Annual Report 2014
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Supporting Georgian
art, culture and heritage
From Bronze to TBC
In 2014, TBC Bank presented a unique collection of
ancient Georgian openwork bronze buckles, dated
VIII-VI centuries BC and I-IV centuries AD. This
collection is of special importance for the history
of Georgian culture, as it compiles a few of this type
of artefacts that are still preserved in the country.
The Georgian public was largely unaware of these
historic treasures until TBC Bank’s Art Gallery
hosted the exhibition From Bronze to TBC. This
project is just one of the unique ways TBC supports
Georgian culture and heritage.
TBC Bank is a leading universal bank in Georgia,
offering a broad range of products and services
through its extensively developed retail, corporate,
SME and micro banking business lines. The Bank
successfully completed its IPO and listed GDRs on
the LSE on 11 June 2014.
Business
Review
This openwork bronze
buckle was discovered in
a village church in 1963.
The frame ornaments are
created with skilled and
precise craftsmanship,
while the buckle is
distinguished with its
four-part composition
each containing a single
ox figure. This type of
design is rare in the wider
buckle collection.
Customer Experience
TBC Bank prides itself on the quality of customer service and
experience. According to internal and external research, TBC Bank
maintained market leading positions in customer experience in
2014. A “Mystery Shopping” study conducted by IPM(d) named TBC
Bank as the friendliest provider of banking services in Georgia.
(a) All market share data is quoted according to the figures published by the NBG
and include TBC Bank and Constanta.
(b) Including employees of all TBC Bank subsidiaries.
(c) Gross loan portfolio according to NBG accounting standards for comparison
purposes. TBC Bank portfolio includes Bank Constanta.
(d) IPM is a leading market research company in Georgia with 15 years of
experience of the market and 12 years within the financial services industry.
IPM’s Mystery Shopping survey evaluates the service quality of the Bank’s
branch and call centre employees according to approximately 80 different
parameters, each one earning one point for the assessed employee when
fulfilled. Parameters cover such important qualitative and quantitative criteria
as professionalism, meeting/closing skills, responsiveness, perceived service
quality, etc. The final score is a percentage total of scores achieved by all
employees out of the maximum 100%.
40 11
Tbilisi
Ratcha-lechkhumi
Kvemo Svaneti
0
1
Imereti
4
8
Shida-
Kartli
2
5
Mtskheta-
Mtianeti
1
1
Samtskhe-
Javakheti
1
5
Tbilisi
Kakheti
2 10
Kvemo-Kartli
4
8
TBC Bank Annual Report 2014
Business Review
TBC at a Glance
We create new opportunities for the success
of people and businesses.
TBC Bank is a leading universal banking group in Georgia with an
unmatched share of retail deposits at 33.7%(a), and a number two
position in loans and deposits with total market shares of 27.7%
and 28.4%, respectively.
We service over 1.2 million clients through a diversified multichannel
platform that comprises 120 branches of TBC Bank and former
Bank Constanta, one of the largest networks of ATMs and POS
terminals in Georgia, global award-winning internet banking,
market-leading mobile, iPad and iPhone banking, a call centre
and TBC Pay terminals and kiosks.
We employ over 5,000 people(b) across our operations, more than
half of whom have been with TBC for four or more years.
Our Multichannel Distribution Platform
TBC Bank’s globally recognised multichannel distribution
platform complements our full service model perfectly. While our
branches are carefully designed with a primary focus on customer
satisfaction, our leading multichannel distribution platform allows
us to offload routine transactions from branches to e-channels.
As a result, TBC has achieved the market-leading portfolio of gross
loans per branch of GEL 30 million(c).
Over the past year, our multichannel capabilities have been recognised
as best in the country and in the wider region, as well as being
acclaimed globally.
Apkhazeti
Zemo Svaneti
Samegrelo
3
7
Guria
Ajara
1
3
0
3
TBC branch
network (2014)
TBC Bank branches
Bank Constanta branches
08
TBC Bank Annual Report 2014
TBC Banking Franchise: Overview
TBC Bank Brand
TBC Bank has one of the best-known and most trusted brands
in Georgia. This is largely due to our high quality customer
experience, strong reputation, long-standing relationships with
customers, traditional focus on social responsibility, and targeted
marketing campaigns.
Products and Services
TBC Bank offers a wide range of banking products and services to
its retail, corporate, SME and micro clients with the majority of our
business concentrated in Georgia, which accounted for 98.3% of
TBC’s total assets and 97.6% of its net income as at and for the year
ended 31 December 2014.
Over the years, we have received a number of prestigious industry
awards, including being named as “Best Bank in Georgia” seven
times by Global Finance magazine, seven times by The Banker,
four times by EMEA Finance and three times by Euromoney.
Recent Awards
4.
5.
6.
7.
BEST PRIVATE BANK
GEORGIA
Corporate and Social
Responsibility Award
Central and Eastern Europe and CIS
1.
2.
3.
8.
9.
10.
11.
Vakhtang Butskhrikidze,
CEO of the Year 2014 /
Central and Eastern
Europe and CIS
TFPAWARD
TRADE FINANCE PROGRAM
ASIAN DEVELOPMENT BANK
12.
13.
1. Bank of the Year 2014: The Banker
2. Best Private Bank in Georgia 2014:
The Banker and PWM Magazine
4. Top 15 Global Trade Finance Deals:
Trade and Forfaiting Review
5. Best Bank in Georgia 2014: Euromoney
6. Most Active Issuing Bank in Georgia in
2013: EBRD Trade Finance Programme
8. Best Foreign Exchange Provider in
Georgia 2015: Global Finance
9. Best Consumer and Corporate Internet
Bank in Georgia 2014: Global Finance
Best Integrated Consumer and
Corporate Bank Site in Central &
Eastern Europe 2014: Global Finance
10. Best Bank in Georgia 2015: Global Finance
11. Best Trade Finance Bank 2015:
Global Finance
12. Most Active Issuing Bank in Georgia
2014: Asian Development Bank Trade
Finance Programme
13. Best Bank in Georgia 2013:
EMEA Finance
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Strategic
Report
TBC Bank Annual Report 2014
Strategic Report
Business Model
TBC Bank Annual Report 2014
Mission and Vision
This year the Management decided to amend the Mission and
Vision statements in order to align them with the Group’s revised
aspirations for the long-term period. Accordingly, our vision
statement was updated to reflect our strategy of growth across
our four segments (retail, micro, SME and corporate) achieving
leading positions on the local market in all segments.
Mission
• to create new opportunities for the success
of people and businesses.
Vision
• to be the largest commercial bank
in Georgia.
Business Model
Our business model is focused on core banking activities in Georgia.
TBC Bank primarily operates on the Georgian market and
concentrates on pure commercial banking activities, investing in
subsidiaries that support or further grow our core business. This
business structure clearly differentiates us and enables us to
remain focused on providing traditional financial services to our
clients on the local market where we enjoy leading presence.
In addition, TBC maintains one of the best funding structures among
local banks and a straightforward and resilient balance sheet.
Sources of Income
As a pure commercial bank, the main sources of income for TBC
Bank are Interest Income and Fee and Commission Income
generated by core banking or related activities. In both areas, we
have delivered strong growth in profitability and expanded our
products offerings for our customers.
Target Customers
As one of the largest banks in Georgia, we provide financial
services to over one million retail customers and businesses
covering the entire market.
• The Retail segment provides high quality services to mass
retail, high net worth individuals and affluent customers.
• The Micro segment provides loans to micro customers,
which also include loans to small farmers and other
rural businesses.
• The SME segment provides financial services and support to
small and medium sized companies, which are considered
the largest drivers of economic growth.
• The Corporate segment provides services and advice to
large mature companies operating on the Georgian market.
TBC Bank is considered as one of the core corporate banks
in the country.
Furthermore, we differentiate ourselves through one of the
highest levels of customer experience, outstanding multichannel
capabilities proven through a number of awards, a strong brand
and a highly professional workforce.
Business Model
We are focused
on core banking
activities in Georgia
Related to Core
Banking Activities
Sources of Income
Interest Income and Fee
and Commission Income
generated by core banking
or related activities
Segments
Covering wide
range of clients
Retail
Corporate
SME
Micro
We differentiate ourself
from competitors across
different criteria
1 Leading positions in an
attractive market poised
for profitable growth
4 Experienced management
team and high quality
corporate governance
2 Strong Track Record of
Growth and Profitability
5 Strong brand, superior
customer experience and
an award-winning franchise
6 Resilient and high quality
balance sheet
7 A leading multi-channel
distribution platform
3 Business model focused on
core banking activities in Georgia
Governance
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TBC Bank Annual Report 2014
Governance
Chairman’s Corporate Governance Statement
TBC Bank Annual Report 2014
Supervisory Board
Report and
Responsibilities
Risk Management Strategic Initiatives. These are discussed in greater
detail in our Risk Management Chapter on page 99 and in the Risks,
Ethics and Compliance Committee Report on page 91. The Supervisory
Board is charged with the responsibility of ensuring that the Bank’s
Management achieves its strategic objectives. During the year,
Management reviewed the Bank’s strategy, addressed in greater
detail in the Strategic Report on page 18, and confirmed the updated
strategy for years 2014-2018.
Even before the Bank’s IPO in 2014, TBC was committed to building
a robust corporate governance framework supported by its
International Financial Institution (IFI) shareholders. Over the past
year, the Bank further strengthened its corporate governance by
welcoming three new Directors to the Supervisory Board, two of
whom are independent Non-executive Directors.
In this Corporate Governance Report, the Bank has prepared a
comprehensive review of its corporate governance framework, which
includes the Audit Committee Report on page 84, the Supervisory
Board Report and Responsibilities on page 73, and the Remuneration
Report on page 89. A review of the responsibilities and effectiveness
of all committees on the Supervisory Board level begins on page 73.
TBC takes great pride in the fact that it is one of the best and largest
employers in the Georgian private sector. The Bank looks to create
a working environment where the best people strive to excel in their
fields every day. A detailed report on our employee relations is
available on page 26.
We believe our advanced corporate governance ensures a fully
engaged relationship between our company and our shareholders and
stakeholders. The Bank’s comprehensive investor communications
programme has allowed its top management to meet with investors
and shareholders on three separate roadshows since our listing
in June 2014. Moreover, our Investor Relations website offers
transparent, accurate and timely information to our investors.
More information on the dialogue between TBC Bank and its
shareholders is provided on page 196.
Finally, in 2014, the Supervisory Board continued to assess its
effectiveness and found that it successfully fulfilled its responsibilities
and operated effectively throughout the year.
The following Supervisory Board Report is approved by the
Supervisory Board of TBC Bank.
Mamuka Khazaradze
Chairman of the Supervisory Board
We believe our advanced corporate
governance ensures a fully engaged
relationship between our company
and our shareholders and
stakeholders
Mamuka Khazaradze
Chairman of the
Supervisory Board
Dear Shareholders,
In June 2014, TBC Bank listed its shares on the London Stock
Exchange through GDRs. As a public company, we are firmly
committed to the achieving standards of corporate governance, which
are in accordance with all applicable regulatory requirements, best
recommended practice, Basel requirements and the Bank’s future
development plans.
The Supervisory Board has the ultimate responsibility for the Bank’s
business, risk strategy and financial soundness, as well as how the
Bank organises and governs itself with the goal of ensuring the
long-term success of the Bank in order to best serve the needs
of shareholders.
In 2014, the Supervisory Board focused on several key issues,
including business strategy, corporate governance and risk
management. The Supervisory Board reviewed and approved
the revised Risk Appetites and Strategy, as well as the new
The Bank’s governance structure establishes proper incentives for the
Supervisory and Management Boards to pursue objectives that are in
the interest of the Bank, and effectively manage the relationship
between the Management Board, the Supervisory Board,
shareholders and other stakeholders.
TBC Bank’s corporate governing bodies are the General Meeting of
Shareholders, the Supervisory Board and the Management Board.
A number of appropriate committees have been established at both
the Supervisory and Management Board levels.
The General Meeting of Shareholders is the supreme governing body
of the Bank, with authority over all key decisions. It elects the Bank’s
Supervisory Board, which is responsible for the supervision and
appointment of members to the Management Board.
The Management Board is responsible for TBC's day-to-day
management, with the exception of functions reserved to the General
Meeting of Shareholders and the Supervisory Board. The Supervisory
Board appoints the members of the Management Board for renewable
terms of four years and is also in charge of their dismissal. Banking
regulations contain certain limitations as to who may become a member
of the Management Board and criteria that each director must fulfil.
The scope of authority of each member of the Management Board is
defined by a contract entered into with the director upon appointment.
The Supervisory Board plays a key role in the Corporate Governance of
the Bank. It has ultimate responsibility for the Bank’s business, risk
strategy and financial soundness, as well as how the Bank organises
and governs itself. The Supervisory Board appoints and supervises
Management to ensure both the achievement of the Bank's strategic
objectives and Management’s ongoing response to the risks inherent
in the business activities. The Supervisory Board is also responsible
for the appointment, evaluation and compensation of the Management
Board members.
In addition, the Supervisory Board is responsible for the following
specific areas:
• approving purchases or disposals by TBC Bank that exceed 3%
of the Bank's equity;
• approving the issuance of procura (general power of attorney)
by the management of TBC Bank;
• approving the establishment and liquidation of TBC Bank's branches;
• authorising any borrowing by TBC Bank if such borrowing exceeds
20% of the Bank's equity;
• electing, changing or removing the external auditor;
• approving the listing of TBC Bank's shares on a stock exchange;
• approving investments by TBC Bank, which exceed an aggregate
total amount of USD 1 million;
• approving any sale, lease, exchange, transfer, pledge, contribution
or other disposition of the assets of TBC Bank and certain of its
subsidiaries exceeding 5% of the book value of TBC Bank;
• approving disposals of TBC Bank's assets, which exceed 5% of the
Bank's equity;
• approving TBC Bank's financial indicators for the following year,
including its business plan or annual budget; and
• approving the entering into related party transactions above
USD 100,000.
Full responsibilities of the Supervisory Board are detailed in the Board
Regulation, available through the Investor Relations website.
The Supervisory Board consists of seven members elected by the
General Meeting of Shareholders for a term of four years each. The
Chairman and the Deputy Chairman of the Supervisory Board are
elected by a simple majority of votes. The Chairman of the Supervisory
Board may not simultaneously hold the position of Chief Executive
Officer of TBC Bank. The following table provides details on the
Supervisory Board members and their respective appointment year.
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Financial
Statements
TBC Bank Annual Report 2014
TBC Bank Annual Report 2014
Financial Statements
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
In thousands of GEL
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Gains less losses from trading in foreign currencies
Foreign exchange translation gains less losses /(losses less gains)
(Losses less gains)/gains less losses from derivative financial instruments
Other operating income
Other operating non-interest income
Provision for loan impairment
Provision for impairment of investments in finance lease
Recovery of/ (Provision for) performance guarantees and credit related commitments
Provision for impairment of other financial assets
Impairment of investment securities available for sale
Operating income after provisions for impairment
Staff costs
Depreciation and amortisation
Provision for liabilities and charges
Administrative and other operating expenses
Operating expenses
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss
Revaluation of available-for-sale investments
Exchange differences on translation to presentation currency
Income tax recorded directly in other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of premises and equipment
Income tax recorded directly in other comprehensive income
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit is attributable to:
- Owners of the Bank
- Non-controlling interest
Profit for the year
Total comprehensive income is attributable to:
- Owners of the Bank
- Non-controlling interest
Total comprehensive income for the year
Earnings per share for profit attributable to the owners of the Bank:
- Basic earnings per share
- Diluted earnings per share
Notes
2014
2013
2012
Net assets Attributable to owners
Consolidated Statement of Changes in Equity
29
29
30
30
31
9
12
20
11
14,15
20
32
512,357
(173,709)
338,648
88,203
(29,523)
58,680
39,730
2,359
(683)
19,600
61,006
474,796
456,545
(192,146)
(217,895)
282,650
238,650
74,361
(24,301)
50,060
37,894
(5,901)
613
16,136
48,742
64,232
(18,830)
45,402
25,240
7,617
(3,804)
13,680
42,733
(48,672)
(32,971)
(23,154)
(77)
902
(1,236)
(22)
(98)
(6,459)
(2,236)
(1,142)
(42)
(1,606)
(4,132)
(10)
409,229
338,546
297,841
(122,835)
(108,613)
(24,427)
(5,500)
(73,548)
(19,993)
(1,315)
(68,692)
(92,289)
(22,103)
(1,700)
(69,440)
(226,310)
(198,613)
(185,532)
182,919
139,933
112,309
33
(24,468)
(15,663)
(14,498)
158,451
124,270
97,811
10
28
33
28
33
(1,849)
2,095
(192)
–
–
54
7,923
1,233
(255)
–
–
8,901
682
(217)
(154)
10,513
(1,520)
9,304
158,505
133,171
107,115
157,451
1,000
121,616
2,654
96,519
1,292
158,451
124,270
97,811
157,505
1,000
130,517
2,654
105,823
1,292
158,505
133,171
107,115
26
26
3.4
3.4
3.0
3.0
2.5
2.5
In thousands of GEL
Note
Share
capital
Share
premium
Share based
payments
reserve
Other
reserves
(note 28)
Retained
earnings
Total
Non-
controlling
interest
Total
equity
Balance at 1 January 2012
15,171
203,308
6,180
33,162
201,826
459,647
9,134
468,781
Profit for the year
Other comprehensive income
Total comprehensive income
for 2012
Share issue
Share based payment
Increase in share capital arising
from share based payment
Equity contribution of owners of
non-controlling shareholders
Transfer of revaluation surplus
on premises to retained
earnings
Balance at 31 December 2012
Profit for the year
Other comprehensive income
Total comprehensive income
for 2013
Share issue
Share based payment
Increase in share capital arising
from share based payment
Equity contribution of owners of
non-controlling shareholders
Dividends paid
Balance at 31 December 2013
Profit for the year
Other comprehensive income
Total comprehensive income
for 2014
Share issue
Share based payment
Transaction costs recognized
directly in equity
Purchase of additional interest
from minority shareholders
Dividends paid
Transfer of revaluation surplus
to retained earnings
Balance at 31 December 2014
24
25
24
25
24
25
–
–
–
815
–
157
–
–
–
23,612
–
–
–
–
–
2,700
4,581
(4,738)
–
–
–
16,143
–
231,501
–
4,142
–
–
–
240
–
116
–
–
–
–
–
7,097
–
–
–
–
2,032
4,026
(4,142)
–
–
–
–
–
9,304
96,519
–
96,519
9,304
1,292
–
97,811
9,304
9,304
96,519
105,823
1,292
107,115
–
–
–
–
–
–
(527)
41,939
–
8,901
535
298,880
121,616
–
24,427
2,700
–
8
592,605
121,616
8,901
–
–
–
24,427
2,700
–
993
993
–
11,419
2,654
–
8
604,024
124,270
8,901
8,901
121,616
130,517
2,654
133,171
–
–
–
–
–
–
–
–
–
(17,869)
7,337
2,032
–
–
(17,869)
–
–
–
7,337
2,032
–
594
–
594
(17,869)
16,499
242,624
2,032
50,840
402,627
714,622
14,667
729,289
–
–
–
–
–
–
3,077
172,493
–
–
–
–
–
–
–
–
–
–
2,592
(9,459)
–
–
–
–
–
–
–
–
54
54
–
–
–
89
–
157,451
–
157,451
54
1,000
–
158,451
54
157,451
–
–
–
157,505
175,570
2,592
(9,459)
1,000
158,505
–
–
–
175,570
2,592
(9,459)
(2,627)
(2,538)
(8,296)
(10,834)
(26,492)
(26,492)
–
–
(26,492)
305
(1,728)
2,033
305
19,576
405,658
4,624
49,255
532,992 1,012,105
7,371 1,019,476
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
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09
16
17
72
73
114
115
01 Performance Highlights
02 Letter from the Chairman
05 Company History
06
08 TBC at a Glance
Initial Public Offering
14 Letter from the Chief
Executive Officer
16 Business Model
18 Strategy
20 Key Strengths
22 Operating Environment and
Market Overview
26 People
28 Operating and Financial
Overview
36 Distribution Channels
38 Principal Risks and
Uncertainties
48 Financial Review
66 Corporate Social
Responsibility Report
72 Chairman’s Corporate
Governance Statement
73 Supervisory Board Report
and Responsibilities
83 Supervisory Board
Committees
84 Audit Committee Report
89 Remuneration Committee
Report
90 Corporate Governance and
Nomination Committee
Report
91 Risks, Ethics and
Compliance Committee
Report
92 Management Board
97 Management Board
Committees
99 Risk Management
112 Independent Auditor’s
Report
113 Consolidated Financial
Statements of TBC Group
Additional Information
196 Shareholders’ meetings
196 Dialogue with shareholders
196 Dividend policy
TBC Bank standalone
statements according to the
National Bank of Georgia
reporting standards are
available on the Bank’s
Investor Relations website
at www.ir.tbcbank.ge
Artarea
In 2014, TBC Bank continued to invest in arts and culture
development in Georgia. Artarea is our pioneering initiative
and the first TV project focusing solely on cultural events and
developments. Artarea went beyond its initial online format in
2014 and started broadcasting on cable. For more on the Bank’s
cultural projects, see our CSR Report on page 66.
Business Review
Performance Highlights
Financial highlights (in millions GEL)
Total Operating Income
Operating Expenses
458.3
2013: 381.5
Change +20.2%
Total Assets
5,423.5
2013: 4,451.1
Change +21.8%
ROAE
18.4%
2013: 18.7%
Change -0.2pp
Cost of Risk
1.6%
2013: 1.3%
Change +0.3pp
226.3
2013: 198.6
Change +13.9%
Gross Loans
3,706.3
2013: 2,958.6
Change +25.3%
ROAA
3.3%(a)
2013: 3.1%
Change +0.2pp
NPL to Gross Loans
0.5%
2013: 1.1%
Change -0.6pp
Profit Before Tax
182.9
2013: 139.9
Change +30.7%
Customer Deposits
3,322.4
2013: 2,886.9
Change +15.1%
Pre-provision ROAE
24.2%
2013: 25.3%
Change -1.1pp
Basel 1 CAR
30.4%
2013: 28.6%
Change +1.7pp
Profit for the Period
158.5
2013: 124.3
Change +27.5%
Cost to Income
49.4%
2013: 52.1%
Change -2.7pp
Basel 2/3 total CAR
15.0%
2013: 14.4%
Change +0.7pp
Selected operating data
Remote Channel
Transactions/
Total Non-cash
Transactions
Cash-in Terminals
(TBC Pay)
82%
2013: 81%
2,262
2013: 2,566
Branches
120
2013: 114
Employees
5,117
2013: 4,471
ATMs
352
2013: 332
POS Terminals
4,820
2013: 2,779
Credit ratings
FITCH
Moody’s
Long-term IDR
Short-term IDR
Bank Deposits FC
Bank Deposits DC
BB–
B
B1
Ba3
(a) Please find all ratio explanations on page 65.
01
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Business Review
Letter from the Chairman
promising young professionals, who laid the foundation for the
success of the Bank and their own careers. I am proud to say that we
have kept the same strategy to this day.
For me, 2014 was a special year where we achieved another milestone
of listing on the London Stock Exchange. I believe this is important not
only for our Bank but also for the country and its economy. The London
listing creates new opportunities for our continued success and
development, while it also reinforces the links between the Georgian
economy and international markets.
We are happy to have completed another successful year, delivering
against our growth targets. We enhanced our leadership positions in
each segment we operate – retail, corporate, SME and micro. Moreover,
we continued to place particular emphasis on our shareholders,
customers, employees, and community, which we have always viewed
as fundamental to our long-term success.
Our Customers
We are proud of the way we do business, which has resulted in
long-term relationships with many of our clients. We are honoured
to be the reliable financial institution for many of the companies
who started as small entrepreneurs in the early 1990s and with
our continuous support became leaders in their industries.
I am happy to see that the Bank’s Management leads our business with
the same passion and dedication today. An ever increasing number
of small enterprises supported by our Bank have grown into large
companies that contribute greatly to our economy. Each of these
companies is a new success story for TBC Bank and for the country.
We have always differentiated ourselves with the highest customer
experience. Our innovation in products and service models has helped
enhance TBC Bank’s image as the customer-oriented institution. I am
proud of our award winning multichannel platform that has made
banking easier, more accessible and convenient for our retail clients.
Recent developments in the micro segment allow us to come closer to
the customers in the regions. TBC Bank’s unique Business Support
Programme provides special value-added services to our SME
customers and the wider Georgian business community.
Our Shareholders
We believe that our focus on long-term successful performance is
well appreciated by our shareholders and we are best positioned to
continuously serve their interest and to facilitate effective discussion
and engagement. We outperformed the market in terms of both loan
and deposit growth, which further enhanced our overall market
position in Georgia. In line with our strategy, the retail and SME
segments made a significant contribution to these results. Our growth
strategy was supported by our robust capital base reinforced through
our IPO and the solid net income for the year. We achieved a record
profit of GEL 158.5 million, translating into an ROAE of 18.4%.
We are happy to have completed
another successful year, delivering
against our growth targets. We
enhanced our leadership positions
in each segment we operate – retail,
corporate, SME and micro. Moreover,
we continued to place particular
emphasis on our shareholders,
customers, employees, and community,
which we have always viewed as
fundamental to our long-term success.
Mamuka Khazaradze
Chairman
Twenty two years ago we started our business with just USD 500 in
capital and have grown together with our customers, our shareholders
and our team from modest beginnings to a leading company in
the region.
We built our Bank with an unwavering dedication to innovation and a
high standard of doing business, which was a display of unprecedented
boldness amid the break-up of the Soviet Union and the resulting
crisis. We were very young and enthusiastic with the ambition to create
a business that would change not only our own future but that of many
others in Georgia. We decided to start by recruiting very talented and
02
TBC Bank Annual Report 2014 Culture of Giving Back
TBC Bank places special emphasis on building the right employee
culture and would like to lead by example as a company. To this end,
we have created several programmes for and with our employees
and I would like to highlight two of them this year.
Our Fund for Large Families responds to the role our team members
play as mothers and caregivers in the community. This unique fund
provides one-time monetary assistance to employees who welcome
their fourth and next child and organises special events and gifts for
their families.
Acting in the same vein, we are grateful for the care our employees
have shown each other as well. They have started a fund – TBC for TBC
– where employees volunteer to donate a portion of their salary each
month. In addition to the Bank’s own efforts, these resources are used
to ease the financial burden for the family members of our employees
who may not have appropriate health insurance.
Social Responsibility
Lastly, but importantly, we pride ourselves on being a socially
responsible company and a leading supporter of arts and cultural
development in particular. In 2014, TBC Bank financed several
important new, as well as traditional projects and I would like to
highlight some of these below.
TBC Supporting Georgian Art Abroad
TBC Bank financed four distinct efforts to promote and export Georgian
art and culture beyond the country’s borders. With TBC’s support,
several Georgian artists have become frequently featured in lots at
auctions at Sotheby’s. A unique exhibition was hosted by the London Rich
Mix Art Space, featuring four Georgian artists. Several young talents
from the country were also given an opportunity to showcase art pieces
in Cologne, Germany, at an exhibition organised in partnership with
DEG. Lastly, with TBC’s backing Georgian photographers were able to
participate in the prestigious photo contest and exhibition PHOTO OFF
in Paris, France.
In light of this continued strong performance, the Bank’s Supervisory
Board plans to distribute 25% of the Bank’s consolidated net income
as dividends.
Our merger with Bank Constanta was successfully completed in
January 2015, which will enable us to offer TBC Bank’s products in
an additional 60 branches. We will also start offering microfinance
products through the Bank’s branch network and further expand our
business in the fast-growing microfinance segment of the market.
Once again, we are excited to step up our support to businesses
outside of Tbilisi by making more of our resources and services
available in the regions through the former Bank Constanta’s network.
We plan to focus our efforts on providing new opportunities for growth
to businesses throughout Georgia.
Our Team
TBC Bank boasts a diverse and experienced team that steers our Bank
through opportunities and challenges every day. We are one of the
largest employers in the market. Approximately 90% of our work force
is young and passionate, aged between 20 and 39. Our Management
has spent an average of over 10 years with TBC. Approximately 70%
of our employees and 60% of middle management are women.
I am very proud that we have continued to strengthen our Supervisory
Board by welcoming Stefano Marsaglia as the Independent Member in
2014. He has replaced Emile Groot, who resigned at the end of the year.
Stefano has extensive experience in the financial services industry, including
his recent roles as Executive Chairman of Corporate and Investment
Banking at Mediobanca, London, and the Chairman of Global Financial
Institutions of the Investment Banking Division at Barclays Bank, London.
When building our management team, we focus on attracting the best
talent in the country. 2014 has been important in this regard, as the
strength of Management Board was reinforced with the top Georgian
talent with outstanding professional and academic background.
George Tkhelidze joined TBC Bank from Barclays Investment Bank
as Chief Risk Officer. David Tsiklauri joined the Bank as Co-Head of
Corporate Banking from Deutsche Bank and, after the departure
of Mariam Megvinetukhutsesi, remains as the Head of Corporate
Banking. Nikoloz Kurdiani was appointed Deputy Chief Executive
Officer of TBC Bank responsible for micro-finance, joining from the
UniCredit Group. We are proud to bring these outstanding Georgian
professionals back to the country, strengthening our Management
Board, and wish them further success in their new roles.
I would like to take this opportunity to thank Emile, Archil and Mariam
for their tremendous contribution to the Bank’s development over
the past years and wish them every success in their personal and
professional endeavours.
03
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Business Review
Letter from the Chairman
Continued
04
Sustaining Historical Heritage
TBC plays an important role in maintaining the country’s historical
heritage. In 2014 the Bank sponsored an exhibition of unique historical
artefacts – a collection of bronze buckles dating as far back as the
Eighth Century BC, at its headquarters in Tbilisi. The Bank also
financed the reconstruction of a historical heritage site in a
mountainous region of Georgia, the Mutso stronghold dating to the late
medieval period, which is set to welcome its first visitors in early 2015.
Literary Award SABA and Online Bookstore
TBC continued to support the SABA Literary Awards programme, one
of the most respected and anticipated literary events in the country.
TBC Bank founded the programme in 2003 with 2014 marking its
12th anniversary ceremony. As of today the Bank has recognised over
110 authors and awarded c. GEL 377,000 in prizes.
SABA online bookstore, the satellite project to support the Awards
Programme, has been gaining popularity among the local and expat
communities. The bookstore, which introduced the first Georgian
e-book app in 2014, promotes Georgian literature beyond the country
borders and allows new authors to be discovered and appreciated.
Until now, dozens of established and up-and-coming writers have
created their own electronic books and sold them using our innovative
e-book platform.
These, and many other initiatives, continue in 2015. A full account of
our CSR activities is available in our Strategic Report.
Outlook
As Chairman of TBC Bank, I am honoured to report that the Bank does
business in its own, very unique way. With our strong delivery on the
set performance targets, we are delighted to create value for our
customers, shareholders and team members.
I would like to express my gratitude to the Bank’s outstanding
management team led by our Chief Executive Officer, Vakhtang
Butskhrikidze, and to our employees, who have supported TBC on its
journey of growth from USD 500 in equity to our current position of
market leadership. I would also like to take this opportunity and
congratulate Vakhtang on being named CEO of the Year 2014 in Central
and Eastern Europe and the CIS by EMEA Finance Magazine.
Mamuka Khazaradze
Chairman
TBC Bank Annual Report 2014 Company History
TBC Bank Milestones
TBC Bank was founded in December 1992 by Mamuka Khazaradze and Badri
Japaridze, who currently hold 22% of the Bank’s shares. TBC Bank’s longstanding
relationships with International Financial Institutions (IFIs) began in 1998 when the
Bank signed two agreements for credit lines dedicated to SME financing with IFC
and DEG. IFC and DEG subsequently became shareholders of TBC Bank in 2000.
The EBRD, FMO, JP Morgan and Ashmore acquired shareholdings in the Bank in
2009. These shareholders have been important partners and contributors to the
Bank’s development and success.
TBC Bank launched its leading retail business line in 2006. In May 2011, we acquired
the fastest-growing microfinance bank in Georgia through a successful acquisition
of an 80% shareholding in Bank Constanta. The microfinance segment is now one
of the key growth drivers for the Bank.
2014
• TBC Bank completes its listing on the Main Market of the
London Stock Exchange.
• TBC Bank gains 100% ownership of Bank Constanta,
paving the way for the full merger between the two banks.
• TBC Bank acquires EBRD share in TBC Leasing.
2012
• TBC Bank celebrates five years of market leadership in
Retail Deposits with a 35% market share at the end of
the year.
• TBC Bank raises GEL 192 million in new financing
through various equity and debt transactions, attracting
new investors to Georgia and to its portfolio.
•
TBC Bank launches a number of key strategic initiatives:
• Multichannel distribution systems and now globally
recognised services: new Internet & Mobile banking
(iPhone, iPad, Android, Blackberry applications, PDA
mobile banking);
•
‘Lean Banking’ project to increase efficiency
throughout the distribution network;
• CRM implementation project with industry-leading
Oracle Siebel; and
• Basel II/III implementation project with support from
Ernst & Young.
2008
• TBC acquires 75% shareholding in TBC Kredit
(formerly SOA Kredit), a non-banking credit institution
in Azerbaijan.
2007
• TBC’s total assets exceed USD 1 billion.
2004
• Non-banking operations, through TBC Leasing, are
launched by the Bank (which later becomes market
leader with 61% market share in 2013).
2000
•
IFC and DEG acquire a combined 20% of TBC’s share
capital and become the Bank’s first IFI shareholders.
TBC Bank becomes the first Georgian company to obtain
an international rating.
1992
• TBC Bank is established with USD 500 initial capital.
The Bank is focused on the corporate segment with
emphasis on SMEs.
2015
2014
2013
2012
2011
2009
2008
2006
2004
2000
1998
1992
2013
• TBC Bank submits its ICAAP report to the NBG.
• TBC Bank launches its SME Business Support Program,
with support from IFC and ADB.
• TBC Bank launches its ground-breaking Sensory
marketing project, which creates a unique branded
customer experience in its branches.
2011
• TBC Invest establishes a representative office in Israel
that acts as an intermediary between potential future
clients and the Bank.
• TBC acquires 80% shareholding in Bank Constanta,
which specialises in microfinance.
2009
• TBC Bank broadens its shareholder base with EBRD, FMO,
JP Morgan and Ashmore becoming shareholders in TBC
Bank, and IFC and DEG contributing additional capital.
2006
• EBRD acquired 10% shareholding in TBC Leasing.
• CITI Bank provides a USD 35 million unsecured loan
to TBC Bank. At this time, this is the largest line of
credit ever provided by a foreign commercial bank to a
Georgian bank.
• TBC Bank launches its retail banking offering, with a
retail product development and marketing strategy
implemented with support from BBDO (marketing) and
SENTEO (consulting).
2002
• The Banker Magazine, a Financial Times Group
publication, names TBC Bank as ”The Bank of the Year
2002 in Georgia,” the first such international recognition
for the Bank.
2001
• TBC Bank launches its first internet banking service.
1998
• TBC Bank enters export/import financing
operations segment.
05
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Business Review
Initial Public Offering
Transaction Overview
In June 2014, TBC Bank completed its LSE listing, which was vital for
TBC Bank’s long-term sustainable development and a milestone
transaction not only for TBC Bank but also for the economy and the
country as a whole.
The transaction raised USD 256 million, by listing 40% of the Bank’s
shares. The IPO price was USD 13 per GDR, valuing the Bank at
USD 640 million.
The deal team consisted of Barclays and UBS as Joint Global
Coordinators and Joint Bookrunners, Renaissance Capital as
Joint Bookrunner, and Peel Hunt as Co-lead Manager. Baker
and McKenzie, Linklaters, DLA Piper and BGI Legal completed
the legal team, while BNY Mellon was TBC’s depositary bank and
Citigate Dewe Rogerson acted as the PR agent. The Bank’s audit
company, PricewaterhouseCoopers (PwC) maintained its role
during the transaction.
TBC Bank IPO took tremendous effort and team work. The Bank
and its advisers successfully executed the transaction in a very
challenging environment.
Challenging environment: IPO context
TBC Bank IPO happened in an extremely challenging environment.
At the beginning of 2014, while TBC Bank was preparing its IPO, the
Ukraine crisis entered a new phase when President Yanukovych fled
the country on February 22nd, heightening geopolitical uncertainty in
the wider region. This had serious effects on regional equity performance.
Many investors drew parallels with the 2008 Georgian invasion and
feared that Russia might open a new front in Georgia to further
increase its influence in the region, spreading aggression similar
to that demonstrated in Ukraine to Georgia as well.
Moreover, many investors believed that Georgia was dependent on
the Russian economy. The country has moved rapidly over the last
ten years to reform, liberalise and diversify its economy. Georgia has
repeatedly been named as one of the top reformers by the IFC and
World Bank Doing Business report, as well as one of the easiest
places in the world to start and do business. Forbes Magazine and
Transparency International have also named Georgia as one of the
friendliest tax regimes and one of the most transparent economies
in the world, respectively(a). Georgia’s trading and financial links have
been greatly reoriented since 2008 with exports to Russia and Ukraine
accounting for only 6.5% and 6.6% respectively. However, most
investors had been given few opportunities to participate in these
developments. Some investors still tended to view the country in
the broader CIS region context as a Russia-dependent economy.
(a) The World’s #2 Reformer; #8 on Starting a Business; #15 globally on the Ease of
Doing Business – according to the World Bank and IFC Doing Business Report 2014.
In June 2014, TBC Bank completed
its LSE listing, which was vital for
TBC Bank’s long-run sustainable
development and a milestone
transaction not only for TBC Bank but
also for the economy and the country
as a whole.
TBC Bank on the London
Stock Exchange
TBC Bank promotional
image for the IPO.
06
TBC Bank Annual Report 2014 Finally, the Georgian economy is still small and receives limited
international exposure. Many investors were deterred by the
challenges of the CIS equity market and by negative news and
commentary about the region, so that they did not want to spend more
time on learning the essential specifics that would build their trust in
Georgia. When the syndicate team banks were conducting investor
feedback calls, some of the investors were answering simply that this
was not a good time for any IPO from the region.
The task for our team was to convince investors that Georgia was
different and was not affected by the Ukrainian developments,
ensuring that the difference was clearly explained and that the
investors understood and trusted TBC Bank’s strong investment story.
It took diligent preparation and persistence in preparing consistent
meetings with investors through various marketing activities, such as
a non-deal roadshow or pilot fishing, in order to ensure that the appropriate
audience was targeted and messages were clearly delivered.
Milestone IPO
TBC Bank IPO was unique for its size and timing.
• Largest ever IPO from Georgia
TBC Bank’s IPO marked a milestone for the Georgian economy
and the banking sector. The IPO was one of only two bank IPOs
from Georgia and, at USD 256 million, is the largest offering by
a Georgian company on a stock exchange.
• Largest ever international off-index IPO from
the EMEA region
As Georgia is not yet part of the MSCI Emerging Markets
or Frontier Markets indices, the TBC Bank GDR could not
be included in tracker or index fund portfolios, increasing
the need for successful marketing to active investors.
• Only bank IPO from CEE region(a) in 2014
Bank IPOs remain a relative rarity historically due
to, arguably, more challenging transaction dynamics.
Since 2008, only 13 banks have gone public in Europe
(six in 2014) and only five of these were from the
European emerging markets.
• 3rd largest CEE IPO in 2014(b)
One of only 9 CEE IPOs(c) in 2014, which saw the lowest
level of CEE IPO activity since 2002 (by USD million raised)
• One of only 4 GDR issues on the London Stock
Exchange in 2014
(a) When referring to CEE, we include CIS countries and Russia
(b) Data according to Dealogic
(c) We include here all company IPOs, not only bank IPOs (as mentioned in the bullet
point immediately preceding)
Unique Equity Story
The Bank’s IPO story was clearly identified and communicated to the
investors, which was an important part of the success of our Offering.
TBC Bank IPO story was based on the benefits and opportunities of
investing in Georgia, the Georgian banking sector and TBC Bank.
These benefits are described in chapters Operational and Financial
Review and Key Strengths.
Successful IPO strategy
The Bank understood that the IPO windows are becoming shorter and
shorter due to the challenging economic environment and it is almost
impossible to predict when the appropriate window will become
available to launch an IPO.
Therefore, rather than forecasting the next possible opportunity, TBC
implemented important initiatives to prepare and improve all aspects
of the Bank to meet best practice standards and started early
engagement and education of investors, so that it was ready to take
advantage of the first suitable window for listing. At the time of the IPO,
TBC had all the necessary structures and practices in place to give
confidence to new investors in its corporate governance.
TBC Bank Shareholding Structure
Before the IPO
After the IPO
Founders 26.7%
EBRD 19.8%
IFC 19.8%
DEG 11.3%
FMO 5.3%
J.P. Morgan 5.0%
Ashmore 4.0%
Management & other 8.6%
Founders 22.4%
EBRD 12.5%
IFC 6.2%
DEG 3.6%
FMO 4.4%
J.P. Morgan 1.6%
Ashmore 2.7%
Management & other 6.6%
Free-float 40.0%
07
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
This openwork bronze
buckle was discovered in
a village church in 1963.
The frame ornaments are
created with skilled and
precise craftsmanship,
while the buckle is
distinguished with its
four-part composition
each containing a single
ox figure. This type of
design is rare in the wider
buckle collection.
Customer Experience
TBC Bank prides itself on the quality of customer service and
experience. According to internal and external research, TBC Bank
maintained market leading positions in customer experience in
2014. A “Mystery Shopping” study conducted by IPM(d) named TBC
Bank as the friendliest provider of banking services in Georgia.
(a) All market share data is quoted according to the figures published by the NBG
and include TBC Bank and Constanta.
(b) Including employees of all TBC Bank subsidiaries.
(c) Gross loan portfolio according to NBG accounting standards for comparison
purposes. TBC Bank portfolio includes Bank Constanta.
(d) IPM is a leading market research company in Georgia with 15 years of
experience of the market and 12 years within the financial services industry.
IPM’s Mystery Shopping survey evaluates the service quality of the Bank’s
branch and call centre employees according to approximately 80 different
parameters, each one earning one point for the assessed employee when
fulfilled. Parameters cover such important qualitative and quantitative criteria
as professionalism, meeting/closing skills, responsiveness, perceived service
quality, etc. The final score is a percentage total of scores achieved by all
employees out of the maximum 100%.
40 11
Tbilisi
Ratcha-lechkhumi
Kvemo Svaneti
0
1
Imereti
4
8
Shida-
Kartli
2
5
Mtskheta-
Mtianeti
1
1
Samtskhe-
Javakheti
1
5
Tbilisi
Kakheti
2 10
Kvemo-Kartli
4
8
Business Review
TBC at a Glance
We create new opportunities for the success
of people and businesses.
TBC Bank is a leading universal banking group in Georgia with an
unmatched share of retail deposits at 33.7%(a), and a number two
position in loans and deposits with total market shares of 27.7%
and 28.4%, respectively.
We service over 1.2 million clients through a diversified multichannel
platform that comprises 120 branches of TBC Bank and former
Bank Constanta, one of the largest networks of ATMs and POS
terminals in Georgia, global award-winning internet banking,
market-leading mobile, iPad and iPhone banking, a call centre
and TBC Pay terminals and kiosks.
We employ over 5,000 people(b) across our operations, more than
half of whom have been with TBC for four or more years.
Our Multichannel Distribution Platform
TBC Bank’s globally recognised multichannel distribution
platform complements our full service model perfectly. While our
branches are carefully designed with a primary focus on customer
satisfaction, our leading multichannel distribution platform allows
us to offload routine transactions from branches to e-channels.
As a result, TBC has achieved the market-leading portfolio of gross
loans per branch of GEL 30 million(c).
Over the past year, our multichannel capabilities have been recognised
as best in the country and in the wider region, as well as being
acclaimed globally.
Apkhazeti
Zemo Svaneti
Samegrelo
3
7
Guria
Ajara
1
3
0
3
TBC branch
network (2014)
TBC Bank branches
Bank Constanta branches
08
TBC Bank Annual Report 2014
TBC Banking Franchise: Overview
TBC Bank Brand
TBC Bank has one of the best-known and most trusted brands
in Georgia. This is largely due to our high quality customer
experience, strong reputation, long-standing relationships with
customers, traditional focus on social responsibility, and targeted
marketing campaigns.
Products and Services
TBC Bank offers a wide range of banking products and services to
its retail, corporate, SME and micro clients with the majority of our
business concentrated in Georgia, which accounted for 98.3% of
TBC’s total assets and 97.6% of its net income as at and for the year
ended 31 December 2014.
Over the years, we have received a number of prestigious industry
awards, including being named as “Best Bank in Georgia” seven
times by Global Finance magazine, seven times by The Banker,
four times by EMEA Finance and three times by Euromoney.
Recent Awards
4.
5.
6.
7.
BEST PRIVATE BANK
GEORGIA
Corporate and Social
Responsibility Award
Central and Eastern Europe and CIS
1.
2.
3.
8.
9.
10.
11.
Vakhtang Butskhrikidze,
CEO of the Year 2014 /
Central and Eastern
Europe and CIS
TFPAWARD
TRADE FINANCE PROGRAM
ASIAN DEVELOPMENT BANK
12.
13.
1. Bank of the Year 2014: The Banker
2. Best Private Bank in Georgia 2014:
The Banker and PWM Magazine
4. Top 15 Global Trade Finance Deals:
Trade and Forfaiting Review
5. Best Bank in Georgia 2014: Euromoney
6. Most Active Issuing Bank in Georgia in
2013: EBRD Trade Finance Programme
8. Best Foreign Exchange Provider in
Georgia 2015: Global Finance
9. Best Consumer and Corporate Internet
Bank in Georgia 2014: Global Finance
Best Integrated Consumer and
Corporate Bank Site in Central &
Eastern Europe 2014: Global Finance
10. Best Bank in Georgia 2015: Global Finance
11. Best Trade Finance Bank 2015:
Global Finance
12. Most Active Issuing Bank in Georgia
2014: Asian Development Bank Trade
Finance Programme
13. Best Bank in Georgia 2013:
EMEA Finance
09
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Business Review
TBC at a Glance
Continued
Retail banking
Customer classification(a)
All individual customers
Corporate banking
Customer classification(b)
Legal entity customers
TBC Bank is the market leader in retail
loans and retail deposits as at 31 December
2014. The retail segment represents 59.5%
of the total deposit portfolio and 45.0%
of the total loan portfolio, making it the
Group’s largest segment in terms of both
deposits and loans. We offer a full range of
products to our retail customers, including
current and saving accounts, term deposits,
consumer, instant, instalment and mortgage
loans, credit cards and overdrafts. We serve
more than one million retail customers
through our extensive multichannel
distribution network.
By 31 December 2014, the Group’s retail
loan portfolio reached GEL 1,666.9 million
with the market share for individuals at
29.7%. At the same time, our market share
in deposits of individuals stood at 33.7%.
(a) All individual customers of the Group as
well as customers that have been granted
gold-pawn loans.
Customer loans
(2014YE, % of total, gross)
45.0
GEL milllion
1,667
Customer deposits
(2014YE, % of total)
59.5
GEL million
1,977
Customers
'000s
1,060
Corporate Banking is a traditionally strong
area of the Bank representing 33.2% of
TBC’s total loan portfolio and 25.1% of total
deposits portfolio. We serve more than
1,400 corporate clients in Georgia, offering
a wide range of products including balance
sheet finance, trade finance, asset finance,
project finance, working capital and
syndicated loans.
Customer loans
(2014YE, % of total, gross)
33.2
GEL milllion
1,232
Customer deposits
(2014YE, % of total)
25.1
GEL milllion
833
(b) Business customers which have annual
revenue of GEL 8.0 million or more or have
been granted a loan in an amount equivalent
to USD 1.5 million or more. Some other
significant legal entity customers may also
be assigned the status of being a corporate
customer, on a discretionary basis; for
example, if they are regarded by the Group
as having strong growth potential.
Customers
'000s
1.5
Subsidiaries
In addition to its core banking business that TBC conducts within
its retail, corporate, SME and micro segments through TBC Bank,
Bank Constanta and TBC Kredit, TBC conducts supplementary
operations through its other subsidiaries. These operations
represented 1.9% of our total assets and 1.7% of our consolidated
net income for the year ended 31 December 2014. For a more
detailed overview of our subsidiaries, please see Operating and
Financial Overview on page 28.
Group shares in total assets
TBC Bank & Constanta 96.4%
TBC Leasing 1.3%
TBC Kredit 1.7%
TBC Invest <0.1%
Other 0.6%
Shareholders
Since the Bank’s IPO on the London Stock Exchange, 40% of
TBC Bank shares are publicly traded. Our International
Financial Institution (IFI) shareholders include International
Finance Corporation (IFC), Deutsche Investitions und
Entwicklungsgesellschaft mbH (DEG), the European Bank for
Reconstruction and Development (EBRD) and Nederlandse
Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO),
with a combined share capital of 26.7%. Other international
institutional investors, J.P. Morgan Chase Bank, N.A., London
Branch ("JPMorgan") and Ashmore Cayman SPC No. 2 Ltd.
("Ashmore"), in aggregate hold 4.3% of the Bank’s shares.
The two founding shareholders jointly hold 22.4% of the Bank’s
share capital, while the remaining 6.7% is owned by management
and other minority shareholders.
Ratings
TBC Bank is rated by Fitch Rating Agency and Moody’s Investor
Services. The Bank’s current ratings are BB- (Long Term IDR)/ B
(Short Term IDR) assigned by Fitch and B1 (FC)/ Ba3 (LC) assigned
by Moody’s.
10
TBC Bank Annual Report 2014 SME banking
SME banking accounted for 14.4% and
15.3% of TBC’s total loans and total
deposits portfolios, respectively. TBC
offers a diverse range of products and
services to its SME segment customers,
including trade finance, project finance,
asset finance and working capital loans.
We serve approximately 56,000 clients.
As at 31 December 2014, we held the
second largest market share for legal
entity loans and deposits of 25.8% and
23.0%, respectively.
Customer classification(c)
Legal entity customers
Customer loans
(2014YE, % of total, gross)
14.4
GEL milllion
534
Customer deposits
(2014YE, % of total)
15.3
GEL milllion
508
Customers
'000s
56
(c) Business customers that are not included
either in the corporate or micro segments
Micro banking
(Bank Constanta)
TBC Bank completed the merger with Bank
Constanta in January 2015. The former Bank
Constanta operations are now presented as
the microfinance operations of TBC Bank.
Following the integration of Bank Constanta’s
business within TBC, the identical range of
products and services is now available
throughout the whole network of TBC and
former Bank Constanta branches.
The micro banking segment is the smallest
but fastest growing segment of the Group,
accounting for 7.4% and 0.1% of total loans
and total deposits, respectively. Total loans
to the micro segment increased by 36%
during 2014, while micro customer deposits
increased by 9.9% YoY. This segment offers
various types of loan and deposit products
tailored to client needs. As at 31 December
2014, we served approximately 36,000
micro banking customers in Georgia.
In January 2015, TBC Bank also further
strengthened its leadership on the market
by acquiring ProCredit Bank’s microfinance
portfolio. At the time of the transaction,
gross loans in this portfolio amounted to
GEL 38.4 million.
Customer classification(d)
All micro customers
Customer loans
(2014YE, % of total, gross)
7.4
GEL milllion
274
Customer deposits
(2014YE, % of total)
0.1
GEL milllion
5
Customers
'000s
36
(d) All business customers of
Bank Constanta, that have
been granted loans by and/
or have deposits with Bank
Constanta, the amount of
which in neither case
exceeds USD 150 thousand.
Development of loans by segment
(gross, % of total)
Customer deposits by segment
(% of total)
Total
loans
(gross,
GEL mn)
2,167
3.9
10.9
46.3
YoY growth: 17.0%
2,537
YoY growth: 16.6%
2,959
YoY growth: 25.3%
3,706
5.8
11.6
45.0
6.8
13.3
39.1
7.4
14.4
33.2
Total
customer
deposits
(gross,
GEL mn)
1,999
YoY growth: 24.4%
2,487
YoY growth: 16.1%
2,887
YoY growth: 15.1%
3,322
0.1
10.0
35.0
0.1
11.5
32.2
0.2
15.7
28.4
0.1
15.3
25.1
38.9
37.6
40.8
45.0
54.9
56.2
55.8
59.5
2011
2012
2013
2014
2011
2012
2013
2014
Micro (CAGR 47.7%)
SME (CAGR 31.3%)
Corporate (CAGR 7.1%)
Retail (CAGR 25.5%)
Micro (CAGR 64.0%)
SME (CAGR 36.5%)
Corporate (CAGR 6.0%)
Retail (CAGR 21.6%)
Source: Consolidated IFRS figures; CAGR figures for 2011–31 December 2014
Source: Consolidated IFRS figures; CAGR figures for 2011–31 December 2014
11
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
14 Letter from the Chief Executive Officer
16 Business Model
18 Strategy
20 Key Strengths
22 Operating Environment and Market Overview
26 People
28 Operating and Financial Overview
36 Distribution Channels
38 Principal Risks and Uncertainties
48 Financial Review
66 Corporate Social Responsibility Report
12
14
Letter from the
Chief Executive
Officer
16
Business Model
48
Financial Review
Strategic ReportTBC Bank Annual Report 2014 13
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Letter from the Chief Executive Officer
significant benefits from the merger with Bank Constanta, which was
completed in January 2015. The merger will enable us to offer TBC
Bank’s products in an additional 60 branches and to further expand
our business in the fast-growing microfinance segment of the market.
In 2014 we continued to operate in a supportive economic environment.
Real GDP grew by 4.7%, slightly below the projected 5.0%, primarily
due to the generally weak macro environment in the region as well
as the slowdown in the Eurozone economy. While the Georgian Lari
depreciated by 7.3% against the US Dollar during 2014, it appreciated
against most of Georgia’s trade-partners’ currencies; that is, by 5.3%
against the Euro, 1.3% against Turkish Lira, 38.0% against the Ruble,
and 7.7% against the Armenian Dram.
Despite ongoing geopolitical unrest and economic slowdown, the
Georgian economy has remained one of the top performers in the
region. The high diversification of the economy, decreasing oil prices,
and the implementation of the EU Association Agreement (AA),
including the Deep and Comprehensive Free Trade Area (DCFTA)
agreement, further strengthen the country’s capacity for resilient
development in the coming years. In this environment, the Georgian
banking sector delivered robust growth with total loans increasing by
23.7% YoY and 12.0% QoQ.
We continued to outperform the market and delivered strong
growth across our portfolios. Driving the 25.3% increase in our total
portfolio, our retail and SME business lines grew at the fastest pace
achieving 45% and 14% shares of total loan book, up from 41% and
13% YoY, respectively.
As a result, we became the largest retail bank in the country in
terms of total retail loans with a 29.7% market share and continued
to maintain our long-term leadership in retail deposits with a 33.7%
market share. We continued to maintain the second highest market
share in total assets and total loans at 26.3% and 27.7%, respectively.
Our Net Interest Margin (NIM) was 8.5% (8.4% excluding one-off
interest income) in 2014, compared to 8.4% in 2013. Total non-interest
income reached GEL 119.7 million in 2014, up 21.1% YoY. Our cost of
risk on loans was 1.6% in 2014, in line with our guidance despite the
above-mentioned currency devaluation. Importantly, we continue to
have one of the lowest levels of Non-Performing Loans (NPLs) at 0.5%,
and comfortable reserve coverage for NPLs plus restructured loans
at 109%.
Our strong capital base, reinforced through our IPO and solid net
income for the year, further supported our growth strategy. The Bank’s
total capital adequacy ratio (CAR) per Basel I stood at 30.4%, and the
total CAR per recently implemented Basel II/III regulation stood at
15.0%, against the minimum requirement of 10.5% (or 13.5% including
the capital buffer).
2014 has been a year of progress
and achievement for TBC Bank. We
secured a listing on the London Stock
Exchange, resulting in the largest ever
IPO from Georgia and the largest ever
off-index IPO from the EMEA region,
an important milestone for both TBC
Bank and the country’s economy.
Vakhtang Butskhrikidze
Chief Executive Officer
We closed the year with a record profit, having already delivered on
most of our mid-term targets. By year-end, our loan book grew by
25.3% p.a., in line with our target of circa 20% p.a. growth. We
maintained our strong profitability with net income for the year at GEL
158.5 million, up 27.5% YoY, and an 18.4% return on average equity
(ROAE). At the same time, we retained a robust capital position with a
Basel II/III Tier I capital ratio of 12.4%. The Bank’s cost to income ratio
decreased to 49% in 2014, compared to 52% in 2013. Without one-off
charges related to the integration of Bank Constanta and the IPO – the
ratio was 47%.
Through rigorous implementation of our strategy based on a balanced
approach to growth and profitability, our focus remains on delivering
continued returns for our shareholders. Furthermore, we expect
14
TBC Bank Annual Report 2014 In 2014, we reached significant milestones in our multichannel
banking. TBC Bank maintained the leading customer base in internet
and mobile banking with approximately 155,000 and 62,000 active
users, respectively. The share of remote channels within total
transactions reached 82%, compared to just over 80% in 2013, while
internet and mobile banking transactions represented 44% of total
transactions transferable to remote channels during 2014, compared
to over 30% achieved in 2013. Moreover, our internet banking continues
to receive international recognition for the third consecutive year, with
Global Finance Magazine awarding us the title of “Best Internet Bank
in Georgia”, as well as the “Best Integrated Consumer Bank Site in
CEE” and “The Best Integrated Corporate Bank Site in CEE”.
Our Management Board was further strengthened with three new
members who have joined us from some of the world’s leading
financial institutions. TBC Bank’s new Chief Risk Office, George
Tkhelidze joined the Bank from Barclays, where he held the position
of Vice President in the Financial Institutions Group (FIG) for EMEA.
David Tsiklauri is the new Deputy CEO, in charge of Corporate Banking,
having had six years of experience at Deutsche Bank, most recently
as Vice President for Capital Markets and Treasury Solutions.
Nikoloz Kurdiani joined TBC as the new Deputy CEO in charge of
Micro Banking, after five years with Unicredit Group in Austria and
Kazakhstan. On behalf of the Management Board, I would like to
congratulate our new members on their appointments and wish them
tremendous success with TBC Bank.
I would also like to take this opportunity to thank Mariam
Megvinetukhutsesi, the former Deputy CEO in charge of Corporate
Banking, who was with TBC Bank for 8 years. Her contribution to the
Bank has been immense. Additionally, I would like to thank Archil
Mamatelashvili who worked with us during a very important period.
I wish Mariam and Archil the best with all their future endeavours.
Outlook
The depreciation of the Georgian Lari and regional developments are
expected to result in a temporary slowing of the economy’s growth
rate in 2015. We believe our asset quality will remain robust under
these conditions, due to our continuing rigorous approach to risk
management and the strength of our existing capital buffers.
We also expect currency depreciation to have some positive effect
in the medium to long-term by helping the economy maintain its
competitiveness in the region. Looking ahead, with low oil prices,
inflation under target, and the resilient nature of the fundamentals of
the Georgian economy, we believe that growth rates will soon return
to the previous levels.
I would like to reiterate our medium-term targets set out below:
• Despite an expected temporary slowdown in the short term,
our medium-term target for loan growth remains at 20%;
• Return on equity remains above 18%+;
• Our cost to income ratio (net of one-off costs) is on a decreasing
trend towards the 45% target
• We have revised our Capital Adequacy ratio to better utilise our
capital and to partially reflect the reduction in the respective
requirements per NBG’s current regulation. We intend to maintain
a solid capital buffer with a targeted 10.5% equity Tier I capital ratio;
• We reiterate our target dividend payout ratio of 25%.
We believe that the actions we have taken ensure that the Bank is well
positioned to sustain its successful performance into the long-term.
We look forward to updating the market on our continued
achievements in the future.
Vakhtang Butskhrikidze
Chief Executive Officer
Record High Profit with Strong NIM
GEL million
NIM
8.5%
158.5
Highest number of Internet and
Mobile Banking Customers
155,000 and 62,000
Strong Capital Buffers
Total CAR Basel II/III
15.0%
15
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Business Model
Mission and Vision
This year the Management decided to amend the Mission and
Vision statements in order to align them with the Group’s revised
aspirations for the long-term period. Accordingly, our vision
statement was updated to reflect our strategy of growth across
our four segments (retail, micro, SME and corporate) achieving
leading positions on the local market in all segments.
Mission
• to create new opportunities for the success
of people and businesses.
Vision
• to be the largest commercial bank
in Georgia.
Business Model
Our business model is focused on core banking activities in Georgia.
TBC Bank primarily operates on the Georgian market and
concentrates on pure commercial banking activities, investing in
subsidiaries that support or further grow our core business. This
business structure clearly differentiates us and enables us to
remain focused on providing traditional financial services to our
clients on the local market where we enjoy leading presence.
In addition, TBC maintains one of the best funding structures among
local banks and a straightforward and resilient balance sheet.
Sources of Income
As a pure commercial bank, the main sources of income for TBC
Bank are Interest Income and Fee and Commission Income
generated by core banking or related activities. In both areas, we
have delivered strong growth in profitability and expanded our
products offerings for our customers.
Target Customers
As one of the largest banks in Georgia, we provide financial
services to over one million retail customers and businesses
covering the entire market.
• The Retail segment provides high quality services to mass
retail, high net worth individuals and affluent customers.
• The Micro segment provides loans to micro customers,
which also include loans to small farmers and other
rural businesses.
• The SME segment provides financial services and support to
small and medium sized companies, which are considered
the largest drivers of economic growth.
• The Corporate segment provides services and advice to
large mature companies operating on the Georgian market.
TBC Bank is considered as one of the core corporate banks
in the country.
Furthermore, we differentiate ourselves through one of the
highest levels of customer experience, outstanding multichannel
capabilities proven through a number of awards, a strong brand
and a highly professional workforce.
16
TBC Bank Annual Report 2014 Business Model
We are focused
on core banking
activities in Georgia
Related to Core
Banking Activities
Sources of Income
Interest Income and Fee
and Commission Income
generated by core banking
or related activities
Segments
Covering wide
range of clients
Retail
Corporate
SME
Micro
We differentiate ourself
from competitors across
different criteria
1 Leading positions in an
attractive market poised
for profitable growth
4 Experienced management
team and high quality
corporate governance
2 Strong Track Record of
Growth and Profitability
5 Strong brand, superior
customer experience and
an award-winning franchise
6 Resilient and high quality
balance sheet
7 A leading multi-channel
distribution platform
3 Business model focused on
core banking activities in Georgia
17
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Strategy
In 2013, TBC Bank set ambitious goals for the year 2014 and
managed to achieve most of its strategic objectives. During 2014,
TBC increased its market shares, delivering strong profitability
and listing its GDRs on the London Stock Exchange.
TBC Bank’s overall strategy for the next years is to enhance the Bank’s
position as a leading Georgian universal financial group by becoming
the no. 1 commercial bank in the country via continuous growth in each
of the four segments. TBC Bank is Georgia’s second largest bank by
assets, no. 1 in retail deposits and retail loans, and has a new, clearly
defined strategy to become the leading pure commercial bank in the
country in the medium-term period.
We will continue strengthening our competitive advantages of a strong
brand, outstanding customer experience, best regional multichannel
capabilities, while we further increase our sales through fully utilising
our CRM platform, unique for Georgian market.
Grow Across all the Segments
We will continue delivering strong growth and profitability results to
become no. 1 commercial bank in Georgia across all four segments.
For this purpose, each segment will have a separate strategy on
delivering ambitious growth targets for the coming years. We aim
to maintain the leading market position in Retail, SME and Micro
segments and concentrate on growing our Corporate business further.
In order to achieve this, we will leverage our strengths across all key
areas including innovative remote channels and CRM platform, and an
experienced management team, as well as absorb synergies from the
Constanta merger.
Further Increase Fee and Commission Income from Core
Banking Products
As financial institutions are facing shrinking net interest margins
on the market, TBC Bank continues focusing on increasing non-
interest income. Currently, TBC Bank is concentrating on traditional
sources of non-interest income including card operation, guarantees,
settlement transactions, income from currency exchange and others.
Furthermore, we also consider new opportunities to generate
additional income, including new products and services that are in
line with our business model of sustaining core banking operations.
In order to achieve this, each segment includes non-interest income
generating initiatives in their strategic plan.
Further Develop Award-winning Multichannel Distribution
Platform
Innovative multichannel capabilities are considered as one of the main
competitive advantages of the Bank. Our leadership in this area has
been proven through multiple awards, strong offloading results and a
high percentage of transactions completed through remote channels.
Strength in this area has also largely contributed to the Bank’s
achievement of becoming the largest retail bank in the country.
In order to further leverage this competitive advantage, we plan to
continue focusing on the development of the Bank’s multichannel
capabilities including internet and mobile banking, call centre, ATMs,
TBC Pay and cash-in terminals.
Continue Strengthening Superior Customer Experience
We continue focusing on our other core competitive advantage of
superior customer experience, which we sustained throughout 2014.
This means further development of various customer service related
factors. This strategic direction is important for the realisation of the
Group’s overall strategic objective to be the largest bank in Georgia.
In order to take it to the next level, the Bank hired Peppers & Rogers
Group, a consultancy that will develop a measurement framework,
targets and plan to further improve customer experience.
By providing the best customer experience on the market, we aim
to retain and further solidify our position in Retail, Micro and SME
segments and to become the largest bank for large corporate
businesses. Apart from maintaining high customer experience levels
in the retail business, in 2015 we will also work on improving the
customer experience in Corporate, SME, and Constanta branches in
order to ensure that the merger does not have a negative effect on the
overall customer experience levels. Furthermore, we believe that in
the current market, provision of superior customer experience is a key
differentiating factor for TBC among other banks.
Synergies from the merger with the Bank Constanta
Bank Constanta operations were merged with those of TBC Bank
on 20 January 2015. We are in the process of achieving synergies by
integrating main back office functions such as IT, HR, finance and
others. This initiative will allow the Bank to improve its operational
efficiency through optimisation of costs and back office processes.
After completing the integration of Bank Constanta’s business within
TBC, the identical range of products and services will be available
throughout the whole network of TBC and former Bank Constanta
branches. Furthermore, all Bank Constanta branches will be
rebranded as “TBC Bank Constanta” within several months of
the merger.
18
TBC Bank Annual Report 2014
TBC Bank
Strategy
Status
for 2014
TBC Bank delivered against
most of its medium-term targets
during 2014. These are discussed
in greater detail on the right.
TBC Strategy Status for 2014
TBC Bank delivered against most of its
medium-term targets during 2014. These are
discussed in greater detail below:
Financial Performance Targets:
TBC Bank is in line with its medium-term financial performance
aspirations. The Bank achieved ROAE of 18.4% in 2014 (against
the medium-term target of +18%); cost-to income continued to
decrease and, excluding the one-off IPO and Constanta legal case
expenses, reached 47.0% (against the medium-term target of
<45%). In terms of the loan book growth, the Bank delivered the
targeted 20% p.a. plus growth with 25.3% growth as at YE 2014.
Competitive Strength:
The Bank continued differentiating itself through strong
brand, high levels of customer experience and outstanding
multichannel capabilities.
Capital Raising:
In June 2014, TBC Bank completed the largest Georgian IPO and
the largest off-index IPO of the EMEA region through listing GDRs
on the main market on the London Stock Exchange. The Bank
raised USD 256 million (USD 100 million primary proceeds),
valuing the company at USD 640 million.
Segment aspirations:
TBC Bank delivered strong growth and increased its market share
in Retail, SME and Micro segments. In 2014, TBC Bank became the
largest retail bank in terms of both loans and deposit in Georgia. In
line with the strategy, the Bank also maintained its position as the
core bank for large corporate businesses.
