1,920)
(2,073)
(3,331)
56,658
2,976
–
(498)
(1,492)
(2,250)
(4,240)
–
(46,857)
–
(217)
(1,382)
(3,513)
(5,112)
–
(4,935)
56,303
(51,097)
(10,047)
15
(3,092)
(45,125)
–
(45,567)
(28,549)
69,856
–
–
54,589
(48,217)
(4,260)
54,589
–
(80,411)
215,659
(69,111)
–
(51,235)
(80,411)
146,548
(51,235)
16,755
(7,814)
(55,570)
83,377
88,005
32,435
4,628
88,005
(988)
(7,681)
12,309
4,628
Annual Report 2015 BGEO Group PLC 137
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Consolidated Statement of Financial Position
As at 31 December 2015 (Thousands of Georgian Lari)
Assets
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Prepayments
Inventories
Investment properties
Property and equipment
Goodwill
Intangible assets
Income tax assets
Other assets
Total assets
Liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Accruals and deferred income
Insurance contracts liabilities
Income tax liabilities
Other liabilities
Total liabilities
Equity
Share capital
Additional paid-in capital
Treasury shares
Other reserves
Retained earnings
Total equity attributable to shareholders of BGEO
Non-controlling interests
Total equity
Total liabilities and equity
Notes
Banking
Business
Investment
Business
Elimination
Total
Banking
Business
Investment
Business
Elimination
Total
Elimination
Total
Banking
Business
Investment
Business
2015
2014
(Reclassified)
2013
(Reclassified)
7
8
9
10
11
12
13
14
15
16
17
18
14
15
20
1,378,459
721,802
906,730
5,366,764
10,376
19,829
21,033
9,439
135,453
337,064
49,592
35,162
16,003
163,731
290,576
15,730
1,153
–
82,354
20,929
37,295
117,588
110,945
457,618
23,392
5,354
5,547
79,479
(236,101)
(6,167)
(4,016)
(44,647)
(4,758)
(1,532)
–
–
–
–
–
–
–
(6,437)
1,432,934
731,365
903,867
5,322,117
87,972
39,226
58,328
127,027
246,398
794,682
72,984
40,516
21,550
236,773
9,171,437
1,247,960
(303,658) 10,115,739
7,044,002
775,507
(240,364)
7,579,145
6,157,737
439,170
(75,938)
6,520,969
4,993,681
1,692,557
961,944
20,364
34,547
89,980
63,073
–
144,534
84,474
126,488
21,298
34,415
78,404
(242,294)
(48,029)
(6,614)
–
–
–
(6,721)
4,751,387
1,789,062
1,039,804
146,852
55,845
124,395
134,756
–
(143,276)
3,338,725
3,140,742
177,313
(92,708)
1,409,214
1,084,656
124,881
(400)
(3,980)
856,695
108,623
46,586
97,564
87,645
728,117
16,493
25,625
61,649
36,280
7,856,146
489,613
(303,658)
8,042,101
5,813,225
372,191
(240,364)
5,945,052
5,093,562
262,291
(75,938)
5,279,915
1,154
101,793
(44)
(63,958)
1,257,415
1,296,360
18,931
–
138,800
–
96,802
319,635
555,237
203,110
1,315,291
758,347
–
–
–
–
–
–
–
–
1,154
240,593
(44)
32,844
1,577,050
1,851,597
222,041
2,073,638
1,143
245,305
(46)
1,028
20,759
(56)
(22,574)
(27,601)
1,350,258
1,050,932
1,574,086
1,045,062
60,007
19,113
1,230,777
403,316
1,634,093
1,064,175
176,879
9,171,437
1,247,960
(303,658) 10,115,739
7,044,002
775,507
(240,364)
7,579,145
6,157,737
439,170
(75,938)
6,520,969
4,347,851
3,567,257
–
(52,387)
3,514,870
(89,358)
(53,330)
(90,181)
(4,282)
(753)
710,144
418,281
769,712
1,040,466
344,919
518,450
70,207
31,840
33,774
101,442
190,860
588,513
49,633
34,432
22,745
8,152
15,120
17,500
10,385
138,490
285,082
38,537
25,069
11,997
(2,460)
209,711
136,313
706,780
399,430
768,559
4,438,032
12,653
14,573
15,644
6,857
128,552
314,369
38,537
31,768
14,484
153,764
3,482,001
1,324,609
827,721
19,897
27,979
79,987
51,031
1,143
87,950
(46)
(11,073)
1,134,158
1,212,132
18,645
92,722
72,181
1,153
–
61,836
18,020
18,130
94,585
62,308
274,144
11,096
2,664
8,261
58,407
29,374
88,726
18,607
17,577
40,594
–
–
157,355
(11,501)
216,100
361,954
41,362
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,608
10,123
1,173
32,596
47,544
8,034
77,824
19,217
185,587
10,183
1,365
7,099
10,817
–
–
65,610
48,094
7,381
16,325
3,084
–
–
11,202
123,192
137,478
39,401
(14,403)
1,053,671
(7,781)
(329)
(717)
–
(321)
(23,010)
(51,558)
(1,370)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
347,261
519,623
40,419
61,947
25,534
88,209
157,707
470,669
48,720
26,434
19,096
146,809
3,117,732
1,157,979
728,117
82,103
73,719
69,030
51,235
1,028
23,843
(56)
(16,399)
1,174,124
1,182,540
58,514
1,241,054
The financial statements on page 135 to 213 were approved by the Board of Directors on 7 April 2016 and signed on its behalf by:
Irakli Gilauri
Chief Executive Officer
BGEO Group PLC
7 April 2016
Registered No. 07811410
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
138 BGEO Group PLC Annual Report 2015
Financial statements Notes
Banking
Business
Investment
Business
Elimination
Total
Banking
Business
Investment
Business
Elimination
Total
Banking
Business
Investment
Business
Elimination
Total
2015
2014
(Reclassified)
2013
(Reclassified)
1,378,459
290,576
(236,101)
1,432,934
10
5,366,764
–
(44,647)
5,322,117
(6,167)
(4,016)
731,365
903,867
(4,758)
(1,532)
87,972
39,226
58,328
127,027
246,398
794,682
72,984
40,516
21,550
(6,437)
236,773
–
(242,294)
4,751,387
(48,029)
1,789,062
(6,614)
1,039,804
146,852
55,845
124,395
134,756
(6,721)
7
8
9
11
12
13
14
15
16
17
18
14
15
20
721,802
906,730
10,376
19,829
21,033
9,439
135,453
337,064
49,592
35,162
16,003
163,731
4,993,681
1,692,557
961,944
20,364
34,547
89,980
63,073
1,154
101,793
(44)
(63,958)
1,257,415
1,296,360
18,931
15,730
1,153
82,354
20,929
37,295
117,588
110,945
457,618
23,392
5,354
5,547
79,479
144,534
84,474
126,488
21,298
34,415
78,404
–
–
138,800
96,802
319,635
555,237
203,110
1,315,291
758,347
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
706,780
399,430
768,559
4,438,032
12,653
14,573
15,644
6,857
128,552
314,369
38,537
31,768
14,484
153,764
92,722
72,181
1,153
–
61,836
18,020
18,130
94,585
62,308
274,144
11,096
2,664
8,261
58,407
(89,358)
(53,330)
–
(90,181)
(4,282)
(753)
–
–
–
–
–
–
–
(2,460)
710,144
418,281
769,712
4,347,851
70,207
31,840
33,774
101,442
190,860
588,513
49,633
34,432
22,745
209,711
1,040,466
344,919
518,450
3,567,257
8,152
15,120
17,500
10,385
138,490
285,082
38,537
25,069
11,997
136,313
27,608
10,123
1,173
–
32,596
47,544
8,034
77,824
19,217
185,587
10,183
1,365
7,099
10,817
(14,403)
(7,781)
–
(52,387)
(329)
(717)
–
–
–
–
–
–
–
(321)
1,053,671
347,261
519,623
3,514,870
40,419
61,947
25,534
88,209
157,707
470,669
48,720
26,434
19,096
146,809
9,171,437
1,247,960
(303,658) 10,115,739
7,044,002
775,507
(240,364)
7,579,145
6,157,737
439,170
(75,938)
6,520,969
3,482,001
1,324,609
827,721
19,897
27,979
79,987
51,031
–
177,313
29,374
88,726
18,607
17,577
40,594
(143,276)
(92,708)
(400)
–
–
–
(3,980)
3,338,725
1,409,214
856,695
108,623
46,586
97,564
87,645
3,140,742
1,084,656
728,117
16,493
25,625
61,649
36,280
–
124,881
–
65,610
48,094
7,381
16,325
(23,010)
(51,558)
–
–
–
–
(1,370)
3,117,732
1,157,979
728,117
82,103
73,719
69,030
51,235
7,856,146
489,613
(303,658)
8,042,101
5,813,225
372,191
(240,364)
5,945,052
5,093,562
262,291
(75,938)
5,279,915
1,154
240,593
(44)
32,844
1,577,050
1,851,597
222,041
2,073,638
1,143
87,950
(46)
(11,073)
1,134,158
1,212,132
18,645
–
157,355
–
(11,501)
216,100
361,954
41,362
1,230,777
403,316
–
–
–
–
–
–
–
–
1,143
245,305
(46)
(22,574)
1,350,258
1,028
20,759
(56)
(27,601)
1,050,932
1,574,086
60,007
1,045,062
19,113
–
3,084
–
11,202
123,192
137,478
39,401
1,634,093
1,064,175
176,879
–
–
–
–
–
–
–
–
1,028
23,843
(56)
(16,399)
1,174,124
1,182,540
58,514
1,241,054
9,171,437
1,247,960
(303,658) 10,115,739
7,044,002
775,507
(240,364)
7,579,145
6,157,737
439,170
(75,938)
6,520,969
Assets
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Prepayments
Inventories
Investment properties
Property and equipment
Goodwill
Intangible assets
Income tax assets
Other assets
Total assets
Liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Accruals and deferred income
Insurance contracts liabilities
Income tax liabilities
Other liabilities
Total liabilities
Equity
Share capital
Additional paid-in capital
Treasury shares
Other reserves
Retained earnings
Non-controlling interests
Total equity
Total liabilities and equity
Irakli Gilauri
Chief Executive Officer
BGEO Group PLC
7 April 2016
Registered No. 07811410
Total equity attributable to shareholders of BGEO
The financial statements on page 135 to 213 were approved by the Board of Directors on 7 April 2016 and signed on its behalf by:
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Annual Report 2015 BGEO Group PLC 139
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Consolidated Income Statement
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Notes
Banking
Business
Investment
Business
2015
Banking interest income
Banking interest expense
Net (loss)/gain from interest rate swaps
Net banking interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Net insurance premiums earned
Net insurance claims incurred
Gross insurance profit
Healthcare revenue
Cost of healthcare services
Gross healthcare profit
Real estate revenue
Cost of real estate
Gross real estate profit
Gross other investment profit
Revenue
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
Operating expenses
Operating income before cost of credit risk/EBITDA
Profit from associates
Depreciation and amortization of investment business
Net foreign currency gain (loss) from investment business
Interest income from investment business
Interest expense from investment business
Operating income before cost of credit risk
Impairment charge on loans to customers
Impairment charge on finance lease receivables
Impairment charge on other assets and provisions
Cost of credit risk
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax expense
Income tax expense
Profit for the year
Attributable to:
– shareholders of BGEO
– non-controlling interests
Earnings per share:
– basic and diluted earnings per share
–
–
–
–
–
–
–
–
–
872,299
(359,372)
–
21
512,927
161,891
(40,302)
22
121,589
76,926
19,837
40,161
(20,114)
54,996
(42,880)
(2,256)
–
92,901
(62,994)
69,700
(54,713)
(1,979)
95,850
(66,420)
28,816
(9,027)
102,858
(75,633)
(1,681)
129,993
(84,660)
Elimination
Total
(12,521)
984
–
859,778
(358,388)
–
(11,537)
501,390
(3,733)
550
158,158
(39,752)
(3,183)
118,406
–
76,926
(1,309)
18,528
2014
(Reclassified)
2013
(Reclassified)
Banking
Business
Investment
Business
Elimination
Total
Elimination
Total
Banking
Business
Investment
Business
(7,313)
593,612
(243,654)
–
577,683
(255,147)
(398)
(5,321)
1,221
572,362
(253,926)
(398)
(7,313)
349,958
322,138
(4,100)
318,038
(2,053)
132,435
(32,643)
116,517
(28,080)
(1,437)
115,080
(28,080)
(2,053)
99,792
88,437
(1,437)
87,000
52,752
48,355
48,355
(620)
9,270
9,402
(514)
8,888
600,925
(243,654)
–
357,271
134,488
(32,643)
101,845
52,752
9,890
28,129
(11,707)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60,013
(32,484)
27,529
16,178
(5,929)
10,249
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60,013
(32,484)
27,529
16,178
(5,929)
10,249
–
(6,963)
(4,844)
1,746
(5,687)
319,896
(41,499)
(2,809)
(17,493)
(61,801)
258,095
(12,839)
245,256
(35,913)
209,343
201,490
7,853
209,343
5.9291
23
20,047
12,116
(2,256)
29,907
16,422
14,987
(1,979)
29,430
19,789
27,225
(1,681)
45,333
125,720
(72,237)
53,483
60,456
(46,810)
13,646
12,804
125,720
(72,237)
53,483
60,376
(46,810)
13,566
12,991
(80)
(80)
187
1,530
1,348
(0)
12,671
139
12,810
–
–
–
–
–
–
–
183,993
(103,055)
80,938
54,409
(39,721)
14,688
20,639
–
–
–
–
–
–
183,993
(103,055)
80,938
54,409
(39,721)
14,688
138
20,777
751,326
128,381
(18,147)
861,560
538,180
94,920
(11,858)
621,242
488,121
77,674
(7,593)
558,202
(155,744)
(74,381)
(34,199)
(3,535)
(31,621)
(18,491)
–
(750)
2,036
1,953
–
–
(185,329)
(90,919)
(34,199)
(4,285)
(130,060)
(58,833)
(25,641)
(3,230)
(25,651)
(15,974)
–
(520)
(154,181)
(117,018)
(73,459)
(25,641)
(3,750)
(50,797)
(24,780)
(1,823)
(19,192)
(10,687)
–
(547)
1,162
1,124
(135,048)
(60,360)
(24,780)
(2,370)
(267,859)
(50,862)
3,989
(314,732)
(217,764)
(42,145)
2,878
(257,031)
(194,418)
(30,426)
2,286
(222,558)
483,467
77,519
(14,158)
546,828
320,416
52,775
(8,980)
364,211
293,703
47,248
(5,307)
335,644
–
–
–
–
–
4,050
(14,225)
651
3,338
(25,493)
–
–
–
(998)
15,156
483,467
45,840
(142,819)
(1,958)
(6,740)
–
–
(3,860)
(151,517)
(3,860)
331,950
41,980
(13,046)
(1,531)
318,904
(44,647)
40,449
(3,761)
274,257
36,688
270,466
3,791
33,228
3,460
274,257
36,688
–
–
–
–
–
–
–
–
–
–
–
–
–
4,050
(14,225)
651
2,340
(10,337)
529,307
(142,819)
(1,958)
(10,600)
(155,377)
373,930
(14,577)
359,353
(48,408)
310,945
303,694
7,251
310,945
7.9264
(9,164)
(3,169)
1,860
(16,089)
(551)
9,531
–
(9,164)
(3,169)
1,309
(6,558)
(6,963)
(4,844)
2,919
(12,167)
(1,173)
6,480
320,416
26,213
346,629
293,703
26,193
(45,088)
(476)
(10,168)
(3,288)
(45,088)
(476)
(13,456)
(41,499)
(2,809)
(16,561)
(55,732)
(3,288)
(59,020)
(60,869)
(932)
(932)
264,684
22,925
287,609
232,834
25,261
(11,837)
820
(11,017)
(8,214)
(4,625)
252,847
(32,343)
23,745
(3,482)
276,592
(35,825)
224,620
(32,099)
20,636
(3,814)
220,504
20,263
240,767
192,521
16,822
216,883
3,621
15,626
4,637
232,509
189,011
8,258
3,510
12,479
4,343
220,504
20,263
240,767
192,521
16,822
6.7228
24
25
25
26
26
21
21
10
10
27
14
20
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
140 BGEO Group PLC Annual Report 2015
Financial statements
2014
(Reclassified)
2013
(Reclassified)
Banking
Business
Investment
Business
Elimination
Total
Banking
Business
Investment
Business
Elimination
Total
600,925
(243,654)
–
357,271
134,488
(32,643)
101,845
52,752
9,890
28,129
(11,707)
–
–
–
–
–
–
–
–
–
(7,313)
–
–
593,612
(243,654)
–
577,683
(255,147)
(398)
(7,313)
349,958
322,138
(2,053)
–
132,435
(32,643)
116,517
(28,080)
(2,053)
99,792
88,437
–
52,752
48,355
(620)
9,270
9,402
–
–
–
–
–
–
–
–
–
(5,321)
1,221
–
572,362
(253,926)
(398)
(4,100)
318,038
(1,437)
–
115,080
(28,080)
(1,437)
87,000
–
48,355
(514)
8,888
69,700
(54,713)
(1,979)
–
95,850
(66,420)
28,816
(9,027)
102,858
(75,633)
(1,681)
–
129,993
(84,660)
23
20,047
12,116
(2,256)
29,907
16,422
14,987
(1,979)
29,430
19,789
27,225
(1,681)
45,333
–
–
–
–
–
–
–
125,720
(72,237)
53,483
60,456
(46,810)
13,646
12,804
–
–
–
(80)
–
(80)
125,720
(72,237)
53,483
60,376
(46,810)
13,566
–
–
–
–
–
–
60,013
(32,484)
27,529
16,178
(5,929)
10,249
–
–
–
–
–
–
60,013
(32,484)
27,529
16,178
(5,929)
10,249
187
12,991
(0)
12,671
139
12,810
751,326
128,381
(18,147)
861,560
538,180
94,920
(11,858)
621,242
488,121
77,674
(7,593)
558,202
(155,744)
(74,381)
(34,199)
(3,535)
(31,621)
(18,491)
–
(750)
2,036
1,953
(185,329)
(90,919)
(34,199)
(4,285)
(130,060)
(58,833)
(25,641)
(3,230)
(25,651)
(15,974)
–
(520)
1,530
1,348
–
–
(154,181)
(73,459)
(25,641)
(3,750)
(117,018)
(50,797)
(24,780)
(1,823)
(19,192)
(10,687)
–
(547)
1,162
1,124
–
–
(135,048)
(60,360)
(24,780)
(2,370)
(267,859)
(50,862)
3,989
(314,732)
(217,764)
(42,145)
2,878
(257,031)
(194,418)
(30,426)
2,286
(222,558)
Operating income before cost of credit risk/EBITDA
483,467
77,519
(14,158)
546,828
320,416
52,775
(8,980)
364,211
293,703
47,248
(5,307)
335,644
4,050
(14,225)
651
3,338
(25,493)
(998)
15,156
–
–
–
–
–
–
(9,164)
(3,169)
1,860
(16,089)
–
–
–
(551)
9,531
–
(9,164)
(3,169)
1,309
(6,558)
–
–
–
–
–
–
(6,963)
(4,844)
2,919
(12,167)
–
–
–
(1,173)
6,480
320,416
26,213
(45,088)
(476)
(10,168)
–
–
(3,288)
(55,732)
(3,288)
264,684
22,925
(11,837)
820
252,847
(32,343)
23,745
(3,482)
220,504
20,263
216,883
3,621
15,626
4,637
220,504
20,263
–
–
–
–
–
–
–
–
–
–
–
–
–
346,629
293,703
26,193
(45,088)
(476)
(13,456)
(41,499)
(2,809)
(16,561)
(59,020)
(60,869)
–
–
(932)
(932)
287,609
232,834
25,261
(11,017)
(8,214)
(4,625)
276,592
(35,825)
224,620
(32,099)
20,636
(3,814)
240,767
192,521
16,822
232,509
8,258
189,011
3,510
12,479
4,343
240,767
192,521
16,822
6.7228
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6,963)
(4,844)
1,746
(5,687)
319,896
(41,499)
(2,809)
(17,493)
(61,801)
258,095
(12,839)
245,256
(35,913)
209,343
201,490
7,853
209,343
5.9291
Banking interest income
Banking interest expense
Net (loss)/gain from interest rate swaps
Net banking interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net banking foreign currency gain
Net other banking income
Net insurance premiums earned
Net insurance claims incurred
Gross insurance profit
Healthcare revenue
Cost of healthcare services
Gross healthcare profit
Real estate revenue
Cost of real estate
Gross real estate profit
Gross other investment profit
Revenue
Salaries and other employee benefits
Administrative expenses
Banking depreciation and amortisation
Other operating expenses
Operating expenses
Profit from associates
Depreciation and amortization of investment business
Net foreign currency gain (loss) from investment business
Interest income from investment business
Interest expense from investment business
Operating income before cost of credit risk
Impairment charge on loans to customers
Impairment charge on finance lease receivables
Impairment charge on other assets and provisions
Cost of credit risk
Net operating income before non-recurring items
Net non-recurring items
Profit before income tax expense
Income tax expense
Profit for the year
Attributable to:
– shareholders of BGEO
– non-controlling interests
Earnings per share:
– basic and diluted earnings per share
Notes
Banking
Business
Investment
Business
2015
21
512,927
(11,537)
501,390
872,299
(359,372)
–
161,891
(40,302)
76,926
19,837
40,161
(20,114)
22
121,589
Elimination
Total
(12,521)
859,778
984
(358,388)
–
(3,733)
550
158,158
(39,752)
(3,183)
118,406
76,926
(1,309)
18,528
–
–
–
–
–
–
–
–
–
54,996
(42,880)
(2,256)
92,901
(62,994)
183,993
(103,055)
80,938
54,409
(39,721)
14,688
20,639
183,993
(103,055)
80,938
54,409
(39,721)
14,688
138
20,777
–
–
–
–
–
–
–
–
–
–
–
–
483,467
45,840
(142,819)
(1,958)
(6,740)
–
–
(3,860)
(151,517)
(3,860)
331,950
41,980
(13,046)
(1,531)
318,904
(44,647)
40,449
(3,761)
274,257
36,688
270,466
3,791
33,228
3,460
274,257
36,688
24
25
25
26
26
21
21
10
10
27
14
20
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,050
(14,225)
651
2,340
(10,337)
529,307
(142,819)
(1,958)
(10,600)
(155,377)
373,930
(14,577)
359,353
(48,408)
310,945
303,694
7,251
310,945
7.9264
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Annual Report 2015 BGEO Group PLC 141
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Profit for the year
Other comprehensive (loss) income
Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods:
– Unrealised revaluation of available-for-sale securities
– Realised gain (loss) on available-for-sale securities reclassified to the consolidated income statement
– (Loss) gain from currency translation differences
Income tax effect
Net other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods
Other comprehensive (loss) income not to be reclassified to profit or loss in subsequent periods:
– Revaluation of property and equipment
Income tax effect
Net other comprehensive (loss) income not to be reclassified to profit or loss in subsequent
periods
Notes
2015
2014
2013
310,945
240,767
209,343
14
12
14
(30,928)
84
(14,372)
(1,276)
(4,079)
(83)
20,157
(124)
4,611
(2,858)
8,922
(872)
(43,940)
15,871
9,803
(7,223)
361
(6,862)
–
–
–
1,591
(223)
1,368
Other comprehensive (loss) income for the year, net of tax
(50,802)
15,871
11,171
Total comprehensive income for the year
260,143
256,638
220,514
Attributable to:
– shareholders of BGEO
– non-controlling interests
256,324
3,819
250,571
6,067
213,597
6,917
260,143
256,638
220,514
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
142 BGEO Group PLC Annual Report 2015
Financial statements Consolidated Statement of Changes in Equity
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Attributable to shareholders of BGEO
Share
capital
Additional paid-
in capital
Treasury shares
Other reserves
Retained
earnings
Non-controlling
interests
Total
Total
equity
31 December 2012
957
14,767
(69)
14,097
981,322
1,011,074
48,438
1,059,512
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Depreciation of property and equipment revaluation
reserve, net of tax
Increase in equity arising from share-based payments
GBP-GEL translation effect
Dividends to shareholders of BGEO (Note 20)
Dilution of interests in subsidiaries
Acquisition of additional interests in existing
subsidiaries by non-controlling shareholders
Non-controlling interests arising on acquisition of
subsidiary
Purchase of treasury shares
–
–
–
–
–
71
–
–
–
–
–
–
–
–
–
13,906
–
–
–
–
–
(4,830)
–
–
–
–
19
(3)
–
–
–
–
(3)
–
(29,069)
201,490
41,176
201,490
12,107
7,853
(936)
209,343
11,171
(29,069)
242,666
213,597
6,917
220,514
(1,797)
–
358
–
–
12
–
–
1,797
–
(426)
(51,235)
–
–
13,925
–
(51,235)
–
–
–
–
–
150
–
13,925
–
(51,235)
150
–
–
–
12
2,958
2,970
–
(4,833)
51
–
51
(4,833)
31 December 2013
1,028
23,843
(56)
(16,399)
1,174,124
1,182,540
58,514
1,241,054
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Depreciation of property and equipment revaluation
reserve, net of tax
Increase in equity arising from share-based payments
Issue of share capital (Note 20)
GBP-GEL translation effect
Transactions costs recognised directly in equity
Dividends to shareholders of BGEO (Note 20)
Acquisition of non-controlling interests in existing
subsidiaries
Non-controlling interests arising on acquisition of
subsidiary
Purchase of treasury shares
–
–
–
–
–
108
7
–
–
–
–
–
–
–
–
–
19,094
218,921
(8,667)
(3,370)
–
–
–
–
–
13
–
–
–
–
–
11,359
232,509
6,703
232,509
18,062
8,258
(2,191)
240,767
15,871
11,359
239,212
250,571
6,067
256,638
(446)
–
–
551
–
–
446
–
–
8,109
–
(71,633)
–
19,107
219,029
–
(3,370)
(71,633)
–
–
–
–
–
–
–
19,107
219,029
–
(3,370)
(71,633)
–
–
(17,639)
–
(4,516)
–
(3)
–
–
–
–
–
(17,639)
(15,516)
(33,155)
–
(4,519)
10,942
–
10,942
(4,519)
31 December 2014
1,143
245,305
(46)
(22,574)
1,350,258
1,574,086
60,007
1,634,093
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Depreciation of property and equipment revaluation
reserve, net of tax
Increase in equity arising from share-based payments
GBP-GEL translation effect*
Dividends to shareholders of BGEO (Note 20)
Dilution of interests in subsidiaries (Note 2)
Transactions costs recognised directly in equity
(Note 2)
Acquisition and sale of non-controlling interests in
existing subsidiaries (Note 2)
Non-controlling interests arising on acquisition of
subsidiary (Note 5)
Purchase of treasury shares
–
–
–
–
–
11
–
–
–
–
–
–
–
–
–
–
22,483
1,737
–
–
–
–
–
(28,932)
31 December 2015
1,154
240,593
–
–
–
–
15
–
–
–
–
–
–
(13)
(44)
–
(41,535)
303,694
(5,835)
303,694
(47,370)
7,251
(3,432)
310,945
(50,802)
(41,535)
297,859
256,324
3,819
260,143
(625)
–
(10,467)
–
109,435
(13,379)
11,989
–
–
625
–
8,719
(80,411)
–
–
22,498
–
(80,411)
109,435
–
897
–
–
125,163
–
23,395
–
(80,411)
234,598
–
–
–
–
(13,379)
–
(13,379)
11,989
2,369
14,358
–
(28,945)
29,786
–
29,786
(28,945)
32,844
1,577,050
1,851,597
222,041
2,073,638
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Annual Report 2015 BGEO Group PLC 143
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Consolidated Statement of Cash Flows
For the year ended 31 December 2015 (Thousands of Georgian Lari)
Cash flows from (used in) operating activities
Interest received
Interest paid
Fees and commissions received
Fees and commissions paid
Insurance premiums received
Insurance claims paid
Healthcare revenue received
Cost of healthcare services paid
Net cash inflow from real estate
Net realised (loss) gain from trading securities
Net realised (loss) gain from investment securities available-for-sale
Net realised gain from foreign currencies
Recoveries of loans to customers previously written off
Other (expenses paid) income received
Salaries and other employee benefits paid
General and administrative and operating expenses paid
Cash flows from operating activities before changes in operating assets and liabilities
Net (increase) decrease in operating assets
Amounts due from credit institutions
Loans to customers
Finance lease receivables
Prepayments and other assets
Net increase (decrease) in operating liabilities
Amounts due to credit institutions
Debt securities issued
Amounts due to customers
Other liabilities
Net cash flows from (used in) operating activities before income tax
Income tax paid
Net cash flows from (used in) operating activities
Cash flows used in investing activities
Acquisition of subsidiaries, net of cash acquired
Purchase of investment securities available-for-sale
Proceeds from sale of investments in associates
Purchase of investments in associates
Proceeds from sale of investment properties
Purchase of investment properties
Proceeds from sale of property and equipment and intangible assets
Purchase of property and equipment and intangible assets
Net cash flows used in investing activities
Cash flows (used in) from financing activities
Proceeds from issue of share capital
Dividends paid
Purchase of treasury shares
Net proceeds from sale of non-controlling interest in existing subsidiary
Proceeds from sale (purchase) of interests in existing subsidiaries, net of cash acquired
Net cash from (used in) financing activities
Effect of exchange rates changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, ending of the year
The accompanying notes on pages 145 to 213 are an integral part of these financial statements.
Notes
2015
2014
2013
863,965
(361,834)
153,049
(39,931)
92,838
(60,818)
171,927
(92,358)
25,611
(655)
(84)
64,256
33,685
(126)
(151,500)
(105,616)
588,978
(270,942)
133,948
(33,006)
95,859
(66,385)
95,865
(70,308)
24,396
407
83
44,169
28,706
3,236
(129,793)
(63,038)
559,604
(239,544)
104,099
(28,211)
126,640
(88,161)
57,953
(33,661)
7,682
61
2,858
46,330
27,479
(21,673)
(109,626)
(62,916)
592,409
382,175
348,914
(180,446)
184,963
(4,022)
(21,062)
(71,099)
(935,313)
6,115
9,897
49,297
(534,365)
(6,777)
5,744
96,462
(60,478)
349,420
(25,915)
931,331
(29,408)
243,021
128,364
236,794
(2,419)
(2,465)
(15,990)
(79,766)
283,908
425,641
(2,662)
489,934
(29,834)
901,923
(18,455)
460,100
(24,467)
(157,509)
–
(3,092)
19,815
(18,947)
24,616
(157,488)
(22,177)
(255,710)
300
(45,567)
7,383
(49,348)
2,648
(80,459)
(7,810)
(48,033)
–
–
10,748
–
5,317
(70,592)
(317,072)
(442,930)
(110,370)
–
(82,015)
(28,945)
221,219
14,358
215,659
(69,725)
(4,519)
–
(28,972)
–
(51,235)
(4,833)
–
–
124,617
112,443
(56,068)
13,322
5,415
(2,818)
722,790
(343,527)
290,844
10
5
15
11
11
12
2
7
7
710,144
1,432,934
1,053,671
710,144
762,827
1,053,671
144 BGEO Group PLC Annual Report 2015
Financial statements
Notes to Consolidated Financial Statements
1. Principal Activities
JSC Bank of Georgia (the “Bank”) was established on 21 October 1994 as a joint stock company (“JSC”) under the laws of Georgia. The
Bank operates under a general banking license issued by the National Bank of Georgia (“NBG”; the Central Bank of Georgia) on
15 December 1994.
The Bank accepts deposits from the public and extends credit, transfers payments in Georgia and internationally and exchanges
currencies. Its main office is in Tbilisi, Georgia. At 31 December 2015 the Bank has 266 operating outlets in all major cities of Georgia
(31 December 2014: 219, 31 December 2013: 202). The Bank’s registered legal address is 29a Gagarini Street, Tbilisi 0160, Georgia.
