TBC Bank Group Annual Report 2021

Plain-text annual report

T N E M E G A N A M D N A T R O P E R S T N E M E T A T S 1 2 0 2 I L A C N A N F I Emerging Stronger – moving forward 20 21 TBC Bank1 is the largest banking group in Georgia. Contents 4 - 103 MANAGEMENT REPORT Who we are TBC at a glance Group highlights 2021 CEO letter Our strategic approach Operating environment in Georgia Our business model Our business strategy and key performance indicators Our ESG strategy and Climate-related Financial Disclosures Our operating performance and stakeholder engagement Business review Retail banking MSME banking Corporate & investment banking Major subsidiaries Our stakeholders Our colleagues Our customers Our community Our environmental 6 8 10 12 16 18 24 36 42 48 54 56 63 65 management system 67 Our financial performance and risk management Financial review Material existing and emerging risks Risk management 72 79 88 104 - 115 GOVERNANCE Corporate governance Supervisory Board biographies The Bank’s Management board biographies 116 - 263 FINANCIAL STATEMENTS Independent auditor’s report Consolidated statements of financial position Consolidated statements of profit or loss and other comprehensive income Consolidated statements of changes in equity Consolidated statements of cash flows Separate statement of financial position Separate statements of profit or loss and other comprehensive income Separate statement of changes in equity Separate statement of cash flows Notes to the consolidated and separate financial statements 264 - 269 ADDITIONAL INFORMATION Glossary Ratio definitions Abbreviations 106 108 112 118 123 124 125 126 127 128 129 130 131 266 267 269 1 TBC Bank refers to JSC TBC Bank (the Bank) and its sub- sidiaries (together Group) 3 TBC BANK MANAGEMENT REPORT 2021 MANAGEMENT REPORT TBC AT A GLANCE Who We Are LEADING UNIVERSAL BANKING FRANCHISE IN GEORGIA1 • Retail - 38.6% loan market share, 40.3% deposit market share; • CIB - 39.1% loan market share, 40.5% deposit market share; • MSME - 63%2 of newly registered legal entities chose TBC Bank. BEST-IN-CLASS DIGITAL CHANNELS AND SUPERIOR CUSTOMER EXPERIENCE • Award-winning internet and mobile banking applications; • Space – our scalable fintech platform; • One of the highest customer satisfaction among service companies in Georgia. PRIMARY PAYMENTS PROVIDER IN GEORGIA • 45.1%1 market share by volume of POS transactions in our terminals; • Traditional payment channels such as • e-commerce, POS and self-service terminals; Innovative payment methods comprising Apple Pay, QR payments and e-wallet. 6 TBC BANK MANAGEMENT REPORT 2021We are the leading universal banking group in Georgia with diversified business across all major market segments. Our Mission Our Strategic Priorities Continue steady growth Diversify our income streams Leverage our advanced digital capabilities Deliver a superior customer experience 1 Based on data published by the National Bank of Georgia as of 31 December 2021 2 Data is for FY 2021, source: www.napr.gov.ge, the National Agency of Public Registry 7 TBC BANK MANAGEMENT REPORT 2021TO MAKE LIFE EASIERis deeply embedded in TBC’s culture and defines everything we do and the way we do it. By combining simplicity with ex-cellence, we strive to create a truly unique experience for our customers.For more information, please refer to our strategy and business model sections. Group Highlights 20211 GROUP HIGHLIGHTS Robust profitability backed by solid capital Diversified earnings streams Steady growth Best in class-digital-channels Outstanding employee and customer experience 8 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021TBC BANK ANNUAL REPORT AND ACCOUNTS 2021TBC BANK MANAGEMENT REPORT 2021TBC BANK MANAGEMENT REPORT 2021 26.3% + 13.4pp YoY RETURN ON EQUITY 3.7% + 2.0pp YoY RETURN ON ASSETS 13.7% + 3.3pp YoY CET 1 CAR 5.0% + 0.3pp YoY NIM + 33.2% YoY GROWTH IN NET F&C INCOME GEL 16,955 mln + 11.5% YoY TOTAL LOANS GEL 14,884 mln + 17.8% YoY TOTAL DEPOSITS 38.8%2 - 0.2 pp YoY TOTAL LOANS MARKET SHARE 97%3 + 2 pp YoY RETAIL OFFLOADING RATIO 66%4 - 2 pp YoY ENPS 40.4%2 + 3.2 pp YoY TOTAL DEPOSITS MARKET SHARE 44%3 + 3 pp YoY DAU/MAU 56%5 N/A NPS 1 Definitions of the ratios are given on pages 267-268 2 Based on data published by the National Bank of Georgia as of 31 December 2021 3 These terms are defined in Glossary on pages 266 4 The Employee Net Promoter Score (ENPS) was measured for the Bank’s employees by an independent consultant in October 2021 5 The Net Promoter Score (NPS) was measured based on the survey conducted by the independent research company IPM in December 2021 9 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021TBC BANK ANNUAL REPORT AND ACCOUNTS 2021TBC BANK MANAGEMENT REPORT 2021TBC BANK MANAGEMENT REPORT 2021CEO LETTER Dear stakeholders, 2021 was a year of strong recovery for TBC. Having successfully adjusted to the post-COVID reality, we concentrated our efforts on increasing and diversifying our income streams. The macroeconomic environment was also supportive throughout the year. As a result, our net income amounted to GEL 843 million and we delivered a record high return on equity of 26.3% in 2021. 10 pandemic related highs and by low US$ deposit rates, while the appreciation of the GEL in the second half of the year led to improved consumer and business senti- ment. Furthermore, the 18% expansion in bank lending also provided much needed support to the economic recovery. While the Georgia economy entered 2022 with strong momentum, the current events in Ukraine and their impact on the global economy are likely to make 2022 a challenging year. However, I remain as- sured by having confidence in the Georgian econo- my’s historical resilience and proven ability to adapt during difficult times. STRONG FINANCIAL RESULTS ACROSS THE BOARD BACKED BY THE SOLID CAPITAL In 2021, our operating income amounted to GEL 1,398 million, up by 25% year-on-year, driven by an increase in both net interest income and non-interest income. The increase in the former was related to a higher net interest margin of 5.0%, compared to 4.7% in 2020, as well as 12% year-on-year growth in our loan book. Over the same period, net fee and commission income grew by an impressive 33%. The increase was broad-based and demonstrated the strength of our business model. In addition, other operating income2 grew by 49% and made a meaningful contribution to the overall profit- ability, mainly driven by FX operations and the sale of investment property. Our robust income streams were further supported by strong performance on the asset side across all segments, with the cost of risk standing at minus 0.3% (ie. net recoveries) in 2021. We kept our cost to income ratio at 32.5% in 2021, below the 2020 level of 34.6%. As a result, we recorded a return on eq- uity of 26.3% and return on assets of 3.7% for the full year 2021. TBC BANK MANAGEMENT REPORT 2021TBC BANK MANAGEMENT REPORT 2021The past several weeks have been overshadowed by the Russian-Ukrainian war and the adverse implica-tions of the military actions for the Ukrainian people. We hope that this war will come to an end and the parties will arrive at a peaceful solution in the nearest future. We are closely monitoring the developments in Ukraine and are assessing its possible impacts on the Georgian economy and our operations under different scenarios. The resilience of the Georgian economy and our diversified business model gives me assur-ance that we will be able to steer the company suc-cessfully though these challenging times.A FIRM MACROECONOMIC RECOVERY, BUT CHALLENGES AHEAD The Georgian economy demonstrated a firm recov-ery in 2021. For the full year, real GDP growth reached 10.4%1, which was an exceptional performance. Impor-tantly, this growth was broad-based and was reflected in almost all sources of inflows as well as in domes-tic demand, only FDI lagged behind, as investment demand takes longer to recover. Domestic demand was fueled by the normalization of saving levels after 1 According to Geostat. 2 Total non-interest income less net fee and commission income. Note: For better presentation purposes, certain financial numbers are rounded the nearest whole number. 11 TBC BANK MANAGEMENT REPORT 2021TBC BANK MANAGEMENT REPORT 2021Strong income generation, coupled with prudent management of our capital, allowed us to maintain strong cap-ital positions. Our CET1, Tier 1 and Total Capital ratios stood at 13.7%, 16.7% and 20.3%, respectively, and remained comfortably above the minimum regulatory requirements by 2.0%, 2.7% and 1.9%, respectively. At the same time, we continued to operate at high liquidity with the net stable funding (NSFR) and liquidity coverage (LCR) ratios standing at 127.3% and 115.8%, respectively, as of 31 December 2021. A STEADY PROGRESS IN OUR CORE BANKING BUSINESS We continue to be market leaders in total loans and deposits. In 2021, our loan book increased by 17% year-on-year in constant currency terms, in line with the overall growth of the banking sector, which translated into a 39% market share. Importantly, the quality of our loan book improved, with the non-performing loan ratio decreasing to 2.4% by the end of 2021, compared to 4.7% at the end of 2020. Over the same period, our deposit growth significantly out-paced market growth and increased by 23% in constant currency terms. As a result, our market share in total deposits amounted to 40% as of 31 December 2021, up by 3 pp year-on-year. I am also delighted to report that our digitalization levels continue to increase. In the fourth quarter of 2021, the num-ber of active retail digital users increased by 14% year-on-year and reached 744,000. In addition, we made significant progress in expanding the number of monthly and daily active digital users, which reached 644,000 (up by 16% year-on-year) and 285,000 (up by 24% year-on-year) respectively in December 2021. The proportion of digital sales of our consumer loans amounted to 45%, while the deposit sales offloading ratio stood at 73%. Furthermore, to ensure the maximum safety of our customers and employees, we ran a wide-scale campaign to en-courage our staff to get vaccinated. As a result, around 85% of all our employees were vaccinated, or were scheduled to receive a vaccine, by the end of 2021. OUTLOOKOur outstanding results for 2021 provide me with much confidence that we are on the right