Medium-Term Targets
Loan book growth (gross)
ROE
Cost income ratio
Equity Tier I capital ratio
(Basel II/III)
Dividend payout ratio
(a) Subject to the AGM approval.
Actual
2014
Mid-term
targets
25.3% c.20% p.a.
≥ 18%
18.4%
< 45%
49.4%/
47.0%
12.4%
25.0%(a)
c.10.5%
25%
19
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Business Model Focused on Core Banking Activities
in Georgia
TBC Bank primarily operates on the Georgian market and
concentrates on pure commercial banking activities, investing in
subsidiaries that support or further grow our core business. This
business structure clearly differentiates and enables us to remain
focused on providing traditional financial services to our clients in
the local market where we enjoy leading presence.
Strong Brand, Superior Customer Experience and an
Award-winning Franchise
Currently, TBC is known as a strong brand with a highly positive
perception on the local market. This is largely due to high quality
customer experience, strong reputation, long-standing
relationships with customers, traditional focus on social
responsibility, and targeted marketing campaigns. This perception
is supported by the amount of internal and external research that
shows the Group’s outstanding performance on the market in
terms of NPS scores and customer satisfaction indices achieved.
Additionally, based on the latest TNS research on brand
awareness conducted in October 2013, TBC was the “Top of Mind”
Bank for 26% of all respondents. A “mystery shopping” study
conducted in 2014 by IPM showed that the Bank is one of
the friendliest provider of banking services on the market
(95.7% for TBC). In recent years the bank has received several
awards, including "Best Bank in Georgia" seven times by
the Global Finance and The Banker magazines, four times
by EMEA Finance and three times by Euromoney.
Strategic Report
Key Strengths
TBC Bank is one of the leading Georgian
banks focused on all key areas of
commercial banking in the country, with
small international footprint in Azerbaijan
and Israel. It is a market leader in the
Retail, SME, Micro and Leasing segments,
and the second largest bank in the
Corporate segment.
The Management recognises the Bank’s competitive advantages
by analysing its position. In 2014, the following strengths
were identified:
Leading Positions in an Attractive Market Poised for
Profitable Growth
TBC Bank has a Total Assets market share of 26% and is one of
the two largest banks in Georgia (the two largest banks in the
country account for 59% of Total Assets market share). As of 31
December 2014, the Bank held 27.7% and 28.4% market share in
the total banking loans and deposits, respectively, which translate
into a total loans portfolio of GEL 3,706 million and the total
deposits portfolio of GEL 3,322 million(a).
Strong Track Record of Growth and Profitability
TBC has shown another year of strong performance and has
benefited from the country’s continued growth. In 2014, TBC
became the largest retail bank in the country and defined a new
strategy to be the leading pure commercial bank in the country
in the medium-term period.
TBC Bank’s track record of growth is strong with the loan book
increasing 17% in 2012, 17% in 2013 and 25% in 2014, finishing
the year with a 27.7% market share in total loans. The Bank also
showed strong performance in deposits, where its customer
deposits grew by 24% in 2012, 16% in 2013 and 15% in 2014,
translating into the market share in total deposits of 28.4% as
at YE 2014. In addition, despite the pressure on margins in the
sector, the Bank maintained a strong net interest margin of 8.5%
in 2014, compared to 8.4% in 2013 and 7.7% in 2012.
(a) Volumes according to IFRS consolidated statements; market shares according
to NBG.
20
TBC Bank Annual Report 2014 The Leading Multi-channel Distribution Platform
One of TBC Bank’s main competitive advantages is the advanced
multi-channel distribution platform, that includes branches,
internet banking, ATM network, POS/cash in terminals, call
centre, and mobile banking. Our leadership in this area has
been proven through multiple awards TBC Bank has won
over consecutive years for corporate and consumer internet
banking in Georgia, Central & Eastern Europe and even globally;
strong offloading results and a high percentage of transactions
completed through remote channels. In 2014 from Global Finance
magazine awarded the Bank Best Consumer & Corporate Internet
Bank in Georgia and Best Integrated Consumer & Corporate Bank
Site in Central & Eastern Europe. Strength in this area also largely
contributed to the Bank’s achievement of becoming the leader in
retail banking. As of 31 December 2014, over 80% of the Bank’s
total transactions were conducted through remote channels. TBC
Bank also significantly invests in its branch network and branch
appearance by using scent and audio marketing designed to
appeal emotionally to customers and a digital signage project to
improve advertising effectiveness in branches.
Resilient and High Quality Balance Sheet
Deposits are the main source of funding for the Bank, accounting for
75.4% of total funding as a percentage of total liabilities and 61.3%
as a percentage of liabilities and capital as of 31 December 2014. As
of the same date, the Bank’s loan to deposits ratio was 111.6%, of
which retail deposits contributed 59.5% within total deposits.
TBC has a well-diversified loan portfolio split across its segments, with
retail, corporate, SME and micro loans accounting for 45.0%, 33.2%,
14.4% and 7.4% of total gross loans, respectively. The Bank operates
across all regions through its branch network (including Constanta
Branches) and major economic and industry sectors in Georgia.
In 2013, TBC Bank’s NPLs plus restructured loans ratio increased
to 4.8% from 4.5% in 2012. As of 31 December 2014, the same
indicator stood at 3.7%. NPL plus restructured loans coverage
ratio was at 109.4% at the end of 2014, compared to 110.6% as of
YE 2013 and 145.1% as of YE 2012.
Starting from June 2014, the NBG introduced Basel II/III
regulation. Implementation of the new regulations is gradual:
commercial banks had to comply with minimum capital adequacy
requirements by June 2014 and full compliance is required by
2017. As of 31 December 2014, the Bank’s Basel II/III tier 1 and
total capital adequacy ratios (CAR) were 12.4% and 15%, compared
to 13.4% and 16.7% as at 30 June 2014, respectively.
Experienced Management Team and High Quality
Corporate Governance
TBC has an experienced management team with international
professional experience at major financial institutions and a proven
track record of leading the Bank’s operations. Due to historical IFI
shareholder presence in the Bank, we have always been differentiated
with strong corporate governance, which was further improved during
Basel II/III implementation and IPO realisation of the Bank.
This openwork bronze
buckle was discovered in
1985 in ancient graves
unearthed during road
works in Western Georgia.
The artistic value of the
buckle is enhanced with
the sophisticated,
smoothly rendered
central figure that
harmonically intertwines
with undulating
ornaments that surround
it and with the rest of
the composition.
21
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Operating Environment and Market Overview
TBC continues to operate in a diversified and underpenetrated market
positioned for sustained solid growth. In 2014, Georgian GDP grew by
4.8%, which despite being slightly below the forecasted 5%, delivered
one of the strongest growth rates in the CIS and Europe.
The country has a well-diversified sector base, represented by a GDP
structure composed of 23% industry, 17% trade, 7% construction, 11%
transport and communications, 9% agriculture and fishing, 10% public
administration, 6% health and social work, and the remaining 17%
distributed among other sectors.
The success of Georgian political and economic reforms was
recognised by a number of international rankings. Georgia was named
the World’s no. 2 Reformer according to the World Bank & IFC Doing
Business Report 2014 and no. 15 globally for the Ease of Doing
Business (Doing Business Report November 2014).
EU Association Agreement
A milestone event for the country occurred when Georgia and the EU
signed an Association Agreement on 27 June 2014, which included
provisions on establishing a Deep and Comprehensive Free Trade
Area (DCFTA). This Agreement clearly indicates Georgia’s aspiration
to become an EU member and is of prime strategic importance for the
country as it will improve the political and economic relationship with
the Eurozone and will help to integrate Georgia into its internal market.
DCFTA offers free movement of goods, services and capital within the
EU, as well as improved trade and investment opportunities, with
custom duties removed on most industrial and agricultural goods,
and assistance in trade-related reforms with the aim to contribute to
economic growth and to better integrate the Georgian economy with
world markets.
Oil and Gas
One of the key competitive advantages of Georgia is its role as a transit
hub, allowing for oil and gas produced in the Caspian Sea to reach
Europe without going through Russia. The Baku–Tbilisi–Ceyhan
pipeline completed in 2005 has contributed to the energy security of
Eurasia by transiting 1.2 million barrels per day from Baku, the capital
of Azerbaijan to Ceyhan, a port in Turkey, via Tbilisi.
Furthermore, British Petroleum (BP) has announced its plans to build
BP Shah Deniz Stage 2, a project that will increase gas production in
the Caspian Sea by further 16 billion cubic meters per year (BCMA).
A capital investment of approximately USD 28 billion will be required to
produce the gas and transport it to the Georgia-Turkey border through
the existing South Caucasus Pipeline that will also require further
expansion. The government expects that the project will start in 2015
and, according to BP, will result in additional USD 2 billion FDI, creating
around 2000 local jobs during the three-year period until it is completed.
Georgia has a fast growing
and investor-friendly economy,
strategically located at a trading
gateway between Europe and Asia.
Banking
in Georgia
The world’s
#2
reformer
#4
friendliest tax regime globally
#8
on starting a business
#15
globally on the ease
of doing business
One of the most
transparent countries
in the world.
22
TBC Bank Annual Report 2014
Hydropower
Georgia is one of the leading countries in terms of hydro potential per
capita, while the country’s neighbours demonstrate excess demand
or experience expensive power generation, opening up new export
opportunities. According to the Georgian Ministry of Energy,thirteen
projects have already been started with a total capacity of 523 MW
and there are more in the planning stage. In addition to the existing
transmission lines between Georgia and Russia, a line between Georgia
and Turkey was recently built, creating an additional export capacity
of 1,000 MW per year. Currently only 18% of total hydro potential is
utilised. The sector represents good opportunities for FDI and has a
positive long-term effect on the current account deficit. In 2013-2014
the energy sector attracted USD 343 million in FDI for the country.
Tourism
Tourism is another area that has a significant positive impact on the
Georgian Economy. As one of the most dynamic growth industries in
Georgia, tourism delivered impressive growth over the past three years
with the number of visitors reaching 5.5 million in 2014, compared to
2.8 million in 2011. According to the Georgian National Tourism Agency,
revenues from this sector reached GEL 1.8 billion in 2014 (4% higher than
in 2013), representing 6% of Georgian GDP. Historically, the government
has been aggressively improving tourist infrastructure in different parts
of the country, developing natural seaside beach resorts as well as winter
ski attractions famous among former Soviet citizens. Tourists are also
attracted to traditional Georgian cuisine and wine, hiking in different
regions of the country, and unique historic places and sites.
Agriculture
The agricultural sector also has strong growth potential due to a
number of factors. Under the DCFTA agreement, the EU and Georgia
will remove all their import duties on agricultural products, creating
export opportunities. Supported by the continuing growth in tourism,
demand for agricultural products including food, mineral water and
wine is increasing. Additionally, after a five-year embargo, Georgia
resumed exports of mineral water, wine and other agricultural products
to Russia, providing further growth potential for the sector. Development
of the agricultural sector is one of the main priorities of the Georgian
Government and hence, further investment in the sector is expected.
Healthcare
Since 2013, the Georgian Government has also directed large funding
to creating a universal healthcare insurance programme for the entire
population. Introduction of the universal insurance system caused
a large increase in healthcare demand, creating opportunities for
healthcare investment. In addition, the fast-developing healthcare
system has led to increased medical tourism.
Georgia’s GDP
Average real GDP growth (2010-2014):
5.6%
10.2
7.8
12.8
10.8
11.6
14.4
15.8
16.1
16.5
17.8
4
.
9
8
.
8
6
.
2
1
0
.
1
1
6
.
2
5
.
5
0
.
3
2
.
1
1
2
.
6
2
.
7
0
.
2
%
4
.
1
-
4
.
6
3
.
3
4
.
2
8
.
4
0
.
2
0
.
5
9
.
4
7
.
3
-
2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015F
Real GDP growth rate (%)
CPI (%)
Nominal GDP (USD bn)
* Adjusted data will be published on November 16, 2015.
GDP composition
00%
26.2
00%
24.3
00%
20.7
2010
2011
2012
Wholesale, retail
trade 17%
Manufacturing 11%
00%
Agriculture, hunting
29.4
fishing 9%
00%
26.8
Other sectors 10%
Public administration 10%
Transport 8%
Construction 7%
Education 5%
Health and social
work 6%
Real estate 6%
Communication 3%
Electricity, gas, water 3%
Financial
2014
2013
intermediation 3%
Hotels and
restaurants 2%
23
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
Strategic Report
Operating Environment and Market Overview
Continued
Country Ratings
In 2014, two rating agencies, Moody’s and Fitch, changed the outlook
on Georgia's sovereign rating to positive from stable. The Moody’s
rating for Georgia’s unsecured long-term FX debt currently stands at
Ba3 and Fitch sets Georgia’s long-term foreign and local currency
Issuer Default Rating at BB-.
Recent Regional Developments and their Effects on Georgia
Georgia is well positioned in respect of developments in Russia and
Ukraine in 2014 due to its diversified economy, which experiences
limited direct effects of the crisis in these two countries. The most
important effect is on remittances, as overall remittances from Russia
decreased by 11.5% in 2014 compared to 2013 (approximately USD 92
million decrease in absolute terms). However, due to their nature,
remittances are expected to recover gradually. Trade with Russia and
Ukraine accounts for 9.6% and 4.9% of exports and 6.7% and 6.4% of
imports, respectively. FDI from these two countries represents a
relatively small element in the total and in 2014 Russian and Ukrainian
FDI accounted for 5% of the total amount (3% in 2013).
As oil and refined products account for 11% of total imports, falling
oil prices will help the country to improve its trade balance and will
support GDP growth in 2015. However, some decrease in demand for
Georgian products is expected from the country’s oil dependent trade
partners (Kazakhstan, Azerbaijan, Russia).
Georgia’s major export markets are the EU (22% of total exports) Azerbaijan
(19%), Armenia (10.1%), Russia (9.6%) and Turkey (8.4%). The major sources
of imports are the EU (28%), Turkey (20.1%) and China (8.5%).
The USD appreciated against most of Georgia’s main trading partners
and neighbours, which led to pressure on the GEL/USD currency rate.
The rate declined to 1.8636 at the end of 2014 (a 7% depreciation). This
depreciation was not comparable to that of the other currencies in the
region. In fact, the Lari appreciated against the Euro by 5%, against the
Rouble by 38%, 46% against the Ukrainian Hryvnia and 1% against the
Turkish Lira. GEL depreciated by 1% against the British pound.
Partner Countries’ Currency Depreciation(a)
USD
31.12.13
31.12.14
Appreciation
Partner Countries Currencies Depreciation
GEL
31.12.13
31.12.14
Appreciation
GEL
1.7363
1.8636
7%
EUR
2.3891
2.2656
5%
EUR
0.726
0.822
13%
RUB
0.0531
0.0329
38%
RUB
32.7292
56.2584
72%
UAH
0.2172
0.1182
46%
UAH
7.993
15.7686
97%
TRY
0.8122
0.8040
1%
TRY
2.1318
2.323
9%
USD
1.7363
1.8636
-7%
GBP
0.605
0.642
6%
GBP
2.8614
2.8932
-1%
(a) Exchange rates according to the National Bank of Georgia, European Central Bank, Central Bank of Russia, National Bank of Ukraine, Central Bank of the Republic of Turkey,
and US Department of Treasury, respectively.
(b) Since the January 2015 merger of Bank Constanta, there are 20 commercial banks in the country.
(c) Adjusted data will be published on November 16, 2015.
(d) Sector NPL is defined as loans overdue 90 days or more. Data provided by the NBG.
24
TBC Bank Annual Report 2014
Depreciation against the USD had a negative impact on consumer
prices. However, it was partially positively offset by the global fall of food
and energy prices, as well as by the fact that the currencies of most of
Georgia’s trading partners have also depreciated against the US Dollar.
As a result, inflation in Georgia reached 2%, compared to 2.4% in 2013.
Banking Sector
As of 31 December 2014, there were 21(b) banks operating in the market with
total assets of GEL 20.6 billion (70.6% of GDP, per estimates). Georgia’s
banking sector is highly concentrated, with twelve banks accounting for
95.6% of total assets (top two largest banks account for 59%), and is fully
privately owned. According to the IMF, the banking sector is one of the
healthiest among peer countries. The sector has relatively low penetration
levels compared to peer group countries. As of YE 2013 the loans/GDP ratio
in Georgia was 39.4%, with the 2014 preliminary calculations at 44.8%(c). As
of the same date, penetration in peer group countries was as follows:
Croatia 86%, Slovenia 80%, Bulgaria 74%, Turkey 69%, Ukraine 64%, Poland
60%, Slovakia 53%, Russia 53%, Kazakhstan 40%, and Romania 34%.
The Georgian banking system has two main features: strong capital
adequacy, which is high at around 17.4% as of YE 2014 and is one of the
highest among frontier markets, and a liquidity requirement of the
NBG for a minimum of 30%, which is also one of the highest among
peer countries. Asset quality is also reasonably good, with a system-
wide NPL ratio of 3.1%(d) as of 31 December 2014.
The Georgian banking sector has a high level of dollarisation at 60.4%
and 60.1% of banking loans and deposits respectively, although there
are higher risk weightings applied to FX loans (175%) causing the local
capital adequacy ratio to be lower. National Bank capital requirements
show strong sector capitalisation with 13.6% of Tier 1 and 17.4% of total
capital ratios as of YE2014.
Due to the current low levels of both GDP per capita and credit
penetration, as well as the strong fundamentals of the banking system,
the sector has high growth potential due to positive growth trends in
both GDP and penetration.
This openwork bronze
buckle was preserved at
a village school museum
in Western Georgia until
2001. Its unique design,
built around the central
sun figure, points to a
semantic connection
with a pre-Christian
astral cult. The artefact
is dating back to the first
few centuries of the
Christian era.
25
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
People
Our highly professional workforce is one of the key competitive
advantages of the Bank. In 2014, we continued strengthening
our corporate culture, developing our people and providing
interesting opportunities to grow with the Bank.
As of 31 December 2014, TBC Bank, together with its subsidiaries,
employed 5,128 people, 657 or 14.4% more than as of the same
period in 2013. TBC Bank alone employed 67% of the total workforce,
while 92% worked at TBC Bank and Bank Constanta combined.
The remaining 8% of our employees were employed by TBC Kredit,
TBC Pay, TBC Leasing and other smaller subsidiaries.
TBC Group Employees
TBC Bank
Bank Constanta
Other
2014
3,427
1,306
395
2013
2,906
1,256
309
2012
2,890
982
265
Turnover rates by department
TBC Bank has one of the lowest employee turnover rates in
Georgia at approx. 0.61% per month in 2014.
Turnover rates
Head Office +
Branches
Finance
Corporate
Retail & SME
Operations
Risks
IT
Branches
2014
2013
7%
14%
7%
5%
4%
7%
8%
8%
187
6
4
7
14
6
10
107
7%
5%
13%
8%
4%
9%
12%
7%
153
2
6
8
12
7
14
89
Equal Opportunity Employment and Gender Balance
TBC Bank is an equal opportunity employer. As part of our Code of
Conduct we do not discriminate in employment decisions based on
gender, ethnicity, religion, disability or other protected categories.
TBC Bank Employee age breakdown
2014
1%
59%
29%
8%
3%
2013
2%
56%
30%
9%
3%
<20
20-29
30-39
40-49
>50
26
TBC Group Personnel By Company (%)
TBC Bank 67%
Constanta 26%
TBC Broker <1%
BSSC 1%
TBC Fund <1%
TBC Pay 3%
TBC Invest <1%
TBC Leasing 1%
UFC 1%
TBC Credit 2%
Gender Breakdown of Employees
TBC Bank
Constanta
TBC Broker
BSSC
TBC Fund
TBC Pay
TBC Invest
TBC Leasing
UFC
TBC Credit
TBC Bank Employee Breakdown by Gender
All employees
Leadership in TBC Bank
Top Management
Middle Management
Supervisory Board
Male
Female
994 (29%) 2,433 (71%)
583
1
33
1
108
3
14
40
72
723
1
1
1
23
1
14
34
48
31-Dec-14
Male
29%
Female
71%
31-Dec-14
Male
87%
60%
86%
Female
13%
40%
14%
31-Dec-14
TBC Bank Employee Breakdown by Location
Branches
Head Office
All employees
53%
47%
TBC Bank Annual Report 2014
Performance Assessment and Remuneration
HR has developed an extensive policy to evaluate professional growth
and skills of our employees. Branches and other front office staff have
performance based motivation system (linked to financial and other
operational KPIs) that was developed by external consultants.
Certain Head Office staff are evaluated against a Management by
Objectives (MBO) system where an employee and the respective
manager agree to the goals and objectives that are closely aligned with
the broad organisational strategic objectives. The process includes
ongoing tracking and biannual feedback on employee achievements.
Performance Assessment and final feedback is standardised across
the Bank and is based on a uniform scoring system that managers are
required to use.
From 2014, TBC Bank HR reconsidered the policy of obligatory
identification of top performers and under performers based on
normal distribution, providing the middle management more
independence in giving final score to their subordinates.
Employee Communication and Survey
Regular communication with employees is an integral part of the
Bank’s corporate culture. We make sure our team is up to date with
the latest information of the Bank’s activities via our executive
presentations, TBC magazine, intranet content and different corporate
events organised by the HR Department.
In 2014, TBC updated its communication strategy and started regular
visits to branches in order to promote inclusive culture. Contact persons
were established with the responsibility to concentrate on smooth
communication between branches and the head office. The Bank also
introduced an SMS Service – TBC Family – in order to send employees
important updates directly via SMS. TBC also started a Talent Club to
spotlight employees gifted in music, art, science or sports.
Employee Benefits Policy
TBC Bank provides various types of non-wage compensation to
employees including bonuses, paid annual leave and sick leave,
competitive pension and health benefits and non-monetary benefits.
We at TBC highly value our staff and recognise that our success largely
depends on the outstanding performance of our workforce and thus,
TBC offers a market-leading employee benefits package.
Employee Training and Leadership Development
TBC Bank’s HR Strategy is to have the best employees on the market
with high performance and company loyalty. Its HR management
system is supported by a tailored IT system to manage personnel
through career planning, training and performance evaluations. TBC
Bank provides internal training programmes via TBC Academy and
mandatory training programmes based on required skills for the
department. TBC Academy is an in-house educational resource that
provides the Bank’s employees an opportunity to acquire knowledge in
various banking disciplines. The Academy features lecturers from the
Bank’s top and middle management.
Fundamental changes were made in the employee training programme
with the introduction of a distance learning system launched in 2013. This
gives the opportunity to improve knowledge, skills and professionalism
of employees in a shorter period of time and with less cost.
TBC will continue setting new instruments to improve employee
qualifications in order to acquire and maintain the best professionals
on the market.
MBA and Qualifications
In addition to in-house training opportunities, TBC Bank provides
support to the best employees for external training, financing
internationally acknowledged qualifications such as CFA and ACCA
as per the departments’ requirements.
The HR department regularly conducts Employee Satisfaction and
Engagement Surveys in order to assess the attitude of our staff
members and take actions accordingly.
TBC also operates a Scholarship Fund, created in 2012, that has
already financed ten middle managers from the Bank who have
had their MBAs co-financed both locally as well as internationally.
Schedule of employee benefits
Health insurance
Pension funds
Social benefits
Marriage
Child birth
Death of a family member
Paid leave and day off
Non-tangible motivation for middle management
International and local MBA, training, seminars
Trigger
After 1 year
After 2 years
After 6 months
After 6 months
After 6 months
After 11 months
0 months
After 2 years
Type of benefit
Monthly co-payment
Monthly co-payment
By case
By case
By case
By case
Annual Ind. fund
Competitive
27
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
Strategic Report
Operating and Financial Overview
Main Achievements in 2014
The Largest Retail Bank
In 2014, TBC Bank became the largest retail bank in the country.
We also maintained our market leadership in retail deposits of over
eight years.
Customer Relationship Management
TBC Bank is one of the first banks in Georgia to develop advanced CRM
capabilities. We are partnering with Oracle by implementing Siebel
CRM solution, a market leader in the financial sector and the world’s
most complete CRM product. During 2014, we continued to integrate
our region-best CRM capabilities into our business operations.
In February 2014, the CRM system launched its first operational
component in the Retail and SME business lines and the call centre.
Multichannel Results
TBC Bank has a globally recognised multichannel distribution
platform that continued to successfully offload routine transactions
from branches to e-channels, while minimising cost and unnecessary
branch network expansion throughout 2013 and 2014. By the end of
2014, the number of our active clients(a) for internet and mobile banking
exceeded 155,000 and 62,000, respectively – the highest number of
active internet banking users in the country. The share of remote
channel transactions in total number of transactions reached 82%.
Due to the effectiveness of our remote banking initiatives, we also
maintained the most efficient and productive branch network in the
country. As at YE 2014, the Bank’s gross loan-per-branch stood at GEL
30 million – more than any other Georgian bank.
Merger with Constanta
At the beginning of 2015, TBC Bank completed the legal and operational
process of integrating Bank Constanta within the set schedule. The
former operations of Bank Constanta are now undertaken by TBC
Bank and the identical range of products and services is available
throughout the whole network of TBC and former Bank Constanta
branches. This was the largest merger ever accomplished in the
Georgian private sector.
In order to further enhance our leading positions in the micro finance
segment, TBC Bank acquired the micro loans portfolio from ProCredit
Bank of c. GEL 40 million, approximately 14% of TBC Bank’s current
micro loans portfolio.
Retail
Segment Overview
In 2014, TBC Bank became the largest bank in the country in terms
of retail deposits and retail loans, accounting for 34% and 30% of the
market shares, respectively, as at YE. The retail business delivered
CAGR of 26% and 22% in loans and deposits over the last three years.
The segment serves over one million customers through its 120
branches and offers its clients a wide range of products, including:
• Credit products—variety of consumer loan products (47% of retail
loan book), mortgage loans (43%), and pawn loans (10%);
• Accounts and deposit products;
• Debit cards—Visa and MasterCard;
• Operational products—cash operations, currency exchange,
wire transfers, safe and deposit boxes; and
Insurance products.
•
The retail loan book composition as of YE2014 consists of consumer
loans at 47%, mortgage loans at 43%, and gold pawn loans at 10%.
As of 31 December 2014, retail loans increased to GEL 1,667 million,
up 38.0% YoY and 15.3% QoQ. As at 31 December 2014, retail deposits
increased to GEL 1,977 million, up 22.8% YoY and 10.6% QoQ. In 2014,
retail loan yields and deposit rates stood at 17.4% and 4.6% respectively
and the segment’s cost of risk was 1.6% during the same period. Fee and
commission income generation increased by 13.6% in 2014.
Awards
TBC Bank was honoured to be recognised for its leadership in a number of
key business lines, as well as for its overall performance as the best bank
in Georgia by all major publications, including Global Finance, The Banker,
Euromoney and EMEA Finance Magazine. TBC was named as the Best
Private Bank in Georgia 2014 by The Banker and the Professional Wealth
Management Magazine, an FT publication. This competition was extended
to Georgia for the first time in 2014. TBC continued to achieve outstanding
results for its internet banking, which named as the best in two categories
in Central and Eastern Europe by the Global Finance Magazine. We were
also recognised for our Corporate Social Responsibility in Central and
Eastern Europe by EMEA Finance. A comprehensive list of our awards is
available on the Investor Relations website.
BEST PRIVATE BANK
GEORGIA
(a) We changed the definition of active IB users in 2013. Currently, clients who have
accessed internet banking at least once over last three months are counted as
active users, in line with the number used in our latest annual report.
28
TBC Bank Annual Report 2014
Lexo Khubulava,
TBC STATUS Client
Today, busy timetables often leave
no time for money management.
Connecting with a personal banker
who takes care of long and short-term
financial goals regardless of daily
distraction makes all the difference.
Lexo Khubulava, founder of the most popular Georgian
career website, found that connection at TBC Bank STATUS
– the same private banking service that assists more than
4,600 clients in the country.
“I bank with TBC because of its high-tech solutions and
consistently outstanding personal services. When I was
considering a new card for my expenditures, my Personal
Banker offered the STATUS card, a special product with
the most flexible and well-tailored features on the market.
What is best, I can monitor and control all my financial
products, including my debit and credit cards, straight
from internet and mobile banking,” explains Khubulava.
“I never worry about financial issues, as I know I am in good
hands with TBC Bank” says Khubulava.
For its excellence in private banking, The Banker and
Professional Wealth Management Magazine, part of the
Financial Times family, chose TBC Bank as the Best Private
Bank in Georgia in 2014.
29
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Operating and Financial Overview
Continued
Corporate Segment
Segment Overview
Corporate business is a leading franchise for TBC Bank with
established business relationships with many of the key corporate
clients in Georgia. As at 31 December 2014, TBC Bank was the second
largest bank in terms of legal entity loans and deposits in the Georgian
banking sector, accounting for 25.8% and 23.0% respectively. The legal
entities market share comprises all legal entity loans and deposits,
including those in the Corporate, SME and Micro segments. The
Corporate segment has delivered CAGR of 7.1% and 6.0% for corporate
loans and deposits respectively during 2011-2014.
The segment serves approximately 1,500 customers, offering strong
expertise in syndicated deals, agribusiness and energy efficiency
programmes, as well as wine, hydro power and healthcare.
The Corporate segment offers a wide range of products, including:
• Credit products—working capital loans, credit lines, overdrafts,
corporate cards, long-term balance sheet finance, project finance,
trade finance including guarantees and LCs, factoring and other
trade finance products;
• Treasury products—currency exchange operations, currency risk
management, and FX derivatives;
• Deposit & other products—term deposits, current/saving
accounts, cash management, cash collections, internet banking,
and payroll services; and
• External third-party products—leasing, insurance packages, and
hedging services.
The broad product offering and client relationships provide an
opportunity to deliver diverse loan/credit exposure to customer
in, trade and services of 21%, energy 17%, consumer goods
and automobile trading 10%, real estate 8%, oil and gas 8%,
communication 8%, agriculture 7%, food industry 7% and other
industries at 14%.
As of 31 December 2014, corporate loans increased to GEL 1,232
million, up 6.4% YoY and 13.6% QoQ. As at 31 December 2014,
corporate deposits increased to GEL 833 million, up 1.6% YoY and
11.6% QoQ. In 2014, corporate loan yields and deposit rates stood at
10.7% and 3% respectively and the segment’s cost of risk was 1.8%
during the same period. Fee and commission generation increased
by 13.9% in 2014.
Awards
Among notable distinctions this year were achievements of the Trade
Finance team, where our transaction was named among Top 15 Global
Trade Finance Transactions by the TFR Magazine and was selected as
the Best Trade Finance Bank in Georgia by the Global Finance Magazine.
Additionally, TBC maintains its title as the Best FX Provider in Georgia,
awarded by the Global Finance Magazine, for the third consecutive
year, having won the award in 2013, 2014, and 2015. A comprehensive
list of our awards is available on the Investor Relations website.
TFPAWARD
TRADE FINANCE PROGRAM
ASIAN DEVELOPMENT BANK
30
TBC Bank Annual Report 2014
Gudauri
Snowmaking Project
Georgian ski resorts are key winter
attractions for ski-lovers around the
world. With support from TBC Bank,
the 2014/15 season at the Gudauri Ski
Resort opened on 20 December with
artificial snow cover.
Our Letter of Credit (LC) for the artificial snowmaking
equipment allowed the Mountain Resorts Development
Company (MRDC), a state-owned entity managing
and developing two famous Georgian ski resorts,
to guarantee a successful ski season every year
regardless of natural snowfall.
TBC Bank provided an LC with post-financing and
negotiated a very flexible prepayment option for the MRDC.
Our experienced trade finance team helped the MRDC
structure not only the transaction, but also a productive
partnership with the provider company, Demaclenko. In
addition to the trade finance services, TBC cooperated with
the Company to create additional seasonal services for ski
lovers – such as instalment payments for ski passes.
Commenting on the partnership, the Head of MRDC,
Alexandre Onoprishvili said: “With TBC Bank’s support, we
received terms and conditions that were perfectly suited for
our goals at any given moment of the transaction. The trade
finance team’s expertise and flexibility was most important
to us. Additionally, you always receive traditionally excellent
service when working with TBC Bank.”
Due to its significance to the Georgian economy, this
transaction was named among Top 15 Global Trade
Financial Deals in 2014 by the Trade and Forfaiting Review.
31
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Operating and Financial Overview
Continued
SME
Segment Overview
TBC is one of the strongest banks on the market in the SME segment and
offers outstanding multichannel capabilities and an efficient relationship
model with high levels of customer experience. Over the period
2011-2013 the SME business line delivered a strong growth for the bank.
The total loan book was growing at CAGR of 20%, while SME at CAGR of
over 31%. TBC’s clients fall under the SME division if they are entities with
loans of up to USD 1.5 million with turnover below GEL 8 million. As at
December 2014, gross loans to SMEs totalled GEL 534 million, giving the
Bank the largest loan book on the Georgian SME market.
in partnership with IBM and IFC, we offer our SME clients a
development tool that is unmatched by its responsiveness to the
challenges faced by the modern Georgian SMEs. The Programme
also allows TBC Bank to better understand its client needs and
educate them about the services and products offered by TBC Bank.
The Programme consists of seven components, the majority of
which launched in 2013, including free training sessions, upgraded
Internet, Mobile and SMS Banking for legal entities, the
educational web platform – www.tbcbusiness.ge, and exclusive
SME conferences.
The segment offers a wide range of products, including:
• Credit products (loans, credit lines, overdrafts, letters of credit,
guarantees)
In 2014, we fully launched all components of the Business Support
Programme and a comprehensive list of all service offered is
provided below.
• Deposit products and payment solutions (current account, savings
• Free training sessions financed by ADB with 2800 clients
trained in two cities
• Upgraded Internet Bank for legal entities
• Completely new Mobile Bank for legal entities
• First educational web portal in the region, SME Toolkit Georgia,
or www.tbcbusiness.ge (financed by IFC and in partnership
with IBM). Here, businesses can find readily available
Georgian-language resources that include tools for financial
accounting, direct selling, and human resource management.
The portal also offers pre-set materials, such as agreement
forms, template accounting forms and a Q&A blog
• SMS Banking services for legal entities
• Conferences and events offered by business sector
• Free business consultation services for SMEs, launched in
partnership with PUM (the Netherlands Senior Experts
service). Through this exclusive partnership, TBC offers a
special, tailored service to our client SMEs that encompasses
a thorough analysis of their operational, business and
development needs in order to select the most suitable PUM
experts from their extensive, international database. The
service is indispensable for our SME clients, since their main
difficulty is in understanding and addressing the weaknesses
and shortfalls they currently have in their business and
operational processes.
account, term deposit, wire transfer, business cards, payroll
services, merchant solutions/POS terminals) and
• Operational products (internet banking, SMS services, money
market, derivatives, cash collection, escrow account, direct debit).
As of 31 December 2014, TBC Bank served approximately 56k
customers through the SME business line.
The SME loan book composition is diverse and as of YE 2014 consists
of trade and services at 39%, food industry at 11%, real estate at 11%,
consumer goods and automobile trading at 9%, construction at 8%,
agriculture at 4% and other industries at 18%.
As of 31 December 2014, SME loans increased to GEL 534 million,
up 36.0% YoY and 15.9% QoQ. As at 31 December 2014, SME deposits
increased to GEL 508 million, up 12.4% YoY and 9.7% QoQ. In 2014, SME
loan yields and deposit rates stood at 12.3% and 1.6% respectively and
the segment’s cost of risk was 0.4% during the same period. Fee and
commission income generation increased by 26.1% during 2014
compared to 2013.
Business Support Programme
As a leading bank in the SME segment, TBC Bank has the
opportunity to directly work with the founders and key employees
of small and medium Georgian businesses. We have identified and
considered the challenges our clients face in this fast-advancing
segment and have designed a long-term, value-added service that
is a novelty for the banking sector in the Caucasian region.
The Business Support Programme provides us with a platform for
productive dialogue with our SME clients. Through free training
sessions, offered with the support of the Asian Development Bank
(ADB), free consultations with our partner organisations (EY, BDO
and others), and the business resource-rich database developed
32
TBC Bank Annual Report 2014
Le Gateau
Bakery
Le Gateau is a popular family-owned
bakery in Tbilisi with annual sales of GEL
1.8 million. TBC Bank is proud to have
supported Le Gateau from the startup
idea to its current 2 locations in the
central part of the capital.
Cooperation between TBC Bank and Le Gateau started in
2011, when the patisserie had only 20 employees. TBC Bank
worked closely with Le Gateau owners, providing advisory
and strategic services, as well as working capital and
investment loan financing and depositary services. Today,
Le Gateau employs over 80 people. The bakery delivered
64% increase in sales during 2014 and expects a further
50% jump by the end of the year with the help of its second
branch, which opened in early 2015.
The latest investment loan to Le Gateau served to establish
a completely streamlined and effective production line in
compliance with international standards of quality.
“We are striving to achieve the highest quality, while
maintaining acceptable prices. We are also optimistic about
our future success, where TBC Bank’s resources and
expertise are vital to our long-term development plans“ –
comments Ms Manana Andjaparidze, owner and founder of
Le Gateau.
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TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Operating and Financial Overview
Continued
Micro Finance
Segment Overview
Micro-finance is also one of the key areas for TBC as the segment
offers high margins and large growth potential. TBC Bank Constanta
is one of the market leaders in the microfinance and delivered the
highest loan book growth of CAGR 48% over 2011-2014. Micro deposits
grew by 64% over the same period.
Subsidiaries
TBC Leasing
TBC Bank offers leasing services in Georgia through its majority-
owned subsidiary, TBC Leasing. These include finance leasing,
leaseback, residual lease, and service leases. Leasing arrangements
are primarily entered into with customers in the construction, medical,
agriculture, transportation and service sectors.
The full merger with Constanta provides a new opportunity not only for
customers to benefit from TBC’s services but also for TBC to further
expand its business in the market's fast-growing microfinance
segment of the market. TBC Bank Constanta serves over 36 thousand
clients in Georgia through 60 branches across the country.
TBC Bank Constanta offers diversified loan products to its
clients, including:
• Credit products – mini loans, business loans, agricultural loans,
seasonal loans and others specifically tailored for a wide range of
customers with different needs
• Deposits products
• All other products previously available only to TBC Bank clients
The micro loan book composition is diverse and as of YE 2014 consists
of agriculture at 57%, trade and services at 38%, transportation at 2%,
and other industries at 3%.
As of 31 December 2014, Micro loans increased to GEL 274 million,
up 36% YoY and 14.5% QoQ. As at 31 December 2014, Micro deposits
increased to GEL 5 million, up 9.9% YoY and down 5% QoQ. In 2014,
Micro loan yields and deposit rates stood at 24.8% and 4.2%
respectively and the segment’s cost of risk was 2.6% during the same
period. In 2014, fee and commission income generation increased by
43.1% YoY.
TBC Leasing is the market leader with 69% of market share of the
Georgian leasing financial services market. TBC Leasing's diversified
customer base provides significant cross-selling opportunities and
growth potential.
International Operations
Although the vast majority of TBC’s operations (representing 98% of
our assets) are conducted in Georgia, we also operate in Azerbaijan
and Israel through our subsidiaries, TBC Kredit and TBC Invest
respectively. Acquired in 2007, TBC Kredit is a non-banking credit
organisation focused on SME and retail customers, offering SME and
retail loans, consumer loans and mortgages. TBC currently holds a
75% equity interest in TBC Kredit. With headquarters in Baku, TBC
Kredit operates four additional branches throughout Azerbaijan.
TBC Invest is a wholly-owned subsidiary established by TBC Bank
in 2011 to act as an intermediary, providing Israeli clients with
information and access to the Georgian banking system. It offers
information to individuals and companies in Israel (Israeli businesses
connected with Georgia and family offices) about TBC Bank's products
and services, fees and interest rates. As at 31 December 2013, more
than 560 customers have opened accounts through TBC Invest.
Other subsidiaries
TBC Group comprises five more companies operating in related
industries in order to support TBC's main activities. These include:
JSC United Financial Corporation and TBC Pay LLC process card
payments and supply payment collection services to providers of
self-service machines and POS, WAP and Windows terminals.
JSC Real Estate Management Fund, which manages property we have
repossessed for future sale.
Banking Systems Service Company (BSSC) LLC provides technical
services and software support for electronic banking systems
(such as POS and cash machines).
A variety of products and brokerage services are provided to our
Georgian customers through our wholly-owned subsidiary
TBC Broker.
34
TBC Bank Annual Report 2014
Micro Farm in
Eastern Georgia
Alexander Naverian, one of our micro
clients, grew his small household
business in Eastern Georgia to
a micro farm that now produces its own
agricultural and dairy products. His
latest GEL 95,000 loan from TBC Bank
Constanta, disbursed within the
agricultural development programme,
helped the client to equip his business
with appropriate technology to expand
and diversify his production.
Alexander Naverian began working with TBC Bank
Constanta in 2014, when his primary activity was minor
household farming with an annual income of GEL 85,000.
With our financial backing, Naverian built a small farm that
houses 85 units of grazing livestock and is equipped with
necessary machinery to ease livestock maintenance. Today,
the micro farm has doubled its income to c. GEL 160,000.
The farmer is now able to produce cheese and other dairy
products that he then sells to restaurant and supermarket
chains. Due to high demand, Naverian has extended his
business to procuring milk from nearby villages, creating
income opportunities for the wider community as well.
TBC Bank Constanta has a significant presence in the rural
agricultural sector, where over 27,000 small farmers and
entrepreneurs share Naverian’s success story. With CAGR
81% growth in micro-finance lending to the agricultural
sector over 2011-2014, we are proud to support agricultural
development in Georgia.
35
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Distribution Channels
Our distribution channels include 120 branches (including 60 Bank
Constanta branches), 352 ATMs (including 57 Bank Constanta ATMs)
and 4,802 POS terminals (3,200 of which have contactless payment
capabilities), 2,262 cash-in terminals (TBC Pay), internet banking, call
centre, and mobile banking. TBC Bank has continued to differentiate
itself through customer-friendly and high quality branch design,
providing superior customer experience to the Bank’s customers.
Innovative multichannel capabilities are considered as one of the main
competitive advantages of the Bank, which is proven by our multiple
awards throughout past years. In 2014, TBC Bank received an award
for the Best Consumer & Corporate Internet Bank in Georgia in
Central & Eastern Europe from Global Finance magazine.
TBC Branch Network Map is available in the TBC at a Glance section
on page 08.
Branch Efficiency
We have been constantly working on optimising our branch network
and increasing efficiency in branches through high quality service and
customer centric branch design. We maintain one of the best branch
productivity indicators among peers in the market by standardising
our services, monitoring customer relations and evaluating their
quality, and making constant improvements to satisfy and retain our
large client base.
TBC Bank started to actively develop its branch network from 2007,
with the help of a consultancy Senteo. The layout of branches was
designed to maximise sales and operational effectiveness. In 2012,
with the help of a strategic consultant, a Lean Management
mechanism was introduced to take full advantage of existing layout
and increase costumer experience and operational and sales
effectiveness. Hence, our Customer Experience Index was improved
by 5.6% and sales and operational effectiveness by 20%-22% by 2014.
After the merger with Bank Constanta, TBC Bank started offering the
full range of TBC and Constanta products in both types of branches.
After full rebranding, newly merged branches will be operating under
the name – “TBC Bank Constanta”.
In order to take it to the next level, the Bank hired Peppers & Rogers
Group, a consultancy that will develop a new retail branch design
strategy, transforming it into a modular Branch of the Future blueprint
that can be applied to TBC Bank’s future branch network. TBC Bank is
developing three pilot sites to be launched in 2015.
36
TBC Bank Annual Report 2014 E- Banking
TBC Bank has been leading the market in Internet and Mobile banking
for several years. Our multichannel platform allows our customers to
complete a majority of banking transactions from remote channels in
the fastest and the most convenient way possible.
TBC Bank launched the first Internet bank in November 2001. Starting
from 2012 TBC Bank launched the new Multichannel project, updating
its internet bank and offering the first ever iPhone and Android mobile
banking applications in the country. In 2013, the bank also introduced
the first Internet banking application for the iPad. As a result, the
Bank managed to offload the majority of its transactions to remote
channels and as of 31 December 2014, 82% of the Bank’s total
transactions were made through remote channels. Overall, TBC Bank
has been very active in developing its multichannel capabilities that
brought Georgian customers the new award-winning internet banking
and advanced mobile and iPad banking with 5 star Apple store rating.
TBC Bank’s internet and mobile banking provide a wide range of
advanced features that are in line with global trends, leading the
Georgian market in banking innovation. All banking services are
integrated into the multichannel platform, giving customers the
360 degree view of their accounts, with the functionality to manage
their money easily anytime, from anywhere and with any device
with a single log-in.
2014
2013
Growth
Number of active Internet or
Mobile Banking users
161,548
130,923
23%
Number of active Mobile
Banking users(a)
62,435
26,979
131%
(a) The number includes active Mobile Banking users, who may also visit
Internet Banking.
TBC Bank’s multichannel platform is differentiated by several
key capabilities:
• Full Synchronisation and Core Banking Integration
• Flexible Platform Architecture for future updates
• Market-leading Personal Finance Management (PFM) Tool
• Online Product Sales
In 2014, we have been working on refining our digital channels by
further improving our sales functionality, updating design, and offering
even more user-friendly log-in and authorisation systems. The goal
of the multichannel effort is to always stay ahead of the competition
in digital channels, increase the number of products sold remotely,
further improve the share of remote transactions and branch
offloading, and contribute to improving customer satisfaction. Remote
channels have also become a source for client acquisition. In 2014,
the number of active Internet Bank users only reached 155,000 and
the number of active Mobile Banking users reached 62,000, which is
the largest digital banking customer base in Georgia.
Other Channels
Apart from branches and digital channels, TBC bank operates one of
the largest networks of ATMs, POS terminals, call centre and cash-in
terminals (TBC Pay). TBC Pay Mini Branches (cash-in terminals) are
located in TBC branches, shopping centres, streets, retail chains and
other crowded areas offering customers fast and convenient day to day
banking. Clients can repay loans, cover utility bills and parking fines,
top-up mobile and deposit to their accounts. TBC Pay terminals help
further increase retail penetration, as TBC is able to serve clients at
their preferred locations while offloading day-today transactions from
traditional branches.
The Call Centre serves approximately 100-150 thousand calls per
month with c. 90% of customer satisfaction index. The Bank has
been actively increasing call centre sales productivity and gradually
offloading non-sale calls to digital channels. More than 100 of TBC
Bank’s staff are employed at the call centre.
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TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Principal Risks and Uncertainties
Risk
Why we think this is important
Risks Relating to TBC’s Business
TBC may not be
successful in
implementing its
strategic plans
The strategy of TBC’s management (Management) includes growth in each of TBC’s retail, corporate, small and
medium enterprise (SME) and micro segments, a specific focus on improving profitability
by increasing income and reducing costs and a continued drive to build upon TBC’s current business strengths. See
“Strategic Report – Strategy”. The further development of TBC’s business, particularly the implementation of these
strategies, may be subject to a number of risks and challenges, including that:
• TBC may not be able to attract new retail, SME or micro customers, whether from its competitors or otherwise,
in order to achieve the growth necessary to grow its market share in the retail, SME and micro finance markets
in Georgia, or those segments may experience less growth or profit potential than TBC anticipates;
• TBC may fail in its attempts to identify and offer attractive new products and services to corporate clients, or may
otherwise be unable to retain or expand its corporate client base in order to maintain its current position as a
market leader in banking services to large corporate businesses;
• TBC may be unable to optimise its income growth by increasing the proportion of its fee and commission income
relative to its total income, or the new initiatives it undertakes to increase fee and commission income may not be
as successful or as profitable as TBC expects;
• TBC may be unable to further develop or enhance the capability of its multichannel distribution platform in order
to grow its client base and more efficiently serve customers, or may be unable to do so in a profitable manner;
• TBC may not be able to maintain the superior customer experience that Management believes is one of the
differentiators underlying its position as one of the most well known and trusted brands in Georgia, which could
weaken TBC’s ability to generate and retain the customer loyalty and adversely affect its ability to grow its share in
the Georgian banking market and improve profitability; and
the cost efficiency initiatives currently planned or being implemented by TBC, such as the core banking system
transformation project and the integration of the administrative and other functions of TBC Bank and Bank
Constanta, may not succeed, or may not achieve the level of savings or cost optimisation anticipated by TBC.
•
These strategic plans may have less growth or profit potential than TBC anticipates, and there can be no assurance
that any of these initiatives will improve profitability to the extent that TBC desires or at all. Furthermore, although
TBC believes that these strategies will enable it to achieve a greater return on average equity (ROAE) in future periods,
there can be no assurance that this will occur, or that its ROAE will not decline.
Any of the foregoing may have a negative impact on TBC’s ability to meet its future growth plans, as well as on its
business, results of operations and/or prospects.
TBC derives the majority of its total income from net interest income. Consequently, TBC’s results of operations are
affected by fluctuations in its net interest margin, which is its net interest income (before provision for loan
impairment) divided by its average interest earning assets. In particular, the results of TBC’s banking operations
depend on the management of key factors that affect TBC’s net interest margin, such as underlying interest rates,
competition for loans and deposits, customer demand and costs of funding. These key factors are influenced by
factors beyond TBC’s control, such as (among others) global and local economic conditions, the resources of TBC’s
competitors and business and consumer confidence. Moreover, interest rates and TBC’s cost of funding are highly
sensitive to many factors beyond TBC’s control, including monetary policies and domestic and international economic
and political conditions and the reserve policies of the National Bank of Georgia (the “NBG”). Any decrease in interest
rates on TBC’s loans to its customers, alone or in combination with increases in rates payable on deposits or other
interest bearing liabilities, could have a material adverse effect on TBC’s future net interest income, net interest
margin and, accordingly, its future profitability.
TBC’s net interest margin was 8.5%, 8.4%, and 7.7% in the years ended 31 December 2014, 2013 and 2012,
respectively. TBC’s net interest margin increased slightly in 2013 and 2014, however net interest margins in Georgia
have generally declined in recent years, and this downward trend may continue. There can be no assurance that TBC
will be able to protect itself from the negative effects of future declines in its net interest margin. Any reduction in
TBC’s net interest margin caused by changes in the key factors outlined above, or otherwise, could have a material
adverse effect on TBC’s net interest income, which could, in turn, have a material adverse effect on TBC’s business,
financial condition and results of operations.
Any decline in TBC’s net
interest income or net
interest margin could
lead to a reduction
in profitability
38
TBC Bank Annual Report 2014 Risk
Why we think this is important
TBC faces significant
competition, which may
increase in the future and
have an adverse impact
on its business
TBC may not be able to
maintain the quality of
its loan portfolio
The Georgian banking sector is very competitive, and TBC is subject to competition from both domestic and foreign
banks. According to the NBG, as at 31 December 2014 there were 21(a) commercial banks operating in Georgia. TBC
competes with a number of these banks, including Bank of Georgia, Liberty Bank, ProCredit Bank, Bank Republic and
VTB Georgia.
Increased competition may have a negative impact on TBC’s market share in deposits and loans to customers, as well
as its ability to grow its deposit and loan portfolios in the future. Although TBC believes that it is well positioned to
compete in the Georgian banking sector, TBC’s market position may suffer if competitors deploy greater financial
resources, have access to lower cost funding or are able to offer a broader suite of products than TBC. TBC may be
unable to introduce new products or services ahead of its competitors or before competitors stabilise their share of
new markets, or may not be as successful as its competitors in syndicating loans for demanding corporate customers.
Increased competition may also have a negative impact on TBC’s ability to sustain its net interest margin and fee and
commission levels. Increasing competition in the banking industry has already led to and may, in the future, continue
to lead to increased pricing pressures on TBC’s products and services, which could have a material adverse effect on
TBC’s net interest income, which could, in turn, have a material adverse effect on TBC’s business, financial condition
and results of operations.
Furthermore, there can be no assurance that TBC’s current regulatory environment with respect to competition and
anti monopoly matters will not be subject to significant change in the future. According to the Competition Law in case
of an alleged breach of the law by a commercial bank, the Competition Agency would be required to refer the matter to
the NBG, which would have the exclusive authority to act on the matter in such cases. Although there are currently no
anti monopoly regulations in Georgia that establish market share limits for banks, there can be no assurance that
such anti monopoly limitations will not be introduced in Georgia in the future. Given the current high market share
maintained by TBC, the introduction of any anti monopoly restrictions may have an effect on the growth rates of TBC,
restrict TBC’s ability to make future acquisitions or lead to TBC being required to sell some of its assets or to exit or
reduce its presence in some or all of its market segments.
(a) Since the January 2015 merger of Bank Constanta, there are 20 commercial banks in the country.
The quality of TBC’s loan portfolio is affected by changes in the creditworthiness of its customers, their ability to repay
their loans on time, TBC’s ability to enforce its security interests on customers’ collateral should such customers fail
to repay their loans and whether the value of such collateral is sufficient to cover the full amounts of those loans. In
addition, the quality of TBC’s loan portfolio may deteriorate due to other reasons, including factors beyond TBC’s
control (such as any negative developments in Georgia’s economy resulting in the financial distress or bankruptcy of
TBC’s customers or the unavailability or limited availability of credit information concerning certain customers) and
factors dependent on TBC’s management and strategy, such as a failure of TBC’s risk management procedures or an
expansion of TBC’s loan portfolio.
Although Management believes that TBC’s growth plan is sustainable and aligned with overall expectations for growth in
the Georgian banking sector generally, there can be no assurance that the quality of TBC’s loan portfolio will not be
adversely affected by the increase in TBC’s loan portfolio and in its customer base. In particular, although Management
considers the micro segment to be lucrative, TBC may be exposed to increased risks from growth in its micro loan
portfolio due to micro customers being typically of lower financial strength than more affluent customers. In addition,
the quality of TBC’s loan portfolio may deteriorate due to internal factors such as failure of risk management procedures.
For more information regarding the credit quality, see note 34 of Consolidated Financial Statements – Financial and
Other Risk Management.
Although TBC believes that it has created adequate provisions for loan impairment in respect of its loan portfolio,
further increases in the level of Non performing Loans could require TBC to take additional provisions, which would
impair TBC’s capital and, if significant, could have a material adverse effect on TBC’s business, financial condition,
results of operations and/or prospects.
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TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Principal Risks and Uncertainties
Continued
Risk
Why we think this is important
TBC may not be able to
maintain the quality
of its loan portfolio
(continued)
Furthermore, TBC’s loan portfolio concentration in Georgia may subject it to risks of default by its largest borrowers and
exposure to particular sectors of the Georgian economy. TBC’s loan portfolio is exposed to certain economic sectors. A
downturn in the business, financial condition, results of operations and/or prospects of TBC’s largest borrowers or in the
sectors to which TBC is particularly exposed may adversely affect the relevant customers’ ability to repay their loans, which
could, in turn, have a material adverse effect on TBC’s business, financial condition, results of operations and/or prospects.
Collateral values may
decline, which could
adversely affect TBC’s
asset quality
As at 31 December 2014, TBC held collateral against its loan portfolio amounting to GEL 3,080.1 million,
corresponding to 83.1% of TBC’s total gross loans. The main forms of collateral taken by TBC in its lending to business
entities are charges over real estate, equipment and inventory. The main form of collateral taken by TBC in its lending
to individuals is a mortgage over residential property. For additional information on collateral policies, see note 9 of
Consolidated Financial Statements – Loans and Advances to Customers.
As at 31 December 2014, 60.4% of TBC’s total gross loans were secured by real estate collateral. With respect to
mortgage loans, TBC generally imposes a loan to value (based on a market value of the real estate used as collateral)
ratio of no higher than 70% at the time the loan is advanced, although the ratio may be higher for clients with a very
good risk profile. Downturns in the residential and commercial real estate markets or a general deterioration of
economic conditions, such as that which occurred during 2008 and 2009, may result in illiquidity and a decline in the
value of the collateral securing TBC’s loans, including a decline to levels below the outstanding principal balance of
those loans.
In addition, declining or unstable prices of collateral in Georgia may make it difficult for TBC to accurately value
collateral held by it. The value of any collateral ultimately realised by TBC will depend on the value of that collateral
TBC is able to realise upon foreclosure, which may be different from the current or estimated value. If the value of the
collateral held by TBC declines significantly in the future, TBC could be required to record additional provisions and
could experience lower than expected recovery levels on collateralised loans that are more than 90 days past due.
Further, changes to laws or regulations may impair the value of such collateral. See “—TBC’s businesses are subject to
substantial regulation and oversight and future changes in regulation, fiscal or other policies are difficult to predict”. If any of
these risks materialise, they could have a material adverse effect on TBC’s business, financial condition, results of
operations and/or prospects.
As at 31 December 2014, 56.1% of TBC’s total assets and 63.2% of TBC’s total gross loans were denominated in foreign
currencies, primarily US Dollars. The majority of retail customers who have mortgage loans denominated in foreign
currencies earn their income in Lari. While the income of a number of Georgian citizens is paid in US Dollars from
remittances from abroad and some customers hedge their exposure to some extent through the maintenance of
savings in US Dollars, customers may not be protected against the significant fluctuations of the exchange rates of the
Lari against the currency of the loan. Although TBC takes steps to mitigate the risk of depreciation of the Lari against
the US Dollar by, inter alia, strict management of open currency positions and by holding higher capital for foreign
currency loans than for Lari denominated loans, significant depreciation of the Lari against the US Dollar or other
foreign currency in which TBC’s loans to customers are denominated may result in difficulties related to the
repayment of such loans, which, in turn, may lead to a decrease in the quality of TBC’s loan portfolio and an increase in
impairment provisions for loans extended to TBC’s customers, which could materially adversely affect TBC’s
business, financial condition, results of operations and/or prospects.
While Management believes TBC currently has sufficient liquidity to meet its obligations, liquidity risk is inherent in
banking operations and can be heightened by a number of factors, including an overreliance on, or an inability to
access, a particular source of funding, changes in credit ratings or market wide phenomena, such as, for example,
financial market instability like that experienced in the recent global financial crisis. Credit markets worldwide have
experienced during recent years, and may continue to experience, a reduction in liquidity and term funding as a result
of global economic and financial factors. The availability of credit to companies in emerging markets in particular
is significantly influenced by the level of investor confidence and, as such, any factors that affect investor confidence
(for example, a downgrade in credit ratings, central bank or state interventions or debt restructurings in a relevant
industry) could affect the price or availability of funding for companies operating in any of these markets. For example,
as the central banks in key economies such as the United States and United Kingdom begin to reduce the scale of their
financial crisis bond and other asset purchases, liquidity is expected to tighten, particularly in emerging markets.
Although TBC has not defaulted on its indebtedness in the past and believes that it will be able to make required
TBC is exposed to risk
resulting from the
granting of foreign
currency denominated
loans
Liquidity risk is inherent
in TBC’s operations
40
TBC Bank Annual Report 2014 Risk
Why we think this is important
Liquidity risk is inherent
in TBC’s operations
(continued)
payments in respect of its indebtedness in the future, if it is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make such payments, it may be forced to default, following which TBC’s creditors would be
entitled to accelerate the maturity of such indebtedness. This could cause cross defaults under, and potential
acceleration of, certain of TBC’s other indebtedness which could, in turn, have a material adverse effect on TBC’s
business, financial condition, results of operations and/or prospects. For an analysis of the maturity profile of TBC’s
financing arrangements, see the Risk Management chapter.
TBC is subject to
operational risk inherent
to its business activities
TBC believes that it has adequate liquidity to withstand significant withdrawals of customer deposits based on
scenarios calculated from historic data including the levels of withdrawals seen during the 2008 Conflict (as defined
below). However, the unexpected and rapid withdrawal of a substantial amount of deposits could have a material
adverse effect on TBC’s business, financial condition, results of operations and/or prospects. Circumstances in which
clients are more likely to withdraw deposits rapidly in large volumes include, amongst others, circumstances beyond
TBC’s control. Furthermore, the lack of a mandatory deposit insurance scheme in Georgia may exacerbate bank runs
during times of financial instability.
TBC is exposed to operational risk. Operational risk is the risk of loss resulting from inadequacy or failure of internal
processes or systems or from external events. This includes the risk of loss due to employees’ lack of knowledge or
wilful violation of laws, rules and regulations or other misconduct. Misconduct by employees, the improper use or
disclosure of confidential information, violation of laws and regulations concerning financial abuse and money
laundering, or embezzlement and fraud, any of which could result in regulatory sanctions or fines as well as serious
reputational or financial harm. Misconduct by employees, including violation of TBC’s own internal risk management
policies, could also include binding TBC to transactions that exceed authorised limits or present unacceptable risks,
or hiding unauthorised or unsuccessful activities, which, in either case, may result in unknown and unmanaged risks
and losses. In addition, in the ordinary course of its business TBC processes a number of transactions manually,
which may further increase the risk that human error or employee tampering or manipulation will result in losses
that may be difficult to detect.
Although TBC has back up systems in place, including central databases, core files and registry settings and central
data storages, any failure or interruption in, or breach of security of, TBC’s information technology systems could
result in failures or interruptions in TBC’s risk management, deposit servicing or loan origination systems or errors in
its accounting books and records. If temporary shutdown or failure of TBC’s information systems occur TBC might be
unable to serve some customers’ needs on a timely basis and might lose their business. No assurance can be given
that such failures or interruptions will not occur or that TBC will adequately address them if they do occur.
Accordingly, the occurrence of any failures or interruptions and any failure to properly implement any systems could
have a material adverse effect on TBC’s business, financial condition, results of operations and/or prospects.
TBC’s risk management
strategies and techniques
may leave it exposed
to unidentified or
unanticipated risks
Although TBC invests substantial time and effort in the development, implementation and monitoring of its risk
management strategies and techniques (see “Asset, Liability and Risk Management”), it may nevertheless fail to
adequately manage risks under certain circumstances, particularly when it is confronted with risks that it has not
identified or anticipated. If circumstances arise that TBC has not identified or included those in its statistical models,
its losses could be greater than expected. If its measures to assess and mitigate risk prove insufficient, or if its models
yield inaccurate results or incorrect valuations, TBC may experience material unexpected losses.
For example, losses relating to credit risk may arise if the risk management policies, procedures and assessment
methods implemented by TBC to mitigate credit risk and to protect against credit losses prove less effective than
expected. TBC employs qualitative tools and metrics for managing risk that are based on observed historical market
behaviour. These tools and metrics may fail to predict future risk exposures, especially in periods of increased
volatility or falling valuations or in periods in which there is a rapid expansion of TBC’s loan portfolio.
Even though TBC requires regular financial disclosure by its corporate customers, some of them may not have
extensive or externally verified credit histories, and their accounts may not be audited by a reputable external auditor.
Furthermore, lending to SME, micro and retail customers carries with it greater credit risk exposure. These
customers typically have less financial strength than large companies, and there is often less credit history available
for such clients.
41
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Principal Risks and Uncertainties
continued
Risk
Why we think this is important
TBC’s risk management
strategies and techniques
may leave it exposed
to unidentified or
unanticipated risks
(continued)
Therefore, notwithstanding TBC’s credit risk evaluation procedures, TBC may be unable to correctly evaluate the
current financial condition of each prospective borrower and to determine accurately the ability of such customer to
repay its loans when due. In addition, any failure to control fraud in TBC’s retail lending portfolio could erode margins
and could negatively affect TBC’s financial condition.
Accordingly, the risk management systems employed by TBC may prove insufficient in measuring and managing
risks and this may have a material adverse effect on TBC’s business, financial condition, results of operations
and/or prospects.
TBC is subject to financial
covenants in its debt
agreements that are
broader than applicable
regulatory requirements,
the breach of which may
cause TBC to be in default
under those agreements
Most loans entered into between TBC and EBRD, FMO and IFC (together, IFI Investors) are subject to the financial
covenants set forth in the Common Terms Agreement and TBC is also party to other loan agreements that also
contain financial covenants. The financial covenants in the Common Terms Agreement require TBC, in certain
instances, to meet different thresholds than are required under applicable Georgian banking regulations or to comply
with additional financial metrics, such as loan to deposit ratios, net stable funding ratios or and other ratios governing
overdue and non performing loans, which may either not be regulated by the NBG or not measured in the same
manner. Whilst TBC believes that it adequately manages its compliance with all applicable financial covenants and is
not at particular risk of breaching any of these, a failure by TBC to comply with these covenants in the future may
constitute a default under the relevant agreements and could cause cross defaults under, and potential acceleration
of, certain of TBC’s other indebtedness which could, in turn, materially adversely affect TBC’s business, financial
condition, results of operations and/or prospects.
Capital adequacy
and regulatory ratios
may constrain
TBC’s profitability
and/or growth
TBC is required by the NBG, and the terms of various of its funding and other arrangements, to comply with certain
capital adequacy ratios and other ratios. The capital adequacy regime in Georgia and globally has been subject to
significant change in recent years TBC’s ability to maintain its ratios could be affected by a number of factors, including:
• an increase of TBC’s risk weighted assets;
• TBC’s ability to raise capital;
•
losses resulting from a deterioration in TBC’s asset quality, a reduction in income levels, an increase in expenses
or a combination of all of the above;
• a decline in the values of TBC’s securities portfolio;
• changes in accounting rules or in the guidelines regarding the calculation of the capital adequacy ratios; and
•
increases in minimum capital adequacy ratios imposed by the NBG.
Although Management believes that TBC currently has adequate capital, TBC may need to raise additional capital in
the future. TBC’s ability to raise capital may be limited by numerous factors, including general economic and financial
conditions, the availability of funding in the capital markets generally or from TBC’s shareholders, investor
confidence, sentiment towards the Georgian economy and the credit rating and financial condition, performance and/
or prospects of TBC. There can be no assurance that it will be able to obtain such capital on favourable terms, in a
timely manner or at all. Any failure to raise additional capital in the future (whether on favourable terms or at all) may
restrict TBC’s growth plans including its ability to grow its loan portfolio.
In October 2013, the NBG introduced its new NBG version of the Basel II/III capital adequacy regulations. Georgian
banks will be required to comply with this regulation beginning in June 2014. According to these new regulations,
TBC is required to maintain a ratio of total regulatory capital to risk weighted assets at 10.5% or more calculated
in accordance with the new regulations. In connection with the final version of its Basel II/III regulation, the NBG
disclosed that it plans to introduce additional capital buffers. In order to reduce the uncertainty regarding minimum
capital buffers, TBC received a non binding letter from the NBG dated 28 February 2014, requesting that TBC
implement a buffer of 3% over any minimum in the current NBG total capital requirements as calculated in
accordance with both current NBG and NBG Basel Pillar 1 guidelines. The NBG emphasised in this letter that it will
be consistent in its regulatory approach across banks (including with respect to capital buffers), and Management
accordingly believes that the NBG’s approach to capital would be applied to all Georgian banks over which the NBG
exercises regulatory oversight. For further information, see the Risk Management chapter. If in the future the NBG
imposes more stringent prudential regulations concerning capital adequacy in order to meet the requirements of
Basel II or Basel III, or for any other reason, there can be no assurance that TBC will be able to comply with these
regulations if and when these become applicable to it.
42
TBC Bank Annual Report 2014 Risk
Why we think this is important
Capital adequacy
and regulatory ratios
may constrain
TBC’s profitability
and/or growth
(continued)
TBC’s businesses are
subject to substantial
regulation and oversight
and future changes
in regulation, fiscal
or other policies are
difficult to predict
Any breach of the NBG’s regulatory requirements relating to the minimum capital adequacy and other regulatory
ratios may result in TBC breaching the covenants in its financing and other arrangements and TBC Bank or other
entities in the TBC group being subject to administrative sanctions, which may result in an increase in the operating
costs of TBC and/or, loss of reputation, or, in extreme cases, the revocation of TBC Bank’s general banking license,
which would result in its inability to perform any banking operations and its liquidation. Any of these events could have
a material adverse effect on TBC’s business, financial condition, results of operations and/or prospects.