BGEO Group PLC (“BGEO”, formerly known as Bank of Georgia Holdings PLC) is a public limited liability company incorporated in
England and Wales with registered number 07811410. BGEO holds 99.52% of the share capital of the Bank as at 31 December 2015,
representing the Bank’s ultimate parent company. Together with the Bank and other subsidiaries BGEO makes up a group of companies
(the “Group”) and provide banking, healthcare, insurance, real estate, leasing, brokerage and investment management services to
corporate and individual customers. The list of the companies included in the Group is provided in Note 2. The shares of BGEO (“BGEO
Shares”) are admitted to the premium listing segment of the Official List of the UK Listing Authority and admitted to trading on the London
Stock Exchange PLC’s Main Market for listed securities, effective 28 February 2012. The Bank is the Group’s main operating unit and
accounts for most of the Group’s activities.
The Group completed legal restructuring in August 2015, undertaken in accordance with the National Bank of Georgia’s intention to
regulate banks in Georgia on a standalone basis and thereby limit investments in non-banking subsidiaries by locally regulated banking
entities.
Bank of Georgia Holdings PLC established a 100% subsidiary – JSC BGEO Group to act as an ultimate Georgian holding company, for
the Group and renamed Bank of Georgia Holdings PLC into BGEO Group PLC.
There were no changes to the management structure of BGEO Group PLC, where Neil Janin remained as Chairman of Board of Directors
and Irakli Gilauri continued as Chief Executive Officer.
BGEO’s registered legal address is 84 Brook Street, London, W1K 5EH United Kingdom.
As at 31 December 2015, 31 December 2014 and 31 December 2013, the following shareholders owned more than 5% of the total
outstanding shares of the Group. Other shareholders individually owned less than 5% of the outstanding shares.
Shareholder
Schroders Investment Management
Harding Loevner Management LP
Franklin Templeton Investments
International Finance Corporation
European Bank for Reconstruction & Development
Others
Total*
31 December
2015
31 December
2014
31 December
2013
10.30%
9.09%
0.48%
–
–
80.13%
12.46%
4.32%
2.45%
–
–
80.77%
3.06%
4.01%
7.21%
5.06%
5.06%
75.60%
100.00%
100.00%
100.00%
*
For the purposes of calculating percentage of shareholding, the denominator includes total number of issued shares, which includes shares held in the trust for the
share-based compensation purposes of the Group.
Annual Report 2015 BGEO Group PLC 145
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
1. Principal Activities continued
As at 31 December 2015, the members of the Supervisory Board and Management Board of the Bank owned 646,959 shares or 1.6%
(31 December 2014: 508,541 shares or 1.3%, 31 December 2013: 413,932 shares or 1.2%) of BGEO. Interests of the members of the
Supervisory Board and Management Board of the Bank were as follows:
Shareholder
Irakli Gilauri
Giorgi Chiladze
Avto Namicheishvili
Archil Gachechiladze
Sulkhan Gvalia
Neil Janin
Mikheil Gomarteli
David Morrison
Kaha Kiknavelidze
Al Breach
Kim Bradley
Murtaz Kikoria*
Levan Kulijanishvili**
Allan Hirst***
Ian Hague***
Hanna Loikkanen****
Total
31 December
2015,
shares held
31 December
2014,
31 December
2013,
shares held
shares held
250,319
116,596
58,139
50,750
37,022
35,729
27,851
26,357
26,337
16,400
1,250
200
9
–
–
–
161,131
101,800
61,664
–
42,022
35,729
30,851
26,357
26,337
16,400
1,250
5,000
–
–
–
–
60,831
82,000
50,000
–
37,237
25,729
35,000
26,357
26,337
14,279
–
–
–
48,434
5,112
2,616
646,959
508,541
413,932
*
Joined the Management Board in December 2014;
** Joined the Management Board in September 2015
*** Stepped down from the Board of Directors of the BGEO and the Supervisory Board of the Bank in December 2013;
**** Stepped down from and rejoined the Board of Directors of BGEO and the Supervisory Board of the Bank in December 2013 and August 2015 respectively.
2. Basis of Preparation
General
In accordance with the exemption permitted under section 408 of the Companies Act 2006, the stand-alone income statement of BGEO
is not presented as part of these financial statements. BGEO’s income for the year is disclosed within the separate statement of changes
in equity.
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the
European Union (“EU”) and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations issued by the International
Accounting Standards Board (“IASB”) effective for 2015 reporting and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS.
The Bank and Georgian-based subsidiaries are required to maintain their records and prepare their financial statements for regulatory
purposes in Georgian Lari, Group’s subsidiaries established outside of Georgia are in their respective local currencies, BGEO is in
Georgian Lari. These financial statements are prepared under the historical cost convention except for:
• the measurement at fair value of financial assets and investment securities, derivative financial assets and liabilities, investment
properties, and revalued property and equipment;
• the measurement of inventories and repossessed assets at lower of cost and net realizable value.
The financial statements are presented in thousands of Georgian Lari (“GEL”), except per-share amounts and unless otherwise indicated.
Going concern
The Board of Directors of BGEO has made an assessment of the Group’s ability to continue as a going concern and is satisfied that it has
the resources to continue in business for a period of at least twelve months from the date of approval of the financial statements.
Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue
as a going concern for the foreseeable future. Therefore, the financial statements continue to be prepared on the going concern basis.
146 BGEO Group PLC Annual Report 2015
Financial statements 2. Basis of Preparation continued
Subsidiaries and associates
BGEO holds a 99.52% stake in the Bank (Through JSC BGEO Group) as at 31 December 2015. Total amount of investment in
subsidiaries in BGEO’s separate statement of financial position as at 31 December 2015 was GEL 950,290 (2014: GEL 896,253, 2013:
GEL 858,205), represented by direct investment in JSC BGEO Group. The consolidated financial statements as at 31 December 2015,
31 December 2014 and 31 December 2013 include the following subsidiaries and associates:
Subsidiaries
JSC BGEO Group
JSC Bank of Georgia
Bank of Georgia Representative Office
UK Limited
Tree of Life Foundation NPO (formerly
known as Bank of Georgia Future
Foundation, NPO)
Bank of Georgia Representative Office
Hungary
Representative Office of JSC Bank of
Georgia in Turkey
Georgia Financial Investments, LLC
Professional Basketball Club Dinamo
Tbilisi, LLC
Teaching University of Georgian Bank,
LLC
Privat Guard, LLC
Benderlock Investments Limited
JSC Belarusky Narodny Bank
BNB Leasing, LLC
JSC Galt and Taggart Holdings (Georgia)
JSC BGEO Investment
JSC m2 Real Estate
m2 Residential, LLC
Optima ISANI, LLC
Tamarashvili 13, LLC
m2 at Hippodrome, LLC
m2 Skyline, LLC
m2 at Kazbegi, LLC
m2 at Tamarashvili, LLC
m2 at Nutsubidze, LLC
M Square Park, LLC
Optima Saburtalo, LLC
m2 Hospitality, LLC
m2, LLC (formerly JSC m2)
Caucasus Autohause, LLC
Land, LLC
JSC Georgian Renewable Power
Company
JSC Geohydro
JSC Svaneti Hydro
JSC Zoti Hydro
Georgia Healthcare Group PLC
JSC Georgia Healthcare Group
JSC Insurance Company Imedi L
(Formerly known as JSC Insurance
Company Aldagi BCI) (a)
Biznes Centri Kazbegze, LLC
JSC Medical Corporation EVEX
JSC My Family Clinic
JSC Kutaisi County Treatment
and Diagnostic Center for
Mothers and Children
Academician Z. Tskhakaia
National Center of Intervention
Medicine of Western Georgia,
LLC
Tskaltubo Regional Hospital, LLC
JSC Kutaisi St. Nicholas Surgical
and Oncological Hospital
Kutaisi Regional Clinical Hospital,
LLC
JSC Zugdidi multi profile Clinical
Hospital “Republic”
–
–
–
–
–
–
–
–
–
Proportion of voting rights and
ordinary share capital held
31 December
2015
31 December
2014
31 December
2013
Country of incorporation
Industry
Date of
incorporation
Date of
acquisition
100.00%
99.52%
100.00%
–
99.63%
100.00%
–
99.59%
100.00%
100.00%
100.00%
100.00%
Georgia
Georgia
Investment
28/5/2015
Banking 21/10/1994
17/8/2010
United Kingdom Information Sharing and
Market Research
Charitable activities
Georgia
25/8/2008
100.00%
100.00%
100.00%
Hungary
Representative Office
18/6/2012
100.00%
100.00%
–
Turkey
Representative Office 25/12/2013
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
79.99%
99.90%
(f)
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
85.00%
65.00%
100.00%
67.70%
100.00%
100.00%
–
100.00%
79.99%
99.90%
100.00%
–
100.00%
–
100.00%
100.00%
–
100.00%
100.00%
100.00%
100.00%
–
–
–
100.00%
100.00%
100.00%
–
85.00%
100.00%
–
–
–
100.00%
100.00%
100.00%
(d)
66.70%
100.00%
100.00%
100.00%
66.70%
–
100.00%
79.99%
99.90%
100.00%
–
100.00%
–
–
100.00%
–
–
100.00%
100.00%
100.00%
–
–
–
–
100.00%
–
–
85.00%
100.00%
–
–
–
100.00%
100.00%
–
51.00%
66.70%
Israel
Georgia
Georgia
Georgia
Cyprus
Belarus
Belarus
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Information Sharing and
Market Research
Sport
9/2/2009
10/1/2011
Education
15/10/2013
Security
Investments
Banking
Leasing
Investments
Investment
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Renewable Energy
–
21/1/2015
12/5/2009 13/10/2009
3/6/2008
16/4/1992
3/6/2008
30/3/2006
–
4/11/2008
–
7/8/2015
–
27/9/2006
–
17/8/2015
–
25/7/2014
–
3/11/2011
–
6/7/2015
–
23/7/2015
–
21/5/2013
–
21/5/2013
–
21/5/2013
–
15/9/2015
–
15/9/2015
–
17/8/2015
–
12/2/2014
–
29/3/2011
–
3/10/2014
–
14/9/2015
Georgia
Georgia
Georgia
United Kingdom
Georgia
Georgia
Renewable Energy
Renewable Energy
Renewable Energy
Healthcare
Healthcare
Insurance
11/10/2013
6/12/2013
20/8/2015
27/8/2015
29/4/2015
22/6/2007
–
–
–
28/8/2015
–
–
Georgia
Georgia
Georgia
Georgia
Various
Healthcare
Healthcare
Medical services
22/6/2010
31/7/2014
3/10/2005
5/5/2003
10/1/2011
–
–
29/11/2011
66.70%
66.70%
66.70%
Georgia
Medical services 15/10/2004
12/9/2011
66.70%
96.87%
66.70%
92.90%
66.70%
81.00%
Georgia
Georgia
Medical services
Medical services
29/9/1999
3/11/2000
12/9/2011
20/5/2008
(d)
(d)
100.00%
100.00%
Georgia
Medical services
19/7/2010
10/1/2010
100.00%
100.00%
Georgia
Medical services
11/6/1998
29/11/2011
Annual Report 2015 BGEO Group PLC 147
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
2. Basis of Preparation continued
Proportion of voting rights and
ordinary share capital held
Subsidiaries
31 December
2015
31 December
2014
31 December
2013
Country of incorporation
Industry
Date of
incorporation
Date of
acquisition
(d)
(d)
(d)
(d)
(d)
100.00%
100.00%
Georgia
Medical services 30/11/1999
29/11/2011
100.00%
100.00%
Georgia
Medical services
1/9/1999
12/9/2011
100.00%
100.00%
100.00%
100.00%
Georgia
Georgia
Medical services
Medical services
17/3/2000
16/3/2000
12/9/2011
12/9/2011
100.00%
100.00%
Georgia
Medical services
13/7/2000
12/9/2011
(d)
50.00%
100.00%
100.00%
–
–
–
–
–
–
–
–
Georgia
Georgia
Georgia
Georgia
Georgia
Medical Service
Medical services
Healthcare Service
20/7/2011
6/4/2001
16/4/1999
30/9/2014
5/8/2015
5/8/2015
Healthcare Service
Healthcare Service
3/5/2011
28/9/2010
5/8/2015
5/8/2015
Georgia
Medical services
18/6/2013
5/8/2015
–
–
–
JSC Chkhorotskhu Regional
Central Hospital
E.K. Pipia Central Hospital of
Tsalenjikha, LLC
Martvili Multi profile Hospital, LLC
Abasha Outpatient-Polyclinic
Union, LLC
Khobi Central Regional Hospital,
LLC
Traumatologist, LLC
GN KO, LLC
High Technology Medical
Center, LLC
Geolab, LLC
Nephrology Development
Clinic Center, LLC
Catastrophe Medicine Pediatric
Center, LLC
Deka, LLC
EVEX-Logistics, LLC
Unimed Achara, LLC
Unimedi Samtskhe, LLC
Unimedi Kakheti, LLC
LLC Caraps Medline
LLC Medline +
Avante Hospital Management
Group, LLC
Children’s New Hospital, LLC
New Life, LLC
Batumi Regional Healthcare
Center for Mothers and
Children, LLC
Sunstone Medical, LLC
M. Iashvili Children’s Central
Hospital, LLC
Institute of Pediatrics,
Alergology and Rheumatology
Centre, LLC
Referral Centre of Pathology, LLC
EVEX Learning Center
JSC Liberty Consumer
JSC Teliani Valley
Teliani Trading (Georgia), LLC
Teliani Trading (Ukraine), LLC
Le Caucase, LLC
Kupa, LLC
Global Beer Georgia, LLC
50.00%
80.00%
100.00%
95.00%
100.00%
100.00%
100.00%
100.00%
(e)
–
(e)
–
–
100.00%
100.00%
100.00%
100.00%
(b)
100.00%
–
–
100.00%
100.00%
100.00%
100.00%
100.00%
–
(e)
(e)
(e)
75.00%
100.00%
100.00%
(e)
66.70%
100.00%
66.70%
100.00%
100.00%
–
–
–
–
–
–
100.00%
100.00%
87.64%
71.44%
100.00%
100.00%
100.00%
70.00%
100.00%
100.00%
100.00%
70.12%
50.92%
100.00%
100.00%
100.00%
70.00%
100.00%
–
100.00%
67.51%
50.88%
100.00%
100.00%
100.00%
70.00%
–
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
11/6/2015
12/1/2012
Medical services
–
2/2/2015
Medical services
1/5/2012
29/6/2010
Medical services
1/5/2012
29/6/2010
Medical services
1/5/2012
29/6/2010
Medical services
Medical Service
26/8/1998 26/12/2013
Medical Service 13/12/2007 30/12/2013
19/2/2014
Medical Service
5/8/2011
Medical Service
18/7/2011
21/9/1999
Medical Service
Medical Service 19/11/2004
19/2/2014
19/2/2014
19/2/2014
Medical Service
Medical Service
9/11/2012
3/5/2011
21/5/2014
19/2/2014
Georgia
Medical Service
6/3/2000
19/2/2014
Georgia
Georgia
Georgia
Georgia
Georgia
Ukraine
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
–
Medical services 29/12/2014
–
Education 20/12/2013
–
24/5/2006
28/2/2007
30/6/2000
10/1/2006
27/3/2007
3/10/2006 31/12/2007
20/3/2007
23/9/2006
20/3/2007
Oak Barrel Production 12/10/2006
–
24/12/2014
Investments
Winery
Distribution
Distribution
Cognac Production
Production and
distribution of alcohol
and non-alcohol
beverages
Travel agency
Fitness centre
Investment
Brokerage and asset
management
29/3/1996
7/3/2006
7/8/2015
25/4/2006
–
–
19/12/1995 28/12/2004
JSC Intertour
JSC Prime Fitness
JSC BG Financial
JSC Galt & Taggart
99.94%
100.00%
100.00%
100.00%
99.94%
100.00%
–
100.00%
99.94%
100.00%
–
100.00%
Branch Office of “BG Kapital” JSC in
Azerbaijan
Galt and Taggart Holdings Limited
BG Capital (Belarus), LLC
Georgian Leasing Company, LLC
Prime Leasing
Solo, LLC
JSC United Securities Registrar of
Georgia
JSC Express Technologies
JSC Georgian Card
Direct Debit Georgia, LLC
LLC Didi Digomi Research Center
Metro Service +, LLC
Express Technologies CEE, LLC
100.00%
100.00%
–
Azerbaijan
Representative Office 28/12/2013
–
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.47%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
–
–
100.00%
100.00%
98.23%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
–
–
100.00%
100.00%
56.20%
100.00%
100.00%
100.00%
–
Cyprus
Belarus
Georgia
Georgia
Georgia
Georgia
Investments
Brokerage
3/7/2006
19/2/2008
–
–
Leasing 29/10/2001 31/12/2004
21/1/2015
27/1/2012
Leasing
–
22/4/2015
Trade
–
29/5/2006
Registrar
Georgia
Georgia
Georgia
Card processing
Electronic payment
services
Georgia Communication services
Georgia
Business servicing
Other Financial Service
Hungary
Activities
Investments 29/10/2007
–
17/1/1997 20/10/2004
–
7/3/2006
23/4/2007
10/5/2006
5/3/2014
–
–
N/A
148 BGEO Group PLC Annual Report 2015
Financial statements 2. Basis of Preparation continued
Subsidiaries
JSC Insurance Company Aldagi
JSC Insurance Company Tao
Aliance, LLC
Green Way, LLC
Premium Residence, LLC
JSC Agron Group
Agron Center, LLC
Premium Compliance Advisory, LLC
Proportion of voting rights and
ordinary share capital held
31 December
2015
31 December
2014
31 December
2013
Country of incorporation
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
(g)
100.00%
100.00%
–
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
–
–
100.00%
100.00%
100.00%
–
–
100.00%
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Georgia
Various
Industry
Insurance
Insurance
Various
Hotel
Agro Trade
Agro Trade
Various
Date of
incorporation
Date of
acquisition
31/7/2014
22/8/2007
3/1/2000
9/8/2008
9/7/2010
3/11/2014
11/11/2014
17/2/2012
–
21/1/2015
5/1/2012
5/1/2012
1/5/2012
–
–
–
Following the National Bank of Georgia’s intention to regulate banks in Georgia on a standalone basis and thereby limit investment in
non-banking subsidiaries by locally regulate entities, the Group undertook legal restructuring in 2015. For this purpose, JSC BGEO Group
was created to act as an ultimate Georgian holding company for the Group, which in turn holds:
• JSC Bank of Georgia and its subsidiaries serving banking operations;
• Newly created JSC BG Financial and its subsidiaries providing non-banking financial services;
• Newly created JSC BGEO Investment and its subsidiaries providing non-financial products and services.
Proportion of voting rights and
ordinary share capital held
Associates
JSC N Tour
JSC Hotels and Restaurants
Management Group – m/Group
Georgian Global Utilities, LLC
Georgian Water and Power, LLC
Rustavi Water, LLC
Gardabani Sewage Treatment, LLC
Mtskheta Water, LLC
Georgian Engineering and Management
Company (GEMC), LLC
JSC Saguramo Energy
31 December
2015
31 December
2014
31 December
2013
Country of incorporation
Industry
Date of
incorporation
Date of
acquisition
30.00%
–
30.00%
(c)
30.00%
10.00%
Georgia
Georgia
Travel services
Food retail
11/1/2001
30/5/2005
29/5/2008
29/5/2008
25%
100%
100%
100%
100%
100%
25%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
British Virgin Islands
Georgia
Georgia
Georgia
Georgia
Georgia
Utilities 16/08/2007
Utilities 25/06/1997
Utilities 31/08/1999
Utilities 20/12/1999
Utilities
1/9/1999
Utilities 20/03/2011
31/12/2014
31/12/2014
31/12/2014
31/12/2014
31/12/2014
31/12/2014
Georgia
Utilities 11/12/2008
31/12/2014
(a) On 31 July 2014 a new holding company – JSC Medical Corporation EVEX was created to hold the Group’s healthcare subsidiaries. Also, the Group’s insurance operations
were split between two legal entities – the newly incorporated JSC Insurance Company Aldagi to operate the Group’s property & casualty insurance business and the
former JSC Insurance Company Aldagi BCI that was renamed to JSC Insurance Company Imedi L to operate the Group’s health insurance business
(b) Merged to LLC Caraps Medline in 2014
(c) No longer Group associate due to sale in 2014
(d) Merged to JSC Medical Corporation Evex in 2015
(e) Merged to Unimed Kakheti, LLC in 2015
(f) Merged to JSC Bank of Georgia in 2015
(g) Agron Center LLC merged to JSC Agron Group in 2015
Georgia Healthcare Group PLC (“GHG”), healthcare and health insurance holding company of the Group, was admitted to the premium
listing segment of the Official List of the UK Listing Authority and admitted to trading on the London Stock Exchange PLC’s Main Market
for listed securities in November 2015.
GHG issued 38,681,820 new ordinary shares for the price of 170 pence per share, diluting the Group’s stake in GHG by 29.4%. Further 2.9%
or 3,868,180 shares of GHG were sold as a result of an exercised over-allotment option granted by the Group to the stabilising manager.
As a result of issuing GHG’s new shares, the Group raised GEL 220,529 net proceeds (GEL 233,908 gross proceeds less GEL 13,379
transaction costs), recognising GEL 124,503 non-controlling interests and GEL 96,026 unrealised gain on dilution of interests in subsidiaries.
As a result of selling the existing shares in GHG through an over-allotment option, the Group received GEL 20,670, recognising GEL 12,450
non-controlling interests and GEL 8,220 unrealised gain on sale of non-controlling interests in existing subsidiaries.
Annual Report 2015 BGEO Group PLC 149
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
3. Summary of Significant Accounting Policies
Adoption of new or revised standards and interpretations
No new or revised IFRS during the year had an impact on the Group’s financial position or performance.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2015.
Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:
• Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);
• Exposure, or rights, to variable returns from its involvement with the investee; and
• The ability to use its power over the investee to affect its returns.
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and
circumstances in assessing whether it has power over an investee, including:
• The contractual arrangement with the other vote holders of the investee;
• Rights arising from other contractual arrangements; and
• The Group’s voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of
the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when
the Group loses control of the subsidiary. Income and expenses of a subsidiary acquired or disposed of during the year are included in
the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the Group and to
the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are
made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All
intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are
eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses
control over a subsidiary, it:
• Derecognises the assets (including goodwill) and liabilities of the subsidiary
• Derecognises the carrying amount of any non-controlling interests
• Derecognises the cumulative translation differences recorded in equity
• Recognises the fair value of the consideration received
• Recognises the fair value of any investment retained
• Recognises any surplus or deficit in profit or loss
• Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained
earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the
consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each
business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the
proportionate share of the acquiree’s identifiable net assets and other components of non-controlling interests at their acquisition date fair
values. Acquisition-related costs are expensed as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and
designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This
includes the separation of embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and
any resulting gain or loss is recognised in profit or loss. It is then considered in the determination of goodwill.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent
consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments:
Recognition and Measurement, is measured at fair value with changes in fair value recognised either in either profit or loss or as a change
to other comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the
appropriate IFRS. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for
within equity.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for
non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value
of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be
recognised at the acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate
consideration transferred, then the gain is recognised in profit or loss.
150 BGEO Group PLC Annual Report 2015
Financial statements 3. Summary of Significant Accounting Policies continued
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing,
goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are
expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill
associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal.
Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the
cash-generating unit retained.
Investments in associates
Associates are entities in which the Group generally has between 20% and 50% of the voting rights, or is otherwise able to exercise
significant influence, but which it does not control or jointly control. Investments in associates are accounted for under the equity method
and are initially recognised at cost, including goodwill. Subsequent changes in the carrying value reflect the post-acquisition changes in
the Group’s share of net assets of the associate. The Group’s share of its associates’ profits or losses is recognised in the consolidated
income statement, and its share of movements in reserves is recognised in other comprehensive income. However, when the Group’s
share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the
Group is obliged to make further payments to, or on behalf of, the associate.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the
associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Fair value measurement
The Group measures financial instruments, such as trading and investment securities, derivatives and non-financial assets such as
investment properties, at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortised cost are
disclosed in Note 30.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or
transfer the liability takes place either:
•
•
In the principal market for the asset or liability; or
In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured
using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their
economic best interest .A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate
economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in
its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair
value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value
hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
• Level 1 − Quoted (unadjusted) market prices in active markets for identical assets or liabilities;
• Level 2 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly
observable;
• Level 3 − Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have
occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value
measurement as a whole) at the end of each reporting period.
Financial assets
Initial recognition
Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, or
available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets upon initial recognition.
Date of recognition
All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase
or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the
period generally established by regulation or convention in the marketplace.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as
investment securities. Such assets are carried at amortised cost using the effective interest method. This calculation includes all fees paid
or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums
and discounts. Gains and losses are recognised in the consolidated income statement when the loans and receivables are derecognised
or impaired, as well as through the amortisation process.
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Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified
in any other categories. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses being
recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at
which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the consolidated income
statement. However, interest calculated using the effective interest method is recognised in the consolidated income statement.
Derivative financial instruments
Whilst the Group does not adopt a formal hedge accounting policy, in the ordinary course of business the Group enters into various
derivative financial instruments including forwards, swaps and options in the foreign exchange and capital markets. Such financial
instruments are initially recognised in accordance with the policy for initial recognition of financial instruments and are subsequently
measured at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current
market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is
positive and as liabilities when it is negative. Gains and losses resulting from these instruments are included in the consolidated income
statement as gains less losses from foreign currencies translation differences.
Measurement of financial instruments at initial recognition
When financial instruments are recognised initially, they are measured at fair value, adjusted, in the case of instruments not at fair value
through profit or loss, for directly attributable fees and costs.
The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. If the Group determines
that the fair value at initial recognition differs from the transaction price, then:
•
•
if the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a
valuation technique that uses only data from observable markets, the Group recognises the difference between the fair value at initial
recognition and the transaction price as a gain or loss;
in all other cases, the initial measurement of the financial instrument is adjusted to defer the difference between the fair value at initial
recognition and the transaction price. After initial recognition, the Group recognises that deferred difference as a gain or loss only
when the inputs become observable, or when the instrument is derecognised.
Offsetting
Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a
legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and
settle the liability simultaneously.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, amounts due from central banks, excluding obligatory reserves with central banks,
and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual
encumbrances and readily convertible to known amount of cash.
Borrowings
Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in
the group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the
exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include
amounts due to credit institutions and amounts due to customers (including promissory notes issued). These are initially recognised
at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings are
subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated
income statement when the borrowings are derecognised as well as through the amortisation process.
If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying
amount of the liability and the consideration paid is recognised in the consolidated income statement.
Subordinated debt
Subordinated debt represents long-term funds attracted by the Bank on the international financial markets or domestic market. The
holders of subordinated debt would be subordinate to all other creditors to receive repayment of debt in case of the Bank’s liquidation.
Subordinated debt is carried at amortised cost.
Leases
i. Finance – Group as lessor
The Group recognises finance lease receivables in the consolidated statement of financial position at a value equal to the net investment
in the lease, starting from the date of commencement of the lease term. In calculating the present value of the minimum lease payments
the discount factor used is the interest rate implicit in the lease. Initial direct costs are included in the initial measurement of the finance
lease receivables. Lease payments received are apportioned between the finance income and the reduction of the outstanding lease
receivable. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding.
ii. Operating – Group as lessee
Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases.
Lease payments under an operating lease are recognised as expenses on a straight-line basis over the lease term and included into other
administrative and operating expenses.
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iii. Operating – Group as lessor
The Group presents assets subject to operating leases in the consolidated statement of financial position according to the nature of the
asset. Lease income from operating leases is recognised in the consolidated income statement on a straight-line basis over the lease
term as other income. The aggregate cost of incentives provided to lessees is recognised as a reduction of rental income over the lease
term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying
amount of the leased asset.
Impairment of financial assets
The Group assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets
is impaired.
A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a
result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or
events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably
estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial
reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such
as changes in arrears or economic conditions that correlate with defaults.
Amounts due from credit institutions, loans to customers and finance lease receivables
For amounts due from credit institutions, loans to customers and finance lease receivables carried at amortised cost, the Group first
assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively
for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an
individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks
characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an
impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been
incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in
the consolidated income statement. Interest income continues to be accrued on the reduced carrying amount based on the original effective
interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery
and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment
loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment
loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the
consolidated income statement in the respective impairment line with a negative sign as a reversal of impairment.
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a
variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the
present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure
less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s internal credit grading
system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and
other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss
experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of
current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is
based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows
reflect, and are consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property
prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The
methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss
estimates and actual loss experience.
Write-off of loans to customers
All retail loans, except mortgages, are written off when overdue by more than 150 days. Retail mortgage loans are written off when
overdue by more than 365 days. Write off of corporate loans overdue by more than 150 days is subject to management discretion and is
evaluated on a case by case basis, taking into account the current and expected positions of the loan/borrower.
Available-for-sale financial assets
For available-for-sale financial investments, the Group assesses at each reporting date whether there is objective evidence that an
investment or a group of investments is impaired.
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In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in
the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the
consolidated income statement – is reclassified from other comprehensive income to the consolidated income statement. Impairment
losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment
are recognised in other comprehensive income.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets
carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the
amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income
statement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the consolidated income
statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event
occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the
consolidated income statement.
Renegotiated loans
Renegotiated loans comprise carrying amount of financial assets that would otherwise be past due or impaired whose terms have been
renegotiated.
Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment
arrangements and the agreement of new loan conditions.
The accounting treatment of such restructuring is as follows:
•
•
•
If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised.
If the loan restructuring is not caused by the financial difficulties of the borrower the Group uses the same approach as for the
modification of financial liabilities described below.
If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Group
recognises the difference between the present value of the new cash flows discounted using the original effective interest rate and the
carrying amount before restructuring in the provision charges for the period. In cases where the loan is not impaired after
restructuring, the Group recalculates the effective interest rate.
Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans
to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or
collective impairment assessment, calculated using the loan’s original or current effective interest rate.
Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:
• the rights to receive cash flows from the asset have expired; or
• the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset,
but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and
• the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all
the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing
involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower
of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision)
on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may
repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at
fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option
exercise price.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the
recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement.
Financial guarantees
In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances.
Financial guarantees are initially recognised in the consolidated financial statements at fair value, in ‘Other liabilities’, being the premium
received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium
and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.
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Any increase in the liability relating to financial guarantees is taken to the consolidated income statement. The premium received is
recognised in the consolidated income statement on a straight-line basis over the life of the guarantee.
Inventories
Inventories are valued at the lower of cost and net realisable value.
Costs incurred in bringing each product to its present location and conditions are accounted for, as follows:
• Raw materials: purchase cost on a first-in/first-out basis
• Finished goods and work in progress: cost of direct materials and labour and a proportion of manufacturing overheads based on the
normal operating capacity, but excluding borrowing costs
Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated
costs necessary to make the sale.
Taxation
The current income tax expense is calculated in accordance with the regulations in force in the respective territories in which BGEO and
its subsidiaries operate.
Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes
are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial
reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit
or loss.
A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the
reporting date.
Deferred tax liabilities are provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except
where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not
reverse in the foreseeable future.
Georgia and Belarus also have various operating taxes that are assessed on the Group’s activities. These taxes are included as a
component of other operating expenses.