track and that our strategy is working. We realize that the current events in Ukraine will have a negative impact on the Georgian economy and impose chal-lenges on our operations. For more information, please refer to our material existing and emerging risks section on pages 79-87.We will continue to closely monitor the events and take all appropriate measures to make sure that TBC Bank safely goes through these challenges.THANK YOUI would like to close my letter by thanking our colleagues for their hard work and dedication and recognizing their in-dividual contributions to our success. We have an exciting journey ahead of us and I am eagerly looking forward to it.Vakhtang ButskhrikidzeCEO28 April 2022OPERATING ENVIRONMENT IN GEORGIA Economic Overview REAL GDP GROWTH (%) 6.4 3.6 4.4 3.0 2.9 4.8 4.8 5.0 10.4 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: Geostat External sector -6.8 Although the tourism sector is still suffering from the pandemic-related crisis, external inflows recorded a strong per- formance in 2021. In 2021, exports of goods increased by 26.9% compared to last year and by 11.7% compared to 2019. Notably, despite re-exports having a lower base effect from a year ago, domestic exports still led the recovery with the share of domestic value-added exports in total exports increasing significantly, from 61.3% in 4Q 2019 to 76.2% in 4Q 2021. Despite the continuing recovery in tourism-related imports and re-exports, imports of goods also went up by 25.1% year-on-year in 2021 and by 5.8% compared to 2019. Importantly, the rebound of the trade in goods was broad- based, reflecting overall increased external and domestic demand. Remittance inflows, which cushioned the pandemic’s economic blow in 2020, performed solidly in the last year, in- creasing by 24.6% year-on-year and by 35.6% when compared to 2019. Although part of the rebound compared to 2019 can be attributed to border closures and the greater transfer of cash remittances through digital channels, overall growth has still been substantial given that the share of cash inflows is only likely to be around 10.0%-15.0%, according to the NBG’s estimates. Tourism inflows recovered moderately throughout the year. Despite the pace of the initial rebound stalling somewhat in August-September, the recovery continued gradually thereafter, with full year inflows amounting to 38.1% of their 2019 level. Annual growth reached a 129.8% year-on-year increase in 2021 on the back of the low base a year ago. No- tably, this growth was primarily led by the recovery of high-spending countries. FDI inflows are taking longer to recover. While they increased 3.2% year-on-year for the full year 2021, this was on the back of higher reinvested earnings as equity and FDI-related debt financing declined sharply in the same period. YOY GROWTH OF INFLOWS AND IMPORT (%) 129.8 24.6 26.9 29.9 25.1 Remittance inflows Exports Exports excl. re-exports Tourism inflows FDI* Imports 3.2 * Sum of the first three quarters of the year Source: Geostat, NBG 12 Economic growthStarting in the second quarter of 2021, the Georgian economy has been rebounding from the pandemic at a remark-able speed. For the full year 2021, according to Geostat, the Georgian economy expanded by 10.4% year-on-year, surpassing the 2019 GDP level by 2.9%.TBC BANK MANAGEMENT REPORT 2021GROWTH OF INFLOWS AND IMPORTS COMPARED TO 2019 (%) 35.6 34.5 11.7 Remittance inflows Exports Exports excl. re-exports Tourism inflows FDI* -24.3 5.8 Imports * Sum of the first three quarters of the year Source: Geostat, NBG -61.9 Fiscal stimulus The fiscal stimulus, although still sizable, negatively affected growth in 2021 as the deficit amounted to around 6.7% of GDP, after an expansionary 9.3% of GDP in 2020. Importantly, the major source of deficit financing in 2020-2021 was external, largely compensating for the pandemic-related drop in net inflows. At the same time, government debt, which reached its mandated ceiling of 60.2% of GDP in 2020, has already normalized at an estimated 51.1% of GDP by the end of 2021. BUDGET DEFICIT AND SPENDING BY TYPES (% OF GDP) GOVERNMENT GROSS DEBT (% OF GDP) 30 25 20 15 10 5 0 22.6 5.7 21.3 6.4 26.2 8.6 25.2 8.1 21.4 8.0 9.3 6.7 2.7 2.3 2.1 12 10 8 6 4 2 0 60.2 51.1 40.8 38.9 40.4 2017 2018 2019 2020 2021E 2017 2018 2019 2020 2021E Budget deficit Current spending Capital spending (RHS) Source: MoF Source: MoF Credit growth on a constant currency basis By the end of 2021, bank credit growth increased to 18.3% year-on-year, compared to 9.1% year-on-year growth by the end 2020. In terms of segments, corporate and MSME lending growth increased markedly by 8.4 pp and 12.0 pp from 2020 to 2021 and amounted to 15.6% and 22.4% year-on-year, respectively. Expansion in the retail segment was also highly pronounced, up by 4.8 pp to 18.0% year-on-year growth at the end of 2021, though mostly on the back of stronger non-mortgage credit. 13 TBC BANK MANAGEMENT REPORT 2021OPERATING ENVIRONMENT IN GEORGIA CONTINUED YOY GROWTH OF LOANS BY SEGMENTS EXCLUDING FX EFFECT (%) 35 30 25 20 15 10 5 0 22.4 18.3 18.0 15.6 0 2 - n a J 0 2 - b e F 0 2 - r a M 0 2 - r p A 0 2 - y a M 0 2 - n u J 0 2 - l u J 0 2 - g u A 0 2 - p e S 0 2 - t c O 0 2 - v o N 0 2 - c e D 0 2 - n a J 0 2 - b e F 1 2 - r a M 1 2 - r p A 1 2 - y a M 1 2 - n u J 1 2 - l u J 1 2 - g u A 1 2 - p e S 1 2 - t c O 1 2 - v o N 1 2 - c e D Total loans Corporate MSME Retail Inflation, monetary policy and the exchange rate Despite challenges such as the unprecedented weakening of the TRY, the GEL gained value in 2021, appreciating by 5.4% against the US$ from 3.28 to 3.10, while the real effective exchange rate appreciated by 20.4%. By the end of 2021, however, annual inflation remained elevated at 13.9%, because of the low base effect a year ago due to the state subsidies on utilities. At the same time, monthly inflation dynamics are already around their target level. However, in December 2021, the NBG increased its policy rate again by 0.5 pp to 10.5%, raising the rate by 2.5 pp in total during the year. CPI INFLATION AND MPR (%) 13.9 10.5 0 2 - n a J 0 2 - b e F 0 2 - r a M 0 2 - r p A 0 2 - y a M 0 2 - n u J 0 2 - l u J 0 2 - g u A 0 2 - p e S 0 2 - t c O 0 2 - v o N 0 2 - c e D 0 2 - n a J 0 2 - b e F 1 2 - r a M 1 2 - r p A 1 2 - y a M 1 2 - n u J 1 2 - l u J 1 2 - g u A 1 2 - p e S 1 2 - t c O 1 2 - v o N 1 2 - c e D CPI inflation Monetary policy rate (MPR) 14 12 10 8 6 4 2 14 TBC BANK MANAGEMENT REPORT 2021 Going forward Before the Russian invasion of Ukraine, TBC Capital estimated that the Georgian economy would grow by around 6.0% in 2022, 5.5% in 2023 and 5.0% in 2024 – close to its trend rate of around 5.2%. According to the World Bank’s projections1 as of January 2022, the Georgian economy was forecast to grow by 5.5% and 5.0% in 2022 and 2023, respectively. The developments in Ukraine and Russia are expected to have adverse implications for the growth outlook of Geor- gia. Please refer to the material existing and emerging risks section on pages 79-87 for more details on the risks aris- ing from the Russian invasion of Ukraine. More information on the Georgian economy and financial sector can be found at www.tbccapital.ge. 1 World Bank, Global Economic Prospects, January 2022 15 TBC BANK MANAGEMENT REPORT 2021OUR BUSINESS MODEL Our Business Model We have a customer-centric business model focused on providing the best customer experience in servicing the everyday needs of our clients. Our strategy is centered on the core principles of sustainable development, digitalization, innovation and efficiency, and is designed to create value for all our stakeholders. OUR MARKETS OUR APPROACH 16 TBC BANK MANAGEMENT REPORT 2021The leading universal financial institution in Georgia, offering a full suite of financial services:• Retail banking• Corporate and investment banking• MSME banking• Leasing• Strong focus on digitalization and innovationOur best-in-class digital capabilities, built over many years through continuous in-vestment in new technologies, strength-en our ability to grow efficiently.• Advanced data analytical capabilitiesOur advanced data analytical capabilities, embedded into the development of our value proposition, help us to maximize customer value via personalized offer-ings.• Superior customer experience and strong brand awarenessCustomer satisfaction lies at the heart of everything we do and helps us build long-standing relationships of trust with our customers.• Excellent corporate governance and strong corporate culture Our exemplary governance standards set the right tone for every employee and foster responsible behavior in all our undertakings.WHAT WE DELIVER HOW WE SHARE VALUE 17 TBC BANK MANAGEMENT REPORT 2021• CustomersProvide tailored solutions and a superior customer experience to our clients.• ColleaguesSupport our colleagues in their profes-sional development and provide reward-ing career opportunities.• InvestorsGenerate sustainable returns for our shareholders and be a reliable partner for our debt holders. • CommunitySupport business development and fos-ter job creation, as well as take an active part in CSR activities.• Strong business growthSupported by our leading Georgian bank-ing franchise.• Diversified income streamsDriven by solid net interest margin and different sources of non-interest income.• Sound asset qualityAs a result of prudent risk management across all segments.• High levels of efficiencyOn the back of the high level of digitiza-tion and automation both in front and back offices.