TBC’s banking operations in Georgia are required to comply with Georgian banking regulations. In addition to
mandatory capital adequacy ratios, the NBG sets lending limits and other economic ratios for banks in Georgia.
Under Georgian banking regulations, TBC Bank is required to, among other things, comply with minimum reserve
requirements and mandatory financial ratios and regularly file periodic reports. In addition to its banking operations,
TBC also provides other regulated financial services and offers financing products, including brokerage services that
are subject to governmental supervision. Furthermore, if regulations change or if TBC expands its businesses, TBC
may become subject to additional rules and regulations at a national, international or supranational level, which may
impact TBC’s operations. See “—Capital adequacy and regulatory ratios may constrain TBC’s profitability and/or growth”.
Future changes in regulation, fiscal or other policies are unpredictable and there is often a delay between the
announcement of a change and the publication of details of such change. Moreover, any such change is outside the
control of TBC. For example, the NBG has indicated that it is considering introducing a new liquidity framework in
Georgia but has yet to confirm the details or timing for the implementation of such liquidity framework. NBG has also
disclosed several draft regulations including changes in provisioning methodology and Basel III Pillar 2 guidance.
Although TBC closely monitors regulatory developments, there can be no assurance that the current regulatory
environment in which TBC operates will not be subject to significant change in the future, including as a result of a
change in government in Georgia, or that TBC will be able to comply with any or all resulting regulations. See “—Risks
Relating to Georgia—The risk of political instability in Georgia could have a material adverse effect on TBC’s business”.
TBC’s measures
to prevent money
laundering may not
be effective in all
material respects
Despite recent success in improving transparency within Georgia and its economy, less developed legislation and
insufficient administrative guidance on the interpretation of such legislation increase the risk of Georgia’s financial
institutions being used as vehicles for money laundering. TBC has implemented measures aimed at preventing any
member of TBC from being used as a vehicle for money laundering, including “know your customer” policies and the
adoption of anti money laundering and compliance procedures in all its branches, in compliance with the Georgian
Law on Facilitating the Prevention of Illicit Income Legalisation (the AML Law).
TBC and Georgia may
not be able to maintain
their credit ratings
Whilst as of the date of this report, no TBC group company has been accused, named or cited in connection with any
occurrences of money laundering, financing of terrorist activity, fraud, or other corrupt or illegal purpose transactions
or breaches of Georgian laws prohibiting such activities, there can be no assurance that attempts to launder money
through TBC will not be made or that TBC’s anti money laundering measures will be effective in all material respects.
Although TBC has never been associated with money laundering and does not expect such associations in the future,
any such association as a result of any failure or insufficiency of its anti money laundering procedures, or if it were
unable to comply with all of the relevant laws regarding financial assistance or money laundering, could subject TBC
to significant fines as well as harm to its reputation, which could, in turn, have a material adverse effect on TBC’s
business, financial condition, results of operations and/or prospects.
On 21 June 2012, Fitch Ratings upgraded TBC Bank’s Long term Issuer Default Rating from ‘B+’ to ‘BB–’, with a
Stable Outlook. The upgrade was driven by TBC Bank’s increased standalone financial strength. At the same time,
the agency upgraded TBC Bank’s Viability Rating from ‘B+’ to ‘BB–’. According to Fitch, the upgrade of TBC Bank’s
Viability Rating reflects TBC’s high levels of capital and liquidity. The agency also considers that there have been
significant positive improvements in the quality of governance and risk management. Fitch affirmed TBC Bank’s
rating and outlook in November 2014. In January 2015 Moody’s affirmed TBC Bank’s foreign currency deposit rating
at B1/NP and their local currency deposit rating at Ba3/NP. At the same time, Moody’s affirmed TBC Bank’s baseline
credit assessments at Ba3.
On 22 November 2011 Standard & Poor’s raised Georgia’s long-term foreign and local currency ratings from “B+” to“BB–”
and, on 15 December 2012, Fitch upgraded Georgia’s sovereign long-term issuer default ratings from “B+” to “BB–”.
43
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Principal Risks and Uncertainties
Continued
Risk
Why we think this is important
TBC and Georgia may
not be able to maintain
their credit ratings
(continued)
There can be no assurance that TBC Bank or Georgia will be able to maintain these credit ratings,
and any deterioration in the general economic environment or TBC’s financial condition could cause downgrades
which could adversely affect TBC’s liquidity and competitive position, undermine confidence in TBC, increase its
borrowing costs and limit its access to capital markets.
Risks Relating to Georgia
Emerging markets such
as Georgia are generally
subject to greater risks
Investing in securities involving emerging markets, such as Georgia, involves a higher degree of risk than investments
in securities of corporate or sovereign issuers of more developed markets. These higher risks include, but are not
limited to, higher volatility, limited liquidity, a narrow export base, current account and budget deficits and changes
in the political, economic, social, legal and regulatory environment. Emerging economies, such as the Georgian
economy, are subject to rapid change and are vulnerable to market conditions and economic downturns elsewhere
in the world. Risks may be compounded by incomplete, unreliable or unavailable economic and statistical data on
Georgia as the information may become outdated relatively quickly. Emerging markets may also experience more
instances of corruption of government officials and misuse of public funds than more mature markets.
In addition, international investors’ reactions to events occurring in one emerging market country or region
sometimes appear to demonstrate a “contagion” effect, in which an entire region or class of investment is disfavoured
by such investors. Georgia has been adversely affected by “contagion” effects in the past, including following the
August 1998 Russian financial crisis and the more recent global financial crisis. No assurance can be given that
it will not be affected by similar effects in the future, including the recent volatility in the Ukraine and elsewhere.
Since the restoration of its independence in 1991, Georgia has had ongoing disputes in the Abkhazia and the Tskhinvali
Region/South Ossetia regions and with Russia. These disputes have led to sporadic violence and breaches of peace
keeping operations.
In September 2013, Russian troops, assisted by the South Ossetian authorities, began moving the de facto border
between Georgia and its breakaway region of South Ossetia further into Georgian controlled territory. The action
increased tension between the countries and drew international criticism. Further movement of the border has been
suspended following diplomatic efforts, but there is no assurance that such actions will not resume which could, in
turn, further increase tensions. On 24 November 2014 Abkhazia signed a treaty with Russia that encompasses greater
military and economic cooperation between the parties. The agreement allows Russia to position its military forces in
Abkhazia and provides for a potential membership for the small de facto state into the Eurasian Economic Union,
Russia’s alliance with Belarus, Kazakhstan and Armenia.
Geopolitical tensions between Ukraine and Russia may also have an adverse impact on the Georgian economy and on
TBC’s business despite the diversification of Georgia’s economy, which has led to limited Georgian trade reliance on
either Ukraine or Russia (including with respect to Russian energy imports) in recent years.
The political instability of Ukraine, including any potential split of the country along regional and ethnic lines, as well
as any prolonging or further escalation of the conflict between Russia and Ukraine, a significant decline in the Russian
economy due to the sanctions or wider uncertainty and/or the increased level of regional, political and economic
instability may have a significant and adverse impact on the neighbouring countries, including Georgia, including
decreases in tourism, foreign investment and consumer confidence.
Russia has indicated that it views the eastward expansion of North Atlantic Treaty Organization (NATO), potentially
including ex Soviet republics, such as Georgia, as hostile. Any worsening of relations between Ukraine and Russia,
any future deterioration or worsening of Georgia’s relationship with Russia, including as a result of major changes in
Georgia’s relations with Western governments and institutions (particularly regarding national security), changes in
Georgia’s importance to Western energy supplies, changes in the amount of aid granted to Georgia or the ability of
Georgian manufacturers to access world export markets, may have a negative effect on the political or economic
stability of Georgia, which could, in turn, have a material adverse effect on TBC’s business, financial condition, results
of operations and/or prospects, as well as the trading price of the GDRs. Furthermore, the economy of Georgia is
dependent on the economies of other countries within the region, including Azerbaijan and Armenia. Any economic
Regional tensions
could have a material
adverse effect on the
Georgian economy
44
TBC Bank Annual Report 2014 Risk
Why we think this is important
Regional tensions
could have a material
adverse effect on the
Georgian economy
(continued)
Economic instability in
Georgia could have a
material adverse effect
on TBC’s business
disruptions or crises in Georgia’s neighbouring markets or significant deteriorations in relations between
neighbouring countries may have a material adverse effect on Georgia’s economy. Any changes in the ability of
Georgian manufacturers to access world export markets may have a negative effect on the economic stability of
Georgia, which, in turn, could have a material adverse effect on TBC’s business, financial condition, results of
operations and/or prospects, as well as the trading price of the GDRs.
Because TBC operates primarily in Georgia, its business, financial condition and results of operations are, and will
continue to be, highly dependent on the general economic conditions in Georgia. Since the dissolution of the Soviet
Union in the early 1990s, Georgia’s society and economy have undergone a rapid transformation from a one party
state with a centrally planned economy to a pluralist democracy with a market economy.
By the end of the year, GEL depreciated against USD by 7%. Annual inflation was down by 0.4pp YoY to 2% in 2014. GDP
growth rate at 1.8% in Q4, 2014. Increase of MPR by 0.5pp to 4.5% in February, 2015. After relatively decreased levels of
FDI in 2nd quarter of 2014, there was an almost 237% increase QoQ in FDI inflows in Q3 of 2014. FDI decreased by 31% in
Q4, however the volume of FDI attracted in each of these quarters was the highest achieved in the respective quarters
since 2008. The major constituent in the rapid growth was a significant inflow of Chinese investments in the 3rd quarter
of 2014. The outflow of UK and other countries’ investments in Q2 was also replaced by significant increases.
During 2014, the largest share of FDIs was allocated in the transport and communication field, reaching USD 343 million.
This was followed by the construction sector which saw USD 295 million in investments. The next largest industries to
attract investments were manufacturing (USD 174 million), energy (USD 99 million), real estate (USD 87 million), financial
(USD 78 million), hotels and restaurants (USD 40 million), and agriculture (USD 19 million). As a result of the decrease in
net FDI inflows beginning in the second half of 2008, in recent years, the current account deficit has been financed, in part,
by increased borrowing. A significant increase in the current account deficit, if not accompanied by a recovery in net FDI
inflows, may result in a further increase in the levels of Government borrowing to finance the current account deficit,
a revaluation of the Lari or a reduction in imports, any of which could materially adversely affect the Georgian economy.
Nowadays, the Georgian economy is highly dollarised with foreign currency deposits over total deposits across the
sector standing at 60.1% as at 31 December 2014. The rate stood at 59.9% as at 31 December 2013 and 64.1% as at
31 December 2012. Although the NBG has adopted measures to support the development of Georgia’s domestic
money markets, the dollarisation rate could adversely impact the effectiveness of the implementation of the NBG’s
monetary and exchange rate policies.
The ability of the Government and the NBG to limit any volatility of the Lari will depend on a number of political and
economic factors, including the NBG’s and the Government’s ability to control inflation, the availability of foreign
currency reserves and FDI inflows, and any failure to do so or a major depreciation or further devaluation of the Lari
could adversely affect Georgia’s economy. According to estimates provided by Geostat, annual inflation in Georgia, as
measured by the end of period consumer price index (CPI), was 2.0% in 2011, (1.4)% in 2012, 2.4% in 2013 and 2.0% in
2014. Although the CPI in Georgia has been subject to mild inflation to deflation in recent years, there is no assurance
that this will remain so. If the Georgian economy were to suffer from high and sustained inflation in future periods,
there would be an increased risk of market instability, a financial crisis, a reduction in consumer purchasing power
and erosion of consumer confidence.
A material depreciation of the Lari relative to the US Dollar or the Euro, changes in monetary policy, inflation, market
instability, a financial crisis, a reduction in consumer purchasing power and erosion of consumer confidence could
each lead to deterioration in the performance of Georgia’s economy, which could, in turn, have a material adverse
effect on TBC’s business, financial condition, results of operations and/or prospects, as well as the trading price of
the GDRs.
45
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Principal Risks and Uncertainties
Continued
Risk
Why we think this is important
The risk of political
instability in Georgia
could have a material
adverse effect on
TBC’s business
Since the restoration of its independence in 1991, Georgia has undergone a substantial political transformation from a
constituent republic in a federal socialist state to an independent sovereign democracy. Political conditions in Georgia
were highly volatile in the 1990s and in the early part of the 2000s. In the presidential elections held on 27 October 2013,
Giorgi Margvelashvili, candidate of the governing Georgian Dream coalition was elected president. In the Georgian
parliamentary elections held on 1 October 2012, the then oppositional Georgian Dream coalition led by Bidzina Ivanishvili
won a majority of seats Following the parliamentary elections, Ivanishvili was elected as the Prime Minister by the
Georgian parliament In November 2013 Ivanishvili stepped down and he was succeeded by Irakli Gharibashvili, his close
ally and a member of the Georgian dream coalition. The next parliamentary election is scheduled to be held in 2016.
The Georgian Dream coalition is generally seen to be business and investor friendly and to date has remained
committed in principle to major economic and fiscal policies designed to liberalise the Georgian economy. At the same
time, however, various legislative initiatives discussed in the Georgian parliament have been subject to criticism by the
business community, including the imposition of a moratorium on foreclosures and the moratorium imposed on
foreign ownership of agricultural land, as well as more complicated visa policies for foreign visitors. Furthermore,
implementation of Government strategy may result in various changes in the regulatory environment of TBC, which
may have negative effect on TBC’s business, financial condition and/or prospects.
While Georgia has introduced policies oriented towards the acceleration of political and economic reforms, there can
be no assurance that current Government policies or economic or regulatory reforms will continue at the same pace
or at all. There can be no assurance that the Government will be able to maintain political and civil stability or that
reform and economic growth will not be hindered as a result of any such events. Any of the events referred to above
could have negative effects on the economy in Georgia, which could, in turn, have a material adverse effect on TBC’s
business, financial condition, results of operations and/or prospects, as well as the trading price of the GDRs.
Although the Lari is a fully convertible currency, there is generally no market outside Georgia for the exchange of Lari.
A market exists within Georgia for the conversion of Lari into other currencies, but it is limited in size. According to the
NBG, in 2012, the total volume of trading by commercial banks in the Lari/US Dollar and Lari/Euro markets (excluding
activities of the NBG) amounted to US Dollar 13 billion and EUR 4 billion, respectively. The exchange rate of the Lari
against the US Dollar is fixed in the Foreign Exchange Auction between commercial banks, which is used to determine
the official exchange rate of the Lari against foreign currencies. According to the NBG, it had US Dollar 2.7 billion in
gold and foreign currency reserves as at 31 December 2014. Whilst it is widely believed that these reserves will be
sufficient to sustain the domestic currency market in the short term, there can be no assurance that a relatively stable
market will continue indefinitely. A lack of growth of this currency market may hamper the development of TBC’s
business and the businesses of its corporate clients, which could, in turn, have a material adverse effect on TBC’s
business, financial condition, results of operations and/or prospects, as well as the trading price of the GDRs
Georgia is still developing an adequate legal framework required for the proper functioning of a market economy.
Several fundamental Georgian civil, criminal, tax, administrative and commercial laws are frequently amended. The
recent nature of much of Georgian legislation and the rapid evolution of the Georgian legal system place the quality
and the enforceability of laws in doubt and result in ambiguities and inconsistencies in their application.
In addition, the court system is understaffed and has been undergoing significant reforms. Judges and courts in
Georgia are generally less experienced in the area of business and corporate law than judges and courts in certain
other countries, particularly the United States and EU countries. Most court decisions are not easily available to the
general public. The uncertainties of the Georgian judicial system could have a negative effect on overall economic
conditions in Georgia, which could, in turn, have a material adverse effect on TBC’s business, financial condition,
results of operations and/or prospects, as well as on the trading price of the GDRs.
Furthermore, State authorities have a high degree of discretion in Georgia and at times may exercise their discretion
arbitrarily. Such arbitrary or discriminatory State action, if directed at any member of TBC, could have a material
adverse effect on TBC’s business, financial condition, results of operations and/or prospects, as well as the trading
price of the GDRs.
Lack of growth in the
currency market could
have a material adverse
effect on TBC’s business
Weaknesses relating
to the Georgian legal
system and legislation
create an uncertain
environment for
investment and business
activity in Georgia
46
TBC Bank Annual Report 2014 Risk
Why we think this is important
The uncertainties of
the Georgian tax system
could have a material
adverse effect of
TBC’s business
In Georgia, tax laws have not been in force for significant periods of time compared to more developed market
economies, and often result in unclear or non existent implementing regulations. Moreover, such tax laws are subject
to frequent changes and amendments, which can result in unusual complexities for the Issuer and its business
generally. Under the Georgian tax code which came into force in January 2005 (the 2005 Tax Code), replacing the tax
code which came into force in 1997, the number of taxes has been reduced from 22 to seven and the administrative
procedures simplified. In order to make the tax reform revenue neutral, however, the tax base was broadened
by eliminating many existing tax exemptions, excise tax rates were increased and tax collection efforts were
strengthened. Whilst the VAT rate was reduced to 18% under the 2005 Tax Code, VAT exemptions were reduced to a
minimum. The corporate profit tax rate was reduced to 15%, whilst the individual income tax rate, which is a flat tax,
was reduced to 20%. This tax rate is generally lower than the tax rate applicable to other banks operating in more
developed Western countries.
A new tax code was adopted in Georgia on 17 September 2010 and came into effect on 1 January 2011 (the “2011 Tax
Code”). In 2011, the Georgian parliament adopted a law on economic liberty prohibiting the introduction of new state wide
taxes or increases in the existing tax rates (except excise) without a public referendum initiated by the Government (except
in certain limited circumstances). This law became effective on 31 December 2013. Any significant increase in the rate of
corporate income tax in Georgia could have a material adverse effect on TBC’s business, financial condition, results of
operations and/or prospects, as well as on the trading price of the GDRs. Differing opinions regarding the interpretation
of various provisions of tax legislation is creating uncertainties, inconsistencies and areas of conflict. While Management
believes that each member of TBC is currently in compliance with the tax laws affecting its operations, there can be no
assurance that the relevant authorities will not take differing positions with regard to interpretative issues, which may
result in one or more members of TBC facing tax adjustments or fines changes in the tax laws or governmental tax
policies may have a material adverse effect on TBC’s business, financial condition, results of operations and/or prospects.
In addition, Georgia faces considerable difficulties in ensuring the impartiality of its court system with respect to tax
claims, especially when large amounts are being contested by tax payers. Although certain steps are being taken
to remedy the current situation, there can be no assurance that such practices will not continue in the future, which
could have a material adverse effect on TBC’s business, financial condition, results of operations and/or prospects,
as well as the trading price of the GDRs.
47
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
TBC Bank closed the year with a record profit of
GEL 158.5 million, up 27.5% YoY, and 18.4% return
on average equity (ROAE).
Results overview 4Q and FY 2014
Income Statement Highlights
in thousands of GEL
Net interest income
Net fee and commission income
Other operating non-interest income
Provisioning charges
Operating income after provisions for
impairment
Operating expenses
Profit before tax
Income tax expense
Profit for the period
FY 2014
FY 2013
338,648
282,650
58,682
61,004
50,061
48,741
(49,104)
(42,906)
409,229
338,546
(226,310)
(198,613)
182,919
139,933
(24,468)
(15,663)
158,451
124,270
Change
19.8%
17.2%
25.2%
14.4%
20.9%
13.9%
30.7%
56.2%
27.5%
4Q'14
3Q'14
4Q'13
Change YoY
Change QoQ
92,276
17,620
22,416
85,351
15,393
13,539
75,985
15,284
13,014
(18,652)
(5,361)
(10,912)
113,659
108,923
93,372
(67,694)
(56,321)
(55,819)
45,965
(5,940)
40,026
52,602
(7,028)
45,574
37,553
(2,147)
176.7%
35,406
13.0%
21.4%
15.3%
72.2%
70.9%
21.7%
21.3%
22.4%
8.1%
14.5%
65.6%
247.9%
4.3%
20.2%
-12.6%
-15.5%
-12.2%
Balance Sheet and Capital Highlights
In millions of GEL
Total assets
Gross loans
Customer deposits
Total equity
Basel I tier 1 capital
Basel I risk weighted assets
Basel II/III Tier 1 capital
Basel II/III risk weighted assets
31-Dec-14
30-Sep-14
GEL
USD
GEL
USD
5,423.5
3,706.3
3,322.4
1,019.5
967.5
3,910.8
783.4
6,296.7
2,910.2
1,988.8
1,782.8
547.0
519.2
2,098.5
420.3
5,043.6
3,230.2
3,002.8
974.7
926.1
2,878.1
1,843.3
1,713.5
556.2
528.5
3,456.3
1,972.3
743.6
424.3
3,378.8
5,486.8
3,131.0
Change
QoQ
7.5%
14.7%
10.6%
4.6%
4.5%
13.2%
5.3%
14.8%
3Q'14
19.2%
3.7%
21.4%
49.3%
0.7%
0.9%
33.0%
16.7%
31-Dec-13
GEL
USD
Change
YoY
4,451.1
2,958.6
2,886.9
729.3
675.7
2,563.5
1,704.0
1,662.7
420.0
389.2
3,135.5
1,805.9
526.2
303.1
4,901.0
2,822.7
21.8%
25.3%
15.1%
39.8%
43.2%
24.7%
48.9%
28.5%
4Q'13
Change YoY
Change QoQ
19.8%
3.4%
26.0%
53.5%
1.3%
1.1%
28.6%
14.4%
-3.8pp
-0.3pp
-2.5pp
-2.4pp
0.6pp
-0.5pp
1.7pp
0.7pp
-0.8
-3.2pp
-0.6pp
2.0pp
1.9pp
1.2pp
-0.4pp
-2.6pp
-1.6pp
0.1
FY 2014
18.4%
3.3%
24.2%
49.4%
1.6%
0.5%
30.4%
15.0%
FY 2013
Change YoY
4Q'14
18.7%
3.1%
25.3%
52.1%
1.3%
1.1%
28.6%
14.4%
-0.2pp
0.2pp
-1.1pp
-2.7pp
0.3pp
-0.5pp
1.7pp
0.7pp
-0.8
16.0%
3.1%
23.5%
51.2%
1.9%
0.5%
30.4%
15.0%
5.3
6.1
5.3
5.2
6.1
Key Ratios
ROAE
ROAA
Pre-provision ROAE
Cost to income
Cost of risk
NPL to gross loans
Basel I total CAR
Basel II/III total CAR
Leverage (times)
48
TBC Bank Annual Report 2014
Income Statement Discussion
Net Interest Income
in thousands of GEL
FY 2014
FY 2013
Loans and advances to customers
465,520
433,968
Investment securities available for sale
30,361
30,442
Change
7.3%
-0.3%
Due from other banks
Investments in leases
Interest income
Customer accounts
Due to credit institutions
Subordinated debt
Debt Securities in issue
Other
Interest expense
Net interest income
6,211
10,265
512,357
110,041
43,384
19,069
928
287
3,030
105.0%
7,356
474,796
39.6%
7.9%
139,913
-21.4%
38,645
13,182
237
169
12.3%
44.7%
292.2%
69.8%
-9.6%
19.8%
173,709
192,146
338,648
282,650
4Q'14
3Q'14
4Q'13
Change YoY
Change QoQ
124,022
116,506
110,908
7,676
1,949
3,133
136,780
28,075
10,771
5,136
436
86
44,505
92,276
7,951
1,563
11.8%
7.8%
7,118
442
341.2%
2,566
128,585
2,242
120,710
27,154
10,782
4,965
259
73
43,234
85,351
30,838
10,692
3,044
87
64
44,725
75,985
39.7%
13.3%
-9.0%
0.7%
68.8%
401.8%
33.9%
-0.5%
21.4%
6.5%
-3.5%
24.7%
22.1%
6.4%
3.4%
-0.1%
3.4%
68.3%
17.6%
2.9%
8.1%
Net interest margin
8.5%
8.4%
0.1pp
8.5%
8.3%
8.5%
-0.1pp
0.2pp
2014 to 2013 Comparison
Net interest income increased by 19.8% to GEL 338.6 million,
compared to 2013, driven by 7.9% higher interest income and 9.6%
lower interest expense.
The 7.9% YoY increase in interest income to GEL 512.4 million in 2014
was mainly due to the increase in interest income from loans to
customers, primarily related to the average gross loan portfolio
increase by 19.6% YoY, which more than offset the decline in loan yields
over the same period from 16.6% to 14.9%, aligned with declining
interest rates in the country. The second largest increase in interest
income in absolute terms came from interest income from due from
other banks, primarily due to an increase in the size of the respective
average portfolio as well as the increased yields on such placements.
Yields on average interest earning assets decreased by 1.3pp to 12.8%,
compared to 14.1% in 2013.
Interest expense decreased by 9.6% YoY to GEL 173.7 million in 2014,
mainly due to lower interest expense on customer accounts. The latter
decreased primarily due to the lower cost of client deposits at 3.7%
(2013: 5.5%), which resulted from the management’s efforts to
optimise the cost of funding in response to the general market trend
of declining interest rates on deposits in Georgia. Consequently, the
reduction in the cost of client deposits more than offset the 15.2%
increase in the average customer deposit portfolio. As a result of
reduced interest rates on clients’ deposits and other borrowed funds
(6.9% in 2014 compared to 7.6% in 2013), the Bank’s cost of funding
ratio declined by 1.3pp to 4.6% in 2014, compared to 5.9% in 2013.
Consequently, NIM was 8.5% in 2014, compared to 8.4% in 2013. Due
to the one-off interest income from one of the corporate loans, our
interest income increased in 1Q 2014 by GEL 2.3 million. Without this
one-off effect, 2014 NIM would have been unchanged on 2013 at 8.4%.
4Q 2014 and 4Q 2013 Comparison
In 4Q 2014, net interest income increased by 21.4% to GEL 92.3 million,
compared to 4Q 2013, driven by 13.3% higher interest income and 0.5%
lower interest expense.
The interest income increase of GEL 16.1 million, or 13.3%, to GEL
136.8 million in 4Q 2014 was mainly due to the increase in interest
income from loans to customers, primarily related to the average
gross loan portfolio increase by 25.1% YoY, which more than offset
the decline in loan yields over the same period from 16.0% to 14.3%,
aligned with the declining interest rates in the country that were
mentioned above. This more than offset the increase in average rates
on due from other banks and investment securities available for sale.
As a result, yields on average interest earning assets decreased to
12.6% from 13.6% in 4Q 2013.
49
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
Strategic Report
Financial Review
Continued
The slight YoY decrease in interest expense by GEL 0.2 million, or 0.5%,
was primarily driven by the reduced interest expense on customer
deposits by GEL 2.8 million, or 9.0%, which mainly resulted from the
reduction in the cost of client deposits by 1.0pp to 3.5% in 4Q 2014 (4Q
2013: 4.5%). The reduced deposit rates more than offset the increase
in the average customer deposit portfolio by 17.9% YoY. The decrease
in interest expense on customer deposits was partially offset by an
increase in interest expense on subordinated debt by GEL 2.1 million,
mainly due to the increase in the rates on subordinated loans.
As a result, NIM was broadly flat in 4Q 2014 compared to the same
quarter of the previous year at 8.5%.
4Q 2014 and 3Q 2014 Comparison
On a QoQ basis, net interest income increased by 8.1% as a result of
6.4% higher interest income and 2.9% higher interest expense.
was due to the 10.7% QoQ increase in the average gross loan portfolio
and which was partially offset by 0.6pp QoQ decrease in average loan
yields. The increase in interest income was also driven by an increase
in interest income from investments in leases, which resulted from
the 14.7% QoQ increase in the respective average portfolio and the
increase in its yields by 1.6pp to 25.8%. Yields on average interest
earning assets increased by 0.1pp in 4Q 2014, compared to the
previous quarter.
The GEL 1.3 million, or 2.9% QoQ, increase in interest expense was due
to the increase in interest expense on customer accounts by GEL 0.9
million, or 3.4%, mainly due to the 7.0% QoQ increase in the average
customer deposits portfolio. The increase in interest expense was also
due to the increase in interest expense from debt securities in issue
and subordinated debt, which resulted from the exchange rate effect
and the increased interest rate on subordinated debt. As a result, the
cost of funding reduced by 0.1pp QoQ.
The GEL 8.2 million, or 6.4%, QoQ increase in interest income mainly
resulted from the increase in interest income on loans, which in turn
On a QoQ basis, NIM increased by 0.2pp.
Reclassification of income from Other Operating Income to Fee and Commission Income
The bank has reclassified operating income of its subsidiaries TBC Pay and UFC from Other Operating Income to Fee and Commission
Income. The following table gives appropriate details of the adjustment.
in thousands of GEL
Financial statement line item
2013 Year
Fee and Commission Income
Fee and commission income from settlement
Fee and commission income from card operations
Other Operating Income
Revenues from cash-in terminal services
Other operating income
Q3 2014
Fee and Commission Income
Fee and commission income from settlement
Fee and commission income from card operations
Other Operating Income
Revenues from cash-in terminal services
Other operating income
Q4 2013
Fee and Commission Income
Fee and commission income from settlement
Fee and commission income from card operations
Other Operating Income
Revenues from cash-in terminal services
Other operating income
50
As previously
reported
As reclassified
11,856
31,834
18,543
33,012
7,446
4,576
5,738
7,009
579
2,592
4,963
7,174
523
3,448
759
3,398
6,108
9,121
210
479
5,335
9,132
152
1,491
TBC Bank Annual Report 2014 Fee and Commission Income
in thousands of GEL
Card operations
Settlement transactions
Guarantees issued
Issuance of letters of credit
Cash transactions
Foreign exchange operations
Other
Fee and commission income
Card operations
Guarantees received
Cash transactions
Settlement transactions
Foreign exchange operations
Letters of credit
Other
Fee and commission expense
Net Fee and Commission Income
FY 2014
FY 2013
4Q'13
Change YoY
Change QoQ
35,247
23,893
9,140
6,889
6,507
1,169
5,359
88,204
16,053
1,173
2,592
2,594
62
2,988
4,061
29,523
58,682
33,012
18,543
6,271
6,769
5,040
1,550
3,177
74,362
13,143
769
1,544
2,157
Change
6.8%
28.9%
45.7%
1.8%
29.1%
-24.6%
68.7%
18.6%
22.1%
52.6%
67.9%
20.3%
70
-11.2%
3,279
3,339
24,301
50,061
-8.9%
21.6%
21.5%
17.2%
4Q'14
10,723
6,653
2,665
1,954
2,121
308
1,773
3Q'14
9,121
6,108
2,114
1,729
1,845
279
1,425
287
635
877
16
663
949
8,578
378
696
538
15
749
1,083
7,228
9,132
5,335
1,060
1,939
1,440
419
1,005
463
593
16
1,159
1,073
5,045
17.4%
24.7%
151.4%
0.8%
47.3%
-26.5%
76.4%
28.9%
41.9%
17.6%
8.9%
26.1%
13.0%
15.0%
10.3%
24.4%
15.8%
36.7%
37.2%
47.9%
2.5%
-42.8%
-11.5%
70.1%
15.3%
-8.7%
63.1%
6.2%
-11.4%
-12.4%
18.7%
14.5%
26,198
5,151
22,621
20,329
3,769
3,630
(1,888)
-115.2%
-24.2%
17,620
15,393
15,284
2014 to 2013 Comparison
In 2014, net fee and commission income reached GEL 58.7 million, up
by GEL 8.6 million, or 17.2% compared to 2013. This mainly resulted
from an increase in net fee and commission income from settlement
transactions by GEL 4.9 million and from guarantees by GEL 2.5
million, driven by the growing scale of the business. The net fee and
commission income from card operations decreased by GEL 0.7
million as the Bank started recording fee income from card operations
on an accrual basis from 2014. Without the effect of card fee deferral
accrual, which amounted to GEL 2.7 million in 2014, the net fee and
commission income would have increased by GEL 11.3 million, or
22.6%, compared to the previous year.
4Q 2014 and 4Q 2013 Comparison
In 4Q 2014, net fee and commission income increased by GEL 2.3
million, or 15.3%, compared to 4Q 2013, mainly due to an increase of
GEL 1.0 million in net fee and commission income from settlement
transactions. In addition, net fee and commission incomes from
issuance of letter of credit and from cash transactions increased by
GEL 0.5 million each. Net fee and commission income from card
operations increased by GEL 0.1 million. Excluding the GEL 0.4 million
card fee deferral recorded in 4Q 2014, net fee and commission income
would have increased by GEL 2.7 million, or 17.9%, compared to the
same quarter of the previous year.
4Q 2014 and 3Q 2014 Comparison
On a QoQ basis, net fee and commission income increased by GEL 2.2
million, or 14.5%, compared to 3Q 2014, resulting from the increase
in most of its components. Net fee and commission income from
guarantees, letters of credit, cash transactions, card operations and
settlement transactions increased by GEL 0.6 million, GEL 0.3 million,
GEL 0.3 million, GEL 0.2 million and GEL 0.2 million respectively. Net
fee and commission income from foreign exchange operations
remained broadly stable on a QoQ basis.
51
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
Strategic Report
Financial Review
Continued
Other Operating Non-interest Income
In 4Q 2014 the Bank reclassified other operating income to fee and commission income as described above.
in thousands of GEL
FY 2014
FY 2013
Change
4Q'14
3Q'14
4Q'13
Change YoY
Change QoQ
Gains less losses from trading in
foreign currencies and foreign
exchange translations
Gains less losses/(losses less gains)
42,090
31,993
31.6%
15,782
10,144
8,103
94.8%
55.6%
from derivative financial instruments
(683)
613
NMF
(299)
162
(57)
NMF
NMF
Revenues from sale of cash-in
terminals
Revenues from operational leasing
Gain from sale of investment
properties
Gain from sale of inventories of
repossessed collateral
Administrative fee income from
international financial institutions
Revenues from non-credit related
fines
Gain on disposal of premises and
equipment
Other
Other operating income
Other operating non-interest income
851
6,997
759
12.0%
2,980
134.8%
239
1,957
210
1,806
152
1,193
57.6%
64.1%
14.0%
8.4%
5,795
5,835
-0.7%
2,699
63
1,139
137.0%
NMF
1,644
1,519
8.2%
982
236
126
2,966
19,598
61,004
1,268
-22.6%
339
-30.4%
37
241.9%
3,398
16,135
48,741
-12.7%
21.5%
550
252
183
41
1,012
6,934
415
199
35
26
479
3,233
546
0.8%
32.6%
362
-30.4%
26.5%
50
264.3%
418.6%
37
1,491
4,969
11.0%
-32.1%
39.5%
55.3%
111.3%
114.5%
65.6%
25.2%
22,416
13,539
13,014
72.2%
2014 to 2013 Comparison
Total other operating non-interest income increased by GEL 12.3
million, or 25.2% to GEL 61.0 million in 2014, compared to the previous
year. This increase was mainly driven by the GEL 10.1 million increase
in gains from trading in foreign currencies and foreign exchange
translations related to increased volumes of currency exchange
operations and the increased margins on such operations, partially
driven by the currency exchange rate volatility in 4Q 2014. Total other
operating non-interest income was also supported by the increase in
revenues from operational leasing (rental income from investment
property) by GEL 4.0 million. These increases were partially offset
by the loss of GEL 0.7 million from the fair valuation of interest rate
swaps (reported under gains less losses from derivative financial
instruments) entered for purposes of hedging interest rate increases
in TBC's banking book. This loss compares to a gain of GEL 0.6 million
in 2013.
4Q 2014 and 4Q 2013 Comparison
In 4Q 2014, other operating non-interest income increased by GEL 9.4
million, or 72.2%, primarily driven by the GEL 7.7 million higher gains
from trading in foreign currencies and foreign exchange translations in
4Q 2014 described above. The increases in other operating non-
interest income also came from the increased gains from sale of
investment properties, up GEL 1.6 million due to higher sales of
investment properties in Q4 2014 compared to Q4 2013 and from
revenues from operational leasing, up GEL 0.8 million. These
increases were partially offset by the loss in derivative financial
instruments described above of GEL 0.3 million in 2014, compared
to the loss of GEL 0.1 million in 4Q 2013.
4Q 2014 and 3Q 2014 Comparison
On a QoQ basis, other operating non-interest income increased by GEL
8.9 million, or 65.6%, primarily reflecting the GEL 5.6 million increase
in gains from trading in foreign currencies and foreign exchange
translations in 4Q 2014 described above, as well as the increase in the
gains from sale of investment properties due to the higher sales of
such properties in 4Q 2014. These increases were partially offset by
the loss in derivative financial instruments described above of GEL 0.3
million in 4Q 2014, compared to the gain of GEL 0.2 million in 3Q 2014.
52
TBC Bank Annual Report 2014 Provision for Impairment
in thousands of GEL
Provision for loan impairment
Provision for impairment of
investments in finance lease
Provision for/ (recovery of provision)
performance guarantees and credit
related commitments
Provision for impairment of other
FY 2014
FY 2013
48,672
32,971
Change
47.6%
4Q'14
16,198
3Q'14
5,521
4Q'13
Change YoY
Change QoQ
9,026
79.5%
193.4%
77
98
-21.9%
-89
56
27
NMF
NMF
-902
6,459
NMF
1,875
-164
-679
NMF
NMF
financial assets
1,236
2,236
-44.7%
22
1,142
-98.1%
669
0
-52
1,401
-52.3%
NMF
0
1,137
-100.0%
-100.0%
49,104
42,906
14.4%
18,652
5,361
10,912
70.9%
247.9%
409,229
338,546
20.9%
113,659
108,923
93,372
21.7%
4.3%
Impairment of investment securities
available for sale
Total provision charges for
impairment
Operating income after provisions for
impairment
Cost of Risk
1.6%
1.3%
0.3pp
1.9%
0.7%
1.3%
0.6pp
1.2pp
2014 to 2013 Comparison
In 2014, total provision charges increased by GEL 6.2 million, or 14.4%,
compared to 2013. The increase was driven by the increased charges
on loans, due to the portfolio growth in 2014 and currency rate
devaluation against USD (63% of our gross loan book is denominated in
foreign currency, of which USD loans represent 96%). The increase in
provision charges was partially offset by the recovery of provisions on
performance guarantees and credit related commitments in 2014 due
to the transfer of guarantees into loans and the reduction of provision
levels on certain guarantees due to the improvement in their financial
standing in 2014.
In 2014, the cost of risk on loans was 1.6%, compared to 1.3% in the
previous year.
4Q 2014 and 4Q 2013 Comparison
In 4Q 2014, total provision charges increased by GEL 7.7 million to GEL
18.7 million, compared to 4Q 2013. The increase was principally driven
by the GEL 7.2 million higher provision charges on loans, affected by
the currency rate devaluation mentioned above and the recovery of
provisions on retail loans in 4Q 2013.
As a result, the cost of risk on loans increased to 1.9% in 4Q 2014,
compared to 1.3% in 4Q 2013.
4Q 2014 and 3Q 2014 Comparison
On a QoQ basis, total provision charges increased by GEL 13.3 million,
primarily resulting from a GEL 10.7 million increase in loan provision
charges, which was due to the portfolio growth in 4Q 2014 as well as
local currency depreciation against USD. As a result, the cost of risk on
loans increased by 1.2pp, compared to the 0.7% cost of risk in 3Q 2014.
53
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
Operating Expenses
in thousands of GEL
Staff costs
Depreciation and amortisation
Provision for liabilities and charges
Professional services
Advertising and marketing services
Rent
Utility services
Intangible asset enhancement
Taxes other than on income
Communications and supply
Stationary and other office expenses
Insurance
Security services
Premises and equipment
maintenance
Business trip expenses
Transportation and vehicles
maintenance
Charity
Personnel training and recruitment
Write-down of current assets to fair
value less costs to sell
Loss on disposal of Inventory
Loss on disposal of investment
properties
Loss on disposal of premises and
equipment
Other
Administrative and other operating
expenses
Operating expenses
Profit before tax
Income tax expense
Profit for the period
Cost to income ratio
ROAE
ROAA
54
4Q'14
3Q'14
4Q'13
Change YoY
Change QoQ
37,260
29,575
30,891
FY 2014
FY 2013
122,835
24,427
5,500
11,969
14,121
11,943
108,613
19,993
1,315
6,247
13,211
10,809
Change
13.1%
22.2%
318.3%
91.6%
6.9%
10.5%
9.2%
16.0%
28.1%
11.3%
11.5%
26.9%
-1.2%
-23.8%
30.9%
0.1%
-0.8%
1.9%
-96.9%
-5.8%
3,369
3,767
3,043
3,103
2,360
1,496
1,597
2,484
1,230
1,215
905
902
6,178
221
3,680
4,371
3,899
3,455
2,632
1,898
1,578
1,893
1,610
1,216
898
919
190
208
0
18
8,194
720
3,519
4,701
3,143
942
1,025
979
994
805
433
424
694
539
330
141
405
-48
7
0
5
5,541
4,780
1,251
3,027
3,010
900
1,353
974
861
624
554
399
465
297
314
259
254
337
5
-1
9
20.6%
65.4%
-45.2%
-4.8%
60.8%
13.9%
12.2%
26.0%
47.9%
-84.9%
181.2%
55.3%
4.4%
4.7%
-17.1%
-24.3%
-9.7%
18.1%
27.3%
12.3%
9.3%
19.5%
-6.7%
3.9%
-47.4%
0.6%
0.5%
15.4%
29.1%
-21.9%
6.1%
49.1%
81.4%
5.3%
-45.5%
59.7%
4,954
1,315
3,696
2,924
2,760
839
1,236
1,084
842
633
386
388
580
577
318
268
403
76
-100.0%
54
-65.9%
7,047
6,425
9.7%
2,484
1,531
73,548
226,310
182,919
68,692
198,613
139,933
24,468
15,663
158,451
124,270
49.4%
18.4%
3.3%
52.1%
18.7%
3.1%
7.1%
13.9%
30.7%
56.2%
27.5%
-2.7pp
-0.2pp
0.2pp
21,520
67,694
45,965
5,940
40,026
51.2%
16.0%
3.1%
-723
221
-93.3%
-97.1%
-114.3%
38.2%
76
-100.6%
-23.3%
28
2,124
-83.9%
17.0%
16,424
56,321
52,602
7,028
18,659
55,819
37,553
15.3%
21.3%
22.4%
2,147
176.7%
-49.3%
62.2%
31.0%
20.2%
-12.6%
-15.5%
45,574
35,406
13.0%
-12.2%
49.3%
19.2%
3.7%
53.5%
19.8%
3.4%
-2.4pp
-3.8pp
-0.3pp
1.9pp
-3.2pp
-0.6pp
TBC Bank Annual Report 2014
2014 to 2013 Comparison
In 2014, total operating expenses increased by GEL 27.7 million, or
13.9% YoY, of which GEL 10.7 million represented one-off charges
related to the IPO (GEL 5.2 million), the settlement of Bank Constanta
claims(a) (GEL 4.8 million) and the costs associated with the merger
with Bank Constanta (GEL 0.7 million).
Without these one-off costs, total operating expenses would have
increased by GEL 17.0 million, or 8.6% in 2014, compared to the
previous year. The GEL 17.0 million increase was mainly due to the
increase in staff costs by GEL 14.2 million, or 13.1% YoY (Bank
Constanta accounted for GEL 3.4 million, or 24.2%, of the total staff
cost increase in line with the growth of Bank Constanta's business
as well as the general increase in salaries, bonuses and various
HR management related costs on a TBC Group level). The increase
in operating expenses was also due to the increase in depreciation
and amortisation expenses that was partially driven by the change
in accounting practices of Bank Constanta during premerger
preparation, and partially by assets growth at large. These increases
were partially offset by the reduced loss on revaluation of repossessed
assets, which amounted to GEL 0.2 million loss in 2014, compared to
GEL 7.1 million loss in 2013.
As a result, the cost to income ratio was 49.4% (47.0% without one-off
charges) in 2014, compared to 52.1% in 2013.
(a) In July 2014, TBC settled for a gross amount of GEL 4.8 million all outstanding
claims by the non-entrepreneurial (non-commercial) Legal Entity Fund
Constanta (the ‘‘Fund’’) and a related individual regarding the sale by the Fund
and the individual of their shares in Bank Constanta to TBC Bank in May 2011.
4Q 2014 and 4Q 2013 Comparison
In 4Q 2014, operating expenses increased by GEL 11.9 million, or
21.3%, to GEL 67.7 million, compared to 4Q 2013. This increase was
primarily effected by a GEL 6.4 million increase in staff costs, which
was primarily related to a 14.5% increase in staff numbers and
increased salaries and bonuses and various HR management
associated costs on a TBC Group level (Bank Constanta accounted for
GEL 1.0 million, or 15.7% of the total staff cost increase aligned with
the growth of Bank Constanta's business). The increase in operating
expenses also came from depreciation and amortisation expenses due
to the merger preparation period described above and one-off charges
of GEL 0.7 million associated with the merger with Bank Constanta.
4Q 2014 and 3Q 2014 Comparison
On a QoQ basis, operating expenses increased by GEL 11.4 million,
or 20.2%, compared to 3Q 2014. Without the one off-costs in 3Q 2014
related to the Constanta settlement case (GEL 4.8 million) and IPO
expenses (GEL 0.3 million) and one-off costs in 4Q 2014 related to
the Bank Constanta merger, total operating expenses would have
increased by GEL 15.8 million, or 30.8% mainly due to the seasonally
high cost Q4. More specifically, the increase was due to a GEL 7.7
million increase in salaries, depreciation and amortisation expenses
associated with the merger preparation period of GEL 2.7 million, as
well as higher professional services and marketing expenses in Q4.
As a result, the cost to income ratio was up 1.9pp QoQ, and up 5.8pp
QoQ excluding one-off charges in 3Q and 4Q 2014.
55
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
Balance Sheet Discussion
In millions of GEL
Cash, due from banks and mandatory cash balances with NBG
Loans and advances to customers (Net)
Financial securities
Fixed and intangible assets & investment property
Other assets
Total assets
Due to credit institutions
Customer accounts
Debt Securities in issue
Subordinated Debt
Other liabilities
Total Liabilities
Total equity
Assets
As of 31 December 2014, TBC had total assets of GEL 5,423.5 million,
up by GEL 972.4 million, or 21.8% YoY. This increase in total assets was
mainly due to the increase in net loans to customers by GEL 754.8
million, or 26.9%. The YoY increase in total assets was also due to a
GEL 176.0 million, or 14.9% increase in liquid assets (comprising cash
and cash equivalents, amounts due from other banks, mandatory cash
balances and investment securities available for sale less corporate
shares), compared to 31 December 2013.
On a QoQ basis, total assets increased by GEL 379.9 million, or 7.5%,
primarily due to a GEL 472.4 million, or 15.3%, increase in net loans
and advances to customers to GEL 3,556.5 million. This increase was
in turn driven mainly by growth in retail and corporate net portfolios,
along with the growth in SME and micro segments. This trend was
partially offset by a decrease in liquid assets by 5.9% to GEL 1,358.6
million. As a result, our liquid assets to liability ratio decreased to
30.8%, compared to 35.5% as of 30 September 2014.
As of 31 December 2014, the gross loan portfolio reached 3,706.3
million, up 25.3% YoY and 14.7% QoQ. At the same time, gross loans
denominated in foreign currency accounted for 63.2% of total gross
loans, compared to 69.3% at 31 December 2013 and 64.1% at 30
September 2014, which reflects the downward trend in foreign currency
denominated loans. The NPL ratio, defined as loans overdue more than
90 days relative to gross loan portfolio, stood at 0.5%, compared to 1.1%
and 0.9% as of 31 December 2013 and 30 September 2014, respectively.
The NPL+restructured ratio was 3.7%, compared to 4.8% and 4.1% as of
31 December 2013 and 30 September 2014, respectively, and the
NPL+restructured loans coverage ratio was 109.4%, compared to
110.6% as of 31 December 2013 and 111.6% as of 30 September 2014.
56
31-Dec-14
30-Sep-14
31-Dec-13
Change QoQ
Change YoY
901.9
3,556.5
466.5
322.7
175.9
5,423.5
749.3
3,322.4
20.4
188.0
123.8
4,404.0
1,019.5
895.1
3,084.1
567.2
306.0
191.2
5,043.6
760.3
3,002.8
14.7
180.7
110.3
687.5
2,801.7
500.7
306.5
154.7
4,451.1
565.8
2,886.9
4.5
168.3
96.3
4,068.9
3,721.8
974.7
729.3
0.8%
15.3%
-17.7%
5.4%
-8.0%
7.5%
-1.5%
10.6%
38.6%
4.0%
12.3%
8.2%
4.6%
31.2%
26.9%
-6.8%
5.3%
13.7%
21.8%
32.4%
15.1%
356.5%
11.7%
28.5%
18.3%
39.8%
Liabilities
As of 31 December 2014, TBC had total liabilities of GEL 4,404.0
million, up 18.3% YoY and 8.2% QoQ.
On a YoY basis, the GEL 682.2 million, or 18.3%, increase in total
liabilities was primarily due to the GEL 435.5 million, or 15.1%, increase
in customer deposits, which was primarily driven by the increase in
retail deposits, as well as due to a GEL 183.5 million increase in due to
credit institutions, which resulted from increases in other borrowed
funds by GEL 144.7 million and in due to other banks by GEL 38.7
million. The increase in total liabilities was also driven by the issuance
of bonds in 2014 by our subsidiaries TBC Kredit and TBC Leasing in the
amounts of USD 5.0 million and USD 2.0 million, respectively.
On a QoQ basis, the GEL 335.1 million, or 8.2% increase in total
liabilities was primarily due to the GEL 319.6 million, or 10.6% increase
in customer accounts.
Liquidity
The Bank’s liquidity ratio, as defined by the National Bank of Georgia,
was 31.1%, compared to 34.0% and 37.7% as of 31 December 2013 and
30 September 2014, respectively.
TBC Bank Annual Report 2014
Total Equity
As of 31 December 2014, TBC had total equity of GEL 1,019.5 million,
compared to GEL 729.3 million as of 31 December 2013 and GEL 974.7
million as of 30 September 2014. The YoY increase in total equity was
primarily driven by the net income attributable to owners of the bank of
GEL 157.5 million and the IPO gross proceeds of GEL 175.6 million.
These increases were partially offset by the 2013 dividend payout in Q1
2014 of GEL 26.5 million.
Regulatory Capital
As of 31 December 2014, the Bank’s Basel II/III(a) tier 1 and total capital
adequacy ratios (CAR) were 12.4% and 15.0%, respectively, compared
to 10.7% and 14.4% as of 31 December 2013, and 13.6% and 16.7% as of
30 September 2014. The decrease in CAR ratios on a QoQ basis was
due to the 14.8% increase in risk weighted assets associated with the
increased gross loans and the local currency devaluation. The
minimum capital requirements set by NBG for Basel II/III tier 1 and
total capital ratios are 8.5% and 10.5% (13.5% including the capital
buffer), respectively. The Bank’s Basel II/III tier 1 capital reached GEL
783.4 million, compared to GEL 526.2 million as of 31 December 2013
and GEL 743.6 million as of 30 September 2014. Risk weighted assets
were GEL 6,296.7 million as of 31 December 2014, up GEL 1,395.7
million YoY and up GEL 809.9 million QoQ.
The Bank’s Basel I tier 1 capital ratio was 24.7%, compared to 21.6%
and 26.8% as of 31 December 2013 and 30 September 2014, respectively.
Tier 1 capital reached GEL 967.5 million, compared to 675.7 million
and 926.1 million as of 31 December 2013 and 30 September 2014,
respectively. Risk weighted assets were GEL 3,910.8 million as of
31 December 2014, up GEL 775.3 YoY and GEL 454.5 million QoQ.
(a) Starting from June 2014 National Bank of Georgia enforced Basel II/III regulation.
Market Shares(b)
Asset Market Shares
TBC Bank’s market share in total assets increased by 1.0pp YoY
and 0.4pp QoQ, attaining 26.3% as of 31 December 2014.
Loans Market Shares
TBC Bank’s market share in total loans was 27.7% as of
31 December 2014, up 0.4pp YoY and 0.7pp QoQ.
In terms of individual loans, the Bank became the largest bank in
individual loans with 29.7% of market share as of 31 December
2014, up 2.0pp YoY and 1.1pp QoQ. The market share in legal entity
loans was 25.8%, down 1.1pp YoY and up 0.3pp QoQ.
Deposits Market Shares
TBC Bank’s market share in total deposits was 28.4% as of
31 December 2014, down 1.1pp YoY and up 0.6pp QoQ.
The Bank maintains its longstanding leadership in individual
deposits with a market share of 33.7%, up 0.7pp YoY and up 0.5pp
QoQ. In terms of legal entity deposits, TBC Bank had market
share of 23.0%, down 2.9pp YoY and up 0.6pp QoQ. The Bank uses
corporate deposits mainly for liquidity management purposes.
(b) Market shares are based on National Bank of Georgia (NBG) and include
Bank Constanta.
57
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
Results by Segments and Subsidiaries
• Retail – all individual customers of the Group as well as customers
• SME – business customers that are not included either in the
that have been granted gold-pawn loans.
corporate or micro segments.
• Corporate – business customers which have annual revenue of GEL
8.0 million or more or have been granted a loan in an amount
equivalent to USD 1.5 million or more. Some other significant legal
entity customers may also be assigned the status of being a
corporate customer, on a discretionary basis; for example, if they
are regarded by the Group as having strong growth potential.
• Micro – all business customers of Bank Constanta, that have been
granted loans by and/or have deposits with Bank Constanta, the
amount of which in neither case exceeds USD 150 thousand.
• Corporate Center and Other Operations – comprise the Treasury,
other support and back office functions, and non-banking
subsidiaries of the Group.
The following table sets out information on the financial results of TBC's segments for 2014:
Retail
Corporate
SME
Micro
Corp. Center
Total
In thousands of GEL
31-Dec-14
Interest Income
Interest Expense
Intersegment interest income/(expense)
Net interest income
Fee and commission income
Fee and commission expense
Net Fee and commission income
Gains less losses from trading in foreign currencies
Foreign exchange translation losses less gains
Net gain from derivative financial instruments
Other operating income
Other operating non interest income
Provision for loan impairment
Provision for performance guarantees and credit
related commitments
Provision for impairment of investments in finance lease
Provision for impairment of other financial assets
Impairment of investment securities available for sale
Profit before administrative and other expenses and
income taxes
Staff costs
Depreciation and amortisation
Provision for liabilities and charges
237,804
-80,808
7,499
164,495
46,368
-26,230
20,138
9,932
–
–
–
116,404
-21,845
-42,246
52,313
18,093
-1,312
16,781
12,456
–
–
–
53,739
-7,196
-3,640
42,903
9,268
-906
8,362
13,286
–
–
–
57,573
-192
-18,468
38,913
3,498
-911
2,587
1,820
–
–
–
9,932
-22,046
12,456
-18,995
13,286
-1,625
1,820
-6,006
–
–
–
–
885
–
–
–
17
–
–
–
–
–
–
–
172,519
-55,427
-13,132
–
63,440
-11,826
-780
–
62,943
-10,755
-1,915
37,314
-15,808
-3,579
–
–
46,837
-63,668
512,357
-173,709
56,855
40,024
10,976
-164
10,812
2,236
2,359
-683
19,600
23,512
–
–
-77
-1,236
-22
–
338,648
77,865
-29,523
58,680
39,730
2,359
-683
19,600
61,006
-48,672
902
-77
-1,236
-22
73,013
409,229
-29,019
-122,835
-5,021
-5,500
-24,427
-5,500
-73,548
Administrative and other operating expenses
-36,026
-4,432
-4,981
-9,600
-18,509
Operating expenses
Profit before tax
Income tax expense
Profit for the year
58
-104,585
-17,038
-17,651
-28,987
-58,049
-226,310
67,934
-9,087
58,847
46,402
-6,207
40,195
45,292
-6,059
39,233
8,327
-1,114
7,213
14,964
-2,001
12,963
182,919
-24,468
158,451
TBC Bank Annual Report 2014 The following table sets out loans and customer deposits portfolios of TBC's segments as of 31 December 2014, 30 September 2014 and
31 December 2013:
In thousands of GEL
Loans and Advances to Customers
Consumer
Mortgage
Pawn
Retail
Corporate
SME
Micro
Total loans and advances to customers (gross)
Less: Provision for loan impairment
Total loans and advances to customers (net)
Customer Accounts
Retail
Corporate
SME
Micro
Total customer accounts
31-Dec-14
30-Sep-14
31-Dec-13
781,043
716,868
169,002
1,666,913
1,231,729
533,919
273,699
676,337
627,531
142,361
603,434
499,428
104,652
1,446,229
1,207,514
1,084,219
1,157,334
460,727
239,034
392,446
201,287
3,706,261
3,230,209
2,958,581
-149,764
-146,145
-156,869
3,556,496
3,084,064
2,801,712
1,977,173
1,788,244
1,610,676
832,555
507,816
4,884
746,345
463,078
5,142
819,779
451,985
4,443
3,322,428
3,002,810
2,886,883
Retail Banking
Retail Loans and Advances to Customers
As of 31 December 2014, retail loans stood at GEL 1,666.9 million, up by
38.0% YoY and 15.3% QoQ. As of this date, TBC Bank’s market share in
individual loans was 29.7%.
Corporate Banking
Corporate Loans and Advances to Customers
As of 31 December 2014, corporate loans amounted to GEL 1,231.7
million, up by 6.4% YoY and 13.6% QoQ. As of the same date, foreign
currency loans represented 69.6% of the total corporate loan portfolio.
As of 31 December 2014, foreign currency loans represented 56.2% of
total retail loan portfolio.
Retail Customer Deposits
As of 31 December 2014, retail deposits increased to GEL 1,977.2
million, up 22.8% YoY and 10.6% QoQ. TBC’s market share in individual
deposits was 33.7% as of the same date.
Term deposits represented 65.4% of the total retail deposit portfolio as
of 31 December 2014. Foreign currency deposits represented 84.3% of
total retail deposit portfolio.
Retail Segment Profitability
In 2014, retail loan yields and deposit rates stood at 17.4% and 4.6%,
respectively, and the segment’s cost of risk was 1.6%. The retail
segment contributed to 37.1%, or GEL 58.8 million, to TBC’s total net
income in 2014.
Corporate Customer Deposits
As of 31 December 2014, corporate deposits were GEL 832.6 million,
up 1.6% YoY and 11.6% QoQ. As of the same date, foreign currency
corporate deposits represented 41.7% of the total corporate
deposit portfolio.
Corporate Segment Profitability
In 2014, corporate loan yields and deposit rates stood at 10.7% and
3.0%, respectively. In the same period, the cost of risk was 1.8%. In
terms of profitability, the corporate segment’s net profit reached GEL
40.2 million, or 25.4% of TBCs total net income.
SME Banking
SME Loans and Advances to Customers
As of 31 December 2014, SME loans increased to GEL 533.9 million,
up by 36.0% YoY and 15.9% QoQ. Despite the absence of SME market
information(a), the management believes that TBC Bank is one of the
leading banks in the market, based on its large and continuously-
growing number of loyal customers.
(a) Due to the fact that NBG does not produce market data comparisons for the SME
segment, it is impossible to calculate SME market shares.
59
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
As of 31 December 2014, foreign currency loans represented 84.3% of
the total SME portfolio.
SME Customer Deposits
As of 31 December 2014, SME deposits were GEL 507.8 million, up by
12.4% YoY and 9.7% QoQ. In regard to SME deposits, the management
believes that TBC Bank has the largest shares on the market, based on
its large customer base.
Foreign currency SME deposits represented 54.0% of total SME
deposit portfolio.
SME Segment Profitability
In 2014, SME loan yields and deposit rates stood at 12.3% and 1.6%,
respectively. In the same period, cost of risk was 0.4%. In terms of
profitability, the SME segment net profit reached GEL 39.2 million,
or 24.8%, of TBC’s total net income.
Subsidiaries
Subsidiary
United Financial Corporation JSC
TBC Broker LLC
TBC Leasing JSC
TBC Kredit LLC
Banking System Service Company LLC
TBC Pay LLC
Real Estate Management Fund JSC
TBC Invest LLC
Bank Constanta JSC
Ownership/
voting % as of
31 December
2014
98.7%
100.0%
99.5%
Country
Georgia
Georgia
Georgia
75.0% Azerbaijan
100.0%
100.0%
100.0%
100.0%
100.0%
Georgia
Georgia
Georgia
Israel
Georgia
60
Micro Banking
Micro Loans and Advances to Customers
Micro loans reached GEL 273.7 million as of 31 December 2014, up by
36.0% YoY and 14.5% QoQ. As of the same date, foreign currency loans
represented 35.9% of the total micro loan portfolio.
Micro Customer Deposits
As of 31 December 2014, micro customer deposits amounted to GEL
4.9 million, up by 9.5% YoY and down 5.0% QoQ. The QoQ decrease was
mainly due to the release of costly legal entity deposits aligned with the
management’s decision to optimise the cost of funding prior to the
merger of TBC Bank and Bank Constanta, which was completed in
January 2015.
Foreign currency micro deposits represented 26.3% of the total micro
deposit portfolio.
Micro Segment Profitability
In 2014, micro loan yields and deposit rates stood at 24.8% and 4.2%,
respectively. In the same period, the cost of risk was 2.6%. In terms of
profitability, the micro segment’s net profit reached GEL 7.2 million, or
4.6% of TBC’s total net income.
Total Assets (after elimination)
Year of
incorporation
or acquisition
1997
1999
2003
2008
2009
2009
Industry
Card processing
Brokerage
Leasing
Non-banking credit
institution
Information services
Processing
2010 Real estate management
2011
2011
PR and marketing
Financial institution
456,330
Amount
GEL’000
6,666
228
71,099
91,165
494
23,089
1,129
99
% in
TBC Group
0.12%
0.00%
1.31%
1.68%
0.01%
0.43%
0.02%
0.00%
8.41%
TBC Bank Annual Report 2014
Annexes
Consolidated Balance Sheet
in thousands of GEL
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers (Net)
Investment securities available for sale
Repurchase receivables
Investments in finance leases
Investment properties
Goodwill
Intangible assets
Premises and equipment
Other financial assets
Deferred income tax asset
Current income tax prepayment
Other assets
TOTAL ASSETS
LIABILITIES
Due to credit institutions
Customer accounts
Current income tax liability
Debt Securities in issue
Deferred income tax liability
Provisions for liabilities and charges
Other financial liabilities
Subordinated debt
Other liabilities
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Retained earnings
Share based payment reserve
Other reserves
TOTAL EQUITY
Non-controlling interest
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
31-Dec-14
30-Sep-14
31-Dec-13
532,118
33,704
336,075
548,286
31,928
314,902
390,465
1,708
295,332
3,556,496
3,084,064
2,801,712
466,510
557,219
500,651
0
50,907
76,216
2,726
37,756
208,692
43,857
383
251
77,776
9,965
43,944
77,893
2,726
30,244
197,859
42,443
304
4,813
96,978
0
35,613
83,383
2,726
23,491
199,668
45,049
0
6,202
65,075
5,423,466
5,043,567
4,451,075
749,285
760,339
565,806
3,322,428
3,002,810
2,886,883
12,433
20,423
23,187
11,899
41,346
188,015
34,974
1,158
14,732
34,225
9,352
36,062
180,737
29,500
0
4,474
27,814
12,380
24,850
168,274
31,305
4,403,990
4,068,915
3,721,786
19,576
405,658
532,992
4,624
49,255
19,576
405,658
492,135
3,605
45,839
1,012,105
966,813
7,371
7,839
1,019,477
974,652
16,499
242,624
402,627
2,032
50,840
714,622
14,667
729,289
5,423,466
5,043,567
4,451,075
61
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
Consolidated Income Statement
In thousands of GEL
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net Fee and Commission Income
Gains less losses from trading in foreign currencies
Foreign exchange translation gains less losses
Gains less losses/(losses less gains) from derivative financial
instruments
Other operating income
Other operating non-interest income
Provision for loan impairment
Provision for impairment of investments in finance lease
Provision for/ (recovery of provision) performance guarantees and
credit related commitments
Provision for impairment of other financial assets
Impairment of investment securities available for sale
Operating income after provisions for impairment
Staff costs
Depreciation and amortisation
Provision for liabilities and charges
Administrative and other operating expenses
Operating expenses
Profit before tax
Income tax expense
Profit for the period
Profit attributable to owners of the bank
FY 2014
FY 2013
4Q'14
3Q'14
4Q'13
512,357
-173,709
338,648
88,204
-29,523
58,682
39,730
2,359
-683
19,598
61,004
474,796
-192,146
282,650
74,362
-24,301
50,061
37,894
-5,901
613
16,135
48,741
-48,672
-32,971
-77
-98
902
-1,236
-22
-6,459
-2,236
-1,142
409,229
338,546
-122,835
-108,613
-24,427
-5,500
-73,548
-19,993
-1,315
-68,692
-226,310
-198,613
182,919
-24,468
158,451
157,451
139,933
-15,663
124,270
121,616
136,780
-44,505
92,276
26,198
-8,578
17,620
14,618
1,164
-299
6,934
22,416
-16,198
89
-1,875
-669
0
113,659
-37,260
-8,194
-720
-21,520
-67,694
45,965
-5,940
40,026
39,901
128,585
-43,234
120,710
-44,725
85,351
22,621
-7,228
15,393
8,391
1,753
162
3,233
13,539
-5,521
-56
164
52
0
108,923
-29,575
-5,541
-4,780
-16,424
-56,321
52,602
-7,028
45,574
45,518
75,985
20,329
-5,045
15,284
11,695
-3,592
-57
4,969
13,014
-9,026
-27
679
-1,401
-1,137
93,372
-30,891
-4,954
-1,315
-18,659
-55,819
37,553
-2,147
35,406
34,646
62
TBC Bank Annual Report 2014
Key Ratios
Average Balances
Average balances included in this document are calculated as the average of the relevant monthly balances as at each month end. Balances
have been extracted from TBC's unaudited and consolidated management accounts prepared from TBC's accounting records and used by
Management for monitoring and control purposes.
ROAE1
ROAA2
Pre-provision ROAE
Pre-provision ROAA
Cost: Income3
Cost of Risk4
NIM5
Loan yields6
Deposit rates7
Yields on interest earning assets8
Cost of Funding9
Spread10
NPLs to gross loans11
NPLs+restructured loans to gross loans12
Provision Level to Gross Loans13
NPLs+Restructured loans coverage ratio14
BIS Tier 115
Total BIS CAR16
NBG Basel II Tier 1 CAR17
NBG Basel II Total CAR18
FY 2014
18.4%
3.3%
24.2%
4.4%
49.4%
1.6%
8.5%
14.9%
3.7%
12.8%
4.6%
8.2%
0.5%
3.7%
4.0%
FY 2013
18.7%
3.1%
25.3%
4.2%
52.1%
1.3%
8.4%
16.6%
5.5%
14.1%
5.9%
8.2%
1.1%
4.8%
5.3%
4Q'14
16.0%
3.1%
23.5%
4.5%
51.2%
1.9%
8.5%
14.3%
3.5%
12.6%
4.4%
8.2%
0.5%
3.7%
4.0%
3Q'14
19.2%
3.7%
21.4%
4.1%
49.3%
0.7%
8.3%
14.9%
3.6%
12.5%
4.5%
8.0%
0.9%
4.1%
4.5%
4Q'13
19.8%
3.4%
26.0%
4.4%
53.5%
1.3%
8.5%
16.0%
4.5%
13.6%
5.3%
8.3%
1.1%
4.8%
5.3%
109.4%
110.6%
109.4%
111.6%
110.6%
24.7%
30.4%
12.4%
15.0%
21.6%
28.6%
10.7%
14.4%
24.7%
30.4%
12.4%
15.0%
26.8%
33.0%
13.6%
16.7%
21.6%
28.6%
10.7%
14.4%
63
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Financial Review
Continued
Selected Ratios Calculated Based on Quarterly Averages
For the readers’ convenience, below are the ratios calculated based on quarterly average balances.