Investment properties
Investment property is land or building or a part of a building held to earn rental income or for capital appreciation and which is not used
by the Group or held for the sale in the ordinary course of business. Property that is being constructed or developed or redeveloped for
future use as an investment property is also classified as an investment property.
Investment property is initially recognised at cost, including transaction costs, and subsequently remeasured at fair value reflecting
market conditions at the end of the reporting period. Fair value of the Group’s investment property is determined on the basis of various
sources including reports of independent appraisers, who hold a recognised and relevant professional qualifications and who have recent
experience in valuation of property of similar location and category.
Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active
continues to be measured at fair value. Earned rental income is recorded in the income statement within net other banking income for
Banking Business companies and within real estate revenue for Investment Business companies. Gains and losses resulting from
changes in the fair value of investment property are recorded in the income statement within net other banking income for Banking
Business companies and within real estate revenue or gross other investment profit for Investment Business companies, depending
on weather the gains derive from active property development or passive appreciation respectively.
Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Group
and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property
becomes owner-occupied, it is reclassified to property and equipment, and its carrying amount at the date of reclassification becomes its
deemed cost to be subsequently depreciated.
Property and equipment
Property and equipment, except for office buildings and service centres, is carried at cost less accumulated depreciation and any
accumulated impairment in value. Such cost includes the cost of replacing part of the equipment when that cost is incurred if the
recognition criteria are met. Office buildings and service centres are measured at fair value less depreciation and impairment charged
subsequent to the date of the revaluation.
The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the
carrying value may not be recoverable.
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Following initial recognition at cost, office buildings and service centres are carried at a revalued amount, which is the fair value at the
date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are
performed once in every three years, unless there is a sign of material change in fair values on the market.
Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is
restated to the revalued amount of the asset. Any revaluation surplus is credited to the revaluation reserve for property and equipment
included in other comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously
recognised in the consolidated income statement, in which case the increase is recognised in the consolidated income statement. A
revaluation deficit is recognised in the consolidated income statement, except that a deficit directly offsetting a previous surplus on the
same asset is directly offset against the surplus in the revaluation reserve for property and equipment.
An annual transfer from the revaluation reserve for property and equipment to retained earnings is made for the difference between
depreciation based on the revalued carrying amount of the assets and depreciation based on the assets original cost. Additionally,
accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is
restated to the devalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is
transferred to retained earnings.
Depreciation of an asset, commences from the date the asset is ready and available for use. Depreciation is calculated on a straight-line
basis over the following estimated useful lives:
Office buildings and service centres
Hospitals and clinics
Furniture and fixtures
Computers and equipment
Motor vehicles
Years
Up to 100
Up to 100
10
5-10
5
The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end.
Assets under construction are stated at cost and are not depreciated until the time they are available for use and reclassified to respective
group of property and equipment.
Leasehold improvements are depreciated over the life of the related leased asset or the expected lease term if lower.
Costs related to repairs and renewals are charged when incurred and included in other operating expenses, unless they qualify for
capitalization.
Goodwill Impairment
Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount
may be impaired.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the
Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to
which the goodwill is so allocated:
• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
•
is not larger than a segment as defined in IFRS 8 “Operating Segments”.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the
goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying
amount, an impairment loss is recognised. Impairment losses cannot be reversed in future periods.
Intangible assets
The Group’s intangible assets include computer software and licenses.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business
combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortisation and any accumulated impairment losses. The economic lives of intangible assets are assessed to be finite and
amortised over 4 to 10 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired.
Amortisation periods and methods for intangible assets are reviewed at least at each financial year-end.
Costs associated with maintaining computer software programs are recorded as an expense as incurred. Software development costs
(relating to the design and testing of new or substantially improved software) are recognised as intangible assets only when the Group
can demonstrate the technical feasibility of completing the software so that it will be available for use or sale, its intention to complete the
asset and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete
the asset and the ability to measure reliably the expenditure during the development. Other software development costs are recognised
as an expense as incurred.
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Insurance and reinsurance receivables
Insurance and reinsurance receivables are recognised based upon insurance policy terms and measured at cost. The carrying value of
insurance and reinsurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable, with any impairment loss recorded in the consolidated statement of income.
Reinsurance receivables primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities.
Premiums on reinsurance assumed are recognised as revenue in the same manner as they would be if the reinsurance were considered
direct business, taking into account the product classification of the reinsured business. Amounts due to reinsurers are estimated in a
manner consistent with the associated reinsured policies and in accordance with the reinsurance contract. Premiums ceded and claims
reimbursed are presented on a gross basis.
An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance receivables are
impaired only if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract that this
can be measured reliably.
Insurance liabilities
General insurance liabilities
General insurance contract liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the reporting date,
whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other
recoveries. Significant delays can be experienced in the notification and settlement of certain types of general insurance claims,
particularly in respect of liability business, environmental and pollution exposures – therefore the ultimate cost of which cannot be known
with certainty at the reporting date.
Provision for unearned premiums
The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as
unearned premium. The change in the provision for unearned premium is taken to the consolidated income statement in order that
revenue is recognised over the period of risk or, for annuities, the amount of expected future benefit payments.
Liability adequacy test
At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred
acquisition costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration
expenses, as well as investment income from assets backing such liabilities, are used. Any inadequacy is immediately charged to the
consolidated income statement by establishing an unexpired risk provision.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that
an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of
obligation can be made.
Provisions for the risk of incurring losses on off-balance sheet commitments is estimated regularly based on the past history of actual
losses incurred on these commitments.
Retirement and other employee benefit obligations
The Group provides management and employees of the Group with private pension plans. These are defined contribution pension plans
covering substantially all full-time employees of the Group. The Group collects contributions in the size of 2% of full-time employees’
salaries, of which 1% is deducted from the salaries and the other 1% – additionally paid by the Group. When an employee reaches the
pension age, aggregated contributions, plus any earnings earned on the employee’s behalf are paid to the employee according to the
schedule agreed with the employee. Aggregated amounts are distributed during the period when the employee will receive accumulated
contributions. Respective pension benefit obligations are recorded within other liabilities, Note 15.
Share-based payment transactions
Employees (including senior executives) of the Group receive share-based remuneration, whereby employees render services as
consideration for the equity instruments (‘equity settled transactions’).
Equity-settled transactions
The cost of equity settled transactions with employees is measured by reference to the fair value at the date on which they are granted.
The cost of equity settled transactions is recognised together with the corresponding increase in equity, over the period in which the
performance and/or service conditions are fulfilled, ending on the date when the relevant employee is fully entitled to the award (‘the
vesting date’). The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the
extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest.
The consolidated income statement charge or credit for the period represents the movement in cumulative expense recognised as at the
beginning and end of that period.
No expense is recognised for the awards that do not ultimately vest except for the awards where vesting is conditional upon market
conditions (a condition linked to the price of BGEO’s shares) which are treated as vesting irrespective of whether the market condition is
satisfied, provided that all other performance conditions are satisfied.
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Where the terms of an equity settled award are modified, the minimum expense is recognised as if the terms had not been modified. An
additional expense is recognised for any modification which increases the total fair value of the share-based payment arrangement, or is
otherwise beneficial to the employee as measured at the date of the modification.
Where an equity-settled award is cancelled, it is treated as if it has vested on the date of cancellation, and any expense not yet
recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as
the replacement award on the date that it is granted, the cancelled and the new awards are treated as if they were a modification of the
original award, as described in the previous paragraph.
Share capital
Share capital
Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business
combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par
value of shares issued is recognised as additional paid-in capital.
Treasury shares
Where BGEO or its subsidiaries purchase BGEO’s shares, the consideration paid, including any attributable transaction costs, net of
income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently
sold or reissued, any consideration received is included in equity. Treasury shares are stated at par value, with adjustment of premiums
against additional paid-in capital.
Dividends
Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting
date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but
before the consolidated financial statements are authorised for issue.
Contingencies
Contingent liabilities are not recognised in the consolidated statement of financial position but are disclosed unless the possibility of any
outflow in settlement is remote. A contingent asset is not recognised in the consolidated statement of financial position but disclosed
when an inflow of economic benefits is probable.
Income and expense recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably
measured. The following specific recognition criteria must also be met before revenue and expense is recognised:
Interest and similar income and expense
For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest
income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the
financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example,
prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of
the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the
Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest
rate and the change in carrying amount is recorded as interest income or expense.
Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest
income continues to be recognised using the original effective interest rate applied to the new carrying amount.
Fee and commission income
The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided
into the following two categories:
Fee income earned from services that are provided over a certain period of time
Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission incomes and
asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down
and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest
rate on the loan.
Fee income from providing transaction services
Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the
acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying
transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.
Dividend income
Revenue is recognised when the Group’s right to receive the payment is established.
158 BGEO Group PLC Annual Report 2015
Financial statements 3. Summary of Significant Accounting Policies continued
Insurance premium income
For property & casualty and health insurance business, premiums written are recognised at policy inception and earned on a pro rata
basis over the term of the related policy coverage. Estimates of premiums written as at the reporting date but not yet received, are
assessed based on estimates from underwriting or past experience and are included in premiums earned.
Insurance claims
General insurance claims incurred include all claim losses occurring during the year, whether reported or not, including the related handling
costs and reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years.
Healthcare revenue
The Group recognises healthcare revenue when the amount can be reliably measured and it is probable that future economic benefits will
flow to the entity. Healthcare revenue is presented net of corrections and rebates that occasionally arise as a result of reconciliation of
detailed bills with counterparties (mostly with the state).
Healthcare revenue comprises the fair value of the consideration received or receivable for providing impatient and outpatient services
and includes following components:
• Healthcare revenue from insurance companies – The Group recognises revenue from the individuals who are insured by various
insurance companies based on the completion of the actual medical service and agreed-upon terms between the counterparties;
• Healthcare revenue from state – The Group recognises the revenue from the individuals who are insured under the state programs
based on the completion of the actual medical service and the agreed-upon terms between the counterparties;
• Healthcare revenue from out-of-pocket and other – The Group recognises the revenue from non-insured individuals based on the
completion of the actual medical service and approved prices by the Group. Sales are usually in cash or by credit card. Other revenue
from medical services includes revenue from municipalities and other hospitals, which the Group has contractual relationship with.
Sales of services are recognised in the accounting period in which the services are rendered calculated according to contractual
tariffs.
Gross real estate profit and Gross other investment profit
Gross real estate profit comprises revenue from sale of developed real estate property and revaluation gains on such developed
properties.
Revenue from sale of developed real estate property is recognised when the significant risks and rewards of ownership of the real estate
have been transferred to the buyer.
Gross other investment profit comprises revenue from sale of other finished goods and revaluation of other investment properties that
were not developed by the Group.
Revenue from the sale of other finished goods is recognised when the significant risks and rewards of ownership of the goods have
passed to the buyer, usually on delivery of the goods.
Continuous transfer of work in progress is applied when: (a) the buyer controls the work in progress, typically when the land on which the
development is taking place is owned by the final customer and (b) all significant risks and rewards of ownership of the work in progress
in its present state are transferred to the buyer as construction progresses, typically when buyer cannot put the incomplete property back
to the Group. In such situations, the percentage of work completed is measured based on the costs incurred up until the end of the
reporting period as a proportion of total costs expected to be incurred.
EBITDA
The Group separately presents EBITDA on the face of income statement for Investment Business. EBITDA is defined as earnings before
interest, taxes, depreciation and amortisation, as well as cost of credit risk and net non-recurring items for the Investment Business.
Non-recurring income and expenses
The Group separately classifies and discloses those income and expenses that are non-recurring by nature. Any type of income or
expense may be non-recurring by nature. The Group defines non-recurring income or expense as an income or expense triggered by or
originated from an extraordinary economic, business or financial event that is not inherent to the regular and ordinary business course of
the Group and is caused by uncertain or unpredictable external factors. Typical non-recurring income or expenses are but not limited to
the following:
• Bankruptcy of a subsidiary or an associate or any other extraordinary and irregular event that causes material impairment of an
investment in that subsidiary or associate or impairment of associated goodwill;
• Expenses incurred for the purposes of initial public offering (“IPO”) that are not directly attributable to issuance of new shares but are
rather associated with the listing of existing shares;
• Gains from bargain purchases (negative goodwill) associated with business combinations;
•
Impairment of property and equipment, which is an additional loss in excess of a regular depreciation charge caused by unexpected
external factors;
• Gains or losses from hyperinflation;
• Gains or losses from breaches of borrowings before maturity;
• Redundancy expenses and costs of lay off of management and executives;
• Failure of a software or license provider to complete implementation of a software or license through a breach of agreement with the
Group, resulting in legal disputes and/or litigations.
Annual Report 2015 BGEO Group PLC 159
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
3. Summary of Significant Accounting Policies continued
Change in Presentation of Statement of Financial Position and Income Statement
The Group changed the reporting format to reflect its recently updated strategy to operate as a Georgia-focused banking group with an
investment arm. As a result, consolidated statements of financial position and income statement are presented as a combination of the
Group’s Banking and Investment businesses with corresponding inter-business eliminations. Certain line items of the statement of
financial position and the income statement were reorganised to provide a more relevant presentation of these two distinct parts of
the Group.
Reclassifications
Starting from 2015, BGEO separated investment in associates from other assets in its separate financial statements and amended
comparative financial information accordingly.
Due to the change in the presentation of the consolidated statement of financial position, the following reclassifications were made to the
31 December 2014 and 31 December 2013 statements of financial position to conform to the year ended 31 December 2015 presentation
requirements:
As previously
reported
4,322,186
38,519
48,659
351,687
–
–
–
–
4,215
18,530
–
11,093
86,471
–
4,732
238,122
–
–
As previously
reported
3,477,309
45,606
329,339
–
–
–
–
4,552
14,544
–
2,930
66,100
–
481
206,576
–
–
Reclassification
As reclassified
(4,322,186)
(38,519)
(48,659)
(141,976)
4,350,803
67,255
31,840
101,442
(4,215)
(18,530)
22,745
(11,093)
(86,471)
97,564
(4,732)
(150,477)
108,623
46,586
–
–
–
209,711
4,350,803
67,255
31,840
101,442
–
–
22,745
–
–
97,564
–
87,645
108,623
46,586
Reclassification
As reclassified
(3,477,309)
(45,606)
(182,530)
3,514,870
40,419
61,947
88,209
(4,552)
(14,544)
19,096
(2,930)
(66,100)
69,030
(481)
(155,341)
82,103
73,719
–
–
146,809
3,514,870
40,419
61,947
88,209
–
–
19,096
–
–
69,030
–
51,235
82,103
73,719
As at
Consolidated Statement of Financial Position:
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
Loans to customers
Finance lease receivables
Investments in associates
Other assets
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Inventories
Current income tax assets
Deferred income tax assets
Income tax assets
Current income tax liabilities
Deferred income tax liabilities
Income tax liabilities
Provisions
Other liabilities
Accruals and deferred income
Insurance contracts liabilities
As at
Consolidated Statement of Financial Position:
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
Loans to customers
Finance lease receivables
Other assets
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Inventories
Current income tax assets
Deferred income tax assets
Income tax assets
Current income tax liabilities
Deferred income tax liabilities
Income tax liabilities
Provisions
Other liabilities
Accruals and deferred income
Insurance contracts liabilities
160 BGEO Group PLC Annual Report 2015
Financial statements 3. Summary of Significant Accounting Policies continued
Due to the change in the presentation of income statement, the following line items were divided into Banking Business and Investment
Business parts and placed above and below revenue respectively. The following main reclassifications were made to the years ended
31 December 2014 and 31 December 2013 income statements to conform to the 31 December 2015 presentation requirements:
Year ended
Consolidated Income Statement:
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
31 December 2014
Interest income
Banking interest income
Interest income from investment business
Interest expense
Salaries and other employee benefits
General and administrative expenses
Banking interest expense
Interest expense from investment business
Depreciation and amortization
Cost of healthcare services
Banking depreciation and amortization
Depreciation and amortization of investment business
Net gain from foreign currencies: dealing
Net gain from foreign currencies: translation differences
Net banking foreign currency gain
Net foreign currency loss from investment business
Year ended
Consolidated Income Statement:
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
31 December 2013
Interest income
Banking interest income
Interest income from investment business
Interest expense
Salaries and other employee benefits
General and administrative expenses
Banking interest expense
Interest expense from investment business
Depreciation and amortization
Cost of healthcare services
Banking depreciation and amortization
Depreciation and amortization of investment business
Net gain from foreign currencies: dealing
Net gain from foreign currencies: translation differences
Net banking foreign currency gain
Net foreign currency loss from investment business
As previously
reported
594,921
–
–
(250,861)
(153,807)
(73,183)
–
–
(28,207)
(78,836)
–
–
44,168
5,415
–
–
As previously
reported
574,108
–
–
(259,613)
(135,055)
(60,364)
–
–
(26,572)
(37,644)
–
–
46,329
(2,818)
–
–
Reclassification
As reclassified
(594,921)
593,612
1,309
250,861
(374)
(276)
(243,654)
(6,558)
28,207
6,599
(25,641)
(9,164)
(44,168)
(5,415)
52,752
(3,169)
–
593,612
1,309
–
(154,181)
(73,459)
(243,654)
(6,558)
–
(72,237)
(25,641)
(9,164)
–
–
52,752
(3,169)
Reclassification
As reclassified
(574,108)
572,362
1,746
259,613
7
4
(253,926)
(5,687)
26,572
5,160
(24,780)
(6,963)
(46,329)
2,818
48,355
(4,844)
–
572,362
1,746
–
(135,048)
(60,360)
(253,926)
(5,687)
–
(32,484)
(24,780)
(6,963)
–
–
48,355
(4,844)
Functional, reporting currencies and foreign currency translation
The consolidated financial statements are presented in Georgian Lari, which is the Group’s presentation currency. BGEO’s and the
Bank’s functional currency is Georgian Lari. Each entity in the Group determines its own functional currency and items included in the
financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded
in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated into functional currency at functional currency rate of exchange ruling at the reporting
date. Gains and losses resulting from the translation of foreign currency transactions are recognised in the consolidated income
statement as gains less losses from foreign currencies – translation differences. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. When
a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss is
recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any
exchange component of that gain or loss is recognised in profit or loss.
Differences between the contractual exchange rate of a certain transaction and the NBG exchange rate on the date of the transaction are
included in gains less losses from foreign currencies (dealing). The official NBG exchange rates at 31 December 2015, 31 December 2014
and 31 December 2013 were:
Lari to GBP
Lari to US$
Lari to EUR
Lari to BYR
(10,000)
31 December 2015
31 December 2014
31 December 2013
3.5492
2.8932
2.8614
2.3949
1.8636
1.7363
2.6169
2.2656
2.3891
1.2904
1.5727
1.8258
Annual Report 2015 BGEO Group PLC 161
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
3. Summary of Significant Accounting Policies continued
As at the reporting date, the assets and liabilities of the entities whose functional currency is different from the presentation currency
of the Group are translated into Georgian Lari at the rate of exchange ruling at the reporting date and, their income statements are
translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken to other
comprehensive income. On disposal of a subsidiary or an associate whose functional currency is different from the presentation currency
of the Group, the deferred cumulative amount recognised in other comprehensive income relating to that particular entity is recognised in
the consolidated income statement.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities
arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at the rate at the reporting date.
Change in Functional Currency
Prior to 1 January 2007, the Bank determined that Georgian Lari was its functional currency, as it was the currency of the primary
economic environment in which the Bank operated. However, in 2007 the Bank determined that US Dollar (“USD”) was its functional
currency, due to the following:
• The US Dollars share of the Bank’s assets and liabilities was constantly increasing;
• Pricing of the loans was primarily based on the cost of funds which were sourced primarily from US Dollars denominated offshore
banking borrowings and deposits, at the same time Global Depositary Receipts (“GDR”) of the Bank floated on the London Stock
Exchange, and were priced and traded in US Dollars;
• After the Bank had listed its shares in the form of GDRs on the London Stock Exchange in November 2006, communication, planning
and execution of business activities of the Bank with shareholders were generally in US Dollars.
In 2015 the Bank performed a re-assessment of its functional currency in accordance with International Accounting Standard 21 – “Effects of
Changes in Foreign Exchange Rates” (IAS 21) and determined that Georgian Lari was its functional currency, due to the following:
• US Dollars share of the Bank’s assets is stable and no longer increasing, while US Dollars share of liabilities is constantly decreasing;
• Due to their decreasing share in debt financing, pricing of the loans is constantly becoming less dependent on US Dollars
denominated offshore banking borrowings and deposits, while following the listing of BGEO on the premium listing segment of the
London Stock Exchange in February 2012, the Bank’s equity financing source also changed from US Dollars to British Pounds Sterling
(“GBP”);
• Communication, planning and execution of business activities of the Bank with shareholders has become less relevant, concentrating
more on Georgian Lari and GBP;
• Following listing on the premium segment of the London Stock Exchange, share-based compensation of the management has
changed from being US Dollars denominated to being GBP denominated;
In 2015 BGEO also performed a re-assessment of its functional currency in accordance with IAS 21 and determined that Georgian Lari
was its functional currency as well, due to the fact that BGEO is a holding company that has no sufficiently substantive operations to
enable it to have a different functional currency from its subsidiary.
As the result, the Bank and BGEO changed their functional currencies, from US Dollars and GBP respectively, to Georgian Lari starting
1 January 2015 and this has been accounted for prospectively from that date.
Share capital, additional paid-in capital and retained earnings of BGEO were retranslated to Georgian Lari from the 31 December 2014
GBP-GEL exchange rate of 2.8932 to the 1 January 2015 exchange rate of 2.9220. This movement is shown as a GBP-GEL translation
effect in the consolidated statement of changes in equity for the year ended 31 December 2015.
Standards issued but not yet effective
Up to the date of approval of the consolidated financial statements, certain new standards, interpretations and amendments to existing
standards have been published that are not yet effective for the current reporting period and which the Group has not early adopted.
Such standards that are expected to have an impact on the Group, or the impacts of which are currently being assessed, are as follows:
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and
Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments
project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after
1 January 2018, with early application permitted. The Group plans to adopt the new standard on the required effective date and is
currently assessing its impact of IFRS 9.
IAS 12 Income Taxes
In January 2016, the IASB issued amendments to IAS 12 Income Taxes. The amendments clarify how to account for deferred tax assets
related to debt instruments measured at fair value and clarify recognition of deferred tax assets for unrealised losses, to address diversity
in practice. Entities are required to apply the amendments for annual periods beginning on or after 1 January 2017. Earlier application is
permitted. These amendments are not expected to have any impact on the Group.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under
IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for
transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements
under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or
after 1 January 2018, when the IASB finalises their amendments to defer the effective date of IFRS 15 by one year. Early adoption is
permitted. The Group is currently assessing the impact of IFRS 15.
162 BGEO Group PLC Annual Report 2015
Financial statements 3. Summary of Significant Accounting Policies continued
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16
results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which finance leases are
currently accounted for under IAS 17 Leases. Lessees will recognise a “right of use” asset and a corresponding financial liability on the
balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. Lessor
accounting remains substantially the same as in IAS 17. The Group is currently assessing the impact of IFRS 16 on its financial statements.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from
operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a
result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited
circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods beginning on or after
1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group given that the
Group has not used a revenue-based method to depreciate its non-current assets.
Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants
The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the
amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of IAS 41. Instead, IAS 16 will
apply. After initial recognition, bearer plants will be measured under IAS 16 at accumulated cost (before maturity) and using either the
cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in
the scope of IAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance will apply. The amendments are retrospectively effective for annual periods
beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have material impact on
the Group.
Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or
contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets
that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or
loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of
unrelated investors’ interests in the associate or joint venture. These amendments must be applied prospectively and are not expected
to have any impact on the Group.
Annual Improvements 2012-2014 Cycle
These improvements are effective for annual periods beginning on or after 1 January 2016. They include:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Assets (or disposal groups) are generally disposed of either through sale or distribution to owners. The amendment clarifies that changing
from one of these disposal methods to the other would not be considered a new plan of disposal, rather it is a continuation of the original
plan. There is, therefore, no interruption of the application of the requirements in IFRS 5. This amendment must be applied prospectively.
IFRS 7 Financial Instruments: Disclosures
(i) Servicing contracts
The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity
must assess the nature of the fee and the arrangement against the guidance for continuing involvement in IFRS 7 in order to assess
whether the disclosures are required. The assessment of which servicing contracts constitute continuing involvement must be done
retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in
which the entity first applies the amendments.
(ii) Applicability of the amendments to IFRS 7 to condensed interim financial statements
The amendment clarifies that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such
disclosures provide a significant update to the information reported in the most recent annual report. This amendment must be applied
retrospectively.
IAS 19 Employee Benefits
The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is
denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in
that currency, government bond rates must be used. This amendment must be applied prospectively.
IAS 34 Interim Financial Reporting
The amendment clarifies that the required interim disclosures must either be in the interim financial statements or incorporated by
cross-reference between the interim financial statements and wherever they are included within the interim financial report (e.g., in the
management commentary or risk report). The other information within the interim financial report must be available to users on the same
terms as the interim financial statements and at the same time. This amendment must be applied retrospectively. These amendments are
not expected to have any impact on the Group.
Annual Report 2015 BGEO Group PLC 163
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
3. Summary of Significant Accounting Policies continued
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The
amendments clarify:
• The materiality requirements in IAS 1
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated
• That entities have flexibility as to the order in which they present the notes to financial statements
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a
single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial
position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods beginning on or after
1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group.
Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception
The amendments address issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS
10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an
investment entity, when the investment entity measures all of its subsidiaries at fair value.
Furthermore, the amendments to IFRS 10 clarify that only a subsidiary of an investment entity that is not an investment entity itself and
that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair
value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by
the investment entity associate or joint venture to its interests in subsidiaries.
These amendments must be applied retrospectively and are effective for annual periods beginning on or after 1 January 2016, with early
adoption permitted. These amendments are not expected to have any impact on the Group.
4. Significant Accounting Judgements and Estimates
In the process of applying the Group’s accounting policies, the board of directors and management use their judgment and make
estimates in determining the amounts recognised in the consolidated financial statements. The most significant judgments and estimates
are as follows:
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be
derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The
input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in
establishing fair values (Note 30).
Measurement of fair value of investment properties and property and equipment
The fair value of investment properties and office buildings and service centres included in property and equipment is determined by
independent professionally qualified appraisers. Fair value is determined using a combination of the internal capitalization method (also
known as discounted future cash flow method) and the sales comparison method.
The Group performs valuation of its investment properties, and office buildings and service centres once in every three years, unless
there is a sign of material change in fair values on the market. Last valuation was performed as at 31 December 2015 by Colliers
International Georgia. Results of this valuation are presented in notes 11 and 12, while valuation inputs and techniques are presented in
note 30.
The estimates described above are subject to change as new transaction data and market evidence become available.
Allowance for impairment of loans and finance lease receivables
The Group regularly reviews its loans and finance lease receivables to assess impairment. The Group uses its judgment to estimate the
amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available sources of historical data
relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on the observable data indicating that
there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate
with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk
characteristics and objective evidence of impairment similar to those in the group of loans and finance lease receivables. The Group uses
its judgment to adjust observable data for a group of loans and finance lease receivables to reflect current circumstances.
The Group considers the fair value of collateral when estimating the amount of impairment loss for collateralised loans and finance
lease receivables. Management monitors market value of collateral on a regular basis. Management uses its experienced judgment or
independent opinion to adjust the fair value to reflect current circumstances. The amount and type of collateral required depends on the
assessment of credit risk of the counterparty.
Information about allowance for impairment of loans and finance lease receivables is presented in Note 10.
164 BGEO Group PLC Annual Report 2015
Financial statements 5. Business Combinations
Acquisition of JSC PrivatBank
On 9 January 2015, the Bank acquired 100% of shares in JSC PrivatBank (“Acquiree”), a commercial Bank operating in Georgia, from
PJSC CB PrivatBank (Ukraine) and its subsidiary for a total consideration of GEL 94,181.
The fair values of identifiable assets and liabilities of the acquiree as at the date of acquisition was:
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables1
Insurance premiums receivable
Investment properties (note 13)
Property and equipment
Intangible assets
Income tax assets
Other assets
Client deposits and notes
Amounts due to credit institutions
Accruals and deferred income
Other liabilities
Total identifiable net assets
Goodwill arising on business combination
Consideration given2
The net cash inflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash inflow
Fair value
recognised on
acquisition
107,553
26,226
297,387
2,069
705
20,301
148
1,785
14,515
470,689
340,284
38,620
1,991
6,668
387,563
83,126
11,055
94,181
2015
(84,933)
107,553
22,620
The Group decided to increase its presence in retail segment of Georgia’s banking sector, by acquiring JSC PrivatBank, thus
consolidating a leading position in the growing retail segment of the Georgian commercial banking sector. Management considers that
the deal will have a positive impact on the value of the Group.
GEL 32,130 and GEL 3,546 of revenue and profit, respectively, comes from the Acquiree during five months ended 31 May 2015. Had the
acquisition occurred as of the beginning of the reporting period, revenue and profit of the combined entity for the current reporting period
would not have been materially different. Fair value of any identified intangible assets was assessed as immaterial and thus no such
assets were recognised by the Group. In May 2015, the Bank completed the integration of the Acquiree. The goodwill of GEL 11,055 was
added to the Retail Banking cash generating unit, as JSC PrivatBank operations became an indistinguishable part of our Retail Banking
business.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the
positive synergy which is expected to be brought into the Group’s operations. The whole amount of goodwill recognised is expected to
be tax deductible.
1 Gross amount of loans to customers and finance lease receivables was GEL 335,008 of which GEL 37,621 is not expected to be collected;
2 Consideration comprised of GEL 94,181, which consists of GEL 84,933 cash payment and GEL 9,248 fair value of a holdback amount.
Acquisition of Healthcare Subsidiaries
During year ended 31 December 2015 JSC Medical Corporation EVEX (“Acquirer”), a wholly owned subsidiary of the Group, made
following acquisitions:
• On 5 August 2015, 50% of the shares of LLC GNCo, a healthcare company operating in Georgia, was acquired from individual
shareholders with effective management and operational control over the company;
• On 30 June 2015, 95% of the shares of LLC Deka, a healthcare company operating in Georgia, was acquired from individual
shareholders;
• On 1 March 2015, 100% share in LLC Tbilisi Emergency Center, a healthcare company operating in Georgia, was acquired from
individual shareholders.
Annual Report 2015 BGEO Group PLC 165
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
5. Business Combinations continued
The provisional fair values of aggregate identifiable assets and liabilities of the acquiree’s as at the date of acquisition were:
Cash and cash equivalents
Receivables from healthcare services1
Property and equipment
Other assets
Amounts due to credit Institution
Accounts payable
Accruals for employee compensation
Deferred income tax liabilities
Other liabilities
Total identifiable net assets
Non-controlling interests
Gain on bargain purchase2
Goodwill arising on business combination
Consideration given3
The net cash inflow on acquisition was as follows:
Cash paid
Cash acquired with the subsidiary
Net cash outflow
Provisional fair
value recognised
on acquisition
541
8,320
125,313
4,419
138,593
15,142
11,123
5,558
12,461
2,631
46,915
91,678
29,786
5,361
12,296
68,827
2015
(47,628)
541
(47,087)
The Group decided to increase its presence and investment in the Tbilisi healthcare market by acquiring LLC GNCo, LLC Deka, LLC
Tbilisi Emergency Center and. Management considers that the deal will have a positive impact on the value of the Group.
GEL 19,010 and GEL 2,634 of revenue and profit, respectively come from the acquirees after their respective acquisition dates. If the
combination had taken place at the beginning of the year, the Group would have recorded GEL 888,415 and GEL 314,429 of revenue and
profit respectively.