• Strong liquidity and a solid capital positionEnsuring the stability of our business model and ability to withstand economic headwinds. OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS CONTINUE STEADY GROWTH Our Strategic Priorities 18 TBC BANK MANAGEMENT REPORT 2021Our strategic priorities serve our mission to make people’s lives easier. Each of these priorities has been carefully selected and thought through to ensure that they are interrelated and complementary to each other so that progress in one of them reinforces progress in the others. In order to achieve growth, we need to de-velop innovative products and services and create an unparalleled customer experience. This in turn requires building strong digital and data analytical capabilities. At the same time, our growth across different segments and products, supports our income stream diversification and strengthens our resil-ience. High levels of digitalization also allow us to improve our efficiency levels and re-duce costs. This in turn allows us to concen-trate our efforts on customer satisfaction and enhancement of our value proposition.Our goal is to maintain our leadership position in Geor-gia and grow in line with the market. Despite the in-creased penetration level, the Georgian banking sector still offers attractive growth opportunities, especially in certain underpenetrated sub-segments such as mort-gages and microloans. Our strong banking franchise in Georgia, underpinned by a superior customer experience, high brand aware-ness and advanced digital capabilities, has enabled us to retain our existing clients as well as attract new cus-tomers, which led to loan book growth of 11.5% in 2021 or 17.3% on a constant currency basis. This increase was mainly driven by growth in GEL denominated loans. In term of segments, the increase was broad based. The CIB and MSME segments grew by 12.3% (or 19.5% on a constant currency basis) and 17.6% (or 23.3% on a constant currency basis) year-on-year, respectively, while retail grew by 7.2% (or 11.5% on a constant curren-cy basis) over the same period. The growth in the CIB segment was related to acquisition of both large and mid-corporate clients, while on the MSME side, we focused on increasing our presence in the small and micro sub-segments. At the same time, our retail book growth was underpinned by both mortgages and con-sumer loans.In 2021, our deposit portfolio increased by 17.8% year-on-year, primarily on the back of growth in retail and CIB deposits, reflecting the strong loyalty and trust of our customers. On a constant currency basis, the growth was 23.1%.As a result, we retained our market leadership position in both total loans and total deposits, which amounted to 38.8% and 40.4%, respectively, as of 31 December 2021, according to data published by the National Bank of Georgia.DELIVER A SUPERIOR CUSTOMER EXPERIENCE We put customers at the heart of everything we do and strive to develop the most relevant products and ser- vices. This requires active engagement with our clients via various channels in order to receive their feedback about our service quality and value proposition, as well as to understand their preferences. Moreover, we aspire to go one step further, anticipat- ing our customers’ needs and surprising them with tai- lored offerings before they ask for them. This is where our advanced data analytical capabilities come into play, providing an opportunities for creating the right product at the right time and the right price. In our retail business, we rolled out several new projects in this re- gard, including customer life-time value and loan pric- ing, while in the CIB segment, we continued to run a commercial excellence transformation project, which helped us better understand and capture the potential of existing and new clients. During the year, we also strengthened our focus on digital offerings across all segments and created new remote products and services, as well as increased au- tomatization of our internal processes. This not only increased customer satisfaction, but also resulted in improved efficiency. DIVERSIFY OUR INCOME STREAMS Our business model is diversified in a number of ways. We serve a wide spectrum of individual and business clients in Georgia, offering them a full suite of financial solutions. Our main source of income is net interest in- come, which represented around 70% of our operating income in 2021 and is primarily driven by our lending operations. Our net fee and commission income is generated through payments, settlement operations, as well as guarantees and letters of credit. As a pre- dominantly cash-based society, Georgia provides an attractive growth opportunity for our payments busi- ness, while our digital channels enable us to increase the scale and revenue-generating capacity of our op- erations in an efficient manner. LEVERAGE OUR ADVANCED DIGITAL CAPABILITIES Our digitalization strategy spans the entire company from front to back office processes and encompasses both sales and transactional operations. We constantly invest in technology and develop new digital products to keep abreast of global trends. A large part of our transactional business in the retail and MSME segments is conducted via remote chan- nels, resulting in a retail offloading ratio above 97%, which means that less than 3% of all transactions are conducted in branches. Mobile and internet banking remains the preferred channel of communication for our customers, with the number of active retail digital users increasing by 14.1% in 2021 and reaching 744,000. At the same time, the daily engagement of our digital users has also increased and in December 2021, our av- erage daily active users reached 285,000, up by 23.9% year-on-year. In parallel, we have been actively devel- oping our digital sales channels for consumer loans and installments. By the end of 2021, the share of consumer loans issued through remote channels increased by 7 pp year-on-year and amounted to 45%. We continued to automate the approval process for smaller MSME loans in order to reduce “the time to yes”. For corporate borrowers, within the scope of the commercial excel- lence transformation project, we significantly sped up the analysis process by utilizing sophisticated IT tools. Our advanced digital infrastructure also allows the vast majority of our back-office employees to work remote- ly without any disruption and have safe and real-time access to our IT system. 19 TBC BANK MANAGEMENT REPORT 2021OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS CONTINUED Key Performance Indicators Robust profitability RETURN ON EQUITY 2021 26.3% 2020 12.9% 2019 24.3% In 2021, we generated a record high return on equity, driven by ro- bust income generation across the board, as well as a strong perfor- mance on the asset quality side. Diversified income streams NET INTEREST MARGIN 2021 2020 2019 5.0% 4.7% 5.5% In 2021, the year-on-year increase in net interest margin was driven by a loan composition change and liability structure optimization. Solid balance sheet CET 1 CAPITAL RATIO 2021 2020 2019 13.7% 10.4% 12.0% 1 Definitions of the ratios are given on pages 267-268 2 Cost to income ratio for prior periods does not correspond to the ratios disclosed in 2020 as they reflect the reclassifica- tions made by the management between net impairment of non-financial assets and administrative and other operating expenses The increase in Tier 1 CAR in 2021 was mainly attributable to strong income generation during the year, which was partially offset by loan book growth. As a result, Tier 1 CAR remained comfortably above the minimum regulatory requirement of 11.7%. 20 TBC BANK MANAGEMENT REPORT 2021We use a broad range of financial and non-financial measures in order to as-sess our performance and provide a balanced view, taking into account the interests of all our stakeholders. The Supervisory Board regularly reviews the key performance indicators (KPIs) in or-der to ensure that they continue to show whether our strategy is working and en-sures the long-term sustainable growth of the Group. Due consideration is also given to the selection of the most rel-evant KPIs for the executive manage-ment’s remuneration in order to better align their interests with those of our stakeholders. FINANCIAL KPIS1 RETURN ON ASSETS COST TO INCOME RATIO2 2021 3.7% 2020 1.7% 2019 3.3% 2021 2020 2019 32.5% 34.6% 37.5% In 2021, our return on assets recovered strongly on the back of ro- bust income generation and a strong improvement on asset quality side. In 2021, due to our strong income generation, we managed to im- prove our cost to income ratio compared to the 2020 level. GROWTH OF NET F&C INCOME 2021 33.2% 2020 5.8% 2019 14.5% In 2021, our net fee and commission income demonstrated a strong rebound across all major categories. LIQUIDITY COVERAGE RATIO NON-PERFORMING LOANS 2021 2020 2019 115.8% 134.2% 110.1% 2021 2020 2019 2.4% 4.7% 2.7% In 2021, we utilized the excess liquidity generated in 2020 while en- suring that our liquidity ratio remained above the regulatory mini- mum requirement of 100%. By the end of 2021, our non-performing ratio improved significantly year-on-year, with a strong performance across all segments. 21 TBC BANK MANAGEMENT REPORT 2021OUR BUSINESS STRATEGY AND KEY PERFORMANCE INDICATORS CONTINUED Steady growth LOAN BOOK GROWTH AT CONSTANT CURRENCY DEPOSIT GROWTH AT CONSTANT CURRENCY 2021 2020 2019 17.3% 8.7% 17.9% 23.1% 2021 2020 2019 2.9% 13.7% In 2021, our loan book grew in line with the market, maintaining our leadership position. Our market share in total loans stood at 38.8% by the end of the year (based on data published by the National Bank of Georgia). In 2021, our deposit growth outpaced the market growth. As a result, our market share in deposits increased by 3.2 pp and reached 40.4% by the end of the year (based on data published by the National Bank of Georgia). 22 TBC BANK MANAGEMENT REPORT 2021NON-FINANCIAL KPIS High employee and customer satisfaction levels EMPLOYEE NET PROMOTER SCORE1 NET PROMOTER SCORE2 2021 2020 2019 66% 68% 41% 2021 2020 2019 56% n/a n/a The employee net promoter score measures employee loyalty and reflects the likelihood of our colleagues recommending their work- place to their friends and family. In 2021, our employee satisfaction levels remained high. This year, we introduced a new metric to assess our customer satis- faction levels. The Net promoter score (NPS) measures how willing customers are to recommend our products and services to others. Strong digital engagement with customers3 DAILY ACTIVE USERS/ MONTHLY ACTIVE USERS 2021 2020 2019 44% 41% n/a RETAIL OFFLOADING RATIO 2021 2020 2019 97% 95% 93% The proportion of daily active users over monthly active users (DAU/ MAU) measures our customers’ daily digital engagement with us. In December 2021, the number of daily and monthly active users reached 285,000 (up by 23.9% YoY) and 644,000 (up by 16.0% YoY), respectively. The retail offloading ratios measures the share of transactions conducted in our remote channels, that is outside the branches. Our retail offloading ratio continued to grow in 2021, as we further strengthened our digital focus and introduced new digital products and services. 