ROAE
ROAA
Pre-provision ROAE
Pre-provision ROAA
Cost of Risk
NIM
Loan yields
Deposit rates
Yields on interest earning assets
Cost of Funding
Spread
FY 2014
18.2%
3.3%
23.9%
4.3%
1.5%
8.3%
14.6%
3.7%
12.6%
4.5%
8.1%
FY 2013
18.7%
3.1%
25.3%
4.2%
1.2%
8.3%
16.4%
5.4%
13.9%
5.8%
8.1%
4Q'14
16.0%
3.0%
23.5%
4.4%
1.9%
8.3%
14.2%
3.5%
12.3%
4.3%
8.1%
3Q'14
19.2%
3.7%
21.4%
4.1%
0.7%
8.2%
14.7%
3.6%
12.4%
4.4%
7.9%
4Q'13
19.8%
3.3%
26.0%
4.3%
1.3%
8.4%
15.8%
4.4%
13.4%
5.1%
8.3%
64
TBC Bank Annual Report 2014
Ratio definitions
1. Return on average total equity (ROAE) equals net income
attributable to owners divided by monthly average of total
shareholders’ equity attributable to the Bank’s equity holders
for the same period; Pre-provision ROAE excludes all provision
charges. Annualised where applicable.
2. Return on average total assets (ROAA) equals net income of the
period divided by monthly average total assets for the same
period. Pre-provision ROAE excludes all provision charges.
Annualised where applicable.
3. Cost to Income ratio equals total operating expenses for
the period divided by the total revenue for the same period.
(Revenue represents the sum of net interest income, net fee
and commission income and other non-interest income).
4. Cost of risk equals provision for loan impairment divided by
monthly average gross loans and advances to customers.
Annualised where applicable.
5. Net interest margin (NIM) is net interest income divided by monthly
average interest-earning assets. Annualised where applicable.
6. Loan yields equal interest income on loans and advances to
customers divided by monthly average gross loans and advances
to customers. Annualised where applicable.
7. Deposit rates equal interest expense on customer accounts
divided by monthly average total customer deposits. Annualised
where applicable.
8. Yields on interest earning assets equals total interest income
divided by monthly average interest earning assets. Annualised
where applicable.
9. Cost of funding equals total interest expense divided by monthly
average interest bearing liabilities. Annualised where applicable.
10. Spread equals difference between yields on interest earning
assets and cost of funding.
11. NPLs to gross loans ratio equals loans for which principal or
interest repayment is overdue for more than 90 days divided by
the gross loan portfolio for the same period.
12. NPLs+restructured loans to gross loans equal NPLs plus those
restructured loans that are overdue by 90 days or less divided by
the gross loan portfolio for the same period.
13. Provision Level to Gross Loans equal loan loss provision divided
by the gross loan portfolio for the same period.
14. NPLs+Restructured loans coverage ratio equal loan loss
provision divided by the sum of NPLs plus those restructured
loans that are overdue by 90 days or less.
15. BIS Tier 1 capital adequacy ratio Tier 1 capital over total
risk weighted assets, both calculated in accordance with
Basel I requirements.
16. Total BIS CAR equals total capital over total risk weighted assets,
both calculated in accordance with Basel I requirements.
17. NBG Basel II Tier 1 CAR equals Tier I Capital divided by total
risk weighted assets, both calculated in accordance with
the NBG Basel II requirements. After adoption of NBG
Basel II/III requirements, the Bank also calculates its capital
requirements and risk weighted assets separately for Pillar 1.
Detailed instructions of Pillar 1 calculations are given by NBG.
The reporting started from the end of 2012.
18. NBG Basel II Total CAR equals total capital divided by total
risk weighted assets, both calculated in accordance with
the NBG Basel II requirements. After adoption of NBG
Basel II/III requirements, the Bank also calculates its capital
requirements and risk weighted assets separately for Pillar 1.
Detailed instructions of Pillar 1 calculations are given by NBG.
The reporting started from the end of 2012.
Exchange Rates
Certain financial information in this document is presented in
USD solely for the convenience of the reader. For balance sheet
items, we used the end-of-period official exchange rate as
reported by the NBG as of 31 December 2014, 30 September 2014,
and 31 December 2013.
65
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Corporate Social Responsibility Report
TBC Bank’s outstanding CSR track record was
recognised by the EMEA Finance Magazine with
the Best Corporate Social Responsibility in
Central & Eastern Europe and CIS 2013 award.
We firmly believe that it is our responsibility to support the community,
the environment and our wider stakeholders among which we operate.
The Bank’s CSR Strategy covers four main areas: workplace, market
place, environment and community.
Workplace
TBC Bank is dedicated to creating the best workplace experience for
its employees. We offer employees the largest benefits package in the
country, as well as advanced professional education and training
opportunities. Projects implemented for TBC Bank employees include:
• TBC Fund for Employees with Large Families (founded in 2013);
• TBC Academy providing training and workshops in different areas
of business and banking free of charge for TBC Bank employees
(founded in 2011);
• Tuition funding to ten members of the middle management for
studies at an MBA level;
• Full social benefits package, including health insurance, pension
schemes, and lengthy, fully-paid maternity and paternity leave.
Environment
TBC Bank believes it has one of the most advanced Environmental and
Social Risk Management systems in the region. Our ESMS Policy is
aligned with the requirements of all relevant recommended best
practices. The system has been developed in cooperation with EBRD,
IFC, DEG, ADB, and FMO and includes provisions that are often much
stricter than national requirements. The Bank also ensures that its
clients and sub-contractors comply with international social and
environmental standards.
ESMS Policy
TBC Bank was one of the first banks in the country to develop
an Environmental and Social Management System (ESMS).
Our International Financial Institution (IFI) shareholders – DEG, IFC,
EBRD, and FMO – provided expertise and guidance throughout the
process to ensure that the Bank implements the most advanced and
comprehensive system based on the highest standards of international
best practice.
These and other matters concerning employee relations are covered
in greater detail on page 26.
Marketplace
TBC Bank has a traditional commitment to supporting small and
medium size businesses. We have a track record for attracting
dedicated facilities for SME financing – including local currency and
sector-specific funds for high-priority industries in the country (such
as agriculture, healthcare and energy).
Additionally, TBC Bank is the first bank in the region to offer free
educational services to its SME clients through the TBC Bank Business
Support Programme launched in 2013 with support from IFC and ADB
and in partnership with IBM, Ernst & Young and BDO.
The Business Support Programme is covered in greater detail on
page 32.
The ESMS Policy focuses on the environmental and social issues
associated with commercial lending and investments. The main
provisions of the ESMS policy are as follows:
• Environmental and social (E&S) risks associated with the Bank’s
operations, relying on tools like EBRD’s Environmental and Social
Risk Management Manual, IFC’s web-based ES toolkit, FMOs
Sectoral Guidelines for Environmental and Social Risk
Assessment, IFC’s Sustainability Framework and Performance
Standards and Guidance Notes, UNEP-FI’s Guide to Banking and
Sustainability, and ADB’s ESMS Template for Banks and Funds.
• Protection of human and labour rights, especially those
of vulnerable population groups, including children and
indigenous peoples.
TBC Bank regularly updates the SEMS document together with its
shareholder and partner IFIs.
The latest update to the policy was approved by the Supervisory Board
and signed by our CEO in December 2012. Our commitment to
regularly reviewing and upgrading our SEMS policy ensures that the
Bank effectively manages environmental and social risks associated
with its operations in order to minimise its impact on the environment
and its stakeholders.
Full details of the TBC Bank ESMS policy are available on the Bank’s
Investor Relations website.
66
TBC Bank Annual Report 2014
Community
TBC Bank differentiates itself through long-term and significant
financial commitment to developing culture, art and music in Georgia,
as well as by maintaining Georgian national heritage. Our investment
and support in the community has continued with several new, as well
as sustained traditional projects in 2014.
Community Projects
implemented by TBC Bank
in 2014 include:
Exclusive exhibition of Georgian cultural heritage
Literary Award Saba
Saba Electronic Bookstore
First digital TV channel Artarea
TBC Art Gallery
TBC Gallery
Public Private Partnership (PPP) for Georgian
cinema development
Art Wall, a unique display project
Kolga Photo Competition
Projects for tourism and the promotion of sports
among young people
TV project on money management
From Bronze to TBC – Ancient Georgian Treasures at TBC Art Gallery
The feature exhibition of 2014 at TBC Art Gallery was the presentation
of a unique collection of ancient Georgian openwork bronze buckles,
preserved to this date in the Oni Local Museum. The exhibition
integrated 18 historical artefacts that date back to the eighth to sixth
centuries BC and the first to fourth centuries AD.
These buckles are of special importance to the history of Georgian
culture. They incorporate ancient traditions of artistic metalwork and
decorative jewellery design. The openwork bronze buckles discovered
in Georgia already attracted scientists’ attention in the early 19th
century. Due to the lack of appropriate regulatory framework, the
artefacts were exported abroad and appeared in private collections.
Thus it was of special importance to display the collection of 18 buckles
still located in Georgia to the wider public, which was largely unaware
of its existence, and preserve its significance in the history of Georgian
culture.
Rehabilitation of Mutso – Georgian Cultural Heritage
Mutso is a stronghold city in the Northern part of mountainous Georgia
that dates back to the middle ages and integrates 25 fortress-houses
and five battle towers. Constructions similar to Mutso are common in
the Caucasus. However, this site is unique for its vertically developed
urbanisation. Unfortunately, only two to four of the original six floors of
the battle towers have survived the test of time, while the rest of the
buildings require urgent reconstruction as well. TBC Bank proudly
supports the project of rehabilitation for this historic monument and
the site is set to welcome its first tourist in 2015.
67
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Strategic Report
Corporate Social Responsibility Report
Continued
Literary Award Saba
TBC continued to support the Saba Literary Awards Programme, one
of the most respected and anticipated literary events in the country.
TBC Bank founded the programme in 2003 with 2014 marking the 12th
anniversary of the ceremony. To this date, the Bank has recognised
over 110 authors and awarded c. GEL 380,000 in prizes.
SABA online bookstore, the satellite project to the Awards
Programme, has been gaining popularity among the local and expat
communities. The e-bookstore, which also introduced the first
Georgian e-reader apps for Android and iOS in 2014, promotes
Georgian literature beyond the country’s borders and allows new
authors to be discovered and appreciated. To this date, up to 150
established and up-and-coming writers have created their own
electronic books and sold them using our innovative e-book platform.
The e-bookstore can be accessed at www.saba.com.ge.
TBC Art Gallery and TBC Gallery
TBC Art Gallery actively presented significant art events to the public
throughout 2014. Four exclusive exhibitions were held during the year
and aimed to promote the most outstanding representatives of
Georgian visual arts.
TBC Gallery, located in TBC Bank’s head office, hosted more than
50 cultural events, among them were presentations of new books,
movies, musical albums, paintings and photos, concerts, and creative
evenings. TBC Gallery is one of the most active and prestigious
galleries in the country.
TBC Supporting Georgian Art Abroad
In 2014, TBC Bank actively promoted Georgian artists abroad.
Four independent projects were implemented in this direction:
London Rich Mix Art Space exhibition: Heritage
With financial backing from TBC Bank, the project entitled Heritage
was presented at the London Rich Mix Art Space. This project united
four Georgian and one Argentinian artist and took place at the
Shoreditch Rich Mix Contemporary Art Space in London.
Georgians at the New Talents – Biennale Cologne
Two Georgian artists, together with 56 others representing different
countries, appeared at the New Talents – Biennale Cologne event held
in Germany. TBC Bank was the presenting sponsor of these young
Georgian artists and the official partner of the Biennale.
Artarea – www.artarea.tv
In 2014, TBC Bank continued its active support in the development of
the first online and digital TV project focusing on culture. Due to the
unique content of the channel and the authors gathered around it,
Artarea went beyond virtual space in 2014 and started broadcasting on
cable. Artarea provides viewers with news on the latest developments
and achievements in culture and arts, featuring popular Georgian
authors and cultural figures. In 2014, the project expanded its activity
and in conjunction with the digital work, became a physical space
where people interested in arts can attend various master classes
and meet artists and authors. Furthermore, the practice of sharing
experience with students transformed into a firm tradition at Artarea.
68
TBC Bank Annual Report 2014 Promotion of Georgian artists to Sotheby’s
In 2014, TBC Art Gallery presented two Georgian artists at the
Sotheby’s Auction House sale event Crossroads. The event also
incorporated artworks from Turkey, Iran, Afghanistan and Tajikistan.
The project was implemented with active support from the Chairman
of TBC Bank Supervisory Board, Mamuka Khazaradze. The event
marked the second time TBC Gallery has presented works of art from
Georgian artists at a Sotheby’s auction event.
Georgian artists in PHOTO-OFF
TBC Art Gallery presented several Georgian photographers with the
project C.V.-LISATION OF MADNESS at the yearly photo exhibition
PHOTO-OFF in Paris in 2014. This was the second time Georgian
photographers were invited to the event. Like last year, the Georgian
project became very popular among photo critics and international
magazines and newspapers. TBC Art Gallery was the presenter
both years.
Public Private Partnership for Georgian Cinema
In 2014 TBC Bank started the first ever pubic private partnership (PPP)
programme in support of Georgian cinema, an area of contemporary
Georgian art that we believe has the greatest potential for international
success. With the donation of approximately GEL 100,000 to the
Georgian National Film Center, TBC Bank sponsored the production
of eight short fiction and documentary films. All eight products are
currently at the post-production stage, and TBC Bank and the Film
Center will jointly present them in May 2015.
Art Wall – digital space for contemporary artists
TBC Bank created the first digital space dedicated to modern video art
titled ART WALL. Located at one of the Bank’s branches in the central
part of the capital city, the Wall presents open-air art shows by
established and promising Georgian artists.
Promotion of young photographers
Another traditional project pioneered by TBC Bank in 2004 celebrated
its 11th anniversary this year. Kolga, a photo competition for young
artists, seeks to discover and promote yet unknown photographers.
The winning pieces were displayed at the Bank’s head office.
Development of tourism and promotion of sports among youth
•
Infrastructure works in Tusheti – TBC continued to rehabilitate the
horse-riding routes and other tourist infrastructure in the remote
mountainous region of Georgia, which attracts special interest
from campers and hikers.
• Zeta Camping – Zeta is a seasonal camp in a mountainous city of
Georgia, financed by TBC Bank. The camp can host approximately
30 people each season and provides necessary infrastructure for
tourists and visitors. The Bank’s investment was crucial for
developing and promoting tourism in the region.
Notable social projects
• Financial aid to the Green House Psychological Support Centre –
with this project, TBC Bank supports disabled children, who receive
therapeutic and psychological aid free of charge. The centre treats
up to 150 children every day.
Developing financial literacy – money management advice for
retail customers
The TV show on money management is TBC Bank’s multi-media
initiative designed to improve general financial literacy of the Georgian
retail consumers. The project utilised old media, new media and live
events to maximise its reach and effectiveness, covering three
platforms: a weekly TV show on a popular news channel, YouTube
tutorials, and live master class events.
The main idea of the project is to provide customers with advice on
managing their personal finances, including using products offered
by the banks and other financial institutions, such as insurance
companies. The overall goal is to raise financial literacy among the
Bank’s existing and potential retail clients so that they can better
utilise and service their financial resources and obligations.
69
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review TBC Bank Annual Report 2014
From left to right: Badri Japaridze, Irina Schmidt, Mamuka Khazaradze, Eric J. Rajendra.
In the top row, from left to right: Nicholas Haag, Stefano Marsaglia, Nikoloz Enukidze
70
TBC Bank Annual Report 2014
Governance
73
Supervisory
Board Report and
Responsibilities
72 Chairman’s Corporate Governance Statement
73 Supervisory Board Report and Responsibilities
83 Supervisory Board Committees
84 Audit Committee Report
89 Remuneration Committee Report
90 Corporate Governance and Nomination Committee Report
91 Risks, Ethics and Compliance Committee Report
92 Management Board
97 Management Board Committees
99 Risk Management
84
Audit Committee
Report
99
Risk
Management
71
Strategic Report Governance Financial Statements Business Review Governance
Chairman’s Corporate Governance Statement
Risk Management Strategic Initiatives. These are discussed in greater
detail in our Risk Management Chapter on page 99 and in the Risks,
Ethics and Compliance Committee Report on page 91. The Supervisory
Board is charged with the responsibility of ensuring that the Bank’s
Management achieves its strategic objectives. During the year,
Management reviewed the Bank’s strategy, addressed in greater
detail in the Strategic Report on page 18, and confirmed the updated
strategy for years 2014-2018.
Even before the Bank’s IPO in 2014, TBC was committed to building
a robust corporate governance framework supported by its
International Financial Institution (IFI) shareholders. Over the past
year, the Bank further strengthened its corporate governance by
welcoming three new Directors to the Supervisory Board, two of
whom are independent Non-executive Directors.
In this Corporate Governance Report, the Bank has prepared a
comprehensive review of its corporate governance framework, which
includes the Audit Committee Report on page 84, the Supervisory
Board Report and Responsibilities on page 73, and the Remuneration
Report on page 89. A review of the responsibilities and effectiveness
of all committees on the Supervisory Board level begins on page 73.
TBC takes great pride in the fact that it is one of the best and largest
employers in the Georgian private sector. The Bank looks to create
a working environment where the best people strive to excel in their
fields every day. A detailed report on our employee relations is
available on page 26.
We believe our advanced corporate governance ensures a fully
engaged relationship between our company and our shareholders and
stakeholders. The Bank’s comprehensive investor communications
programme has allowed its top management to meet with investors
and shareholders on three separate roadshows since our listing
in June 2014. Moreover, our Investor Relations website offers
transparent, accurate and timely information to our investors.
More information on the dialogue between TBC Bank and its
shareholders is provided on page 196.
Finally, in 2014, the Supervisory Board continued to assess its
effectiveness and found that it successfully fulfilled its responsibilities
and operated effectively throughout the year.
The following Supervisory Board Report is approved by the
Supervisory Board of TBC Bank.
Mamuka Khazaradze
Chairman of the Supervisory Board
We believe our advanced corporate
governance ensures a fully engaged
relationship between our company
and our shareholders and
stakeholders
Mamuka Khazaradze
Chairman of the
Supervisory Board
Dear Shareholders,
In June 2014, TBC Bank listed its shares on the London Stock
Exchange through GDRs. As a public company, we are firmly
committed to the achieving standards of corporate governance, which
are in accordance with all applicable regulatory requirements, best
recommended practice, Basel requirements and the Bank’s future
development plans.
The Supervisory Board has the ultimate responsibility for the Bank’s
business, risk strategy and financial soundness, as well as how the
Bank organises and governs itself with the goal of ensuring the
long-term success of the Bank in order to best serve the needs
of shareholders.
In 2014, the Supervisory Board focused on several key issues,
including business strategy, corporate governance and risk
management. The Supervisory Board reviewed and approved
the revised Risk Appetites and Strategy, as well as the new
72
TBC Bank Annual Report 2014 Supervisory Board
Report and
Responsibilities
The Bank’s governance structure establishes proper incentives for the
Supervisory and Management Boards to pursue objectives that are in
the interest of the Bank, and effectively manage the relationship
between the Management Board, the Supervisory Board,
shareholders and other stakeholders.
TBC Bank’s corporate governing bodies are the General Meeting of
Shareholders, the Supervisory Board and the Management Board.
A number of appropriate committees have been established at both
the Supervisory and Management Board levels.
The General Meeting of Shareholders is the supreme governing body
of the Bank, with authority over all key decisions. It elects the Bank’s
Supervisory Board, which is responsible for the supervision and
appointment of members to the Management Board.
The Management Board is responsible for TBC's day-to-day
management, with the exception of functions reserved to the General
Meeting of Shareholders and the Supervisory Board. The Supervisory
Board appoints the members of the Management Board for renewable
terms of four years and is also in charge of their dismissal. Banking
regulations contain certain limitations as to who may become a member
of the Management Board and criteria that each director must fulfil.
The scope of authority of each member of the Management Board is
defined by a contract entered into with the director upon appointment.
The Supervisory Board plays a key role in the Corporate Governance of
the Bank. It has ultimate responsibility for the Bank’s business, risk
strategy and financial soundness, as well as how the Bank organises
and governs itself. The Supervisory Board appoints and supervises
Management to ensure both the achievement of the Bank's strategic
objectives and Management’s ongoing response to the risks inherent
in the business activities. The Supervisory Board is also responsible
for the appointment, evaluation and compensation of the Management
Board members.
In addition, the Supervisory Board is responsible for the following
specific areas:
• approving purchases or disposals by TBC Bank that exceed 3%
of the Bank's equity;
• approving the issuance of procura (general power of attorney)
by the management of TBC Bank;
• approving the establishment and liquidation of TBC Bank's branches;
• authorising any borrowing by TBC Bank if such borrowing exceeds
20% of the Bank's equity;
• electing, changing or removing the external auditor;
• approving the listing of TBC Bank's shares on a stock exchange;
• approving investments by TBC Bank, which exceed an aggregate
total amount of USD 1 million;
• approving any sale, lease, exchange, transfer, pledge, contribution
or other disposition of the assets of TBC Bank and certain of its
subsidiaries exceeding 5% of the book value of TBC Bank;
• approving disposals of TBC Bank's assets, which exceed 5% of the
Bank's equity;
• approving TBC Bank's financial indicators for the following year,
including its business plan or annual budget; and
• approving the entering into related party transactions above
USD 100,000.
Full responsibilities of the Supervisory Board are detailed in the Board
Regulation, available through the Investor Relations website.
The Supervisory Board consists of seven members elected by the
General Meeting of Shareholders for a term of four years each. The
Chairman and the Deputy Chairman of the Supervisory Board are
elected by a simple majority of votes. The Chairman of the Supervisory
Board may not simultaneously hold the position of Chief Executive
Officer of TBC Bank. The following table provides details on the
Supervisory Board members and their respective appointment year.
73
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Supervisory Board Report and Responsibilities
Continued
Supervisory Board Composition
Name
Position
Mamuka Khazaradze
Chairman of the Supervisory Board
Badri Japaridze
Eric J. Rajendra
Irina Schmidt
Nicholas Dominic Haag
Stefano Marsaglia
Nikoloz Enukidze
Vice-Chairman of the Supervisory Board
Member
Member
Member
Independent Member
Independent Member
Initial Year of
Appointment
Current Terms Year
of Appointment
Current Terms
Year of Expiration
1992
1992
2010
2012
2013
2014
2013
2013
2013
2014
2012
2013
2014
2013
2017
2017
2018
2016
2017
2018
2017
* Emile Groot resigned in December 2014 and Stefano Marsaglia was appointed in his place.
Biographies for members of the Supervisory Board currently in office
can be found on page 79. TBC Bank Supervisory Board includes two
independent Directors as Board members. With three more members
appointed as Board Directors by international financial institutions, the
majority of the seven members of the Board are either independent or
appointed by international shareholders, in line with the Bank’s
commitment to high standards of corporate governance.
In 2014, the Supervisory Board met 45 times: four in person and
on 41 occasions additionally discussed relevant items via email
and teleconference.
Name
Chairman
Mamuka Khazaradze
Deputy Chairman
Badri Japaridze
Non-executive Directors
Eric J. Rajendra
Irina Schmidt
Nicholas Dominic Haag
Emile Groot*
Independent Members
Nikoloz Enukidze
Stefano Marsaglia
Company Secretary
Irma Dvali
Scheduled Meetings
Eligible to Attend
Scheduled
Meetings Attended
Extraordinary Meeting
eligible to participate
Extraordinary
Meeting participated
4
4
4
4
4
1
4
3
4
4
4
3
4
1
4
3
41
41
41
41
41
4
41
37
41
41
41
41
41
4
41
37
* Emile Groot resigned in December 2014 and Stefano Marsaglia was appointed in his place.
74
TBC Bank Annual Report 2014 Application of the Georgian Corporate Governance Code for
Commercial Banks
TBC is party to the Corporate Governance Code for Commercial Banks
adopted by the Banking Association of Georgia in September 2009,
which was drafted with the guidance of the IFC, one of the Bank’s
shareholders, based on internationally recognised principles of good
corporate governance. Compliance with the CG Code for Commercial
Banks is not mandatory; however, in February 2014 TBC revised
its internal regulations to ensure compliance with the CG Code and
since then, TBC has complied with all relevant provisions set out in
the above Code.
Supervisory Board Performance in 2014
In addition to the regular functions described above, the following list
highlights how the Board spent its time in 2014:
Strategy and Budget
• continued to monitor the Bank’s achievement of strategic
objectives;
• continued to monitor the Banks achievement of its budget;
• discussed and approved the updated Strategy of the Bank for the
Risk Management
• discussed and Approved new Risk Management Strategic
Initiatives, updated Risk Appetites Statement and Risk Strategy;
• reviewed and approved the updated ICAAP document;
• approved a Policy on Environmental and Social Standards and
Anti-money Laundering and Anti-corruption Standards; and
• approved the amended version of the Bank Related and Connected
Parties Lending and Banking Services Policy.
Management Compensation
• discussed and approved management compensation for the year
of 2013 in accordance with the approved Supervisory and
Management Board Compensation System; and
• discussed and approved requirement for consultants solicited to
develop new Supervisory Board and Management Board
Compensation Systems for the years 2016-2018.
Constanta Integration
• engaged with the Management for the Strategy of Constanta
integration within TBC Bank group;
• discussed and approved Constanta Merger with TBC Bank as the
2015-2019 period; and
best strategy for going forward;
• discussed and approved the new budget for 2015 as well as a high
• closely monitored the milestones for the merger with Bank
level budget for 2015-2019.
Constanta; and
• engaged with the management on the Constanta rebranding process.
Other
• engaged with the Management to develop the Core Banking
Transformation Project for the years, where the Board continues
to receive monthly updates on progress; and
• discussed and approved the appropriate plan for the Core Banking
Transformation Project implementation.
TBC Bank IPO
• discussed and approved TBC Bank’s IPO plan;
• attended presentations for the selection of the investment banks;
• discussed and approved investment banks for the IPO;
• discussed and approved other members of the syndicate teams
for IPO such as Legal counsel, broker, PR agent and the
depositary bank;
• approved the engagement of the Bank’s external auditor,
PwC, for the IPO-related non-audit services;
• closely monitored the progress of the IPO;
• attended presentation, investor feedback and price expectations
of the IPO; and
• discussed and approved final placement terms and conditions.
Corporate Governance
• discussed and approved the changes to the Management
Board Regulation;
• discussed and approved the changes to the Supervisory
Board Regulation;
• discussed and approved the changes to the Committee Charters
and committee composition; and
• discussed and approved changes to the Supervisory and
Management Boards.
75
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Supervisory Board Report and Responsibilities
Continued
Succession Planning and Appointments
TBC Bank looks to ensure that the Supervisory and Management
Boards consist of highly qualified and skilled members. Policies on the
appointment, Term of Office and Resignation of the Supervisory Board
Members is provided in Article 2 of the Supervisory Board Regulation.
The responsibility to seek and recommend appropriate candidates for
Supervisory and Management Board positions, as well as to draft and
recommend the Succession Planning policy of the Bank, rests with the
Corporate Governance and Nominations Committee. Further
information on the Succession Planning Policy is provided in the
Nomination Committee performance review on page 90.
Conflicts of Interest
The Charter and The Supervisory Board Regulation incorporate
relevant provisions on conflicts of interest for the Board members for
appropriate disclosures and approvals. These requirements were fully
complied with during 2014.
Principal Activities of the Company
The Bank is a joint stock company limited by shares and was set up in
accordance with Georgian regulations. The Bank’s registered address
and place of business is: 7 Marjanishvili Street, 0102 Tbilisi, Georgia.
Additional information to be considered as part of this Report is
presented in the following sections:
Business Model (page 16)
Strategy (page 18)
Operating Environment and Market Review (page 22)
People (page 26)
Principal Risks and Uncertainties (page 38)
Financial Review (page 46)
Corporate and Social Responsibility (page 66)
Risk Management (page 99)
Dividend Pay-out Recommended by the Board
On 4 March 2014, the General Meeting of Shareholders approved
a distribution in the amount of GEL 26,492,294 to the shareholders
(equivalent to 25% of TBC Bank's net profit), which was paid on
4 March 2014. On 26 February 2014, the Supervisory Board approved
a resolution, beginning in 2015, to annually distribute 25% of TBC's
consolidated net income for the previous year as a dividend to
shareholders, provided that the financial standing of TBC Bank
allows such distribution.
Indemnity Provision
TBC Bank Directors and Officers are eligible for indemnity provision
that includes liability cover from claims that may arise as a result of
decisions and actions taken within the scope of their regular duties.
The Bank’s insurance policy also contains special excess protection
for Supervisory Board Members, who may not be eligible for the same
indemnities as Management Board Members and other officers.
Political Donations
There were no political donations made during the year 2014.
Risk information on Financial Instruments
Descriptions of all relevant risk management policies are available in
note 35 to the Consolidated Financial statements of the Bank.
Post-Balance Sheet Events
Subsequent to 31 December 2014, the Group has completed the legal
and operational process of merging JSC Bank Constanta with TBC
Bank. The former operations of Bank Constanta will now be
undertaken by TBC Bank as the sole legal entity.
On 27 January 2015 the Group acquired a micro loans portfolio with a
carrying amount of GEL 37,300 thousand from ProCredit Bank
Georgia, the fifth largest bank in Georgia by total assets. The
consideration paid amounted to GEL 40,000 thousand.
Likely Future Developments in the Business
Likely future developments in the business of the Bank are discussed
in the Strategic Report, available on page 16.
Research and Development in the Business
TBC Bank continuously updates, develops and researches new and
existing products and services for all of its business lines as part of its
regular course of operations.
Branches Outside the UK
TBC provides a wide range of banking and financial services through
120 branches and offices in Georgia and through its affiliates, including
five in Azerbaijan and an affiliate office in Israel.
Acquisition of Own Shares
TBC Bank has not conducted an acquisition of its own shares.
Employees
Disability
TBC Bank gives equal opportunity and creates conditions for
employment and career growth to disabled candidates and employees.
Career development and training opportunities are provided to
disabled employees at an equal level and scope with all necessary
adjustments to fit the special needs of our colleagues.
76
TBC Bank Annual Report 2014 Employee Involvement
TBC Bank regularly communicates to its employees, providing
information on the Bank and its activities, including in relation to
financial and economic factors affecting the Bank's performance,
and receiving regular feedback from all staff. The Bank implements
top-down communication from Supervisory Board to the Management
Board and middle management and then to employees using executive
presentations, corporate news magazines, intranet content, and
various employee appreciation and motivation events organised
by the Human Resources department.
In order to accurately assess the attitude and experience of employees,
the HR department conducts regular Employee Satisfaction and
Engagement Surveys each year, which among other things monitor
staff engagement and loyalty. The results are discussed and
appropriate action plans are set by the management each year.
Apart from the base salary and additional cash incentives, both
the Management Board members and key members of the middle
management enjoy bonuses awarded in the form of the Bank’s
shares under the Long Term Incentive Plan (LTIP).
The Shares are allocated to eligible members on the basis of their
performance and performance of their teams. The number of shares
allocated depends on delivery against relevant KPIs. Shares are
allocated each year, following publication of the audit report.
Company's Capital Structure
The authorised capital of the Bank is GEL 21,236,255 (twenty one
million two hundred thirty six thousand two hundred and fifty five Lari).
Equity attributable to the owners of the Bank is GEL 1,012,105,000
(one billion twelve million one hundred five thousand). Total Capital
Per Basel III local regulation is GEL 947 million. There are 53,090,637
shares authorised, and 49,532,868 shares(a) out of the authorised
shares are issued and fully paid.
Following the IPO on 11 June 2014, the founder shareholders and top
management are subject to the lock up period during which they are
not able to sell or transfer their shares. The period lasts for one year
from the IPO date.
Significant ultimate owners of the shares of the bank are Mamuka
Khazaradze and Badri Japaridze holding 14.9% and 7.5%, respectively.
They hold shares both directly in the capital of the Bank and through
SPVs. For their biographies please see page 79.
The rights attached to shares awarded under the LTIP described
above, are subject to the condition of continuous employment. Initially,
shares are subject to restrictions on sale and transfer to any party and
do not provide for voting rights, but they are eligible for dividends. After
one year of continuous employment from the date of registration of the
shares in the name of the beneficiary, restrictions are removed with
respect to 10% of the shares awarded, after two years, the restrictions
are removed with respect to another 10% of the shares, and after three
years all shares become free from restrictions.
The LTIP also provides additional provisions governing entitlement to
shares and obligations to return the shares in case of termination or
expiry of service contract or employment contract.
Securities Carrying Special Rights
There are no securities carrying special rights with regard to control of
the company.
Restrictions on Voting Rights
Shares granted and not vested to the top management and middle
management of the Bank as part of the LTIP described above, do not
have voting rights until vesting conditions are met. As of March 2015,
these shares represented 1.1%(b) of the issued and paid shares of
TBC Bank.
There are no restrictions on voting rights, except that the employees
cannot enjoy the rights on the shares under the employee share
scheme until the shares are vested.
Appointment and Replacement of Directors
The General Meeting of Shareholders is authorised, by a simple
majority of votes, to amend the articles of the Bank and to appoint or
replace the directors.
Change of Control
Contracts with most of the Bank’s lenders usually contain a change of
control clause which usually requires the lenders consent before the
change of control occurs. Contracts with top management contain
a special provision for increased compensation if the loss of office
occurs because of a change of control.
Going Concern Basis
The Directors confirm that they consider it appropriate to adopt
the going concern basis of accounting, and there are no material
uncertainties to the Bank's ability to continue to do so for the
foreseeable future from the date of approval of the financial statements.
(a) The number reflects the grant of bonus shares to a number of senior employees
of TBC Bank, in line with the Bank’s Long-Term Incentive Plan, conducted on
5 March 2015.
(b) The figure reflects the grant of bonus shares to a number of senior employees
of TBC Bank, in line with the Bank’s Long-Term Incentive Plan, conducted on
5 March 2015.
77
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Supervisory Board Report and Responsibilities
Continued
Risk Management and Internal Control
The Supervisory Board is responsible for the effectiveness of the risk
management and internal control in TBC Bank. TBC Bank has
identified major risks faced by the Bank, has determined the Bank’s
risk appetite and developed a risk strategy. Key risks faced by the Bank
are Credit risk, Operational risk, Market risk, Liquidity risk, Interest
Rate risk on banking book, Strategic and Reputational Risks.
Management has set up control system in order to ensure that key
risks are properly managed and mitigated. A number of policies are
approved at Supervisory Board level. Key performance metrics are
regularly reported to the Supervisory Board and/or to the Risk, Ethics
and Compliance Committee.
In accordance with Basel II Pillar 2 requirements, the Bank performed
in depth Internal Capital Adequacy Assessment Process (ICAAP); the
output document was actively debated by the Supervisory Board and
Risk, Ethics and Compliance Committee and was submitted to the
National Bank of Georgia for further review in September 2014.
Further information on the Bank’s risk management is available in the
Risk Management Report on page 99.
This openwork bronze
buckle was accidentally
discovered in 1962
during vineyard tilling.
The beautiful artefact
has an aesthetically
pleasing, airy and
gracious composition
and is a wonderful
example of highly artistic
and delicate
craftsmanship in the
wider collection.
78
TBC Bank Annual Report 2014 Members of the Supervisory Board
Mamuka Khazaradze
Chairman of the Supervisory Board
Mr Khazaradze graduated from the Technical University of Georgia
in 1988 and also holds a diploma from Harvard Business School.
Between 1988 and 1989, he worked as an engineer at the Projecting-
Technological Scientific Research Institute in Tbilisi. In 1991 and 1992,
respectively, he founded and became the President of TBC Bank. In
1995 he founded IDS Borjomi Georgia, Borjomi Beverages Co. N.V.,
where he held the position of President until 2004, and between 1999
and 2002, he acted as Vice Chairman of the Supervisory Board of
Microfinance Bank of Georgia. In 2004, Mr Khazaradze also founded
the Georgian Reconstruction and Development Company, of which
he is still the President. Between 1997 and 2007, he was also Vice
President of the Olympic Committee of Georgia. Since 2000 he has
been a partner and the President of NGO New Movement, and since
2010 has served as the Chairman of the Board of the American
Academy in Tbilisi and the Chairman of the Supervisory Board of
Lisi Lake Development. In 2014, Mr Khazaradze was recognised
as Entrepreneur of the Year in Georgia by Ernst & Young, the year
this prestigious awards programme was launched in the country.
Mr Khazaradze has been the Chairman of the Supervisory Board
since TBC Bank's incorporation in 1992.
Badri Japaridze
Deputy Chairman of the Supervisory Board
Mr Japaridze graduated from the faculty of psychology of Tbilisi State
University in 1982 and also holds a postgraduate qualification from
the Faculty of Psychology of Moscow State University. In 2001 he also
completed an executive course at the London School of Economics and
Political Science. Between 1990 and 1992, Mr Japaridze was a member
of the Parliament of Georgia. In 1992, he was appointed as Head of the
Foreign Relations Department at TBC Bank and was appointed as Vice
President of TBC Bank in 1993. In 1996, he was elected as Chairman of
the Board of TBC TV LLC, a position he still retains. Since 1995, he has
held the position of Vice President of IDS Borjomi Georgia, Borjomi
Beverages Co. N.V., of which he is a co-founder, and acted as a
member of the Board of that company between 2004 and 2010. In 1995,
Mr Japaridze was elected to TBC Bank's Supervisory Board and has
held the position of Vice Chairman of the Supervisory Board since
1996. Since 2004, he has also acted as a member of the Supervisory
Board of the American Chamber of Commerce in Georgia and the
Georgian Reconstruction and Development Company, of which he
is co-founder. Mr Japaridze was elected to the Supervisory Board
of the EU-Georgian Business Council in 2006 and later became the
Vice Chairman. In 2008, he was elected to the Supervisory Board
of Geoplant, a position he retains today. Mr Japaridze is also the
Chairman of the Supervisory Board of TBC Kredit, and a member
of the Supervisory Board of TBC Leasing and Bank Constanta.
79
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Supervisory Board Report and Responsibilities
Continued
Irina Schmidt
Member of the Supervisory Board
Ms Schmidt graduated from St. Petersburg State University with a
degree in foreign languages and literature in 1994 and obtained DES
from Geneva University in 1999 and an MBA from Europa-Institut
(Saarland University) in 2001. Since 2001, Ms Schmidt has held a
number of positions in DEG, including Investment Manager and Senior
Investment Manager with Power of Attorney (procura). Since 2007,
Ms Schmidt has served as a Vice President of DEG in Europe/Middle
East/Central Asia with responsibility for new business development,
project evaluation and the management of DEG's portfolio in the
Caucasus region. Since 2012 she has been a Board member of Bank
Respublika in Azerbaijan. Ms Schmidt was appointed to the
Supervisory Board (as the nominee for DEG) in 2012.
Eric J. Rajendra
Member of the Supervisory Board
Mr Rajendra graduated from Brandeis University (B.A.), earned his
M.A. at the Fletcher School in 1982 (Tufts University in cooperation
with Harvard University) and conducted postgraduate research
at INSEAD Business School in the areas of financial markets
and institutions. Mr Rajendra is also a graduate of the Australian
Institute of Company Directors and was formerly an Adjunct
Professor of Strategy at INSEAD. During 2005-2014, he held the
position of Senior Advisor to the IFC and has served as a Board
Director or Consulting Advisor on selected emerging markets
financial institutions where the World Bank Group has an equity
interest, as well as leading strategic initiatives for the firm. Prior
to joining the IFC, he was a Vice President at Capgemini and a Vice
President at Electronic Data Systems; in both institutions he was a
key leader of the financial services practice. From 2010 to 2012 he
was a member of the Board of Directors at Orient Express Bank.
During 2006-2014 he was a member of the Board of Directors of
LOCKO-Bank where he is also the Chairman of the Audit and Risk
Committee. He started his career as a banker at JP Morgan Chase
Bank in 1982 and later became a partner at McKinsey & Company.
Mr Rajendra was appointed to the Supervisory Board in 2010.
80
TBC Bank Annual Report 2014 Nikoloz Enukidze
Independent Member of the Supervisory Board
Mr Enukidze graduated from Tbilisi State University with a degree in
physics in 1993 and obtained an MBA from the University of Maryland
in 1996. Mr Enukidze has served as Managing Director of Corporate
Finance for Concorde Capital, a leading Ukrainian investment banking
firm; Assistant Director at ABN AMRO Corporate Finance in London for
four years; Senior Manager of Business Development of Global One
Communications LLC based in Reston, Virginia; and three years at ABN
AMRO Corporate Finance in Moscow. After years of experience in the
financial services industry, Mr Enukidze served as Vice Chairman of
the Supervisory Board of Bank of Georgia and was one of the key people
leading the bank to a successful IPO on the London Stock Exchange,
the first ever IPO in London for a company from the Caucasus region.
In 2008, Mr Enukidze was appointed as Chairman of the Bank of Georgia
Board and he led the bank through the international and local financial
crisis. Prior to joining TBC, Mr Enukidze also served as Chairman of the
Supervisory Board of Galt & Taggart Securities. At present, as founder
of Nine Oaks Advisors, Mr Enukidze acts as financial advisor and
investor on projects in Central and Eastern Europe. Since 2011 he has
also served as an independent Director of the Supervisory Board and
member of the Audit Committee of TMM Real Estate Development PLC,
a Ukrainian real estate development company listed on the Deutsche
Börse since 2007, and since 2014 as the Chairman of the Supervisory
Board of JSC Caucasus Minerals. Mr Enukidze was born and raised in
Tbilisi and is a British national. Mr Enukidze was appointed to the
Supervisory Board as an independent member in 2013.
Nicholas Dominic Haag
Member of the Supervisory Board
Mr Haag earned an M.A. from the University of Oxford with a degree
in modern studies in Geography in 1980. Mr Haag has 32 years of
experience working in the financial services industry, with a significant
emphasis on equity capital markets. His experience includes seven
years at Barclays Bank between 1980 and 1987 in various capital
markets and project finance roles, including as the Head of Equity
Syndicate, Barclays de Zoete Wedd (BZW); ten years at Banque
Paribas, Paribas Capital Markets between 1989 and 1999, initially as
Deputy Head of Global Equity Capital Markets and later Senior Banker
and Head of European Client Coverage (ex-France); two years at ING
Barings between 1999 and 2001 as Managing Director and Global Head
of Technology Banking Group; six years at ABN AMRO between 2001
and 2007 based in London as the Global Head of Technology Banking,
Member of Global TMT Management Committee, Senior Managing
Director and Member of the Senior Credit Committee; four years
with the Royal Bank of Scotland between 2008 and 2012 and
RBS Hoare Govett as Managing Director, Head of London Equity
Capital Markets and Member of the Global Equities Origination
Management Committee. Since 2012, he has served as a senior
independent adviser to the Chairman of the Management Board and
since 2013 as a member of the Supervisory Board of Credit Bank of
Moscow and a financial consultant specialising in capital raisings and
stock exchange flotations. Since 2012 he has acted as sole Director of
his own consulting company, Nicdom Limited. Mr Haag was appointed
to the Supervisory Board in 2013.
81
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Supervisory Board Report and Responsibilities
Continued
Responsibility of the Supervisory Board
The members of the Supervisory Board confirm their engagement
in preparing the annual report and accounts in conformity with the
detailed responsibilities provided in Article 10 of the Georgian
Supervisory Board Regulation, and state that they consider the report
and accounts, taken as a whole, as fair, balanced and understandable
and provide the information necessary for shareholders to assess the
Bank's performance, business model and strategy. The Independent
Auditor’s Report is available on page 112.
Each of the members of the Supervisory Board, whose names and
functions are listed on pages 79 to 82, confirm that, to the best of their
knowledge and belief:
a) the financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of TBC Bank
and the undertakings included in the consolidation taken as a
whole; and
b) the management report includes a fair review of the development
and performance of the business and the position of TBC Bank and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face.
The members of the Supervisory Board confirm that, so far as they
are aware, there is no relevant audit information of which the auditors
are unaware and the Directors have taken all steps that they ought to
have taken as a member of the Supervisory Board in order to make
themselves aware of any relevant audit information and to establish
that the Company's auditor is aware of that information.
On behalf of the Supervisory Board,
Mamuka Khazaradze
Chairman of the Supervisory Board
Stefano Marsaglia
Independent Member of the Supervisory Board
Mr Marsaglia graduated from Turin University with a degree in
Economics and Commerce in 1978. Mr Marsaglia has 35 years of
experience in the financial services industry with particular expertise
in corporate and investment banking in Europe and Latin America.
In 1987, he was appointed Deputy Managing Director and Head of
Investment Banking for Southern Europe at UBS and served as
Assistant Director at Morgan Grenfell from 1983 to 1987. Mr Marsaglia
acted as Managing Director, Global Head of Financial Institutions and
Co-Head of Investment Banking for Europe at Rothschild between
1992 and 2010, and as the Chairman of Global Financial Institutions
of the Investment Banking Division at Barclays Bank, London between
2010 and 2014. Mr Marsaglia currently serves as Executive Chairman
of Corporate and Investment Banking at Mediobanca, London.
Mr Marsaglia was appointed to the Supervisory Board in 2014.
82
TBC Bank Annual Report 2014 Supervisory Board Committees
In line with international standards of best practice,
Basel requirements, and the Bank’s future development
plans, TBC Bank has established several committees;
the Risks, Ethics and Compliance Committee, Remuneration
Committee, Corporate Governance and Nomination Committee
and Audit Committee.
Please find the respective Committee Reports on the following pages:
Audit Committee
Remuneration Audit Committee
Corporate Governance and Nomination Committee
Risks, Ethics and Compliance Committee
84
89
90
91
These Committees assist the Supervisory Board and the Bank in
improving the structures and processes in place for managing the
Bank, the relationship between the Management, the Supervisory
Board, shareholders, and other stakeholders.
The following table sets out Supervisory Board Committee membership:
Chairperson
Member
Audit Committee
Remuneration Committee
Corporate Governance and
Nomination Committee
Risks, Ethics and
Compliance Committee
Outside Directors
Badri Japaridze
Eric J. Rajendra
Irina Schmidt
Nicholas Dominic Haag
Nikoloz Enukidze
Stefano Marsaglia
83
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review
Governance
Audit Committee Report
Committee Membership and Qualifications
I am pleased to have taken over the chairmanship of the Audit
Committee in March 2014 following the retirement of Emile Groot from
the Board. I was first appointed as a member of the Committee in 2013.
Emile helped to establish the Bank's Audit Committee, chairing it in
the years since 2011, leading up to the Bank's successful IPO in June
2014. I would like to express our deep appreciation of Emile's
contribution. In addition to Emile, the Audit Committee also saw the
resignations in December 2014, again following the Bank's IPO, of its
remaining members who were not on the Supervisory Board of the
Bank, Givi Lemonjava and Levan Zuroshvili. They had originally joined
the Committee in the context of Georgia's Banking Law which
stipulates that audit committees should include only independent
members who are not on a bank's board; TBC subsequently obtained
a derogation from the National Bank of Georgia to allow inclusion of
Supervisory Board committee members in line with international
norms. The Committee is very appreciative of their good work over
many years and I am pleased to report that Givi has agreed to stay on
as adviser to the Committee.
The Committee now comprises in total four Non-Executive directors of
whom two are INEDs, Nikoloz Enukidze (joined the Committee in 2013)
and Stefano Marsaglia (joined in June 2014); both nominations were
considered and approved by the Board's Corporate Governance and
Nomination Committee. The other two, Eric Rajendra (appointed to
the Committee in 2012) and myself, were originally nominated to the
Supervisory Board by two of the Bank's equity investing IFIs, IFC and
EBRD respectively. Nikoloz has in the past been Chairman of Bank of
Georgia and Stefano is Executive Chairman of Corporate and
Investment Banking at Mediobanca having been Chairman of the
Global Financial Institutions Group at Barclays Corporate and
Investment Bank.
All current members of the Committee (see biographies on pages 79
to 82 of the Annual Report) possess a detailed understanding of the
financial sector, with backgrounds primarily in banking, and most
serve or have served on (or chaired) other banks' audit committees.
The Committee therefore has sufficient recent and relevant expertise
to operate effectively and calls upon other expert internal and external
resources where required.
Committee Role and Meetings
The Audit Committee, with delegated authority from the Supervisory
Board, has multiple areas of responsibility and focus. Its first priority
is to ensure the integrity (accuracy and full disclosure) of the Bank's
financial reporting, looking hardest at areas of reporting risk and
supervising the proper interpretation of accounting rules. Secondly,
the Committee oversees the Bank's systems of internal control in
relation to financial reporting, fraud, and compliance with prevailing
laws and regulations, also evaluating management's competence in
this task. The Committee relies heavily on Internal Audit to provide an
objective and professionally sceptical view of how the Bank is handling
a number of key reporting and record-keeping risks. The Committee
also makes recommendations on the appointment and remuneration
of external auditors and seeks to maximise the value of the external
audit relationship.
In relation to risk, the Bank has a separate Risk committee (on which
I sit) and, while there are areas of overlap (mostly in relation to
operational risk) with the jurisdiction of the Audit Committee, the two
committees each have clearly defined responsibilities and cooperate
extensively to minimise duplication and ensure nothing is overlooked.
The Audit Committee has joined other Supervisory Board committees
of the Bank in building an active direct dialogue with the National Bank
of Georgia as we regard providing ongoing comfort to and obtaining
feedback from the regulatory authorities as part of our role of
supervising the best interests of all stakeholders in the Bank.
The Committee is fully conscious of the Bank's new status as a listed
company on the London Stock Exchange – the heightened investor and
regulatory scrutiny that this rightfully brings as well as pressures on
management to show performance – and has stepped up its oversight
function. The Bank is continuing to grow at a fast pace and this growth
is likely to be sustained so long as the Georgian economy continues to
prosper. This growth brings challenges to the accounting and control
infrastructure of the Bank at the same time as TBC continues to
reweight its business towards its Retail, Micro and SME divisions.
The Audit Committee remains vigilant about the implications of these
changes and works to ensure that the Bank's systems keep pace.
Likewise, financial reporting disclosure requirements have been
steadily increasing for a number of years, in tandem with the
complexity of accounting standards.
The Committee met formally in person in each quarter of 2014
(February, June, September, December), in accordance with the
Bank's quarterly financial reporting cycle and the cycle of Supervisory
Board meetings. There were regular interim telephone meetings,
mostly around planned releases of financial data, and also ad hoc
communications between members and with Internal Audit, External
Auditors and management.
84
TBC Bank Annual Report 2014 The table below describes the committee composition and formal meeting attendance for 2014:
Audit Committee Composition
Name
Emile Groot
Position
Previous Chairman *
Nicholas Dominic Haag
Chairman
Givi Lemonjava
Eric J. Rajendra
Levan Zuroshvili
Nikoloz Enukidze
Stefano Marsaglia
Previous Member**
Member
Previous Member***
Member
Member
* Resigned from March 2014
** Resigned from December 2014
*** Resigned from December 2014
Year of
Appointment
Scheduled
Meetings
Eligible to
Attend
Scheduled
Meetings
Attended
Additional
Meetings
Eligible to
Attend
Additional
Meetings
Attended
2011
2014
2002
2012
2002
2014
2014
1
4
4
4
4
3
2
1
4
4
3
4
3
1
-
2
2
2
2
2
2
-
2
2
2
2
2
2
The Bank's CEO, CFO and other management board members plus the
Chief Compliance Officer were on occasion invited to participate in Audit
Committee meetings together routinely with the Head of Internal Audit.
Minuted meetings generally took place on the day prior to Supervisory
Board meetings and the Audit Committee made a formal report as
a separate agenda item in the latter. In addition, Audit Committee
members attended a number of conferences and education programmes
including a tailored IFRS workshop and training on internal audit best
practices (both provided by PwC) to allow Committee members to stay
ahead of evolving international accounting regulations and control
improvements. Further training is expected in 2015 to prepare myself
and colleagues for the continuing high velocity in changes to accounting,
reporting and governance standards.
The Audit Committee Policy of the Bank is set out on TBC's internet
web site at the Investor Relations website.
This Policy document was last reviewed, amended and agreed by
the Committee in December 2014 and approved by the Board in
March 2015.
Assessment of Effectiveness
The Audit Committee Effectiveness Review is conducted every year
by the Board and the individual Committee members in order to
assess the Audit Committee’s performance, as per international
best practice standards.
The review conducted for the year 2014 was completed in March 2015
and concluded that the Committee operates effectively and carries out
all its responsibilities as laid out in its Charter.
Planning and Release of Financial Statements
Starting from second half of 2014, as one of the initiatives for further
improving the financial reporting process, the Audit Committee
assumed the role of comprehensively pre-vetting all audited and
auditor-reviewed financial releases. Accordingly, the Audit Committee
reviewed during the year the releases of half-year and full-year
financial statements, making recommendations to the Supervisory
Board to approve these. The Committee also had pre-release sight
of the third quarter results and held discussions with management
about these. In respect of 2014, the Audit Committee has reviewed
all data and narrative comment and concluded that the Annual
Report and financial statements are complete, clear, balanced
and consistent with the Committee's understanding of the facts.
Likewise, we considered and are satisfied with transparency on
the Bank’s liquidity and capital adequacy.
85
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Audit Committee Report
Continued
To meet the new IPO related best practice requirements regarding the
speed and level of disclosure of the financial results, we are pleased
that we have been able to accelerate reporting of our 2014 quarterly,
semi-annual and annual statements as well as to increase the depth
of these reports.
The Audit Committee held multiple 2014 audit planning meetings
with PwC during the course of the year, commencing formal audit
planning in June. The Audit Committee had the opportunity, without
management present, to highlight areas it wished the external audit
to focus on, flagging relevant issues and trends. The Committee has
evolved towards a policy of regular quarterly status discussions with
PwC prior to each Supervisory Board meeting, proactively and
mutually addressing any material audit or control issues. PwC has
started to attend parts of Supervisory Board, Audit Committee as well
as Management Board meetings of the Bank. In addition, as Chairman
of the Committee, I also have regular, candid and free-form private
sessions with PwC between Committee and Board meetings.
Areas of Audit Committee Focus
We have assessed the reasonableness and appropriateness of critical
accounting policies. The main areas of accounting judgement involved
the valuation of loans issued and related impairment charges and
loan loss provisions. PwC reviewed portfolio-based provisioning of
individually-significant loans on a sample basis and also collectively-
assessed provisions in respect of individually non-significant loans.
The Audit Committee has reviewed assumptions around these
provisions and been provided with regular updates on problem and
watch list loans as well as related collateral assumptions. We have
taken comfort by back-testing the actual sale prices achieved on
certain realised collateral assets. We have also reviewed changes
to the aggregate proportion of over- and under-collateralised loans
within the Bank’s total portfolio.
The Audit Committee has additionally sought clarification on a range
of other significant topics including the valuation of investment
properties, the accounting treatment post-IPO for share based
payments under the Bank’s management compensation plan,
the amortisation and useful life of tangible and also intangible
(e.g. software licenses) assets and the proper accounting for
repo (sale and repurchase) agreements. Other areas of focus and
discussion with management and internal and external auditors
have included the classification of interest income on impaired loans
as well as the nature and extent of off balance sheet commitments and
related party transactions including the comprehensive identification
of the latter. We have looked at the impact of changing tax legislation
across the Bank’s relevant geographies and the accounting treatment
for the Bank’s fast-growing financial leasing business.
As noted, the Audit Committee has challenged underlying
assumptions and in all cases PwC and management have
satisfactorily explained their methodologies used and there were
no material disagreements arising. We have also found it useful
to discuss materiality thresholds with the external auditors and
with management.
Control Environment
We have reviewed the approach and extent of internal control testing
by management and internal and external auditors. The Committee
spent considerable time in 2014 seeking to ensure that the Bank's
internal controls are sufficiently robust, working with Internal Audit to
track closely any identified shortcomings and scrutinising remediation
follow-up with vintage analyses being carefully maintained. KPIs in
respect of the reduction of identified audit deficiencies, however minor,
have been cascaded down to branch and departmental level and also
included in KPIs for members of the Management Board. We note that
in the second half of 2014 there was evidence of a resulting
improvement in the prompt resolution of any such issues.
At our request, PwC has advised us that, consistent with prior years,
their audit work included testing of the Bank's information technology
systems controls and, in particular, testing of IT security, programme
maintenance and operational controls as well as selected application
controls over interest, commissions and treasury cycles with related
balance sheet items. For avoidance of doubt, the scope of this testing
was limited to that necessary for the audit of the financial statements
rather than as a separate engagement. PwC also advised us that the
audit work additionally included a review of the Bank's fraud risk
assessment procedures, again evaluating controls and introducing
an element of unpredictability in their audit procedures.
One area we continue to monitor is management compensation,
confirming an appropriate balance of incentives which, whilst
motivating, do not create potential risks for exaggerated financial
reporting. TBC operates an overlapping committee structure of
members and it is helpful that Nikoloz Enukidze and I both sit on the
Bank's Remuneration Committee.
As noted, we scrutinised relevant related party transactions to ensure
that they were carried out on an arm’s length basis and did not impact
normal financial reporting metrics of the Bank. We are comfortable
that management and the Supervisory Board have an adequate
process in place to identify and record related parties.
Another area we have paid attention to is the integrity of financial
information obtained from borrowers at loan application and
monitoring stages, validating appropriate controls implemented
by management.
86
TBC Bank Annual Report 2014 Under TBC's committee structure, ethical standards are supervised
by the Risk, Ethics and Compliance Committee. However, the Audit
Committee liaises closely with it, there is substantial cross-committee
membership (including myself) and I am satisfied that the prevailing
ethical climate and safeguards of the Bank are generally supportive of
the control environment, in terms of prevailing rules, 'tone at the top'
and equally important 'message in the middle'.
Constanta/Subsidiaries
Plans were made for the full integration of Constanta Bank, upon
merger, into the audit and control framework of the Bank, combining
operations and standardising controls. Following completion of the
merger with Constanta, Internal Audit is now performing its roles in
respect of this bank with integration of relevant personnel nearly
complete. In addition, during the year greater emphasis was placed
by Audit Committee and Internal Audit on monitoring controls within
other subsidiaries of the Bank, particularly TBC Kredit. The merger
with Constanta leads to certain changes in this bank's traditional
systems of business process and record-keeping and the Audit
Committee will continue to keep a close eye on this evolution.
External Auditor Independence and Reappointment
The Audit Committee is responsible for the assessment of the
performance, objectivity and independence of the external auditor
and the delivery of a quality audit. Each year the Audit Committee is
required to consider the reappointment of the auditors, the suitability
of the lead engagement partner as well as the wider audit team and
the remuneration and terms of engagement for the chosen auditor.
2014 has been the seventh year in which PwC have audited the Bank.
The fact that we have a substantially new Audit Committee with a new
Committee chairman has allowed us to take a fresh look at the PwC
relationship with new people challenging PwC's and management's
interpretation of accounting and control features of the Bank. We
remain satisfied that PwC continues to offer an independent,
professional and cost-effective service. We reached this decision on
the basis of their openness to challenge, our perception of their proper
independence from management, the very low level of prior year
financial restatements and PwC’s proven ability to meet our tight
reporting deadlines. The Committee also noted that the PwC team
working onsite, including the audit manager and the audit partner, have
been changed during the firm’s period of incumbency. 2014 is the first
year for the current audit manager and the fourth year for the audit
partner on TBC. The multi-country location of key members of the
PwC team is not ideal in terms of accessibility but we do not consider
that this impacts the overall quality of the audit, note that several
members of the PwC team are based in Tbilisi and do not see another
firm providing any significantly better geographic footprint. It is the
Committee's current intention, subject to suitable contract terms,
to recommend that we proceed with PwC for the year 2015 audit.
In 2014 the Bank hired PwC for only small audit-related training
assignments and for non-audit services directly connected to the
IPO, notably running an IPO readiness diagnostic and the provision of
relevant comfort letters where there were natural synergies with the
audit work performed. Other Big 4 vendors were used to provide other
non-audit advisory services, notably Ernst & Young and Deloitte. The
Audit Committee and management are in agreement that we should
look to these other providers for future non-audit services where they
offer an economically and professionally equivalent alternative. The
new Audit Committee policy draft formally introduces new rules on
the engagement and remuneration of the Bank's external auditor in
relation to the performance of non-audit services. Essentially, we will
only use PwC for non-audit services where such a contract has been
pre-cleared with the Audit Committee and where there is either a
clear synergy with PwC’s audit role or where PwC offers superior
competence or materially better commercial terms. As stated,
we remain satisfied that PwC demonstrates a sufficient degree of
independence and objectivity in its role as the Bank's external auditor.
Internal Audit
The Committee has taken a fresh look at the role and competencies of
the Internal Audit department and is satisfied that it is fit for purpose
as a "3rd line of defence". Internal Audit currently has sufficient
budget and resources to perform its role. The independence from
management of the Internal Audit function in its reporting line and
direction has been reinforced; Internal Audit now reports solely to
the Committee with the latter also determining the former’s budget
and compensation. The Audit Committee has demonstrated to
management its clear empowerment of Internal Audit. The Audit
Committee meets regularly with the Head of Internal Audit with no
management present, and benefits from the department's objective
assurance and insights. As chairman of the Committee, I am in at
least monthly contact with the Head of Internal Audit. The Committee
routinely reviews Internal Audit's annual and rolling 3 year plan,
provides feedback on it and authorises any changes to its scope.
We provide targets for and formal assessment of Internal Audit and
ensure that it is effective, suitably embedded in the organisation,
respected by management and of use to them. The head of Internal
Audit now routinely attends monthly Management Board meetings.
Internal Audit has created scales of criticality and a graduated
escalation procedure has been put in place to allow it to rapidly
alert me and the Committee to any pressing issues that have come
to light. The Bank's Internal Audit Charter was updated in December.
We have encouraged Internal Audit to take an increasingly 'risk-based'
approach to its work, prioritising a hierarchy of higher-risk areas.
Sample sizes for its audits have risen significantly in 2014; this has
provided extra reassurance to the Committee.
87
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Audit Committee Report
Continued
The Bank has recruited a small number of additional Internal Audit
staff including a specialist internal IT auditor. It is in the process of
acquiring Internal Audit automation software to give it the capability
for less manual and more continuous audit testing and tracking.
In accordance with international trends, and in anticipation of more
automation of areas of its work, Internal Audit has increasingly been
assuming responsibilities beyond a pure 'policeman' role. It has, for
example, been helping to validate the integrity of the Bank's Basel
report generation process as well as assisting in testing internal
controls over TBC's financial reporting.
The intention is for Internal Audit's work to become more flexible
to respond to changes in the Bank's operational, technological
and organisational structures and environment by building in a
time 'cushion' allowing it to address any urgent and unexpected
developments. In addition to its scheduled audit of head office, service
centre and branch units, the intention in 2015 is for Internal Audit to
focus further on critical areas including the Bank's provisioning policy,
collateral valuation methodology, loan rating model, its financial
leasing activities, the quality of its MIS systems, business continuity
and cybersecurity as well as the control of outside service providers.
Training was given a high priority in 2014. Almost all managerial staff
in Internal Audit have been enrolled in preparing for exams to become
at least Level 1 Certified Internal Auditors, an accreditation process
run by the international Institute of Internal Auditors. Internal auditors
have received training from PwC on emerging global trends in Internal
Audit best practice.
It is intended to commission an external assessment of the
performance of Internal Audit within the next two years, in accordance
with the standards recommended by the Institute of Internal Auditors.
Nicholas Dominic Haag
Chairman of the Audit Committee
88
TBC Bank Annual Report 2014 Governance
Remuneration Committee Report
The Remuneration Committee advises the Supervisory Board on the
compensation system for the Supervisory and Management Boards,
including reviewing the achievements of and determining compensation
for the Supervisory Board and Management Board, the heads of TBC
Bank's business segments as well as for certain employees of the
bank. The Remuneration Committee is also responsible for approving
members of the long-term management incentive program and
supporting its development, setting the compensation policy relative
to the dismissal of key members of the management, and approving
annual reports of remuneration policy and practice.
The Remuneration Committee consists of three members of the Supervisory
Board. Members meet on a quarterly basis and schedule additional
meetings when appropriate. The Committee is chaired by Irina Schmidt.
The Remuneration Committee Policy of the Bank is set out on TBC's
Investor Relations website.
The following describes the Committee composition and meeting
attendance in 2014:
Remuneration Committee Composition
Name
Irina Schmidt
Emile Groot
Position
Chairman
Member
Nicholas Dominic Haag
Nikoloz Enukidze
Member
Independent Member
Year of
Appointment
Scheduled
Meetings Eligible
To Attend
Scheduled
Meetings
Attended
Additional
Meetings Eligible
to Attend
Additional
Meetings
Attended
2012
2012
2013
2013
4
1
4
4
4
1
4
4
3
–
3
3
3
–
3
3
Assessment of Work Completed
Approval of Management Remuneration and KPI Assessments
The Committee assessed the Senior Management performance
against KPIs and set remuneration in accordance with the Senior
Management Compensation System adopted in 2013.
Approval of KPIs for 2015
The Committee discussed and updated the 2015 KPIs for the Senior
Management of the Bank in accordance with the Senior Management
Compensation System adopted in 2013.
New Compensation System for 2016-2019
The Committee has announced a tender to develop a new
compensation system for the year 2016-2019 for the Supervisory
Board and Management Board, as well as for the long-term incentive
plan for Middle Management. A request for proposals was sent to 13
companies specialising in top management compensation for London
Stock Exchange Listed companies. After reviewing several short-
listed companies, the Committee selected the consultant that will
work on developing the new compensation system during 2015.
Assessment of Effectiveness
The Remuneration Committee Effectiveness Review is conducted
every year in order to assess the performance of the Committee. This
assessment is carried out by Committee members themselves and by
the Supervisory Board as a whole, in line with international standards
of best practice in corporate governance. The 2014 Remuneration
Committee review has found that the Committee effectively fulfilled all
of its responsibilities and obligations.
Remuneration Disclosure
Compensation of the key management and supervisory board
members is presented below:
In thousands of GEL
Salaries and bonuses
Cas settled bonuses related to share-based compensation
Equity-settled share-based compensation
Total
Expense over the
six months ended
30 June
2014
4,448
490
953
5,891
30 June
2013
4,105
919
926
5,950
Accrued liability of
30 June
2014
1,678
490
–
2,168
31 December
2013
3,798
1,692
–
5,490
Share based payments policy and cumulative shares awarded are available
from note 16 of the Consolidated Financial Statements of the Bank.
Irina Schmidt
Chairman of the
Remuneration Committee
89
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Corporate Governance and Nomination Committee Report
The Committee is responsible for developing corporate governance
principles and guidelines applicable to TBC Bank, assessing the
alignment of the Bank’s governance practice with international
standards of best practice, selecting and screening individuals
qualified to become candidates for Supervisory Board and
Management Board membership, considering and making
recommendations to the Supervisory Board on the composition of
the Supervisory Board and the Management Board, as well as on the
composition and structure of the Supervisory Board Committees.
The Corporate Governance and Nomination Committee consists
of four members of the Supervisory Board. Members meet on a
quarterly basis and schedule additional meetings when appropriate.
The committee is chaired by Eric J. Rajendra.
The Nomination and Corporate Governance Committee Policy of
the Bank is set out on TBC's Investor Relations website.