The primary factor that contributed to the cost of business combination that resulted in the recognition of goodwill on acquisition is the
positive synergy that is expected to be brought into the Group’s operations. The goodwill of GEL 12,296 was added to the Healthcare
cash generating unit. The whole amount of goodwill recognised is expected to be tax deductible. The Group has elected to measure the
non-controlling interests in LLC GNCo and LLC Deka at the non-controlling interests’ proportionate share of their respective identifiable
net assets.
1 Gross amount of receivables from healthcare services was GEL 18,271 of which GEL 9,951 is not expected to be collected;
2 Prior to acquisition, owners of LLC Deka encountered certain financial difficulties which resulted in a lower acquisition cost and a gain from a bargain purchase in the
amount of GEL 5,361, recorded in net non-recurring items;
3 Consideration comprised GEL 68,827 which consists of cash payment of GEL 47,628 and a holdback amount with a fair value of GEL 21,199.
166 BGEO Group PLC Annual Report 2015
Financial statements
6. Segment Information
Following the updated strategy of the Group to operate as a Georgia-focused banking group with an investment arm, the management
also reorganised its segment information accordingly. The previously presented Corporate Banking, Retail Banking, Investment
Management and Corporate Centre of the Strategic group, P&C of the Synergistic group and BNB of the Non-core group was
reorganised into the Banking Business, while GHG and Affordable Housing of the Synergistic group and Liberty Consumer and Other of
the Non-core group were reorganised into the Investment Business.
For management purposes, the Group is organised into the following operating segments based on products and services as follows:
Banking Business
– The Group’s Banking Business segments, dedicated to delivery and enhancement of banking and related financial services:
RB
CB
IM
P&C
BNB
– Retail Banking (excluding Retail Banking of BNB) – principally providing consumer loans, mortgage loans, overdrafts, credit card
facilities and other credit facilities as well as funds transfer and settlement services, and handling customers’ deposits for both,
individuals as well as legal entities, encompassing mass affluent segment, retail mass markets, small & medium enterprises and micro
businesses;
– Corporate Banking (excluding Corporate Banking of BNB) – principally providing loans and other credit facilities to large legal entities,
larger than SME and Micro, finance lease facilities provided by Georgian Leasing Company LLC, as well as providing funds transfers
and settlement services, trade finance services and documentary operations support, handling saving and term deposits for corporate
and institutional customers;
– Investment Management – principally providing private banking services to resident and non-resident wealthy individuals as well as their
direct family members by ensuring individually tailored approach and exclusivity in rendering common banking services such as fund
transfers, currency exchange or settlement operations, or holding their savings and term deposits; Investment Management involves
providing wealth and asset management services to the same individuals through differing investment opportunities and specifically
designed investment products. It also encompasses corporate advisory, private equity and brokerage services;
– Property and Casualty Insurance – principally providing wide-scale property and casualty insurance services to corporate clients and
insured individuals;
– Comprising JSC Belarusky Narodny Bank, principally providing retail and corporate banking services in Belarus.
Investment Business
– the Group’s investment arm segments, with disciplined development paths and exit strategies:
GHG
m2
– Georgia Healthcare Group – principally providing wide-scale healthcare and health insurance services to clients and insured individuals;
– Comprising the Group’s real estate subsidiaries, principally developing and selling affordable residential apartments and also, holding
investment properties repossessed by the Bank from defaulted borrowers and managing those properties.
Management monitors the operating results of its segments separately for the purpose of making decisions about resource allocation
and performance assessment. Segment performance, as explained in the table below, is measured in the same manner as profit or loss
in the consolidated financial statements.
Transactions between operating segments are on an arm’s length basis in a manner as with transactions with third parties.
The Group’s operations are primarily concentrated in Georgia, except for BNB, which operates in Belarus.
No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue in
2015, 2014 or 2013.
Annual Report 2015 BGEO Group PLC 167
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
6. Segment Information continued
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
and for the year ended 31 December 2015:
Banking Business
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Other Banking
Business
322,878
78,218
17,109
9,159
–
–
–
–
134,883
31,142
38,136
9,178
–
–
–
–
20,941
3,193
3,627
1,178
–
–
–
–
29,307
9,198
17,036
2,199
–
–
–
–
2,330
310
993
994
21,179
–
–
–
2,344
(440)
25
4
–
–
–
–
Banking
Business
Eliminations
244
(32)
–
(2,875)
(1,132)
–
–
–
Banking
Business
512,927
121,589
76,926
19,837
20,047
–
–
–
427,364
213,339
28,939
57,740
25,806
1,933
(3,795)
751,326
96,831
21,633
(33)
128,381
(18,147)
861,560
(172,297)
(51,888)
(11,470)
(19,731)
(11,199)
(5,069)
3,795
(267,859)
(37,633)
(5,860)
(7,402)
33
(50,862)
3,989
(314,732)
Operating income (expense) before cost of credit
risk/EBITDA
255,067
161,451
17,469
38,009
14,607
(3,136)
Investment Business related income statement items
Operating income before cost of credit risk
Cost of credit risk
–
255,067
(75,406)
–
161,451
(55,678)
–
17,469
(480)
–
38,009
(19,270)
–
14,607
(710)
–
(3,136)
27
Net operating income (loss) before non-recurring
items
179,661
105,773
16,989
18,739
13,897
(3,109)
Net non-recurring (expense/loss) income/gain
(8,947)
(4,539)
(337)
1,478
(701)
–
170,714
101,234
16,652
20,217
13,196
(3,109)
(23,992)
(14,928)
(2,328)
(2,754)
(731)
86
146,722
86,306
14,324
17,463
12,465
(3,023)
–
–
–
–
–
–
–
–
–
483,467
–
483,467
(151,517)
331,950
(13,046)
318,904
(44,647)
274,257
Investment Business
Other
Investment
Business
Investment
Business
Eliminations
GHG
M2
–
–
–
–
12,149
80,938
557
3,187
–
–
–
–
–
–
14,131
7,502
59,198
15,773
(30,791)
28,407
(3,449)
(2,905)
12,868
–
–
–
–
–
–
–
–
9,950
9,950
2,548
2,017
4,565
(411)
24,958
12,868
4,154
(1,676)
(137)
282
23,282
12,731
4,436
9
(1,974)
(1,796)
23,291
10,757
2,640
Investment
Inter-Business
Business
Eliminations
Group
Total
–
–
–
–
12,116
80,938
14,688
20,639
(11,537)
(3,183)
501,390
118,406
(1,309)
(2,256)
138
76,926
18,528
29,907
80,938
14,688
20,777
(33)
77,519
(14,158)
546,828
14,158
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(31,679)
45,840
(3,860)
41,980
(1,531)
40,449
(3,761)
36,688
91,886
3,565
95,451
(14,225)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(17,521)
529,307
(155,377)
373,930
(14,577)
359,353
(48,408)
310,945
144,567
12,923
157,490
(48,424)
4,612,774
3,117,808
3,937,985
3,282,133
114,406
1,065,568
475,483
397,970
102,886
66,630
2,011
146
(74,108)
(74,109)
9,171,437
7,856,146
758,966
286,941
275,676
167,889
213,638
35,103
(320)
(320)
1,247,960
(303,658)
10,115,739
489,613
(303,658)
8,042,101
43,990
6,568
50,558
(27,714)
5,689
870
6,559
(4,126)
1,181
293
1,474
(486)
1,193
598
1,791
(1,038)
442
958
1,400
(834)
186
71
257
(1)
–
–
–
–
52,681
9,358
62,039
(34,199)
89,653
3,532
93,185
(12,666)
701
21
722
(191)
1,532
12
1,544
(1,368)
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
168 BGEO Group PLC Annual Report 2015
Financial statements 6. Segment Information continued
and for the year ended 31 December 2015:
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
Banking Business
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Business
Eliminations
Other Banking
322,878
134,883
20,941
78,218
17,109
9,159
31,142
38,136
9,178
3,193
3,627
1,178
29,307
9,198
17,036
2,199
2,330
310
993
994
21,179
2,344
(440)
25
4
Banking
Business
244
(32)
(2,875)
(1,132)
Banking
Business
512,927
121,589
76,926
19,837
20,047
risk/EBITDA
255,067
161,451
17,469
38,009
14,607
(3,136)
483,467
Net non-recurring (expense/loss) income/gain
(8,947)
(4,539)
(337)
1,478
(701)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
255,067
(75,406)
161,451
(55,678)
17,469
(480)
38,009
(19,270)
14,607
(710)
(3,136)
27
179,661
105,773
16,989
18,739
13,897
(3,109)
170,714
101,234
16,652
20,217
13,196
(3,109)
(23,992)
(14,928)
(2,328)
(2,754)
(731)
86
146,722
86,306
14,324
17,463
12,465
(3,023)
–
–
–
–
–
–
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Operating income (expense) before cost of credit
Investment Business related income statement items
Operating income before cost of credit risk
Cost of credit risk
items
Net operating income (loss) before non-recurring
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
483,467
(151,517)
331,950
(13,046)
318,904
(44,647)
274,257
52,681
9,358
62,039
(34,199)
427,364
213,339
28,939
57,740
25,806
1,933
(3,795)
751,326
96,831
21,633
–
–
–
–
12,149
80,938
557
3,187
–
–
–
–
–
–
14,131
7,502
–
–
–
–
–
–
–
9,950
9,950
Investment
Business
Inter-Business
Eliminations
Group
Total
–
–
–
–
12,116
80,938
14,688
20,639
(11,537)
(3,183)
–
(1,309)
(2,256)
–
–
138
501,390
118,406
76,926
18,528
29,907
80,938
14,688
20,777
–
–
–
–
(33)
–
–
–
(33)
128,381
(18,147)
861,560
Investment Business
Other
Investment
Business
Investment
Business
Eliminations
GHG
M2
(172,297)
(51,888)
(11,470)
(19,731)
(11,199)
(5,069)
3,795
(267,859)
(37,633)
(5,860)
(7,402)
33
(50,862)
3,989
(314,732)
59,198
15,773
(30,791)
28,407
(3,449)
(2,905)
12,868
–
2,548
2,017
4,565
(411)
24,958
12,868
4,154
(1,676)
(137)
282
23,282
12,731
4,436
9
(1,974)
(1,796)
23,291
10,757
2,640
–
–
–
–
–
–
–
–
–
77,519
(14,158)
546,828
(31,679)
45,840
(3,860)
41,980
(1,531)
40,449
(3,761)
36,688
14,158
–
–
(17,521)
529,307
(155,377)
–
–
–
–
–
373,930
(14,577)
359,353
(48,408)
310,945
4,612,774
3,937,985
114,406
3,117,808
3,282,133
1,065,568
475,483
397,970
102,886
66,630
2,011
146
(74,108)
(74,109)
9,171,437
7,856,146
758,966
286,941
275,676
167,889
213,638
35,103
(320)
(320)
1,247,960
489,613
(303,658)
(303,658)
10,115,739
8,042,101
43,990
6,568
50,558
(27,714)
5,689
870
6,559
(4,126)
1,181
293
1,474
(486)
1,193
598
1,791
(1,038)
442
958
1,400
(834)
186
71
257
(1)
89,653
3,532
93,185
(12,666)
701
21
722
(191)
1,532
12
1,544
(1,368)
–
–
–
–
91,886
3,565
95,451
(14,225)
–
–
–
–
144,567
12,923
157,490
(48,424)
Annual Report 2015 BGEO Group PLC 169
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
6. Segment Information continued
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
and for the year ended 31 December 2014 (reclassified):
Banking Business
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Other Banking
Business
215,796
58,858
18,622
3,563
–
–
–
–
103,158
24,811
24,848
6,996
–
–
–
–
14,613
8,760
1,432
789
–
–
–
–
22,410
9,443
9,932
504
–
–
–
–
506
312
(2,085)
516
17,752
–
–
–
317
(449)
3
36
–
–
–
–
Banking
Business
Eliminations
471
110
–
(2,514)
(1,330)
–
–
–
Banking
Business
357,271
101,845
52,752
9,890
16,422
–
–
–
296,839
159,813
25,594
42,289
17,001
(93)
(3,263)
538,180
68,847
13,752
12,321
94,920
(11,858)
621,242
(127,627)
(48,985)
(11,810)
(18,390)
(9,403)
(4,812)
3,263
(217,764)
(30,077)
(5,136)
(6,932)
(42,145)
2,878
(257,031)
Operating income (expense) before cost of credit
risk/EBITDA
169,212
110,828
13,784
23,899
Investment Business related income statement items
Operating income before cost of credit risk
Cost of credit risk
–
169,212
(9,241)
–
110,828
(41,750)
–
13,784
47
–
23,899
(4,187)
7,598
–
7,598
(601)
(4,905)
–
(4,905)
–
Net operating income (loss) before non-recurring
items
159,971
69,078
13,831
19,712
6,997
(4,905)
Net non-recurring (expense/loss) income/gain
(5,796)
(2,672)
(296)
(3,073)
–
–
154,175
66,406
13,535
16,639
6,997
(4,905)
(19,297)
(9,493)
(2,029)
(962)
(1,083)
521
134,878
56,913
11,506
15,677
5,914
(4,384)
–
–
–
–
–
–
–
–
–
320,416
–
320,416
(55,732)
264,684
(11,837)
252,847
(32,343)
220,504
(22,041)
16,729
(2,872)
(1,752)
6,864
(66)
(2,769)
2,620
(350)
13,857
6,798
2,270
505
18
14,362
6,816
(1,345)
(1,022)
13,017
5,794
297
2,567
(1,115)
1,452
Investment Business
Other
Investment
Business
Investment
Business
Eliminations
GHG
M2
–
–
–
–
–
14,987
53,483
–
–
–
–
–
–
–
–
–
–
–
–
13,645
1
377
107
12,320
Investment
Inter-Business
Business
Eliminations
Group
Total
–
–
–
–
14,987
53,483
13,646
12,804
(7,313)
(2,053)
(620)
(1,979)
–
–
(80)
187
349,958
99,792
52,752
9,270
29,430
53,483
13,566
12,991
38,770
8,616
5,389
52,775
(8,980)
364,211
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(26,562)
26,213
(3,288)
22,925
820
23,745
(3,482)
20,263
40,632
1,576
42,208
(9,164)
8,980
(17,582)
346,629
(59,020)
287,609
(11,017)
276,592
(35,825)
240,767
70,586
9,873
80,459
(34,805)
–
–
–
–
–
–
–
–
–
–
–
3,269,069
2,316,688
3,315,377
2,412,671
40,888
842,874
403,764
326,515
86,750
58,695
73,120
748
(144,966)
(144,966)
7,044,002
5,813,225
409,834
237,565
193,119
112,407
172,785
22,449
(231)
(230)
775,507
372,191
(240,364)
7,579,145
(240,364)
5,945,052
19,540
6,503
26,043
(19,525)
2,629
1,121
3,750
(3,812)
3,894
130
4,024
(413)
2,101
304
2,405
(1,318)
1,477
232
1,709
(570)
313
7
320
(3)
–
–
–
–
29,954
8,297
38,251
(25,641)
38,503
1,519
40,022
(7,714)
368
27
395
(332)
1,761
30
1,791
(1,118)
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
170 BGEO Group PLC Annual Report 2015
Financial statements 6. Segment Information continued
and for the year ended 31 December 2014 (reclassified):
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
Banking Business
Investment Business
296,839
159,813
25,594
42,289
17,001
(93)
(3,263)
538,180
68,847
13,752
12,321
(127,627)
(48,985)
(11,810)
(18,390)
(9,403)
(4,812)
3,263
(217,764)
(30,077)
(5,136)
(6,932)
GHG
M2
–
–
–
–
14,987
53,483
–
377
–
–
–
–
–
–
13,645
107
Other
Investment
Business
–
–
–
–
–
–
1
12,320
38,770
8,616
5,389
(22,041)
16,729
(2,872)
(1,752)
6,864
(66)
(2,769)
2,620
(350)
13,857
6,798
2,270
505
18
14,362
6,816
(1,345)
(1,022)
13,017
5,794
297
2,567
(1,115)
1,452
Investment
Business
Eliminations
Investment
Business
Inter-Business
Eliminations
Group
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,987
53,483
13,646
12,804
(7,313)
(2,053)
–
(620)
(1,979)
–
(80)
187
349,958
99,792
52,752
9,270
29,430
53,483
13,566
12,991
94,920
(11,858)
621,242
(42,145)
2,878
(257,031)
52,775
(8,980)
364,211
(26,562)
26,213
(3,288)
22,925
820
23,745
(3,482)
20,263
8,980
–
–
(17,582)
346,629
(59,020)
–
–
–
–
–
287,609
(11,017)
276,592
(35,825)
240,767
3,269,069
3,315,377
2,316,688
2,412,671
40,888
842,874
403,764
326,515
86,750
58,695
73,120
(144,966)
7,044,002
748
(144,966)
5,813,225
409,834
237,565
193,119
112,407
172,785
22,449
(231)
(230)
775,507
372,191
(240,364)
(240,364)
7,579,145
5,945,052
19,540
6,503
26,043
(19,525)
2,629
1,121
3,750
(3,812)
3,894
130
4,024
(413)
2,101
304
2,405
(1,318)
1,477
232
1,709
(570)
313
7
320
(3)
38,503
1,519
40,022
(7,714)
368
27
395
(332)
1,761
30
1,791
(1,118)
–
–
–
–
40,632
1,576
42,208
(9,164)
–
–
–
–
70,586
9,873
80,459
(34,805)
risk/EBITDA
169,212
110,828
13,784
23,899
7,598
(4,905)
320,416
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Operating income (expense) before cost of credit
Investment Business related income statement items
Operating income before cost of credit risk
Cost of credit risk
items
Net operating income (loss) before non-recurring
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Business
Eliminations
Other Banking
215,796
103,158
14,613
22,410
58,858
18,622
3,563
24,811
24,848
6,996
8,760
1,432
789
9,443
9,932
504
506
312
(2,085)
516
17,752
317
(449)
3
36
Banking
Business
471
110
(2,514)
(1,330)
Banking
Business
357,271
101,845
52,752
9,890
16,422
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
169,212
(9,241)
110,828
(41,750)
13,784
47
23,899
(4,187)
7,598
(601)
(4,905)
159,971
69,078
13,831
19,712
6,997
(4,905)
154,175
66,406
13,535
16,639
6,997
(4,905)
(19,297)
(9,493)
(2,029)
(962)
(1,083)
521
134,878
56,913
11,506
15,677
5,914
(4,384)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
320,416
(55,732)
264,684
(11,837)
252,847
(32,343)
220,504
29,954
8,297
38,251
(25,641)
Net non-recurring (expense/loss) income/gain
(5,796)
(2,672)
(296)
(3,073)
Annual Report 2015 BGEO Group PLC 171
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
6. Segment Information continued
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
and for the year ended 31 December 2013 (reclassified):
Banking Business
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Other Banking
Business
192,796
53,010
16,274
3,838
–
–
–
–
101,096
27,318
24,723
5,975
–
–
–
–
9,365
1,298
1,382
834
–
–
–
–
18,565
6,350
5,875
(128)
–
–
–
–
(177)
248
101
545
20,749
–
–
–
265,918
159,112
12,879
30,662
21,466
(91)
(195)
–
99
–
–
–
–
(186)
Banking
Business
Eliminations
583
408
–
(1,761)
(960)
–
–
–
Banking
Business
322,138
88,437
48,355
9,402
19,789
–
–
–
(1,730)
488,120
56,003
10,478
11,216
77,674
(7,593)
558,201
(116,768)
(43,654)
(8,917)
(15,200)
(7,858)
(3,751)
1,730
(194,417)
(21,677)
(2,818)
(5,954)
(30,426)
2,286
(222,557)
Operating income (expense) before cost of credit
risk/EBITDA
149,154
115,458
3,962
15,462
13,608
(3,937)
Investment Business related income statement items
Operating income before cost of credit risk
Cost of credit risk
–
149,154
(28,931)
–
115,458
(31,112)
–
3,962
10
–
15,462
(563)
–
13,608
(273)
–
(3,937)
–
Net operating income (loss) before non-recurring
items
120,223
84,346
3,972
14,899
13,335
(3,937)
Net non-recurring (expense/loss) income/gain
(2,201)
(2,690)
(2,508)
(399)
–
(416)
118,022
81,656
1,464
14,500
13,335
(4,353)
(14,466)
(11,223)
(1,351)
(3,514)
(2,100)
555
103,552
70,433
113
10,986
11,235
(3,798)
–
–
–
–
–
–
–
–
–
293,703
–
293,703
(60,869)
232,834
(8,214)
224,620
(32,099)
192,521
34,326
(20,230)
14,096
(747)
7,660
1,111
8,771
(185)
5,262
(1,936)
3,326
–
13,349
8,586
3,326
–
(823)
(3,802)
13,349
(2,049)
11,300
7,763
(1,142)
6,621
(476)
(623)
(1,099)
Investment Business
Other
Investment
Business
Investment
Business
Eliminations
GHG
M2
–
–
–
–
27,248
27,529
502
724
–
–
–
–
–
–
–
–
–
–
–
–
8
9,739
739
11,208
Investment
Inter-Business
Business
Eliminations
Group
Total
–
–
–
–
27,225
27,529
10,249
12,671
(4,100)
(1,437)
(514)
(1,681)
139
318,038
87,000
48,355
8,888
45,333
27,529
10,249
12,809
47,248
(5,307)
335,644
5,307
(23)
(23)
23
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(21,055)
26,193
(932)
25,261
(4,625)
20,636
(3,814)
16,822
37,021
890
37,911
(6,963)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(15,748)
319,896
(61,801)
258,095
(12,839)
245,256
(35,913)
209,343
62,202
8,390
70,592
(31,743)
2,709,786
1,830,958
3,083,035
2,344,946
28,846
684,503
326,465
260,980
72,402
50,447
15,944
469
(78,741)
(78,741)
6,157,737
5,093,562
274,049
176,118
115,220
59,021
50,116
27,367
(215)
(215)
439,170
262,291
(75,938)
6,520,969
(75,938)
5,279,915
20,921
5,666
26,587
(18,703)
2,853
972
3,825
(3,459)
302
78
380
(355)
466
249
715
(1,628)
503
522
1,025
(573)
136
13
149
(62)
–
–
–
–
25,181
7,500
32,681
(24,780)
35,136
832
35,968
(5,853)
463
47
510
(75)
1,422
11
1,433
(1,035)
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
172 BGEO Group PLC Annual Report 2015
Financial statements 6. Segment Information continued
and for the year ended 31 December 2013 (reclassified):
The following tables present income statement and certain asset and liability information regarding the Group’s operating segments as at
Banking Business
Investment Business
265,918
159,112
12,879
30,662
21,466
(186)
(1,730)
488,120
56,003
10,478
11,216
GHG
M2
–
–
–
–
27,248
27,529
502
724
–
–
–
–
–
–
9,739
739
Other
Investment
Business
–
–
–
–
–
–
8
11,208
Investment
Business
Eliminations
Investment
Business
Inter-Business
Eliminations
Group
Total
–
–
–
–
(23)
–
–
–
(23)
–
–
–
–
27,225
27,529
10,249
12,671
(4,100)
(1,437)
–
(514)
(1,681)
–
–
139
318,038
87,000
48,355
8,888
45,333
27,529
10,249
12,809
77,674
(7,593)
558,201
(116,768)
(43,654)
(8,917)
(15,200)
(7,858)
(3,751)
1,730
(194,417)
(21,677)
(2,818)
(5,954)
23
(30,426)
2,286
(222,557)
34,326
(20,230)
14,096
(747)
7,660
1,111
8,771
(185)
5,262
(1,936)
3,326
–
13,349
8,586
3,326
–
(823)
(3,802)
13,349
(2,049)
11,300
7,763
(1,142)
6,621
(476)
(623)
(1,099)
–
–
–
–
–
–
–
–
–
47,248
(5,307)
335,644
(21,055)
26,193
(932)
25,261
(4,625)
20,636
(3,814)
16,822
5,307
–
–
(15,748)
319,896
(61,801)
–
–
–
–
–
258,095
(12,839)
245,256
(35,913)
209,343
2,709,786
3,083,035
28,846
1,830,958
2,344,946
684,503
326,465
260,980
72,402
50,447
15,944
(78,741)
6,157,737
469
(78,741)
5,093,562
274,049
176,118
115,220
59,021
50,116
27,367
(215)
(215)
439,170
262,291
(75,938)
(75,938)
6,520,969
5,279,915
20,921
5,666
26,587
(18,703)
2,853
972
3,825
(3,459)
302
78
380
(355)
466
249
715
(1,628)
503
522
1,025
(573)
136
13
149
(62)
35,136
832
35,968
(5,853)
463
47
510
(75)
1,422
11
1,433
(1,035)
–
–
–
–
37,021
890
37,911
(6,963)
–
–
–
–
62,202
8,390
70,592
(31,743)
Retail
banking
Corporate
banking
Investment
management
BNB
P&C
Business
Eliminations
Other Banking
192,796
101,096
53,010
16,274
3,838
27,318
24,723
5,975
9,365
1,298
1,382
834
18,565
6,350
5,875
(128)
(177)
248
101
545
20,749
–
–
–
–
–
–
–
–
Banking
Business
583
408
(1,761)
(960)
–
–
–
–
(91)
(195)
99
–
–
–
–
–
Net banking interest income
Net fee and commission income
Net banking foreign currency gain (loss)
Net other banking income
Gross insurance profit
Gross healthcare profit
Gross real estate profit
Gross other investment profit
Revenue
Operating expenses
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Operating income (expense) before cost of credit
risk/EBITDA
149,154
115,458
3,962
15,462
13,608
(3,937)
Investment Business related income statement items
–
Operating income before cost of credit risk
149,154
(28,931)
115,458
(31,112)
15,462
(563)
13,608
(273)
–
3,962
10
(3,937)
–
–
Cost of credit risk
items
Net operating income (loss) before non-recurring
Net non-recurring (expense/loss) income/gain
(2,201)
(2,690)
(2,508)
(399)
(416)
120,223
84,346
3,972
14,899
13,335
(3,937)
118,022
81,656
1,464
14,500
13,335
(4,353)
(14,466)
(11,223)
(1,351)
(3,514)
(2,100)
555
103,552
70,433
113
10,986
11,235
(3,798)
Profit before income tax
Income tax (expense) benefit
Profit for the year
Assets and liabilities
Total assets
Total liabilities
Other segment information
Property and equipment
Intangible assets
Capital expenditure
Depreciation & amortization
Banking
Business
322,138
88,437
48,355
9,402
19,789
–
–
–
293,703
–
293,703
(60,869)
232,834
(8,214)
224,620
(32,099)
192,521
25,181
7,500
32,681
(24,780)
–
–
–
–
–
–
–
–
–
–
–
–
–
Annual Report 2015 BGEO Group PLC 173
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
7. Cash and Cash Equivalents
Cash on hand
Current accounts with central banks, excluding obligatory reserves
Current accounts with other credit institutions
Time deposits with credit institutions with maturity of up to 90 days
Cash and cash equivalents
2015
2014
2013
442,293
152,455
475,779
362,407
393,315
152,647
138,243
25,939
384,410
132,219
357,447
179,595
1,432,934
710,144
1,053,671
Cash and cash equivalents held by BGEO of GEL 32,435 (2014: GEL 88,005, 2013: GEL 4,628) is represented by placements on current
accounts with Georgian and the Organisation for Economic Co-operation and Development (“OECD”) banks.
As at 31 December 2015, GEL 662,296 (2014: GEL 136,559, 2013: GEL 485,740) was placed on current and time deposit accounts
with internationally recognised OECD banks and central banks that are the counterparties of the Group in performing international
settlements. The Group earned up to 0.59% interest per annum on these deposits (2014: up to 1.30%, 2013: up to 6.92%). Management
does not expect any losses from non-performance by the counterparties holding cash and cash equivalents, and there are no material
differences between their book and fair values.
8. Amounts Due from Credit Institutions
Obligatory reserves with central banks
Time deposits with maturity of more than 90 days
Deposits pledged as security for open commitments
Inter-bank loan receivables
Amounts due from credit institutions
2015
2014
2013
620,287
12,717
96,405
1,956
382,963
33,832
–
1,486
330,319
9,623
1,761
5,558
731,365
418,281
347,261
Obligatory reserves with central banks represent amounts deposited with the NBG and National Bank of the Republic of Belarus (the
“NBRB”). Credit institutions are required to maintain cash deposit (obligatory reserve) with the NBG and with the NBRB, the amount of
which depends on the level of funds attracted by the credit institution. The Group’s ability to withdraw these deposits is restricted by the
statutory legislature. The Group earned nil interest on obligatory reserves with NBG and NBRB for the years ended 31 December 2015,
31 December 2014 and 31 December 2013.
As at 31 December 2015 inter-bank loan receivables include GEL 1,956 (2014: GEL 1,486, 2013: GEL 4,685) placed with non-OECD
banks.
9. Investment Securities
Georgian ministry of Finance treasury bonds*
Georgian ministry of Finance treasury bills**
Certificates of deposit of central banks***
Other debt instruments****
Corporate shares
Investment securities
2015
2014
2013
575,591
165,545
76,807
84,476
1,448
459,400
169,796
92,547
46,557
1,412
391,486
63,606
59,265
–
5,266
903,867
769,712
519,623
GEL 229,800 was pledged for short-term loans from the NBG (2014: GEL 341,681, 2013: GEL 200,065).
*
** GEL 3,805 was pledged for short-term loans from the NBG (2014: GEL 60,889, 2013: GEL 19,773).
*** GEL 2,966 was pledged for short-term loans from the NBG (2014: Nil, 2013: GEL 30,328).
**** GEL 79,187 was pledged for short-term loans from the NBG (2014: GEL 25,069, 2013: Nil).
Other debt instruments as at 31 December 2015 mainly comprises Georgian Lari denominated bonds issued by European Bank for
Reconstruction and Development of GEL 50,666 (2014: GEL 25,069, 2013: Nil), and Georgian Lari denominated bonds issued by the
International Finance Corporation of GEL 28,460 (2014: Nil, 2013: Nil).