1 The Employee Net Promoter Score (ENPS) was measured for the Bank’s employees by an independent consultant in October 2021 2 The Net Promoter Score (NPS) was measured based on survey conducted by the independent research company IPM in December 2021 3 These terms are defined in glossary on page 266 23 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES Our Environmental, Social and Governance (ESG) Strategy Our aspiration to contribute to sustainable develop- ment comes from our role as a leading financial insti- tution in Georgia’s development. We are aware that we have an impact on the country’s economy, busi- ness development, employment and the progress of the society, as a whole. This role is connected to our responsibility to contribute to a better future through innovation and technology in order to increase the ac- cessibility of financial services and to enable our cus- tomers to be a part of the globalized economic society. While pursuing our aspirations, we guide our activities in line with international sustainability standards and principles, making them a part of the strategy, culture and day-to-day operations of our company. This year, we took further steps to enhance the Group’s environmental, social and governance (ESG) frame- work through the development of an ESG strategy. The ESG Strategy reaffirms our commitment to make a long-term, sustainable contribution to the country and the region. The ESG Strategy defines several key areas for the coming years: a strong ESG governance structure at the Supervisory Board and executive level; a focus on sustainable financing, services and prod- ucts; employee diversity, equality and inclusion; green and sustainable funding; and a system and approach for impact measurement and reporting. VARIOUS INITIATIVES AND PROGRAMMES TO SUPPORT THE TARGETS SET BY THE ESG STRATEGY ESG in TBC’s governance and culture: 2021 was a milestone year in the establishment of the ESG gover- nance structure, which spans different organizational levels. Two ESG-related committees were established – one at the Supervisory Board level, another at the executive management level. The ESG Coordination Department was established in TBC Bank to support and coordinate initiatives defined by the ESG strategy. TBC Bank initiated an ESG Ambassadors programme, which aims to strengthen environmental, social and governance structures and increase the involvement of TBC employees as focal points for these areas. Through this initiative, TBC employees will contribute to the quality of sustainability for customers, company, the environment and society as a whole. Employee diversity: In order to expand our focus on diversity, gender and inclusion issues, we have devel- oped a Diversity, Equality and Inclusion Policy (avail- able at www.tbcbankgroup.com), which sets targets and establishes a methodology to advance diversity, equality and inclusion, integrating its approach into the Group’s operations and management processes and focusing on diverse areas including gender, multi- cultural, multigenerational and disability backgrounds. Gender equality and the empowerment of women and girls are important dimensions of the sustainability of the company and its stakeholders, including custom- ers, employees, suppliers, partners and society as a whole. The policy takes into account the United Na- tions Women Empowerment Principles (WEPs) – a set of principles offering guidance to businesses on how to promote gender equality and women’s empower- ment in the workplace, marketplace and community. TBC Bank became a signatory of the UN WEPs in 2021. Sustainable financing: TBC strives to increase its pos- itive impact on society and the economy through in- troducing new financial products and services that are designed to deliver a specific social or environmental benefit. The ESG Strategy sets targets for the growth of our total sustainable loan portfolio, including financ- ing energy efficient, renewable energy and resource efficient projects, women-led and women-owned business, startups and rural businesses. Responsible procurement: Our responsible purchas- ing practices and relationships with suppliers can have a significant impact on the well-being, financial sta- bility and development of suppliers, as well as on the economy as a whole. We pay special attention to small local suppliers and promote their inclusion in our sup- ply chain. The ESG Strategy sets targets connected to green procurement initiatives, social enterprises, wom- en-owned companies, startups and local business. OUR ESG TARGETS 2022 • Some ESG KPIs linked to senior management remuneration in the medium term to reflect our mid-term strategy; • Target volume of our sustainable loan portfolio1 - GEL 750 million. 2023 • Measure the Group’s direct performance towards the Paris Agreement targets for reduction of GHG emissions; • Target volume of our sustainable loan portfolio1 - GEL 1 billion; • Target for women in middle managerial positions at the Bank level - 40%; • Target for social impact procurement - GEL 5 million. 2025 • Net-zero GHG emissions (direct). 24 TBC BANK MANAGEMENT REPORT 2021Our Environmental, Social and Governance (ESG) Strategy Climate-related Financial Disclosures 2021 In 2020, we made a promise to introduce a Task Force for Climate-related Financial Disclosure (TCFD) framework to demonstrate our commitment towards taking active measures to mitigate the effects of climate change, to assess and mitigate climate risks, and identify climate opportunities. It should be noted, that the data we have used provides the best available approach to making progress, notwith- standing the challenges that exist in the data sets and methodologies required for the Georgian environment, which bears the largest part of our activities. We expect the availability and reliability of required data to improve over time, and we intend to integrate improvements into our reporting as it becomes available. Below is the first disclosure prepared by the Group considering the implementation of TCFD recommendations. Recommended disclosure Describe the organisation’s governance around climate-related risks and opportunities Describe management’s role in assessing and managing climate-related risks and opportunities Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario Describe the organisation’s processes for identifying and assessing climate-related risks Describe the organisation’s processes for managing climate-related risks Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions and the related risks Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets Status Reference Disclosed Disclosed 1.1 1.2 Disclosed 2.1, 2.2 Disclosed Disclosed Disclosed Disclosed Disclosed Disclosed Disclosed Disclosed 2.2 2.3 3 3 3 4 4 4 1 Our sustainable loan portfolio includes energy efficiency, youth support and women in business loans financed by special purpose funds received from IFIs, as well as loans financing renewable energy, which include all hydro power plants financed by the Bank 25 TBC BANK MANAGEMENT REPORT 202126 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED1. GOVERNANCE1.1 Supervisory Board’s oversight of climate-related risks and opportunitiesIn November 2021, the Supervisory Board approved the Group ESG Strategy in order to address specifically the Group’s specific targets and initiatives related to climate change, its direct and indirect environmental impact and sustainable development across the Group. The ESG Strategy also covers customers, employees, suppliers, wid-er society, financial inclusion, employee relations and talent management, workplace diversity and inclusion. The Supervisory Board retains the primary responsibility for overseeing the implementation of the strategy, as part of its commitment to having direct oversight over the Group’s climate-related issues. The Supervisory Board is supported by the Risk Committee. For example, progress against the reporting metrics such as the volume of the sustainable loan portfolio are overseen by the Risk Committee, which also received updates three times a year through the Chief Risk Officers (CRO) report. In 2022, we will incorporate a Climate Risk Appetite Statement in our Risk Appetite Frame-work (RAF).In January 2022, the Group established an Environmental, Social and Governance (“ESG”) and Ethics Committee at the Supervisory Board level. This reflects the importance of sustainability in TBC’s corporate governance and allows the Supervisory Board members to dedicate more time and focus to ESG topics. The role of the Committee is formal-ized to support and advise the Supervisory Board in its oversight of the implementation of (i) strategy (ii) policies and (iii) programs of the Company and its subsidiaries in relation to Environmental, Social and Governance matters and ensuring that the ESG strategy is implemented across all relevant businesses of the Group. Furthermore, the ESG and Ethics Committee supports the Supervisory Board in promoting its collective vision of values, conduct and culture and overseeing management’s efforts (i) to foster a culture of ethics (ii) appropriate conduct, and (iii) employee ethical engagement within the Group. The Committee will provide strategic guidance on climate-related matters and will report to the Supervisory Board, which has overall oversight. The ESG and Ethics Committee will meet at least four times per year. Under the ESG oversight of the ESG and Ethics Committee are: a) periodical review of the Group’s ESG strategy, including climate strategy, as well as implementation plans and monitor its execution; b) oversee Group’s disclosures on ESG matters, including reporting in line with the TCFD principles, in the Annual Report and Accounts. The Supervisory Board of JSC TBC Bank has established a diverse and comprehensive training agenda, which is re-viewed annually. The Group’s Company Secretarial team creates a general training catalogue at the beginning of each year, which covers all relevant areas of Risk, Audit, Remuneration and Governance. In 2020 and 2021, additional atten-tion was paid to ESG and, in particular climate-related matters, regulatory compliance, reporting, shareholder views and impact. The catalogue includes an effective mix of publicly available and client-tailored webinars, analytical ma-terials, and opportunities for live discussion with industry participants. The providers of these training opportunities include the Big Four accounting firms, external legal advisors, chartered institutes (such as the Institute of Directors and the Governance Institute), and, where relevant, senior professionals with specific subject matter expertise. Direc-tors use the training catalogue in order to create their bespoke training calendars and exchange knowledge during Supervisory Board meetings or via the Group’s dedicated Supervisory Board platform. In 2022, further topic-specific training sessions on climate-related issues are planned that will equip members of the Supervisory Board as well as the executive management of TBC Bank and other relevant employees with detailed knowledge about the TCFD and climate change-related risks and opportunities and the operative tools available to implement the ESG Strategy. 