The following describes the committee composition and meeting
attendance in 2014:
Corporate Governance and Nomination Committee Composition
Name
Eric J. Rajendra
Badri Japaridze
Irina Schmidt
Nikoloz Enukidze
Position
Chairman
Member
Member
Independent Member
Year of
Appointment
Scheduled
Meetings Eligible
to Attend
Scheduled
Meetings Attended
Additional
Meetings Eligible
to Attend
Additional
Meetings
Attended
2012
2012
2012
2013
4
4
4
4
4
4
3
4
2
2
2
2
2
2
2
2
Assessment of the Work Completed
In 2014 the Corporate Governance and Nomination Committee worked
on the following items in line with its responsibilities and obligations:
New Members of the Supervisory Board and Management Board
The Committee was involved in finding new candidates for Supervisory
and Management Board membership. It discussed proposed
candidates and reviewed and interviewed shortlisted individuals
for the position of the second Non-executive Independent Director
on the Board. The Committee then presented their recommendation
to the Supervisory Board for approval. As a result, the Board was
strengthened with a new INED member in March 2014. The Committee
was also involved in finding candidates for three new Management
Board positions. It considered and interviewed candidates for three
new Deputy CEOs: the Chief Risk Officer, George Tkhelidze, the Head
of Corporate Banking, David Tsiklauri, and the Head of Microfinance
Banking, Nikoloz Kurdiani. The Committee incorporated the views of
the CEO in this process and presented the optimal finalist candidate
for the full Supervisory Board's approval.
Succession Planning Policy
The Committee worked on the Succession Planning Framework and
heard and noted the positions of the Management Board members
throughout the year. On 9 December 2014, the Committee presented
and recommended appropriate Succession Planning frameworks for
each of the Deputy CEOs.
CEO level. The committee has identified strong and weak areas
for each candidate and developed a plan for further professional
development. The recommended succession planning framework
ensures that the company builds an appropriate internal leadership
pipeline and includes initiatives that cover additional qualification
courses, training opportunities and recommendations on developing
generalist and specialist skills as needed.
Induction and Training
New Directors of the Supervisory Board receive induction training
shortly after appointment. Further professional development
opportunities are provided based on the work Directors carry out on
different Supervisory Board committees. During the self-assessment
process at the end of the year, the Directors identify a relevant
development programme for each member of the Board.
Assessment of Effectiveness
The Corporate Governance and Nomination Committee effectiveness
review is conducted every year in order to assess the Committee’s
performance. This assessment is carried out by Committee members
themselves and by the Supervisory Board as a whole, in line with
international standards of best practice in corporate governance. The 2014
Corporate Governance and Nomination Committee review has found that
the Committee effectively fulfilled all of its responsibilities and obligations.
Key members of the Management Board and middle management
have been identified for succession planning at the CEO and Deputy
Eric J. Rajendra
Chairman of the Corporate Governance and Nomination Committee
90
TBC Bank Annual Report 2014 Risks, Ethics and Compliance Committee Report
The Risk, Ethics and Compliance Committee (RECC) is responsible for
reviewing, assessing and recommending any actions to be taken by the
Supervisory Board regarding TBC Bank's risk management strategy,
risk appetite and tolerance, risk management system and risk policies.
In addition, the RECC reviews and approves large exposures to
customers in circumstances when the borrower's aggregate liability
to TBC Bank exceeds 5% of TBC Bank's Basel capital. Other main
responsibilities of the committee are to supervise TBC Bank's
commitment to the highest standards of ethical behaviour and to
oversee TBC Bank's compliance function.
RECC consists of four members of the Supervisory Board and
members meet in person on a quarterly basis. If required, the
Committee holds additional meetings via electronic communications,
including meetings held in accordance with RECC’s loan approval
responsibility. The Committee is chaired by Nikoloz Enukidze,
independent member of the Board.
The Risks, Ethics and Compliance Committee Policy of the Bank is set
out on TBC's Investor Relations website.
The following describes the committee composition and meeting
attendance in 2014:
Risk, Ethics and Compliance Committee Composition
Name
Nikoloz Enukidze
Nicholas Dominic Haag
Badri Japaridze
Irina Schmidt
Position
Chairman
Member
Member
Member
Year of
Appointment
Scheduled
Meetings Eligible
to Attend
Scheduled
Meetings Attended
Additional
Meetings Eligible
to Attend
Additional
Meetings
Attended
2014
2013
2012
2012
4
4
4
4
4
4
3
3
12
12
12
12
12
12
12
12
Assessment of the Work Completed
In 2014 the RECC worked on the following items in line with its
responsibilities and obligations:
Supervision of Risk Management
On a quarterly basis, the Committee reviewed the Bank’s credit,
operating and financial risk management results, the status of its
largest corporate problem loans and the Bank’s capital position.
In September 2014, TBC issued its second ICAAP document, which
was actively debated by the Committee and subsequently approved by
the Supervisory Board. The document was submitted to NBG for
further discussions.
The Committee examined the Bank’s new Risk Appetite Framework
and approved the revised Risk Appetite Document, which was
submitted to NBG in September 2014. The Committee also reviewed
and approved updated IRR limits. The Committee maintained regular
dialogue with the Bank’s management and, in particular, the CRO.
The Committee closely monitored and supported strategic initiatives
in the risk management area. The full Directors’ Statement on Risk
Management and Internal Control is provided on page 78.
Supervising the Compliance Function
The Committee heard quarterly updates by the Chief Compliance
Officer on the implementation of the compliance program, which was
approved by the Committee in December 2013 in accordance with the
Compliance Policy of the Bank adopted by the Supervisory Board
on 22 May 2013.
Supervising the Right Culture within the Bank
The Committee reviewed TBC Bank’s Code of Conduct and Code
of Ethics approved in 2013 in order to ensure that the documents
reflected current developments in the Bank and to recommend further
amendments as necessary. No amendments to the Code of Conduct
and Code of Ethics were considered necessary in 2014.
Assessment of Effectiveness
The Risks, Ethics and Compliance Committee Effectiveness Review
is conducted every year by the Board and the individual Committee
members in order to assess the RECC performance, as per
international standards of best practice in corporate governance.
During the year 2014, which was the second full year of its operation,
the Committee was effective in overseeing the Bank’s risk
management, compliance activities and ethical standards. In 2015
the Committee plans to pay particular attention to Strategic Risk
Management initiatives introduced by the Bank’s new CRO, who was
appointed in December 2014.
Nikoloz Enukidze
Chairman of the Risk, Ethics and Compliance Committee
91
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Management Board
The Management Board is responsible for TBC's day-to-day management, with the exception of functions reserved to the General Meeting
of Shareholders and the Supervisory Board. The Supervisory Board appoints the members of the Management Board for renewable terms
of four years and is also in charge of their dismissal. Banking regulations contain certain limitations as to who may become a member of the
Management Board and criteria that each director must fulfil. The scope of authority of each member of the Management Board is defined
by a contract entered into with the director upon appointment.
From left to right: Giorgi Shagidze, David Tsiklauri, George Tkhelidze, Vakhtang Butskhrikidze, Paata Gadzadze, Vano Baliashvili, Nikoloz Kurdiani.
In the bottom row, from left to right: Nino Masurashvili, Mariam Megvinetukhutsesi(a).
(a) Mariam Megvinetukhutsesi resigned from her position as Deputy CEO and Co-Head of Corporate Banking in December 2014.
92
TBC Bank Annual Report 2014 Members of the Management Board
Paata Gadzadze
First Deputy CEO
Mr Gadzadze graduated from Tbilisi State University in 1992 with a
degree in Economics and holds a postgraduate qualification from
the Institute of Economics, Academy of Sciences of Georgia. Between
1992 and 1994, he was Assistant to the Minister of State Property
Management. Mr Gadzadze held the position of lecturer at the
European School of Management in Tbilisi between 1994 and 2004.
He joined TBC in 1994 as Deputy General Director of TBC Bank and
was appointed to the Management Board in 1996. In 2005 he was also
Head of the Credit Department. Mr Gadzadze has held the position of
First Deputy CEO since 1998. Between 2000 and 2004, he also served
as CEO of Georgian Pension and Insurance Holding. Since 2007 he has
held the position of Chairman of the Supervisory Board of UFC.
Vakhtang Butskhrikidze
CEO
Mr Butskhrikidze graduated from Tbilisi State University in 1992 with
a degree in Economics and holds post graduate qualifications from
the Institute of Economics, Academy of Sciences of Georgia and the
European School of Management in Tbilisi. He obtained an MBA from
the European School of Management in Tbilisi in 2001. Between 1993
and 1994, he acted as Junior Specialist at the Institute of Economics,
Academy of Sciences of Georgia, as well as Assistant to the Minister of
Finance of Georgia. Mr Butskhrikidze joined TBC as a Senior Manager
of the Credit Department in 1993 and was elected as Deputy Chairman
of the Management Board in 1994. He became Chairman of the
Management Board in 1996. Since 1998, he has held the position of
CEO of TBC Bank and has headed a number of TBC's committees.
Mr Butskhrikidze is also a member of the Supervisory Boards of the
Association of Banks of Georgia and the Georgian Stock Exchange and
is Chairman of the Financial Committee of the Business Association
of Georgia. Since 2011 he has also held the position of member
of the Supervisory Board of the Partnership Fund, Georgia. In 2001,
Mr Butskhrikidze was honoured with the "Best Businessman of
the Year" award by Georgian Times Magazine and in 2011 he was
recognised as the "Best Banker 2011" by GUAM – Organization for
Democracy and Economic Development award. Mr Butskhrikidze
was also named as the CEO of the Year 2014 in Central and Eastern
Europe and the CIS by EMEA Finance magazine.
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Management Board
Continued
Giorgi Shagidze
Deputy CEO, CFO
Mr Shagidze graduated from Tbilisi State University in 1997 with a
degree in Economics. He obtained an MBA degree from the University
of Cambridge Judge Business School in 2008. Between 1996 and 2001,
Mr Shagidze worked at Agro Industrial Bank of Georgia as Head of
Credit Investment Department, Head of International Payments,
Customer Relationship Manager, Dealer and Applications Developer.
Between 2001 and 2005, he worked at Tbiluniversalbank, where he
held the positions of CEO, Deputy CEO, Head of IT and Branch Manager.
In 2005, he became Director of Distribution Channels Division at Bank
of Georgia before becoming Deputy CEO of the Peoples Bank of
Georgia in 2005. Between 2008 and 2010, Mr Shagidze acted as a
Global Operations Executive for Barclays Bank Plc. He became Deputy
CEO and Chief Financial Officer of TBC Bank and was appointed to the
Management Board in 2010. Since 2011 he has been a member of the
Supervisory Board of Bank Constanta.
Vano Baliashvili
Deputy CEO, COO
Mr Baliashvili graduated from Tbilisi State University in 1992 with a
degree in Economics and obtained an MBA from the European School
of Management in Tbilisi. In 2011 he obtained a Master's Certificate in
Project Management from George Washington University, school of
business. Between 1993 and 1995, he held the positions of Intern
Accountant and Accountant at Commercial Bank Sandro and Chief
Accountant at Commercial Bank Shalen. Between 1995 and 1999, he
held the positions of Economist, Foreign Exchange Division, Head of
the Foreign Exchange Department, and Head of the Internal Audit
Department at JSC TbilCredit Bank. Mr Baliashvili joined TBC in 1999
as Head of Service, Internal Audit and Control. He became Finance
Division Chief in 2000 and has held the position of Deputy CEO, Chief
Operating Officer since 2002. Since 2008, Mr Baliashvili has also held
the position of Chairman of the Supervisory Board of UFC. He was
appointed to the Management Board in 2002.
94
TBC Bank Annual Report 2014 George Tkhelidze
Deputy CEO, Chief Risk Officer
Mr Tkhelidze graduated from the London Business School with an
MBA degree. Prior to this, he obtained a Diploma in Law from Tbilisi
State University in 2000 and a Master of Laws degree in International
Commercial Law at the University of Nottingham in 2002. Mr Tkhelidze
joined TBC Bank from Barclays Investment Bank, where he held the
position of Vice President in the Financial Institutions Group (FIG),
EMEA since June 2011. For the two years prior to this he was an
Associate Director in Barclays Debt Finance and Restructuring Teams.
In his earlier career in Georgia, Mr Tkhelidze held various managerial
positions in ALDAGI insurance company, where he also served as
Chief Executive Officer until he left the position in 2007 to obtain his
MBA degree. During his career in London, Mr Tkhelidze executed
multiple M&A, debt and capital markets transactions with European
financial institutions.
David Tsiklauri
Deputy CEO, Corporate Banking
Mr Tsiklauri obtained his MBA degree from London Business School
in 2008. He also holds MSE and BSE degrees from the Georgian
Technical University. He joined TBC Bank from Deutsche Bank, where
he served as the Vice President of the Capital Markets and Treasury
Solutions team since 2011. He has specific expertise in the origination,
structuring and execution of public and private transactions and
principal investment trades in several countries, including the
Emerging Markets. Prior to this, Mr Tsiklauri worked as an Associate
in the Debt Capital Markets Department at Deutsche Bank. From
2005-2006 he served as the Head of Investor Relations at TBC Bank
until he left the position to earn his MBA degree.
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Management Board
Continued
Nino Masurashvili
Deputy CEO, Retail and SME Banking
Ms Masurashvili graduated from Tbilisi State University in 1996 with
a degree in Economics and obtained an MBA from the European
School of Management in Tbilisi. Between 1995 and 2000, she held
the positions of Credit Account Manager, Credit Officer, Financial
Analyst (Financial Department) and Head of Financial Analysis and
Forecasting Department at JSC TbilCom Bank. Between 1998 and
2000, she also held the position of Accountant at the Barents Group.
Ms Masurashvili joined TBC in 2000 as Manager in the Planning and
Control Department and became head of that department in 2002.
Between 2004 and 2005, she acted as Head of the Sales Department
and Retail Bank Coordinator. Ms Masurashvili was appointed as
Deputy CEO, Retail and SME Banking and to the Management Board
in 2006. Between 2006 and 2008 Ms Masurashvili was the Chairman
of the Supervisory Board of UFC. Since 2011 she has also held a
position as a member of the Supervisory Board of TBC Kredit and
Bank Constanta.
Nikoloz Kurdiani
Deputy CEO, Micro Banking
Mr Kurdiani obtained his MBA degree from IE Business School
in 2007. He also holds an MSc degree in International Economics
from the Georgian Technical University and completed BBA studies
at Ruhr-University Bochum in Germany and the Caucasus School
of Business. Mr Kurdiani has ten years of experience in the banking
industry which includes five years at UniCredit Group in Austria and
Kazakhstan. He has expertise in post-acquisition integration and
restructuring, as well as improving retail sales. Between 2008 and
2010 Mr Kurdiani held the position of Senior Sales Support Expert at
the CEE Retail Division of Bank Austria, UniCredit Group, responsible
for Turkey, Kazakhstan, Ukraine and Serbia. Between 2010 and 2013,
he was Head of the Retail Division of ATF Bank, UniCredit Group in
Kazakhstan. Immediately before joining TBC Bank, Mr Kurdiani was
Managing Director of Kaspi Bank, a leading retail bank in Kazakhstan.
Prior to obtaining his MBA degree in 2007, he served as Head of the
Retail Banking Division of Bank Republic Georgia, Société Générale
Group, and also held several positions at Bank of Georgia between
2003 and 2006.
96
TBC Bank Annual Report 2014 Management Board Committees
In order to effectively carry out its daily responsibilities, the
Management Board has established the following committees: Credit
Committee, Assets and Liabilities Management Committee (ALCO),
Operational Risk Management Committee, Customer Satisfaction
Committee, IT Steering Committee, Change Advisory Board
Committee and Operations Management Committee.
Credit Committee
The Credit Committee is composed of top and middle managers of
TBC Bank, and is chaired by the CEO.
The Committee meets once a month or more frequently, as required.
The exact composition of the Credit Committee varies among the
Retail, Corporate, SME and Micro-finance segments. The Credit
Committee reports to the Management Board.
The Credit Committee is responsible for maintaining loan portfolio
quality within acceptable risk levels and ensuring that TBC's lending
guidelines are consistent with relevant legislation and regulatory
policies. The Credit Committee reviews the quality of TBC's loan
portfolio on a regular basis and monitors and controls the recovery
and collection process in respect of TBC's loans. It informs the
Management Board about notable developing trends and recommends
necessary actions in order to take advantage of new opportunities and
maintain proper portfolio diversification.
The Credit Committee delegates its loan approval authority to the Loan
Approval Committees.
Loan Approval Committee
Loan Approval Committees are responsible for reviewing credit
applications and approving credit products. Different Loan Approval
Committees are in place for the approval of credit exposures to Retail,
Corporate, SME and Micro customers.
The composition of a Loan Approval Committee depends on the type of
the exposure, aggregated liabilities of the borrower and the borrower’s
risk profile. The Loan Approval Committee consists of at least two
persons with sufficient credit experience. Credit risk managers (as
members of corresponding Loan Approval Committees) ensure that
borrower and proposed credit exposure risks are thoroughly analysed.
A corporate loan to a ‘‘large borrower’’ (a borrower with exposure to
more than 5% of TBC Bank’s Basel capital) would require the review
and approval of the Risk, Ethics and Compliance Committee. Loans to
TBC’s related and connected parties are approved by the Supervisory
Board (although the Supervisory Board delegates approval authority
to the Management Board for loans up to USD 100,000).
Assets and Liabilities Management Committee (ALCO)
The ALCO has ten members, is chaired by the CEO and meets once a
month or more frequently, as required. It is supported by middle
management from TBC Bank's finance operations. The ALCO reports
to the Management Board.
The ALCO is responsible for overseeing the effective implementation
of TBC Bank's asset and liability management policies in order to
(I) maximise shareholder value and enhance profitability, (II) ensure
that liquidity, interest rate, foreign exchange, capital adequacy and
interbank counterparty risks are managed efficiently within the
Risk Appetite Statement, and (III) ensure compliance with existing
covenants and limits from the NBG, IFIs and other third parties.
The functions of the ALCO include setting and monitoring risk
exposure limits based on reports, analysis, forecasts, stress
tests and hypothetical scenarios prepared by TBC’s financial risk
management and other functions, approving risk management
methodologies, making decisions and amendments to TBC’s
asset liability structure, approving risk hedging instruments,
and deciding on corrective actions in case specified limits are
breached. The ALCO is given authority to make a number of decisions
regarding TBC’s assets and liabilities under its governing documents,
although authorisation for certain decisions is reserved to the
Management Board.
Operational Risks Committee
The Operational Risks Committee has six members comprising
top and middle managers of TBC Bank and is chaired by the CEO.
The Operational Risks Committee reports to the Management Board.
The Operational Risks Committee is responsible for reviewing
operational risks faced by TBC, overseeing these risks and making
decisions in order to minimise them. Meetings of the Operational
Risks Committee are held on a quarterly basis or more frequently,
as required. The Operational Risks Committee functions are to review
and approve operational risk management policy; review and approve
recommendations related to the development of the risk management
framework; review and approve the limits of risk insurance; discuss
reports on operational risks; monitor critical risks; and prepare
recommendations for the Management Board on these issues.
97
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review This openwork bronze
buckle was also
preserved at the school
museum in Western
Georgia until 2001. This
artistically sophisticated
artefact features a
beautifully designed
composition. The buckle
once again reinforces
experts’ conviction that
even in the Late Antique
period, local metal
workers were extremely
skilled and advanced in
their profession.
Governance
Management Board Committees
Continued
Other Committees
The Customer Experience Management Committee is responsible
for overseeing and ensuring customer satisfaction. The Committee
is chaired by the CEO with membership comprised of top and
middle managers.
The IT Steering Committee is responsible for prioritisation and
approval of IT projects and the IT project portfolio performance
oversight. The Committee is chaired by the Deputy Chief Information
Officer with membership comprised of top and middle managers.
The Change Advisory Board Committee is responsible for the review
and approval of all IT related change requests initiated by different
business units. The Committee is chaired by the Deputy Chief
Information Officer with membership comprised of top and
middle managers.
The Operations Management Committee is responsible for developing
and improving the service processes in the Bank. The Committee
is chaired by the CEO with membership comprised of top and
middle managers.
The Problem Loans Committee is responsible for the management
and monitoring of TBC's portfolio of problem assets through all
phases of collection. The Committee is chaired by the CRO with
membership comprised of top and middle managers.
98
TBC Bank Annual Report 2014 Risk Management
TBC considers its risk management function to be fundamental to its
business. The main objectives of risk management are to contribute to
the development of TBC's business strategy by ensuring risk-adjusted
profitability and guarantee TBC's sustainable development through
the implementation of an efficient risk management system. The
major inherent risks of TBC's business are credit risk, liquidity risk,
market risk (including interest rate and foreign currency risk),
operational risk, strategic risk and reputational risk. TBC's risk
management process encompasses all the activities that affect its risk
profile and consists of the following core elements: (i) active board and
senior management oversight; (ii) adequate policies and procedures
aimed at effectively controlling risk exposures; (iii) adequate risk
identification, measurement and management systems; and (iv)
comprehensive internal controls. TBC systematically reviews and
continuously seeks to improve its risk management policies and
systems to ensure that they are in line with any new challenges it faces.
TBC's risk management strategy identifies significant risks it faces,
formulates risk appetite limits and communicates the risk
management framework. The risk management process consists of
the following stages:
Risk identification
Identification of the full range of business level
risks TBC faces.
Risk assessment
Assessment of all identified risks based on the
likelihood of occurrence and significance of their
impact and creation of risk maps.
Control
Reporting
Establishment of key control processes and
practices, including limit structures and
reporting requirements, and a formalised risk
monitoring process to control adherence to
predefined targets and risk limits.
Establishment of an effective management
information system in order to ensure a timely
flow of information to the corresponding
risk units.
The following principles are fundamental to TBC's risk management:
• Sustainability. TBC conducts its business with a view towards
long-term sustainability. Therefore potential impacts on
sustainability of TBC are assessed when making business
decisions and when managing resources and infrastructure. TBC
pursues a strategy that excludes any involvement in transactions
that could pose an unacceptable risk for TBC's activities,
development and reputation.
• Materiality. The materiality of each risk to which TBC is exposed
across the corresponding asset classes is mainly determined
based on size of exposure, the current nature of processes and
related controls. All material risks are identified based on the risk
identification and assessment processes that are undertaken
regularly within TBC.
• Proportionality. The more material a risk exposure is, the more
efforts and resources are devoted to its analysis and more
sophisticated approaches and complex methods are applied
to its measurement.
• Risk acceptance/risk hedging. The risk management framework
within TBC encompasses all types of risks to which TBC is exposed
and that should be managed. TBC either accepts exposure to a risk
or hedges against it, depending on the type of risk. TBC accepts risk
exposure according to the predefined risk appetite limits set by the
Supervisory Board and Management Board. Certain types of risks,
such as operational risks, interest rate risk and market risks, are
hedged by means of insurance and/or derivative transactions.
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Risk Management
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Risk Management Structure
TBC conducts its risk management activities within the framework of
its unified risk management system. The following chart sets forth
TBC's risk management structure:
Supervisory Board
Risk Ethics and
Compliance Committee
Management Board
Audit Committee
Credit
Committee
Operational Risk
Committee
ALCO
CEO
Problem Loans
Management
Internal
Audit
Loan Approval
Committee
Deputy CEO
CFO
Deputy CEO
CRO
Compliance
Department
Financial Risks
Underwriting
AML
Risk Management
Compliance
Problem Loans Committee
In addition to this general risk management structure, which governs
the entire TBC group, several of TBC Bank's subsidiaries (Bank
Constanta(a), TBC Kredit and TBC Leasing) also have their own internal
risk management structures.
Principal Risk Management Bodies
The monitoring and implementation of TBC's risk management
function is split among eight principal risk management bodies: the
Supervisory Board, the Risk, Ethics and Compliance Committee, the
Audit Committee, the Management Board, the Credit Committee, the
Operational Risks Committee, the Assets and Liabilities Management
Committee (ALCO) and the Problem Loans Committee.
TBC employs a Chief Risk Officer (CRO), who reports to the CEO and is
responsible for supervising all risk management activities across TBC's
business except for financial risk management, which is supervised
by the Chief Financial Officer. The Chief Risk Officer is also required to
ensure that TBC's risk exposure level is in accordance with the defined
limits set forth in TBC's Risk Appetite Statement (as defined below)
and that its operations are adequate in light of TBC's risk profile.
The Chief Risk Officer and Chief Financial Officer have independent
access to the Chairman of the Risk, Ethics, and Compliance Committee.
Supervisory Board
The Supervisory Board is responsible for the oversight of TBC's risk
management. It approves TBC's risk management strategy, risk
appetite and policies that are recommended by the Management
Board. The Supervisory Board approves credit portfolio forecasts and
budgets and monitors TBC's performance. The Supervisory Board
also approves decisions that fall outside of the scope of Loan Approval
Committee's authority, such as extending loans to TBC Bank's related
and connected parties. The CRO presents a comprehensive report
regarding compliance with risk appetite limits, credit portfolio, and
results of the enterprise wide stress test to the Supervisory Board
on a quarterly basis.
For more detailed information on the Supervisory Board, the
Management Board, and relevant Committees, please refer to the
Corporate Governance chapter of this Report.
(a) Bank Constanta was legally merged with TBC Bank in January 2015.
100
TBC Bank Annual Report 2014 Risk Management Implementation
TBC's risk management policies are implemented through a number
of committees and departments, including the Internal Audit, Financial
Risk Management, Treasury, Credit Portfolio Risk Management,
Corporate, SME and Retail Underwriting, Operational Risk
Management, Legal and Compliance Departments, each of which
reports to one of the principal risk management bodies referred
to above.
Internal Audit Department
The establishment and maintenance of appropriate systems of risk
management and internal control is primarily the responsibility
of business management. The Internal Audit function provides
independent and objective assurance in respect of the adequacy
of the design and operating effectiveness of the framework of risk
management, control and governance process across the group,
focusing on the areas of greatest risk to TBC Bank using a risk-based
approach. The Internal Audit Department monitors compliance with
local legislation and regulation, including compliance with NBG
requirements and regulation, regularly reviews the reliability of
the Bank’s information technology systems, assesses reliability
and integrity of financial information and reporting procedures
in accordance with a predetermined schedule. The Bank Internal
Audit Department discusses the results of all assessments with
management, and reports its findings and recommendations to
the Bank Audit Committee and the Supervisory Board. The Internal
Audit Department is independent of the Management Board.
Financial Risk Management Department
The Financial Risk Management Department is involved in the
management of financial risks arising from TBC's day-to-day banking
activities, including liquidity risk, interest rate risk, foreign currency
exchange risk and capital adequacy risk. It prepares various reports
and analyses in order to assist ALCO in performing its main functions.
The Financial Risk Management Department reports to the Chief
Financial Officer and monitors compliance with the limits set by the
ALCO, regulators and international financial institutions, forecasts
liquidity and other ratios and covenants, provides stress testing and
analyses hypothetical scenarios.
Treasury Department
The Treasury Department is involved in short-term liquidity
management, money-market and fixed income dealing, foreign
exchange dealing and TBC Bank's overall open currency position
management. The ALCO provides guides for the Treasury
Department's operations on an ongoing basis and sets limits for bank
counterparties. The Treasury Department is authorised to conclude
foreign exchange, money market and fixed income deals within the
limits approved by ALCO, The Treasury Department, along with the
Financial Risk Management Department, prepares regular reports,
which are presented to the ALCO and which are the primary means by
which the ALCO supervises the Treasury Department's asset and
liability management functions.
The Treasury Department undertakes a number of activities
in relation to liquidity, money-market and fixed income dealing,
including managing the distribution of cash and non-cash liquidity
among TBC Bank's branches and nostros accounts, placing free
liquidity (within approved limits by ALCO) with local and foreign
counterpart banks, as well as investing in local sovereign debt
securities. The Treasury Department also attracts short-term
funding from local and foreign counterpart banks (when necessary)
and conducts ongoing analyses of risks and opportunities aimed at
ensuring that TBC Bank remains in compliance with limits set by the
Financial Risk Management Department. The Treasury Department
then prepares recommendations in respect of revised risk exposure
limits for the ALCO. The Treasury Department also undertakes a
number of functions to manage and constantly monitor TBC Bank's
overall open currency position and to ensure compliance with the
prudential ratios set by the NBG, as well as TBC Bank's internal
policies. In addition, the Treasury Department is responsible for
setting foreign exchange bid and ask rates, as well as monitoring and
authorising certain transactions on non-standard rates, conducting
foreign exchange and derivative transactions with large clients in
accordance with TBC Bank's foreign exchange pricing policy and
advising clients on foreign exchange issues.
Credit Portfolio Risk Management Department
The Credit Portfolio Risk Management Department reports to the
Chief Risk Officer and is responsible for the management of credit
portfolio risk. The Credit Portfolio Risk Management Department
ensures the maintenance of a balanced loan portfolio and the
correspondence of actual risks to the predefined limits.
The Department prepares policies and procedures for efficient
credit risk management, which are approved by the Supervisory
Board or Management Board. The Credit Portfolio Risk Management
Department is responsible for the timely identification and assessment
of credit risks and outlining mitigation actions regarding those risks
that should be reduced. This department develops adequate tools and
models for effective credit risk management, such as application and
behavioural scorecards and rating models. The department develops
models for stress testing in order to assess credit exposures under
various scenarios and make corresponding conclusions for capital
adequacy purposes.
The Credit Portfolio Risk Management Department reviews and
analyses portfolio dynamics on a regular basis, analyses underwriting
standards and outlines recommendations for managing portfolio risks
more efficiently. The Credit Portfolio Risk Management Department
prepares regular reports to the Management Board, Supervisory
Board, Credit Committee and Risk, Ethics and Compliance Committee
in order to timely communicate information about portfolio quality
trends and structure, compliance with risk appetite limits, TBC's
related and connected party exposures, results of stress tests and
outputs of the risk assessment process.
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Corporate, SME, and Retail Credit Underwriting Departments
The Corporate, SME and Retail Credit Underwriting departments are
involved in the applications approval process as members of the
corresponding loan approval committees. Corporate, SME and retail
credit risk managers review loan presentations on credit exposures
prepared by the loan officers and credit analysts to ensure that the
analysis is complete, that comprehensive information is gathered to
assess the borrower's risk profile, that all relevant risks are identified
and adequately addressed and that the loan is properly structured.
Corporate and SME credit risk managers also oversee the monitoring
process of individual transactions in order to timely discover any signs
of deterioration in a borrower's repayment capability and undertake
corresponding measures. The Corporate, SME and Retail Credit
Underwriting Departments report to the Chief Risk Officer.
Applications for any micro loans not approved at the branch level are
reviewed by Bank Constanta's Credit Risk Management Department.
In addition to application reviews, this department is responsible for
micro loans portfolio quality monitoring and for the development of
models for credit portfolio management.
Operational Risk Management Department
The Operational Risk Management Department implements a
framework for identifying, assessing, measuring and reporting
principles of operational risks. This operational risk management
framework enables TBC's identification and assessment of
operational risk categories within TBC's processes and operations;
the detection of critical risk areas or groups of operations with an
increased risk level; the development of response actions and the
imposition of restrictions in critical risk zones to neutralise identified
risk; and the development of business-process optimisation schemes,
including document circulation, information streams, distribution of
functions, permissions and responsibilities. It ensures that operational
risk is within TBC's risk appetite. The Operational Risk Management
Department reports to the Chief Risk Officer.
Legal Department
The Legal Department ensures that TBC's activities conform to
applicable legislation and works 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 TBC's activities in a timely manner, the investigation of
TBC's activities in order to identify any legal risks, the planning and
implementation of all necessary actions to eliminate identified legal
risks and participation in legal proceedings on behalf of TBC where
necessary. The Legal Department monitors all changes in relevant
laws and regulations, and ensures that those changes are properly
reflected in TBC's procedures, instructions, manuals, templates and
other relevant documentation.
Compliance Department
The Compliance Department is focused on improving the entire
compliance system. It is responsible for coordinating the identification,
assessment and documentation of compliance risks associated with
TBC's activities, including the development of new products and
business practices, the proposed establishment of new types of
business or customer relationships or material changes in the nature
of such relationships and other related measures. The Compliance
Department is authorised to plan and administer TBC's overall
compliance systems, perform compliance-related direction and
supervision, and instruct on corrective action and other measures to
branches, offices, divisions, headquarters, subsidiaries, and affiliates,
both in and out of Georgia, upon the occurrence of violations of
compliance, all in an integrated fashion.
Anti-money laundering is one of the Compliance Department's main
functions, established according to the compliance legislation and
recommendations of competent international organisations. TBC is
committed to high standards of anti-money laundering and requires
Management and employees to adhere to these standards in order to
prevent the use of TBC's products and services for money laundering
purposes. Adherence to this policy is mandatory for all TBC group
companies and for all employees.
Risk Appetite
Management considers the risk appetite to be fundamental in the
Bank’s risk management. Risk appetite is defined as the level of risk
the Bank is willing to take in the pursuit of its business strategy.
Management believes that a well-defined risk appetite statement
leads to more efficient risk management across the Group with:
• greater transparency of key risk objectives,
• consistency between strategic objectives and the risk management
framework, and
• greater awareness of risk objectives and more effective
communication with internal decision-makers and
external stakeholders.
The TBC Bank Group defines acceptable levels of risk in order to meet
the following aims and goals:
• Maintain the capital adequacy ratio and proper allocation of capital
• Manage liquidity
• Manage earnings volatility
• Maintain the desired level of credit rating of the Bank
• Comply with the requirements of the regulators, creditors
and shareholders
102
TBC Bank Annual Report 2014 The Bank regularly assesses whether it, considering its business
strategy, operates within the bounds of the stated risk appetite
statement under business as usual, mild stress and severe stress
scenarios. If analysis reveals that the Bank operates outside of its risk
appetite, changes are recommended where appropriate to the Bank’s
business plan.
The risk appetite statement is cascaded down to the operational
limits for all types of risks and business segments and approved by
the Risk, Ethics and Compliance Committee. Quantitative limits are
set where possible for those risk drivers which affect the Bank’s risk
profile and thus is important for maintaining risks within the Bank’s
risk appetite. Qualitative limits are set for limits which are not easily
quantifiable. Limits are updated on a yearly basis in line with the
Bank’s business strategy.
Internal Capital Adequacy Assessment Process (ICAAP)
Following the adoption of Basel II/III requirements by the NBG,
TBC calculates its capital requirements and risk-weighted assets
separately under both Pillar 1 and Pillar 2 starting from 31 December
2012. The NBG sets forth detailed instructions of Pillar 1 calculations.
For Pillar 2 purposes, TBC has adopted an Internal Capital Adequacy
Assessment Process (ICAAP), whereby TBC Bank assesses all
material risks that it faces and reserves capital for each.
In September 2014, TBC has issued its second ICAAP document that
was actively debated by Risk, Ethics and Compliance committee and
was approved by the Supervisory Board. The document was submitted
to the NBG for further discussions.
The key components of TBC's ICAAP process include the risk
identification, comprehensive assessment of risks and sound capital
cover assessments, including risk appetite establishment and limiting
system construction; aggregation; stress testing; validation; risk
monitoring; reporting and ex post control; quality assurance and
internal control review process; and capital planning.
The table below summarises the material risks TBC Bank faces and the
approaches used to calculate capital charges for each identified risk.
Summary of Risks Considered per Basel pillar I and II
Key areas
Credit Risk
Currency Induced
Credit Risk (CICR)
Market Risk
Operational Risk
Pillar I
Pillar II
Standardised
approach
Standardised approach
NBG assessment Bank assessment
Standardised
approach
Basic Indicator
Approach
Standardised approach
Advanced Measurement
Approach
Liquidity Risk
Not required
Not required
Interest Rate Risk in
the banking book
Reputation Risk
Strategic Risk
—
—
—
Concentration Risk —
Advanced Approach
Benchmarking
Benchmarking
Bank assessment
Under ICAAP, TBC Bank's economic capital is calculated in order to
cover all material risks other than liquidity risk (for which a liquidity
contingency plan, rather than capital, is required).
Stress Testing
TBC Bank performs stress testing which is used to provide valuable
information for the management decision making within economic
capital management. The Bank has developed a comprehensive,
Enterprise-Wide Stress Testing (EWST) framework that is actively
used for capital management and risk assessment purposes.
TBC Bank considers two main scenarios in its stress testing:
Mild stress – a stress that might occur during the normal business cycle
(once in seven years). According to the risk appetite of the bank, the bank
should have enough buffer on top of minimum capital requirements to
ensure that the bank can withstand the mild stress scenario without
breaching the minimum capital adequacy requirement.
Severe stress – a stress that could occur once in 100 years. The Risk
appetite requires the bank to maintain positive equity in case of the
severe stress test scenario. If capital is not enough to maintain positive
equity after the severe stress test, the stress results will be applied as
severe stress buffer on top of minimum capital requirements and mild
stress or NBG buffers.
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Methodology used for both stress tests is the same, however the
scenarios and risks considered are different.
Stress tests scenarios are designed to be consistent with TBC Bank’s
risk appetite statement.
Credit Risk Management
Overview
TBC Bank is exposed to credit risk, which is the risk that a counterparty
will be unable to pay amounts in full when due. TBC Bank's exposure
to credit risk arises as a result of its lending operations and other
transactions with counterparties giving rise to financial assets. Adverse
changes in the credit quality of the borrower or a general deterioration
in economic conditions could affect the recoverability and the value of
TBC Bank’s credit portfolio and therefore its financial performance.
The credit risk that the Bank faces includes: (i) counterparty credit risk
(the risk default or non-fulfilment of contracts due to a deterioration
in the counterparty's credit quality); (ii) concentration risk (the risk
of portfolio quality deterioration due to large exposures to small
numbers of borrowers or individual industries); (iii) currency-induced
credit risks (risks arising from foreign currency-denominated loans in
the portfolio); and (iv) residual risks (resulting from the use of credit
risk-mitigation techniques).
The objective of TBC Bank's credit risk management is to maximise
risk-adjusted rate of return by maintaining credit risk exposure within
acceptable parameters as defined by TBC Bank’s risk appetite.
Comprehensive risk management methods and processes are
established as part of TBC Bank’s risk management framework to
manage credit risk effectively. The main principles for TBC Bank's
credit risk management are: establishing an appropriate credit risk
environment; operating under a sound credit-granting process; and
maintaining efficient processes for credit risk measurement, control
and monitoring.
The Bank systematically reviews and continuously seeks to improve its
credit risk management policies and systems in an effort to ensure
that high quality and strong credit risk management systems are in
place, and they are in line with any new challenges the Bank faces
from the changing market environment, as well as the development
and growth of the Bank’s business. As part of this process,
the following initiatives were carried out in 2014:
of scorecards with support of external consultants. Moving
to in-house development enables the Bank to apply specific
knowledge of the local market, thus leading to more robust
scorecards development.
• Retail loans’ early collection system was reviewed and improved
together with external consultant. Updated processes for early
phase collection enables the Bank to more efficiently manage
delinquencies in the retail loan book, and thus minimise level of
overdue loans.
• The methodology was developed for management and
measurement of concentration risks in the loan book. The
methodology enables the Bank to keep concentration level at the
acceptable limit, as defined by the risk appetite and to assess the
required capital under Pillar II for the given concentration level
Credit Analysis Process
TBC Bank strives to ensure a sound credit-granting process by
establishing well-defined credit granting criteria and building up an
efficient process for the comprehensive assessment of a borrower's
risk profile. The credit analysis process is comprised of a number
of aspects. Principal amongst these is a risk assessment of the
counterparty according to predefined credit granting principles. Various
assessment processes are in place based on the type of credit exposure
and borrower profile. When analysing corporate, SME, micro and large
retail loans it is ensured that sufficient information is received about the
borrower, its credit history, purpose of the credit and, where applicable,
collateral in order to make an adequate credit decision. For smaller
retail loans, such as POS loans and credit cards, decisions are mainly
based on the borrower’s application score and credit bureau rating.
Different Loan Approval Committees are in place for the approval of
credit exposures to retail, corporate, SME and micro customers. The
composition of a Loan Approval Committee depends on aggregated
liabilities of the borrower and the borrower's risk profile. Credit risk
managers (as members of corresponding Loan Approval Committees)
ensure that the borrower and proposed credit exposure risks are
thoroughly analysed. POS and credit card loans are reviewed by the
Centralised Operations Processing Department. Loans to TBC Bank's
related and connected parties are approved by the Supervisory Board
(although the Supervisory Board delegates approval authority to the
Management Board for loans up to USD 100,000). A loan to a "large
borrower" (a borrower with exposure to more than 5% of TBC Bank's
Basel capital) requires the review and approval of the Risk, Ethics and
Compliance Committee.
• The Bank’s risk appetite statement was updated and approved
by the Supervisory Board and Risk, Ethics and Compliance
Committee. The management believes that clearly articulated
risk appetite provides clear direction for the Bank’s risk taking
activities, thereby enabling the critical link between the Bank’s
strategy and day-to-day risk management. The Bank moved to the
in-house scorecard development and updated scorecards for the
number of retail products. The Bank used to develop various types
Credit Risk Mitigation
Credit decisions are based primarily on the borrower's repayment
capacity and creditworthiness; in addition, TBC Bank uses credit risk
mitigation tools given by collateral and guarantees to reduce credit
risk. The reliance that can be placed on these mitigants is carefully
assessed for legal certainty and enforceability, market valuation of
collateral and counterparty risk of the guarantor. Corresponding
policies determine eligibility of collateral types and outline procedures
104
TBC Bank Annual Report 2014 to ensure that the value of collateral is appropriately appraised and
monitored regularly. It is ensured that the agreements regarding the
provision of the collateral can be enforced legally.
The majority types of collateral used for credit risk mitigation
purposes are: real estate; equipment, machinery, inventory and other
movable assets; cash and gold. In order to be recognised as security
and for the loan to be classified as secured, all items pledged must be
valued in accordance with TBC Bank's internal policies, by TBC Bank's
Internal Appraisal Group (other than loans to related parties, for which
external appraisers are used). The policy prescribes both the process
of valuation and the frequency of valuation for different collateral
types. The Internal Appraisal Group is independent from the loan
granting process in order to ensure that adequate appraisals are
obtained and proper appraisal procedures are followed.
Collateral of significant value (defined as cases where the value
of each of the loan and the collateral exceeds GEL 500,000) is
re-evaluated annually by internal appraisers during on-site visits.
Statistical methods are used to monitor the value of equipment and
real-estate collateral that are of non-significant value. Inventory
collateral is re-evaluated semi-annually. Collateral may require
more frequent re-evaluation as a result of changes to the borrower's
standing or market fluctuations. In case of repossession, any collateral
is also re-evaluated within three months prior to any repossession.
Credit Risk Measurement and Monitoring
TBC Bank dedicates considerable resources to gain a clear and
accurate understanding of the credit risk the Bank faces across
various business segments. In order to efficiently manage the
portfolio, loans are classified according to risk criteria in accordance
with an internal classification system corresponding to NBG policy
and IFRS requirements. The risk management function has also
established an internal industry and single facility grading system
in order to effectively evaluate and rate the overall strength of TBC's
credit portfolio.
Grading
The Bank has established a facility grading system with respect to
retail, corporate, SME and micro loans.
For retail loans, TBC Bank together with the help of external
consultants developed a statistical behavioural rating model. The
model contains three separate grading systems for (a) loans secured
by real estate, (b) credit limits, and (c) consumer and other retail
loans. Each type is further differentiated depending on the amount
of time the loan has been outstanding (with separate analyses for
loans outstanding more than or less than six months). A grade is
allocated to the facility based on variables relating to the borrower's
demographic (including gender, work experience), credit history and
payment behaviour, utilisation of facilities (frequency of credit usage
and balances of loan amounts) and macroeconomic factors (such as
GDP and refinance rates).
The expert grading system for corporate and SME loans was updated
together with external consultants. The grade is allocated to corporate
and SME borrowers above a certain threshold and consists of a
combination of (i) the industry grade score, (ii) a general borrower
score reflecting the borrower's position in the industry and its
corporate governance, and (iii) a borrower financial score reflecting
financial conditions of the borrower and its potential ability to meet
financial liabilities.
Portfolio Supervision
In order to minimise credit risk, TBC Bank continuously monitors its
credit portfolio, both at the level of individual transaction and at overall
credit portfolio level. TBC Bank’s risk management policies and
processes are designed to identify and analyse risk in a timely manner,
to set appropriate risk limits, and to monitor the risks and adherence
to limits by means of reliable and timely data.
TBC Bank has processes in place to monitor credit portfolio quality on
a daily basis, analyse trends and take remedial measures as and when
any deterioration occurs. The system enables the Bank to ascertain
whether loans are being properly serviced, the adequacy of provisions,
whether the overall risk profile is within limits established according to
risk appetite and general compliance with all credit regulatory limits.
At the individual borrower level, TBC Bank regularly monitors the
borrower's timely debt repayments, as well as, for corporate and SME
loans, the borrower's financial condition, use of funds and fulfilment of
covenants. The corresponding policy provides procedural guidelines
relating to credit risk monitoring, monitoring frequency and roles and
responsibilities of corresponding individuals.
Provisioning guidelines
The allowance for loss is established for financial assets when there is
objective evidence that a financial asset is impaired. According to TBC
Bank's policy, the Bank's loan loss reserve must be maintained at a
level that is adequate to absorb all estimated inherent losses in TBC
Bank's credit portfolio at any given point in time. TBC Bank makes
every effort to maintain an adequate allowance for loss in order to
properly reflect the risk affecting TBC's earnings and capital. The
Bank estimates loan provisions and allowance for losses according
to rules set both by the NBG and IFRS.
Provisioning levels by NBG standards are defined according to the
borrower's financial condition, number of days overdue and collateral
coverage of the loan. Under NBG rules, retail and micro-finance loan
provisioning is done collectively, whereas corporate and SME loan
provisioning levels are assessed individually.
According to IFRS, the credit portfolio is assessed for provision
impairment on an individual and collective basis. For provisioning
purposes, borrowers or group of borrowers are classified as
"significant" or "non-significant". Borrowers with total liabilities of GEL
two million or more are regarded as significant. Significant loans with
105
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Risk Management
Continued
an impairment trigger event (such as a deterioration of the borrower's
financial standing or delinquencies in loan repayment) are assessed
for impairment on an individual basis. The remaining portfolio
(non-significant loans and significant loans with no impairment) is
assessed together on a collective basis.
Individual assessment is conducted based on the borrower's financial
standing and discounted collateral values (with discount ratios
differing by collateral type). The borrower's financial standing is
assessed based on historical and projected financials, including
historical financial results, business specifications, national economic
and relevant industry trends.
Collective assessment is conducted by reference to compiled
statistical data of five years' historical losses. The collectively-
assessed portfolio is segmented according to individual industries
(in the case of business loans) and product types (in the case of
retail loans).
Concentration
Concentration management is a significant function of credit risk
management. A concentration of credit risk exists when a number
of counterparties are engaged in similar activities and have similar
economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
and other conditions. As a result, TBC Bank constantly reviews its
concentration in a number of areas.
TBC Bank limits the level of credit risk it undertakes by placing
limits on concentrations of: (i) single borrowers and groups of related
borrowers; (ii) large borrowers (classified as those with exposure
to more than 5% of TBC Bank's regulatory capital); (iii) related and
affiliated parties of TBC Bank (iv) single borrowers with unsecured
liability and total unsecured loans; (v) single industry and groups of
"higher-risk" industries (such as development, construction and real
estate) and (vi) top 20 group of borrowers. The limits are updated
annually or more frequently as necessary.
Comprehensive monitoring system is in place to ensure that
concentration levels are within the predefined limits.
Stress Testing
TBC Bank uses stress tests to estimate potential credit losses in case
of deteriorating economic conditions and their effect on available
capital. Two types of stress tests are undertaken for credit risk
management purposes: (i) enterprise wide stress test and (ii) currency
induced credit risk stress test.
Under the enterprise wide stress testing framework potential credit
losses are estimated for mild and severe stress scenarios. The
framework contrasts key economic criteria with historical observed
default data. This data is used to predict an effect of different stress
scenarios on TBC Bank’s current credit portfolio considering default
rates and collateral prices. The stressed available capital under
different scenarios is compared with required capital according to both
internal and regulatory capital rules, to assess the Bank’s financial
strength under the different economic conditions.
According to the currency induced credit risk stress testing framework
TBC Bank's foreign currency-denominated credit portfolio is stress
tested for currency devaluations, estimating potential losses suffered
by a foreign currency-denominated credit portfolio. The results of
stress testing are applied for capital requirements assessment
purposes under ICAAP.
Funding and Liquidity Risk Management
Liquidity risk is the risk that TBC either does not have sufficient
financial resources available to meet all of its obligations and
commitments as they fall due, or can access those resources only at a
high cost. Liquidity risk is managed by the Financial Risk Management
and Treasury Departments and is monitored by the ALCO.
The principal objectives of TBC's liquidity risk management policy are to:
(i) ensure the availability of funds in order to meet claims arising from
total liabilities and off-balance sheet commitments, both actual and
contingent, at an economic price;
(ii) recognise any structural mismatch existing within TBC's statement
of financial position and set monitoring ratios to manage funding in
line with the Bank’s well-balanced growth; and
(iii) monitor liquidity and funding on an ongoing basis to ensure that
approved business targets are met without compromising TBC's
risk profile.
The Liquidity risk management Policy is reviewed by Management
Board prior to approval by the Supervisory Board.
Liquidity risk is categorised into two risk types: funding liquidity risk
and market liquidity risk.
Funding liquidity risk is the risk that TBC will not be able to efficiently
meet both expected and unexpected current and future cash flow
without affecting either its daily operations or its financial condition
under both normal conditions and during a crisis situation. To manage
funding liquidity risk TBC internally developed Liquidity Coverage Ratio
(LCR) and a Net Stable Funding Ratio (NSFR) models both under Basel III
liquidity guidelines. In addition, TBC applies as well stress tests and
"what-if" scenario analyses and monitors NBG minimum liquidity ratio.
LCR (calculated by reference to the sum of qualified liquid assets and
30-day cash inflows divided by 30-day cash outflows) is used to help
manage short-term liquidity risks. TBC's liquidity risk management
framework is designed to comprehensively project cash flows arising
from assets, liabilities and off-balance sheet items over certain time
bands and ensure that liquidity coverage ratio limits are put in place.
TBC also stress tests the results of liquidity through large shock
scenarios set by the NBG. TBC calculates its internal liquidity coverage
106
TBC Bank Annual Report 2014 ratio and conducts stress tests on a weekly basis. TBC Bank's liquidity
coverage ratios were 402%, 344% and 305% for the years ended
31 December 2014, 2013 and 2012, respectively.
NSFR is used for long-term liquidity risk management to promote
resilience over a longer time horizon by creating additional incentives
for TBC to rely on more stable sources of funding on a continuing basis.
Market liquidity risk is the risk that TBC cannot easily offset or eliminate
a position at the then-current market price because of inadequate
market depth or market disruption. To manage market liquidity risk,
TBC follows Basel III guidelines on high-quality liquidity asset eligibility
to ensure that TBC's high-quality liquid assets can be sold without
causing a significant movement in the price and with minimum loss
of value.
In addition, TBC has a liquidity contingency plan, updated annually,
which forms part of TBC's overall prudential liquidity policy and is
designed to ensure that TBC is able to meet its funding and liquidity
requirements and maintain its core business operations in
deteriorating liquidity conditions that could arise outside the ordinary
course of its business.
Funding
TBC's principal sources of liquidity include customer deposits and
customer accounts, borrowings from local and international banks
and financial institutions, subordinated loans from the IFI Investors,
local inter-bank short-term term deposits and loans, proceeds from
sales of investment securities, principal repayments on loans, interest
income, and fee and commission income.
We believe that strong and diversified funding structure is one of TBC's
differentiators. TBC relies on relatively stable deposits from Georgia
as the main source of funding. In order to maintain and further
enhance liability structure TBC sets the targets for retail deposits in
the strategy and sets the gross loan to deposit ratio limits. TBC's gross
loan to deposit ratio (defined as total value of gross loans divided by
total value of deposits) was 112%, 103% and 102% as at 31 December
2014, 2013 and 2012, respectively.
TBC also sets deposit concentration limits for large deposits and
deposits of non-Georgian residents in its deposit portfolio.
We believe that TBC has sufficient liquidity to meet its current on- and
off-balance sheet obligations.
For further information on management of liquidity risk, please refer
to Note 35 to the Audited Consolidated Financial Statements.
Maturity Analysis
TBC's principal sources of liquidity include deposits and customer
accounts; borrowings from local and international banks and financial
institutions; subordinated loans from the IFI Investors; inter-bank term
deposits and short-term loans; proceeds from sales of investment
securities; principal repayments on loans; interest income; and fee
and commission income.
We believe that TBC has sufficient liquidity to meet its current on-
and off-balance sheet obligations.
For further information on management of liquidity risk, please refer
to Note 35 to the Audited Consolidated Financial Statements.
TBC follows the Basel Committee's definition of market risk as the
risk of losses in on- and off-balance-sheet positions arising from
movements in market prices. These risks are principally (a) risks
pertaining to interest rate related instruments and equities in the
"trading book" (financial instruments or commodities held for trading
purposes); and (b) foreign exchange risk and commodities risk
throughout TBC. TBC's strategy is not to be involved in trading financial
instruments or investments in commodities. Accordingly, TBC's only
exposure to market risk is foreign exchange risk in its "structural
book," comprising its regular commercial banking activities having
no trading, arbitrage or speculative intent.
Foreign Exchange Risk
TBC is exposed to currency risk that arises from the potential change
in foreign currency exchange rates, which can affect the value of a
financial instrument. This risk stems from the open currency positions
created due to mismatches in foreign currency assets and liabilities.
The NBG requires TBC Bank to monitor both balance-sheet and total
aggregate balance (including off-balance sheet) open currency
positions and to maintain the later one within 20% of TBC Bank's
regulatory capital. For the year ended 31 December 2014, TBC Bank
maintained an aggregate balance open currency position of 3.1%.
In addition, the Supervisory Board sets further limits on open currency
positions. The ALCO has set limits on the level of exposure by currency
and for total aggregate position which are more conservative than
those set by the NBG and the Supervisory Board. TBC Bank's
compliance with these limits is monitored daily by the heads of the
Treasury and Financial Risk Management Departments and is
reported periodically to the Management Board, the Supervisory
Board and the Risk, Ethics and Compliance Committee.
Open currency positions are used to assess TBC Bank's minimum
capital requirements under the ICAAP framework on a monthly basis.
In addition, the Financial Risk Management Department performs
stress testing on a monthly basis.
107
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review Governance
Risk Management
Continued
Interest Rate Risk Management
Interest rate risk arises from potential changes in market interest
rates that can adversely affect the value of TBC's financial assets and
liabilities. This risk can arise from maturity mismatches of assets and
liabilities, as well as from the repricing characteristics of such assets
and liabilities. Most of the loans and deposits offered by TBC are at
fixed interest rates, while a portion of TBC's borrowings is based on a
floating rate of interest. TBC's floating rate borrowings are, to a certain
extent, hedged as a result of the NBG paying a floating rate of interest
on the minimum reserves that TBC holds with the NBG. TBC Bank has
also entered into interest rate swap agreements in order to mitigate
interest rate risk. Furthermore, many of TBC's loans to and deposits
from customers contain a clause allowing TBC to adjust the interest
rate on the loan/deposit in case of adverse interest rate movements,
thereby limiting TBC's exposure to interest rate risk. Management
also believes that TBC's interest rate margins provide a reasonable
buffer in order to mitigate the effect of possible adverse interest
rate movement.
TBC Bank employs an advanced framework for the management of
interest rate risk. In order to manage interest rate risk TBC Bank
establishes appropriate limits, monitors compliance with the limits
and prepares forecasts. Interest rate risk is managed by the Financial
Risk Management Department and is monitored by the ALCO. The
ALCO decides on actions that are necessary for effective interest rate
risk management and follows up on their implementation. The ALCO
reports periodically to the Management Board, the Supervisory Board
and the Risk, Ethics and Compliance Committee.
TBC Bank measures four types of interest rate risk based on the
source of the risk: (i) repricing risk, (ii) yield curve risk, (iii) basis risk
and (iv) optionality (embedded option risk).
TBC Bank considers a number of stress scenarios, including different
yield curve shift scenarios and behavioural adjustments to cash flows
(such as deposit withdrawals or loan prepayments), to calculate the
impact on one-year profitability and enterprise value. Appropriate
limits are set by the Supervisory Board and by the ALCO.
Under the ICAAP framework, TBC Bank reserves capital in the amount
of the adverse effect of possible parallel yield curve shift scenarios on
net interest income over a one-year period for Basel II Pillar 2 capital
calculation purposes. As at 31 December 2014 the impact of the
downward parallel shift of a yield curve of 3.3% in GEL and an upward
parallel shift of 2.5% in USD on net interest income over a one-year
period was equivalent to GEL 29 million.
108
Operational Risk Management
TBC Bank is exposed to operational risk, which is the risk of loss
resulting from inadequate or failed processes, people and systems or
from external events. It includes legal risk, but excludes strategic and
reputational risk.
In order to oversee and mitigate operational risk, TBC Bank has
established an operational risk management framework. The main
components of this framework are the identification, assessment,
measurement and reporting of operational risk, including information
technology risk. TBC Bank uses various tools and techniques to
mitigate operational risk, including internal loss data, structured
self-assessment systems, scenario and root cause analyses, risk
mapping and risk indicators. The Supervisory Board and Management
Board ensures a strong internal control culture within the bank where
control activities are an integral part of TBC Banks operations.
In connection with the Basel II/III Implementation Project, TBC Bank
reviewed and enhanced its operational risk management system
according to Basel II requirements. This included the development of
an Internal Advance Measurement (AMA) model to calculate economic
capital for operational risk.
TBC Bank has implemented various policies, processes and
procedures (including as part of the Basel II/III Implementation
Project) to control and mitigate material operational risks.
These include:
•
Implementation of new technologies, increased levels of
automation and the use of insurance policies to minimise and
externalise risks relating to "low frequency, high severity" events;
• Outsourcing risk management policy which enables TBC Bank to
control outsourcing (Vendor) Risk arising from adverse events and
risk concentrations due to failures in vendor selection, insufficient
controls and oversight over a vendor and/or services provided by a
vendor and other impacts to the vendor which could not happen to
us by nature, severity or frequency;
•
• Establishment of business continuity plans to ensure TBC Bank's
ability to operate on an ongoing basis and limit losses in the event
of a severe business disruption;
Implementation of procedures to analyse system flaws and
take corrective measures to prevent the re-occurrence of
significant losses;
Involvement of the Operational Risk Department in the approval
process of new products and services to minimise risks relating
thereto; and
•
• Development of a special Operational Risk Awareness programme
for TBC Bank employees and provision of regular training to
further strengthen TBC's internal risk culture.
TBC Bank Annual Report 2014 The Management Board and the Supervisory Board together set TBC
Banks operational risk appetite policy and the Operational Risks
Committee oversees compliance with the limits set therein. The
Operational Risks Committee discusses TBC Banks operational risk
profile and risk minimisation recommendations on a regular basis.
The Operational Risk Department is responsible for the
implementation of the operational risk management framework and
reports to the Chief Risk Officer. The Operational Risk Department is
also responsible for receiving IT incident reports, monitoring IT
incident occurrences and overseeing activities targeted at solving
identified problems. External consultants perform regular
assessments of information security risks, which are managed
according to international standards.
To minimise information security risk TBC has invested in Data Loss
Prevention and Information Security and Event Management (SIEM)
systems. The data loss prevention system is designed to detect
potential data breaches and prevent sensitive data from loss and
misuse. SIEM system provides real-time analysis of security alerts
generated by network hardware and applications.
The internal control function of the Operational Risk Management
Department is intended to detect systematic errors in banking
operations, ensure far-reaching improvement and development
through proposals and added value in process advancements. The
main functions of this process include: development of internal control
system to address risks that could prevent achieving established
goals; use of qualitative and quantitative methods to identify risk and
determine relative risk rankings; coordination of establishment and
maintenance control activities such as reconciliations, approvals, and
review of operating activities; and monitoring and reporting results to
the Management and Supervisory Board to enable it to understand the
internal control system and focus on the material and strategic
implications for TBC Banks business.
In addition, TBC Bank manages Compliance and AML Risk,
Reputational Risk, Strategic Risk and other relevant risks. For more
information regarding these risks, please refer to TBC Bank IR website
at www.ir.tbcbank.ge and relevant documents within.
109
TBC Bank Annual Report 2014 Strategic Report Governance Financial Statements Business Review TBC Bank Annual Report 2014
Financial
Statements
112 Independent Auditor’s Report
113 Consolidated Financial Statements of TBC Group
117 Notes to the Financial Statements
ADDITIONAL INFORMATION
196 Shareholders’ Meetings
196 Dialogue with Shareholders
196 Dividend Policy
110
112
Independent
Auditor’s Report
113
Consolidated
Financial
Statements
of TBC Group
196
Additional
Information
TBC Bank Annual Report 2014
111
Strategic Report Governance Financial Statements Business Review Financial Statements
Independent Auditor’s Report
To the Shareholders and Management of JSC TBC Bank:
We have audited the accompanying consolidated financial statements of JSC TBC Bank and its subsidiaries, which comprise the consolidated
statement of financial position as at 31 December 2014, and the consolidated statements of profit or loss and other comprehensive income,
changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other
explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of JSC TBC Bank and its
subsidiaries as at 31 December 2014, and their financial performance and cash flows for the years then ended in accordance with
International Financial Reporting Standards.
18 February 2015
Tbilisi, Georgia
112
TBC Bank Annual Report 2014 TBC Bank Annual Report 2014
Consolidated Statement of Financial Position
In thousands of GEL
ASSETS
Cash and cash equivalents
Due from other banks
Mandatory cash balances with the National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in finance leases
Investment properties
Current income tax prepayment
Deferred income tax asset
Other financial assets
Other assets
Goodwill
Intangible assets
Premises and equipment
TOTAL ASSETS
LIABILITIES
Due to credit institutions
Customer accounts
Other financial liabilities
Current income tax liability
Debt securities in issue
Deferred income tax liability
Provisions for liabilities and charges
Other liabilities
Subordinated debt
TOTAL LIABILITIES
EQUITY
Share capital
Share premium
Retained earnings
Share based payment reserve
Other reserves
Net assets attributable to owners
Non-controlling interest
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Approved for issue and signed on 18 February 2015
Notes
31 December
2014
31 December
2013
31 December
2012
6
7
8
9
10
12
15
33
11
13
16
14
14
17
18
21
19
33
20
22
23
24
24
25
28
37
532,118
33,704
336,075
390,465
1,708
295,332
398,587
29,542
316,061
3,556,496
2,801,712
2,370,200
466,510
50,907
76,216
251
383
43,857
77,775
2,726
37,756
208,692
500,651
407,733
35,613
83,383
6,202
–
45,049
65,075
2,726
23,491
199,668
26,377
34,305
10,135
–
25,301
67,354
2,726
18,817
192,556
5,423,466
4,451,075
3,899,694
749,285
565,806
627,123
3,322,428
2,886,883
2,486,944
41,346
12,433
20,423
23,187
11,898
34,975
188,015
24,850
19,462
–
4,474
27,814
12,380
31,305
168,274
–
–
20,143
6,174
20,744
115,080
4,403,990
3,721,786
3,295,670
19,576
405,658
532,992
4,624
49,255
1,012,105
7,371
16,499
242,624
402,627
2,032
50,840
714,622
14,667
1,019,476
729,289
16,143
231,501
298,880
4,142
41,939
592,605
11,419
604,024
5,423,466
4,451,075
3,899,694
Vakhtang Butskhrikidze
Chief Executive Officer
Giorgi Shagidze
Chief Financial Officer
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
113
Strategic Report Governance Financial Statements Business Review
Financial Statements
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
In thousands of GEL
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Gains less losses from trading in foreign currencies
Foreign exchange translation gains less losses /(losses less gains)
(Losses less gains)/gains less losses from derivative financial instruments
Other operating income
Other operating non-interest income
Provision for loan impairment
Provision for impairment of investments in finance lease
Recovery of/ (Provision for) performance guarantees and credit related commitments
Provision for impairment of other financial assets
Impairment of investment securities available for sale
Operating income after provisions for impairment
Staff costs
Depreciation and amortisation
Provision for liabilities and charges
Administrative and other operating expenses
Operating expenses
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss
Revaluation of available-for-sale investments
Exchange differences on translation to presentation currency
Income tax recorded directly in other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of premises and equipment
Income tax recorded directly in other comprehensive income
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit is attributable to:
- Owners of the Bank
- Non-controlling interest
Profit for the year
Total comprehensive income is attributable to:
- Owners of the Bank
- Non-controlling interest
Total comprehensive income for the year
Earnings per share for profit attributable to the owners of the Bank:
- Basic earnings per share
- Diluted earnings per share
Notes
2014
2013
2012
29
29
30
30
31
9
12
20
11
14,15
20
32
512,357
(173,709)
338,648
88,203
(29,523)
58,680
39,730
2,359
(683)
19,600
61,006
474,796
456,545
(192,146)
(217,895)
282,650
238,650
74,361
(24,301)
50,060
37,894
(5,901)
613
16,136
48,742
64,232
(18,830)
45,402
25,240
7,617
(3,804)
13,680
42,733
(48,672)
(32,971)
(23,154)
(77)
902
(1,236)
(22)
(98)
(6,459)
(2,236)
(1,142)
(42)
(1,606)
(4,132)
(10)
409,229
338,546
297,841
(122,835)
(108,613)
(24,427)
(5,500)
(73,548)
(19,993)
(1,315)
(68,692)
(92,289)
(22,103)
(1,700)
(69,440)
(226,310)
(198,613)
(185,532)
182,919
139,933
112,309
33
(24,468)
(15,663)
(14,498)
158,451
124,270
97,811
10
28
33
28
33
(1,849)
2,095
(192)
–
–
54
7,923
1,233
(255)
–
–
8,901
682
(217)
(154)
10,513
(1,520)
9,304
158,505
133,171
107,115
157,451
1,000
121,616
2,654
96,519
1,292
158,451
124,270
97,811
157,505
1,000
130,517
2,654
105,823
1,292
158,505
133,171
107,115
26
26
3.4
3.4
3.0
3.0
2.5
2.5
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
114
TBC Bank Annual Report 2014 TBC Bank Annual Report 2014
Consolidated Statement of Changes in Equity
In thousands of GEL
Note
Share
capital
Share
premium
Share based
payments
reserve
Other
reserves
(note 28)
Retained
earnings
Total
Non-
controlling
interest
Total
equity
Balance at 1 January 2012
15,171
203,308
6,180
33,162
201,826
459,647
9,134
468,781
Net assets Attributable to owners
Profit for the year
Other comprehensive income
Total comprehensive income
for 2012
Share issue
Share based payment
Increase in share capital arising
from share based payment
Equity contribution of owners of
non-controlling shareholders
Transfer of revaluation surplus
on premises to retained
earnings
Balance at 31 December 2012
Profit for the year
Other comprehensive income
Total comprehensive income
for 2013
Share issue
Share based payment
Increase in share capital arising
from share based payment
Equity contribution of owners of
non-controlling shareholders
Dividends paid
Balance at 31 December 2013
Profit for the year
Other comprehensive income
Total comprehensive income
for 2014
Share issue
Share based payment
Transaction costs recognized
directly in equity
Purchase of additional interest
from minority shareholders
Dividends paid
Transfer of revaluation surplus
to retained earnings
Balance at 31 December 2014
24
25
24
25
24
25
–
–
–
815
–
157
–
–
–
23,612
–
–
–
–
–
2,700
4,581
(4,738)
–
–
–
16,143
–
231,501
–
4,142
–
–
–
240
–
116
–
–
–
–
–
7,097
–
–
–
–
2,032
4,026
(4,142)
–
–
–
–
–
9,304
96,519
–
96,519
9,304
1,292
–
97,811
9,304
9,304
96,519
105,823
1,292
107,115
–
–
–
–
–
–
(527)
41,939
–
8,901
535
298,880
121,616
–
24,427
2,700
–
8
592,605
121,616
8,901
–
–
–
24,427
2,700
–
993
993
–
11,419
2,654
–
8
604,024
124,270
8,901
8,901
121,616
130,517
2,654
133,171
–
–
–
–
–
–
–
–
–
(17,869)
7,337
2,032
–
–
(17,869)
–
–
–
7,337
2,032
–
594
–
594
(17,869)
16,499
242,624
2,032
50,840
402,627
714,622
14,667
729,289
–
–
–
–
–
–
3,077
172,493
–
–
–
–
–
–
–
–
–
–
2,592
(9,459)
–
–
–
–
–
–
–
–
54
54
–
–
–
89
–
157,451
–
157,451
54
1,000
–
158,451
54
157,451
–
–
–
157,505
175,570
2,592
(9,459)
1,000
158,505
–
–
–
175,570
2,592
(9,459)
(2,627)
(2,538)
(8,296)
(10,834)
(26,492)
(26,492)
–
–
(26,492)
305
(1,728)
2,033
305
19,576
405,658
4,624
49,255
532,992 1,012,105
7,371 1,019,476
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
115
Strategic Report Governance Financial Statements Business Review Financial Statements
Consolidated Statement of Cash Flows
In thousands of GEL
Cash flows from operating activities
Interest received
Interest paid
Fees and commissions received
Fees and commissions paid
Income received from trading in foreign currencies
Other operating income received
Staff costs paid
Administrative and other operating expenses paid
Income tax paid
Note
2014
2013
2012
462,448
430,700
(192,482)
(200,303)
499,052
(182,572)
95,295
(29,478)
39,730
13,804
74,823
(24,097)
37,894
10,300
(116,481)
(102,115)
(74,703)
(11,555)
(66,849)
(2,008)
64,232
(18,830)
25,240
9,993
(89,589)
(66,465)
(26,701)
Cash flows from operating activities before changes in operating assets and liabilities
233,092
197,914
128,277
Changes in operating assets and liabilities
Net (increase) / decrease in due from other banks
Net increase in loans and advances to customers
Net increase in investment in finance lease
Net decrease / (increase) in other financial assets
Net decrease in other assets
Net increase / (decrease) in due to other banks
Net increase in customer accounts
Net increase in other financial liabilities
Net (decrease) / increase in other liabilities and provision for liabilities and charges
Net cash (used in) / from operating activities
Cash flows from investing activities
Acquisition of investment securities available for sale
Proceeds from disposal of investment securities available for sale
Proceeds from redemption at maturity of investment securities available for sale
10
10
10
Acquisition of investment securities held to maturity
Proceeds from redemption of investment securities held to maturity
Acquisition of premises, equipment and intangible assets
Proceeds from disposal of investment property
Purchase of additional shares in subsidiaries
Net cash from / (used in) investing activities
(61,192)
(686,746)
(11,889)
593
11,056
39,539
336,631
10,919
(5,187)
61,275
(54,599)
(453,686)
(404,568)
(9,334)
(23,048)
22,471
(30,334)
(4,398)
(25,276)
26,402
(34,013)
297,393
474,948
7,808
5,231
6,383
1,339
(133,184)
75,690
114,495
(845,665)
(755,433)
(813,864)
51,369
843,695
61,626
619,902
90,857
599,913
(5,000)
33,000
–
–
(31,052)
(52,820)
18,316
–
14,296
–
6,422
(86,641)
(133,618)
–
–
(47,506)
15,452
(10,923)
370,124
(252,693)
6,000
–
19,334
(4,474)
(26,492)
–
175,570
(9,458)
159,856
321,160
(213,057)
(286,695)
45,763
–
–
(24,738)
4,474
–
(17,869)
594
7,199
–
–
–
–
993
24,426
–
35,146
8,411
24,434
374,153
277,911
(13,040)
(9,496)
15,869
141,653
390,465
532,118
6
6
(8,122)
398,587
390,465
398,587
Cash flows from financing activities
Proceeds from other borrowed funds
Redemption of other borrowed funds
Proceeds from subordinated debt
Redemption of subordinated debt
Proceeds from debt securities in issue
Redemption of debt securities in issue
Dividends paid
Equity contribution of owners of non-controlling shareholders
Issue of ordinary shares
Transaction costs recognized directly in equity
Net cash from /(used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The notes set out on pages 117 to 195 form an integral part of these consolidated financial statements.