174 BGEO Group PLC Annual Report 2015
Financial statements
10. Loans to Customers and Finance Lease Receivables
Commercial loans
Consumer loans
Micro and SME loans
Residential mortgage loans
Gold – pawn loans
Loans to customers, gross
Less – Allowance for loan impairment
Loans to customers, net
Finance Lease Receivables, gross
Less – Allowance for finance lease receivables impairment
Finance Lease Receivables, net
Loans to customers and finance lease receivables, net
Allowance for loan impairment
Movements of the allowance for impairment of loans to customers by class are as follows:
2015
2014
2013
2,397,781
1,165,107
1,041,929
814,344
61,140
2,181,427
801,474
772,283
604,143
53,785
1,854,622
660,220
566,273
447,063
61,871
5,480,301
(198,894)
4,413,112
(103,780)
3,590,049
(120,785)
5,281,407
4,309,332
3,469,264
42,912
(2,202)
40,710
39,248
(729)
38,519
46,249
(643)
45,606
5,322,117
4,347,851
3,514,870
At 1 January
Charge
Recoveries
Write-offs
Accrued interest on written-off loans
Currency translation differences
At 31 December
Individual impairment
Collective impairment
Commercial
loans
2015
72,885
59,090
4,331
(10,324)
(1,086)
416
Consumer
loans
2015
23,648
62,638
21,079
(47,075)
(9,035)
(238)
Residential
mortgage
loans
2015
2,993
3,410
3,066
(2,847)
(561)
–
Micro and
SME loans
2015
4,254
17,681
5,209
(10,694)
(992)
1,046
Total
2015
103,780
142,819
33,685
(70,940)
(11,674)
1,224
125,312
51,017
6,061
16,504
198,894
118,960
6,352
1,850
49,167
4,380
1,681
13,745
2,759
138,935
59,959
125,312
51,017
6,061
16,504
198,894
Gross amount of loans, individually determined to be impaired, before deducting any
individually assessed impairment allowance
330,084
3,136
15,902
27,421
376,543
At 1 January
Charge (reversal)
Recoveries
Write-offs
Accrued interest on written-off loans
Currency translation differences
At 31 December
Individual impairment
Collective impairment
Consumer
loans
2014
Residential
mortgage loans
2014
Commercial
loans
2014
90,949
34,617
3,104
(41,894)
(13,581)
(310)
20,772
14,147
14,730
(22,556)
(3,341)
(104)
72,885
23,648
63,816
9,069
1,403
22,245
72,885
23,648
Micro and
SME loans
2014
5,971
(1,396)
5,211
(4,748)
(348)
(436)
Total
2014
120,785
45,088
28,706
(71,975)
(17,974)
(850)
4,254
103,780
3,637
617
71,381
32,399
4,254
103,780
3,093
(2,280)
5,661
(2,777)
(704)
–
2,993
2,525
468
2,993
Gross amount of loans, individually determined to be impaired, before deducting any
individually assessed impairment allowance
243,825
1,924
7,944
10,594
264,287
Annual Report 2015 BGEO Group PLC 175
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
10. Loans to Customers and Finance Lease Receivables continued
At 1 January
Charge (reversal)
Recoveries
Write-offs
Accrued interest on written-off loans
Currency translation differences
At 31 December
Individual impairment
Collective impairment
Commercial
loans
2013
Consumer
loans
2013
Residential
mortgage loans
2013
78,198
13,671
4,693
(4,404)
(1,153)
(56)
20,249
27,550
14,363
(35,866)
(5,509)
(15)
90,949
20,772
76,009
14,940
8,221
12,551
90,949
20,772
9,713
(5,388)
4,958
(4,974)
(1,216)
–
3,093
2,861
232
3,093
Micro and
SME loans
2013
1,877
5,666
3,465
(4,707)
(344)
14
Total
2013
110,037
41,499
27,479
(49,951)
(8,222)
(57)
5,971
120,785
4,708
1,263
91,799
28,986
5,971
120,785
Gross amount of loans, individually determined to be impaired, before deducting any
individually assessed impairment allowance
144,020
14,817
6,792
10,925
176,554
Interest income accrued on loans, for which individual impairment allowances have been recognised as at 31 December 2015 comprised
GEL 22,234 (2014: GEL 17,021, 2013: GEL 18,170).
Collateral and other credit enhancements
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented
regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows:
• For commercial lending, charges over real estate properties, equipment and machinery, corporate shares, inventory, trade receivables
and third party corporate guarantees.
• For retail lending, mortgages over residential properties, cars, gold and jewellery and third party corporate guarantees.
Management requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral
obtained during its review of the adequacy of the allowance for loan impairment.
It is the Group’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the
outstanding claim. In general, the Group does not occupy repossessed properties for business use.
Without taking into account discounted value of collateral, allowance for loan impairment would be GEL 176,759 higher as at
31 December 2015 (2014: GEL 145,838 higher, 2013: GEL 47,256 higher).
Concentration of loans to customers
As at 31 December 2015, the concentration of loans granted by the Group to the ten largest third party borrowers comprised GEL
708,839 accounting for 13% of the gross loan portfolio of the Group (2014: GEL 711,647 and 16% respectively, 2013: GEL 610,916 and
17% respectively). An allowance of GEL 2,484 (2014: GEL 4,034, 2013: GEL 22,740) was established against these loans.
As at 31 December 2015, the concentration of loans granted by the Group to the ten largest third party group of borrowers comprised
GEL 1,094,979 accounting for 20% of the gross loan portfolio of the Group (2014: GEL 1,094,084 and 25% respectively, 2011: GEL
912,106 and 25% respectively). An allowance of GEL 41,413 (2014: GEL 18,324, 2013: GEL 9,345) was established against these loans.
As at 31 December 2015, 31 December 2014 and 31 December 2013, loans were principally issued within Georgia, and their distribution
by industry sector was as follows:
Individuals
Trade
Manufacturing
Real estate
Services
Construction
Hospitality
Transport & communication
Mining and quarrying
Financial intermediation
Electricity, gas and water supply
Other
Loans to customers, gross
Less – allowance for loan impairment
Loans to customers, net
176 BGEO Group PLC Annual Report 2015
2015
2014
2013
2,482,389
727,214
711,677
354,331
223,088
178,642
168,011
165,330
127,706
77,662
77,633
186,618
1,831,479
647,858
719,003
244,134
156,399
114,891
166,214
151,715
15,310
109,201
124,772
132,136
1,411,958
560,389
659,527
250,147
124,711
132,477
106,997
148,849
9,517
14,758
63,378
107,341
5,480,301
(198,894)
4,413,112
(103,780)
3,590,049
(120,785)
5,281,407
4,309,332
3,469,264
Financial statements 10. Loans to Customers and Finance Lease Receivables continued
Loans have been extended to the following types of customers:
Private companies
Individuals
State-owned entities
Loans to customers, gross
Less – allowance for loan impairment
Loans to customers, net
2015
2014
2013
2,958,145
2,482,389
39,767
2,531,689
1,831,479
49,944
2,073,147
1,411,958
104,944
5,480,301
(198,894)
4,413,112
(103,780)
3,590,049
(120,785)
5,281,407
4,309,332
3,469,264
The following is a reconciliation of the individual and collective allowances for impairment losses on loans to customers for the years
ended 31 December 2015, 31 December 2014 and 31 December 2013:
At 1 January
Charge for the year
Recoveries
Write-offs
Interest accrued on impaired loans to
customers
Currency translation differences
Individual
impairment
2015
71,381
94,883
9,994
(34,722)
2015
Collective
impairment
2015
32,399
47,936
23,691
(36,218)
Total
2015
103,780
142,819
33,685
(70,940)
Individual
impairment
2014
91,799
34,088
12,897
(51,774)
2014
Collective
impairment
2014
28,986
11,000
15,809
(20,201)
Total
2014
120,785
45,088
28,706
(71,975)
Individual
impairment
2013
83,172
19,395
10,828
(17,269)
2013
Collective
impairment
2013
26,865
22,104
16,651
(32,682)
Total
2013
110,037
41,499
27,479
(49,951)
(3,617)
1,016
(8,057)
208
(11,674)
1,224
(14,846)
(783)
(3,128)
(67)
(17,974)
(850)
(4,273)
(54)
(3,949)
(3)
(8,222)
(57)
At 31 December
138,935
59,959
198,894
71,381
32,399
103,780
91,799
28,986
120,785
Finance Lease Receivables
Minimum lease payments receivable
Less – Unearned finance lease income
Less – Allowance for impairment
Finance lease receivables, net
2015
2014
2013
51,649
(8,737)
42,912
(2,202)
47,047
(7,799)
39,248
(729)
56,124
(9,875)
46,249
(643)
40,710
38,519
45,606
The difference between the minimum lease payments to be received in the future and the finance lease receivables represents unearned
finance income.
As at 31 December 2015, the concentration of investment in the five largest lease receivables comprised GEL 15,234 or 36% of total
finance lease receivables (2014: GEL 10,160 or 26%, 2013: GEL 5,766 or 12%) and finance income received from it for the year ended
31 December 2015 comprised GEL 1,931 or 20% of total finance income from lease (2014: GEL 909 or 11%, 2013: GEL 429 or 6%).
Future minimum lease payments to be received after 31 December 2015, 31 December 2014 and 31 December 2013 are as follows:
Within 1 year
From 1 to 5 years
More than 5 years
Minimum lease payment receivables
Movements of the allowance for impairment of finance lease receivables are as follows:
At 1 January
Charge
Amounts written-off
Currency translation differences
At 31 December
Individual impairment
Collective impairment
2015
2014
2013
28,807
22,842
–
29,901
17,146
–
35,472
18,880
1,772
51,649
47,047
56,124
Finance lease
receivables
2015
Finance lease
receivables
2014
Finance lease
receivables
2013
729
1,958
(305)
(180)
2,202
1,507
695
2,202
643
476
(435)
45
729
243
486
729
507
2,809
(2,639)
(34)
643
100
543
643
Gross amount of finance lease receivables, individually determined to be impaired, before deducting any
individually assessed impairment allowance
3,725
1,487
870
Annual Report 2015 BGEO Group PLC 177
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
11. Investment Properties
At 1 January
Additions*
Disposals
Net gains from revaluation of investment property
Hyperinflation effect
Acquisition through business combination
Transfers from (to) property and equipment and other assets**
Currency translation differences
At 31 December
2015
2014
2013
190,860
56,823
(19,815)
20,737
–
705
2,381
(5,293)
157,707
58,449
(7,383)
1,909
394
–
(31,025)
10,809
160,353
20,051
(10,748)
9,788
–
–
(21,737)
–
246,398
190,860
157,707
*
GEL 18,947 paid in 2015 for acquisition of properties by the Group’s Real Estate business for development. The remaining additions of 2015 and full additions of 2014 and
2013 comprise foreclosed properties, no cash transactions were involved.
** Comprised of GEL 669 transfer to property and equipment (2014: transfers to property and equipment GEL 6,389 and 2013: transfers from property and equipment GEL
4,979 respectively), GEL 2,357 transfer from other assets – inventories (2014 and 2013: transfer to other assets – inventories GEL 25,132 and GEL 14,089) and GEL 693
transfer from finance lease receivables (2014: transfer from finance lease receivable GEL 496 and 2013: transfer to finance lease receivable 12,627).
Investment properties are stated at fair value. The fair value represents the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. The date of latest revaluation is 31 December 2015 and was carried
out by professional valuators. Refer to Note 30 for details on fair value measurements of investment properties.
The Group has no restrictions on the realisability of its investment properties and no contractual obligations to purchase, construct or
develop investment properties or for repairs, maintenance and enhancements.
12. Property and Equipment
The movements in property and equipment during the year ended 31 December 2015 were as follows:
Cost or revalued amount
31 December 2014
Additions
Business combination, Note 5
Disposals
Transfers
Transfers to investment properties
Transfers (to) from other assets
Revaluation
Currency translation differences
Office buildings
& service
centres
230,376
5,348
10,388
(2,555)
3,090
(425)
–
(9,168)
(3,169)
Hospitals
& clinics
Furniture
& fixtures
Computers
& equipment
Motor
vehicles
Leasehold
improvements
Assets under
construction
Total
207,038
24,528
94,096
(1,425)
8,538
–
–
–
–
140,130
23,764
8,317
(389)
3,124
–
(343)
–
(269)
130,810
67,631
22,806
(21,096)
(1,616)
–
(736)
–
(525)
7,566
2,834
870
(581)
(1,024)
–
4
–
(83)
12,751
5,555
1,790
(1,872)
4,000
–
–
–
(77)
9,599
14,907
7,347
(140)
(16,112)
–
(6,231)
–
(337)
738,270
144,567
145,614
(28,058)
–
(425)
(7,306)
(9,168)
(4,910)
31 December 2015
233,435
332,775
174,334
197,274
9,586
22,147
9,033
978,584
Accumulated impairment
31 December 2014
Reversal of impairment
Transfers to investment properties
Currency translation differences
31 December 2015
Accumulated depreciation
31 December 2014
Depreciation charge
Currency translation differences
Transfers
Transfers to investment properties
Transfers (to) from other assets
Revaluation
Disposals
31 December 2015
Net book value:
31 December 2014
31 December 2015
3,621
(1,097)
(1,040)
(263)
1,221
3,208
3,059
(195)
(199)
(54)
–
(1,945)
(25)
–
–
–
–
–
2,646
4,264
–
58
–
–
–
(124)
51
–
–
(13)
38
75,530
15,787
(91)
589
–
(233)
–
(161)
120
–
–
(38)
82
55,402
15,920
(235)
(315)
–
(606)
–
(1,575)
13
–
–
(6)
7
4,023
1,770
(31)
(60)
–
3
–
(360)
3,849
6,844
91,421
68,591
5,345
9
–
–
(9)
–
5,125
2,676
(36)
(73)
–
–
–
(1,197)
6,495
9
–
–
–
9
–
–
–
–
–
–
–
–
–
3,823
(1,097)
(1,040)
(329)
1,357
145,934
43,476
(588)
–
(54)
(836)
(1,945)
(3,442)
182,545
223,547
204,392
64,549
75,288
3,530
7,617
9,590
588,513
228,365
325,931
82,875
128,601
4,234
15,652
9,024
794,682
178 BGEO Group PLC Annual Report 2015
Financial statements
12. Property and Equipment continued
The movements in property and equipment during the year ended 31 December 2014 were as follows:
Cost or revalued amount
31 December 2013
Additions
Business combination
Disposals
Transfers
Transfers from investment properties
Transfers from (to) other assets
Effect of hyperinflation
Currency translation differences
Office buildings
& service
centres
209,639
1,417
2
(44)
5,040
6,389
478
3,225
4,230
Hospitals
& clinics
Furniture
& fixtures
Computers
& equipment
Motor
vehicles
Leasehold
improvements
Assets under
construction
Total
128,491
26,478
51,839
(38)
268
–
–
–
–
129,769
8,492
588
(623)
(1,856)
–
(216)
228
3,748
101,563
21,020
6,076
(1,084)
3,005
–
(511)
438
303
6,728
2,665
306
(1,089)
(1,150)
–
–
52
54
10,771
3,258
–
(2,675)
1,139
–
–
67
191
8,942
7,256
141
(93)
(6,446)
–
(61)
58
(198)
595,903
70,586
58,952
(5,646)
–
6,389
(310)
4,068
8,328
31 December 2014
230,376
207,038
140,130
130,810
7,566
12,751
9,599
738,270
Accumulated impairment
31 December 2013
Effect of hyperinflation
Currency translation differences
31 December 2014
Accumulated depreciation
31 December 2013
Depreciation charge
Effect of hyperinflation
Currency translation differences
Transfers to other assets
Disposals
31 December 2014
Net book value:
31 December 2013
31 December 2014
3,611
187
(177)
3,621
553
3,009
134
(261)
(352)
125
3,208
–
–
–
–
40
7
4
51
1,526
1,141
–
–
–
(21)
65,442
12,471
102
(1,333)
(499)
(653)
109
19
(8)
120
44,414
11,828
238
(1,129)
(494)
545
6
3
4
13
4,317
1,187
38
(233)
–
(1,286)
–
–
9
9
5,216
1,849
66
(298)
–
(1,708)
2,646
75,530
55,402
4,023
5,125
–
–
9
9
–
–
–
–
–
–
–
3,766
216
(159)
3,823
121,468
31,485
578
(3,254)
(1,345)
(2,998)
145,934
205,475
126,965
64,287
57,040
223,547
204,392
64,549
75,288
2,405
3,530
5,555
8,942
470,669
7,617
9,590
588,513
Annual Report 2015 BGEO Group PLC 179
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
12. Property and Equipment continued
The movements in property and equipment during the year ended 31 December 2013 were as follows:
Cost or revalued amount
31 December 2012
Additions
Business combination
Disposals
Transfers
Transfers (to) from investment properties
Transfers to other assets
Revaluation
Effect of hyperinflation
Currency translation differences
Office buildings
& service
centres
210,182
684
1
(1,645)
6,088
(7,300)
–
(5,620)
2,864
4,385
Hospitals
& clinics
Furniture
& fixtures
Computers
& equipment
Motor
vehicles
Leasehold
improvements
Assets under
construction
Total
78,572
12,833
4,889
(425)
32,622
–
–
–
–
–
112,986
13,760
345
(207)
1,123
–
(316)
–
207
1,871
82,731
21,405
162
(2,306)
112
40
(1,187)
(289)
376
519
9,616
1,453
–
(4,514)
–
–
–
–
48
125
7,839
1,378
526
(434)
1,335
–
–
–
61
66
37,267
10,689
82
(4)
(41,280)
2,055
–
106
72
(45)
539,193
62,202
6,005
(9,535)
–
(5,205)
(1,503)
(5,803)
3,628
6,921
31 December 2013
209,639
128,491
129,769
101,563
6,728
10,771
8,942
595,903
Accumulated impairment
31 December 2012
Impairment charge
Effect of hyperinflation
Currency translation differences
31 December 2013
Accumulated depreciation
31 December 2012
Depreciation charge
Effect of hyperinflation
Currency translation differences
Transfers to investment properties
Transfers to other assets
Revaluation
Disposals
31 December 2013
Net book value:
31 December 2012
31 December 2013
2,189
1,171
364
(113)
3,611
4,691
3,010
364
(239)
(226)
–
(7,047)
–
–
–
–
–
–
36
–
6
(2)
40
99
–
16
(6)
109
6
–
1
(1)
6
508
54,406
36,270
6,386
1,032
–
–
–
–
–
(14)
11,162
6
44
–
(86)
–
(90)
9,913
16
81
–
(962)
(347)
(557)
1,328
1
21
–
–
–
(3,419)
553
1,526
65,442
44,414
4,317
–
–
–
–
–
3,725
1,597
–
32
–
–
–
(138)
5,216
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,330
1,171
387
(122)
3,766
105,986
28,042
387
(61)
(226)
(1,048)
(7,394)
(4,218)
121,468
203,302
78,064
58,544
46,362
205,475
126,965
64,287
57,040
3,224
2,405
4,114
37,267
430,877
5,555
8,942
470,669
Office building and service centres of the Group are subject to revaluation on a regular basis. The date of latest revaluation is
31 December 2015 and was carried out by professional valuators. Refer to Note 30 for details on fair value measurements of the
Group’s premises.
If the office buildings and service centres had been measured using the cost model, the carrying amounts of the office buildings and
service centres as at 31 December 2015, 31 December 2014 and 31 December 2013 would have been as follows:
Cost
Accumulated depreciation and impairment
Net carrying amount
2015
2014
2013
179,067
(19,736)
166,839
(16,896)
146,104
(14,023)
159,331
149,943
132,081
180 BGEO Group PLC Annual Report 2015
Financial statements
13. Goodwill
Movements in goodwill during the years ended 31 December 2015, 31 December 2014 and 31 December 2013, were as follows:
Cost
1 January
Business combinations, Note 5
At 31 December
Accumulated impairment
1 January
At 31 December
Net book value:
1 January
At 31 December
2015
2014
2013
78,083
23,351
77,170
913
74,107
3,063
101,434
78,083
77,170
28,450
28,450
28,450
28,450
28,450
28,450
49,633
72,984
48,720
49,633
45,657
48,720
Impairment test for goodwill
Goodwill acquired through business combinations with indefinite lives have been allocated to six individual cash-generating units, for
impairment testing: Corporate Banking, Retail Banking, Property & Casualty Insurance, Health Insurance, Healthcare and Liberty
Consumer.
The carrying amount of goodwill allocated to each of the cash-generating units (“CGU”) is as follows:
P&C Insurance
Retail banking*
Corporate banking
Healthcare**
Health Insurance
Liberty Consumer
Total
2015
2014
2013
16,139
23,488
9,965
16,491
3,462
3,439
16,139
12,433
9,965
4,195
3,462
3,439
16,139
12,433
9,965
3,282
3,462
3,439
72,984
49,633
48,720
* GEL 11,055 increase in goodwill for 2015 is from acquisition of JSC PrivatBank (note 5), which was added to Retail Banking CGU. Impairment test revealed no need for
impairment as at 31 December 2015.
** GEL 12,296 increase in goodwill for 2015 is from acquisition of healthcare subsidiaries (note 5), which was added to Healthcare CGU. Impairment test revealed no need for
impairment as at 31 December 2015.
Key assumptions used in value in use calculations
The recoverable amounts of the CGUs have been determined based on a value-in-use calculation, using cash flow projections based on
financial budgets approved by senior management covering from one to three-year period. Discount rates were not adjusted for either a
constant or a declining growth rate beyond the three-year periods covered in financial budgets. For the purposes of the impairment test,
a 3% permanent growth rate has been assumed when assessing the future operating cash flows of the CGU.
The following discount rates were used by the Group for Corporate Banking and Retail Banking:
Discount rate
Corporate Banking
Retail Banking
2015,
%
5.8%
2014,
%
6.2%
2013,
%
8.5%
2015,
%
6.7%
2014,
%
6.5%
2013,
%
8.5%
The following rates were used by the Group for P&C Insurance and Health Insurance:
P&C Insurance
Health Insurance
2015,
%
2014,
%
2013,
%
2015,
%
2014,
%
2013,
%
Discount rate
10.4%
10.9%
13.3%
11.2%
11.3%
14.5%
The following rates were used by the Group for Healthcare and Liberty Consumer:
Discount rate
Healthcare
2014,
%
2015,
%
2013,
%
11.6%
10.5%
14.5%
Liberty Consumer
2015,
%
9.4%
2014,
%
2013,
%
9.0%
14.5%
Annual Report 2015 BGEO Group PLC 181
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
13. Goodwill continued
Discount rates
Discount rates reflect management’s estimate of return required in each business. This is the benchmark used by management to assess
operating performance and to evaluate future investment proposals. Discount rates are calculated by using weighted average cost of
capital (“WACC”).
For the Healthcare CGU the following additional assumptions were made over the first three-year period of the business plan:
• Further synergies from healthcare businesses will increase cost efficiency and further improve operating leverage;
• Growth of other healthcare business lines through an increased market demand and economic growth.
For the Retail and Corporate banking CGUs the following additional assumptions were made:
• Stable, business as usual growth of loans and deposits;
• No material changes in cost/income structure or ratio;
• Stable, business as usual growth of trade finance and other documentary businesses;
• Further expansion of the express banking businesses bringing more stable margins to retail banking.
Sensitivity to changes in assumptions
Management believes that reasonable possible changes to key assumptions used to determine the recoverable amount for each CGU
will not result in an impairment of goodwill. The excess of value in use over carrying value is determined by reference to the net book
value as at 31 December 2015. Possible change was taken as +/-1% in discount rate and growth rate.
14. Taxation
The corporate income tax (expense) benefit comprises:
Current income expense
Deferred income tax expense
Income tax expense
Deferred income tax (expense) benefit in other comprehensive income (loss)
2015
2014
2013
(38,959)
(9,449)
(24,493)
(11,332)
(17,284)
(18,629)
(48,408)
(35,825)
(35,913)
1,637
(124)
(1,095)
Deferred tax related to items charged or credited to other comprehensive income during the years ended 31 December 2015, 2014 and
2013 was as follows:
Currency translation differences
Net losses on investment securities available-for-sale
Revaluation of buildings
Income tax (expense) benefit in other comprehensive income
2015
1,276
–
361
1,637
2014
(124)
–
–
(124)
2013
(873)
1
(223)
(1,095)
The income tax rate applicable to most of the Group’s income is the income tax rate applicable to subsidiaries’ income which ranges
from 15% to 25% (2014: from 15% to 27%, 2013: from 15% to 24%).
The UK Finance Bill 2015 was enacted in November 2015 reducing the standard rate of corporation tax from 20% to 19% effective from
1 April 2017 and 18% effective from 1 April 2020. There are no UK deferred tax balances at 31 December 2015. The deferred tax
balances in other countries are recognised at the substantially enacted rates at the balance sheet date.
182 BGEO Group PLC Annual Report 2015
Financial statements
14. Taxation continued
The effective income tax rate differs from the statutory income tax rates. As at 31 December 2015, 31 December 2014 and 31 December
2013 a reconciliation of the income tax expense based on statutory rates with the actual expense is as follows:
Profit before income tax expense
Average tax rate
Theoretical income tax expense at average tax rate
Non-taxable income
Correction of prior year declarations
Non-deductible expenses
Tax at the domestic rates applicable to profits in each country
Effect of changes in tax rate
Other
Income tax expense
2015
2014
2013
359,353
15%
(53,903)
3,744
1,472
(487)
(262)
–
1,028
276,592
15%
(41,489)
–
5,802
(697)
193
(502)
868
245,256
15%
(36,788)
–
2,402
(486)
(1,155)
–
114
(48,408)
(35,825)
(35,913)
Applicable taxes in Georgia and Belarus include corporate income tax (profit tax), individuals’ withholding taxes, property tax and value
added tax, among others. However, regulations are often unclear or nonexistent and few precedents have been established. This creates
tax risks in Georgia and Belarus, substantially more significant than typically found in countries with more developed tax systems.
Management believes that the Group is in substantial compliance with the tax laws affecting its operations. However, the risk remains
that relevant authorities could take differing positions with regard to interpretative issues.
As at 31 December 2015, 31 December 2014 and 31 December 2013 income tax assets and liabilities consist of the following:
Current income tax assets
Deferred income tax assets
Income tax assets
Current income tax liabilities
Deferred income tax liabilities
Income tax liabilities
2015
2014
2013
3,654
17,896
4,215
18,530
4,552
14,544
21,550
22,745
19,096
20,083
104,312
11,093
86,471
2,930
66,100
124,395
97,564
69,030
Annual Report 2015 BGEO Group PLC 183
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
2014
1,005
1,195
980
1,510
198
12,296
936
3,869
–
–
(1,499)
–
–
855
–
(51)
Origination and reversal of temporary differences
In the income
Business
comprehensive
statement
combination
income
2015
In other
(523)
(1,194)
–
650
5,035
6,606
50
(406)
26
(1,325)
(763)
(1,160)
18,653
6,500
(1,122)
(1,142)
(1,992)
982
–
–
–
–
–
–
–
–
–
–
–
–
(13)
(1)
–
–
–
(367)
250
(49)
2
(165)
(2)
–
–
(53)
(7)
(39)
482
–
980
2,160
4,866
17,160
937
4,447
31,032
68
–
222
6,511
5,403
7,470
(517)
28,956
9,666
(1,184)
68,818
19,667
9,653
(1,802)
117,448
(9,449)
(10,663)
1,637
(86,416)
(695)
21,989
10,218
(1,010)
(3)
–
(165)
–
(330)
(7)
(8)
(58)
(571)
(124)
44
1,325
30,236
1,382
41,683
64
6,532
8,664
89,930
(67,941)
Notes to Consolidated Financial Statements continued
14. Taxation continued
Deferred tax assets and liabilities as at 31 December 2015, 31 December 2014 and 31 December 2013 and their movements for
the respective years are as follows:
Origination and reversal of temporary differences
Origination and reversal of temporary differences
2012
In the income
statement
In other
comprehensive
income
2013
In the income
statement
Business
combination
In other
comprehensive
income
Tax effect of deductible temporary differences:
Amounts due to credit institutions
Investment securities: available-for-sale
Investment properties
Insurance premiums receivables
Allowances for impairment and provisions for other
losses
Tax losses carried forward
Property and equipment
Other assets and liabilities
55
7
–
1,324
1,059
9,145
933
2,730
1,125
1,188
2,479
(438)
(604)
(974)
9
439
Deferred tax assets
15,253
3,224
Tax effect of taxable temporary differences:
Amounts due to credit institutions
Amounts due to customers
Loans to customers
Other insurance liabilities & pension fund obligations
Property and equipment
Investment properties
Intangible assets
Other assets and liabilities
72
–
9,008
850
29,782
461
4,887
2,025
28
1,325
12,831
106
1,650
1,711
688
3,514
Deferred tax liabilities
47,085
21,853
–
1
–
–
–
620
–
–
621
(48)
–
–
–
1,179
(2,170)
–
2,755
1,716
1,180
1,196
2,479
886
455
8,791
942
3,169
19,098
52
1,325
21,839
956
32,611
2
5,575
8,294
(175)
(1)
–
624
(257)
2,650
(6)
751
3,586
(5)
–
8,562
426
4,473
69
965
428
70,654
14,918
–
–
–
–
–
–
–
–
–
–
–
–
–
4,929
–
–
–
4,929
Net deferred tax liabilities
(31,832)
(18,629)
(1,095)
(51,556)
(11,332)
(4,929)
184 BGEO Group PLC Annual Report 2015
Financial statements 14. Taxation continued
the respective years are as follows:
Deferred tax assets and liabilities as at 31 December 2015, 31 December 2014 and 31 December 2013 and their movements for
Origination and reversal of temporary differences
Origination and reversal of temporary differences
Origination and reversal of temporary differences
In the income
comprehensive
In the income
Business
comprehensive
In other
In other
2012
statement
income
2013
statement
combination
income
2014
In the income
statement
Business
combination
In other
comprehensive
income
Tax effect of deductible temporary differences:
Amounts due to credit institutions
Investment securities: available-for-sale
Investment properties
Insurance premiums receivables
Allowances for impairment and provisions for other
losses
Tax losses carried forward
Property and equipment
Other assets and liabilities
Deferred tax assets
Tax effect of taxable temporary differences:
Amounts due to credit institutions
Amounts due to customers
Loans to customers
Other insurance liabilities & pension fund obligations
Property and equipment
Investment properties
Intangible assets
Other assets and liabilities
Deferred tax liabilities
15,253
3,224
621
19,098
(695)
21,989
55
7
–
1,324
1,059
9,145
933
2,730
72
–
9,008
850
29,782
461
4,887
2,025
1,125
1,188
2,479
(438)
(604)
(974)
9
439
28
1,325
12,831
106
1,650
1,711
688
3,514
1,180
1,196
2,479
886
455
8,791
942
3,169
52
1,325
21,839
956
32,611
2
5,575
8,294
–
1
–
–
–
–
–
–
–
–
–
620
(48)
1,179
(2,170)
2,755
1,716
(175)
(1)
–
624
(257)
2,650
(6)
751
3,586
(5)
–
8,562
426
4,473
69
965
428
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,929
(1,499)
–
–
–
–
–
–
–
855
(51)
(3)
(165)
(330)
(7)
(8)
(58)
(571)
1,005
1,195
980
1,510
198
12,296
936
3,869
44
1,325
30,236
1,382
41,683
64
6,532
8,664
89,930
47,085
21,853
70,654
14,918
4,929
(523)
(1,194)
–
650
5,035
6,606
50
(406)
10,218
26
(1,325)
(763)
(1,160)
18,653
6,500
(1,122)
(1,142)
19,667
–
–
–
–
–
(1,992)
–
982
(1,010)
–
–
–
–
9,666
–
–
(13)
9,653
2015
482
–
980
2,160
4,866
17,160
937
4,447
31,032
68
–
28,956
222
68,818
6,511
5,403
7,470
–
(1)
–
–
(367)
250
(49)
2
(165)
(2)
–
(517)
–
(1,184)
(53)
(7)
(39)
(1,802)
117,448
Net deferred tax liabilities
(31,832)
(18,629)
(1,095)
(51,556)
(11,332)
(4,929)
(124)
(67,941)
(9,449)
(10,663)
1,637
(86,416)
Annual Report 2015 BGEO Group PLC 185
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
15. Other Assets and Other Liabilities
Other assets comprise:
Investments in associates
Foreclosed assets*
Derivative financial assets
Other receivables
Operating tax assets
Defined contribution pension assets
Assets purchased for finance lease purposes
Reinsurance assets
Settlements on operations
Trading securities owned
Other
Less – Allowance for impairment of other assets
Other assets
*
Foreclosed assets represent movable repossessed assets.
Other liabilities comprise:
Accounts payable
Amounts payable for share acquisitions*
Defined contribution pension obligations
Other insurance liabilities
Creditors
Other taxes payable
Derivative financial liabilities
Provisions
Dividends payable
Other
Other liabilities
2015
2014
2013
53,458
49,602
42,212
19,380
18,225
13,706
10,689
10,381
5,060
1,977
22,083
48,659
49,090
45,733
4,811
10,934
11,201
6,841
11,289
2,869
1,034
20,014
–
43,924
39,431
19,797
15,626
9,540
3,649
9,471
10,461
1,149
8,909
246,773
(10,000)
212,475
(2,764)
161,957
(15,148)
236,773
209,711
146,809
2015
2014
2013
44,865
38,005
13,706
9,572
7,729
5,072
3,243
2,240
815
9,509
15,995
16,786
11,201
7,395
10,436
4,258
7,505
4,732
2,419
6,918
11,220
–
9,540
7,360
7,855
1,505
1,513
481
511
11,250
134,756
87,645
51,235
*
2015 amounts payable for share acquisitions comprise GEL 28,757 payable for the healthcare subsidiaries acquired in 2015 and GEL 9,248 payable for the acquisition of
JSC PrivatBank. 2014 amounts payable for share acquisitions comprise GEL 13,694 payable for healthcare business acquisitions and GEL 3,092 payable for acquisition of
Georgian Global Utilities LLC.