1.2 Executive management’s role in assessing and managing climate-related risks and opportunitiesAt the executive level, responsibility for climate change-related risks and opportunities is assigned to the ESG Com-mittee, which was established by the Management Board in March 2021 and is responsible for implementing the ESG strategy and approving the annual as well as separate, detailed action plans for key projects. At the first meeting of the ESG Committee in March 2021, the annual action plan covering various ESG matters for 2021 was approved. For major projects, such as the implementation of the recommendations of the TCFD, a separate action plan has been devel-oped and key implementation steps defined. The progress and implementation status of action plans are monitored at the ESG committee’s meetings. The implementation of the ESG strategy is supported by the various organization-al functions responsible for ESG matters: Environmental and Social Risk Management Team, the ESG Coordinator and the ESG competence center. Among other matters, the ESG Committee’s responsibilities include the review and monitoring of climate-related risks and opportunities as well as the establishment of an effective mitigation and control system to manage identified (material) climate related risks. The ESG Committee meets on a quarterly basis. Furthermore, the Environmental Committee meets on a quarterly basis and oversees the implementation and oper-ation of the Environmental Management System, which includes implementing an internal environmental manage-ment system and addresses the resource consumption and other environmental impacts of daily operations in TBC Bank. The Environmental and Social Risk Management Team regularly reports on the environmental management plans and results to the Environmental Committee. The Environmental Committee reports directly to the Chief Risk Officer. The ESG governance structure 1 1 SUPERVISORY BOARD RISK COMMITTEE ESG AND ETHICS COMMITTEE ESG COMMITTEE ENVIRONMENTAL COMMITTEE ESG COORDINATION DEPARTMENT ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT TEAM 2. STRATEGY The Group’s objective is to act responsibly and manage the environmental and social risks associated with its opera- tions in order to minimize negative impacts on the environment. In order to achieve this, the Group has clearly defined processes in place to identify and assess climate-related risks to our business. This approach enables the Group to reduce our ecological footprint by using resources efficiently and promoting environmentally friendly measures in order to mitigate the effects of climate change. Since banking is not a high-polluting activity, the implementation of an internal Environmental Management System to address the Group’s resource consumption might not have a significant impact on the surrounding environment. However, TBC Bank has reviewed all of the operational activities, procured items, and outsourced services that it can control (present and planned), and has identified all of the mate- rial environmental aspects relevant to the business. The direct environmental impact of our business activity arises from energy, water, fuel and other resource usage, waste and emissions. The Bank has established a comprehensive internal environmental system to manage its GHG emissions and is committed to reducing them by closely monitor- ing its consumption of resources. In order to evaluate the significance of impact for each of the categories, we have developed a comprehensive evaluation methodology and applied it to the whole Group. Based on this, annual goals are defined and specific initiatives and programmes are elaborated to reach them. In 2020, the Bank obtained an ISO 14001:2015 certificate for its environmental management system; in 2021, the Bank completed the re-certification successfully. More information about the environmental management system can be found on pages 67-71. In 2021, the Group took further steps to enhance its ESG framework and to demonstrate its commitment towards taking active measures to mitigate the effects of climate change. The ESG strategy was developed and approved by the Supervisory Board in November 2021, as described above. Below are the five main pillars of TBC’s ESG strategy. Establish ESG governance framework until the end of 2021 Set-up a system for measuring impacts on sustainability across the group, customers, employees and society Access to green and other sustainable financing sources Increase sustainable loan portfolio Increase customer loyalty and employee motivation TBC Group’s ambition is to be a leading supporter of ESG principles in Georgia and region. We aspire to make our direct environmental impact net zero by 2025 and continue to develop our plan to enable our indirect environmental impact to also reach net zero as soon as practicable thereafter. The long-term aspirations are supported by different measures outlined in the ESG Strategy. The key components for 2022 and 2023 are listed below: • Increase of the sustainable loan portfolio, which largely consists of renewable energy and energy-efficiency loans (please see detailed breakdown of the portfolio on page 70); Implementation of the green loan framework which offers a tailored green financing for SMEs; • • Approach and system for data collection, segregation and analysis; • Elaboration of a methodology to calculate financed emissions; • Measure the group’s direct performance towards the Paris Agreement targets for the reduction of GHG emissions; 1 These terms are defined in the glossary on page 266 27 TBC BANK MANAGEMENT REPORT 2021Incorporation of ESG matters in the risk appetite; • Groups’ Policy on Climate Change; • • Excluding/limiting high-carbon activities (Please see our Exclusion List, available at www.tbcbankgroup.com); and • ESG resource center for employees, customers and wider public in order to increase awareness and knowledge about the risks and opportunities of climate change. Work is continuing to further embed climate-related risks and opportunities within our business. An ESG Compe- tence Center will be established to help the Bank deliver its strategic objectives and bring all of its climate-related work together. 2.1. Climate-related risks An overall climate risk profile was assessed based on the first climate risk assessment (please see more about the climate risk assessment in the chapter risk management below). The table below shows a summary of potential tran- sitional and physical risks identified by the Group for the Georgian environment. The time horizons considered in the assessment are short – up to 3 years, medium – up to 8 years and long – above 8 years. with the levels of a possible impact – low, medium or high. While assessing the impact of climate change risks on a sector, a category – low, me- dium and high - was assigned compared to other sectors, as well as in comparison with other risk categories. Thus, the assessment results are not comparable with the same impact categories in other countries or regions. Transition risks Physical risks Risk sources Policy and Legal Technology Market Reputation Acute Chronic • Substitution of existing products and services with lower emissions options, including requirements to replace manufacturing technology to cleaner alternatives • Unsuccessful investment in new technologies • Changing customer behavior including deliberate move to lower carbon footprint products • Uncertainty in market signals • Increased cost of raw materials, increased volatility and costs, sourcing restrictions for carbon heavy raw materials • Shifts in consumer preferences to green products • Stigmatization of sector, resulting in reduced revenue from negative impacts on workforce management and planning (e.g., employee attraction and retention) • Increased stakeholder concern or negative stakeholder feedback • Increased severity of extreme weather events such as floods • Changes in precipitation patterns and extreme variability in weather patterns affecting food production and living environment • Rising mean temperatures affecting working conditions, living conditions and local infrastructure • Rising sea levels affecting local ecosystems, increasing subsidence and flood risks Long Medium Long Medium Long Medium Low Low Medium Medium Types of risks • Increased GHG emissions pricing in order to incentivise movement to renewable energy sources • Enhanced regulatory environment and mandated requirements: may introduce minimum standard or expectations on green credentials of product outputs or business operations, enhanced emissions- reporting obligations • Exposure to litigation resulting in the costs related to the compensations Long Low Time horizon Level of potential impacts affecting customers and TBC 28 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUEDThe overall assessment of the impact of transitional policy measures The Georgia’s 2030 Climate Change Strategy1 and Climate Action Plan lays out different policy measures on which TBC Bank based its identification of the potential impact of the policy measures on different economic sectors, which are financed by TBC. As a summary of the potential impact of the various transition risks and physical risks identified, the transitional risks in Georgia and on the TBC Bank’s activities are low. The assessment considers, that trade and services dominate the Georgian economy, and the policy measures outlined in the Georgia’s 2030 Cli- mate Change Strategy will have overall low impact on the economic