116
TBC Bank Annual Report 2014 TBC Bank Annual Report 2014
Notes to the Consolidated Financial Statements
Introduction
1
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year
ended 31 December 2014 for TBC Bank (the “Bank”) and its subsidiaries (together referred to as the “Group” or “TBC Bank Group”).
The Bank was incorporated on 17 December 1992 and is domiciled in Georgia. The Bank is a joint stock company limited by shares and was
set up in accordance with Georgian regulations.
In 2009 the Group issued new shares and since then it does not have an ultimate controlling party. At 31 December 2014, 2013 and 2012
shareholders structure is as follows:
Shareholders
Bank of New York (Nominees), Limited
TBC Holdings LTD
Individuals
Liquid Crystal International N.V. LLC
International Finance Corporation
European Bank for Reconstruction and Development
Deutsche Investitions und Entwicklungsgesellschaft MBH
JPMorgan Chase Bank
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.
Ashmore Cayman SPC
Total
Note
24
% of ownership interest held as at 31 December
2014
71%
16%
8%
5%
–
–
–
–
–
–
2013
–
19%
9%
7%
20%
20%
11%
5%
5%
4%
2012
–
20%
7%
7%
20%
20%
12%
5%
5%
4%
100%
100%
100%
Bank of New York is the nominal holder of the shares that have been listed on the London Stock Exchange following the IPO in June 2014
Principal activity. The Bank’s principal business activity is universal banking operations that include corporate, small and medium
enterprises (“SME”), retail and micro operations within Georgia. The Bank has operated under a general banking license issued by the
National Bank of the Georgia (“NBG”) since 20 January 1993.
The Bank has 13 (2013: 13; 2012: 13) branches and 46 (2013: 47; 2012: 45) service centres within Georgia. As at 31 December 2014, the Bank
had 3,427 employees (2013: 2,893 employees; 2012: 2,705 employees).
The Bank is a parent of a group of companies (the “Group”) incorporated in Georgia and Azerbaijan, primary business activities include
providing banking, leasing, brokerage card processing services to corporate and individual customers. The list of companies included in the
Group is provided in Note 2. The Bank is the Group’s main operating unit and accounts for most of the Group’s activities.
Registered address and place of business. The Bank’s registered address and place of business is: 7 Marjanishvili Street, 0102 Tbilisi, Georgia.
Presentation currency. These consolidated financial statements are presented in thousands of Georgian Lari (“GEL thousands”), unless
otherwise indicated.
2 Summary of Significant Accounting Policies
Basis for preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) under the historical cost convention, as modified by the revaluation of premises, available-for-sale financial assets,
the initial recognition of financial instruments based on fair value and identifiable assets acquired and liabilities assumed in a business
combination measured at their fair values at the acquisition date and financial instruments categorised as at fair value through profit or loss.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have
been consistently applied to all the periods presented, unless otherwise stated (refer to Note 3).
117
Strategic Report Governance Financial Statements Business Review
2 Summary of Significant Accounting Policies Continued
Consolidated financial statements. Subsidiaries are those investees, including structured entities, that the Group controls because the
Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable
returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s
returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether
the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when
decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even
when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the
size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other
investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent
the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are
deconsolidated from the date on which control ceases.
The consolidated financial statements include the following principal subsidiaries:
Ownership / voting % as of 31 December
Subsidiary
United Financial Corporation JSC
TBC Broker LLC
TBC Leasing JSC
TBC Kredit LLC
Banking System Service Company LLC
TBC Pay LLC
Real Estate Management Fund JSC
TBC Invest LLC
Bank Constanta JSC
2014
98.67%
100%
99.48%
75%
100%
100%
100%
100%
100%
2013
2012
Country
Year of
incorporation
or acquisition Industry
93.32%
100%
89.53%
75%
100%
100%
100%
100%
93.32%
100%
89.53%
Georgia
Georgia
Georgia
1997 Card processing
1999 Brokerage
2003 Leasing
75% Azerbaijan
100%
100%
100%
100%
Georgia
Georgia
Georgia
Israel
Non-banking credit
institution
2008
2009 Information services
2009 Processing
2010 Real estate management
2011 PR and marketing
84.69%
83.85%
Georgia
2011 Financial institution
The acquisition method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent
of any non-controlling interest.
The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net
assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate
share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value.
Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the
amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date.
Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it identified all the assets
acquired and all liabilities and contingent liabilities assumed, and reviews appropriateness of their measurement.
The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities
incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition
related costs such as advisory, legal, valuation and similar professional services.
Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are
deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed.
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are
also eliminated unless the cost cannot be recovered. The Bank and all of its subsidiaries use uniform accounting policies consistent with the
Group’s policies.
Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly
or indirectly, by the Bank. Non-controlling interest forms a separate component of the Group’s equity.
118
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
2 Summary of Significant Accounting Policies Continued
Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or significant influence, any retained
interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the
initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset.
In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had
directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are
recycled to profit or loss.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously
recognised in other comprehensive income are reclassified to profit or loss where appropriate.
Financial instruments – key measurement terms. Depending on their classification financial instruments are carried at fair value, cost,
or amortised cost as described below.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which
transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or
liability and the quantity held by the entity. This is the case even if a market’s normal daily trading volume is not sufficient to absorb the
quantity held and placing orders to sell the position in a single transaction might affect the quoted price.
A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value
of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (ie an asset)
for a particular risk exposure or paid to transfer a net short position (ie a liability) for a particular risk exposure in an orderly transaction
between market participants at the measurement date. This is applicable for assets carried at fair value on a recurring basis if the Group:
(a) manages the group of financial assets and financial liabilities on the basis of the entity’s net exposure to a particular market risk (or risks)
or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy;
(b) it provides information on that basis about the group of assets and liabilities to the entity’s key management personnel; and (c) the market
risks, including duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities
is substantially the same.
Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial
data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not
available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted
prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all
material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level
three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable
inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Refer to Note 40.
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its
acquisition and includes transaction costs. Measurement at cost is only applicable to investments in equity instruments that do not have a
quoted market price and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of
such unquoted equity instruments. Refer to Note 10.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument.
An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and
commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and
securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.
Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus
accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of
transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method.
Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees
deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated
statement of financial position.
119
Strategic Report Governance Financial Statements Business Review 2 Summary of Significant Accounting Policies Continued
The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a
constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter
period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable
interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating
rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the
whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that
are an integral part of the effective interest rate (refer to income and expense recognition policy).
Initial recognition of financial instruments. Trading securities, derivatives and other financial instruments at fair value through profit or
loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value
at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference
between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument
or by a valuation technique whose inputs include only data from observable markets.
All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention
(“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial asset.
All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument.
Derecognition of financial assets. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows
from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into
a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or
(ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the
counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose
additional restrictions on the sale.
Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. Cash and cash equivalents include cash on hand, amounts due from the NBG, excluding
mandatory reserves, and all interbank placements and interbank receivables with original maturities of less than three months. Funds
restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents
are carried at amortised cost.
The payments or receipts presented in the statement of cash flows represent transfers of cash and cash equivalents by the Group, including
amounts charged or credited to current accounts of the Group’s counterparties held with the Group, such as loan interest income or
principal collected by charging the customer’s current account or interest payments or disbursement of loans credited to the customer’s
current account, which represent cash or cash equivalent from the customer’s perspective.
Mandatory cash balances with the National Bank of Georgia. Mandatory cash balances with the National Bank of Georgia are carried at
amortised cost and represent mandatory reserve deposits which are not available to finance the Group’s day to day operations and hence are
not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows.
Investment securities available for sale. This classification includes investment securities which the Group intends to hold for an indefinite
period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Group
classifies investments as available for sale at the time of purchase.
Investment securities available for sale are carried at fair value. Interest income on available for sale debt securities is calculated using
the effective interest method and recognised in profit or loss for the year. Dividends on available-for-sale equity instruments are recognised
in profit or loss for the year when the Group’s right to receive payment is established and it is probable that the dividends will be collected.
All other elements of changes in the fair value are recognized in Other Comprehensive Income (“OCI”) until the investment is derecognised
or impaired, at which time the cumulative gain or loss is reclassified from OCI to profit or loss. Impairment losses are recognised in profit
or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of investment securities
available for sale.
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A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative
impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset
previously recognised in profit or loss – is removed from equity and reclassified from OCI. Impairment losses on equity instruments are not
reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and
the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss
is reversed through current period’s profit or loss for the year.
Sale and repurchase agreements. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the
counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised.
The securities are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or
repledge the securities, in which case they are reclassified as repurchase receivables. The corresponding liability is presented within amounts
due to credit institutions. The repurchase agreements are short-term in nature. Available-for-sale securities reclassified to repurchase
receivables continue to be carried at fair value in accordance with accounting policies for these categories of assets.
Investment securities held to maturity. This classification includes quoted non-derivative financial assets with fixed or determinable
payments and fixed maturities that the Group has both the intention and ability to hold to maturity. Management determines the
classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification
at each the end of each reporting period. Investment securities held to maturity are carried at amortised cost.
Due from other banks. Amounts due from other banks are recorded when the Group advances money to counterparty banks with original
maturity of more than three months and with no intention of trading the resulting unquoted non-derivative receivable due on fixed or
determinable dates. Amounts due from other banks are carried at amortised cost.
Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or
originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the
receivable. Loans and advances to customers are carried at amortised cost.
When impaired financial assets are renegotiated and the renegotiated terms and conditions differ substantially from the previous terms,
the new asset is initially recognised at its fair value.
Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss when incurred as a result of
one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount
or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group
determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or
not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.
The primary factors that the Group considers whether a financial asset is impaired is its overdue status and realisability of related collateral,
if any. The following other principal criteria are also used to determine that there is objective evidence that an impairment loss has occurred:
• any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;
• the borrower experiences a significant financial difficulty as evidenced by borrower’s financial information that the Group obtains;
• the borrower considers bankruptcy or a financial reorganisation;
• there is adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that
impact the borrower; or
• the value of collateral significantly decreases as a result of deteriorating market conditions.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics.
Those characteristics are relevant to the estimation of future cash flows for groups or such assets by being indicative of the debtor’s ability
to pay all amounts due according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of historical loss
experience and the success of recovery of overdue amounts. Historical experience is adjusted on the basis of current observable data to
reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently.
If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of
the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms.
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Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of
expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the
asset. 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.
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 (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is
reversed by adjusting the allowance account through profit or loss.
Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset
have been completed and the amount of the loss has been determined. Loans to customers in retail, SME and micro segments (see Note 27
for segment definitions) are written off at the earliest of (a) after being past due for more than 180 days or (b) being fully provided for more
than 90 days. Loans issued to customers in the corporate segment are written off after being past due for more than 270 days, unless the
management expects to recover the loan within short period of time after 270 days threshold. Subsequent recoveries of amounts previously
written off are credited to impairment loss account in profit or loss for the year.
Repossessed collateral. Repossessed collateral represents non-financial assets acquired by the Group in settlement of overdue loans. The
assets are initially recognised at fair value when acquired and included in premises and equipment, investment property or inventories within
other assets depending on their nature and the Group’s intention in respect of recovery of these assets and are subsequently re-measured
and accounted for in accordance with the accounting policies for these categories of assets. Inventories of repossessed assets are recorded
at the lower of cost or net realisable value.
Credit related commitments. The Group enters into credit related commitments, including letters of credit and financial guarantees.
Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to
third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at
their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life
of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement
and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the
carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the
unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the
end of each reporting period.
Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts do
not transfer credit risk. Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees
received. This amount is amortised on a straight line basis over the life of the contract. At the end of each reporting period, the performance
guarantee contracts are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of
expenditure required to settle the contract at the end of each reporting period, discounted to present value if the discounting effect is material.
The Bank has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts.
Such amounts are recognised as loans and receivables.
Goodwill. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually
and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-
generating units, that are expected to benefit from the synergies of the business combination. Such units or group of units represent the
lowest level at which the Group monitors goodwill, and are not larger than an operating segment. Gains or losses on disposal of an operation
within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the disposed
operation, generally measured on the basis of the relative values of the disposed operation and the portion of the cash-generating unit which
is retained.
Premises and equipment. Premises and equipment, except for land, buildings and construction in progress, are stated at cost, less
accumulated depreciation and provision for impairment, where required. Cost of premises and equipment of acquired subsidiaries is the
estimated fair value at the date of acquisition.
Following initial recognition, land, buildings and construction in progress are carried at revalued amount, being the fair value at the date of
revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed
frequently enough to ensure that the carrying amount does not differ materially from that which would be determined using fair values at the
end of reporting period.
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Any revaluation surplus is credited to the revaluation reserve for premises and equipment included in equity, except to the extent that it
reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognized in profit
or loss to the extent of the decrease previously charged. A revaluation deficit is recognized in profit or loss, except that a deficit directly
offsetting a previous surplus on the same asset is recognized in other comprehensive income and reduces revaluation reserve for premises
and equipment cumulated in equity.
Depreciation on revalued buildings is charged to profit or loss. Upon disposal of revalued property, any revaluation reserve relating to the
particular asset being sold or retired is transferred to retained earnings.
Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of premises and
equipment items are capitalised and the replaced part is retired.
If impaired, premises and equipment are written down to the higher of their value in use and fair value less costs to sell. The decrease in
carrying amount is charged to profit or loss to the extent it exceeds the previous revaluation surplus in equity. An impairment loss
recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or
fair value less costs to sell.
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss.
Depreciation. Land and construction in progress are not depreciated. Depreciation on other items of premises and equipment is calculated
using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives as follows:
Premises
Furniture and fixtures
Computers and office equipment
Motor vehicles
Other equipment
Leasehold improvements
30 – 100 years;
5 – 8 years;
3 – 8 years;
4 – 5 years;
2 – 10 years; and
lesser of 7 years or the term of the underlying lease
The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated
costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset
is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and
adjusted if appropriate, at the end of each reporting period.
Investment property. Investment property is property held by the Group to earn rental income or for capital appreciation, or both and which
is not occupied by the Group.
Investment property is stated at cost less accumulated depreciation and provision for impairment, where required. Investment property is
amortised on a straight line basis over expected useful lives of thirty to fifty years. If any indication exists that investment properties may be
impaired, the Group estimates the recoverable amount as the higher of value in use and fair value less costs to sell. The carrying amount of an
investment property is written down to its recoverable amount through a charge to profit or loss for the year. An impairment loss recognised
in prior years is reversed if there has been a subsequent change in the estimates used to determine the asset’s recoverable amount.
Land included in investment property is not depreciated. Depreciation on other items of investment properties is calculated using the
straight-line method to allocate their cost to their residual values over their estimated useful lives of 30 to 50 years. Residual values of
investment properties are estimated to be nil.
Earned rental income is recorded in profit or loss for the year within other operating income.
Subsequent expenditure is capitalised to the asset’s carrying amount only when it is probable that future economic benefits associated with
the expenditure will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when
incurred.
Intangible assets. All of the Group’s intangible assets have definite useful life and primarily include capitalised computer software
and licenses.
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Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.
All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Intangible assets are amortised
on a straight line basis over expected useful lives of two to fifteen years.
Finance lease receivables (Investment in finance lease). Where the Group is a lessor in a lease which transfers substantially all the risks
and rewards incidental to ownership to the lessee, the assets leased out are presented as investments in finance leases and carried at the
present value of the future lease payments. Investments in finance leases are initially recognised at commencement (when the lease term
begins) using a discount rate determined at inception (the earlier of the date of the lease agreement and the date of commitment by the
parties to the principal provisions of the lease).
The difference between the gross receivable and the present value represents unearned finance income. This income is recognised over the
term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly
attributable to negotiating and arranging the lease are included in the initial measurement of the finance lease receivable and reduce the
amount of income recognised over the lease term. Finance income from leases is recorded within interest income in the profit or loss.
Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the
initial recognition of investments in leases. The Group uses the same principal criteria to determine that there is objective evidence that an
impairment loss has occurred as for loans carried at amortised costs disclosed earlier in this note. Impairment losses are recognised
through an allowance account to write down the receivables’ net carrying amount to the present value of expected cash flows (which exclude
future credit losses that have not been incurred) discounted at the interest rates implicit in the finance leases. The estimated future cash
flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease.
Receivables from terminated leases. The Company recognizes receivables from terminated contracts at the moment of lease contract
termination. These receivables are recognized at amount comprising difference between fair value of repossessed assets and outstanding
balance of net investment in finance lease. Receivables are accounted for at amortised cost less impairment
Prepayment for purchase of leasing assets. Prepayment for purchase of leasing assets comprise interest bearing advance payments made
to purchase assets for transfer into leases. Such advances are accounted for at amortised cost less impairment. On commencement of the
leases, advances towards lease contracts are transferred into net investment in finance lease.
Due to credit institutions. Amounts due to credit institutions are recorded when money or other assets are advanced to the Group by
counterparty banks. The non-derivative liability is carried at amortised cost. If the Group purchases its own debt, it is removed from the
consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is
included in gains or losses arising from retirement of debt.
Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at
amortised cost.
Subordinated debt. Subordinated debt includes long-term non-derivative liabilities to international financial institutions and is carried at
amortised cost. The repayment of subordinated debt ranks after all other creditors in case of liquidation and is included in “tier 2 capital”
of the Bank.
Debt securities in issue. Debt securities in issue include promissory notes, bonds, certificates of deposit and debentures issued by the
Group. Debt securities are stated at amortised cost. If the Group purchases its own debt securities in issue, they are removed from the
consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is
included in gains arising from retirement of debt.
Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts, interest rate futures, forward rate
agreements, currency and interest rate swaps, currency and interest rate options are carried at their fair value. The Group also enters into
offsetting deposits with its counterparty banks to exchange currencies. Such deposits, while legally separate, are aggregated and accounted
for as a single derivative financial instrument (currency swap) on a net basis where (i) the deposits are entered into at the same time and in
contemplation of one another, (ii) they have the same counterparty, (iii) they relate to the same risk and (iv) there is no apparent business
purpose for structuring the transactions separately that could not also have been accomplished in a single transaction.
All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair
value of derivative instruments are included in profit or loss. The Group does not apply hedge accounting.
Certain derivative instruments embedded in other financial instruments are treated as separate derivative instruments when their risks and
characteristics are not closely related to those of the host contract.
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Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with the legislation enacted
or substantively enacted by the end of reporting period in the respective territories that the Bank and its subsidiaries operate. The income
tax charge/credit comprises current tax and deferred tax and is recognised in profit or loss except if it is recognised directly in other
comprehensive income because it relates to transactions that are also recognised, in the same or a different period, directly in other
comprehensive income.
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the
current and prior periods. Taxable profits or losses are based on estimates if consolidated financial statements are authorised prior to filing
relevant tax returns. Taxes, other than on income, are recorded within administrative and other operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising
between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial
recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a
transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit.
Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is
not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of reporting
period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised.
Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary
differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against
which the deductions can be utilised.
Deferred income tax is provided on post-acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary’s
dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future.
Uncertain tax positions. The Group’s uncertain tax positions are reassessed by Management at the end of each reporting period. Liabilities
are recorded for income tax positions that are determined by Management as more likely than not to result in additional taxes being levied if
the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted
or substantively enacted by the end of reporting period and any known Court or other rulings on such issues. Liabilities for penalties,
interest and taxes other than on income are recognised based on Management’s best estimate of the expenditure required to settle the
obligations at the end of the reporting period.
Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount.
They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can
be made.
Share capital. Ordinary shares with discretionary dividends are classified as equity. Incremental costs directly attributable to the issue of
new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration
received over the par value of shares issued is recorded as share premium in equity.
Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividends declared after the end of the reporting
period and before the consolidated financial statements are authorised for issue, are disclosed in the subsequent events note.
Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective
interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that
are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a
financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or
collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Group to
originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific
lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan
commitments as financial liabilities at fair value through profit or loss.
When loans and other debt instruments become doubtful of collection, they are written down to present value of expected cash inflows and
interest income is thereafter recorded for the unwinding of the present value discount based on the asset’s effective interest rate which was
used to measure the impairment loss.
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All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion
of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.
Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition
of loans, shares or other securities or the purchase or sale of businesses, which are earned on execution of the underlying transaction
are recorded on its completion. Portfolio and other management advisory and service fees are recognised based on the applicable service
contracts, usually on a time-proportion basis. Asset management fees related to investment funds are recorded rateably over the period
the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously
provided over an extended period of time.
Foreign currency translation. The functional currency of each of the Group’s consolidated entities is the currency of the primary economic
environment in which the entity operates. The Bank’s functional currency and the Group’s presentation currency is the national currency of
Georgia Lari.
Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of respective territories that
the Bank and its subsidiaries operate, at the respective reporting period. Foreign exchange gains and losses resulting from the settlement
of transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange
rates are recognised in profit or loss. Translation at year-end rates does not apply to non-monetary items, including equity investments.
Effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss.
The results and financial position of each group entity (the functional currency of none of which is a currency of a hyperinflationary economy)
are translated into the presentation currency as follows:
(i) assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the respective
reporting period;
(ii) income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative
effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the
transactions);
(iii) components of equity are translated at the historic rate; and
(iv) all resulting exchange differences are recognised in other comprehensive income.
When control over a foreign operation is lost, the exchange differences previously recognised in other comprehensive income are
reclassified to profit or loss for the year as part of the gain or loss on disposal. On partial disposal of a subsidiary without loss of control,
the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate. At 31 December 2014 the closing rate of exchange used for translating foreign currency balances was
USD 1 = 1.8636 (2013: USD 1 = GEL 1.7363; 2012: USD 1 = GEL 1.6567); EUR 1 = 2.2656 (2013: EUR 1 = GEL 2.3891; 2012: EUR 1 = GEL 2.1825).
Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only
when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Staff costs and related contributions. Wages, salaries, paid annual leave and sick leave, bonuses, and non-monetary benefits as well as the
cash settled part of the share based payment schemes are accrued in the year in which the associated services are rendered by the
employees of the Group.
Earnings per share. Earnings per share (“EPS”) are determined by dividing the profit or loss attributable to owners of the Bank by the
weighted average number of participating shares outstanding during the reporting year.
Diluted earnings per share. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares
outstanding to assume conversion of all dilutive potential ordinary shares. In calculating diluted EPS, non-vested ordinary shares are
treated as outstanding on the grant date.
Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s chief
operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately.
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Share based payments. Under share-based compensation plan the Group receives services from management as consideration for equity
instruments of the Group. The fair value of the employee services received in exchange for the grant of the equity instruments is recognised
as an expense. The total amount to be expensed is determined by reference to the fair value of the equity instruments granted, excluding the
impact of any non-market service and performance vesting conditions. Non-market vesting conditions are included in assumptions about
the number of equity instruments that are expected to vest. The total amount expensed is recognised over the vesting period, which is the
period over which all of the specified vesting conditions are to be satisfied. At each balance sheet date, the Group revises its estimates of the
number of equity instruments that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the
revision of original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Increase in equity on accrued shares
resulting from the equity settled parts of both schemes is accounted for under share based payment reserve. Upon meeting vesting
conditions, share based payment reserve attributable to the vested shares is transferred to share capital and share premium.
Amendments of the consolidated financial statements after issue. The Bank’s shareholders and management have the power to amend the
consolidated financial statements after issue.
Reclassifications. In order to achieve better and more useful presentation, the management has changed the presentation of a number of
financial statement line items in 2014. The following reclassifications were made to 31 December 2013 and 31 December 2012 balances to
conform to the 31 December 2014 presentation:
Period end
Financial statement line item
As previously reported
As reclassified
Description
31 December 2013
Fee and commission income
66,497
Other operating income
24,000
31 December 2012
Fee and commission income
58,140
Other operating income
19,772
74,361
16,136
64,232
13,680
Revenues from cash-in terminal
services and card processing
previously presented under other
operating income are presented
in fee and commission income on
settlement transactions and on card
operations.
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year.
Estimates and judgements are continually evaluated and are based on Management’s experience and other factors, including expectations
of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those
involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts
recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets
and liabilities within the next financial year include:
Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related
parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if
transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for
judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. In management judgment,
at 31 December 2014, 2013 and 2012, there were no loans and advances at other than market conditions. Terms and conditions of related
party balances are disclosed in Note 42.
Impairment losses on loans and advances and finance lease receivables. The Group regularly reviews its loan portfolio and finance lease
receivables to assess impairment. In determining whether an impairment loss should be recorded in the statement of profit or loss and
other comprehensive income, the Group makes judgements as to whether there is any observable data indicating that there is a measurable
decrease in the estimated future cash flows from a portfolio of loans or finance lease receivables before the decrease can be identified with
an individual loan in that portfolio. This evidence may include 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 portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating
both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss
experience. A 5% increase or decrease between actual loss experience and the loss estimates used will result in an additional or lower
charge for loan loss impairment of GEL 7,488 thousand (2013: GEL 7,843 thousand; 2012: GEL 8,325 thousand) and additional charge for
impairment of finance lease receivables of GEL 10 thousand (2013: GEL 9 thousand ; 2012: GEL 6 thousand), respectively.
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Impairment provisions for individually significant loans and leases are based on the estimate of discounted future cash flows of the individual
loans and leases taking into account repayments and realisation of any assets held as collateral against the loan or the lease. A 5% increase
or decrease in the actual future discounted cash flows from individually significant loans which could arise from a mixture of differences in
amounts and timing of the cash flows will result in an additional or lower charge for loan loss provision of GEL 2,081 thousand (2013: GEL
4,215 thousand; 2012: GEL 3,877 thousand), respectively. A 5% increase or decrease in the actual future discounted cash flows from
individually significant leases which could arise from a mixture of differences in amounts and timing of the cash flows will result in an
additional or lower charge for provision of GEL 2 thousand (2013:1 thousand ; 2012: 1 thousand), respectively.
Fair value disclosure of investment properties. Investment properties held by the Group are carried at cost. However, as per the
requirements of IAS 40, the Group also discloses the fair value of investment properties as at the reporting dates. Fair value is determined by
internal appraisers of the group, who hold a recognised and relevant professional qualification. In determining the fair values of investment
properties, three market comparatives are identified. As comparatives are usually somewhat different from the appraised properties, the
quoted prices of the comparatives were further adjusted based on the differences in their location, condition, size, accessibility, age and
expected discounts to be achieved through negotiations with the vendors. Comparative prices per square meter so determined are then
multiplied by the area of the valued property to arrive at the appraised value of the investment property. At 31 December 2014, investment
properties comprised real estate assets located in Tbilisi and other regions of Georgia with the fair value amounting to GEL 79,056 thousand
(2013: GEL 86,480 thousand; 2012: GEL 45,041 thousand).
Tax legislation. Georgian and Azerbaijani tax, currency and customs legislation is subject to varying interpretations. Refer to Note 36.
4 Adoption of New or Revised Standards and Interpretations
The following new standards and interpretations became effective for the Group from 1 January 2014:
“Offsetting Financial Assets and Financial Liabilities” – Amendments to IAS 32 (issued in December 2011 and effective for annual
periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified
in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and
that some gross settlement systems may be considered equivalent to net settlement. The standard clarified that a qualifying right of set off
(a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course
of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy. The amended standard did not have a material impact on
the Group.
“Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment entities” (issued on 31 October 2012 and effective for annual periods
beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from
investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose
is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis.
An investment entity is required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries
that provide services that are related to the entity’s investment activities. IFRS 12 was amended to introduce new disclosures, including any
significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an
unconsolidated subsidiary, whether intended or already provided to the subsidiary. The amended standard did not have a material impact on
the Group.
IFRIC 21 – “Levies” (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the
accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the
legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future
period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition
principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading
schemes is optional. The interpretation did not have a material impact on the Group.
Amendments to IAS 36 – “Recoverable amount disclosures for non-financial assets” (issued in May 2013 and effective for annual periods
beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The
amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets
but there has been no impairment. The amended standard did not have a material impact on the Group.
Amendments to IAS 39 – “Novation of Derivatives and Continuation of Hedge Accounting” (issued in June 2013 and effective for annual
periods beginning 1 January 2014). The amendments allow hedge accounting to continue in a situation where a derivative, which has been
designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect
clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The amended standard did not have
a material impact on the Group.
128
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued
TBC Bank Annual Report 2014
5 New Accounting Pronouncements
Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2015
or later, and which the Group has not early adopted.
IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2014 and effective for annual periods beginning on or
after 1 January 2018). Key features of the new standard are:
• Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost,
those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at
fair value through profit or loss (FVPL).
• Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual
cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at
amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where
an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash
flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial
assets but will be included in assessing the SPPI condition.
Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present
changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for
trading, changes in fair value are presented in profit or loss.
•
•
• Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9.
The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at
fair value through profit or loss in other comprehensive income.
IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’
approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that
entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit
impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using
lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables.
• Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities
with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all
hedges because the standard currently does not address accounting for macro hedging.
The Group is currently assessing the impact of the new standard on its financial statements.
Amendments to IAS 19 – “Defined benefit plans: Employee contributions” (issued in November 2013 and effective for annual periods
beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period
in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the
employee contributions is independent of the number of years of service. The amendment is not expected to have any material impact on the
Group’s financial statements.
Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless
otherwise stated below). The improvements consist of changes to seven standards.
IFRS 2 was amended to clarify the definition of a ‘vesting condition’ and to define separately ‘performance condition’ and ‘service condition’;
The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014.
IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is
classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both
financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss.
Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014.
IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a
description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the
aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity’s assets when segment
assets are reported.
The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not
made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of
discounting is immaterial.
129
Strategic Report Governance Financial Statements Business Review 5 New Accounting Pronouncements Continued
IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity
uses the revaluation model.
IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or
to the parent of the reporting entity (‘the management entity’), and to require to disclose the amounts charged to the reporting entity by
the management entity for services provided.
The amendments are not expected to have material impact on the Group’s financial statements.
Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014).
The improvements consist of changes to four standards.
The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for
early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented.
IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11.
The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself.
The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of
financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that
are within the scope of IAS 39 or IFRS 9.
IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish
between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether
the acquisition of an investment property is a business combination.
The amendments are not expected to have material impact on the Group’s financial statements.
IFRS 14, Regulatory deferral accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016).
IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP
requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such
amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already
presents IFRS financial statements is not eligible to apply the standard.
Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11 (issued on 6 May 2014 and effective for the periods
beginning on or after 1 January 2016). This amendment adds new guidance on how to account for the acquisition of an interest in a joint
operation that constitutes a business. The amended is not expected to have any material impact on the Group’s financial statements.
Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (issued on 12 May 2014 and
effective for the periods beginning on or after 1 January 2016). In this amendment, the IASB has clarified that the use of revenue-based
methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an
asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The amended is not expected to
have any material impact on the Group’s financial statements.
IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January
2017). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the
customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or
rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum
amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be
capitalised and amortised over the period when the benefits of the contract are consumed. The amended is not expected to have any
material impact on the Group’s financial statements.
130
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
5 New Accounting Pronouncements Continued
Agriculture: Bearer plants – Amendments to IAS 16 and IAS 41 (issued on 30 June 2014 and effective for annual periods beginning
1 January 2016). The amendments change the financial reporting for bearer plants, such as grape vines, rubber trees and oil palms, which
now should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing.
Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41. The produce growing on bearer plants will remain
within the scope of IAS 41. The amended is not expected to have any material impact on the Group’s financial statements.
Equity Method in Separate Financial Statements – Amendments to IAS 27 (issued on 12 August 2014 and effective for annual periods
beginning 1 January 2016). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint
ventures and associates in their separate financial statements. The amended is not expected to have any material impact on the Group’s
financial statements.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on
11 September 2014 and effective for annual periods beginning on or after 1 January 2016). These amendments address an inconsistency
between the requirements in IFRS 10 and those in IAS 28 in dealing with the sale or contribution of assets between an investor and its
associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a
business. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are
held by a subsidiary. The amended is not expected to have any material impact on the Group’s financial statements.
Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and effective for annual periods beginning on or after 1 January
2016). The amendments impact 4 standards. IFRS 5 was amended to clarify that change in the manner of disposal (reclassification from
“held for sale” to “held for distribution” or vice versa) does not constitute a change to a plan of sale or distribution, and does not have to be
accounted for as such. The amendment to IFRS 7 adds guidance to help management determine whether the terms of an arrangement to
service a financial asset which has been transferred constitute continuing involvement, for the purposes of disclosures required by IFRS 7.
The amendment also clarifies that the offsetting disclosures of IFRS 7 are not specifically required for all interim periods, unless required by
IAS 34. The amendment to IAS 19 clarifies that for post-employment benefit obligations, the decisions regarding discount rate, existence of
deep market in high-quality corporate bonds, or which government bonds to use as a basis, should be based on the currency that the
liabilities are denominated in, and not the country where they arise. IAS 34 will require a cross reference from the interim financial
statements to the location of “information disclosed elsewhere in the interim financial report”. The amended is not expected to have any
material impact on the Group’s financial statements.
Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016). The
Standard was amended to clarify the concept of materiality and explains that an entity need not provide a specific disclosure required by an
IFRS if the information resulting from that disclosure is not material, even if the IFRS contains a list of specific requirements or describes
them as minimum requirements. The Standard also provides new guidance on subtotals in financial statements, in particular, such subtotals
(a) should be comprised of line items made up of amounts recognised and measured in accordance with IFRS; (b) be presented and labelled
in a manner that makes the line items that constitute the subtotal clear and understandable; (c) be consistent from period to period; and (d)
not be displayed with more prominence than the subtotals and totals required by IFRS standards. The amended is not expected to have any
material impact on the Group’s financial statements.
Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS 12 and IAS 28 (issued in December 2014 and
effective for annual periods on or after 1 January 2016). The Standard was amended to clarify that an investment entity should measure
at fair value through profit or loss all of its subsidiaries that are themselves investment entities. In addition, the exemption from preparing
consolidated financial statements if the entity’s ultimate or any intermediate parent produces consolidated financial statements available for
public use was amended to clarify that the exemption applies regardless whether the subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with IFRS 10 in such ultimate or any intermediate parent’s financial statements. The amended is
not expected to have any material impact on the Group’s financial statements.
Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s consolidated
financial statements.
131
Strategic Report Governance Financial Statements Business Review 6 Cash and Cash Equivalents
In thousands of GEL
Cash on hand
Cash balances with the National Bank of Georgia (other than mandatory reserve deposits)
Correspondent accounts and overnight placements with other banks
Placements with and receivables from other banks with original maturities of less than three
months
Total cash and cash equivalents
2014
2013
2012
202,384
138,396
100,305
165,385
61,407
79,643
139,362
71,707
163,869
91,033
84,030
23,649
532,118
390,465
398,587
92% of correspondent accounts and overnight placements with other banks are placed with OECD banking institutions (31 December 2013:
93%; 31 December 2012: 98%).
As at 31 December 2014 GEL 91,033 thousand was placed on interbank term deposits with five non-OECD banks (31 December 2013: 84,030
thousand with four non-OECD banks; 31 December 2012: 23,649 thousand with eight non-OECD banks).
Interest rate analysis of cash and cash equivalents is disclosed in Note 34.
Credit rating of correspondent accounts and overnight placements with other banks is as follows:
In thousands of GEL
A+
A
BBB
BBB-
BB+
BB
BB-
B+
B
B-
Not rated
Total
2014
48,873
42,452
329
–
401
–
4,151
–
168
–
3,931
2013
58,192
14,904
1,844
–
–
–
262
–
570
1,170
2,701
2012
62,137
94,792
764
11
–
3,591
–
511
–
277
1,786
100,305
79,643
163,869
Credit rating of placements with and receivables from other banks with original maturities of less than three months is as follows:
In thousands of GEL
BB+
BB
BB-
Not rated
Total
2014
–
89,165
1,868
–
91,033
2013
2012
70,042
16,369
–
–
13,988
84,030
–
–
7,280
23,649
The table contains ratings of Standard & Poor’s and Fitch Ratings international agencies. When different credit ratings are designated by the
agencies, the highest designated rating for this asset is used.
132
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
7 Due from Other Banks
Amounts due from other banks include placements with original maturities of more than three months that are not collateralised and
represent neither past due nor impaired amounts at the end of 2014, 2013 and 2012.
Credit rating of placements with other banks with original maturities of more than three months is as follows:
In thousands of GEL
A
BBB+
BB+
B
Not rated
Total
2014
3,839
56
15,924
5,970
7,915
33,704
2013
2012
–
–
–
–
1,708
1,708
–
–
–
–
29,542
29,542
At 31 December 2014 the Group had placements with original maturities of more than three months with three counterparty banks with
aggregated amounts above GEL 5,000 thousand (2013: nil; 2012: 1 bank). The total aggregate amount of these placements was GEL 29,179
thousand (2013: nil; 2012: 28,164 thousand) or 87% of the total amount due from other banks (2013: nil; 2012:95.3%).
As of 31 December 2014 GEL 4,525 thousand, (2013: GEL 1,615 thousand; 2012 GEL 1,213 thousand) were kept on deposits as restricted cash
under an arrangement with a credit card company or credit card related services with other banks. Refer to Note 40 for the estimated fair
value of amounts due from other banks. Interest rate analysis of due from other banks is disclosed in Note 34.
8 Mandatory cash balances with the National Bank of Georgia
Mandatory cash balances with the National Bank of Georgia (“NBG”) represent amounts deposited with the NBG. Resident financial institutions
are required to maintain an interest-earning obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by
the financial institutions. The Group earned up to 2% annual interest on the mandatory reserve with the NBG in 2014, 2013 and 2012.
In 2014, Fitch Ratings re-affirmed government of Georgia’s short-term sovereign credit rating of “B” and long-term credit rating of “BB-“.
9 Loans and Advances to Customers
In thousands of GEL
Corporate loans
Consumer loans
Mortgage loans
Loans to small and medium enterprises
Micro loans
Others
Total loans and advances to customers (before impairment)
Less: Provision for loan impairment
Total loans and advances to customers
2014
2013
2012
1,231,729
1,157,334
1,142,087
781,043
716,868
533,919
273,699
169,002
603,434
499,428
392,446
201,287
104,652
482,704
385,416
294,217
145,931
86,343
3,706,260
(149,764)
2,958,581
(156,869)
2,536,698
(166,498)
3,556,496
2,801,712
2,370,200
Included in the consumer loans are consumer loans, card loans, overdrafts, express and fast loans and other loans.
133
Strategic Report Governance Financial Statements Business Review 9 Loans and Advances to Customers Continued
Movements in the provision for loan impairment during 2014 are as follows:
In thousands of GEL
Provision for loan impairment
at 1 January 2014
Total provision for impairment during the
year:
Provision for impairment charged to income
statement during the year
Recoveries of loans previously written off
Amounts written off during the year as
uncollectible
Provision for loan impairment
at 31 December 2014
Corporate
loans
Consumer
loans
Mortgage
loans
Small and
medium
enterprises
Micro
loans
107,666
31,704
8,292
4,315
4,892
29,461
26,886
3,323
4,173
8,263
18,995
10,466
20,362
6,524
1,666
1,657
1,625
2,548
6,006
2,257
Other
Total
–
36
18
18
156,869
72,142
48,672
23,470
(45,901)
(21,837)
(2,726)
(3,200)
(5,547)
(36)
(79,247)
91,226
36,753
8,889
5,288
7,608
–
149,764
Loans and advances to customers written off in 2014 included loans to customers in the gross amount of GEL 7,142 thousand issued during
2014, a previously issued performance guarantee of GEL 4,823 thousand which was transformed into loan in 2014 and GEL 67,282 thousand
issued in prior years.
Included in the amounts written off during the period as uncollectible is the provision of GEL 20,154 thousand for a corporate loan part of
which was recovered in June 2014 through repossession of financial instruments amounting to GEL 3,014 thousand which are accounted for
under investment securities available for sale.
Movements in the provision for loan impairment during 2013 are as follows:
In thousands of GEL
Provision for loan impairment at 1 January 2013
Total provision for/(recovery of) impairment during the
year:
Corporate
loans
112,975
Consumer
loans
31,156
Mortgage
loans
13,186
Small and
medium
enterprises
Micro
loans
Total
4,820
4,361
166,498
21,203
22,789
(2,316)
1,846
4,234
47,756
Provision for/(recovery of) impairment charged to income
statement during the year
Recoveries of loans previously written off
Amounts written off during the year as uncollectible
17,035
4,168
(26,512)
18,029
4,760
(22,241)
Provision for loan impairment at 31 December 2013
107,666
31,704
(4,652)
2,336
(2,578)
8,292
88
1,758
(2,351)
4,315
2,471
1,763
(3,703)
4,892
32,971
14,785
(57,385)
156,869
Loans and advances to customers written off in 2013 included loans to customers in the gross amount of GEL 7,387 thousand issued during
2013 and GEL 49,998 thousand issued in prior years.
134
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
9 Loans and Advances to Customers Continued
Movements in the provision for loan impairment during 2012 are as follows:
In thousands of GEL
Provision for loan impairment at 1 January 2012
Total provision for impairment during the year:
Provision for impairment charged to income statement
during the year
Recoveries of loans previously written off
Amounts written off during the year as uncollectible
Provision for loan impairment at 31 December 2012
Corporate
loans
114,106
10,993
1,190
9,803
(12,124)
112,975
Consumer
loans
25,833
22,040
15,649
6,391
(16,717)
31,156
Mortgage
loans
12,661
2,541
649
1,892
(2,016)
13,186
Small and
medium
enterprises
5,459
2,571
1,198
1,373
(3,210)
4,820
Micro
loans
601
5,056
4,468
588
(1,296)
4,361
Total
158,660
43,201
23,154
20,047
(35,363)
166,498
Loans and advances to customers written off in 2012 included loans to customers in the gross amount of GEL 1,613 thousand issued during
2012 and GEL 33,750 thousand issued in prior years.
For terms of loans and advances to related parties, impairment provisions made against those loans and amounts written off during the year
refer to Note 42.
Economic sector risk concentrations within the customer loan portfolio are as follows:
In thousands of GEL
Individual
Service
Agriculture
Energy
Consumer goods and automobile trading
Pawn shop
Real estate
Food industry
Oil and gas
Construction
Communication
Transportation
Manufacturing
Mining
Other
2014
2013
2012
Amount
1,497,911
575,525
265,562
216,500
175,681
169,002
165,937
141,283
102,912
95,111
94,309
64,720
42,086
29,952
69,769
%
Amount
40% 1,102,862
15%
539,825
7%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
2%
164,441
106,083
130,152
104,652
132,321
158,865
121,921
101,879
102,547
67,223
33,609
40,346
51,855
%
37%
18%
6%
4%
4%
4%
5%
5%
4%
3%
4%
2%
1%
1%
2%
Amount
868,120
487,938
119,935
79,929
132,579
86,343
149,328
109,031
143,355
108,914
82,360
70,453
30,073
31,140
37,200
%
34%
19%
5%
3%
5%
4%
6%
4%
6%
4%
3%
3%
1%
1%
2%
Total loans and advances to customers (before
impairment)
3,706,260
100% 2,958,581
100% 2,536,698
100%
Service sector contains loans disbursed to consumer service, healthcare, media and financial service industries.
At 31 December 2014 the Group had 71 borrowers (2013: 62 borrower; 2012: 61 borrowers) with aggregated loan amounts above GEL 5,000
thousand. The total aggregate amount of these loans was GEL 1,031,720 thousand (2013: GEL 910,248 thousand; 2012: GEL 879,619 thousand)
or 27.8% of the gross loan portfolio (2013: 31%; 2012: 35%).
135
Strategic Report Governance Financial Statements Business Review 9 Loans and Advances to Customers Continued
Analysis by credit quality of loans outstanding at 31 December 2014 is as follows:
In thousands of GEL
Neither past due nor impaired
– Borrowers with credit history over two
years
– New borrowers
Total neither past due nor impaired
Past due but not impaired
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
– more than 360 days overdue
Total past due but not impaired
Individually assessed impaired loans (gross)
– not overdue
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
Total individually assessed impaired loans
147,305
Collectively assessed impaired loans (gross)
– not overdue
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
– more than 360 days overdue
6,783
4
207
16
–
–
Corporate
loans
Consumer
loans
Mortgage
loans
Small and
medium
enterprises
Micro
loans
Others
Total
784,212
290,596
1,074,808
415,328
323,911
739,239
470,873
235,411
706,284
248,251
267,137
515,388
106,930
154,407
261,337
110,731
56,316
2,136,325
1,327,778
167,047
3,464,103
229
2,377
13,281
201
–
–
–
3
8
6
3,165
40
–
–
–
5,156
288
–
–
–
3,345
151
56
–
–
1,151
503
107
88
106
26,327
3,560
166
96
112
2,606
13,499
3,205
5,444
3,552
1,955
30,261
124,483
18,270
4,227
325
–
–
–
–
–
9,267
1,020
7,445
7,641
2,189
743
–
–
–
–
–
2,089
113
2,912
2,022
243
–
2,506
–
–
–
2,506
1,119
68
4,942
2,771
1,309
372
–
–
–
–
–
3,383
1,670
1,861
1,625
268
3
8,810
–
–
–
–
–
–
–
–
–
–
–
–
126,989
18,270
4,227
325
149,811
22,641
2,875
17,367
14,075
4,009
1,118
62,085
Total collectively assessed impaired loans
7,010
28,305
7,379
10,581
Total loans and advances to customers
(before impairment)
Total provision
1,231,729
(91,226)
781,043
(36,753)
716,868
(8,889)
533,919
(5,288)
273,699
(7,608)
169,002
–
3,706,260
(149,764)
Total loans and advances to customers
1,140,503
744,290
707,979
528,631
266,091
169,002
3,556,496
136
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
9 Loans and Advances to Customers Continued
Analysis by credit quality of loans outstanding at 31 December 2013 is as follows:
In thousands of GEL
Neither past due nor impaired
– Borrowers with credit history over two
years
– New borrowers
Total neither past due nor impaired
Past due but not impaired
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
– more than 360 days overdue
Total past due but not impaired
Individually assessed impaired loans (gross)
– not overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
– not overdue
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
– more than 360 days overdue
Total collectively assessed impaired loans
Total loans and advances to customers
(before impairment)
Total provision
Total individually assessed impaired loans
186,335
Collectively assessed impaired loans (gross)
Corporate
loans
Consumer
loans
Mortgage
loans
Small and
medium
enterprises
Micro
loans
Others
Total
619,783
342,499
962,282
285,199
284,794
569,993
335,855
152,859
179,036
198,371
488,714
377,407
70,208
124,258
194,466
9,509
92,141
1,499,590
1,194,922
101,650
2,694,512
1,012
409
2,786
–
–
11,973
3,735
58
13
–
–
11
–
–
–
5,287
635
–
–
–
1,827
–
–
–
–
1,440
1,136
77
78
271
25,274
2,249
2,876
78
271
4,207
12,044
3,746
5,922
1,827
3,002
30,748
175,635
357
4,303
6,040
2,727
–
–
295
1,488
–
4,510
–
–
–
–
–
2,145
776
8,794
7,014
2,259
409
–
–
–
–
–
2,191
485
2,624
1,234
434
–
21,397
6,968
2,335
–
–
–
2,335
2,075
131
1,184
1,702
1,529
161
6,782
–
–
–
–
–
1,349
454
1,669
1,328
14
180
4,994
–
–
–
–
–
–
–
–
–
–
–
–
177,970
357
4,303
6,040
188,670
10,487
1,846
14,271
11,573
5,724
750
44,651
1,157,334
(107,666)
603,434
(31,704)
499,428
(8,292)
392,446
(4,315)
201,287
(4,892)
104,652
–
2,958,581
(156,869)
Total loans and advances to customers
1,049,668
571,730
491,136
388,131
196,395
104,652
2,801,712
137
Strategic Report Governance Financial Statements Business Review In thousands of GEL
Neither past due nor impaired
– Borrowers with credit history over two
years
– New borrowers
Total neither past due nor impaired
Past due but not impaired
– 1 to 30 days overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
– 181 to 360 days overdue
9 Loans and Advances to Customers Continued
Analysis by credit quality of loans outstanding at 31 December 2012 is as follows:
Corporate
loans
Consumer
loans
Mortgage
loans
Small and
medium
enterprises
Micro
loans
Others
Total
583,682
354,076
937,758
214,312
237,939
452,251
236,243
128,516
364,759
120,317
162,895
283,212
672
137,690
138,362
4,134
82,209
1,159,360
1,103,325
86,343
2,262,685
4,251
414
123
6
8,945
4,469
27
–
4,590
3,048
–
–
2,051
430
10
–
930
–
–
–
Total past due but not impaired
4,794
13,441
7,638
2,491
930
Individually assessed impaired loans (gross)
– not overdue
– 31 to 90 days overdue
– 91 to 180 days overdue
- 181 to 360 days overdue
173,965
13,377
3,334
4,115
Total individually assessed impaired loans
194,791
Collectively assessed impaired loans (gross)
- not overdue
- 1 to 30 days overdue
- 31 to 90 days overdue
- 91 to 180 days overdue
- 181 to 360 days overdue
- more than 360 days overdue
2,811
1,134
–
35
764
–
–
–
–
–
–
3,177
600
2,968
6,665
3,128
474
–
–
–
–
–
8,407
232
623
2,401
1,356
–
–
–
–
–
–
4,904
94
2,126
510
590
290
–
–
–
–
–
1,753
104
2,335
2,447
–
–
Total collectively assessed impaired loans
4,744
17,012
13,019
8,514
6,639
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,767
8,361
160
6
29,294
173,965
13,377
3,334
4,115
194,791
21,052
2,164
8,052
12,058
5,838
764
49,928
Total loans and advances to customers
(before impairment)
Total provision
1,142,087
(112,975)
482,704
(31,156)
385,416
(13,186)
294,217
(4,820)
145,931
(4,361)
86,343
–
2,536,698
(166,498)
Total loans and advances to customers
1,029,112
451,548
372,230
289,397
141,570
86,343
2,370,200
The retail segment in Note 27 includes the following classes from above tables: consumer, mortgage and other. Included in other are
primarily pawn shop loans secured with precious metals.
The Group applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Recognition and Measurement, and
created portfolio provisions for impairment losses that were incurred but have not been specifically identified with any individual loan by the
end of reporting period.
The tables above show analysis of loan portfolio based on credit quality. The Group’s policy for credit risk management purposes is to
classify each loan as ‘neither past due nor impaired’ until specific objective evidence of impairment of the loan is identified. The primary
factors by which the Group considers a loan as impaired are: overdue status of loan, financial position of a borrower and fair value of related
collateral. The Group conducts impairment analysis of each individual loan on a quarterly basis.
Past due, but not impaired, loans primarily include collateralised loans where the fair value of collateral covers the overdue interest and
principal repayments. The amount reported as past due but not impaired is the whole balance of such loans, not only the individual
instalments that are past due.
138
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
9 Loans and Advances to Customers Continued
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The main types of collateral
obtained are the following:
inventory and equipment,
• Real estate properties,
•
• cash covers,
• third party guarantees.
The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets where collateral and other credit
enhancements are equal to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and
other credit enhancements are less than the carrying value of the asset (“under-collateralised assets”).
The effect of collateral at 31 December 2014:
In thousands of GEL
Corporate loans
Consumer loans
Mortgage loans
Loans to small and medium enterprises
Micro loans
Others
Total
The effect of collateral at 31 December 2013:
In thousands of GEL
Corporate loans
Consumer loans
Mortgage loans
Loans to small and medium enterprises
Micro loans
Others
Total
The effect of collateral at 31 December 2012:
In thousands of GEL
Corporate loans
Consumer loans
Mortgage loans
Loans to small and medium enterprises
Micro loans
Others
Total
Over-collateralised Assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
943,782
2,366,233
496,838
1,129,883
690,576
1,683,436
509,732
1,502,898
134,707
163,960
264,571
189,920
287,947
284,205
26,292
24,187
138,992
5,042
97,485
15,843
9,011
9,527
3,584
4,883
2,939,595
7,136,941
766,665
140,333
Over-collateralised Assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
745,948
1,819,917
404,098
955,249
476,713
1,182,387
369,125
1,104,910
93,632
99,637
189,155
115,216
411,386
199,336
22,715
23,321
107,655
5,015
321,064
6,054
6,531
7,567
1,189
4,752
2,189,153
5,366,834
769,428
347,157
Over-collateralised Assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
774,701
300,655
363,332
271,350
57,368
81,758
1,873,588
744,061
999,838
789,728
124,177
81,990
367,386
182,049
22,084
22,867
88,563
4,585
203,772
6,555
6,705
6,256
775
4,412
1,849,164
4,613,382
687,534
228,475
The effect of collateral is determined by comparison of fair value of collateral to gross loans and advances outstanding at the reporting date.
The Group’s internal appraiser performed physical inspection of pledged real estate and estimated the fair value of real estate at the balance
sheet date using primarily market comparison method. Fair value of inventory, equipment and other assets was determined by the Group’s
credit department using the Group’s internal guidelines.
139
Strategic Report Governance Financial Statements Business Review 9 Loans and Advances to Customers Continued
Refer to Note 40 for the estimated fair value of each class of loans and advances to customers. Interest rate analysis of loans and advances
to customers is disclosed in Note 34. Information on related party balances is disclosed in Note 42.
10 Investment Securities Available for Sale
In thousands of GEL
Georgian Government notes
Certificates of Deposit of the National Bank of Georgia
Corporate bonds
Ministry of Finance of Georgia Treasury Bills
Total debt securities
Corporate shares – quoted (VISA Inc)
Corporate shares – unquoted
Total investment securities available for sale
2014
2013
2012
232,934
198,233
25,034
476
173,974
321,140
–
–
196,004
187,551
–
19,210
456,677
495,114
402,765
6,140
3,693
4,858
679
3,156
1,812
466,510
500,651
407,733
Management could not reliably estimate the fair value of the Group’s investment in shares of its unquoted equity investment securities
available for sale. Therefore, these investments are carried at cost of GEL 3,693 thousand (2013: GEL 679 thousand; 2012: GEL 1,812
thousand). The investees have not published recent financial information about their operations, their shares are not quoted and recent trade
prices are not publicly accessible.
At 31 December 2014 investment securities available for sale carried at GEL 173,239 thousand have been pledged to local banks or financial
institutions as collateral with respect to other borrowed funds (2013: GEL 84,086 thousand; 2012: GEL 54,800 thousand). Refer to Note 17.
None of the debt securities available for sale are overdue or impaired.
At 31 December 2014 the principal equity investment securities available for sale are:
Name
Visa Inc.
LTD Caucasus Online
JSC GRDC
Other
Total
Nature of business
Country of registration
Card Processing
USA
Telecommunication
Georgia
Property development
Netherlands Antilles
The movements in investment securities available for sale are as follows:
In thousands of GEL
Carrying amount at 1 January
Purchases
Disposals
Redemption at maturity
Revaluation
Interest income accrued
Interest income received
Impairment related to investment in equity security
Carrying amount at 31 December
Carrying value at 31 December
2014
6,140
3,014
365
314
9,833
2013
4,858
–
365
314
5,537
2012
3,156
–
1,502
310
4,968
Note
2014
2013
2012
500,651
848,679
(51,369)
(843,695)
(1,849)
30,361
(16,246)
(22)
407,733
755,433
(61,626)
266,436
813,864
(90,857)
(619,902)
(599,913)
7,923
30,442
(18,210)
(1,142)
682
27,211
(9,680)
(10)
466,510
500,651
407,733
28
29
140
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
11 Other Financial Assets
In thousands of GEL
Prepayments for purchase of leasing assets
Receivables on guarantees
Receivables on credit card services and money transfers
Receivable on terminated leases
Other
Less: Provision for impairment
Total other financial assets
2014
13,032
11,728
9,440
3,323
10,564
(4,230)
43,857
2013
13,516
11,660
6,557
2,249
14,147
(3,080)
2012
6,859
10,890
3,349
4,345
6,743
(6,885)
45,049
25,301
Movements in the provision for impairment of other financial assets during 2014 are as follows:
In thousands of GEL
Provision for impairment at 1 January 2014
Provision for impairment during the year
Amounts written off during the year as uncollectible
Recovery of amounts previously written off
Provision for impairment at 31 December 2014
Movements in the provision for impairment of other financial assets during 2013 are as follows:
In thousands of GEL
Provision for impairment at 1 January 2013
Provision for impairment during the year
Amounts written off during the year as uncollectible
Recovery of amounts previously written off
Provision for impairment at 31 December 2013
Movements in the provision for impairment of other financial assets during 2012 are as follows:
In thousands of GEL
Provision for impairment at 1 January 2012
Provision for impairment during the year
Amounts written off during the year as uncollectible
Recovery of amounts previously written off
Provision for impairment at 31 December 2012
Receivables
on terminated
leases
2,054
533
(14)
–
Other
1,026
703
(409)
337
2,573
1,657
Receivables
on terminated
leases
3,887
236
(2,069)
–
2,054
Receivables
on terminated
leases
3,966
579
(658)
–
3,887
Other
2,998
2,000
(4,022)
50
1,026
Other
–
3,553
(736)
181
2,998
Total
3,080
1,236
(423)
337
4,230
Total
6,885
2,236
(6,091)
50
3,080
Total
3,966
4,132
(1,394)
181
6,885
141
Strategic Report Governance Financial Statements Business Review 11 Other Financial Assets Continued
Analysis by credit quality of other financial receivables is as follows:
In thousands of GEL
Neither past due nor impairment
– Prepayments for purchase of leasing assets
– Receivables on credit card services and money transfers
– Receivables on guarantees
– Other
Total neither past due nor impaired
Past due but not impaired
– Receivables on guarantees
– more than 90 days overdue
Total past due but not impaired
Receivables individually determined to be impaired (gross)
– Receivables on terminated leases
– less than 90 days overdue
– more than 90 days overdue
– Other receivables
– less than 90 days overdue
– more than 90 days overdue
Total individually impaired (gross)
Less impairment provision
Total other financial assets
2014
2013
2012
13,032
9,440
836
8,763
32,071
13,516
6,557
880
11,830
32,783
10,892
10,892
10,780
10,780
3,323
–
3,323
1,801
–
1,801
5,124
2,249
–
2,249
2,317
504
1,813
4,566
6,859
3,349
1,084
3,873
15,165
9,806
9,806
4,345
175
4,170
2,870
2,870
–
7,215
(4,230)
43,857
(3,080)
45,049
(6,885)
25,301
Receivables individually determined to be impaired include receivables on terminated leases and other receivables for which impairment
provision was assessed individually. The primary factors by which the Group considers a receivable as impaired is overdue status.
Receivables on terminated leases are under-collateralised, estimated fair value of collateral on these equals GEL 808 thousand (2013: GEL
95 thousand; 2012: GEL 472 thousand). The remaining assets are not collateralized.
12 Investments in Finance Lease
Investments in finance lease of GEL 50,907 thousand (2013: GEL 35,613 thousand; 2012: GEL 26,377 thousand) are represented by leases of
equipment.
Finance lease payments receivable (gross investment in the leases) and their present values are as follows:
In thousands of GEL
Finance lease payments receivable at 31 December 2014
Unearned finance income
Impairment loss provision
Present value of lease payments receivable at 31 December 2014
Finance lease payments receivable at 31 December 2013
Unearned finance income
Impairment loss provision
Present value of lease payments receivable at 31 December 2013
Finance lease payments receivable at 31 December 2012
Unearned finance income
Impairment loss provision
Present value of lease payments receivable at 31 December 2012
Due in 1 year
Due between 2
and 5 years
36,414
(8,380)
(126)
27,908
27,662
(4,594)
(69)
22,999
24,775
20,592
(5,941)
(110)
(3,636)
(67)
18,724
16,889
18,616
(4,629)
(71)
13,916
15,418
(2,914)
(43)
12,461
Total
64,076
(12,974)
(195)
50,907
45,367
(9,577)
(177)
35,613
34,034
(7,543)
(114)
26,377
At 31 December 2014 the estimated fair value of financial lease receivables was GEL 50,907 thousand (2013: GEL 35,613 thousand; 2012: GEL
26,377 thousand). Refer to Note 40.
142
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
12 Investments in Finance Lease Continued
Movements in the provision for impairment of net investment in finance lease are as follows:
In thousands of GEL
Provision for impairment at the beginning of the year
Provision for impairment during the year
Amounts written off during the year as uncollectible
Transfer from receivable from terminated leases
Provision for impairment at the end of the year
Analysis by credit quality of net investment in finance lease is as follows:
In thousands of GEL
Neither past due nor impaired
- Customers with more than two year experience
- New customers
Total neither past due nor impaired
Past due but not impaired
- Less than 30 days overdue
- 31 to 90 days overdue
- 91 to 180 days overdue
- 180 days to 360 days overdue
Total past due but not impaired
Individually impaired
- Not overdue
- 1 to 30 days overdue
- 31 days to 90 days overdue
- From 91 to 180 days
- From 181 to 360 days
- More than 360 days
Individually impaired gross
Total investment in finance lease- gross
Impairment loss provision
Total net investment in finance lease
31 December
2014
31 December
2013
31 December
2012
177
77
(59)
–
195
114
98
(35)
–
177
108
42
(27)
(9)
114
31 December
2014
31 December
2013
31 December
2012
9,570
30,442
40,012
6,213
1,479
424
67
8,183
8,750
19,854
28,604
7,044
15,365
22,409
3,261
872
–
–
–
–
–
6
3,261
878
1,926
2,419
568
75
197
–
141
603
59
583
251
10
2,686
385
133
–
–
–
2,907
51,102
3,925
35,790
3,204
26,491
(195)
(177)
(114)
50,907
35,613
26,377
The Group applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Recognition and Measurement, and
created portfolio provisions for impairment losses that were incurred but have not been specifically identified with any individual lease by
the reporting date. The Group’s policy is to classify each lease as “neither past due nor impaired” until specific objective evidence of
impairment of the lease is identified. The primary factors that the Group considers whether a lease is impaired are deterioration of financial
position of lessee, its overdue status and realisability of the leased asset.
The Group normally structures its finance lease contracts so that the lessee makes a minimum prepayment of 20% of the equipment
purchase price at the inception of the lease term. The Group holds title to the leased assets during the lease term. The title to the asset
under finance lease contract is transferred to the lessees at the end of the contracts terms, including full repayment of lease payments.
Generally the lease terms are up to five years.
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. The main types of collateral
obtained are the following:
• Leased assets (inventory and equipment)
• Down payment
• Real estate properties,
• Third party guarantees.
143
Strategic Report Governance Financial Statements Business Review 12 Investments in Finance Lease Continued
The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets where collateral and other credit
enhancements are equal to or exceed carrying value of the asset (“over-collateralized assets”) and (ii) those assets where collateral and
other credit enhancements are less than the carrying value of the asset (“under-collateralized assets”).