The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional
amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset or liability, reference rate or index and is
the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions
outstanding at the year end and are not indicative of the credit risk.
2015
Foreign exchange contracts
Forwards and Swaps – domestic
Forwards and Swaps – foreign
Options Foreign
Total derivative assets/liabilities
Interest rate contracts
Forwards and Swaps – foreign
Foreign exchange contracts
Forwards and Swaps – domestic
Forwards and Swaps – foreign
Equity/Commodity contracts
Call options – foreign
Notional
amount
Fair value
Asset
Liability
12,510
145,055
56,768
214,333
183
41,994
35
42,212
2013
10
510
2,723
3,243
Notional
amount
Fair value
Asset
Liability
Notional
amount
2014
Fair value
Asset
Liability
–
–
–
97,566
–
1,453
49,648
494,206
247
45,486
1,242
6,263
66,640
100,465
332
39,076
–
–
–
1,166
23
50
10
–
Total derivative assets/liabilities
543,854
45,733
7,505
265,837
39,431
1,513
Foreign exchange forwards and swaps primarily consist of currency swaps with the National Bank of the Republic of Belarus of GEL
40,102 (2014: GEL 45,482, 2013: GEL 38,917), with the effective maturities of 3 months (2014: 13 months, 2013: 25 months).
186 BGEO Group PLC Annual Report 2015
Financial statements
15. Other Assets and Other Liabilities continued
The Group’s investment in associate comprises of Georgian Global Utilities LLC (“GGU”), a holding company incorporated in the British
Virgin Islands with wholly owned subsidiaries that supply water and provide wastewater services, as well as owns and operates
hydropower generation facilities in Georgia.
GGU is a private entity that is not listed on any public exchange. The Group’s interest in GGU is accounted for using the equity method in
the consolidated financial statements. The following table illustrates the summarised financial information as at and for the year ended
31 December 2015 of the Group’s investment in GGU:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity
Group’s share in equity
Group’s carrying amount of the investment
Revenue
Operating expenses
EBITDA
Depreciation and amortisation expenses
Net interest expense
Currency translation loss
Profit before income tax expense
Income tax expense
Profit for the year
Total comprehensive income for the year
Group's share in profit for the year
2015
2014
38,463
282,189
38,862
73,901
47,201
269,213
24,757
101,061
207,889
190,596
51,972
47,649
53,458
48,659
121,114
(57,824)
63,290
(20,564)
(7,385)
(14,514)
125,255
(73,920)
51,335
(19,436)
(1,439)
56
20,827
30,516
(4,627)
(7,922)
16,200
22,594
16,200
22,594
4,050
–
GGU requires its parent’s consent to distribute its profits, but also needs the Group’s consent on such distributions if they exceed 50% of
the associate’s profit in accordance with IFRS for the previous year.
In 2008 GGU was sold to a group of private investors. As part of the share purchase agreement, GGU undertook an investment obligation
of US$ 220 million (GEL 527 million*) to refurbish and to rehabilitate the water supply and wastewater management infrastructure. The
management of GGU believes that as of 31 December 2015, GGU has already fulfilled the above and as of 31 December 2015 is in the
process of reconciliation of the fulfilled commitments with relevant government authorities.
*
Translated at the official NBG exchange rate of 2.3949 as at 31 December 2015.
16. Client Deposits and Notes
The amounts due to customers include the following:
Time deposits
Current accounts
Promissory notes issued
Amounts due to customers
Held as security against letters of credit and guarantees (Note 19)
2015
2014
2013
2,597,244
2,153,275
868
1,867,925
1,445,790
25,010
1,593,171
1,514,038
10,523
4,751,387
3,338,725
3,117,732
64,534
53,393
53,903
As at 31 December 2015, 31 December 2014 and 31 December 2013, promissory notes issued by the Group comprise the notes
privately held by financial institutions being effectively equivalents of certificates of deposits with fixed maturity and fixed interest rate. The
average effective maturity of the notes was 9 months (2014: 1 month, 2013: 12 months).
At 31 December 2015, amounts due to customers of GEL 782,146 (16%) were due to the 10 largest customers (2014: GEL 424,103 (13%),
2013: GEL 436,694 (14%).
Amounts due to customers include accounts with the following types of customers:
Individuals
Private enterprises
State and state-owned entities
Amounts due to customers
2015
2014
2013
2,615,774
1,945,233
190,380
1,868,762
1,284,955
185,008
1,511,452
1,435,900
170,380
4,751,387
3,338,725
3,117,732
Annual Report 2015 BGEO Group PLC 187
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
16. Amounts Due to Customers continued
The breakdown of customer accounts by industry sector is as follows:
Individuals
Trade
Transport & communication
Financial intermediation
Service
Manufacturing
Construction
Government services
Electricity, gas and water supply
Real estate
Hospitality
Other
Amounts due to customers
17. Amounts Owed to Credit Institutions
Amounts due to credit institutions comprise:
Borrowings from international credit institutions
Short-term loans from the National Bank of Georgia
Time deposits and inter-bank loans
Correspondent accounts
Subtotal
Non-convertible subordinated debt
Amounts due to credit institutions
2015
2014
2013
2,615,774
374,291
317,161
292,771
289,485
236,238
224,477
141,007
74,125
64,990
18,818
102,250
1,868,762
277,792
173,591
110,759
275,504
107,813
220,234
128,046
21,275
53,742
33,503
67,704
1,511,452
360,378
143,681
69,239
350,558
85,673
241,271
50,481
78,537
69,625
35,049
121,788
4,751,387
3,338,725
3,117,732
2015
2014
2013
640,517
307,200
353,638
92,617
574,240
400,772
261,551
32,606
1,393,972
395,090
1,269,169
140,045
504,943
250,138
221,267
12,921
989,269
168,710
1,789,062
1,409,214
1,157,979
During the year ended 31 December 2015 the Group paid up to 5.29% on US Dollars borrowings from international credit institutions
(2014: up to 6.77%, 2013: up to 6.23%). During the year ended 31 December 2015 the Group paid up to 7.95% on US Dollars
subordinated debt (2014: up to 10.40% and 2013: up to 11.33%).
In June 2015, the Group signed a US$ 90 million subordinated loan agreement with the International Finance Corporation. The loan
facility, which includes US$ 20 million from the European Fund for Southeast Europe, bears a maturity of ten years and qualifies as Tier II
capital under the Basel 2 framework.
Some long-term borrowings from international credit institutions are received upon certain conditions (the “Lender Covenants”) that the
Group maintains different limits for capital adequacy, liquidity, currency positions, credit exposures, leverage and others. At 31 December
2015, 31 December 2014 and 31 December 2013 the Group complied with all the Lender Covenants of the significant borrowings from
international credit institutions.
18. Debt Securities Issued
Debt securities issued comprise:
Eurobonds
Georgian local bonds
Certificates of deposit
Debt securities issued
2015
2014
2013
908,183
98,859
32,762
779,445
46,217
31,033
728,117
–
–
1,039,804
856,695
728,117
In May 2015, the Group’s healthcare subsidiary JSC Medical Corporation EVEX completed the issuance of 2-year local bonds of US$ 15
million (GEL 34 million). The bonds were issued at par with an annual coupon rate of 9.50% payable semi-annually with 5% withholding
tax applying to individuals.
In May 2015, the Group’s real estate subsidiary JSC m2 Real Estate completed the issuance of 2-year local bonds of US$ 20 million (GEL
45 million). The bonds were issued at par with an annual coupon rate of 9.50% payable semi-annually with a 5% withholding tax applying
to individuals.
188 BGEO Group PLC Annual Report 2015
Financial statements
19. Commitments and Contingencies
Legal
In the ordinary course of business, the Group and BGEO are subject to legal actions and complaints. Management believes that the
ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the
results of future operations of the Group or BGEO.
Financial commitments and contingencies
As at 31 December 2015, 31 December 2014 and 31 December 2013 the Group’s financial commitments and contingencies comprised
the following:
Credit-related commitments
Guarantees issued
Undrawn loan facilities
Letters of credit
Operating lease commitments
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years
Capital expenditure commitments
Less – Cash held as security against letters of credit and guarantees (Note 16)
Less – Provisions
Financial commitments and contingencies, net
2015
2014
2013
473,839
273,851
43,126
465,527
144,634
95,669
478,247
147,273
55,608
790,816
705,830
681,128
17,056
31,216
5,553
53,825
27,624
12,382
21,943
3,178
37,503
10,035
7,978
12,844
1,693
22,515
11,463
(64,534)
(2,240)
(53,393)
(4,732)
(53,903)
(481)
805,491
695,243
660,722
As at 31 December 2015, capital expenditure represented the commitment for purchase of property and capital repairs of GEL 25,915
and software and other intangible assets of GEL 1,709. As at 31 December 2014, capital expenditure represented the commitment for
purchase of property and capital repairs of GEL 9,810 and software and other intangible assets of GEL 225. As at 31 December 2013,
capital expenditure represented the commitment for purchase of property and capital repairs of GEL 8,796 and software and other
intangible assets of GEL 2,667.
20. Equity
Share capital
As at 31 December 2015, issued share capital comprised 39,500,320 common shares, of which 39,500,320 were fully paid
(31 December 2014: 39,500,320 issued share capital, of which 39,500,320 were fully paid, 31 December 2013: 35,909,383 issued share
capital, of which 35,909,383 were fully paid). Each share has a nominal value of one (1) British Penny (31 December 2014: one (1) British
Penny, 31 December 2013: one (1) British Penny). Shares issued and outstanding as at 31 December 2015 are described below:
31 December 2012
Effect of translation of equity components to presentation currency
31 December 2013
Issue of share capital
Effect of translation of equity components to presentation currency
31 December 2014
Effect of translation of equity components to presentation currency
31 December 2015
Number of
shares
Ordinary
Amount of
shares
Ordinary
35,909,383
–
35,909,383
3,590,937
–
39,500,320
–
39,500,320
957
71
1,028
108
7
1,143
11
1,154
On 5 December 2014, a total of 3,590,937 ordinary shares of 1 British Penny each in the capital of BGEO (the “Placing Shares”) have
been placed by Citigroup Global Markets Limited (“Citi”), Numis Securities Limited (“Numis”) and RBC Capital Markets (“RBC”) at a price
of 2.025 British Penny per Placing Share, raising GEL 215,659 in net proceeds. The Placing Shares issued represented 9.99% of the
issued ordinary shares of BGEO prior to the Placing. On 10 December 2014 the Placing Shares were admitted to the premium listing
segment of the Official List of the UK Listing Authority and to the London Stock Exchange. The Placing Shares are credited as fully paid
and rank pari passu in all respects with the existing ordinary shares of 1 British Penny each in the capital of BGEO, including the right to
receive all dividends and other distributions declared, made or paid on or in respect of such shares after the date of issue of the Placing
Shares. Citi acted as Global Coordinator in respect of the Placing and together with Numis and RBC as Joint Bookrunners in respect of
the Placing.
Annual Report 2015 BGEO Group PLC 189
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
20. Equity continued
Treasury shares
Treasury shares are held by the Group solely for the employee’s future share-based compensation purposes.
The number of treasury shares held by the Group as at 31 December 2015 comprised 1,521,752 (31 December 2014: 1,522,185,
31 December 2013: 1,973,376).
Nominal amount of treasury shares of GEL 44 as at 31 December 2015 comprise the Group’s shares owned by the Group (31 December
2014: GEL 46, 31 December 2013: GEL 56).
Dividends
Shareholders are entitled to dividends in British Pounds Sterling.
On 21 May 2015, the Directors of BGEO declared an interim dividend for 2014 of Georgian Lari 2.1 per share. The currency conversion
date was set at 8 June 2015, with the official GEL – GBP exchange rate of 3.5110, resulting in a GBP denominated interim dividend of
0.5981 per share. Payment of the total GEL 80,411 interim dividends was received by shareholders on 16 June 2015.
On 28 May 2014, the Directors of BGEO declared an interim dividend for 2013 of Georgian Lari 2.0 per share. The currency conversion
date was set at 9 June 2014, with the official GEL – GBP exchange rate of 2.9815, resulting in a GBP denominated interim dividend of
0.6708 per share. Payment of the total GEL 71,633 interim dividends was received by shareholders on 18 June 2014.
On 23 May 2013, the Directors of BGEO declared an interim dividend for 2012 of Georgian Lari 1.5 per share. The currency conversion
date was set at 10 June 2013, with the official GEL – GBP exchange rate of 2.6051, resulting in a GBP denominated interim dividend of
0.5758 per share. Payment of the total GEL 51,235 interim dividends was received by shareholders on 19 June 2013.
Nature and purpose of Other Reserves
Revaluation reserve for property and equipment
The revaluation reserve for property and equipment is used to record increases in the fair value of office buildings and service centres
and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.
Unrealised gains (losses) on investment securities
This reserve records fair value changes on investment securities.
Unrealised gains (losses) from dilution or sale/acquisition of shares in existing subsidiaries
This reserve records unrealised gains (losses) from dilution or sale/acquisition of shares in existing subsidiaries.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of
foreign subsidiaries.
Movements in other reserves during the years ended 31 December 2015, 31 December 2014 and 31 December 2013 are presented in
the statements of other comprehensive income.
2015
2014
2013
303,694
38,314,369
7.9264
232,509
201,490
34,584,751 33,983,014
5.9291
6.7228
Earnings per share
Basic and diluted earnings per share
Profit for the year attributable to ordinary shareholders of the Group
Weighted average number of ordinary shares outstanding during the year
Basic and diluted earnings per share
190 BGEO Group PLC Annual Report 2015
Financial statements
21. Net Interest Income
From loans to customers
From investment securities: available-for-sale
From finance lease receivable
From amounts due from credit institutions
Interest Income
On client deposits and notes
On amounts owed to credit institutions
On debt securities issued
Interest Expense
Net Interest Income
2015
2014 (reclassified)
Banking
Business
Investment
Business
Elimination
Total
Banking
Business
Investment
Business
Elimination
Total
782,525
69,670
9,728
10,376
872,299
(190,024)
(100,714)
(68,634)
1,480
11
–
1,847
3,338
(12,289)
(245)
–
(985)
771,716
69,436
9,728
11,238
546,668
39,988
8,370
5,899
(13,519)
862,118
600,925
628
–
–
1,232
1,860
–
(22,395)
(3,098)
2,767
11,453
1,920
(187,257)
(111,656)
(69,812)
(133,835)
(55,384)
(54,435)
–
(15,619)
(470)
(7,313)
–
–
(551)
539,983
39,988
8,370
6,580
(7,864)
594,921
–
9,063
468
(133,835)
(61,940)
(54,437)
(359,372)
(25,493)
16,140
(368,725)
(243,654)
(16,089)
9,531
(250,212)
512,927
(22,155)
2,621
493,393
357,271
(14,229)
1,667
344,709
From loans to customers
From investment securities: available-for-sale
From finance lease receivable
From amounts due from credit institutions
Interest Income
On client deposits and notes
On amounts owed to credit institutions
On debt securities issued
Interest Expense
Net Interest Income
22. Net Fee and Commission Income
Settlements operations
Guarantees and letters of credit
Cash operations
Currency conversion operations
Brokerage service fees
Advisory
Other
Fee and commission income
Settlements operations
Cash operations
Guarantees and letters of credit
Insurance brokerage service fees
Currency conversion operations
Other
Fee and commission expense
Net fee and commission income
2013 (reclassified)
Banking
Business
Investment
Business
Elimination
Total
527,323
35,371
7,466
7,523
577,683
(160,249)
(59,475)
(35,423)
847
–
–
2,072
2,919
–
(12,166)
(1)
(5,321)
–
–
(1,173)
522,849
35,371
7,466
8,422
(6,494)
574,108
1,221
6,480
–
(159,028)
(65,161)
(35,424)
(255,147)
(12,167)
7,701
(259,613)
322,536
(9,248)
1,207
314,495
2015
2014
2013
112,540
25,930
13,822
1,550
805
465
3,046
87,076
21,503
9,665
3,204
7,214
–
3,773
76,541
23,771
9,049
2,652
785
272
2,010
158,158
132,435
115,080
(29,371)
(4,670)
(3,836)
(708)
(62)
(1,105)
(21,354)
(3,726)
(3,991)
(1,137)
(108)
(2,327)
(19,124)
(2,666)
(3,917)
(608)
(95)
(1,670)
(39,752)
(32,643)
(28,080)
118,406
99,792
87,000
Annual Report 2015 BGEO Group PLC 191
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
23. Gross Insurance Profit
Net insurance premiums earned, net insurance claims incurred and respective gross insurance profit for the years ended 31 December
2015, 31 December 2014 and 31 December 2013 comprised:
2015
2014
2013
9,830
110,962
120,792
283
(7,006)
114,069
(530)
(20,402)
1
(237)
5,381
81,691
87,072
70
26,621
113,763
(53)
(18,328)
(32)
500
3,610
135,635
139,245
881
2,913
143,039
(505)
(14,660)
5
2,114
(21,168)
(17,913)
(13,046)
92,901
95,850
129,993
(2,046)
(67,561)
(69,607)
54
4,186
3,045
(672)
(1,364)
(68,827)
(70,191)
120
1,858
443
1,350
(954)
(86,425)
(87,379)
441
1,036
2,325
(1,083)
(62,994)
(66,420)
(84,660)
29,907
29,430
45,333
2015
2014
2013
144,013
36,102
3,878
–
78,967
33,854
11,562
1,337
19,810
17,677
22,418
108
183,993
125,720
60,013
(65,344)
(35,474)
(2,017)
(220)
(39,022)
(20,830)
(12,042)
(343)
(20,182)
(9,791)
(1,885)
(626)
(103,055)
(72,237)
(32,484)
80,938
53,483
27,529
2015
2014
2013
44,917
7,083
2,409
54,409
56,993
1,910
1,473
60,376
7,151
7,202
1,825
16,178
(39,721)
(46,810)
(5,929)
14,688
13,566
10,249
2015
2014
2013
10,079
7,267
154
3,277
20,777
12,449
–
89
453
12,991
11,270
944
221
374
12,809
Life insurance contracts premium written
General insurance contracts premium written
Total premiums written
Gross change in life provision
Gross change in general insurance contracts unearned premium provision
Total gross premiums earned on insurance contracts
Reinsurers’ share of life insurance contracts premium written
Reinsurers’ share of general insurance contracts premium written
Reinsurers’ share of change in life provision
Reinsurers’ share of change in general insurance contracts unearned premium provision
Total reinsurers’ share of gross earned premiums on insurance contracts
Net insurance premiums earned
Life insurance claims paid
General insurance claims paid
Total insurance claims paid
Reinsurers’ share of life insurance claims paid
Reinsurers’ share of general insurance claims paid
Gross change in total reserves for claims
Reinsurers’ share of change in total reserves for claims
Net insurance claims incurred
Gross insurance profit
24. Gross Healthcare Profit
Revenue from government programmes
Revenue from free flow (non-insured retail individuals)
Revenue from insurance companies
Other revenue from medical services
Healthcare revenue
Direct salary expenses
Direct materials
Expenses on medical service providers
Other direct expenses
Cost of healthcare services
Gross healthcare profit
25. Gross Real Estate Profit and Gross Other Investment Profit
Revenue from affordable housing
Revaluation of investment property developed by the Group
Income from operating lease
Real estate revenue
Cost of real estate
Gross real estate profit
Revenue from wine production and distribution
Net gains from revaluation of other investment properties
Net gain from sale of PPE and IP
Other investment Profit
Gross other investment profit
192 BGEO Group PLC Annual Report 2015
Financial statements
26. Salaries and Other Employee Benefits, and General and Administrative Expenses
Salaries and bonuses
Social security costs
Pension costs
Salaries and other employee benefits
2015
2014
2013
(181,316)
(3,216)
(150,167)
(3,292)
(132,087)
(2,290)
(797)
(722)
(671)
(185,329)
(154,181)
(135,048)
The average number of staff employed by the Group for the years ended 31 December 2015, 31 December 2014 and 31 December 2013
comprised:
The Bank
Insurance companies**
BNB
Other
Average number of staff employed excluding healthcare*
Healthcare companies***
Average total number of staff employed
2015
4,591
623
504
1,062
6,780
8,229
2014
3,622
597
433
840
5,492
7,242
2013
3,686
589
362
807
5,444
6,046
15,009
12,734
11,490
Salary expenses on staff employed in the healthcare segment are included in cost of healthcare services.
*
** JSC Insurance Company Imedi L and JSC Insurance Company Aldagi.
*** JSC Medical Corporation EVEX and its subsidiaries.
Salaries and bonuses include GEL 31,219, GEL 27,193 and GEL 18,702 of the Equity Compensation Plan costs for the years ended
31 December 2015, 31 December 2014 and 31 December 2013, respectively, associated with the existing share-based compensation
scheme approved in the Group (Notes 28 and 32).
Occupancy and rent
Legal and other professional services
Marketing and advertising
Repairs and maintenance
Office supplies
Communication
Operating taxes
Corporate hospitality and entertainment
Travel expenses
Security
Personnel training and recruitment
Insurance
Other
General and administrative expenses
2015
2014
2013
(18,077)
(12,183)
(11,266)
(10,785)
(7,579)
(6,630)
(5,735)
(4,807)
(2,383)
(2,074)
(1,703)
(1,176)
(6,521)
(11,351)
(9,742)
(10,901)
(9,065)
(6,246)
(5,107)
(5,074)
(4,139)
(1,621)
(2,577)
(1,697)
(443)
(5,496)
(9,783)
(8,399)
(9,467)
(7,482)
(6,119)
(4,750)
(4,567)
(3,233)
(1,441)
(2,149)
(1,212)
(520)
(1,238)
(90,919)
(73,459)
(60,360)
Auditors’ remuneration is included within legal and other professional services expenses above and comprises:
2015
Audit of BGEO Group and subsidiaries’ annual accounts
Review of the Group’s interim accounts
Other assurance services
Total auditors’ remuneration
2014
Audit of BGEO Group and subsidiaries’ annual accounts
Review of the Group’s interim accounts
Other assurance services
Total auditors’ remuneration
2013
Audit of BGEO Group and subsidiaries’ annual accounts
Review of the Group’s interim accounts
Other assurance services
Total auditors’ remuneration
Audit
Audit Related
Other Services
Total
2,130
–
–
2,130
1,784
–
–
1,784
1,430
–
–
1,430
–
385
40
425
–
124
673
797
–
226
98
324
–
–
4,846
4,846
–
–
263
263
–
–
260
260
2,130
385
4,886
7,401
1,784
124
936
2,844
1,430
226
358
2,014
The figures shown in the above table relate to fees paid to Ernst & Young LLP and its associates. Fees paid to other auditors not
associated with Ernst & Young LLP in respect of the audit of the Parent and Group’s subsidiaries were GEL 40 (2014: GEL 17, 2013: GEL
145) and in respect of other services of the Group were GEL 200 (2014: GEL 327, 2013: GEL 634).
Other assurance services in the year ended 31 December 2015 comprised of GEL 1,450 audit and GEL 3,101 non-audit services, or GEL
4,551 total, related to GHG IPO and debited directly to equity as GHG IPO related transaction costs.
Annual Report 2015 BGEO Group PLC 193
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
27. Net Non-recurring Expenses
Gain on bargain purchase (note 5)
Reversal of impairment on property and equipment
Gain from building transferred to healthcare segment from the Government
Gain from penalties on unfulfilled obligations by contractors
Other non-recurring income/gain
Total non-recurring income/gain
Loss from early repayments of borrowings from international credit institutions and debt securities issued
JSC PrivatBank integration costs
Impairment of prepayments
Write-off of miscellaneous healthcare related assets
Impairment of finance lease receivables
Management leave compensation expense
Foreign exchange loss on revaluation of holdback
Tax penalties from inspection of Revenue Services of Georgia
Impairment of property and equipment, and intangible assets
Impairment of investment securities available-for-sale
Loss from Belarus Hyperinflation
Charity expenses
Impairment of receivables from sale of BG Bank
Impairment of investment in associate
Loss from damaged physical assets
Unforeseen loss on Affordable Housing pilot project
Other
Total non-recurring expense/loss
Net non-recurring expense/loss
2015
2014
5,361
1,524
–
–
641
7,526
(4,519)
(3,731)
(2,503)
(2,277)
(1,969)
(1,598)
(1,580)
(1,340)
(426)
–
–
–
–
–
–
–
(2,160)
1,003
–
524
–
277
1,804
(2,503)
–
–
–
–
–
–
–
–
(3,837)
(3,073)
(210)
–
–
–
–
(3,198)
2013
–
–
–
201
515
716
–
–
–
–
–
(577)
–
–
(1,171)
–
(1,694)
(240)
(3,100)
(2,441)
(531)
(389)
(3,412)
(22,103)
(12,821)
(13,555)
(14,577)
(11,017)
(12,839)
28. Share-based Payments
Executives’ Equity Compensation Plan
Sanne Fiduciary Services Limited (the “Trustee”) acts as the trustee of the Group’s Executives’ Equity Compensation Plan (“EECP”).
In March 2015 the BGEO’s remuneration committee resolved to award 153,500 ordinary shares of BGEO to the members of the
Management Board and 107,215 ordinary shares of BGEO to the Group’s 24 executives. Shares awarded to the Management Board and
the other 20 executives are subject to two-year vesting, with continuous employment being the only vesting condition for both awards.
The Group considers 19 March 2015 as the grant date. The Group estimates that the fair value of the shares awarded on 19 March 2015
was Georgian Lari 57.41 per share.
In February 2014 the Bank’s Supervisory Board resolved to award 135,500 ordinary shares of BGEO to the members of the Management
Board and 88,775 ordinary shares of BGEO to the Group’s 27 executives. Shares awarded to the Management Board are subject to
two-year vesting, while shares awarded to the other 27 executives are subject to three-year vesting, with continuous employment being
the only vesting condition for both awards. The Group considers 24 February 2014 as the grant date. The Group estimates that the fair
value of the shares awarded on 24 February 2014 was Georgian Lari 67.90 per share.
In February 2013 the Bank’s Supervisory Board resolved to award 200,000 ordinary shares of BGEO to the members of the Management
Board and 137,850 ordinary shares of BGEO to the Group’s 28 executives. Shares awarded to the Management Board are subject to
two-year vesting, while shares awarded to the other 28 executives are subject to three-year vesting, with continuous employment being
the only vesting condition for both awards. The Group considers 15 February 2013 as the grant date. The Group estimates that the fair
value of the shares awarded on 15 February 2013 was Georgian Lari 35.56 per share.
In August 2015, Management Board members signed new three-year fixed contingent share-based compensation agreements with the
total of 934,000 ordinary shares of BGEO. The total amount of shares fixed to each executive will be awarded in three equal instalments
during the 3 consecutive years starting January 2017, of which each award will be subject to a four-year vesting period. The Group
considers 24 August 2015 as the grant date for the awards. The Group estimates that the fair value of the shares on 24 August 2015
was Georgian Lari 59.17.
In February 2013 the CEO of the Bank and the deputies signed new three-year fixed contingent share-based compensation agreements
with the Bank for the total of 840,000 ordinary shares of BGEO. The total amount of shares fixed to each executive will be awarded in
three equal instalments during the 3 consecutive years starting January 2014, of which each award will be subject to a four-year vesting
period. The Group considers 18 February 2013 as the grant date for the awards. The Group estimates that the fair value of the shares on
18 February 2013 was Georgian Lari 35.45.
The Bank grants share compensation to its non-executive employees too. In March 2015, February 2014 and February 2013, the
Supervisory Board of the Bank resolved to award 111,298, 42,745 and 68,850 ordinary shares to its non-executive employees,
respectively. All these awards are subject to three-year vesting, with a continuous employment being the only vesting condition for all
awards. The Group considers 19 March 2015, 24 February 2014 and 15 February 2013 as the grant dates of these awards, respectively.
The Group estimates that the fair values of the shares awarded on 19 March 2015, 24 February 2014 and 15 February 2013 were
Georgian Lari 57.41, 67.90 and 35.56 per share, respectively.
194 BGEO Group PLC Annual Report 2015
Financial statements 28. Share-based Payments continued
Summary
Fair value of the shares granted at the measurement date is determined based on available market quotations.
The weighted average fair value of share-based awards at the grant date comprised Georgian Lari 58.74 per share in year ended
31 December 2015 (31 December 2014: Georgian Lari 67.90 per share, 31 December 2013: Georgian Lari 35.48).
The Group’s total share-based payment expenses for the year ended 31 December 2015 comprised GEL 31,219 (31 December 2014:
GEL 27,193, 31 December 2013: GEL 18,702) and are included in “salaries and other employee benefits”, as “salaries and bonuses”.
Below is the summary of the share-based payments related data:
Total number of equity instruments awarded*
– Among them, to top management and board of directors
Weighted average value at grant date, per share (GEL in full amount)
Value at grant date, total (GEL)
Total expense recognised during the year (GEL)
2015
2014
2013
1,536,013
1,106,000
58.74
267,020
135,500
67.90
1,246,700
300,000
35.48
90,228
18,132
44,238
(31,219)
(27,193)
(18,702)
*
2015 award includes fixed contingent share-based compensation of 1,164,000 ordinary shares per new employment agreements signed 24 August 2015 for subsequent
consecutive 3 year period, including 934,000 of the Management Board members. 2013 award includes fixed contingent share-based compensation of 840,000 ordinary
shares per new employment agreements of CEO and deputies, signed in February 2013 for the subsequent consecutive 3 year period;
During 2015 total gain from exercise of the share options by BGEO directors amounted to GEL 8,251 (2014: 7,437, 2013: GEL 2,558).
29. Risk Management
Introduction
Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring,
subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability and each
individual within the Group is accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to credit risk,
liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to operational risks.
The independent risk control process does not include business risks such as changes in the environment, technology and industry.
They are monitored through the Group’s strategic planning process.
Risk management structure
Audit Committee
The Audit Committee is an independent body and is directly monitored by the Board. It has the overall responsibility for developing
and implementation of overall risk assessment and risk mitigation strategies, principles, frameworks, policies and limits. The Audit
Committee is responsible for the fundamental risk issues and manages and monitors relevant risk decisions covering, but not limited
to: macroeconomic and environmental risks, general control environment, manual and application controls, risks of intentionally or
unintentional misstatements, risk of fraud or misappropriation of assets, information security, anti-money laundering, information
technology risks, etc.
Risk Committee
The Risk Committee is responsible for ensuring that the Group’s risk appetite and exposure are addressed as part of strategy and
appropriateness of risk strategy and appetite; oversee and advise the Board on the current and emerging risk exposures of the Group;
oversee and monitor the implementation of the risk strategy by senior management to address the risk exposures of the Group; review
the effectiveness of the Group’s risk management framework and internal control systems (other than internal financial control systems
which is the responsibility of the BGEO Audit Committee); assess the adequacy and quality of the risk management function and the
effectiveness of risk reporting within the Group; ensure that risk is properly considered in setting the Group’s remuneration policy;
oversee the communication of the tone from top related to risk management to every level of the business through senior management;
review and approve the Group’s risk management policy.
Management Board
The Management Board has the responsibility to monitor and manage the entire risk process within the Group, on a regular basis, by
assigning tasks, creating different executive committees, designing and setting up risk management policies and procedures as well as
respective guidelines and controlling the implementation and performance of relevant departments and committees.