sectors, especially in short and medium term. The Georgia’s 2030 Climate Change Strategy takes into consideration that Georgia is a transitional and growing economy, and therefore the government strategy is not to impede the growth of the GDP with policy measures and rather to support a smooth transition where necessary. It is worth noting, that the economic sectors most affected by transitional risks world-wide such as mining crude petroleum, natural gas and metal ores, manufacturing coke and refined petroleum products2 are present to the extremely limited extend in Georgia, resulting in a low overall impact of transitional measures on economic growth, if any. The overall assessment of the impact of the physical risks The geographical location and natural conditions of Georgia – a small country with a mountainous landscape, a Black Sea coastal zone, and semi-arid areas in the Southeast – all contribute to the country’s vulnerability to the physical risks of climate change. The sectors that are thought to be most vulnerable to climate change in Georgia include agriculture, forestry, tourism, and healthcare3. The impact of physical risks on economic sectors, which are financed by the TBC Bank, will become material over the time. For the Group, the risks can materialise through the impairment of asset values and the deteriorating creditwor- thiness of customers, operating in Georgia. Certain geographic areas and economic sectors such as winter resorts, agricultural land are affected partially already and might deteriorate further in the medium time horizon. The overall assessment of the potential impact in Georgia and on the TBC Bank’s activities is medium in long-term perspective. It is understood that climate change risks are largely associated with longer-term impacts; however, those longer-term impacts are unclear, especially considering the shorter-term maturity structure of the Bank’s loan portfolio. 2.2. Climate-related risks and opportunities on the business and financial planning We are working to incorporate climate and broader ESG considerations in our financial planning process. In 2022, we continue the development of measurement capabilities across the Group’s opportunities and the advancement of the scenario analysis framework. Some qualitative considerations related to climate and ESG matters were incor- porated in the financial planning cycle for 2022-2023. In 2022, the Group seeks to include considerations linked to business actions identified through scenario analysis as well as progress on climate-related opportunities, including the launch of new products and initiatives. To encourage customers to invest in green products and services, the Group offers services, financing and funding solutions, as outlined in the table below: Climate-related opportunities Customer Renewable energy financing Corporate Green Loan Framework - a standardized approach to sustainable finance, including energy efficiency, renewable energy and resource efficiency financing MSME Long-term business loan for solar panels MSME Our progress TBC bank is the leading bank in the local financing of renewable energy project with GEL 554 million In 2021, TBC bank developed the Green Loan Framework with the Green for Growth Fund (GGF) Technical Assistance Facility, represented by Finance in Motion GmbH and financed by the European Union under the EU4Energy Initiative. In 2022, TBC launched a special long- term loan for solar power plants. The product considers different financial and non-financial benefits. Global Climate Fund (GCF) accreditation, enabling the Bank to have direct access to GCF funding GCF accreditation All In 2021, TBC Bank became the first commercial bank in the Caucasus region to receive accreditation by the Green Climate Fund (GCF). Energy efficiency loans Retail Financing of hybrid/electric cars, mortgages and energy efficient processing. The portfolio volume equals to GEL 15.5 million Impact Contributing to Georgia's transition to low-carbon economy Encourage customers to transition to low carbon activities Encourage customers to optimize their costs and to support the transition to low carbon activities The accreditation will enable the Bank to finance projects for adaptation to, and mitigation of, climate change and contribute to combatting climate change in Georgia Encourage customers to transition to low carbon activities 1 Georgia’s 2030 Climate Change Strategy 2 Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change | Bank of England 3 Georgia’s Third National Communication to the UNFCCC 29 TBC BANK MANAGEMENT REPORT 20212.3. Climate-related scenarios TBC Group is taking significant steps to develop sce- nario analysis capabilities to better understand and act on the implications of climate-related risks and oppor- tunities for our business and customers. The develop- ment of climate-related scenario analysis is complex, as climate data and sub-sector information availability, accessibility, and suitability for financial risk analysis, as well as climate-related risk modelling capabilities in Georgia are very limited and still evolving. This sec- tion summarises our first-time exercise to undertake climate scenario analysis for the Georgian context and the related qualitative results. The starting point for the first exercise, which was car- ried out in 2022, are two climate scenarios - the Orderly scenarios of 1.5°C (Net Zero 2050) and below 2°C, de- veloped by the Network of Central Banks and Supervi- sors for Greening the Financial System (NGFS). Orderly scenarios assume that climate policies are introduced early and become gradually more stringent. Both phys- ical and transition risks are relatively subdued1. Each of the scenarios includes a trajectory of carbon prices and emissions over time. They are drawn from a set of scenarios published by the NGFS. We used coun- try-level downscaled data for Georgia considering the NGFS 1.5°C (Net Zero 2050) and below 2°C scenarios. While analyzing this data, we identified that the sce- narios and underlying downscaled data show certain inconsistencies in relation to the local economic envi- ronment; some of the sector level downscaled results were implausible, e.g. hydro energy outputs were fall- ing very heavily. However, we stayed within the NGFS scenario framework, adjusting only a few parameters, where reasonable, and after consulting an external knowledgeable consultant. In particular, we used the GCAM (Global Change Assessment Model) model as the main source of data for the scenario analysis. We used data from the model to project how climate change will affect net revenues of the sector for the period of 2020-2050. Certain modifications were ap- plied to the model data in order to reflect the specifics of the country. Third party data was also used to better understand how carbon emissions are allocated to var- ious sectors and subsectors. The major variables used from the model were carbon emissions, carbon price, secondary and final energy prices, and demand on the secondary and final energy. These were the only vari- ables available on the sectoral level for Georgia from NGFS projections. We examined the impacts of two scenarios on a se- lected sample from our corporate customers in the carbon-intensive sectors (energy and utilities, oil and gas), as well as in metals and mining. We stressed the latest available financial statements and projection re- sults (where applicable) for the time horizon covering the remaining maturity of the respective exposure. The selected sample of corporate customers includ- ed several hydro power plants (HPPs), electricity and gas distribution companies, a thermal power plant (the only TPP in the Group’s portfolio) and a company in the metal industry. For the selection, we took companies with different sizes – small, medium and large HPPs and some leading companies in the respective sector. In summary, the results of the first stress scenario ex- ercise showed those sectors had different sensitivity levels towards transitional risks. While the transitional risks for few cases might show negative impacts in ac- cordance with two NGFS scenarios - largely due to the negative impact of the incorporated extremely high carbon taxes, it is understood that significant amend- ments to the scenario components and analysis need to be performed before the results can be considered in the risk management framework. It is important to consider that the transitional risks in Georgia are low, and policy measures, especially carbon taxes, are not among the measures foreseen by the Georgian gov- ernment. At the same time, we analyzed the existing mitigation measures for those few cases, and identi- fied a satisfactory level of the financial resilience, con- sidering the publicly available Georgia’s 2030 Climate Change Strategy and Climate Action Plan, as well. Despite these limitations, the scenario analysis allows us to test a range of possible future climate pathways and understand the nature and magnitude of the risks they present. The purpose of scenario analysis is not to forecast the future but to understand and prepare to manage risks that could arise. In 2022, we continue working on the climate scenario framework in order to include other sectors, as well as the impact of physical risks. Furthermore, in 2022, the focus will be on devel- oping of sectoral guidelines for climate related risks and opportunities, where deemed necessary. For more initiatives planned in 2022, please refer to the para- graph 3. Risk management part (p 33). In addition to exposure sensitivity analysis, the Group has already started work on an aggregated level sen- sitivity analysis. To this end, we analyzed downscaled estimates for Georgia of two NGFS Climate Scenari- os: Net Zero 2050 and below 2°C. The main initial ob- servation appears to be that Georgia is grouped with high-carbon-emission countries under GCAM, MES- SAGEix-GLOBIOM2 as well as REMIND-MAgPIE3 mod- els. This implies that the downscaled data for Geor- gia should be used with care. In fact, when looking at downscaled estimates for a number of other countries with economies of a broadly similar structure in the context of climate change, the impact appears to be significantly different. In particular, e.g. in GCAM mod- el, Georgia is grouped together with Armenia, Azerbai- jan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turk- menistan, Uzbekistan, while the deviation in the stress scenario from the baseline scenarios is similar for all 30 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUEDcountries in the group. Meanwhile, downscaled estimates for Croatia, which has rather similar characteristics of the economy to Georgia, looks completely different as compared with the group where commodity intensive econo- mies prevail. TBC group has started to conduct research to estimate more relevant downscaled scenario for Georgia. In this regard, the National Bank of Georgia plans to start working on climate scenarios based on the NGFS framework to estimate the potential aggregated impact on the financial sector in Georgia. 