The effect of collateral at 31 December 2014:
In thousands of GEL
Investment in leases
Total
The effect of collateral at 31 December 2013:
In thousands of GEL
Investment in leases
Total
The effect of collateral at 31 December 2012:
In thousands of GEL
Investment in leases
Total
13 Other Assets
In thousands of GEL
Current other assets
Inventories of repossessed collateral
Prepayments for other assets
Other inventories
Prepaid taxes other than income tax
Total current other assets
Non-current other assets
Assets repossessed from terminated leases
Prepayments for construction in progress
Prepaid insurance of leasing assets
Assets purchased for leasing purposes
Other
Total non-current other assets
Total other assets
Over-collateralised assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
45,608
45,608
79,134
79,134
5,494
5,494
3,616
3,616
Over-collateralised assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
32,280
32,280
62,169
62,169
3,510
3,510
3,229
3,229
Over-collateralised assets
Under-collateralised assets
Carrying value
of the assets
Fair value of
collateral
Carrying value
of the assets
Fair value of
collateral
24,670
24,670
51,590
51,590
1,821
1,821
221
221
2014
2013
2012
60,480
3,724
2,961
1,718
68,883
3,797
2,078
609
545
1,863
8,892
49,920
56,316
3,006
3,130
402
3,401
3,383
528
56,458
63,628
1,752
5,016
482
–
1,367
8,617
1,852
905
347
413
209
3,726
77,775
65,075
67,354
Inventories of repossessed collateral represents real estate assets and equipment acquired by the Group in settlement of overdue loans, other
than those classified as investment property or premises and equipment. The Group expects to dispose of the assets in the foreseeable future.
Such assets are initially recognised at fair value and subsequently measured at lower of cost and net realisable value.
With respect to certain inventories of repossessed collaterals, the Group has granted the previous owners a right to repurchase the
inventories at prices equal to or higher than the carrying value of the loan at the date of repossession. This right is usually effective for a
period of 6 to 12 months from the date of repossession during which the Group obliges not to dispose of the repossessed collateral to third
parties. As of 31 December 2014, the carrying value of the inventories of repossessed collateral which were subject to the repurchase
agreement was GEL 33,283 thousand (2013: GEL 19,840 thousand, 2012: GEL 16,158 thousand).
144
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
14 Premises, Equipment and Intangible Assets
In thousands of GEL
Cost or valuation at 1 January 2012
Accumulated depreciation/amortisation
Including accumulated impairment loss
Carrying amount at 1 January 2012
Additions
Transfers
Transfers from Investment Property, net
Disposals
Transfer to Inventory
Increase / (decrease) in value on revaluation
Impairment charge to profit and loss
Depreciation/amortisation charge
Elimination of accumulated depreciation/
amortisation on disposals
Carrying amount at 31 December 2012
Cost or valuation at 31 December 2012
Accumulated depreciation/amortisation
including accumulated impairment loss
Carrying amount at 31 December 2012
Additions
Transfers
15
28
Transfers from (to) Investment Property, net
15
Disposals
Impairment charge to profit and loss
Depreciation/amortisation charge
Elimination of accumulated depreciation/
amortisation on disposals
Carrying amount at 31 December 2013
Cost or valuation at 31 December 2013
Accumulated depreciation/amortisation
including accumulated impairment loss
Carrying amount at 31 December 2013
Additions
Transfers
Transfers from (to) Investment Property, net
15
Disposals
Impairment charge to profit and loss
Depreciation/amortisation charge
Elimination of accumulated depreciation/
amortisation on disposals
Carrying amount at 31 December 2014
Cost or valuation at 31 December 2014
Accumulated depreciation/amortisation
including accumulated impairment loss
Carrying amount at 31 December 2014
Premises and
leasehold
improvements
Office and
computer
equipment
Note
Construction in
progress
Total premises
and equipment
Computer
software
licences
Total
124,851
86,677
19,782
231,310
16,272
247,582
(18,302)
(49,129)
–
(67,431)
(6,208)
(73,639)
106,549
1,892
15,751
(2,418)
(2,149)
–
1,585
(768)
(4,275)
1,853
118,020
138,744
37,548
16,533
309
–
(5,478)
(309)
–
(1)
(15,360)
5,284
38,526
97,732
19,782
23,969
(16,060)
–
(609)
–
8,928
–
–
–
36,010
36,010
163,879
42,394
10,064
10,750
173,943
53,144
–
(2,418)
(8,236)
(309)
10,513
(769)
–
–
(16)
–
–
(1)
–
(2,418)
(8,252)
(309)
10,513
(770)
(19,635)
(2,015)
(21,650)
7,137
192,556
272,486
35
18,817
27,003
7,172
211,373
299,489
(20,724)
(59,206)
–
(79,930)
(8,186)
(88,116)
118,020
3,458
1,383
244
(1,146)
–
38,526
18,136
201
–
(2,577)
(219)
(3,607)
(11,390)
653
119,005
142,683
2,367
45,044
113,273
36,010
192,556
18,817
211,373
3,199
(1,584)
(345)
(1,665)
4
–
–
35,619
35,619
24,793
8,729
33,522
–
(101)
(5,388)
(215)
–
–
(51)
–
–
(101)
(5,439)
(215)
(14,997)
(4,038)
(19,035)
3,020
199,668
291,575
34
23,491
35,681
3,054
223,159
327,256
(23,678)
(68,229)
–
(91,907)
(12,190)
(104,097)
119,005
800
1,396
(646)
(1,509)
–
45,044
26,684
161
–
(9,355)
(220)
(3,214)
(14,267)
270
116,102
142,724
9,276
57,323
130,543
35,619
199,668
1,383
(1,557)
–
28,867
–
(646)
23,491
19,884
223,159
48,751
–
–
–
(646)
(178)
(11,042)
(334)
(11,376)
–
–
–
35,267
35,267
(220)
(17,481)
–
(220)
(5,493)
(22,974)
9,546
208,692
308,534
208
37,756
55,231
9,754
246,448
363,765
(26,622)
(73,220)
–
(99,842)
(17,475)
(117,317)
116,102
57,323
35,267
208,692
37,756
246,448
145
Strategic Report Governance Financial Statements Business Review 14 Premises, Equipment and Intangible Assets Continued
Depreciation and amortisation charge presented on the face of the statement of profit or loss and other comprehensive income include
depreciation and amortisation charge of premises and equipment, investment properties and intangible assets.
Construction in progress consists of construction and refurbishment of branch premises and a new headquarter of the Bank. Upon
completion, assets are transferred to premises.
The Group revalues premises every three years, unless based on indicators in real estate market it becomes evident that the changes in fair
values of premises might be significant, which would trigger more frequent revaluations. Premises were revalued to market value on 6 July
2012. The valuation was carried out by an independent firm of valuers which holds a recognised and relevant professional qualification and
who have recent experience in valuation of assets of similar location and category.
The basis used for the appraisal was sales comparison method. As part of sales comparison method, at least three market comparatives
were identified. As comparatives were somewhat different from the appraised properties, the quoted prices of the comparatives were
further adjusted based on the differences in their location, condition, size, accessibility, age and expected discounts to be achieved through
negotiations with the vendors. Comparative prices per square meter so determined were then multiplied by the area of the valued property
to arrive at the appraised value of the premises.
In thousands of GEL
(except for range of inputs)
Fair value as
of 6 July 2012
(valuation date)
Carrying value
at 31 December
2013
Carrying value
at 31 December
2014
Office buildings
54,757
56,502
56,468
Branches and service centres
81,134
82,437
75,878
Valuation
technique
Other key
information
Unobservable
inputs
Range of unobservable inputs
(weighted average)
Sales
comparison
approach
Sales
comparison
approach
Land
Buildings
Land
Buildings
Price per
square
metre
Price per
square
metre
382 – 3,784 (577)
244 – 2,926 (704)
3 – 2,468 (345)
325 – 9,864 (2,292)
At 31 December 2014 the carrying amount of premises would have been GEL 86,039 thousand (2013: GEL 88,942 thousand; 2012: GEL 87,957
thousand) had the assets been carried at cost less depreciation and impairment losses. At 31 December 2014 the carrying amount of
construction in progress would have been GEL 20,000 thousand (2013: GEL 20,345 thousand; 2012: GEL 20,736 thousand) had the assets
been carried at cost less impairment losses.
15 Investment Properties
In thousands of GEL
Gross book value at 1 January
Accumulated depreciation at 1 January
Carrying amount at 1 January
Transfer from property, plant and equipment
Transfer from inventories of repossessed collateral
Addition from foreclosure
Disposals at cost
Elimination of depreciation on disposal
Transfer to property, plant and equipment
Depreciation charge
Gross book value at 1 January
Accumulated depreciation at 1 January
Carrying amount at 31 December
Note
14
14
2014
84,879
(1,496)
83,383
646
2,059
772
2013
34,973
(668)
34,305
345
23,648
38,638
2012
27,621
(539)
27,082
2,418
19,230
–
(9,657)
(12,481)
(14,296)
466
–
(1,453)
78,699
(2,483)
76,216
130
(244)
(958)
84,879
(1,496)
83,383
324
–
(453)
34,973
(668)
34,305
At 31 December 2014, investment properties comprised of 9 lots (2013: 12 lots; 2012:10 lots) of land and 57 buildings (2013: 58 buildings;
2012: 22 buildings) located in Tbilisi and other regions of Georgia with the fair value amounting to GEL 79,056 thousand (2013: GEL 86,480
thousand; 2012: GEL 34,928 thousand). For details behind valuation refer to Note 3.
146
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
15 Investment Properties Continued
Where the Group is the lessor, the future minimum lease payments receivable under non-cancellable operating leases, are as follows:
In thousands of GEL
Not later than 1 year
Later than 1 year and not later than 5 years
Total operating lease payments receivable
16 Goodwill
Movements in goodwill arising on the acquisition of subsidiaries are:
In thousands of GEL
Carrying amount at 1 January
Addition from acquisition of subsidiary
Transfer on de-classification of non-current assets previously held for sale
2014
107
1,008
1,115
2014
2,726
–
–
2013
163
1,736
1,899
2013
2,726
–
–
2012
68
1,657
1,725
2012
2,726
–
–
Carrying amount at 31 December
2,726
2,726
2,726
Goodwill Impairment Test
Goodwill is allocated to cash-generating units (CGUs, which represent the lowest level within the Group at which the goodwill is monitored
by Management and which are not larger than a segment) as follows:
In thousands of GEL
LLC TBC Kredit
JSC Bank Constanta
JSC United Financial Corporation
Total carrying amount of goodwill
2014
1,262
769
695
2,726
2013
1,262
769
695
2,726
2012
1,262
769
695
2,726
The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections
based on financial budgets approved by Management covering a five-year period. Cash flows beyond the five-year period are extrapolated
using the estimated growth rates stated below.
Assumptions used for value-in-use calculations to which the recoverable amount is most sensitive were:
JSC Bank Constanta
Growth rate beyond five years of Free Cash Flow to equity
Pre-tax discount rate
JSC United Financial Corporation
Growth rate beyond five years of Free Cash Flow to equity
Pre-tax discount rate
LLC TBC Kredit
Growth rate beyond five years of Free Cash Flow to equity
Pre-tax discount rate
2014
2013
2012
6.00% p.a.
5.00% p.a.
5.00% p.a.
18.82% p.a. 24.85% p.a. 24.11% p.a.
6.00% p.a.
5.00% p.a.
5.00% p.a.
22.36% p.a. 22.08% p.a. 21.50% p.a.
4.00% p.a.
3.20% p.a.
5.00% p.a.
17.05% p.a. 23.00% p.a. 22.41% p.a.
Management determined budgeted gross margin based on past performance and its market expectations. The weighted average growth rates
used are consistent with the forecasts included in industry reports. The discount rates reflect specific risks relating to the relevant CGUs.
If the revised estimated pre-tax discount rate applied to the discounted cash flows of JSC Bank Constanta had been 10 percentage points
higher than Management’s estimates, the Group would not need to reduce the carrying value of either goodwill or carrying value of net
assets of the CGU (2013: GEL 769 thousand and 16,402 thousand; 2012: GEL 769 thousand and 16,076 thousand). Recoverable amount of JSC
Constanta Bank CGU exceeds its carrying amount by GEL 71,384 thousand (2013: GEL 20,467 thousand; 2012: GEL 13,370 thousand). The
CGU’s carrying amount would equal its value in use at a discount rate of 29.36% p.a. (2013: 29.01% p.a.; 2012: 27.28% p.a.).
147
Strategic Report Governance Financial Statements Business Review 16 Goodwill Continued
If the revised estimated pre-tax discount rate applied to the discounted cash flows of JSC United Financial Corporation had been
10 percentage points higher than Management’s estimates, the Group would need to reduce the carrying value of goodwill by GEL 695
thousand and carrying value of net assets of the CGU by GEL 2,915 thousand (2013: GEL 695 thousand and GEL 101 thousand; 2012: nil).
Recoverable amount of JSC United Financial Corporation CGU exceeds its carrying amount by GEL 801 thousand (2013: GEL 982 thousand;
2012: GEL 3,636 thousand). The CGUs’ carrying amount would equal its value in use at a discount rate of 22.45% p.a. (2013: 23.02% p.a.;
2012: 40.01% p.a.)
If the revised estimated pre-tax discount rate applied to the discounted cash flows of LLC TBC Kredit had been 10 percentage points higher
than Management’s estimates, the Group would not need to reduce the carrying value of goodwill (2013:nil; 2012: nil). Recoverable amount
of LLC TBC Kredit CGU exceeds its carrying amount by GEL 57,348 thousand (2013: GEL 16,829 thousand; 2012: GEL 13,972 thousand).
The CGUs’ carrying amount would equal its value in use at a discount rate 47.6% of p.a. (2013: 38.26% p.a; 2012: 37.86% p.a.).
17 Due to Credit Institutions
In thousands of GEL
Due to other banks
Correspondent accounts and overnight placements
Deposits from banks
Short-term loans from banks
Total due to other banks
Other borrowed funds
Borrowings from foreign banks and financial institutions
Borrowings from local banks and financial institutions
Borrowings from Ministry of Finance
Total other borrowed funds
Total amounts due to credit institutions
18 Customer Accounts
In thousands of GEL
State and public organisations
- Current/settlement accounts
- Term deposits
Other legal entities
- Current/settlement accounts
- Term deposits
Individuals
- Current/demand accounts
- Term deposits
Total customer accounts
State and public organisations include government owned profit orientated businesses.
2014
2013
2012
37,247
47,802
934
85,983
452,469
204,475
6,358
663,302
749,285
4,894
42,358
–
47,252
417,504
92,987
8,063
518,554
565,806
6,569
53,700
15,935
76,204
479,854
63,599
7,466
550,919
627,123
2014
2013
2012
130,008
47,084
134,518
72,463
72,638
225,926
1,042,559
125,605
935,083
134,143
635,181
155,112
684,521
1,292,651
621,211
989,465
386,737
1,011,350
3,322,428
2,886,883
2,486,944
148
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
18 Customer Accounts Continued
Economic sector concentrations within customer accounts are as follows:
In thousands of GEL
Individual
Trade and Service
Construction
Transportation
Consumer Goods and Automobile Trading
Oil and Gas
Real Estate
Food Industry
Communication
Energy
Manufacturing
Agriculture
Mining
Other
2014
2013
2012
Amount
1,977,172
435,414
136,429
101,939
86,729
75,562
72,843
62,149
57,677
48,094
18,869
17,755
7,541
224,255
%
Amount
60% 1,610,676
13%
344,803
4%
3%
3%
2%
2%
2%
2%
1%
1%
1%
0%
6%
131,427
129,096
72,739
147,005
57,798
97,421
28,909
57,179
21,013
23,772
21,746
143,299
%
56%
12%
5%
4%
2%
5%
2%
3%
1%
2%
1%
1%
1%
5%
Amount
1,398,087
%
56%
211,729
116,392
197,115
50,286
142,173
45,116
53,745
19,305
92,121
15,507
14,198
6,240
124,930
8%
5%
8%
2%
6%
2%
2%
1%
4%
1%
0%
0%
5%
Total customer accounts
3,322,428
100% 2,886,883
100% 2,486,944
100%
At 31 December 2014 the Group had 125 customers (2013: 97 customers; 2012: 78 customers) with balances above GEL 3,000 thousand.
The aggregate balance of these customers was GEL 1,111,385 thousand (2013: GEL 915,407 thousand; 2012: GEL 758,428 thousand) or 33%
of total customer accounts (2013: 32%; 2012: 30%).
At 31 December 2014 included in customer accounts are deposits of GEL 636 thousand and GEL 71,902 thousand (2013: GEL 9,652 thousand
and GEL 38,973 thousand; 2012: GEL 3,572 thousand and GEL 33,135 thousand) held as collateral for irrevocable commitments under letters
of credit and guarantees issued, respectively. Refer to Note 36.
Refer to Note 40 for the disclosure of the fair value of each class of customer accounts. Interest rate analysis of customer accounts is
disclosed in Note 34. Information on related party balances is disclosed in Note 42.
19 Debt Securities in Issue
In thousands of GEL
Bonds issued on Azerbaijani market
Bonds issued on Georgian market
Bonds issued on Georgian market
Total debt securities in issue
In thousands of GEL
Bonds issued on Azerbaijani market
Total debt securities in issue
Currency
AZN
USD
USD
Currency
AZN
Carrying
amount in
GEL as at
31 December
2014
7,236
9,469
3,718
20,423
Carrying
amount in
GEL as at
31 December
2014
Maturity
Date
Coupon
rate
Effective
interest rate
16–Apr–16
21–Jul–16
3–Sep–17
9.0%
9.0%
8.4%
9.7%
9.7%
9.2%
Maturity
Date
4,474
1–Jan–14
4,474
Coupon
rate
7.0%
Effective
interest rate
8.4%
The group did not have any debt securities in issue as at 31 December 2012.
Refer to Note 40 for the disclosure of the fair value of debt securities in issue. Interest rate analysis of debt securities in issue are disclosed
in Note 34.
149
Strategic Report Governance Financial Statements Business Review 20 Provisions for Performance Guarantees, Credit Related Commitments and Liabilities and Charges
Movements in provisions for performance guarantees, credit related commitment and liabilities and charges are as follows:
In thousands of GEL
Carrying amount at 1 January 2012
Additions less releases recorded in profit or loss
Utilisation of provision
Carrying amount at 31 December 2012
Additions less releases recorded in profit or loss
Utilisation of provision
Carrying amount at 31 December 2013
Additions less releases recorded in profit or loss
Utilisation of provision
Carrying amount at 31 December 2014
Performance
guarantees
Credit related
commitments
5,426
2,471
(5,565)
2,332
2,374
(553)
4,153
759
–
4,912
1,708
(866)
–
842
4,085
–
4,927
(1,661)
–
3,266
Other
1,300
1,700
–
3,000
1,315
(1,015)
3,300
5,500
(5,080)
3,720
Total
8,434
3,305
(5,565)
6,174
7,774
(1,568)
12,380
4,598
(5,080)
11,898
Credit related commitments and performance guarantees: Provision was created against losses incurred on financial and performance
guarantees and commitments to extend credit to borrowers whose financial conditions deteriorated.
Provisions for liabilities, charges, performance guarantees and credit related commitments are primarily expected to be utilised within
twelve months after the year-end.
21 Other Financial Liabilities
Other financial liabilities comprise the following:
In thousands of GEL
Trade payables
Debit or credit card payables
Security deposits for finance lease
Derivative financial liabilities
Other accrued liabilities
Total other financial liabilities
Refer to Note 40 for disclosure of the fair value of other financial liabilities.
22 Other Liabilities
Other liabilities comprise the following:
In thousands of GEL
Accrued employee benefit costs
Taxes payable other than on income
Advances received
Other
Total other liabilities
All of the above liabilities are expected to be settled within twelve months after the year-end.
Note
39
2014
9,835
8,710
6,915
5,639
10,247
41,346
2014
21,502
10,232
977
2,264
34,975
2013
8,129
2,488
6,098
4,405
3,730
2012
5,688
1,166
3,388
7,139
2,081
24,850
19,462
2013
17,740
9,705
1,297
2,563
2012
13,412
1,337
534
5,461
31,305
20,744
150
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
23 Subordinated Debt
At 31 December 2014, subordinated debt comprised:
In thousands of GEL
Grant Date
Maturity Date
Currency
Outstanding
amount in
original
currency
Outstanding
amount in GEL
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden
N.V.
International Financial Corporation
European Bank for Reconstruction and Development
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden
N.V.
Deutsche Investitions und Entwicklungsgesellschaft MBH
Deutsche Investitions und Entwicklungsgesellschaft MBH
Kreditanstalt für Wiederaufbau Bankengruppe
Total subordinated debt
19–Dec–13
15–Apr–23
23–Apr–09
12–Nov–18
23–Apr–09
12–Nov–18
23–Apr–09
12–Nov–18
19–Feb–08
15–Jul–18
26–Jun–13
10–Jun–14
15–Jun–20
8–May–21
USD
USD
USD
USD
USD
USD
GEL
35,299
18,655
18,676
7,067
10,410
7,453
6,204
65,782
34,766
34,804
13,169
19,400
13,890
6,204
188,015
At 31 December 2013, subordinated debt comprised:
In thousands of GEL
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.
International Financial Corporation
European Bank for Reconstruction and Development
Deutsche Investitions und Entwicklungsgesellschaft MBH
Deutsche Investitions und Entwicklungsgesellschaft MBH
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.
Total subordinated debt
At 31 December 2012, subordinated debt comprised:
In thousands of GEL
International Financial Corporation
European Bank for Reconstruction and Development
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.
Deutsche Investitions und Entwicklungsgesellschaft MBH
Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V.
Total subordinated debt
The debt ranks after all other creditors in case of liquidation.
Grant Date
Maturity Date
19–Dec–13
15–Apr–23
23–Apr–09
12–Nov–18
23–Apr–09
12–Nov–18
19–Feb–08
15–Jul–18
26–Jun–13
23–Apr–09
15–Jun–20
12–Nov–18
Grant Date
Maturity Date
23–Apr–09
12–Nov–18
23–Apr–09
12–Nov–18
13–Dec–12
15–Apr–22
19–Feb–08
23–Apr–09
15–Jul–18
12–Nov–18
Outstanding
amount in
original
currency USD
Outstanding
amount in GEL
34,905
18,558
18,585
10,394
7,441
7,032
60,605
32,222
32,269
18,048
12,920
12,210
96,915
168,274
Outstanding
amount in
original
currency USD
Outstanding
amount in GEL
18,481
18,413
15,210
10,353
7,007
30,617
30,505
25,198
17,152
11,608
69,464
115,080
Refer to Note 40 for the disclosure of the fair value of subordinated debt. Information on related party balances is disclosed in Note 42.
151
Strategic Report Governance Financial Statements Business Review 24 Share Capital
In thousands of GEL except for number of shares
At 1 January 2012
Shares issued
Increase in share capital arising from share based payment
At 31 December 2012
Shares issued
Increase in share capital arising from share based payment
At 31 December 2013
Share split
Shares issued
Transaction costs recognized directly in equity
At 31 December 2014
Number of
vested shares
Share
capital
Share
premium
Total
151,710
15,171
203,308
218,479
8,145
1,564
815
157
23612
4,581
24,427
4,738
161,419
16,143
231,501
247,644
2,411
1,157
240
116
7,097
4,026
7,337
4,142
164,987
16,499
242,624
259,123
41,081,763
7,692,308
–
–
3,077
–
–
172,493
(9,459)
–
175,570
(9,459)
48,939,058
19,576
405,658
425,234
On 4 March 2014, Shareholders of the Bank approved the spilt of the ordinary shares 250-for-1 and authorised for issue additional
10,445,387 shares. Following this decision, the total authorised number of ordinary shares is 53,090,637 shares (31 December 2013: 170,581
shares), with a nominal value of GEL 0.4 per share after the split (31 December 2013: GEL 100 per share). All issued ordinary shares are
fully paid.
In accordance with Georgian legislation, the number of issued ordinary shares and relevant amounts of share capital and share premium
differ from presentation above due to accounting for share based payment transactions described in note 25.
In thousands of GEL except for number of shares
At 1 January 2012
Shares issued
Increase in share capital arising from share based payment
At 31 December 2012
Shares issued
Increase in share capital arising from share based payment
At 31 December 2013
Registering shares in the name of employees under share based payment
arrangement
Share split
Shares issued
Transaction costs recognized directly in equity
At 31 December 2014
Number of
outstanding
shares
Share
capital
Share
premium
Total
151,710
15,171
203,308
218,479
8,145
1,564
815
157
23612
4,581
24,427
4,738
161,419
16,143
231,501
247,644
2,411
1,157
240
116
7,097
4,026
7,337
4,142
164,987
16,499
242,624
259,123
1,229
41,387,784
7,692,308
–
123
–
3,077
–
4,156
–
172,493
(9,459)
4,279
–
175,570
(9,459)
49,246,308
19,699
409,814
429,513
All ordinary shares rank equally except for 307,250 unvested shares that were registered in the name of the management under share based
payment arrangement and which do not have voting rights before service conditions are met (see Note 25). These unvested shares are still
included in number of outstanding shares per NBG accounting rules. All other shares carry one vote.
In June 2014, 19,684,322 shares of the Bank were sold in the form of Global Depositary Receipts (“GDRs”) on London Stock Exchange
(the “LSE”) pursuant to an initial public offering to institutional investors. 7,692,308 shares in the form of GDRs were sold by the Bank while
the balance was sold by the selling shareholders. Bank of New York (“BNY”) acts as a depositary of these shares. Each GDR represents
1 ordinary share of the Bank.
At the reporting date the Bank has 1,037,500 authorised shares reserved for issuance under share based payment arrangement (31 December 2013:
1,037,500 shares). For description of share based payment scheme refer to Note 25. Per management’s estimate, the number of shares that the
Bank will need to issue under the share based payment arrangement approximates 803,336 (31 December 2013: 699,250).
152
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued
TBC Bank Annual Report 2014
24 Share Capital Continued
Transaction costs, that is, incremental costs, are costs directly attributable to the equity transaction that otherwise would have been avoided
had the equity instruments not been issued. Transaction costs of an equity transaction are accounted for as a deduction from equity, net of
any related income tax benefit.
Included in transaction costs are fees paid to investment bankers, lawyers, underwriters and other professional advisers involved in the
initial public offering.
25 Share Based Payments
May 2011 arrangement:
In May 2011, the Supervisory Board of the Bank approved a senior management bonus scheme for the years 2010 – 2012 and granted 3,300
new shares to the members of senior and middle management of the Group. According to the scheme, each year, subject to predefined
performance conditions, certain number of the shares is awarded to the participants. The performance conditions are divided into (i) team
goals and (ii) individual performance indicators. The total number of the shares to be awarded depends on meeting team goals and the book
value per share according to the audited IFRS consolidated financial statements of the Group for the year preceding the date of the award.
The team goals primarily relate to achieving growth, profitability and portfolio quality metrics set by the Supervisory Board as well as
compliance with certain regulatory ratios and covenants set by the lending international financial institutions. Individual performance
indicators are defined separately for each participant and are used to calculate the number of shares that should be awarded to them out of
the total bonus pool. The awarded shares were subject to continuous employment condition until 1 January 2014 when full title on the
awarded shares was transferred to the scheme participants. Before this date, the shares were eligible to dividends but did not have voting
rights and could not be sold or transferred to third parties. The Group considers 3 May 2011 as the grant date. The fair value of the shares as
at the grant date was estimated at GEL 2,837 per share. The valuation was carried out by an external valuator. All staff costs related to this
Senior Management Bonus scheme have been recognised during the vesting period. The last outstanding shares out of the 3,300 share grant
were issued in April 2013 and the share based payment reserve was debited by GEL 4,142 thousand.
June 2013 arrangement:
In June 2013, Supervisory Board of the Bank approved a new management compensation scheme for the years 2013 – 2015 and authorised
4,150 new shares as a maximum estimated number of new shares to be issued in accordance with the scheme. Authorized numbers of new
shares have increased to 1,037,500 new shares in order to reflect the share split 250-for-1 approved by the Shareholders on 4 March 2014.
According to the scheme, each year, subject to predefined performance conditions, certain number of the shares will be awarded to the top
management and some of the middle managers of the Group. The performance conditions are divided into (i) team goals and (ii) individual
performance indicators. The total number of the shares to be awarded depends on meeting the team goals and the book value per share
according to the audited IFRS consolidated financial statements of the Group for the year preceding the date of the award. The team goals
primarily relate to achieving growth, profitability and portfolio quality metrics set by the Supervisory Board as well as compliance with
certain regulatory requirements. The total number of shares in the bonus pool depends on achievement of team goals. Individual
performance indicators are defined separately for each participant and are used to calculate the number of shares to be awarded to them
out of the total bonus pool. After awards, these shares carry service conditions and before those conditions are met the shares are eligible to
dividends but do not have voting rights and cannot be sold or transferred to third parties. Service conditions assume continuous employment
until the gradual transfer of the full title to the scheme participants is complete. Shares of each of 2013, 2014 and 2015 tranche vest gradually
on the second, third and fourth year following the performance appraisal. Eighty percent of the shares vest in the fourth year after the
award. Under this compensation system the total vesting period extends to June 2019.
The shareholders and Supervisory Board have granted put options on the shares to be awarded under the new management compensation
scheme. In addition, the shareholders and the Supervisory Board have granted put options on all bonus shares awarded under the previous
share based payment arrangements. All of the put options became null and void upon the listing of the Bank’s shares on LSE in June 2014.
At no point of the operation of the share based payment scheme did the management expect the put options to be exercised. Consequently, the
scheme was accounted for as equity-settled scheme and no obligation was recognised for the put options. The Group considers 20 June 2013
as the grant date. Based on management’s estimate of expected achievement of performance and service conditions 732,000 shares have
been granted that will be gradually awarded to the members of the scheme as described above. The fair value of the share at the grant date,
as adjusted for the effect of 250-for-1 share split, is evaluated at GEL 13,93 per share and the valuation was carried out by an external valuator.
The valuation was performed by applying the income and market approaches. The market approach involved estimating market capitalization
to book value of equity multiple and deal price to book value of equity multiple for comparable banks. When selecting comparable banks, the
appraiser chose banks that operated in the Black Sea region and Central and Eastern Europe and had similar portfolio mix and growth
priorities as TBC Bank. Income approach involved discounting free cash flows to equity estimated over 10-year horizon.
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Strategic Report Governance Financial Statements Business Review
25 Share Based Payments Continued
When developing the projections, the following major assumptions were made:
• Over 2013-2023 period, the compound annual growth rate was assumed at 15.2% for loans and at 15.1% for customer accounts.
• The spread on the bank’s customer business was assumed to gradually decline from estimated 10.2% in 2013 till it would stabilize at
5.8% in 2021.
• Over 2013-2023 period, non-interest income was forecast to average 1.8% of customer volume (i.e. gross loans and deposits).
• Year-on-year growth in various components of employee compensation was assumed at 37.6%-56.0% in 2014, 2.4%-9.8% in 2015 and was
then assumed to gradually decline to 2.1%-3.6% in 2023. Year-on-year growth in administrative expenses was assumed at 38.3% in 2014,
10.4% in 2015 and was then assumed to gradually decline to 3.3% in 2023.
• The Bank’s terminal value was estimated using Gordon growth model, applying US long-term inflation forecast (2.1%) as the Bank’s
terminal cash flows growth rate.
• Bank’s cost of equity was estimated at 15.10%.
The final valuation was based on income approach, with market approach serving as a reasonableness check on the result obtained by the
income approach. The value of Bank’s equity so calculated was then divided by the number of ordinary shares issued as of valuation date and
further reduced with the discount for lack of control.
The Bank also pays personal income tax on behalf of equity settled scheme beneficiaries which is accounted as cash settled part. Tabular
information on both of the schemes is given below:
In GEL except for number of shares
Number of unvested shares at the beginning of the period
Number of shares granted
Increase in the number of unvested shares due to 250-for-1 split
Change in estimate of number of shares expected to vest based on performance conditions
Number of shares vested
Number of unvested shares at the end of the period
Value at grant date per share as adjusted for 250-for-1 split (GEL) / Value at grant date per
share (GEL)
Expense on equity-settled part (GEL thousand)
Expense on cash-settled part (GEL thousand)
Expense recognised as staff cost during the period (GEL thousand)
31 December
2013
(not adjusted
for the share
split)
1,157
2,797
–
–
(1,157)
2,797
3,482
2,032
2,055
4,087
31 December
2012
(not adjusted
for the share
split)
2,721
–
–
–
(1,564)
1,157
2,837
2,700
676
3,376
31 December
2014
2,797
696,453
104,086
–
803,336
13.93
2,592
1,710
4,302
Liability in respect of the cash-settled part of the award amounted to GEL 1,710 thousand as of 31 December 2014 (2013: GEL 2,055 thousand;
2012: GEL 432 thousand).Staff costs related to equity settled part of the share based payment schemes are recognised in the income
statement on a straight line basis over the vesting period of each relevant tranche and corresponding entry is credited to share based
payment reserve in equity.
26 Earnings per Share
Basic earnings per share are calculated by dividing the profit or loss attributable to owners of the Bank by the weighted average number of
ordinary shares in issue during the year.
In thousands of GEL except for number of shares
2014
2013
2012
Profit for the period attributable to the owners of the Bank (excluding the profit attributable to the
shares encumbered under the share based payment scheme – refer to Note 25)
Weighted average number of ordinary shares in issue
Basic earnings per ordinary share attributable to the owners of the Bank (expressed in GEL
per share)
156,469
121,616
96,519
45,524,938
40,978,000
38,292,250
3.4
3.0
2.5
154
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued
TBC Bank Annual Report 2014
26 Earnings per Share Continued
Diluted earnings per share are calculated by dividing the profit or loss attributable to owners of the Bank by the weighted average number of
ordinary shares adjusted for the effects of all dilutive potential ordinary shares during the year:
In thousands of GEL except for number of shares
2014
2013
2012
Profit for the period attributable to the owners of the Bank (excluding the profit attributable to the
shares encumbered under the share based payment scheme – refer to Note 25)
157,071
121,616
96,519
Weighted average number of ordinary shares in issue adjusted for the effects of all dilutive
potential ordinary shares during the period
45,968,817
41,055,500
38,292,250
Diluted earnings per ordinary share attributable to the owners of the Bank (expressed in GEL
per share)
3.4
3.0
2.5
Weighted average number of ordinary shares in issue as at 31 December 2013 and 2012 has been adjusted for the 250-for-1 share split that
took place in March 2014.
27 Segment Analysis
The chief operating decision maker which is the Board of Directors reviews the Group’s internal reporting in order to assess performance
and allocate resources. In 2014, the Board has changed the way it analyses certain information in order to enhance the control and
monitoring of the Group’s performance. This has resulted in the creation of a new segment ‘Corporate Center and Other Operations’ and a
change in the presentation of segment information. The operating segments are now determined as follows:
• Retail – all individual customers of the Group as well as customers that have been granted gold-pawn loans.
• Corporate – business customers which have annual revenue of GEL 8.0 million or more or have been granted a loan in an amount
equivalent to USD 1.5 million or more. Some other significant legal entity customers may also be assigned the status of being a corporate
customer, on a discretionary basis; for example, if they are regarded by the Group as having strong growth potential.
• SME – business customers that are not included either in the corporate or micro segments.
• Micro – all business customers of Bank Constanta, that have been granted loans by and/or have deposits with Bank Constanta, the
amount of which in neither case exceeds USD 150 thousand.
• Corporate Center and Other Operations – comprise the Treasury, other support and back office functions, and non-banking subsidiaries
of the Group.
The Board of Directors assesses the performance of the operating segments based on a measure of adjusted profit before income tax.
The reportable segments are the same as the operating segments.
The vast majority of the entity’s revenues are attributable to Georgia. A geographic analysis of origination of the Group’s assets and liabilities
is given in note 34.
Segment information for the reportable segments of the Group for the years ended 31 December 2014, 2013 and 2012 is set out below:
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Strategic Report Governance Financial Statements Business Review
27 Segment Analysis Continued
In thousands of GEL
31 December 2014
- Interest income
- interest expense
- Inter-segment interest income/(expense)
- Net interest income
- Fee and commission income
- Fee and commission expense
- Net Fee and commission income
- Gains less losses from trading in foreign currencies
- Foreign exchange translation losses less gains
- Net gain from derivative financial instruments
- Other operating income
- Other operating non-interest income
- Provision for loan impairment
- Provision for performance guarantees and credit related
commitments
- Provision for impairment of investments in finance lease
- Provision for impairment of other financial assets
- Impairment of investment securities available for sale
- Profit before administrative and other expenses and
income taxes
- Staff costs
- Depreciation and amortisation
- Provision for liabilities and charges
- Administrative and other operating expenses
- Operating expenses
- Profit before tax
- Income tax expense
- Profit for the year
Retail
Corporate
SME
Micro
237,804
116,404
(80,808)
7,499
164,495
46,368
(26,230)
20,138
9,932
–
–
–
(21,845)
(42,246)
52,313
18,093
(1,312)
16,781
12,456
–
–
–
53,739
(7,196)
(3,640)
42,903
9,268
(906)
8,362
13,286
–
–
–
57,573
(192)
(18,468)
38,913
3,498
(911)
2,587
1,820
–
–
–
9,932
12,456
(22,046)
(18,995)
13,286
(1,625)
1,820
(6,006)
–
–
–
–
885
–
–
–
17
–
–
–
–
–
–
–
Corporate
centre
and other
operations
46,837
(63,668)
56,855
40,024
10,976
(164)
10,812
2,236
2,359
(683)
19,600
23,512
–
–
(77)
(1,236)
(22)
Total
512,357
(173,709)
–
338,648
88,203
(29,523)
58,680
39,730
2,359
(683)
19,600
61,006
(48,672)
902
(77)
(1,236)
(22)
172,519
63,440
62,943
37,314
73,013
409,229
(55,427)
(13,132)
–
(36,026)
(11,826)
(10,755)
(15,808)
(29,019)
(122,835)
(780)
–
(4,432)
(1,915)
–
(4,981)
(3,579)
–
(9,600)
(5,021)
(5,500)
(18,509)
(24,427)
(5,500)
(73,548)
(104,585)
(17,038)
(17,651)
(28,987)
(58,049)
(226,310)
67,934
(9,087)
58,847
46,402
(6,207)
40,195
45,292
(6,059)
39,233
533,919
507,816
8,327
(1,114)
7,213
273,699
4,885
14,964
(2,001)
12,963
–
–
–
182,919
(24,468)
158,451
3,706,260
3,322,428
421,168
Total gross loans and advances to customers reported
1,666,913
1,231,729
Total customer accounts reported
1,977,172
832,555
Total credit related commitments and performance
guarantees
94
390,763
30,292
19
156
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
27 Segment Analysis Continued
In thousands of GEL
31 December 2013
- Interest income
- interest expense
- Inter-segment interest income/(expense)
- Net interest income
- Fee and commission income
- Fee and commission expense
- Net Fee and commission income
- Gains less losses from trading in foreign currencies
- Foreign exchange translation losses less gains
- Net gain from derivative financial instruments
- Other operating income
- Other operating non-interest income
- Provision for loan impairment
- Provision for performance guarantees and credit related
commitments
- Provision for impairment of investments in finance lease
- Provision for impairment of other financial assets
- Impairment of investment securities available for sale
- Profit before administrative and other expenses and
income taxes
- Staff costs
- Depreciation and amortisation
- Provision for liabilities and charges
- Administrative and other operating expenses
- Operating expenses
- Profit before tax
- Income tax expense
- Profit for the year
Retail
Corporate
SME
Micro
207,028
131,385
(96,144)
24,157
135,041
40,823
(17,627)
23,196
8,614
–
–
–
(35,721)
(50,675)
44,989
15,881
(4,688)
11,193
12,522
–
–
–
44,370
(7,622)
(3,679)
33,069
7,349
(1,089)
6,260
9,244
–
–
–
51,185
(426)
(15,045)
35,714
2,444
(620)
1,824
1,513
–
–
–
8,614
12,522
(13,377)
(17,035)
9,244
(88)
1,513
(2,471)
–
–
–
–
(6,124)
(335)
–
–
–
–
–
–
–
–
–
–
Corporate
centre
and other
operations
40,828
(52,233)
45,242
33,837
7,864
(277)
7,587
6,001
(5,901)
613
16,136
16,849
–
–
(98)
(2,236)
(1,142)
Total
474,796
(192,146)
–
282,650
74,361
(24,301)
50,060
37,894
(5,901)
613
16,136
48,742
(32,971)
(6,459)
(98)
(2,236)
(1,142)
153,474
45,545
48,150
(49,949)
(11,862)
–
(32,693)
(8,329)
(753)
–
(3,175)
(9,909)
(1,904)
–
(4,135)
36,580
(14,138)
(2,061)
–
(10,130)
54,797
338,546
(26,288)
(108,613)
(3,413)
(1,315)
(18,559)
(19,993)
(1,315)
(68,692)
(94,504)
(12,257)
(15,948)
(26,329)
(49,575)
(198,613)
Total gross loans and advances to customers reported
1,207,514
1,157,334
Total customer accounts reported
1,610,676
819,779
Total credit related commitments and performance
guarantees
256
346,587
43,099
127
58,970
(6,602)
52,368
33,288
(3,726)
29,562
32,202
(3,604)
28,598
392,446
451,985
10,251
(1,147)
9,104
201,287
4,443
5,222
(584)
4,638
–
–
–
139,933
(15,663)
124,270
2,958,581
2,886,883
390,069
Starting from 2014, the chief operating decision maker is reviewing the more detailed segmental analysis in order to assess performance
and allocate resources. Before that segment information was presented only for certain items of the profit and loss statements.
157
Strategic Report Governance Financial Statements Business Review 27 Segment Analysis Continued
Segment information for the reportable segments as it was presented before 2014, is set out below for the year ended 31 December 2012:
In thousands of GEL
31 December 2012
External revenues:
- Interest income on loans and advances to customers
- Fee and commission income
- Gains less losses from trading in foreign currencies
Revenue from external customers
External Expenses:
- Interest expense on customer accounts
- Fee and commission expense
- Provision for loan impairment
- Provision for liabilities and charges
Expenses from external customers
Adjusted profit before non-segmental income, administrative and
other expense and income tax
31 December 2012
Retail
Corporate
SME
Micro
Total
189,942
148,720
33,860
6,858
15,333
15,580
230,660
179,633
93,854
13,459
16,298
(1)
55,560
438
1,190
2,045
123,610
59,233
38,486
7,442
8,242
54,170
7,026
713
1,198
(438)
8,499
37,101
414,249
1,505
875
58,140
31,555
39,481
503,944
194
427
4,468
–
5,089
156,634
15,037
23,154
1,606
196,431
107,050
120,400
45,671
34,392
307,513
Total gross loans and advances to customers reported
Total customer accounts reported
Total credit related commitments and performance guarantees
954,463
1,142,087
1,398,087
253
800,346
336,765
294,217
285,219
24,804
145,931
2,536,698
3,292
2,486,944
–
361,822
A reconciliation of adjusted profit before non-segmental income, administrative and other expenses and income tax is provided as follows:
In thousands of GEL
Adjusted profit before non-segmental income, administrative and other expense and income tax
Non-segmental interest income
Non-segmental interest expense
Non-segmental fee and commission income
Non-segmental fee and commission expense
Non-segmental losses less gains from trading in foreign currency
Non-segmental provision for liabilities and charges
Net losses from derivative financial instruments
Foreign exchange translation gains less losses
Impairment of impairment for investment securities available for sale
Provision for impairment of investments in finance lease
Provision for impairment of other financial assets
Other operating income
Staff costs
Depreciation and amortisation
Administrative and other operating expenses
Profit before tax
31 December
2012
307,513
42,296
(61,261)
6,092
(3,793)
(6,315)
(1,700)
(3,804)
7,617
(10)
(42)
(4,132)
13,680
(92,289)
(22,103)
(69,440)
112,309
158
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
27 Segment Analysis Continued
Reportable segments’ assets are reconciled to total assets as follows:
In thousands of GEL
Total segment assets (gross loans and advances to customers)
Provision for loan impairment
Cash and cash equivalents
Mandatory cash balances with National Bank of Georgia
Due from other banks
Investment securities available for sale
Current income tax prepayment
Deferred income tax asset
Other financial assets
Investments in finance leases
Other assets
Premises and equipment
Intangible assets
Investment properties
Goodwill
Total assets per statement of financial position
Reportable segments’ liabilities are reconciled to total liabilities as follows:
In thousands of GEL
Total segment liabilities (customer accounts)
Due to Credit institutions
Debt securities in issue
Current income tax liability
Deferred income tax liability
Provisions for liabilities and charges
Other financial liabilities
Other liabilities
Subordinated debt
Total liabilities per statement of financial position
Reportable segments’ interest income is reconciled to total interest income as follows:
In thousands of GEL
Segments’ interest income
Investment securities available for sale (Note 10)
Due from other banks
Investment securities held to maturity
Investments in leases
Other
Total interest income
31 December
2014
31 December
2013
31 December
2012
3,706,260
2,958,581
2,536,698
(149,764)
(156,869)
(166,498)
532,118
336,075
33,704
466,510
251
383
43,857
50,907
77,775
390,465
295,332
1,708
500,651
6,202
–
45,049
35,613
65,075
398,587
316,061
29,542
407,733
10,135
–
25,301
26,377
67,354
208,692
199,668
192,556
37,756
76,216
2,726
23,491
83,383
2,726
18,817
34,305
2,726
5,423,466
4,451,075
3,899,694
31 December
2014
31 December
2013
31 December
2012
3,322,428
2,886,883
2,486,944
749,285
565,806
627,123
20,423
12,433
23,187
11,898
41,346
34,975
188,015
4,474
–
27,814
12,380
24,850
31,305
168,274
–
–
20,143
6,174
19,462
20,744
115,080
4,403,990
3,721,786
3,295,670
31 December
2014
31 December
2013
31 December
2012
465,520
30,361
6,211
–
10,265
–
433,968
414,249
30,442
3,030
–
7,356
–
27,211
6,960
2,373
5,734
18
512,357
474,796
456,545
159
Strategic Report Governance Financial Statements Business Review In thousands of GEL
Segments’ interest expense
Due to credit institutions
Subordinated debt
Other
Total interest expense
28 Other Reserves
In thousands of GEL
At 1 January 2012
27 Segment Analysis Continued
Reportable segments’ interest expense is reconciled to total interest expense as follows:
31 December
2014
31 December
2013
31 December
2012
110,041
139,913
156,634
43,384
19,069
1,215
38,645
13,182
406
47,946
13,226
89
173,709
192,146
217,895
Revaluation of investments available for sale
Revaluation of premises
Transfer of revaluation surplus on premises to retained earnings
Currency translation
Income tax effects
At 31 December 2012
Revaluation of investments available for sale
Currency translation
Income tax effects
At 31 December 2013
Revaluation of investments available for sale
Currency translation
Income tax effects
Increase arising on revaluation of properties as a result of acquisition of
non-controlling interest
Transfer of revaluation surplus to retained earnings due to sale
At 31 December 2014
10
14
10
10
Revaluation reserve for
Note
Premises
Available for
sale securities
Cumulative
currency
translation
reserve
2,373
–
–
–
(217)
–
Total other
reserves
33,162
682
10,513
(527)
(217)
(1,674)
2,156
41,939
–
1,233
–
3,389
–
2,095
–
–
–
7,923
1,233
(255)
50,840
(1,849)
2,095
113
89
(2,033)
28,269
–
10,513
(527)
–
(1,520)
36,735
–
–
–
2,520
682
–
–
–
(154)
3,048
7,923
–
(255)
36,735
10,716
–
–
305
89
(2,033)
35,096
(1,849)
–
(192)
–
–
8,675
5,484
49,255
Revaluation reserve for available for sale securities is transferred to profit or loss when realised through sale or impairment. Revaluation
reserve for premises is transferred to retained earnings when realised through sale or other disposal.
160
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
29 Interest Income and Expense
In thousands of GEL
Interest income
Loans and advances to customers
Investment securities available for sale (Note 10)
Investments in leases
Due from other banks
Investment securities held to maturity
Other
Total interest income
Interest expense
Customer accounts
Due to credit institutions
Subordinated debt
Other
Total interest expense
Net interest income
30 Fee and Commission Income and Expense
In thousands of GEL
Fee and commission income
Fee and commission income in respect of financial instruments not at fair value through profit or
loss:
- Card operations
- Settlement transactions
- Guarantees issued
- Issuance of letters of credit
- Cash transactions
- Foreign exchange operations
- Other
Total fee and commission income
Fee and commission expense
Fee and commission expense in respect of financial instruments not at fair value through profit or
loss:
- Card operations
- Guarantees received
- Settlement transactions
- Cash transactions
- Foreign exchange operations
- Other
Total fee and commission expense
Net fee and commission income
2014
2013
2012
465,520
30,361
10,265
6,211
–
–
433,968
30,442
7,356
3,030
–
–
414,249
27,211
5,734
6,960
2,373
18
512,357
474,796
456,545
110,041
139,913
156,634
43,384
19,069
1,215
38,645
13,182
406
47,946
13,226
89
173,709
192,146
217,895
338,648
282,650
238,650
2014
2013
2012
35,247
23,892
9,140
6,889
6,507
1,169
5,359
33,012
18,543
6,271
6,769
5,040
1,550
3,176
27,782
15,160
9,530
2,762
4,092
1,632
3,274
88,203
74,361
64,232
16,053
13,143
4,161
2,594
2,592
62
4,061
29,523
58,680
4,048
2,157
1,544
70
3,339
24,301
50,060
9,657
3,625
1,501
1,084
62
2,901
18,830
45,402
161
Strategic Report Governance Financial Statements Business Review 31 Other Operating Income
In thousands of GEL
Revenues from operational leasing
Gain from sale of investment properties
Gain from sale of inventories of repossessed collateral
Administrative fee income from international financial institutions
Revenues from sale of cash-in terminals
Revenues from non-credit related fines
Gain on disposal of premises and equipment
Net gain on terminated finance lease contracts
Other
Total other operating income
2014
6,997
5,795
1,644
982
852
236
126
–
2,968
19,600
2013
2,980
5,835
1,519
1,268
760
339
37
–
3,398
2012
3,292
2,734
4,102
1,163
–
434
–
108
1,847
16,136
13,680
Carrying value of inventories of repossessed collateral disposed of during year ended 31 December 2014 was GEL 13,721 thousand
(2013: GEL 19,558 thousand; 2012: GEL 7,212 thousand).
32 Administrative and Other Operating Expenses
In thousands of GEL
Advertising and marketing services
Professional services
Rent
Intangible asset enhancement
Taxes other than on income
Utility services
Communications and supply
Stationery and other office expenses
Insurance
Premises and equipment maintenance
Business trip expenses
Security services
Transportation and vehicle maintenance
Personnel training and recruitment
Charity
Loss on disposal of inventories
Write-down of current assets to fair value less costs to sell
Loss on disposal of premises and equipment
Loss on disposal of investment properties
Other
Total administrative and other operating expenses
33 Income Taxes
Income tax expense comprises the following:
In thousands of GEL
Current tax charge
Deferred tax (credit)/charge
Income tax expense for the year
162
2014
14,121
11,969
11,943
4,371
3,900
3,681
3,455
2,632
1,899
1,893
1,610
1,578
1,216
919
898
208
190
18
–
7,047
73,548
2013
13,211
6,247
10,809
3,767
3,043
3,369
3,103
2,360
1,496
2,484
1,230
1,597
1,215
902
905
221
6,178
54
76
6,425
2012
15,183
10,054
10,295
2,605
3,363
3,036
3,199
2,958
1,440
1,904
1,104
1,522
1,687
574
911
–
1,317
1,658
–
6,630
68,692
69,440
2014
29,365
(4,897)
24,468
2013
8,247
7,416
15,663
2012
4,077
10,421
14,498
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
33 Income Taxes Continued
The income tax rate applicable to the majority of the Group’s income is 15% (2013: 15%; 2012: 15%). The income tax rate applicable to the
majority of subsidiaries income ranges from 15% to 20% (2013: 15% – 20%; 2012: 15% – 20%).
Reconciliation between the expected and the actual taxation charge is provided below.
In thousands of GEL
Profit before tax
Theoretical tax charge at statutory rate (2014: 15%; 2013: 15%; 2012: 15%)
Tax effect of items which are not deductible or assessable for taxation purposes:
- Income which is exempt from taxation
- Non-deductible expenses and other differences
- Recognition of previously unrecognized deferred tax assets
Income tax expense for the year
2014
2013
2012
182,919
27,438
139,933
112,309
20,990
16,846
(4,678)
1,708
–
(4,865)
1,758
(2,220)
(4,756)
2,408
–
24,468
15,663
14,498
The Group has not recorded a deferred tax liability in respect of temporary differences of GEL 6,141 thousand (2013: GEL 3,653 thousand;
2012: GEL 1,524 thousand) associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those
temporary differences, and does not intend to reverse them in the foreseeable future.
Differences between IFRS and statutory taxation regulations in Georgia and Azerbaijan give rise to temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these
temporary differences is detailed below and is recorded at the rate of 15% (2013: 15%; 2012: 15%) for Georgia and 20% for Azerbaijan
(2013: 20%; 2012: 20%).
In thousands of GEL
Tax effect of deductible/(taxable) temporary differences and tax loss carry
forwards
Premises and equipment
Loan impairment provision
Fair valuation of investment securities available for sale
Other financial assets
Other assets
Investment in leases
Investment property
Due to credit institutions
Subordinated debt
Other financial liabilities
Other liabilities
Share based payment
Net deferred tax asset/(liability)
Recognised deferred tax asset
Recognised deferred tax liability
Net deferred tax asset/(liability)
31 December
2013
(Charged)/
credited to
profit or loss
(Charged)/
credited
directly
to other
comprehensive
income
31 December
2014
(18,306)
(5,666)
(557)
191
1,741
(13)
(7,012)
464
(289)
1,027
301
305
(27,814)
–
(27,814)
(27,814)
(2,039)
948
(475)
4,292
2,423
42
576
(756)
30
790
(681)
(253)
4,897
383
4,514
4,897
305
–
(192)
–
–
–
–
–
–
–
–
–
113
–
113
113
(20,040)
(4,718)
(1,224)
4,483
4,164
29
(6,436)
(292)
(259)
1,817
(380)
52
(22,804)
383
(23,187)
(22,804)
163
Strategic Report Governance Financial Statements Business Review 33 Income Taxes Continued
In thousands of GEL
Tax effect of deductible/(taxable) temporary differences and tax loss carry
forwards
Premises and equipment
Loan impairment provision
Fair valuation of investment securities available for sale
Tax loss carry forwards
Other financial assets
Other assets
Investment in leases
Investment property
Due to credit institutions
Subordinated debt
Other Financial liabilities
Other Liabilities
Share based payment
31 December
2012
(Charged)/
credited to
profit or loss
Charged
directly
to other
comprehensive
income
31 December
2013
(16,961)
(834)
(473)
678
1,320
865
(197)
(2,576)
(433)
(219)
–
(1,313)
–
(1,345)
(4,832)
171
(678)
(1,129)
876
184
(4,436)
897
(70)
1,027
1,614
305
–
–
(255)
–
–
–
–
–
–
–
–
–
–
(18,306)
(5,666)
(557)
–
191
1,741
(13)
(7,012)
464
(289)
1,027
301
305
Net deferred tax asset/(liability)
(20,143)
(7,416)
(255)
(27,814)
In thousands of GEL
1 January 2012
Tax effect of deductible/(taxable) temporary differences and tax loss carry
Charged
directly
to other
comprehensive
income
(Charged)/
credited to
profit or loss
31 December
2012
forwards
Premises and equipment
Loan impairment provision
Fair valuation of investment securities available for sale
Tax loss carry forwards
Other financial assets
Other assets
Investment in leases
Investment property
Due to credit institutions
Subordinated debt
Other liabilities
(13,790)
9,752
(1,651)
(10,586)
(407)
198
–
(276)
3
(2,382)
(521)
(167)
(458)
88
480
1,320
1,141
(200)
(194)
88
(52)
(855)
(1,520)
(16,961)
–
(154)
–
–
–
–
–
–
–
–
(834)
(473)
678
1,320
865
(197)
(2,576)
(433)
(219)
(1,313)
Net deferred tax asset/(liability)
(8,048)
(10,421)
(1,674)
(20,143)
In the context of the Group’s current structure and Georgian tax legislation, tax losses and current tax assets of different group companies
may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where
there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and
the same taxation authority.
34 Financial and Other Risk Management
The risk management function within the Group is carried out in respect of the following risks: credit, geographical, market which includes
principally currency and interest rate risks, liquidity, operational strategic and reputational risks. The primary objectives of the risk management
function are to (i) contribute to the development of the Group’s business strategy by ensuring risk adjusted profitability and (ii) guarantee the
Group’s sustainable development through the implementation of efficient risk management systems.
164
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
34 Financial and Other Risk Management Continued
Group’s risk management process encompasses all the activities that affect its risk profile and consists of the following core elements:
(i) active board and senior management oversight; (ii) adequate policies and procedures aimed at effectively controlling risk exposures;
(iii) adequate risk identification, measurement and management systems; and (iv) comprehensive internal controls.
The monitoring and implementation of TBC Bank’s risk management function is split among eight principal risk management bodies:
the Supervisory Board, the Risk, Ethics and Compliance Committee, the Audit Committee, the Management Board, the Credit Committee,
the Operational Risks Committee, the Assets and Liabilities Management Committee and the Problem Loans Committee.
TBC Bank’s risk management policies are implemented through a number of its departments, including the Internal Audit, Financial Risk
Management, Treasury, Credit Risk Management, Corporate, SME and Retail Credit Risk Management, Operational Risk Management,
Legal and Compliance Departments, each of which reports to one of the principal risk management bodies referred to above.
TBC Bank also employs a Chief Risk Officer, who reports to the Management Board and who is responsible for supervising all risk
management activities across TBC Bank’s business except for financial risk management, which is supervised by the Chief Financial Officer.
The Chief Risk Officer is also required to ensure that TBC Bank’s risk exposure level is in accordance with the defined limits set forth in TBC
Bank’s Risk Appetite Statement and that its operations are adequate in light of TBC Bank’s risk profile. The Chief Risk Officer and Chief
Financial Officer have independent access to the Chairman of the Risk, Ethics, and Compliance Committee.
Credit risk. The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due.
The Group’s exposure to credit risk arises as a result of its lending operations and other transactions with counterparties giving rise
to financial assets.
The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on the consolidated statement of
financial position as well as for financial and performance guarantees and commitments to extend credit, the maximum exposure to credit
risk is the amount of the commitment. Refer to Note 36. The subcategories of credit risk are: counterparty credit risk (the risk default or
non-fulfilment of contracts due to a deterioration in the counterparty’s credit quality); concentration risk (the risk of portfolio quality
deterioration due to large exposures to small number of borrowers or individual industries); currency-induced credit risks (risks arising
from foreign currency-denominated loans in the portfolio); and residual risks (resulting from the use of credit risk-mitigation techniques).
For efficient management of credit risk the adequate policies, and procedures are in place. The credit policies establish framework for
lending decisions reflecting the Bank’s tolerance for credit risk.
The credit risks are managed at the transaction and portfolio level. At the transaction level credit risk management includes: credit applications
review, credit application rating review, approval of credits and monitoring of individual borrowers’ financial standing. As for the portfolio level
– credit risk management includes: definition of the risk appetite, credit portfolio analysis, industry analysis, concentrations management,
rating models development, expected losses estimation, undertaking stress tests for unexpected losses estimation and development of credit
policies and instructions. Loan Approval Committees are responsible to review credit applications and approve credit products. Different Loan
Approval Committees are in place for the approval of credit exposures to retail, corporate, SME and micro customers. The composition of a Loan
Approval Committee depends on aggregated liabilities of the borrower and the borrower’s risk profile. Credit risk managers (as members of
corresponding Loan Approval Committees) ensure that the borrower and proposed credit exposure risks are thoroughly analysed. A loan to a
“large borrower” (a borrower with exposure to more than 5% of TBC Bank’s Basel capital) requires the review and approval of the Risk, Ethics
and Compliance Committee.
The Group has established portfolio monitoring systems in order to manage its credit exposure effectively. Reports are generated on a daily,
weekly, monthly and quarterly basis in order to monitor the dynamics of loan portfolio of the Bank’s various business segments and ensure
compliance with predefined risk appetite limits.
The Credit Risk Management Department analyses trends of the portfolio on a monthly basis, including total credit portfolio exposure,
concentrations, maturities, volumes and performance of non-performing loans, write-offs and recoveries, and presents its findings to
the Management Board. Furthermore, reports relating to the credit quality of the credit portfolio, compliance with risk appetite limits,
TBC Bank’s related and connected party exposures, results of stress tests are presented to the Supervisory Board and Risk Ethics and
Compliance Committee on a quarterly basis. The Bank’s Credit Risk Management Department reviews ageing analysis of outstanding loans
and follows up past due balances. Management therefore considers it to be appropriate to provide ageing and other information about credit
risk as disclosed in Note 9.
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of counterparty failing to
perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligations as it does
for on-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures.
165
Strategic Report Governance Financial Statements Business Review
34 Financial and Other Risk Management Continued
Geographical risk concentrations. Assets, liabilities, credit related commitments and performance guarantees have generally been
attributed to geographic regions based on the country in which the counterparty is located. Balances legally outstanding to/from off-shore
companies which are closely related to Georgian counterparties are allocated to the caption “Georgia”. Cash on hand and premises and
equipment have been allocated based on the country in which they are physically held.
The geographical concentration of the Group’s assets and liabilities at 31 December 2014 is set out below:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets
Total financial assets
Non-financial assets
Total assets
Liabilities
Due to credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
Total financial liabilities
Non-financial liabilities
Total liabilities
Net balance sheet position
Performance guarantees
Credit related commitments
Georgia
OECD
Non-OECD
Total
348,237
615
336,075
3,397,855
460,370
50,907
43,802
91,896
3,910
–
71,971
6,140
–
55
91,985
29,179
–
532,118
33,704
336,075
86,670
3,556,496
–
–
–
466,510
50,907
43,857
4,637,861
173,972
207,834
5,019,667
401,744
22
2,033
403,799
5,039,605
173,994
209,867
5,423,466
279,445
2,931,114
3,718
37,677
6,204
3,258,158
81,365
411,605
312,470
–
3,454
181,811
909,340
178
58,235
78,844
16,705
215
–
749,285
3,322,428
20,423
41,346
188,015
153,999
4,321,497
950
82,493
3,339,523
909,518
154,949
4,403,990
1,700,082
(735,524)
54,918
1,019,476
183,528
513,746
–
–
–
–
183,528
513,746
166
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
34 Financial and Other Risk Management Continued
The geographical concentration of the Group’s assets and liabilities at 31 December 2013 is set out below:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets
Total financial assets
Non-financial assets
Total assets
Liabilities
Due to credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
Total financial liabilities
Non-financial liabilities
Total liabilities
Net balance sheet position
Performance guarantees
Credit related commitments
Georgia
OECD
Non-OECD
Total
242,264
74,279
73,922
390,465
–
295,332
2,639,915
495,793
35,613
44,990
1,630
–
91,492
4,858
–
59
78
–
1,708
295,332
70,305
2,801,712
–
–
–
500,651
35,613
45,049
3,753,907
172,318
144,305
4,070,530
379,248
28
1,269
380,545
4,133,155
172,346
145,574
4,451,075
115,519
2,513,794
403,179
347,410
47,108
565,806
25,679
2,886,883
–
19,638
–
–
4,474
5,164
168,274
48
–
4,474
24,850
168,274
2,648,951
924,027
77,309
3,650,287
70,160
92
1,247
71,499
2,719,111
924,119
78,556
3,721,786
1,414,044
(751,773)
67,018
729,289
156,551
422,239
–
–
–
–
156,551
422,239
167
Strategic Report Governance Financial Statements Business Review 34 Financial and Other Risk Management Continued
The geographical concentration of the Group’s assets and liabilities at 31 December 2012 is set out below:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets
Total financial assets
Non-financial assets
Total assets
Liabilities
Due to credit institutions
Customer accounts
Other financial liabilities
Subordinated debt
Total financial liabilities
Non-financial liabilities
Total liabilities
Net balance sheet position
Performance guarantees
Credit related commitments
Georgia
OECD
Non-OECD
Total
216,913
28,164
316,061
2,273,550
404,577
26,377
25,262
160,598
1,378
–
36,917
3,156
–
39
21,076
–
–
398,587
29,542
316,061
59,733
2,370,200
–
–
–
407,733
26,377
25,301
3,290,904
202,088
80,809
3,573,801
324,112
52
1,729
325,893
3,615,016
202,140
82,538
3,899,694
128,610
2,245,785
18,679
–
445,140
239,433
297
115,080
53,373
627,123
1,726
2,486,944
486
–
19,462
115,080
2,393,074
799,950
55,585
3,248,609
45,666
112
1,283
47,061
2,438,740
800,062
56,868
3,295,670
1,176,276
(597,922)
25,670
157,795
380,442
–
–
–
–
604,024
157,795
380,442
Market risk. The Bank follows the Basel Committee’s definition of market risk as the risk of losses in on- and off-balance-sheet positions
arising from movements in market prices. This risk is principally made up of (a) risks pertaining to interest rate instruments and equities in
the trading book and (b) foreign exchange rate risk (or currency risk) and commodities risk throughout the Bank. The Bank’s strategy is not
to be involved in trading book activity or investments in commodities. Accordingly, the Bank’s exposure to market risk is primarily limited to
foreign exchange rate risk in the structural book.
Currency risk. Foreign exchange rate risk arises from the potential change in foreign currency exchange rates, which can affect the value
of a financial instrument. This risk stems from the open currency positions created due to mismatches in foreign currency assets and
liabilities. The NBG requires the Bank to monitor both balance-sheet and total aggregate (including off-balance sheet) open currency
positions and to maintain the later one within 20% of the Bank’s regulatory capital. As at 31 December 2014, the Bank maintained an
aggregate open currency position of 3.1% of regulatory capital (2013: 0.79%; 2012: negative 4.3%). The Asset/Liability Management
Committee (“ALCO”) has set limits on the level of exposure by currency as well as on aggregate exposure positions which are more
conservative than those set by the NBG. The Bank’s compliance with such limits is monitored daily by the heads of the Treasury and
Financial Risk Management Departments.
The Bank has in place Market Risk Management Policy, market risk management procedure and relevant methodologies which are updated
annually in order to further increase effectiveness of currency risk management.
168
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
34 Financial and Other Risk Management Continued
The table below summarises the Group’s exposure to foreign currency exchange rate risk at the balance sheet date. Gross amount of
currency swap deposits is included in Derivatives. Therefore Total financial assets and liabilities below are not traceable with either balance
sheet or liquidity risk management tables, where net amount of gross currency swaps is presented:
In thousands of GEL
Georgian Lari
US Dollars
Euros
Other
Total
In thousands of GEL
Georgian Lari
US Dollars
Euros
Other
Total
At 31 December 2014
Monetary
financial assets
Monetary
financial
liabilities
Derivatives
Net balance
sheet position
1,979,583
1,336,626
55,335
2,704,810
2,573,475
(193,200)
262,113
72,543
376,934
34,414
117,668
18,313
698,292
(61,865)
2,847
56,442
5,019,049
4,321,449
(1,884)
695,716
At 31 December 2013
At 31 December 2012
Monetary
financial assets
Monetary
financial
liabilities
1,438,492
994,150
2,374,574
2,333,144
217,267
38,917
294,734
28,259
Net balance
sheet position
Monetary
financial assets
Monetary
financial
liabilities
412,773
1,088,821
809,165
(18,762)
2,153,303
2,133,821
(1,017)
27,190
277,692
54,119
272,759
32,864
Derivatives
(31,569)
(60,192)
76,450
16,532
Derivatives
Net balance
sheet position
20,139
(14,891)
(4,802)
–
299,795
4,591
131
21,255
4,069,250
3,650,287
1,221
420,184
3,573,935
3,248,609
446
325,772
To assess currency risk the Bank performs value-at-risk (“VAR”) sensitivity analysis on a quarterly basis. The analysis calculates the effect
on the income of the Group of possible worst movement of currency rates against Georgian Lari, with all other variables held constant. To
identify maximum expected losses associated with currency fluctuations, 99% confidence level is defined based on monthly changes in
exchange rates over the 3 years look-back period. During the years ended 31 December 2014, 2013 and 2012, sensitivity analysis did not
reveal any significant potential effect on the Group’s equity:
In thousands of GEL
Maximum loss (VAR, 99% confidence level)
Maximum loss (VAR,95% confidence level)
As at 31
December
2014
(2,572)
(1,886)
As at 31
December
2013
As at 31
December
2012
(589)
(413)
(183)
(130)
Interest rate risk. Interest rate risk arises from potential changes in market interest rates that can adversely affect the fair value or future
cash flows of the financial instrument. This risk can arise from maturity mismatches of assets and liabilities, as well as from the re-pricing
characteristics of such assets and liabilities.