Bank Asset and Liability Management Committee
The Bank’s Asset and Liability Management Committee (“ALCO”) is the core risk management body. It is responsible for managing the
Bank’s assets and liabilities, all risks associated with them as well as the overall financial structure of the Group. It is also primarily
responsible for the funding, capital adequacy risk, liquidity risks and market risks of the Bank.
Internal Audit
Risk management processes throughout the Group are audited annually by the internal audit function that examines both the adequacy
of the procedures and the Group’s compliance with the procedures. Internal Audit discusses the results of all assessments with
management, and reports its findings and recommendations to the Audit Committee.
Annual Report 2015 BGEO Group PLC 195
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
29. Risk Management continued
Risk measurement and reporting systems
The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and
unexpected losses, which are an estimate of the ultimate actual loss based on different forecasting models. The models make use of
probabilities derived from historical experience, adjusted to reflect the economic environment. The Group runs three different basic
scenarios, of which one is Base Case (forecast under normal business conditions) and the other two are Troubled and Distressed
Scenarios, which are worse and the worst case scenarios, respectively, that would arise in the event that extreme events which are
unlikely to occur do, in fact, occur.
Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy
and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected
industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure
across all risks types and activities.
Information compiled from all the businesses is examined and processed in order to analyse, control and identify early risks. This
information is presented and explained to the Management Board, and the head of each business division. The reports include aggregate
credit exposures and their limits, exceptions to those limits, liquidity ratios and liquidity limits, market risk ratios and their limits, and
changes to the risk profile. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis. The
Management Board receives a comprehensive Credit Risk report and ALCO report once a month. These reports are designed to provide
all the necessary information to assess and conclude on the risks of the Group.
Risk measurement and reporting systems
For all levels throughout the Group, specifically tailored risk reports are prepared and distributed in order to ensure that all business
divisions have access to extensive, relevant and up-to-date information.
A daily briefing is given to the Management Board and all other relevant employees of the Group on the utilisation of market limits,
proprietary investments and liquidity, plus any other risk developments.
Risk mitigation
As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in
interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions. While these are intended for
hedging, these do not qualify for hedge accounting.
The Group actively uses collateral to reduce its credit risks (see below for more detail).
Excessive risk concentration
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic
region, or these counterparties represent related parties to each other, or have similar economic features that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations also involve
combined, aggregate exposures of large and significant credits compared to the total outstanding balance of the respective financial
instrument. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry
or geographical location.
In order to avoid excessive concentrations of risks, the Group’s policies and procedures include specific guidelines to focus on
maintaining a diversified portfolio of both, financial assets as well as financial liabilities. Identified concentrations of credit risks or liquidity/
repayment risks are controlled and managed accordingly.
Credit risk
Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties failed to discharge their contractual
obligations. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual
counterparties and for geographical, industry, product and currency concentrations, and by monitoring exposures in relation to such
limits.
The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of
counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system,
which assigns each counterparty a risk rating. Risk ratings are subject to regular revision.
The credit quality review process allows the Group to assess the potential loss as a result of the risks to which it is exposed and take
corrective action.
Derivative financial instruments
Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the
statement of the financial position.
Credit-related commitments risks
The Group makes available to its customers guarantees which may require that the Group make payments on their behalf. Such
payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to loans and
these are mitigated by the same control processes and policies.
196 BGEO Group PLC Annual Report 2015
Financial statements 29. Risk Management continued
Credit quality per class of financial assets
The credit quality of financial assets is managed by the Group through internal credit ratings. The table below shows the credit quality by
class of asset for loan-related lines in the statement of financial position, based on the Group’s credit rating system.
Total 31 December 2015
Amounts due from credit institutions
Debt investment securities available-for-sale
Loans to customers:
Commercial loans
Consumer loans
Micro and SME loans
Residential mortgage loans
Gold – pawn loans
Finance lease receivables
Total
Total 31 December 2014
Amounts due from credit institutions
Debt investment securities available-for-sale
Loans to customers:
Commercial loans
Consumer loans
Micro and SME loans
Residential mortgage loans
Gold – pawn loans
Finance lease receivables
Total
Total 31 December 2013
Amounts due from credit institutions
Debt investment securities available-for-sale
Loans to customers:
Commercial loans
Consumer loans
Micro and SME loans
Residential mortgage loans
Gold – pawn loans
Finance lease receivables
Total
Notes
8
9
10
Neither past due nor impaired
High
grade
Standard
grade
Sub-standard
grade
Past due or
individually
impaired
Total
731,365
902,419
1,789,428
1,047,775
892,014
750,455
61,140
–
–
196,607
22,810
80,064
22,033
–
–
–
57,085
22,642
27,828
11,223
–
–
–
731,365
902,419
354,661
71,880
42,023
30,633
–
2,397,781
1,165,107
1,041,929
814,344
61,140
4,540,812
321,514
118,778
499,197
5,480,301
10
16,442
12,270
3,531
10,669
42,912
6,191,038
333,784
122,309
509,866
7,156,997
Notes
8
9
10
Neither past due nor impaired
High
grade
Standard
grade
Sub-standard
grade
Past due or
individually
impaired
Total
418,281
768,300
1,635,707
739,767
663,388
570,879
53,785
–
–
138,115
22,293
83,413
16,565
–
–
–
159,074
1,541
7,799
2,009
–
–
–
418,281
768,300
248,531
37,873
17,683
14,690
–
2,181,427
801,474
772,283
604,143
53,785
3,663,526
260,386
170,423
318,777
4,413,112
10
19,437
4,684
2,150
12,977
39,248
4,869,544
265,070
172,573
331,754
5,638,941
Notes
8
9
10
Neither past due nor impaired
High
grade
Standard
grade
Sub-standard
grade
Past due or
individually
impaired
Total
347,261
514,357
1,461,590
607,344
486,536
411,291
61,871
–
–
114,248
19,849
63,501
21,359
–
–
–
110,791
1,475
4,198
2,303
–
–
–
347,261
514,357
167,993
31,552
12,038
12,110
–
1,854,622
660,220
566,273
447,063
61,871
3,028,632
218,957
118,767
223,693
3,590,049
10
30,325
4,020
1,918
9,986
46,249
3,920,575
222,977
120,685
233,679
4,497,916
Past due loans to customers, analysed by age below, include those that are past due by at least one day and are not impaired.
It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of
the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating
system is supported by a variety of financial analytics to provide the main inputs for the measurement of counterparty risk. All internal risk
ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. Attributable risk ratings are
assessed and updated regularly.
The credit risk assessment policy for non-past due and individually non-impaired financial assets has been determined by the Group
as follows:
• A financial asset that is neither past due nor impaired at the reporting date, but historically used to be past due no more than 30 days
is assessed as a financial asset with High Grade;
• A financial asset that is neither past due nor impaired at the reporting date, but historically used to be past due more than 30 but less
than 60 days is assessed as a financial asset with Standard Grade;
• A financial asset that is neither past due nor impaired at the reporting date, but historically used to be past due more than 60 days or
borrower of this loan has at least an additional borrowing in past due more than 60 days as at reporting date is assessed as a financial
asset with Sub-Standard Grade.
Annual Report 2015 BGEO Group PLC 197
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
29. Risk Management continued
Aging analysis of past due but not impaired loans per class of financial assets
31 December 2015
Loans to customers:
Consumer loans
Micro and SME loans
Residential mortgage loans
Commercial loans
Finance lease receivables
Total
31 December 2014
Loans to customers:
Commercial loans
Consumer loans
Residential mortgage loans
Micro and SME loans
Finance lease receivables
Total
31 December 2013
Loans to customers:
Consumer loans
Commercial loans
Residential mortgage loans
Micro and SME loans
Finance lease receivables
Total
31 to 60 days
61 to 90 days
More than
90 days
Total
Less than
30 days
29,592
5,196
7,594
21,727
1,520
Less than
30 days
2,673
19,266
3,822
2,926
1,977
8,498
4,148
1,207
1,227
342
528
4,758
788
3,307
9,154
6,930
1,000
908
25
535
9,398
23,724
4,259
5,023
1,596
4,547
68,744
14,603
14,732
24,575
6,944
39,149
129,598
65,629
15,422
31 to 60 days
61 to 90 days
More than
90 days
Total
342
2,703
304
259
156
3,764
1,162
9,222
1,832
598
203
4,705
35,949
6,746
7,090
11,490
13,017
65,980
30,664
18,535
Less than
30 days
16,735
9,118
4,201
843
5,839
36,736
31 to 60 days
61 to 90 days
More than
90 days
Total
–
2,422
547
18
3,081
6,068
–
847
288
200
88
1,423
1
11,584
283
52
108
12,028
16,736
23,971
5,319
1,113
9,116
56,255
See Note 10 for more detailed information with respect to the allowance for impairment of loans to customers and finance lease
receivables.
The Group specifically monitors performance of the loans with overdue payments in arrears for more than 90 days. The gross carrying
value (i.e. carrying value before deducting any allowance for impairment) of such loans comprised GEL 166,224, GEL 118,131 and GEL
123,975 as at 31 December 2015, 31 December 2014 and 31 December 2013, respectively.
Carrying amount per class of financial assets whose terms have been renegotiated
The table below shows the carrying amount for renegotiated financial assets by class.
Loans to customers:
Commercial loans
Micro and SME loans
Residential mortgage loans
Consumer loans
Finance lease receivables
Total
2015
2014
2013
141,294
20,890
28,594
18,243
2,684
115,155
8,734
3,446
617
4,957
44,559
5,147
9,418
1,031
1,533
211,705
132,909
61,688
Impairment assessment
The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by any
number of days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the
original terms of the contract. The Group addresses impairment assessment in two areas: individually assessed allowances and
collectively assessed allowances. Loans are considered to be individually impaired if they are past due by certain number of days as
prescribed per the Group methodology, or history of the debt service is deteriorated by a certain percentage, as defined per the Group
methodology, or any other defined event of default is identified. Impairment for all such loans is assessed individually, rather than through
a collective impairment assessment model of the Group.
198 BGEO Group PLC Annual Report 2015
Financial statements
29. Risk Management continued
Individually assessed allowances
For loan loss allowance determination purposes the Group considers all individually significant loans and classifies them between being
individually impaired or not impaired. The allowance for those individually significant loans that are determined to be individually impaired
is determined through individual assessment of the associated credit risk by assigning a proper credit rating. The allowances for non-
significant loans that are determined to be individually impaired are also individually assessed. The allowance for losses for individually
significant loans that are determined not to be individually impaired is assessed through the collective assessment approach described
below. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to
improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy
ensue, the availability of other financial support and the realisable value of collateral, the timing of the expected cash flows and past
history of the debt service of the borrower. Impairment losses are evaluated at each reporting date, unless unforeseen circumstances
require more careful attention.
Collectively assessed allowances
Allowances are assessed collectively for all loans (including but not limited to credit cards, residential mortgages, and unsecured
consumer lending, commercial lending, etc.), both, significant as well as non-significant, where there is not yet objective evidence of
individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.
The collective assessment takes into account the impairment that is likely to be present in the portfolio even though there is not yet
objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the
following information: historical losses on the portfolio, current economic conditions, the appropriate delay between the time a loss is
likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected
receipts and recoveries once impaired. Local management is responsible for deciding the length of this period which can extend for as
long as one year, depending on the product. The impairment allowance is then reviewed by credit management to ensure alignment with
the Group’s overall policy.
Financial guarantees and letters of credit are assessed and provision is made in a similar manner as for loans.
The geographical concentration of the Group’s assets and liabilities is set out below:
2015
CIS and
other foreign
countries
Total
Georgia
OECD
623,904
630,217
824,820
5,002,004
1,625,445
662,296
97,242
79,047
–
63,265
146,734
3,906
–
320,113
36,746
1,432,934
731,365
903,867
5,322,117
1,725,456
8,706,390
901,850
507,499
10,115,739
3,522,316
508,287
98,859
446,820
422,649
1,063,404
940,945
8,296
806,422
217,371
–
6,732
4,751,387
1,789,062
1,039,804
461,848
4,576,282
2,435,294
1,030,525
8,042,101
4,130,108
(1,533,444)
(523,026)
2,073,638
Assets:
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
All other assets
Liabilities:
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
All other liabilities
Net balance sheet position
Assets:
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
All other assets
Liabilities:
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
All other liabilities
Georgia
OECD
475,858
393,975
726,880
4,081,898
1,266,904
136,559
1,686
25,069
–
10,069
2014
CIS and
other foreign
countries
97,727
22,620
17,763
265,953
56,184
Total
Georgia
OECD
2013
CIS and
other foreign
countries
Total
710,144
418,281
769,712
4,347,851
1,333,157
480,651
293,163
515,774
3,315,562
1,004,536
485,740
3,638
–
–
4,556
87,280
50,460
3,849
199,308
76,452
1,053,671
347,261
519,623
3,514,870
1,085,544
6,945,515
173,383
460,247
7,579,145
5,609,686
493,934
417,349
6,520,969
2,163,559
582,906
46,216
324,846
515,879
770,838
810,479
3,709
659,287
55,470
–
11,863
3,338,725
1,409,214
856,695
340,418
2,165,890
359,374
–
258,963
243,697
705,177
728,117
7,532
708,145
93,428
–
9,592
3,117,732
1,157,979
728,117
276,087
3,117,527
2,100,905
726,620
5,945,052
2,784,227
1,684,523
811,165
5,279,915
Net balance sheet position
3,827,988
(1,927,522)
(266,373)
1,634,093
2,825,459
(1,190,589)
(393,816)
1,241,054
Annual Report 2015 BGEO Group PLC 199
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
29. Risk Management continued
Liquidity risk and funding management
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress
circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages
assets with liquidity in mind, and monitors future cash flows and liquidity on a regular basis. This incorporates an assessment of expected
cash flows and the availability of high grade collateral which could be used to secure additional funding if required.
The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen
interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Group
maintains a cash deposit (obligatory reserve) with the NBG, the amount of which depends on the level of customer funds attracted.
The liquidity position is assessed and managed by the Group primarily on a standalone Bank basis, based on certain liquidity ratios
established by the NBG. As at 31 December 2015, 31 December 2014 and 31 December 2013 these ratios were as follows:
Average liquidity ratio
Maximum liquidity ratio
Minimum liquidity ratio
2015,
%
38.1%
48.0%
28.9%
2014,
%
39.3%
46.8%
31.7%
2013,
%
42.3%
48.1%
35.5%
The average liquidity ratio is calculated on a standalone basis for JSC Bank of Georgia as the annual average (arithmetic mean) of daily
liquidity ratios, computed as the ratio of liquid assets to liabilities determined by the National Bank of Georgia as follows:
Liquid assets comprise cash, cash equivalents and other assets that are immediately convertible into cash. Those assets include
investment securities issued by the Georgian Government plus Certificates of Deposit issued by NBG and do not include amounts due
from credit institutions, other than inter-bank deposits, and/or debt securities of Governments and Central Banks of non-OECD countries,
amounts in nostro accounts which are under lien, impaired inter-bank deposits and amounts on obligatory reserve with NBG that are
pledged due to borrowings from NBG.
Liabilities comprise the total balance sheet liabilities, less amounts due to credit institutions that are to be exercised or settled later than
six months from the reporting date, plus off-balance sheet commitments with residual maturity subsequent to the reporting date of less
than six months. Off-balance sheet commitments include all commitments except financial guarantees and letters of credit that are fully
collateralised by cash covers in the Bank, and commitments due to dealing operations with foreign currencies. The maximum and
minimum liquidity ratios are taken from historical data of the appropriate reporting years.
The Group also matches the maturity of financial assets and financial liabilities and imposes a maximum limit on negative gaps compared
to the Bank’s standalone total regulatory capital calculated per NBG regulation. The ratios are assessed and monitored monthly and
compared against set limits. In the case of deviations, amendment strategies/actions are discussed and approved by ALCO.
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment
obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects
that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the
expected cash flows indicated by the Bank’s deposit retention history.
Financial liabilities
As at 31 December 2015
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Other liabilities
Less than
3 months
3 to 12 months
1 to 5 years
Over 5 years
Total
2,968,883
318,902
51,564
53,099
1,258,421
376,323
24,695
36,939
613,914
628,932
1,070,369
19,266
60,094
524,874
–
4
4,901,312
1,849,031
1,146,628
109,308
Total undiscounted financial liabilities
3,392,448
1,696,378
2,332,481
584,972
8,006,279
Financial liabilities
As at 31 December 2014
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Other liabilities
Less than
3 months
2,064,563
616,480
45,941
37,183
3 to 12 months
1 to 5 years
Over 5 years
Total
903,041
225,911
73,767
37,004
461,975
535,643
879,653
17,422
22,098
189,493
–
–
3,451,677
1,567,527
999,361
91,609
Total undiscounted financial liabilities
2,764,167
1,239,723
1,894,693
211,591
6,110,174
Financial liabilities
As at 31 December 2013
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Other liabilities
Less than
3 months
2,059,836
437,600
27,822
20,866
3 to 12 months
1 to 5 years
Over 5 years
Total
830,537
207,191
26,913
70,713
476,370
539,324
855,086
14,242
32,099
141,842
–
3
3,398,842
1,325,957
909,821
105,824
Total undiscounted financial liabilities
2,546,124
1,135,354
1,885,022
173,944
5,740,444
200 BGEO Group PLC Annual Report 2015
Financial statements
29. Risk Management continued
The table below shows the contractual expiry by maturity of the Group’s financial commitments and contingencies.
31 December 2015
31 December 2014
31 December 2013
Less than
3 months
411,175
320,945
272,385
3 to 12 months
1 to 5 years
Over 5 years
Total
300,894
257,065
244,987
142,915
162,858
181,044
17,281
12,500
16,690
872,265
753,368
715,106
The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.
The maturity analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer
period than indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.
Included in due to customers are term deposits of individuals. In accordance with the Georgian legislation, the Bank is obliged to repay
such deposits upon demand of a depositor (Note 16).
Market risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such
as interest rates, foreign exchanges, and equity prices. The Group classifies exposures to market risk into either trading or non-trading
portfolios. Trading and non-trading positions are managed and monitored using sensitivity analysis.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial
instruments. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held
constant, on the Group’s consolidated income statement.
The sensitivity of the consolidated income statement is the effect of the assumed changes in interest rates on the net interest income for
the year, based on the floating rate non-trading financial assets and financial liabilities held at 31 December 2015. Changes in basis points
are calculated as standard deviations of daily changes in floating rates over the last month multiplied by respective floating rates. During
the year ended 31 December 2015, year ended 31 December 2014 and year ended 31 December 2013, sensitivity analysis did not reveal
any significant potential effect on the Group’s equity.
Currency
GEL
EUR
US$
Currency
GEL
EUR
US$
Currency
GEL
EUR
US$
Currency
GEL
EUR
US$
Increase in
basis points
2015
0.63%
0.20%
0.05%
Decrease in
basis points
2015
0.63%
0.20%
0.05%
Sensitivity of
net interest
income
2015
1,887
81
187
Sensitivity
of other
comprehensive
income
2015
(5,080)
–
–
Sensitivity of
net interest
income
2015
Sensitivity
of other
comprehensive
income
2015
(1,887)
(81)
(187)
5,080
–
–
Increase in
basis points
2014
Sensitivity of net
interest income
2014
0.07%
0.01%
0.01%
198
(6)
84
Decrease in
basis points
2014
Sensitivity of net
interest income
2014
0.07%
0.01%
0.01%
(198)
6
(84)
Sensitivity
of other
comprehensive
income
2014
–
–
–
Sensitivity
of other
comprehensive
income
2014
–
–
–
Annual Report 2015 BGEO Group PLC 201
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
29. Risk Management continued
Currency
GEL
US$
Currency
GEL
US$
Increase in
basis points
2013
Sensitivity of net
interest income
2013
0.14%
0.01%
34
29
Decrease in
basis points
2013
Sensitivity of net
interest income
2013
0.14%
0.01%
(34)
(29)
Sensitivity
of other
comprehensive
income
2013
–
–
Sensitivity
of other
comprehensive
income
2013
–
–
Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Management
Board has set limits on positions by currency based on the NBG regulations. Positions are monitored daily.
The tables below indicate the currencies to which the Group had significant exposure at 31 December 2015 on its trading and non-
trading monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement
of the currency rate against the Georgian Lari, with all other variables held constant on the income statement (due to the fair value of
currency sensitive non-trading monetary assets and liabilities). The reasonably possible movement of the currency rate against the
Georgian Lari is calculated as a standard deviation of daily changes in exchange rates over the last month. A negative amount in the table
reflects a potential net reduction in income statement or equity, while a positive amount reflects a net potential increase. During the year
ended the year ended 31 December 2015, year ended 31 December 2014 and year ended 31 December 2013, sensitivity analysis did not
reveal any significant potential effect on the Group’s equity.
Currency
EUR
GBP
US$
2015
2014
2013
Change in
currency rate
in %
Effect on profit
before tax
Change in
currency rate
in %
Effect on profit
before tax
Change in
currency rate
in %
Effect on profit
before tax
2.9%
2.5%
1.1%
1
–
(1,329)
14.3%
22.9%
23.4%
11
(6)
(4,745)
1.9%
2.1%
0.8%
(7)
(0)
(1)
Prepayment risk
Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment
earlier than expected, such as fixed rate mortgages when interest rates fall, or other credit facilities, for similar or whatever reasons.
The Group calculates the effect of early repayments by calculating the weighted average rates of early repayments across each loan
product individually, applying these historical rates to the outstanding carrying amount of respective products as at the reporting date and
multiplying by the weighted average effective annual interest rates for each product. The model does not make a distinction between
different reasons for repayment (e.g. relocation, refinancing and renegotiation) and takes into account the effect of any prepayment
penalties on the Group’s income.
The estimated effect of prepayment risk on net interest income of the Group for the years ended 31 December 2015, 31 December 2014
and 31 December 2013 is as follows:
Effect on net
interest income
2015
2014
2013
(19,341)
(16,744)
(5,944)
Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform,
operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot
expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group
is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff
education and assessment processes, including the use of internal audit.
Operating environment
Most of the Group’s business in concentrated in Georgia. As an emerging market, Georgia does not possess a well-developed business
and regulatory infrastructure that would generally exist in a more mature market economy. Operations in Georgia may involve risks that
are not typically associated with those in developed markets (including the risk that the Georgian Lari is not freely convertible outside the
country, and undeveloped debt and equity markets). However, over the last few years the Georgian government has made a number of
developments that positively affect the overall investment climate of the country, specifically implementing the reforms necessary to
create banking, judicial, taxation and regulatory systems. This includes the adoption of a new body of legislation (including new Tax Code
and procedural laws). In the view of the Board, these steps contribute to mitigate the risks of doing business in Georgia.
The existing tendency aimed at the overall improvement of the business environment is expected to persist. The future stability of the
Georgian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and
monetary measures undertaken by the Government. However, the Georgian economy is vulnerable to market downturns and economic
slowdowns elsewhere in the world.
202 BGEO Group PLC Annual Report 2015
Financial statements
30. Fair Value Measurements
Fair value hierarchy
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature,
characteristics and risks of the asset or liability. The following tables show analysis of assets and liabilities measured at fair value or for
which fair values are disclosed by level of the fair value hierarchy:
31 December 2015
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Investment securities
Other assets – derivative financial assets
Other assets – trading securities owned
Total revalued property
Office buildings
Service centres
Assets for which fair values are disclosed
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables
Liabilities measured at fair value:
Other liabilities – derivative financial liabilities
Liabilities for which fair values are disclosed
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
31 December 2014
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Investment securities
Other assets – derivative financial assets
Other assets – trading securities owned
Total revalued property
Office buildings
Service centres
Assets for which fair values are disclosed
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables
Liabilities measured at fair value:
Other liabilities – derivative financial liabilities
Liabilities for which fair values are disclosed
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
1,977
–
–
–
–
–
–
–
–
–
–
–
–
–
–
902,419
42,212
–
–
–
–
246,398
94,476
40,873
111,049
1,448
–
–
228,365
96,455
131,910
246,398
94,476
40,873
111,049
903,867
42,212
1,977
228,365
96,455
131,910
1,432,934
731,365
–
–
–
5,284,299
1,432,934
731,365
5,284,299
3,243
–
3,243
–
–
938,894
4,777,093
1,789,062
131,621
4,777,093
1,789,062
1,070,515
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
1,034
–
–
–
–
–
–
–
768,300
45,733
–
–
–
–
190,860
92,285
31,632
66,943
1,412
–
–
223,547
112,082
111,465
190,860
92,285
31,632
66,943
769,712
45,733
1,034
223,547
112,082
111,465
–
–
–
–
–
–
–
710,144
418,281
–
–
–
4,447,978
710,144
418,281
4,447,978
7,505
–
7,505
–
–
779,455
3,366,109
1,409,214
77,250
3,366,109
1,409,214
856,695
Annual Report 2015 BGEO Group PLC 203
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
30. Fair Value Measurements continued
31 December 2013
Assets measured at fair value
Total investment properties
Land
Residential properties
Non-residential properties
Investment securities
Other assets – derivative financial assets
Other assets – trading securities owned
Total revalued property
Office buildings
Service centres
Assets for which fair values are disclosed
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables
Liabilities measured at fair value
Other liabilities – derivative financial liabilities
Liabilities for which fair values are disclosed
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
1,149
–
–
–
–
–
–
–
–
–
–
–
–
–
–
514,401
39,431
–
–
–
–
1,053,671
347,261
–
157,707
26,749
42,954
88,004
5,222
–
–
205,475
85,400
120,075
157,707
26,749
42,954
88,004
519,623
39,431
1,149
205,475
85,400
120,075
1,053,671
347,261
3,629,708
3,629,708
1,513
–
1,513
–
–
728,117
3,159,482
1,157,979
–
3,159,482
1,157,979
728,117
The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation
techniques. These incorporate the Group’s estimate of assumptions that a market participant would make when valuing the instruments.
Derivative financial instruments
Derivative financial instruments valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency
swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap
models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign
exchange spot and forward rates and interest rate curves.
Trading securities and investment securities
Trading securities and a certain part of investment securities are quoted equity and debt securities. Investment securities valued using a
valuation technique or pricing models consist of unquoted equity and debt securities. These securities are valued using models which
sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The
non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and
economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.
Movements in level 3 financial instruments measured at fair value
The following tables show a reconciliation of the opening and closing amounts of level 3 financial assets which are recorded at fair value:
Level 3 financial assets
Equity investment securities available-for-sale
5,888
(666)
5,222
(3,837)
27
1,412
36
1,448
31 December
2012
Sale of AFS
securities
At
31 December
2013
Impairment of
Investment in
BG Bank
Purchase of AFS
securities
At
31 December
2014
Purchase of AFS
securities
At
31 December
2015
Movements in level 3 non-financial assets measured at fair value
All investment properties and revalued properties of property and equipment are level 3. Reconciliations of their opening and closing
amounts are provided in Notes 11 and 12 respectively.
Impact on fair value of level 3 financial instruments measured at fair value of changes to key assumptions
Level 3 financial assets
Equity investment securities available-for-sale
2015
2014
2013
Effect of
reasonably
possible
alternative
assumptions
Carrying
Amount
Effect of
reasonably
possible
alternative
assumptions
Effect of
reasonably
possible
alternative
assumptions
Carrying
Amount
Carrying
Amount
1,448
+/– 217
1,412
+/– 212
5,222
+/– 786
204 BGEO Group PLC Annual Report 2015
Financial statements
30. Fair Value Measurements continued
The following table shows the impact on the fair value of level 3 instruments of using reasonably possible alternative assumptions:
In order to determine reasonably possible alternative assumptions the Group adjusted key unobservable model inputs as follows:
For equities, the Group adjusted the price-over-book-value multiple by increasing and decreasing the ratio by 10%, which is considered
by the Group to be within a range of reasonably possible alternatives based on the price-over-book-value multiples used across peers
within the same geographic area of the same industry.
Description of significant unobservable inputs to valuations of non-financial assets
The following tables show descriptions of significant unobservable inputs to level 3 valuations of investment properties and revalued
properties and equipment:
Valuation
technique
Significant
unobservable
inputs
Range
(weighted
average)
Other key
information
Range
(weighted
average)
Sensitivity of the input to fair value
Market
approach
Market
approach
Price per
square
metre
Price per
square
metre
51-1,332
(457)
933-1,939
(1,405)
Square
metres,
land
Square
metres,
building
8,165-
230,398
(116,236)
Increase (decrease) in the price per square metre
would result in increase (decrease) in fair value
80 - 3,251
(2,402)
Increase (decrease) in the price per square metre
would result in increase (decrease) in fair value
Investment
property
2015
246,398
Land
94,476
Residential
properties
40,873
Non-residential
properties
111,049
Price
2.8 - 5.5 million
(4.1 million)
19,550
Market
approach
78,898
Income
approach
12,601
Cost
approach
Rent per
square
metre
29.2 - 45.5
(38.1)
Occupancy
rate
35% - 90%
(81%)
12 - 218
(26)
34 - 67
(57)
366 - 1,054
(778)
Average
daily rate
Land price
per square
metre
Depreciated
replacement
cost per
square
metre
Square
metres,
land
Square
metres,
building
Square
metres,
building
Square
metres,
land
Square
metres,
building
8,383 -
18,635
(11,826)
2,293 -
6,702
(3,774)
Increase (decrease) in the price would result in
increase (decrease) in fair value
418 - 4,868
(2,798)
Increase (decrease) in the price would result in
increase (decrease) in fair value
Increase (decrease) in the occupancy rate would
result in increase (decrease) in fair value
Increase (decrease) in the occupancy rate would
result in increase (decrease) in fair value
7,939 -
13,946
(9,672)
Increase (decrease) in the land price per square
metre would result in increase (decrease) in fair
value
836 - 1,639
(1,851)
Increase (decrease) in the depreciated replacement
cost per square metre would result in increase
(decrease) in fair value
Annual Report 2015 BGEO Group PLC 205
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
30. Fair Value Measurements continued
Property and
equipment
2015
228,365
Valuation
technique
Significant
unobservable
inputs
Range
(weighted
average)
Other key
information
Range
(weighted
average)
Sensitivity of the input to fair value
Office buildings
96,455
Income ap-
proach
Rent per
square
metre
53 - 108
(83)
Square me-
tres, building
243 - 17,647
(12,670)
Increase (decrease) in the rent per square metre
would result in increase (decrease) in fair value
Occupancy
Rate
60% - 95%
(84%)
Increase (decrease) in the occupancy rate would
result in increase (decrease) in fair value
Service centres
131,910
30,783
Market
approach
89,645
11,482
Income
approach
Cost
approach
Price per
square
metre
Rent per
square
metre
1926 - 3,996
(3,170)
26.3 - 115.0
(52.4)
Square
metres,
building
Square
metres,
building
66 - 1,589
(1,076)
Increase (decrease) in the price per square metre
would result in increase (decrease) in fair value
196 - 2,283
(952)
Increase (decrease) in the price per square metre
would result in increase (decrease) in fair value
Occupancy
Rate
40% - 95%
(83%)
Average
daily rate
16 - 256
(29)
501 - 501
(501)
Depreciated
replacement
cost per
square
metre
Increase (decrease) in the price per square metre
would result in increase (decrease) in fair value
Increase (decrease) in the average daily rate would
result in increase (decrease) in fair value
Increase (decrease) in the average daily rate would
result in increase (decrease) in fair value
Financial instruments overview
Set out below is an overview of all financial instruments, other than cash and short-term deposits, held by the Group as at 31 December
2015, 31 December 2014 and 31 December 2013:
31 December 2015
Loans and
receivables
Available-for
sale
Fair value
through profit
or loss
731,365
5,322,117
87,972
–
–
–
–
–
–
1,448
902,419
–
–
–
–
1,505
472
42,212
6,141,454
903,867
44,189
4,751,387
1,789,062
1,039,804
106,128
–
7,686,381
–
–
–
–
–
–
–
–
–
–
3,243
3,243
Financial assets
Amounts due from credit institutions
Loans to customers and finance lease receivables
Accounts receivable and other loans
Equity instruments
Debt instruments
Foreign currency derivative financial instruments
Total:
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Trade and other payables (in other liabilities)
Foreign currency derivative financial instruments
Total:
206 BGEO Group PLC Annual Report 2015
Financial statements
30. Fair Value Measurements continued
Financial assets
Amounts due from credit institutions
Loans to customers and finance lease receivables
Accounts receivable and other loans
Equity instruments
Debt instruments
Foreign currency derivative financial instruments
Commodity options
Total:
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Trade and other payables (in other liabilities)
Foreign currency derivative financial instruments
Interest rate swaps
Total:
31 December 2014
31 December 2013
Loans and
receivables
Available-for
sale
Fair value
through profit
or loss
Loans and
receivables
Available-for
sale
Fair value
through profit
or loss
418,281
4,347,851
70,207
–
–
–
–
–
–
–
1,412
768,300
–
–
–
–
–
41
993
45,733
–
347,261
3,514,870
40,419
–
–
–
–
–
–
–
5,266
514,357
–
–
–
–
–
58
1,091
39,408
23
4,836,339
769,712
46,767
3,902,550
519,623
40,580
3,338,725
1,409,214
856,695
57,295
–
–
5,661,929
–
–
–
–
–
–
–
–
–
–
–
7,505
–
3,117,732
1,157,979
728,117
27,786
–
–
7,505
5,031,614
–
–
–
–
–
–
–
–
–
–
–
60
1,453
1,513
Fair value of financial assets and liabilities not carried at fair value
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are carried in the
financial statements. The table does not include the fair values of non-financial assets and non-financial liabilities or fair values of other
smaller financials assets and financial liabilities, fair values of which are materially close to their carrying values.
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Total unrecognised change in unrealised fair value
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Loans to customers and finance lease receivables
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Total unrecognised change in unrealised fair value
Carrying value
2015
Fair value
2015
Unrecognised
gain (loss)
2015
1,432,934
731,365
5,322,117
1,432,934
731,365
5,284,299
4,751,387
1,789,062
1,039,804
4,777,093
1,789,062
1,070,515
–
–
(37,818)
(25,706)
–
(30,711)
(94,235)
Carrying value
2014
Fair value
2014
Unrecognised
loss
2014
Carrying value
2013
Fair value
2013
Unrecognised
loss
2013
710,144
418,281
4,347,851
710,144
418,281
4,447,978
–
–
100,127
1,053,671
347,261
3,514,870
1,053,671
347,261
3,629,708
–
–
114,838
3,338,725
1,409,214
856,695
3,366,109
1,409,214
856,695
3,117,732
1,157,979
728,117
3,159,482
1,157,979
728,117
(27,384)
–
–
72,743
(41,750)
–
–
73,088
The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not
already recorded at fair value in the consolidated financial statements.
Assets for which fair value approximates carrying value
For financial assets and financial liabilities that are liquid or have a short term maturity (less than three months) it is assumed that the
carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a
specific maturity and variable rate financial instruments.
Fixed rate financial instruments
The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when
they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest
bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk
and maturity.
Annual Report 2015 BGEO Group PLC 207
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
31. Maturity Analysis of Financial Assets and Liabilities
The table below shows an analysis of financial assets and liabilities according to when they are expected to be recovered or settled. See
Note 29 “Risk management” for the Group’s contractual undiscounted repayment obligations.
On Demand
Up to 3 Months
Up to 6 Months
Up to 1 Year
Up to 3 Years
Up to 5 Years
Over 5 Years
Total
2015
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
1,072,361
617,673
560,120
–
360,573
702
241,481
796,765
–
28,338
31,247
537,690
–
82,393
6,531
1,024,619
–
309
60,244
1,586,728
–
–
3,057
705,152
–
1,950
1,187
671,163
1,432,934
731,365
903,867
5,322,117
Total
2,250,154
1,399,521
597,275
1,113,543
1,647,281
708,209
674,300
8,390,283
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Total
Net
847,003
92,617
–
810,072
528,644
51,457
541,142
108,023
–
2,008,160
247,414
53,703
444,591
403,528
934,644
80,012
139,573
–
20,407
269,263
–
4,751,387
1,789,062
1,039,804
939,620
1,390,173
649,165
2,309,277
1,782,763
219,585
289,670
7,580,253
1,310,534
9,348
(51,890)
(1,195,734)
(135,482)
488,624
384,630
810,030
Accumulated gap
1,310,534
1,319,882
1,267,992
72,258
(63,224)
425,400
810,030
On Demand
Up to 3 Months
Up to 6 Months
Up to 1 Year
Up to 3 Years
Up to 5 Years
Over 5 Years
Total
2014
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
691,573
382,714
327,846
–
18,571
808
383,657
695,719
–
3,974
7,361
510,881
–
26,324
9,698
734,149
–
2,486
34,008
1,282,395
–
–
1,966
624,387
–
1,975
5,176
500,320
710,144
418,281
769,712
4,347,851
Total
1,402,133
1,098,755
522,216
770,171
1,318,889
626,353
507,471
6,245,988
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Total
Net
272,235
32,951
–
603,510
582,882
45,864
366,000
63,704
28,930
1,686,080
153,848
43,425
355,892
314,313
738,476
39,995
152,742
–
15,013
108,774
–
3,338,725
1,409,214
856,695
305,186
1,232,256
458,634
1,883,353
1,408,681
192,737
123,787
5,604,634
1,096,947
(133,501)
63,582
(1,113,182)
(89,792)
433,616
383,684
641,354
Accumulated gap
1,096,947
963,446
1,027,028
(86,154)
(175,946)
257,670
641,354
On Demand
Up to 3 Months
Up to 6 Months
Up to 1 Year
Up to 3 Years
Up to 5 Years
Over 5 Years
Total
2013
Financial assets
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
884,728
289,926
256,140
–
168,943
7,438
254,202
671,803
–
7,296
3,518
408,163
–
29,199
1,697
706,289
–
8,953
2,915
1,058,058
–
4,449
823
428,307
–
–
328
242,250
1,053,671
347,261
519,623
3,514,870
Total
1,430,794
1,102,386
418,977
737,185
1,069,926
433,579
242,578
5,435,425
Financial liabilities
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Total
Net
284,099
13,620
–
525,229
401,781
26,886
460,880
61,071
–
1,542,062
137,223
25,938
251,091
272,072
94,848
43,228
182,508
580,445
11,143
89,704
–
3,117,732
1,157,979
728,117
297,719
953,896
521,951
1,705,223
618,011
806,181
100,847
5,003,828
1,133,075
148,490
(102,974)
(968,038)
451,915
(372,602)
141,731
431,597
Accumulated gap
1,133,075
1,281,565
1,178,591
210,553
662,468
289,866
431,597
The Group’s capability to discharge its liabilities relies on its ability to realise equivalent assets within the same period of time. In the
Georgian marketplace, where most of the Group’s business is concentrated, many short-term credits are granted with the expectation
of renewing the loans at maturity. As such, the ultimate maturity of assets may be different from the analysis presented above. To reflect
the historical stability of current accounts, the Group calculates the minimal daily balance of current accounts over the past two years
and includes the amount in the less than 1 year category in the table above. The remaining current accounts are included in the on
demand category.
208 BGEO Group PLC Annual Report 2015
Financial statements
31. Maturity Analysis of Financial Assets and Liabilities continued
The Group’s principal sources of liquidity are as follows:
inter-bank deposit agreement;
• deposits;
• borrowings from international credit institutions;
•
• debt issues;
• proceeds from sale of securities;
• principal repayments on loans;
•
•
interest income; and
fees and commissions income.
As at 31 December 2015 amounts due to customers amounted to GEL 4,751,387 (2014: GEL 3,338,725, 2013: GEL 3,117,732) and
represented 59% (2014: 56%, 2013: 59%) of the Group’s total liabilities. These funds continue to provide a majority of the Group’s funding
and represent a diversified and stable source of funds. As at 31 December 2015 amounts owed to credit institutions amounted to GEL
1,789,062 (2014: GEL 1,409,214, 2013: GEL 1,157,979) and represented 22% (2014: 24%, 2013: 22%) of total liabilities. As at 31 December
2015 debt securities issued amounted to GEL 1,039,804 (2014: GEL 856,695, 2013: GEL 728,117) and represented 13% (2014: 14%,
2013: 14%) of total liabilities.
In the Board’s opinion, liquidity is sufficient to meet the Group’s present requirements.
The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled:
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Prepayments
Inventories
Investment properties
Property and equipment
Goodwill
Intangible assets
Income tax assets
Other assets
Total assets
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Accruals and deferred income
Insurance contracts liabilities
Income tax liabilities
Other liabilities
Total liabilities
Net
31 December 2015
Less than
1 Year
More than
1 Year
1,432,934
729,106
839,379
2,359,074
87,955
39,177
25,371
98,387
–
–
–
–
3,654
106,129
–
2,259
64,488
2,963,043
17
49
32,957
28,640
246,398
794,682
72,984
40,516
17,896
130,644
Total
1,432,934
731,365
903,867
5,322,117
87,972
39,226
58,328
127,027
246,398
794,682
72,984
40,516
21,550
236,773
5,721,166
4,394,573
10,115,739
4,206,377
976,698
105,160
113,134
51,273
20,083
120,082
545,010
812,364
934,644
33,718
4,572
104,312
14,674
4,751,387
1,789,062
1,039,804
146,852
55,845
124,395
134,756
5,592,807
2,449,294
8,042,101
128,359
1,945,279
2,073,638
Annual Report 2015 BGEO Group PLC 209
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Notes to Consolidated Financial Statements continued
31. Maturity Analysis of Financial Assets and Liabilities continued
Cash and cash equivalents
Amounts due from credit institutions
Investment securities
Loans to customers and finance lease receivables
Accounts receivable and other loans
Insurance premiums receivable
Prepayments
Inventories
Investment properties
Property and equipment
Goodwill
Intangible assets
Income tax assets
Other assets
Total assets
Client deposits and notes
Amounts owed to credit institutions
Debt securities issued
Accruals and deferred income
Insurance contracts liabilities
Income tax liabilities
Other liabilities
Total liabilities
Net
31 December 2014
31 December 2013
Less than
1 Year
More than
1 Year
Total
Less than
1 Year
More than
1 Year
710,144
413,820
728,562
1,940,749
70,207
31,764
17,848
30,184
–
–
–
–
–
88,734
–
4,461
41,150
2,407,102
–
76
15,926
71,258
190,860
588,513
49,633
34,432
22,745
120,977
710,144
418,281
769,712
4,347,851
70,207
31,840
33,774
101,442
190,860
588,513
49,633
34,432
22,745
209,711
1,053,671
333,859
515,557
1,786,255
40,404
61,006
14,802
68,534
–
–
–
–
4,552
54,154
–
13,402
4,066
1,728,615
15
941
10,732
19,675
157,707
470,669
48,720
26,434
14,544
92,655
Total
1,053,671
347,261
519,623
3,514,870
40,419
61,947
25,534
88,209
157,707
470,669
48,720
26,434
19,096
146,809
4,032,012
3,547,133
7,579,145
3,932,794
2,588,175
6,520,969
2,927,825
833,385
118,219
36,241
43,166
11,093
49,422
410,900
575,829
738,476
72,382
3,420
86,471
38,223
3,338,725
1,409,214
856,695
108,623
46,586
97,564
87,645
2,812,270
613,695
52,824
75,541
70,968
2,930
39,323
305,462
544,284
675,293
6,562
2,751
66,100
11,912
3,117,732
1,157,979
728,117
82,103
73,719
69,030
51,235
4,019,351
1,925,701
5,945,052
3,667,551
1,612,364
5,279,915
12,661
1,621,432
1,634,093
265,243
975,811
1,241,054
210 BGEO Group PLC Annual Report 2015
Financial statements
32. Related Party Disclosures
In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other
party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible
related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be
effected on the same terms, conditions and amounts as transactions between unrelated parties. All transactions with related parties
disclosed below have been conducted on an arm’s length basis.
The volumes of related party transactions, outstanding balances at the year end, and related expenses and income for the year are
as follows:
2015
2014
2013
Shareholders*
Associates**
Key
management
personnel***
Shareholders*
Associates**
Key
management
personnel***
Shareholders*
Associates**
Key
management
personnel***
Loans outstanding at 1 January,
gross
Loans issued during the year
Loan repayments during the year
Other movements
Loans outstanding at 31 December,
gross
Less: allowance for impairment at
31 December
Loans outstanding at 31 December,
net
Interest income on loans
Loan impairment charge
Deposits at 1 January
Deposits received during the year
Deposits repaid during the year
Other movements
Deposits at 31 December
Interest expense on deposits
Other income
Borrowings at 1 January
Borrowings received during the year
Borrowings repaid during the year
Other movements****
Borrowings at 31 December
Interest expense on borrowings
Interest rate swaps***** at 1 January
Payments during the year
Other movements
Interest rate swaps at 31 December
Net loss from interest rate swaps
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
78,592
4,000
(84,033)
14,982
2,048
4,511
(6,188)
887
13,541
1,258
(116)
–
13,425
1,258
3,986
–
4,975
195,316
(199,048)
176
173
–
17,500
40,774
(41,548)
3,403
1,419
20,129
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
85,933
(16,376)
9,035
1,484
4,853
(4,474)
185
78,592
2,048
(743)
(1)
77,849
2,047
1,767
(743)
50
132,087
(128,859)
1,697
86
–
11,455
33,646
(31,225)
3,624
–
–
–
–
–
–
–
–
–
11,636
–
–
(11,636)
4,975
17,500
–
(33)
15
–
–
–
–
–
–
–
–
–
–
–
(477)
77
–
–
–
–
–
–
233,209
–
1,453
(234,662)
–
–
–
–
–
–
–
–
(6,750)
1,453
(1,453)
–
–
–
(2)
2
–
–
–
–
–
–
–
–
–
–
–
(513)
92
–
–
–
–
–
–
–
–
–
–
–
(488)
–
233,441
61,224
(68,135)
6,679
233,209
(16,569)
4,783
(3,728)
398
1,453
(398)
–
–
–
–
–
–
–
–
–
17
168
(119)
(16)
50
–
–
–
–
–
–
–
–
–
–
–
–
–
5,136
2,871
(2,319)
(4,204)
1,484
(20)
1,464
66
(14)
9,681
20,444
(15,018)
(3,652)
11,455
(425)
86
–
–
–
–
–
–
–
–
–
–
–
*
On 24 February 2012 the EBRD and IFC utilized the equity conversion feature of subordinated convertible loans, becoming shareholders of the Group and sold their shares
in 2014.
** On 23 December 2014 the Group acquired 25% interest in GGU, a holding company with wholly owned subsidiaries that supply water and provide wastewater services,
which also owns and operates hydropower generation facilities in Georgia.
*** Key management personnel include members of BGEO’s Board of Directors and Chief Executive Officer and Deputies of the Bank.
**** Movements caused by the change in the list of respective related parties during the period. Reduction of borrowings from related parties is attributable to the sale of BGEO
shares by the International Finance Corporation during the year ended 31 December 2014.
***** Interest rate swap agreements with IFC.
Annual Report 2015 BGEO Group PLC 211
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes to Consolidated Financial Statements continued
32. Related Party Disclosures continued
Details of Directors’ emoluments are included in the Remuneration Report on pages 107 to 123. Compensation of key management
personnel comprised the following:
Salaries and other benefits
Share-based payments compensation
Social security costs
Total key management compensation
2015
2014
2013
6,464
19,435
55
4,143
14,763
43
3,688
12,309
28
25,954
18,949
16,025
Key management personnel do not receive cash settled compensation, except for fixed salaries. The major part of the total
compensation is share-based (Note 28). The number of key management personnel at 31 December 2015 was 16 (31 December 2014:
16, 31 December 2013: 15).
33. Capital Adequacy
The Group maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Group’s capital is
monitored using, among other measures, the ratios established by the NBG in supervising the Bank.
Approved and published on 28 October 2013 by NBG, new capital adequacy regulation became effective in 2014, based on Basel II/III
requirements, adjusted for NBG’s discretionary items. Pillar 1 requirements became effective on 30 June 2014, with Pillar II (ICAAP)
requirements becoming effective 30 June 2015. A transition period is to continue through 1 January 2017, during which the Bank will be
required to comply with both the new, and the current, capital regulations of the NBG.
During year ended 31 December 2015, the Bank and the Group complied in full with all its externally imposed capital requirements.
The primary objectives of the Group’s capital management are to ensure that the Bank complies with externally imposed capital
requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to
maximise shareholders’ value.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk
characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment
to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and
processes from the previous years.
NBG capital adequacy ratio
The NBG requires banks to maintain a minimum capital adequacy ratio of 11.4% of risk-weighted assets, computed based on the Bank’s
standalone special purpose financial statements prepared in accordance with NBG regulations and pronouncements. As at 31 December
2015, 31 December 2014 and 31 December 2013, the Bank’s capital adequacy ratio on this basis was as follows:
Core capital
Supplementary capital
Less: Deductions from capital
Total regulatory capital
Risk-weighted assets
Total capital adequacy ratio
2015
2014
2013
728,139
649,607
(60,311)
895,318
398,598
(365,487)
810,545
313,220
(256,471)
1,317,435
928,429
867,294
7,811,398
6,719,169
5,638,556
16.9%
13.8%
15.4%
Core capital comprises share capital, additional paid-in capital and retained earnings (without current period profits), less intangible
assets and goodwill. Supplementary capital includes subordinated long-term debt, current period profits and general loss provisions.
Deductions from the capital include investments in subsidiaries. Certain adjustments are made to IFRS-based results and reserves, as
prescribed by the NBG.
212 BGEO Group PLC Annual Report 2015
Financial statements
33. Capital Adequacy continued
New NBG (Basel II/III) capital adequacy ratio
Effective 30 June 2014, the NBG requires banks to maintain a minimum total capital adequacy ratio of 10.5% of risk-weighted assets,
computed based on the bank’s stand-alone special purpose financial statements prepared in accordance with NBG regulations and
pronouncements, based on Basel II/III requirements. As at 31 December 2015 the Bank’s capital adequacy ratio on this basis was
as follows:
Tier 1 capital
Tier 2 capital
Total capital
Risk-weighted assets
Total capital ratio
2015
2014
914,784
479,176
800,465
217,100
1,393,960
1,017,565
8,363,369
7,204,080
16.7%
14.1%
Tier 1 capital comprises share capital, additional paid-in capital and retained earnings, less investments in subsidiaries, intangible assets
and goodwill. Tier 2 capital includes subordinated long-term debt and general loss provisions. Certain adjustments are made to IFRS-
based results and reserves, as prescribed by the NBG.
34. Event after the Reporting Period
In March 2016 the Group signed a binding Memorandum of Understanding, subject to relevant regulatory approvals, to acquire a 100%
equity stake in JSC GPC (“GPC”), one of the three leading pharmaceutical retailers and wholesalers in Georgia.
Annual Report 2015 BGEO Group PLC 213
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information
Abbreviations
ADB
Asian Development Bank
EPS
Earnings per share
AFS
Available-for-sale
ESDD
Environmental and Social Due Diligence
AGM
Annual General Meeting
ALCO
Asset and Liability Committee
AML
Anti-money laundering
ATMs
Automated Teller Machines
WM
Wealth Management
BGH
Bank of Georgia Holdings PLC
ESMS
Environmental and Social Risk Management
Procedures
EUR
Euro
EY
FDI
FMO
Ernst & Young
Foreign direct investment
Financierings-Maatschappij voor
Ontwikkelingslanden
BIS
Bank for International Settlement
FMS
Financial Monitoring Services
BKNP
Borjomi-Kharagauli National Park
FRC
Financial Reporting Council
BNB
Belarusky Narodny Bank
GBP
Great British Pound, national currency of the UK
BYR
Belarusian Rouble, national currency of the
Republic of Belarus
CAGR
Compounded annual growth rate
GDP
Gross domestic product
GDRs
Global Depositary Receipts
GEL
Georgian Lari or Lari, national currency of Georgia
CAR
Capital Adequacy ratio
CD
Certificate of Deposit
CEO
Chief Executive Officer
Code
UK Corporate Governance Code 2014 (the
Code)
GHG
Georgia Healthcare Group
GIPA
Georgian Institute of Public Affairs
GLC
Georgian Leasing Company
GPW
Gross Premiums Written
CPI
Consumer price index
IAS
International Accounting Standards
CRM
Customer relationship management
IASB
International Accounting Standards Board
CRO
Chief Risk Officer
IDPs
Internally Displaced Persons
DCFTA Deep and Comprehensive Free Trade
IMF
International Monetary Fund
Agreement
DFI
Development Finance Institutions
EBRD
European Bank for Reconstruction and
Development
EECP
Executives’ Equity Compensation Plan
IFC
International Finance Corporation
IFRS
International Financial Reporting Standards
IMF
International Monetary Fund
214 BGEO Group PLC Annual Report 2015
Additional information IR
Investor Relations
PPP
Purchasing power parity
IRR
Internal Rate of Return
ROAA
Return on Average Assets
IT
Information Technology
ROAE
Return on Average Equity
JSC
Joint stock company
ROCE
Return on Capital Employed
KfW
Kreditanstalt für Wiederaufbau
SBRE
SB Real Estate
KPIs
Key performance indicators
SHRM
Society for Human Resources Management
LCR
Liquidity Coverage ratio
SMEs
Small and medium size enterprises
LSE
London Stock Exchange
TNS
Taylor Nelson Sofres
MFC
My Family Clinic
TSR
Total Shareholder Return
MOH
Ministry of Labour, Health and Social Affairs
TUB
Tbiluniversal Bank, Georgia
MPA
Motor personal accident
UAH
Ukrainian Hryvna, national currency of Ukraine
MSME Micro small and medium enterprise
UK
United Kingdom of Great Britain and Northern Ireland
US$
The US Dollar, national currency of the United
States of America
VAR
Value at Risk
WACC Weighted Average Cost of Capital
MTPL
Motor third-party liability insurance
NBG
National Bank of Georgia
NBRB
National Bank of the Republic of Belarus
NGO
Non-governmental organisation
NIM
Net Interest Margin
NMF
Not meaningful to present
NPLs
Non-performing loans
OECD
Organisation for Economic Co-operation and
Development
OFAC
Office of Foreign Assets Control
PA
Personal accident
P&C
Property & Casualty
PFFIs
Participating foreign financial institutions
PLC
Public limited company
POS
Point of Sale
Annual Report 2015 BGEO Group PLC 215
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Glossary
Asset and Liability Committee
(ALCO)
The core risk-management body that establishes policies and guidelines with respect to
various aspects of risk-management strategy
Asian Development Bank (ADB) of
countries in Asia
Average Interest Earning Assets
Basic EPS
A regional development bank established to facilitate economic development
Interest-earning assets include: fixed income investment and trading securities, amounts
due from credit institutions and loans to customers and finance lease receivables
Profit for the period from operations attributable to shareholders of the Group divided by
the weighted average number of outstanding ordinary shares over the same period
Belarusky Narodny Bank (BNB)
Belarusian banking subsidiary of Bank of Georgia Group
BIS Tier I Capital Adequacy ratio
Tier I Capital divided by total risk-weighted assets, both calculated in accordance with the
requirements of Basel Accord I
BIS Total Capital Adequacy ratio
Total Capital divided by total risk-weighted assets, both calculated in accordance with the
requirements of Basel Accord I
New NBG (Basel 2/3) Tier I Capital
Adequacy ratio
Tier I Capital divided by total risk weighted assets, both calculated in accordance with the
requirements the National Bank of Georgia instructions
New NBG (Basel 2/3) Total Capital
Adequacy ratio
Total capital divided by total risk weighted assets, both calculated in accordance with the
requirements of the National Bank of Georgia instructions
Book value per share
Total equity attributable to shareholders of the Group divided by ordinary shares
outstanding at period end; net ordinary shares outstanding equals total number of ordinary
shares outstanding at period end less number of treasury shares at period end
Constant currency basis
Changes assuming constant exchange rate
Cost of Funding
Interest expense of the period (adjusted for the gains or losses from revaluation of interest
rate derivatives) divided by monthly average interest-bearing liabilities; interest-bearing
liabilities include: amounts due to credit institutions, amounts due to customers, debt
securities issued and interest rate derivatives
Cost to Income ratio
Operating expenses divided by revenue
Development Finance Institutions
(DFIs)
Development finance institutions established (or chartered) by more than one country which
are subject to international law and whose owners or shareholders are generally national
governments, including, among others, the EBRD, IFC, ADB, etc
East-West Highway
The main highway in Georgia
Environmental and Social Policy
A policy adopted by the BGH Board of Directors in 2012
EVEX
Express banking
Express branch
Express card
JSC Medical Corporation EVEX holds the Group’s healthcare subsidiaries
A wide array of services and products including Express branches, Express cards and
Express Pay terminals, aimed at attracting mass-market customers
A small-format branch offering predominantly transactional banking services through
ATMs and Express Pay terminals
A contactless card with a loyalty programme linked to the customer’s current account,
which can also be used for transport payments
Express Metro branches
Express branches in metro stations in Tbilisi
Express Pay (self-service) terminal
A payment terminal enabling customers to make various payments remotely including utility
bill payments and loan repayments at a wide variety of locations
FMO
Financierings-Maatschappij voor Ontwikkelingslanden: The Netherlands Development Bank
216 BGEO Group PLC Annual Report 2015
Additional information Galt & Taggart
Former BG Capital
Georgian Leasing Company (GLC)
The Bank’s wholly-owned subsidiary through which it provides finance leasing services
Geostat
National Statistics Office of Georgia
Global Depositary Receipt (GDR)
A certificate issued by a depositary bank, which represents ownership of an underlying
number of shares
Gross loans
In all sections of the Annual Report, except for the consolidated financial statements, gross
loans are defined as gross loans to customers and gross finance lease receivables
International Finance Corporation
(IFC)
A member of the World Bank Group, the largest global development institution focused
exclusively on the private sector in developing countries
Kreditanstalt für Wiederaufbau (KfW)
German Government-owned development bank
Liberty Consumer
A Georgia-focused investment company in which the Group holds a 70% stake
Loan Yield
m2 Real Estate
Market share(s)
Interest income from loans to customers and finance lease receivables divided by average
gross loans to customers and finance lease receivables
Real Estate business of the Group, formerly known as SB Real Estate
Market share data is based on the information provided by the National Bank of Georgia.
For Bank of Georgia, market share represents market share based on total assets as of
31 December 2014 (unless noted otherwise) on a stand-alone basis. For Aldagi, market
share is provided based on the gross insurance premium revenue as of 31 December 2014
Net Interest Margin (NIM)
Net interest income of the period (adjusted for the gains or losses from revaluation of
interest rate derivatives) divided by average interest-earning assets for the same period
Net loans
In all sections of the Annual Report, except for the consolidated audited financial
statements, net loans are defined as gross loans to customers and finance lease
receivables less allowance for impairment
Non-performing loans (NPLs)
The principal and interest on loans overdue for more than 90 days and any additional
potential losses estimated by management
Operating cost
Operating leverage
Equals operating expenses
Percentage change in revenue less percentage change in operating expenses
Reserve for loan losses to gross
loans
Allowance for impairment of loans and finance lease receivables divided by gross loans and
finance lease receivables
Return on Average Total Assets
(ROAA)
Profit for the period divided by monthly Average Total Assets for the same period
Return on Average Total Equity
(ROAE)
Profit for the period attributable to shareholders of the Group divided by monthly average
equity attributable to shareholders of the Bank for the same period
Tender Offer
BGH, a public limited liability company, launched the Tender Offer to exchange its entire
ordinary share capital for an equivalent number of the Bank’s ordinary shares and thus to
acquire the entire issued and to be issued share capital, including those shares represented
by GDRs, of the Bank in December 2011. The Tender Offer was successfully completed in
February 2012
Weighted average number of
ordinary shares
Average of daily outstanding number of shares less daily outstanding number of treasury
shares
Weighted average diluted number of
ordinary shares
Weighted average number of ordinary shares plus weighted average dilutive number of
shares known to the management during the same period
Annual Report 2015 BGEO Group PLC 217
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Forward-looking statements
Where this Annual Report contains forward-looking statements,
these are made by the Directors in good faith based on the
information available to them at the time of their approval of this
Annual Report. These statements should be treated with caution
due to the inherent risks and uncertainties underlying any such
forward-looking information. The Group cautions investors that a
number of important factors, including those in this Annual Report,
could cause actual results to differ materially from those contained
in any forward-looking statement. Such factors include, but are
not limited to, those discussed under “Principal Risks and
Uncertainties” on pages 48 to 51 of the Strategic Report. The
Group undertakes no obligation to publicly update any forward-
looking statement, whether as a result of new information, future
events or otherwise.
Shareholder Information
Our website
All shareholders and potential shareholders can gain access to the
Annual Report, presentations to investors, key financial
information, regulatory news, share and dividend data, AGM
documentation and other significant information about BGEO at
http://www.bgeo.com.
Our registered address
BGEO Group PLC
84 Brook Street
London W1K 5EH
United Kingdom
Annual General Meeting
The Annual General Meeting of BGEO (the AGM) will be held at
12:00 pm (London time) on Thursday, 26 May 2016 at Baker &
McKenzie LLP, 100 New Bridge Street, London EC4V 6JA. Details
of the business to be conducted at the AGM are contained in the
Notice of AGM which will be mailed to shareholders on or about
25 April 2016 and will be available on the BGEO’s website: http://
bgeo.com/page/id/83/shareholder-meetings.
Shareholder enquiries
BGEO’s share register is maintained by Computershare Investor
Services PLC.
Any queries about the administration of holdings of ordinary
shares, such as change of address or change of ownership,
should be directed to the address or telephone number
immediately below. Holders of ordinary shares may also check
details of their shareholding, subject to passing an identity check,
by visiting the Registrar’s website: www.investorcentre.co.uk or by
calling the Shareholder Helpline on +44 (0)370 873 5866.
Computershare Investor Services PLC
The Pavilions, Bridgwater Road
Bristol BS99 6ZY
United Kingdom
+44 (0)870 873 5866
Dividends
On 16 February 2016, the Directors of BGEO declared their
intention to recommend an annual dividend in the amount of GEL
2.4 per share (payable in British Pounds Sterling at the prevailing
rate), subject to approval by the shareholders at BGEO’s AGM. As
a holding company whose principal assets are the shares of its
subsidiaries, BGEO relies primarily on dividends and other
statutorily and contractually permissible payments from its
subsidiaries, principally the Bank, to generate reserves necessary
to pay dividends to its shareholders.
If the annual dividend is approved at BGEO’s AGM on 26 May
2016, BGEO envisions the following dividend timetable:
Ex-Dividend Date: 7 July 2016
Record Date: 8 July 2016
Currency Conversion Date: 11 July 2016
Payment Date: 22 July 2016
218 BGEO Group PLC Annual Report 2015
Additional information Notes
Annual Report 2015 BGEO Group PLC 219
Strategic reportOverviewGovernanceFinancial statementsStrategic reportStrategyStrategic reportPerformanceAdditional information Notes
220 BGEO Group PLC Annual Report 2015
Additional information Galt & Taggart is a wholly-owned subsidiary of BGEO Group. Galt & Taggart Research is a pioneer of
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Azerbaijan and offer a breadth of coverage across various sectors, as well as deep expertise in each of
them. Our team of Georgian and Azerbaijani finance and economic experts have dedicated areas of
coverage, providing timely analysis and insights for our clients.
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