The deposits and the largest part of loans offered by the Bank are at fixed interest rates, while a portion of the Bank’s borrowings is based
on a floating rate of interest. The Bank’s floating rate borrowings are, to a certain extent, hedged by the NBG paying a floating rate on the
minimum reserves that the Bank holds with the NBG. The Bank has also entered into interest rate swap agreements in order to mitigate
interest rate risk, analyses of derivative financial instruments is given in Note 39. Furthermore, vast majority of the Bank’s loans to
customers contain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, thereby limiting the
Bank’s exposure to interest rate risk. Management also believes that the Bank’s interest rate margins provide a reasonable buffer in order
to mitigate the effect of possible adverse interest rate movement.
The table below summarises the Group’s exposure to interest rate risks. The table presents the aggregated amounts of the Group’s financial
assets and liabilities at amounts monitored by the management, categorised by the earlier of contractual interest re-pricing or maturity
dates. Currency swaps are not netted when assessing the Group’s exposure to interest rate risks. Therefore, total financial assets and
liabilities below are not traceable with either balance sheet or other financial risk management tables.
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Strategic Report Governance Financial Statements Business Review 34 Financial and Other Risk Management Continued
In thousands of GEL
31 December 2014
Total financial assets
Total financial liabilities
Net interest sensitivity gap at 31 December 2014
31 December 2013
Total financial assets
Total financial liabilities
Net interest sensitivity gap at 31 December 2013
31 December 2012
Total financial assets
Total financial liabilities
Net interest sensitivity gap at 31 December 2012
Less than
1 year
More than
1 year
Total
2,238,703
2,763,543
2,808,079
1,584,484
5,046,782
4,348,027
(524,840)
1,223,595
698,755
2,001,124
2,364,190
2,102,561
1,317,960
4,103,685
3,682,150
(363,066)
784,601
421,535
1,917,616
2,256,548
1,715,962
1,051,705
3,633,578
3,308,253
(338,932)
664,257
325,325
At 31 December 2014, if interest rates at that date had been 100 basis points lower with all other variables held constant, profit for the year
would have been GEL 2,600 thousand (2013: GEL 1,800 thousand; 2012 GEL 1,695 thousand;) higher, mainly as a result of lower interest
expense on variable interest liabilities. Other comprehensive income would have been GEL 5,482 thousand (2013: GEL 5,093 thousand,
2012: GEL 4,951 thousand) higher, as a result of an increase in the fair value of fixed rate financial assets classified as available for sale
and repurchase receivables.
If interest rates had been 100 basis points higher, with all other variables held constant, profit would have been GEL 2,600 thousand
(2013: GEL 1,800 thousand 2012: GEL 1,695 thousand;) lower, mainly as a result of higher interest expense on variable interest liabilities.
Other comprehensive income would have been GEL 5,278 thousand (2013: GEL 4,786 thousand, 2012: GEL 4,926 thousand) lower, as a
result of decrease in the fair value of fixed rate financial assets classified as available for sale.
For the management of interest rate risk on a standalone basis, the Bank has introduced an advanced model developed with the assistance
of Ernst & Young LLC. The interest rate risk analysis is performed by Financial Risk Management Department monthly.
The Bank calculates impact of changes in interest rates using both Net Interest Income and Economic Value sensitivity. Net Interest Income
sensitivity measures the impact of a change of interest rates along the various maturities on the yield curve on the net interest revenue for
the nearest year. Economic Value measures the impact of a change of interest rates along the various maturities on the yield curve on the
present value of the Group’s assets, liabilities and off-balance sheet instruments. When performing Net Interest Income and Economic Value
sensitivity analysis, the Bank uses parallel shifts in interest rates as well as number of different scenarios.
In order to manage Interest Rate risk the Bank establishes appropriate limits. The Bank monitors compliance with the limits and prepares
forecasts. ALCO decides on actions that are necessary for effective interest rate risk management and follows up on the implementation.
Periodic reporting is done to Management Board and Supervisory Board Risk, Ethics and Compliance Committee.
Liquidity Risk. Liquidity risk is the risk that TBC either does not have sufficient financial resources available to meet all of its obligations and
commitments as they fall due, or can access those resources only at a high cost. Liquidity risk is managed by the Financial Risk Management
and Treasury Departments and is monitored by the ALCO.
The principal objectives of the TBC Bank’s liquidity risk management policy are to: (i) ensure the availability of funds in order to meet
claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; (ii) recognise any
structural mismatch existing within TBC Bank’s statement of financial position and set monitoring ratios to manage funding in line with
well-balanced growth; and (iii) monitor liquidity and funding on an ongoing basis to ensure that approved business targets are met without
compromising the risk profile of the Bank.
Liquidity risk is categorised into two risk types: funding liquidity risk and market liquidity risk.
Funding liquidity risk is the risk that TBC will not be able to efficiently meet both expected and unexpected current and future cash flow
and collateral needs without affecting either its daily operations or its financial condition. To manage funding liquidity risk TBC Bank uses
Liquidity Coverage ratio and Net Stable Funding ratio set forth under Basel III, as well as minimum liquidity ratio defined by the NBG. In
addition the Bank performs stress tests, what if and scenarios analysis.
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34 Financial and Other Risk Management Continued
The Liquidity Coverage ratio is used to help manage short-term liquidity risks. The Bank’s liquidity risk management framework is designed
to comprehensively project cash flows arising from assets, liabilities and off-balance sheet items over certain time bands and ensure that
liquidity coverage ratio limits are put in place. TBC Bank also stress tests the results of liquidity through large shock scenarios set by the
NBG. TBC Bank calculates its internal liquidity coverage ratio and conducts stress tests on a weekly basis.
The Net Stable Funding ratio is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating
additional incentives for TBC to rely on more stable sources of funding on a continuing basis. TBC Bank also sets deposit concentration
limits for large deposits and deposits of non-Georgian residents in its deposit portfolio.
Net Stable Funding ratio is calculated based on the IFRS consolidated financial statements. In addition, for internal purposes TBC Bank
calculates NSFR ratio on the basis of standalone financial statements prepared in accordance with the NBG accounting rules.
Calculation of the NSFR as at 31 December 2014, 2013 and 2012 is summarized in the table below.
Net Stable Funding Ratio
In thousands of GEL
Available stable funding
Capital: Tier 1 & Tier 2 Capital Instruments
Tier 1
Tier 2
Long Term Funding (year >= 1)
Long Term Borrowings (>=1 year)
Subordinated debt not included in Tier 2
Other funding (>=1 year)
Other Funding
Total Corporate deposits
Total SME deposits
Total Retail deposits
Short term Borrowings with remaining maturity (<1 year)
Subordinated Debt (<1 year)
Required amount of stable funding
Long term Assets with remaining maturity >=1 year
Reserves in NGB (Stable part)
Loans (>=1 year)
Fixed and Intangible Assets(>=1 year)
Other assets >=1 year)
Financial lease receivables (>1 year)
Short term Assets with remaining maturity <1 year
Loans (<= 1 year)
Financial lease receivables (<=1 year)
Undrawn amount of committed credit and liquidity facilities
Unused credit lines and undisbursed amounts from loans
Guarantees
As at 31 December
2014
2013
2012
114.6%
118.6%
121.6%
Factor
4,135,922
Amount
3,410,696
2,952,368
1,188,187
898,278
737,179
100%
100%
100%
100%
100%
967,495
220,692
489,933
388,378
62,043
39,512
675,723
222,555
559,359
177,820
387,814
358,006
319,244
284,372
34,314
34,256
13,120
60,514
2,457,802
2,124,604
1,857,183
50%
80%
416,277
410,160
409,769
365,335
401,239
229,866
80% 1,581,739
1,288,541
1,117,706
50%
50%
47,674
1,952
59,635
1,324
107,259
1,113
3,610,370
2,874,587
2,427,415
2,892,927
2,293,969
1,884,688
100%
332,363
273,267
256,157
100% 2,268,629
1,775,280
1,401,093
100%
100%
100%
50%
50%
5%
5%
246,448
22,506
22,981
682,580
668,617
13,963
34,863
14,214
20,649
223,159
22,263
–
211,373
16,065
–
551,225
515,816
551,225
515,816
–
29,393
9,890
19,503
–
26,911
8,979
17,932
Management believes that strong and diversified funding structure is one of TBC’s differentiators. TBC relies on relatively stable deposits
from Georgia as the main source of funding. In order to maintain and further enhance liability structure TBC sets the targets for retail
deposits in its strategy and sets the loan to deposit ratio limits.
Loan to deposit ratio was at 111.6%, 102.5% and 102.0%, at the 31 December 2014, 2013 and 2012 respectively.
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34 Financial and Other Risk Management Continued
Market liquidity risk is the risk that TBC cannot easily offset or eliminate a position at the then-current market price because of inadequate
market depth or market disruption. To manage market liquidity risk, TBC Bank follows Basel III guidelines on high-quality liquidity asset
eligibility to ensure that the Bank’s high-quality liquid assets can be sold without causing a significant movement in the price and with
minimum loss of value.
In addition, TBC Bank has a liquidity contingency plan, which forms part of the TBC’s overall prudential liquidity policy and is designed
to ensure that TBC is able to meet its funding and liquidity requirements and maintain its core business operations in deteriorating
liquidity conditions that could arise outside the ordinary course of its business. The plan is updated once a year. Last time it was updated
in January 2013.
The Bank calculates liquidity ratio on a daily basis in accordance with the requirements of the NBG. The limit is defined by the NBG for
average liquidity ratio, which is calculated as the ratio of average liquid assets to average liabilities for the respective month, including
borrowings from financial institutions and part of off-balance sheet liabilities with residual maturity up to 6 months. As at 31 December
the ratios were well above the prudential limit set by the NBG as follows:
Average Liquidity Ratio
2014
31.1%
2013
34.0%
2012
36.6%
According to daily cash flow forecasts, and the surplus in liquidity standing, Treasury Department places funds in short-term liquid assets,
largely made up of short-term risk-free securities, interbank deposits and other inter-bank facilities, to ensure that sufficient liquidity is
maintained within the Group as a whole.
Maturity analysis. The table below summarizes the maturity analysis of the Group’s financial liabilities as at 31 December 2014 based
on remaining undiscounted contractual 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 Group could be required
to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.
The maturity analysis of financial liabilities at 31 December 2014 is as follows:
In thousands of GEL
Liabilities
Due to Credit institutions
Customer accounts – individuals
Customer accounts – other
Other financial liabilities
Subordinated debt
Debt securities in issue
Gross settled forwards
Performance guarantees
Financial guarantees
Other credit related commitments
Less than 3
months
From 3 to 12
months
From 12
months to 5
years
Over 5 years
Total
287,557
1,027,688
1,115,065
39,934
1,176
78
190,644
27,214
119,510
284,284
102,151
737,972
98,241
1,300
19,430
236
60,213
53,553
91,717
–
377,385
250,916
113,422
112
178,206
22,008
–
114,531
28,024
–
44,602
24,333
35,865
–
70,795
–
–
517
–
–
811,695
2,040,909
1,362,593
41,346
269,607
22,322
250,857
195,815
239,251
284,284
Total potential future payments for financial obligations
3,093,150
1,164,813
1,084,604
176,112
5,518,679
172
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued
TBC Bank Annual Report 2014
34 Financial and Other Risk Management Continued
The maturity analysis of financial liabilities at 31 December 2013 is as follows:
In thousands of GEL
Liabilities
Due to Credit institutions
Customer accounts – individuals
Customer accounts – other
Other financial liabilities
Subordinated debt
Gross settled forwards
Performance guarantees
Financial guarantees
Other credit related commitments
Less than 3
months
From 3 to 12
months
158,525
917,166
988,285
23,717
103,522
595,740
171,952
1,133
From 12
months to 5
years
313,213
129,487
37,431
–
Over 5 years
Total
42,715
617,975
13,071
1,655,464
86,251
1,283,919
–
24,850
906
15,418
160,948
76,045
123,799
33,582
115,453
197,801
298
73,558
97,122
–
–
54,986
21,702
–
–
1,741
–
–
253,317
124,097
163,867
234,277
197,801
Total potential future payments for financial obligations
2,559,234
1,058,743
717,767
219,823
4,555,567
The maturity analysis of financial liabilities at 31 December 2012 is as follows:
In thousands of GEL
Liabilities
Due to Credit institutions
Customer accounts – individuals
Customer accounts – other
Other financial liabilities
Subordinated debt
Gross settled forwards
Performance guarantees
Financial guarantees
Other credit related commitments
Less than 3
months
From 3 to 12
months
222,660
679,547
753,368
19,353
862
63,094
47,431
35,482
179,589
98,844
583,177
142,647
109
10,998
8,075
99,154
55,248
–
From 12
months to 5
years
309,509
193,330
173,640
–
Over 5 years
Total
53,391
684,404
9,212
1,465,266
19,854
1,089,509
–
92,189
78,303
–
59,962
28,991
–
–
–
45,865
–
19,462
182,352
71,169
206,547
165,586
179,589
Total potential future payments for financial obligations
2,001,386
998,252
857,621
206,625
4,063,884
The undiscounted financial liability analysis gap 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.
Term Deposits included in customer accounts are classified based on remaining contractual maturities, although, in accordance with the
Georgian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they partially or fully forfeit their right to accrued
interest and the Group is obliged to repay such deposits upon demand of a depositor. Based on Bank’s deposit retention history, the
Management does not expect that many customers will require repayment on the earliest possible date; accordingly, the table does not
reflect Management’s expectations as to actual cash outflows.
The Group does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Group monitors liquidity gap analysis
based on the expected maturities. In particular, the customers’ deposits are distributed in the given maturity gaps following their
behavioural analysis.
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34 Financial and Other Risk Management Continued
The expected gap may be summarised as follows at 31 December 2014:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Finance lease receivables
Other financial assets
Total financial assets
Liabilities
Due to Credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
Total financial liabilities
Credit related commitments and performance guarantees
Performance guarantees
Financial guarantees
Other credit related commitments
Credit related commitments and performance guarantees
Net liquidity gap at 31 December 2014
Cumulative gap at 31 December 2014
Less than 3
months
From 3 to 12
months
Over 1 year
Total
532,118
–
14
29,179
–
–
4,511
–
532,118
33,704
336,075
336,075
534,371
466,510
10,300
20,280
770,034
2,252,091
3,556,496
–
17,627
5,965
–
466,510
22,980
17,612
50,907
43,857
1,899,668
822,805
2,297,194
5,019,667
285,677
279,084
–
39,934
1,098
82,439
381,169
749,285
–
–
1,300
2,805
3,043,344
3,322,428
20,423
112
184,112
20,423
41,346
188,015
605,793
86,544
3,629,160
4,321,497
4,912
3,266
36,644
44,822
–
–
–
0
–
–
–
0
4,912
3,266
36,644
44,822
1,249,053
736,261
(1,331,966)
653,348
1,249,053
1,985,314
653,348
Management believes that the Group has sufficient liquidity to meet its current on- and off-balance sheet obligations.
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TBC Bank Annual Report 2014
34 Financial and Other Risk Management Continued
The analysis by expected maturities may be summarised as follows at 31 December 2013:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Finance lease receivables
Other financial assets
Total financial assets
Liabilities
Due to Credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
Total financial liabilities
Credit related commitments and performance guarantees
Performance guarantees
Financial guarantees
Other credit related commitments
Credit related commitments and performance guarantees
Net liquidity gap at 31 December 2013
Cumulative gap at 31 December 2013
Less than 3
months
From 3 to 12
months
Over 1 year
Total
390,465
93
295,332
445,069
500,651
7,148
22,103
–
–
–
–
390,465
1,615
1,708
–
295,332
623,376
1,733,267
2,801,712
–
11,593
5,024
–
500,651
16,872
17,922
35,613
45,049
1,660,861
639,993
1,769,676
4,070,530
156,545
261,546
–
23,717
833
90,018
319,243
565,806
–
2,625,337
2,886,883
4,474
1,133
1,814
–
–
165,627
4,474
24,850
168,274
442,641
97,439
3,110,207
3,650,287
4,153
4,927
34,962
44,042
–
–
–
–
–
–
–
–
4,153
4,927
34,962
44,042
1,174,178
542,554
(1,340,531)
376,201
1,174,178
1,716,732
376,201
175
Strategic Report Governance Financial Statements Business Review 34 Financial and Other Risk Management Continued
The analysis by expected maturities may be summarised as follows at 31 December 2012:
In thousands of GEL
Assets
Cash and cash equivalents
Due from other banks
Mandatory cash balances with National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Finance lease receivables
Other financial assets
Total financial assets
Liabilities
Due to Credit institutions
Customer accounts
Other financial liabilities
Subordinated debt
Total financial liabilities
Credit related commitments and performance guarantees
Performance guarantees
Financial guarantees
Other credit related commitments
Credit related commitments and performance guarantees
Net liquidity gap at 31 December 2012
Cumulative gap at 31 December 2012
Less than 3
months
From 3 to 12
months
Over 1 year
Total
398,587
1,378
316,061
442,312
407,733
4,799
8,973
–
28,164
–
–
–
–
398,587
29,542
316,061
560,935
1,366,953
2,370,200
–
9,127
2,989
–
407,733
12,451
13,339
26,377
25,301
1,579,843
601,215
1,392,743
3,573,801
219,787
310,867
19,353
793
83,007
87,043
109
1,434
324,329
627,123
2,089,034
2,486,944
–
112,853
19,462
115,080
550,800
171,593
2,526,216
3,248,609
2,332
842
33,601
36,775
–
–
–
–
–
–
–
–
2,332
842
33,601
36,775
992,268
429,622
(1,133,473)
288,417
992,268
1,421,890
288,417
In order to assess the possible outflow of the bank’s customer accounts management applied value-at-risk analysis. The statistical data
was used on the basis of a holding period of one month for a look-back period of five years with a confidence level of 99%. The value at risk
analysis was performed for the following maturity gaps: (0-3 months) and (0-12 months), based on which the maximum percentage of
deposits’ outflow was calculated.
Management believes that in spite of a substantial portion of customers’ accounts being on demand, diversification of these deposits by
number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide a long-term and
stable source of funding for the Group. Moreover, the Group’s liquidity risk management includes estimation of maturities for its current
deposits. The estimation is based on statistical methods applied to historic information on fluctuations of customer account balances.
Operating environment. Most of the Group’s business in concentrated in Georgia. Emerging economies, such as the Georgian economy,
are subject to rapid change and are vulnerable to market conditions and economic downturns elsewhere in the world. As a consequence,
operations in Georgia may be exposed to certain risks that are not typically associated with those in developed markets. Nevertheless,
over the last few years the Georgian government has changed number of civil, criminal, tax, administrative and commercial laws that
have positively affected the overall investment climate of the country. Georgia has an international reputation as a country with a favourable
investment environment. For example, in the “Doing Business 2015: Understanding Regulations for Small and Medium-Size Enterprises”
report published by the IFC and the World Bank, Georgia was ranked as the fifteenth (out of 189) easiest country in the world in which to do
business, ahead of all its neighbouring countries and many EU Member States. Moreover, according to the World Bank & IFC Doing Business
Report 2015, Georgia was ranked as the number one in the world in terms of registering property. Georgia is also acknowledged to have low
corruption levels as demonstrated by the Transparency International 2013 Global Corruption Barometer.
35 Management of Capital
The Group’s objectives when managing capital are (i) to comply with the capital requirements set by the NBG (ii) to safeguard the Group’s
ability to continue as a going concern and (iii) to comply with Basel Capital Accord 1988 capital adequacy ratios as stipulated by borrowing
agreements. Compliance with capital adequacy ratios set by the NBG is monitored monthly with reports outlining their calculation reviewed
and signed by the Bank’s CFO and Deputy CFO.
176
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
35 Management of Capital Continued
Bank and the Group complied with all its internally and externally imposed capital requirements throughout 2012, 2013 and 2014.
NBG Capital adequacy ratio
Under the current capital requirements set by NBG banks have to maintain a ratio of regulatory capital to risk weighted assets (“statutory
capital ratio”) above the set 12% minimum level and a ratio of Tier 1 capital to risk weighted assets above the set 8% minimum level.
In a non-binding letter NBG disclosed intention to introduce additional buffer of 3% over any minimum in the current NBG total capital
requirements as calculated in accordance with both current NBG and NBG Basel II Pillar 1 guidelines. Regulatory capital is based on the
Bank’s standalone reports prepared in accordance with the NBG accounting rules:
In thousands of GEL
Share capital
Retained earnings and other disclosed reserves
General loan loss provisions (up to 1.25 % of risk – weighted assets)
Less intangible assets
Less Investments into subsidiary companies and capital of other banks
Subordinated debt (included in regulatory capital)
Total regulatory capital
Risk-weighted Exposures
Credit risk weighted assets (including off-balance obligations)
Currency Induced Credit Risk
minus general and special reserves
Risk-weighted assets
Tier 1 Capital adequacy ratio
Total Capital adequacy ratio
2014
2013
2012
433,521
402,793
64,627
(26,123)
(117,962)
116,068
872,924
261,045
290,585
51,038
(18,197)
(59,129)
131,312
251,785
253,057
44,224
(14,048)
(68,615)
99,733
656,654
566,136
4,125,740
1,525,435
3,340,518
3,030,372
1,321,561
1,232,923
(155,192)
(166,377)
(137,411)
5,495,983
4,495,702
4,125,884
12,2%
15,9%
10,6%
14,6%
11,2%
13,7%
The breakdown of the Bank’s assets into the carrying amounts based on NBG accounting rules and relevant risk-weighted exposures as of
the end of 2014, 2013, 2012 are given in the tables below:
In thousands of GEL
Risk weighted Exposures
Cash, cash equivalents, Interbank Deposits and Securities
Gross Loans and accrued interests
Repossessed Assets
Fixed Assets and intangible assets
Other assets
Total
Total Off-balance
minus general and special reserves
Total Amount
In thousands of GEL
Risk weighted Exposures
Cash, cash equivalents, Interbank Deposits and Securities
Gross Loans and accrued interests
Repossessed Assets
Fixed Assets and intangible assets
Other assets
Total
Total Off-balance
minus general and special reserves
Total Amount
2014
Carrying Value
RW amount
1,426,453
257,522
3,353,985
4,668,750
67,381
201,721
198,146
67,381
175,598
112,829
5,247,686
5,282,080
868,270
369,095
(155,192)
(155,192)
5,960,764
5,495,983
2013
Carrying Value
RW amount
1,170,286
158,730
2,713,271
3,829,318
69,143
202,902
143,487
69,143
184,705
92,255
4,299,089
4,334,151
615,670
(166,377)
327,928
(166,377)
4,748,382
4,495,702
177
Strategic Report Governance Financial Statements Business Review 35 Management of Capital Continued
In thousands of GEL
Risk weighted Exposures
Cash, cash equivalents, Interbank Deposits and Securities
Gross Loans and accrued interests
Repossessed Assets
Fixed Assets and intangible assets
Other assets
Total
Total Off-balance
minus general and special reserves
Total Amount
2012
Carrying Value
RW amount
1,166,966
180,826
2,323,789
3,433,936
28,010
198,550
152,965
28,010
184,502
93,105
3,870,280
3,920,379
555,768
(137,411)
342,916
(137,411)
4,288,637
4,125,884
NBG Basel II Capital adequacy ratio
After adoption of NBG Basel II/III requirements the Bank in addition to above capital ratios calculates its capital requirements and risk
weighted assets separately for Pillar 1. Detailed instructions of Pillar 1 calculations are given by NBG. The reporting started from the end of
2013. The composition of the Bank’s capital calculated in accordance with Basel II (Pillar I) is as follows:
In thousands of GEL
Tier 1 Capital
Tier 2 Capital
Regulatory capital
Risk-weighted Exposures
Credit Risk Weighted Exposures
Risk Weighted Exposures for Market Risk
Risk Weighted Exposures for Operational Risk
Total Risk-weighted Exposures
Minimum Tier 1 ratio
Tier 1 Capital adequacy ratio
Minimum total capital adequacy ratio
Total Capital adequacy ratio
2014
2013
2012
783,360
163,505
526,224
177,950
467,509
138,957
946,865
704,174
606,466
5,879,120
4,553,155
4,093,417
27,186
3,946
18,635
390,378
343,892
343,018
6,296,684
4,900,993
4,455,070
8.5%
12.4%
10.5%
15.0%
8.5%
10.7%
10.5%
14.4%
8.5%
10.5%
10.5%
13.6%
The breakdown of the Bank’s assets into the carrying amounts based on NBG accounting rules and relevant risk-weighted exposures as of
the 31 December 2014, 2013 and 2012 are given in the tables below:
In thousands of GEL
Cash, cash equivalents, Interbank Exposures and Securities
Gross loans and accrued interests, excluding loans to JSC Bank Constanta
Repossessed Assets
Fixed Assets and intangible assets
Other assets
minus general provision, penalty and interest provision
Total
Total Off-balance
Market Risk
Operational Risk
Total Amount
178
2014
Carrying Value
RW amount
1,524,235
682,162
3,254,912
4,330,991
67,381
227,843
199,439
67,381
187,918
307,609
(48,030)
(48,030)
5,225,780
5,528,031
934,174
27,186
273,265
351,089
27,186
390,378
6,460,405
6,296,684
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
35 Management of Capital Continued
In thousands of GEL
Cash, cash equivalents, Interbank Exposures and Securities
Gross loans and accrued interests, excluding loans to JSC Bank Constanta
Repossessed Assets
Fixed Assets and intangible assets
Other assets
minus general provision, penalty and interest provision
Total
Total Off-balance
Market Risk
Operational Risk
Total Amount
In thousands of GEL
Cash, cash equivalents, Interbank Exposures and Securities
Gross loans and accrued interests, excluding loans to JSC Bank Constanta
Repossessed Assets
Fixed Assets and intangible assets
Other assets
minus general provision, penalty and interest provision
Total
Total Off-balance
Market Risk
Operational Risk
Total Amount
2013
Carrying Value
RW amount
1,253,675
467,647
2,619,707
3,321,301
69,143
202,902
153,663
(41,837)
69,143
203,833
214,198
(41,837)
4,257,253
4,234,285
678,453
318,870
5,180
3,946
240,724
343,892
5,181,610
4,900,993
2012
Carrying Value
RW amount
1,187,804
372,002
2,299,656
3,041,501
28,010
198,550
156,259
28,010
207,791
192,909
(20,128)
(20,128)
3,850,151
3,822,085
617,134
24,459
240,112
271,332
18,635
343,018
4,731,856
4,455,070
179
Strategic Report Governance Financial Statements Business Review 35 Management of Capital Continued
Capital adequacy ratio under Basel Capital Accord 1988
The Group and the Bank are also subject to minimum capital requirements established by covenants stated in loan agreements, including
capital adequacy levels calculated in accordance with the requirements of the Basel Accord, as defined in the International Convergence of
Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated
November 2005), commonly known as Basel I. The composition of the Group’s capital calculated in accordance with Basel Accord is as follows:
In thousands of GEL
Tier 1 capital
Share capital
Retained earnings and disclosed reserves
Less: Goodwill
Non-controlling interest
Total tier 1 capital
Tier 2 capital
Revaluation reserves
General Reserve
Subordinated debt (included in tier 2 capital)
Total tier 2 capital
Total capital
Credit risk weighted assets (including off-balance obligations)
Less: General Reserve
Market Risk
Total Risk-weighted assets
Minimum Tier 1 ratio
Tier 1 Capital adequacy ratio
Minimum total capital adequacy ratio
Total Capital adequacy ratio
2014
2013
2012
425,234
537,616
(2,726)
7,371
259,123
404,659
(2,726)
14,667
247,644
303,022
(2,726)
11,419
967,495
675,723
559,359
49,255
49,367
122,070
220,692
1,188,187
3,949,360
50,840
40,403
131,312
222,555
898,278
41,939
36,148
99,733
177,820
737,179
3,232,229
2,891,766
(100,397)
(116,466)
(130,350)
61,864
19,779
25,977
3,910,827
3,135,542
2,787,393
4.0%
24.7%
8.0%
30.4%
4.0%
21.6%
8.0%
28.6%
4.0%
20.1%
8.0%
26.4%
IFRS provisions created on loans without impairment trigger event
Following Basel I guidelines General Reserve is defined by the management as the minimum among the following:
a)
b) 2% of loans without impairment trigger event
c) 1.25% of total RWA (Risk Weighted Assets)
The breakdown of the Group’s assets into the carrying amounts and relevant risk-weighted exposures as of the end of 2014, 2013, 2012 are
given in the tables below:
In thousands of GEL
Risk weighted Exposures
Cash and other cash equivalents, mandatory cash balances with the NBG, due from other banks, investment
securities available for sale
Gross loans and accrued interests
Repossessed assets
Fixed assets and intangible assets
Other assets
Total
Total Off-balance
Less: Loan loss provision minus General Reserve
Market Risk
Total Amount
180
2014
Carrying Value
RW amount
1,368,407
63,462
3,706,260
3,035,718
60,480
249,174
188,909
60,480
246,448
188,909
5,573,230
3,595,017
1,028,774
354,343
(100,397)
(100,397)
61,864
61,864
6,563,471
3,910,827
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
35 Management of Capital Continued
In thousands of GEL
Risk weighted Exposures
Cash and other cash equivalents, mandatory cash balances with the NBG, due from other banks, investment
securities available for sale
Gross loans and accrued interests
Repossessed assets
Fixed assets and intangible assets
Other assets
Total
Total Off-balance
Less: Loan loss provision minus General Reserve
Market Risk
Total Amount
In thousands of GEL
Risk weighted Exposures
Cash and other cash equivalents, mandatory cash balances with the NBG, due from other banks, investment
securities available for sale
Gross loans and accrued interests
Repossessed assets
Fixed assets and intangible assets
Other assets
Total
Total Off-balance
Less: Loan loss provision minus General Reserve
Market Risk
Total Amount
2013
Carrying Value
RW amount
1,188,156
38,613
2,958,581
2,419,822
49,920
225,885
185,402
49,920
223,159
185,402
4,607,944
2,916,916
656,386
315,313
(116,466)
(116,466)
19,779
19,779
5,167,643
3,135,542
2012
Carrying Value
RW amount
1,151,923
48,388
2,536,698
2,145,081
56,316
214,099
107,156
56,316
211,374
107,156
4,066,192
2,568,315
622,791
323,451
(130,350)
(130,350)
25,977
25,977
4,584,610
2,787,393
36 Contingencies and Commitments
Legal proceedings. The Bank is a defendant in a number of legal claims. When determining the level of provision to be set up in respect of
such claims, management uses both internal and external professional advice. The management is of the opinion that no material losses will
be incurred in respect of claims, and accordingly no provision has been made in these financial statements.
Tax legislation. Georgian and Azerbaijani tax and customs legislation is subject to varying interpretations, and changes, which can occur
frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the
relevant authorities. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the period
of review. To respond to the risks, the Group has engaged external tax specialists who are performing periodic reviews of Group’s taxation
policies and tax filings. The Group’s management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax
and customs positions will be sustained. Accordingly, as at 31 December 2014, 2013 and 2012 no provision for potential tax liabilities has
been recorded.
Operating lease commitments. Where the Group is the lessee, as at 31 December 2014, the future minimum lease payments under
non-cancellable operating leases over the next year amount to GEL 4,766 thousand (31 December 2013: 4,063 thousand, 31 December 2012:
1,675 thousand).
Compliance with covenants. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants
may result in negative consequences for the Group including growth in the cost of borrowings and declaration of default. The Group was in
compliance with covenants as at 31 December 2014, 2013 and 2012.
181
Strategic Report Governance Financial Statements Business Review 36 Contingencies and Commitments Continued
Credit related commitments and financial guarantees. The primary purpose of these instruments is to ensure that funds are available to a
customer as required. Financial guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make
payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and
commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on
the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which
they relate or cash deposits and therefore carry less risk than a direct borrowing.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of
credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total
unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend
credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit related
commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
Performance guarantees. Performance guarantees are contracts that provide compensation if another party fails to perform a contractual
obligation. Such contracts do not transfer credit risk. The risk under performance guarantee contracts is the possibility that the insured
event (i.e.: the failure to perform the contractual obligation by another party) occurs. The key risks the Group faces are significant
fluctuations in the frequency and severity of payments incurred on such contracts relative to expectations.
Outstanding credit related commitments and performance guarantees are as follows:
In thousands of GEL
Performance guarantees issued
Financial guarantees issued
Undrawn credit lines
Letters of credit
Total credit related commitments and performance guarantees (before provision)
Provision for performance guarantees
Provision for credit related commitments and financial guarantees
2014
2013
2012
188,440
86,770
284,284
145,958
705,452
(4,912)
(3,266)
160,704
95,762
197,801
133,603
587,870
(4,153)
(4,927)
160,127
112,997
179,589
88,698
541,411
(2,332)
(842)
Total credit related commitments and performance guarantees
697,274
578,790
538,237
The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future
cash requirements, as these financial instruments may expire or terminate without being funded. Non-cancellable commitments as at 31
December 2014 composed GEL 138,296 thousand (2013: GEL 131,342 thousand; 2012 GEL 124,448 thousand).
Fair value of credit related commitments and financial guarantees as well as performance guarantees were GEL 8,179 thousand at 31
December 2014 (2013: GEL 9,080 thousand; 2012: GEL 3,174 thousand). Total credit related commitments and performance guarantees are
denominated in currencies as follows:
In thousands of GEL
Georgian Lari
US Dollars
Euro
Other
Total
2014
2013
2012
254,554
377,964
46,057
26,877
218,553
299,190
42,388
27,739
194,178
279,563
36,431
31,239
705,452
587,870
541,411
Capital expenditure commitments. At 31 December 2014, the Group has contractual capital expenditure commitments amounting to GEL 511
thousand (2013: 2,365 thousand; 2012: nil).
182
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
37 Non-Controlling Interest
The following table provides information about each subsidiary that had non-controlling interest as at 31 December 2014:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation JSC
Total
Place of
business (and
country of
incorporation if
different)
Georgia
Azerbaijan
Georgia
0.52%
25%
1.33%
0.52%
25%
1.33%
Proportion of
non-controlling
interest
Proportion of
non-controlling
interest’s
voting rights
held
Profit
attributable to
non-controlling
interest
Accumulated
non-controlling
interest in the
subsidiary
Dividends
paid to non-
controlling
interest during
the year
The summarised financial information of these subsidiaries was as follows at 31 December 2014:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation
JSC
Total
Current assets
Non-current
assets
Current
liabilities
Non-current
liabilities
43,541
45,238
2,846
91,625
29,236
45,927
4,772
79,935
20,625
11,949
44,710
47,743
431
487
33,005
92,940
Revenue
6,130
12,881
9,212
28,223
6
970
24
1,000
Profit
1,204
3,880
1,792
6,876
38
7,006
327
7,371
–
–
–
–
Total
comprehensive
income
1,204
3,880
1,792
6,876
Cash flows
(2,745)
590
432
(1,723)
The following table provides information about each subsidiary that had non-controlling interest as at 31 December 2013:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation JSC
Bank Constanta JSC
Total
Place of
business (and
country of
incorporation if
different)
Georgia
Azerbaijan
Georgia
Georgia
Proportion of
non-controlling
interest
Proportion of
non-controlling
interest’s
voting rights
held
Profit
attributable to
non-controlling
interest
Accumulated
non-controlling
interest in the
subsidiary
Dividends
paid to non-
controlling
interest during
the year
10.47%
25.00%
6.68%
16.15%
10.47%
25.00%
6.68%
16.15%
60
833
35
1,726
2,654
624
6,036
303
7,704
14,667
–
–
–
–
–
The summarised financial information of these subsidiaries was as follows at 31 December 2013:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation
JSC
Bank Constanta JSC
Total
Current assets
Non-current
assets
Current
liabilities
Non-current
liabilities
33,570
41,867
24,212
31,814
27,160
26,024
24,664
22,150
1,529
195,077
4,712
150,631
1,046
134,591
286
160,989
272,043
211,369
188,821
208,089
Revenue
3,767
11,291
6,758
55,972
77,788
Total
comprehensive
income
573
3,334
522
11,271
15,700
Profit
573
3,334
522
11,271
15,700
Cash flows
996
1,120
71
2,362
4,549
183
Strategic Report Governance Financial Statements Business Review 37 Non-Controlling Interest Continued
The following table provides information about each subsidiary that had non-controlling interest as at 31 December 2012:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation JSC
Bank Constanta JSC
Total
Place of
business (and
country of
incorporation if
different)
Georgia
Azerbaijan
Georgia
Georgia
Proportion of
non-controlling
interest
Proportion of
non-controlling
interest’s
voting rights
held
Profit
attributable to
non-controlling
interest
Accumulated
non-controlling
interest in the
subsidiary
Dividends
paid to non-
controlling
interest during
the year
10.47%
25.00%
6.68%
16.15%
10.47%
25.00%
6.68%
16.15%
17
509
58
708
564
5,203
267
5,385
1,292
11,419
–
–
–
–
–
The summarised financial information of these subsidiaries was as follows at 31 December 2012:
In thousands of GEL
TBC Leasing JSC
TBC Kredit LLC
United Financial Corporation
JSC
Bank Constanta JSC
Current assets
Non-current
assets
Current
liabilities
Non-current
liabilities
24,491
34,300
1,161
159,916
15,439
27,919
4,845
84,573
14,821
8,511
1,269
93,123
19,725
32,704
350
116,634
Total
219,868
132,776
117,724
169,413
Revenue
5,766
9,239
5,092
39,195
59,292
Total
comprehensive
income
220
2,037
871
4,295
7,423
Profit
220
2,037
871
4,295
7,423
Cash flows
2,541
(3,665)
309
9,441
8,626
38 Offsetting Financial Assets and Financial Liabilities
Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at 31 December 2014:
Gross amounts
before
offsetting in
the statement
of financial
position (a)
Gross amounts
set off in the
statement
of financial
position (b)
Net amount
after offsetting
in the
statement
of financial
position
(c) = (a) – (b)
Amounts subject to
master netting and similar
arrangements not set off in the
statement of financial position
Financial
instruments (d)
Cash collateral
received (e)
Net amount of
exposure (c) –
(d) – (e)
In thousands of GEL
ASSETS
Cash and Cash Equivalents
- Placements with other banks with original maturities of
less than three months
Other financial assets:
117,594
26,561
91,033
- Receivables on credit card services and money transfers
11,399
1,959
9,440
TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
128,993
28,520
100,473
LIABILITIES
Due to credit institutions
Other financial liabilities
775,846
43,305
26,561
1,959
749,285
41,346
TOTAL LIABILITIES SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
819,151
28,520
790,631
–
–
–
–
–
–
–
–
–
–
–
–
91,033
9,440
100,473
749,285
41,346
790,631
184
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
38 Offsetting Financial Assets and Financial Liabilities Continued
Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at 31 December 2013:
Gross amounts
before
offsetting in
the statement
of financial
position (a)
Gross amounts
set off in the
statement
of financial
position (b)
Net amount
after offsetting
in the
statement of
financial
position
(c) = (a) – (b)
Amounts subject to
master netting and similar
arrangements not set off in the
statement of financial position
Financial
instruments (d)
Cash collateral
received (e)
Net amount of
exposure (c) –
(d) – (e)
In thousands of GEL
ASSETS
Cash and Cash Equivalents
- Placements with other banks with original maturities of
less than three months
Other financial assets:
115,901
31,871
84,030
- Receivables on credit card services and money transfers
7,481
924
6,557
TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
123,382
32,795
90,587
LIABILITIES
Due to credit institutions
Other financial liabilities
597,677
25,774
31,871
924
565,806
24,850
TOTAL LIABILITIES SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
623,451
32,795
590,656
–
–
–
–
–
–
–
–
–
–
–
–
84,030
6,557
90,587
565,806
24,850
590,656
Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at 31 December 2012:
Gross amounts
before
offsetting in
the statement
of financial
position (a)
Gross amounts
set off in the
statement
of financial
position (b)
Net amount
after offsetting
in the
statement of
financial
position
(c) = (a) – (b)
Amounts subject to
master netting and similar
arrangements not set off in the
statement of financial position
Financial
instruments (d)
Cash collateral
received (e)
Net amount of
exposure
(c) – (d) – (e)
In thousands of GEL
ASSETS
Cash and Cash Equivalents
- Placements with other banks with original maturities of
less than three months
Other financial assets:
78,320
54,671
23,649
- Receivables on credit card services and money transfers
4,436
1,087
3,349
TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
82,756
55,758
26,998
LIABILITIES
Due to credit institutions
Other financial liabilities
681,794
20,549
54,671
1,087
627,123
19,462
TOTAL LIABILITIES SUBJECT TO OFFSETTING, MASTER
NETTING AND SIMILAR ARRANGEMENT
702,343
55,758
646,585
–
–
–
–
–
–
–
–
–
–
–
–
23,649
3,349
26,998
627,123
19,462
646,585
The amount set off in the statement of financial position reported in column (b) is the lower of (i) the gross amount before offsetting reported
in column (a) and (ii) the amount of the related instrument that is eligible for offsetting. Similarly, the amounts in columns (d) and (e) are
limited to the exposure reported in column (c) for each individual instrument in order not to understate the ultimate net exposure.
Deposits placed with other banks and deposits received from other banks as part of gross settled currency swap arrangement have been
netted-off in these financial statements and the instrument has been presented as either asset or a liability at fair value.
The disclosure does not apply to loans and advances to customers and related customer deposits unless they are netted-off in the statement
of financial position.
185
Strategic Report Governance Financial Statements Business Review 39 Derivative Financial Instruments
In the normal course of business, the Group enters into various derivative financial instruments, to manage currency, liquidity and interest
rate risks and for trading purposes.
In thousands of GEL
Fair value of gross settled currency swaps, included in other financial assets or due from banks
Fair value of foreign exchange forwards and gross settled currency swaps, included in other
financial liabilities
Fair value of Interest rate swaps, included in other financial liabilities
Total
2014
618
(2,502)
(3,137)
(5,021)
2013
1,221
–
(4,405)
(3,184)
2012
446
–
(7,139)
(6,693)
Foreign Exchange Forwards and gross settled currency swaps. Foreign exchange derivative financial instruments entered into by the
Group are generally traded in an over-the-counter market with professional market counterparties on standardised contractual terms
and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market
interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets
and liabilities can fluctuate significantly from time to time.
The table below sets out fair values, at the balance sheet date, of currencies receivable or payable under foreign exchange forwards contracts
and gross settled currency swaps entered into by the Group. The table reflects gross positions before the netting of any counterparty positions
(and payments) and covers the contracts with settlement dates after the respective balance sheet date. The contracts are short term in nature.
In thousands of GEL
Foreign exchange forwards and gross settled currency
swaps: fair values, at the balance sheet date, of
- USD payable on settlement (-)
- USD receivable on settlement (+)
- GEL payable on settlement (-)
- GEL receivable on settlement (+)
- EUR payable on settlement (-)
- EUR receivable on settlement (+)
- Other payable on settlement (-)
- Other receivable on settlement (+)
2014
2013
2012
Contracts with
positive fair
value
Contracts with
negative fair
value
Contracts with
positive fair
value
Contracts with
negative fair
value
Contracts with
positive fair
value
Contracts with
negative fair
value
–
(222,231)
–
(91,590)
–
(36,428)
29,031
–
31,398
–
(26,530)
81,865
–
118,272
–
(604)
–
–
(1,479)
19,792
–
–
–
–
76,450
–
17,169
–
–
26,507
–
–
(26,508)
(31,569)
41,676
–
–
(637)
–
–
3,274
–
–
–
(8,075)
–
–
–
Fair value of foreign exchange forwards and gross
settled currency swaps
248,960
(250,844)
125,017
(123,796)
71,457
(71,011)
Net fair value of foreign exchange forwards and gross
settled currency swaps
–
(1,884)
1,221
–
446
–
Interest rate swaps. In March 2010 TBC Bank entered into interest rate swap agreement, to hedge floating interest rate on its subordinated
debt. The hedge covers payment of floating rate interest payments with the notional principal of USD 44,000 thousand. The swap expires in
November 2018. At the reporting date fair value of interest rate swaps was estimated to be negative GEL 3,137 thousand (2013: negative GEL
4,405 thousand; 2012: negative GEL 7,139 thousand).
Information on related party balances is disclosed in Note 42.
186
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued
TBC Bank Annual Report 2014
40 Fair Value Disclosures
(a) Recurring fair value measurements
Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end
of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows:
In thousands of GEL
ASSETS AT FAIR VALUE
FINANCIAL ASSETS
Investment securities available for sale
- Government notes
- Certificates of Deposits of National Bank of Georgia
- Corporate bonds
- Ministry of Finance Treasury Bills
- Corporate shares (Visa Inc)
Foreign exchange forwards and gross settled currency swaps,
included in other financial assets or due from banks
NON-FINANCIAL ASSETS
- Premises and leasehold improvements
31 December 2014
Level 1
Level 2
Level 3
Total
–
–
–
–
6,140
–
–
232,934
198,233
25,034
476
–
618
–
–
–
–
–
–
–
232,934
198,233
25,034
476
6,140
618
132,346
132,346
132,346
595,781
TOTAL ASSETS RECURRING FAIR VALUE MEASUREMENTS
6,140
457,295
LIABILITIES CARRIED AT FAIR VALUE
FINANCIAL LIABILITIES
- Interest rate swaps included in other financial liabilities
Foreign exchange forwards and gross settled currency swaps, included in other
financial liabilities
TOTAL LIABILITIES RECURRING FAIR VALUE MEASUREMENTS
–
–
–
3,137
2,502
5,639
–
–
–
3,137
2,502
5,639
There were no transfers between levels 1 and 2 during the year ended 31 December 2014 (2013: none, 2012: none).
187
Strategic Report Governance Financial Statements Business Review 40 Fair Value Disclosures Continued
31 December 2013
31 December 2012
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
- Corporate shares (Visa Inc)
4,858
In thousands of GEL
ASSETS AT FAIR VALUE
FINANCIAL ASSETS
Investment securities
available for sale
- Government notes
- Certificates of Deposits of
National Bank of Georgia
- Corporate bonds
- Ministry of Finance Treasury
Bills
Foreign exchange forwards and
gross settled currency swaps,
included in other financial
assets or due from banks
NON-FINANCIAL ASSETS
- Premises and leasehold
improvements
TOTAL ASSETS
RECURRING FAIR VALUE
MEASUREMENTS
LIABILITIES CARRIED AT FAIR
VALUE
FINANCIAL LIABILITIES
- Interest rate swaps included
in other financial liabilities
Foreign exchange forwards and
gross settled currency swaps,
included in other financial
liabilities
TOTAL LIABILITIES
RECURRING FAIR VALUE
MEASUREMENTS
–
–
–
–
–
–
173,974
321,140
–
–
–
–
–
–
4,858
3,156
173,974
321,140
–
–
–
1,221
–
–
–
–
–
–
1,221
–
–
–
138,939
138,939
196,004
187,551
–
19,210
–
446
–
–
–
–
–
–
196,004
187,551
–
19,210
3,156
446
–
130,878
130,878
4,858
496,335
138,939
640,132
3,156
403,211
130,878
537,245
–
–
–
4,405
–
4,405
–
–
–
4,405
–
4,405
–
–
–
7,139
–
7,139
–
–
–
7,139
–
7,139
There were no transfers between levels 1 and 2 during the year ended 31 December 2014 (2013: none, 2012: none).
188
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
40 Fair Value Disclosures Continued
The description of valuation technique and description of inputs used in the fair value measurement for level 2 measurements:
In thousands of GEL
ASSETS AT FAIR VALUE
FINANCIAL ASSETS
Certificates of Deposits of NBG, Ministry of
Finance Treasury Bills, Government notes,
Corporate bonds
Foreign exchange forwards and gross
settled currency swaps, included in
due from banks
TOTAL ASSETS RECURRING FAIR VALUE
Fair value at 31 December
2014
2013
2012
Valuation technique
Inputs used
456,677
495,114
402,765
(“DCF”)
curve
Discounted cash flows
Government bonds yield
618
1,221
446
Forward pricing
using present value
calculations
Official exchange rate,
risk-free rate
MEASUREMENTS
457,295
496,335
403,211
LIABILITIES CARRIED AT FAIR VALUE
FINANCIAL LIABILITIES
Other financial liabilities
- Interest rate swaps included in other
financial liabilities
- Foreign exchange forwards included in
other financial liabilities
TOTAL RECURRING FAIR VALUE
MEASUREMENTS AT LEVEL 2
3,137
4,405
7,139
value calculations
Observable yield curves
Swap model using present
2,502
–
Forward pricing
using present value
calculations
–
Official exchange rate,
risk-free rate
5,639
4,405
7,139
There were no changes in valuation technique for level 2 and level 3 recurring fair value measurements during the year ended 31 December
2014 (2013: none; 2012: none).
For description of the techniques and inputs used for Level 3 recurring fair value measurement of (as well as reconciliation of movements in)
premises refer to Note 14. The unobservable input to which the fair value estimate for premises is most sensitive is price per square meter:
the higher the price per square meter, the higher the fair value.
189
Strategic Report Governance Financial Statements Business Review
40 Fair Value Disclosures Continued
(b) Assets and liabilities not measured at fair value but for which fair value is disclosed
Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows:
31 December 2014
Level 1
Level 2
Level 3
Carrying Value
532,118
33,704
–
–
–
–
–
–
–
–
–
–
–
–
–
336,075
–
–
–
532,118
33,704
336,075
–
–
–
–
–
–
–
–
–
–
1,221,155
1,140,503
780,259
729,013
533,527
264,303
168,231
50,907
43,239
744,290
707,979
528,631
266,091
169,002
50,907
43,239
79,057
76,216
565,822
336,075
3,869,691
4,628,755
–
–
–
–
–
–
749,285
–
749,285
1,857,089
1,483,891
3,322,428
20,423
35,707
188,015
–
–
–
20,423
35,707
188,015
2,850,519
1,483,891
4,315,858
In thousands of GEL
FINANCIAL ASSETS
Cash and cash equivalents
Due from other banks
Mandatory cash balances with the NBG
Loans and advances to customers:
- Corporate loans
- Consumer loans
- Mortgage loans
- Small and micro loans
- Micro
- Others
Investments in leases
Other financial assets
NON-FINANCIAL ASSETS
Investment properties, at cost
TOTAL ASSETS
FINANCIAL LIABILITIES
Due to credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
TOTAL LIABILITIES
190
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
40 Fair Value Disclosures Continued
In thousands of GEL
FINANCIAL ASSETS
31 December 2013
31 December 2012
Level 1
Level 2
Level 3
Carrying Value
Level 1
Level 2
Level 3
Carrying Value
Cash and cash equivalents
Due from other banks
390,465
1,708
Mandatory cash balances with
the NBG
Loans and advances to
customers:
- Corporate loans
- Consumer loans
- Mortgage loans
- Small and micro loans
- Micro
- Others
Investments in leases
Other financial assets
NON-FINANCIAL ASSETS
Investment properties, at cost
TOTAL ASSETS
FINANCIAL LIABILITIES
Due to credit institutions
Customer accounts
Debt securities in issue
Other financial liabilities
Subordinated debt
TOTAL LIABILITIES
–
–
295,332
–
–
–
390,465
1,708
295,332
–
–
–
–
–
–
1,172,503
1,049,668
607,940
519,180
397,229
193,784
103,896
35,613
43,828
571,730
491,136
388,131
196,395
104,652
35,613
43,828
86,480
83,383
398,587
29,542
–
–
–
–
–
–
–
–
–
–
–
–
316,061
–
–
–
398,587
29,542
316,061
–
–
–
–
–
–
–
–
–
1,046,831
1,029,112
455,020
375,406
293,294
134,010
85,449
26,377
24,855
451,548
372,230
289,397
141,570
86,343
26,377
24,855
34,928
34,305
–
–
–
–
–
–
–
–
–
392,173
295,332
3,160,453
3,652,041
428,129
316,061
2,476,170
3,199,927
–
–
–
–
–
–
565,806
–
565,806
1,690,812
1,206,300
2,886,883
4,474
20,445
168,274
–
–
–
4,474
20,445
168,274
2,449,811
1,206,300
3,645,882
–
–
–
–
–
627,123
–
627,123
1,094,556
1,392,388
2,486,944
–
12,323
115,080
–
–
–
–
12,323
115,080
1,849,082
1,392,388
3,241,470
191
Strategic Report Governance Financial Statements Business Review 40 Fair Value Disclosures Continued
The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair
value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at
current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of investment properties was
estimated using market comparatives (refer to Note 3).
Amounts due to credit institutions were discounted at the Group’s own incremental borrowing rate. Liabilities due on demand were
discounted from the first date that the amount could be required to be paid by the Group.
There were no changes in valuation technique for level 2 and level 3 measurements of assets and liabilities not measured at fair values
during the year ended 31 December 2014 (2013: none; 2012: none).
41 Presentation of Financial Instruments by Measurement Category
For the purposes of measurement, IAS 39, Financial Instruments: Recognition of Measurement, classifies financial assets into the following
categories: (a) loans and receivables; (b) available for sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair
value through profit or loss (“FVTPL”). Financial assets at fair value through profit or loss have two subcategories: (i) assets designated as
such upon initial recognition, and (ii) those classified as held for trading. The following table provides a reconciliation of classes of financial
assets with these measurement categories as of 31 December 2014:
In thousands of GEL
ASSETS
Cash and cash equivalents
Due from other banks
Mandatory cash balances with the National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets:
- Other financial receivables
TOTAL FINANCIAL ASSETS
NON-FINANCIAL ASSETS
TOTAL ASSETS
Loans and
receivables
Available for
sale assets
Finance lease
receivables
Assets
designated at
FVTPL
–
33,704
336,075
3,556,496
–
–
43,239
–
–
–
–
466,510
–
–
–
–
–
–
–
50,907
–
3,969,514
466,510
50,907
–
–
–
–
–
–
–
–
–
–
–
–
618
618
–
–
Total
532,118
33,704
336,075
3,556,496
466,510
50,907
43,857
5,019,667
403,799
5,423,466
The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2013:
Loans and
receivables
Available for
sale assets
Finance lease
receivables
Assets
designated at
FVTPL
–
1,708
295,332
2,801,712
–
–
43,828
–
–
–
–
500,651
–
–
–
–
–
–
–
35,613
–
3,142,580
500,651
35,613
–
–
–
–
–
–
–
–
–
–
–
–
1,221
1,221
–
–
Total
390,465
1,708
295,332
2,801,712
500,651
35,613
45,049
4,070,530
380,545
4,451,075
In thousands of GEL
ASSETS
Cash and cash equivalents
Due from other banks
Mandatory cash balances with the National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets:
- Other financial receivables
TOTAL FINANCIAL ASSETS
NON-FINANCIAL ASSETS
TOTAL ASSETS
192
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
41 Presentation of Financial Instruments by Measurement Category Continued
The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2012:
In thousands of GEL
ASSETS
Cash and cash equivalents
Due from other banks
Mandatory cash balances with the National Bank of Georgia
Loans and advances to customers
Investment securities available for sale
Investments in leases
Other financial assets:
- Other financial receivables
TOTAL FINANCIAL ASSETS
NON-FINANCIAL ASSETS
TOTAL ASSETS
Loans and
receivables
Available for
sale assets
Finance lease
receivables
Assets
designated at
FVTPL
–
29,407
316,061
2,370,200
–
–
24,855
–
–
–
–
407,733
–
–
–
–
–
–
–
26,377
–
2,740,523
407,733
26,377
–
–
–
–
–
–
–
135
–
–
–
–
446
581
–
–
Total
398,587
29,542
316,061
2,370,200
407,733
26,377
25,301
3,573,801
325,893
3,899,694
As at 31 December 2014, 2013 and 2012, all of the Group’s financial liabilities except for derivatives are carried at amortised cost. Derivatives
belong to the fair value through profit or loss measurement category.
42 Related Party Transactions
Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party
or can 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. Parties that hold more than 6% of
ownership stake in the Bank or have their representatives in the Supervisory board are considered as Significant Shareholders. Included in
key management personnel are members of the Supervisory Board, the Management Board and close members of the family.
At 31 December 2014, the outstanding balances with related parties were as follows:
In thousands of GEL
Gross amount of loans and advances to customers (contractual interest rate: 7.5 – 23%)
Impairment provisions for loans and advances to customers
Derivative financial liability
Due to credit institutions (contractual interest rate: 0 – 13 %)
Customer accounts (contractual interest rate: 0 – 9.5 %)
Subordinated debt (contractual interest rate: 9.2 – 12 %)
Note
Significant
shareholders
39
5,383
190
3,137
63,542
5,925
102,859
Key
management
personnel
1,315
9
–
–
7,302
–
The income and expense items with related parties except from key management compensation for the year 2014 were as follows:
In thousands of GEL
Interest income
Interest expense
Gains less losses from trading in foreign currencies
Foreign exchange translation gains less losses
Fee and commission income
Fee and commission expense
Administrative and other operating expenses (excluding staff costs)
Net loss on derivative financial instruments
Note
Significant
shareholders
Key
management
personnel
551
15,408
56
331
9
926
70
39
(683)
114
350
26
51
10
–
164
–
193
Strategic Report Governance Financial Statements Business Review 42 Related Party Transactions Continued
Aggregate amounts of loans advanced to and repaid by related parties during 2014 were:
In thousands of GEL
Amounts advanced to related parties during the year
Amounts repaid by related parties during the year
At 31 December 2013, the outstanding balances with related parties were as follows:
In thousands of GEL
Gross amount of loans and advances to customers (contractual interest rate: 13 – 26 %)
Impairment provisions for loans and advances to customers
Derivative financial liability
Due to credit institutions (contractual interest rate: 0 – 13 %)
Customer accounts (contractual interest rate: 0 – 13 %)
Subordinated debt (contractual interest rate: 5 – 11 %)
Significant
shareholders
Key
management
personnel
2,074
(7,501)
3,042
(3,204)
Note
Significant
shareholders
Key
management
personnel
39
9,928
152
4,405
67,894
5,421
95,458
1,312
15
–
–
4,598
–
The income and expense items with related parties except from key management compensation for the year 2013 were as follows:
In thousands of GEL
Interest income
Interest expense
Gains less losses from trading in foreign currencies
Foreign exchange translation (losses less gains) / gains less losses
Fee and commission income
Fee and commission expense
Administrative and other operating expenses (excluding staff costs)
Net gain on derivative financial instruments
39
Aggregate amounts of loans advanced to and repaid by related parties during 2013 were:
Note
Significant
shareholders
Key
management
personnel
1,527
14,596
67
(227)
10
993
67
613
159
352
9
50
7
–
205
–
Significant
shareholders
Key
management
personnel
4,246
(8,756)
1,751
(2,218)
Note
Significant
shareholders
Key
management
personnel
Other related
parties
39
13,137
250
7,139
161,767
3,839
61,122
1,571
19
–
–
15,358
318
–
–
4,530
22,192
–
–
In thousands of GEL
Amounts advanced to related parties during the year
Amounts repaid by related parties during the year
At 31 December 2012, the outstanding balances with related parties were as follows:
In thousands of GEL
Gross amount of loans and advances to customers (contractual interest rate:
13 – 26 %)
Impairment provisions for loans and advances to customers
Derivative financial liability
Due to credit institutions (contractual interest rate: 0 – 13 %)
Customer accounts (contractual interest rate: 0 – 13 %)
Subordinated debt (contractual interest rate: 5 – 11 %)
194
TBC Bank Annual Report 2014Financial StatementsNotes to the Consolidated Financial StatementsContinued TBC Bank Annual Report 2014
42 Related Party Transactions Continued
The income and expense items with related parties except from key management compensation for the year 2012 were as follows:
In thousands of GEL
Interest income
Interest expense
Provision for loan impairment
Gains less losses from trading in foreign currencies
Foreign exchange translation (losses less gains) / gains less losses
Fee and commission income
Administrative and other operating expenses (excluding staff costs)
Note
Significant
shareholders
Key
management
personnel
1,757
16,805
–
8
(106)
11
17
Other related
parties
1,644
565
26
392
926
376
–
–
261
386
–
4
2
5
133
–
Net loss on derivative financial instruments
39
(3,804)
At 31 December 2012, other rights and obligations with related parties were as follows:
In thousands of GEL
Guarantees issued by the Group at the year end
Aggregate amounts of loans advanced to and repaid by related parties during 2012 were:
In thousands of GEL
Amounts advanced to related parties during the year
Amounts repaid by related parties during the year
Significant
shareholders
Key
management
personnel
Other related
parties
–
–
5,401
Significant
shareholders
Key
management
personnel
Other related
parties
1,816
(5,041)
1,018
(1,994)
15,253
(9,398)
Compensation of the key management personnel and supervisory board members is presented below:
In thousands of GEL
Salaries and bonuses
Cash settled bonuses related to share-based
compensation
Equity-settled share-based compensation
Total
2014
2013
2012
Expense
10,096
1,463
2,192
13,751
Accrued
liability
3,929
2,012
–
Expense
8,783
1,692
1,671
5,941
12,146
Accrued
liability
3,798
1,692
–
5,490
Expense
7,256
676
2,700
10,632
Accrued
liability
3,983
432
–
4,415
43 Events after the balance sheet date
Subsequent to 31 December 2014, the Group has completed the legal and operational process of merging JSC Bank Constanta with TBC
Bank. The former operations of Bank Constanta will now be undertaken by TBC Bank as the sole legal entity.
On 27 January 2015 the Group acquired micro loans portfolio with the carrying amount of GEL 37,300 thousand from ProCredit Bank
Georgia, the fifth largest bank by total assets. The consideration paid amounted to GEL 40,000 thousand.
195
Strategic Report Governance Financial Statements Business Review Financial Statements
Additional Information
Shareholders’ Meetings
According to the Charter, regular General Meetings of
Shareholders must be convened annually not later than three
months from the day of preparation of the annual balance sheet.
Extraordinary General Meetings of Shareholders must be
convened within 20 days from submission of the written request
of the Management Board, Supervisory Board or shareholders
holding at least 5% of the Shares of TBC Bank. Shareholders may
request the convening of a General Meeting of Shareholders only
if at least one month has elapsed since the date of the prior
General Meeting of Shareholders. If shareholder(s) holding at
least 5% of the Shares request that an Extraordinary General
Meeting of Shareholders is convened and the only item on the
agenda is the dismissal of Management Board member(s),
the Supervisory Board must call the meeting within 20 days,
otherwise the shareholders themselves may convene
the meeting.
The time, place and the agenda of the General Meeting of
Shareholders shall be published in printed media at least 20 days
prior to the date of such General Meeting of Shareholders.
Shareholders holding at least 1% of the Shares should also be
notified about the General Meeting of Shareholders via registered
mail. The Supervisory Board shall set a reporting date which
cannot be earlier than 45 days before the scheduled General
Meeting of Shareholders. Only those shareholders who were
shareholders of record as of the reporting date set by the
Supervisory Board may participate in the General Meeting
of Shareholders.
Any shareholder holding a ordinary share may attend and vote at
the meeting personally or through proxy and the quorum of the
General Meeting of Shareholders is satisfied if the holders of
more than 50% of all votes are present or represented at the
General Meeting of Shareholders. If the General Meeting of
Shareholders is not quorate, the Supervisory Board must convene
a new General Meeting of Shareholders with the same agenda,
which will be quorate if the holders of more than 25% of all
votes are present or represented. If the General Meeting of
Shareholders convened for the second time is not quorate, the
Supervisory Board must convene a further General Meeting of
Shareholders with the same agenda, which will be quorate
irrespective of the number of shareholders present or
represented at the General Meeting of Shareholders.
General Meetings of Shareholders are presided over by the
chairman of the Supervisory Board or, in his absence, by the
deputy chairman of the Supervisory Board. In the event that the
latter is also absent, the meeting is presided over by one of the
other directors.
Dialogue with Shareholders
Per usual practice, the Chairman and the Deputy Chairman
of the Supervisory Board discuss the Bank’s governance and
strategy with major shareholders and ensure that the views of
shareholders are communicated to the Board as a whole. Among
other things, these meetings include the Chairman’s participation
in the non-deal roadshows post-listing. Non-executive directors
together with the executive directors have the opportunity to
attend scheduled meetings with the major shareholders to gain
a balanced understanding of their issues and concerns.
Dividend Policy
On 8 April 2009 the Management Board adopted, and the
Supervisory Board approved, the Capital Management and
Dividend Planning Policy of TBC Bank in order to ensure current
capital adequacy, to plan for future capital needs and project
efficient dividend payouts. The general objective of the Dividend
Policy is to manage the capital position with the regular dividend
payouts in the amount that will not only ensure compliance with
internal regulations but also ensure capital adequacy for TBC's
future expansion.
On 4 March 2014, the GMS approved a distribution in the amount
of GEL 26,492,294 to the shareholders (equivalent to 25%
of TBC Bank's net profit), which was paid on 4 March 2014.
On 26 February 2014, the Supervisory Board approved a
resolution, beginning in 2015, to annually distribute 25% of
TBC's consolidated net income for the previous year as a dividend
to shareholders, provided that the financial standing of TBC Bank
allows such distribution.
TBC's dividend strategy is based on two major priorities:
(i) maintaining adequate capital for TBC Bank; and (ii) ensuring
consistency of dividend payment to shareholders in sufficient
amounts. Excessive dividends will not be paid out if it jeopardizes
TBC's current capital adequacy or future growth opportunities.
Dividend payments are made only when: (a) the dividends
are in compliance with TBC Bank's approved capital plan;
(b) the dividend amounts are in accordance with all regulatory
requirements and internal regulations of TBC Bank, thus not
putting in jeopardy future expansion; and (c) the dividend
payments do not adversely impact TBC's capital structure
and related regulatory capital ratio requirements.
196
196
TBC Bank Annual Report 2014 Disclaimer
By reading this Report, you acknowledge and agree to be bound by
the following:
None of the future projections, expectations, estimates or
prospects in this Report should be taken as forecasts or promises
nor should they be taken as implying any indication, assurance or
guarantee that the assumptions on which such future projections,
expectations, estimates or prospects have been prepared are
correct or exhaustive or, in the case of the assumptions, fully
stated in the Report. These forward-looking statements speak
only as at the date as of which they are made, and the Bank
expressly disclaims any obligation or undertaking to disseminate
any updates or revisions to any forward-looking statements
contained in the Report to reflect actual results, changes in
assumptions or changes in factors affecting these statements.
The information and opinions contained in this Report are
provided as at the date of the Report, are based on general
information gathered at such date and are subject to change
without notice. The Bank relies on information obtained from
sources believed to be reliable but does not guarantee its
accuracy or completeness.
Neither the Bank, nor any of its respective agents, employees
or advisers intends or has any duty or obligation to provide the
recipient with access to any additional information, to amend,
update or revise this Report or any information contained in
the Report.
This Report is provided for information purposes only and does
not constitute an offer to sell or the solicitation of an offer to buy
securities. No part of this Report, nor the fact of its publication,
should form the basis of or be relied on in connection with any
contract or commitment or investment decision.
www.tbcbank.ge
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