3. RISK MANAGEMENT The risks associated with climate change have both a physical impact arising from more frequent and severe weather changes, and a transitional impact that may entail extensive policy, legal and technological changes to reduce the ecological footprint of the households and businesses. For the Group, both of these risks can materialise through the impairment of asset values and the deteriorating creditworthiness of customers, which could result in a reduction of the Group’s profitability. The Group may also become exposed to reputational risks as a result of its lending to or other business operations with customers deemed to be contributing to climate change. In order to identify, assess and manage risks associated with climate change, before the undertaking the climate risk assessment, the Group performed a general analysis in order to understand the maturity level of the ESG framework. The general analysis process covered the assessment of the existing policies and procedures, identification of areas for further development and a gap analysis. Furthermore, the gap analysis considered various international standards and concept papers (European Central Bank, European Banking Authority, TCFD, Global Reporting Initiative and the Four accounting firms), reports about climate change in Georgia, criteria of ESG rating agencies and expectations in relevant expert papers. Based on the analysis, the main focus areas were identified and reflected in the ESG strategy, considering the business strategy of the Group. As mentioned above, climate risks can materialize, first of all, through the impairment of asset values and deteriorat- ing creditworthiness of customers. Therefore, as a first step, we looked at the material subsidiaries of the TBC Group PLC by assets, considering the materiality level of the 1% share in assets. The Group is the only subsidiary, which takes above 1 % of assets - JSC TBC Bank, which is the largest financial institution in Georgia. In order to increase the understanding of climate-related risks on its loan portfolio, the Bank performed a high-level sectoral risk assess- ment, as different sectors might be vulnerable to different climate-related risks over different time horizons. The risk assessment process and content is based on TCFD recommendations, climate-related documents published by the Bank of England, the climate change assessments of Georgia performed as part of the IPCC reports, and the targets and strategy 2030 defined by the Georgian government to achieve the National Determined Contribution of Georgia4. The risk assessment focuses on economic sectors such as: energy, oil and gas, metals and mining, tourism, agriculture, food industry, healthcare, construction and real estate. This assessment is the first exercise conducted with regards to overall climate change risks. Therefore, the assessment of levels and impacts might change in the future, based on further review of the methodology, deep dive analysis and increased understanding of the impact of climate change risks. To define the climate-related economic sectors for the sectoral analysis, a key materiality threshold has been agreed above 1% of the loan portfolio. The sectoral assessment was performed with the involvement of the business and credit risk specialists responsible for the respective economic sectors in the Bank. 1 Net Zero 2050 is an ambitious scenario that limits global warming to 1.5 °C through stringent climate policies and innovation, reaching net zero CO2 emissions around 2050. Some jurisdictions such as the US, EU and Japan reach net zero for all greenhouse gases by this point. This scenario assumes that ambitious climate policies are introduced immediately. Carbon dioxide removal (CDR) is used to accel- erate the de-carbonisation but kept to the minimum possible and broadly in line with sustainable levels of bioenergy production. Net CO2 emissions reach zero around 2050, giving at least a 50 % chance of limiting global warming to below 1.5 °C by the end of the century, with no or low overshoot (< 0.1 °C) of 1.5 °C in earlier years. Physical risks are relatively low but transition risks are high. Below 2 °C gradually increases the stringency of climate policies, giving a 67 % chance of limiting global warming to below 2 °C. This scenario assumes that climate policies are introduced immediately and become gradually more stringent though not as high as in Net-zero 2050. CDR is deployment is relatively low. Net-zero CO2 emissions are achieved after 2070. Physical and transition risks are both relatively low. 2 The MESSAGEix-GLOBIOM Integrated Assessment Model is based on the MESSAGEix framework, an open- source energy systems optimization modelling environment including macro-economic feedback using a stylized computable general equilibrium model. 3 REMIND (REgional Model of Investment and Development) is a numerical model that represents the future evolution of the world economies with a special focus on the development of the energy sector and the implications for our world climate. REMIND is used in connection with other models to provide a detailed answer. One such model is MAgPIE (Model of Agricultural Production and its Impacts on the Environment). 4 A nationally determined contribution (NDC) is a national plan highlighting climate change mitigation, including climate-related targets for greenhouse gas emission reductions, policies and measures governments aim to implement in response to climate change and as a contribution to achieve the global targets set out in the Paris Agreement. 31 TBC BANK MANAGEMENT REPORT 2021GROSS LOANS BY SECTORS 0.3% 0.2% 4.4% 0.5% 0.7% 0.9% 0.7% 1.2% 1.3% 1.8% 2.0% 2.4% 37.7% 4.9% 5.1% 5.9% 6.1% 6.5% 9.4% 8.0% GEL 16.9 BLN TOTAL LOANS FOR STANDALONE BANK Individual Real Estate Automotive Transportation Hospitality & Leisure Oil & Gas Energy & Utilities Pawn Shops Construction Food Industry Trade Agriculture Healthcare Services Financial Services Manufacturing Media & Publishing Metal & Mining Communication Other The sectoral distribution of the loan portfolio for standalone Bank as of the year end 2021 is given in the table above.. The maturity of assets are essential for defining the different time horizons for the analysis and for assessing the ma- teriality of climate-related risks for different sectors. The maturity structure of the loan portfolio shows that the major- ity of assets is distributed in much shorter time horizons than the timeframe in which the impacts of climate change, especially of physical risks, may arise in Georgia. Since 2012, TBC Bank has had a process to consider environmental and social risk, which was established in line with industry guidelines that aim to mitigate the effects of climate change. TBC Bank has developed E&S risk manage- ment procedures to identify, assess, manage and monitor environmental and social risks which are fully compliant with Georgian environmental legislation, follow international best practices and incorporate appropriate consider- ation of IFC Performance Standards, EBRD Performance Requirements (PRs) and ADB’s Safeguard Requirements (SRs). These procedures are fully integrated into the credit risk management process and are routinely applied to SMEs and corporate customers. In collaboration with partner IFIs, a clear Environmental and Social (E&S) risk catego- rization matrix was developed. Projects that are to be financed are classified according to E&S categories (low, me- dium, high and A category) based on analysis; where necessary, deep dive analysis and due diligence are performed. When categorizing the transaction according to E&S risk category, priority is given to the higher risk. Additionally, external specialized companies are involved in the detailed assessment of E&S risks for A category projects, such as hydroelectric plants. The Environmental Management Policy and Procedure provides TBC with a good description of assessing environmental risks related to clients. More information about the environmental management system can be found on pages 67-71. It is worth noting that processes related to climate risks will continue to evolve as TBC embeds its approaches further. This process will be supported with the climate-related training to strengthen the Bank’s capacity, knowledge and capabilities for managing climate-related risks across the business. In order to further facilitate the integration of these risk identification processes into the Group’s overall risk manage- ment, in 2022, the Group will undertake deep dive analyses to understand the extent to which climate-related risks are to be categorized as principal risks. The Group will develop a Policy on Climate Change, a risk appetite statement and risk appetite measures. The high-level sectoral assessment carried out during 2021 has provided insights into the po- tential impacts on specific sectors. In 2022, the focus will be on developing of sectoral guidelines for climate related risks and opportunities, where deemed necessary. Key initiatives will include further enhancement of the climate risk management framework and the development of ESG profiles for corporate clients covering ESG factors, including relevant climate-related risks and opportunities. Climate risk might impact other, more traditional risk categories for banking such as: market risk, operational risk, liquidity risk and reputational risk. A summary of the assessment is given in the table below. Certain risk factors, which were identified for operational and reputational risks, are already covered under the existing risk management frame- work. 32 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUEDBanking risk types Impact from Physical Risk Impact from Transition Risk Market risk Liquidity risk No material impact expected No material impact expected No material impact expected No material impact expected Operational risk Extreme events that would cause damages to Group's own sites could affect the ability to provide services to its clients (e.g., lack of electricity supply, inability for employees to work in premises). No material impact expected Reputational risk No material impact expected Financing to high-emitting borrowers could affect brand image, as perceived by stakeholders 4. METRICS AND TARGETS The metrics related to the Group’s own operations are given in the environmental management system section on page 68 and include Scope 1, Scope 2 and Scope 3 GHG emissions. In 2022, key initiatives will include further implementation of the TCFD recommendations, the development of the cli- mate-related scenario analysis framework, the development of ESG profiles for corporate clients covering climate-re- lated risks and opportunities and increasing our expertise in climate-related matters. These initiatives will also con- sider sectoral guidelines for climate related risks and opportunities, where necessary and feasible. The climate action initiatives are part of the overall ESG strategy, which was approved by the Supervisory Board in November 2021. The ESG strategy sets aspirational targets, such as Net-Zero GHG emissions1 related to the direct environmental impact by 2025 and an increase in the sustainable loan portfolio, which consists of renewable energy loans, energy efficiency loans, and financing with social components, etc. As of Q4 2020, the total sustainable port- folio stays at GEL 676.3 million. Please see more details about the sustainable portfolio on page 70. The strategy and targets will be reviewed annually. Starting from 2022, the ESG-related KPIs are included in the long-term incentive plans for executive remuneration. The following table sets out some key metrics and targets of our ESG strategy. The GHG emissions targets for 2023 will be defined during the annual review of the ESG strategy, as well as the targets of sustainable portfolio for the following years. Metrics / Targets Total emissions (own operations) Water consumption per employee (m3/pp) Sustainable portfolio Management KPI 2022 2023 Annual increase below 3% Annual increase below 1.5% 2025 Net-zero GHG emissions (direct) GEL 750 million – the target volume of the sustainable loan portfolio Long-term incentive plan (LTIP) for management linked to the total portfolio of sustainable assets GEL 1 billion – the target volume of the sustainable loan portfolio Long-term incentive plan (LTIP) for management linked to the total portfolio of sustainable assets The ESG strategy of the Group is evolving, therefore, the Group continues to develop additional targets and metrics to measure all identified risks and opportunities of the Group. The current targets and metrics are disclosed above. 1 The Net-Zero GHG commitment refers to the direct impact of Scope 1, Scope 2 and Scope 3, which are defined on the page 68. 33 TBC BANK MANAGEMENT REPORT 2021 TBC Bank has been awarded a special prize for its outstanding efforts to champion Sustainable Development Goals in the country at Corporate Responsibility Award Ceremony 2021 organized by Global Compact Network Georgia. 34 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY AND CLIMATE-RELATED FINANCIAL DISCLOSURES CONTINUED35 TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW RETAIL BANKING Retail Banking 147 # OF BRANCHES 4,205 # OF SELF-SERVICE TERMINALS 1,570 # OF ATMs1 25,990 # OF ACTIVE MERCHANT TERMINALS2 744,000 ACTIVE DIGITAL USERS 44% DAU/MAU 4.9 MOBILE BANKING APP RATING ON BOTH GOOGLE PLAY STORE AND APPLE APP STORE 36 Our goal is to be the first choice for individuals living in Georgia and Georgian citizens working aboard, by providing simple, convenient and relevant financial services by leveraging our advanced digital capabilities. Tornike Gogichaishvili In 2021, we focused our efforts on further refining our customer journey in digital channels by introducing new products and services, increasing the accessibil- ity of our payments options, as well as upgrading our branches to create a more friendly environment for our clients. In addition, we continued to leverage our data analytical capabilities to generate more tailored offer- ings and increase our profitability. We also expanded our offerings to the young generation and started to target the Georgian diaspora. In 2021, our gross retail loan book amounted to GEL 6,266 million, up by 11.5% year-on-year on a constant currency basis, driven by an increase in mortgage and consumer loans, which grew by 12.5% and 9.4% without the FX effect, respectively. Over the same period, our deposit portfolio increased by 19.0% year-on-year on a constant currency basis, reaching GEL 5,630 million. The net profit for the retail segment amounted to GEL 286.3 million. More information about the financial per- formance of the retail segment is provided in the finan- cial review section on pages 72 to 78. OVERVIEW TBC Bank has established itself as a leading retail bank in Georgia over the past decade, serving around 1.5 mil-lion active clients. We have a strong presence across different customer segments, including mass retail and affluent customers, thanks to our customer centric approach and best-in-class omni-channel distribution platform. The latter is comprised of leading digital channels, modern branches, best-in-class call centers, as well as the wide-network of ATMs and self-service terminals, which serve as a strong substitute for bank branches. MULTI-CHANNEL DISTRIBUTION NETWORKOUR DIGITAL PLATFORMS TBC BANK MANAGEMENT REPORT 202138.6% 37.0% 97% 56% 40.3% 37.8% 1.5 mln OUR MAIN STRATEGIC PRIORITIES Continue enhancing our advanced omni-channel platforms During 2021, customer engagement in remote channels remained high, with 97% of transactions conducted via re- mote channels by retail customers, including 59% coming from our internet and mobile banking applications. RETAIL OFFLOADING RATIO IN 2021 3% -1pp YoY 15% -3pp YoY 23% -7pp YoY 59% +11pp YoY Internet & mobile bank Self-service terminals ATMs Branches Including partner banks 1 2 Active merchant terminals include POS terminals and ecommerce with at least one transaction conducted during the month. 3 Based on data published by the National Bank of Georgia as of 31 December 2021; in this context retail refers to individual customers. 4 Based on survey conducted by the independent research company IPM in December 2021. 37 2021 HIGHLIGHTSRETAIL LOAN MARKET SHARE3RETAIL DEPOSITS MARKET SHARE3RETAIL SHARE IN TOTAL LOAN BOOKRETAIL SHARE IN TOTAL DEPOSIT PORTFOLIORETAIL OFFLOADING RATIONUMBER OF ACTIVE CUSTOMERSNET PROMOTER SCORE (NPS)4TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW RETAIL BANKING CONTINUED In order to increase the sale of consumer loans via digital sales, in August 2021 we launched an end-to- end lending process in our mobile banking. We also continued to polish our online lending platforms TBC credit (www.tbccredit.ge) and TBC installment plat- form (www.tbcganvadeba.ge). As a result, the share of consumer loans sold via remote channels grew from 38% in 4Q 2020 to 45% in 4Q 2021. Over the same period, the share of time and savings deposits being opened remotely stood at high 73%. CONSUMER LOANS OFFLOADING IN DIGITAL CHANNELS 45% 38% 4Q 2020 4Q 2021 DEPOSITS OFFLOADING IN DIGITAL CHANNELS 72% 73% 4Q 2020 4Q 2021 In addition, we introduced open banking, which en- ables our customers to add other Georgian bank ac- counts to our mobile banking applications and man- age their banking operations centrally. Furthermore, we enriched our digital banking with more handy features, including an IBAN scanner, which simplifies money transfers, as well as a transaction filter, which helps customers to quickly sort transactions by different pa- rameters. In recognition of our efforts, we won “Best Integrated Consumer Bank Site in Central and Eastern Europe 2021” award from Global Finance magazine. While we are driving our transactions and sales to- wards digital channels, the branches play an important role in nourishing customer relationships and commu- nicating our vision: “to make life easier”. Therefore, this year we launched a branch redesign project with the aim of simplifying the customer journey in branches. According to the new concept, the branch is divided 38 into several core zones and is tailored to the needs of different customer segments. By the end of the year, we redesigned 13 branches in the capital city and 5 branches in the regions. Making payments simpler than ever After entering Tbilisi’s transport payments network in 2020, in 2021 we expanded our presence in three other large cities of Georgia – Kutaisi, Gori and Poti. In these cities, customers can now pay using any of our debit or credit cards, or by dedicated transport cards issued by TBC. Transport cards are very easy to obtain and use. They are nameless cards, which are not tied to any bank account and have no expiration date. The trans- port card can be purchased in our branches, as well as several store chains. At the end of 2021, the number of our active transport cards amounted to 47,100. Another initiative on the payments side was the intro- duction of a simplified dispute process for unautho- rized card transactions, which allows us to decrease the review period from 35 to 3 days. Furthermore, we increased the number of cases for which custom- ers could get reimbursement in case of unauthorized card usage. These services are available for all insured cards, TBC Concept and wealth management cus- tomers, and they are also included in certain subscrip- tion options for our mass retail clients. Getting closer to our customers In order to better meet the needs of our customers and allow more flexibility, in the end of 2020 we introduced a subscriptions model for our mass retail. With the help of our advanced analytical capabilities, we have devel- oped carefully selected packages for our customers and are constantly updating them based on customer feedback. We are also actively using various commu- nication channels to explain the benefits of this sub- scription model to our customers and encourage them to subscribe. As a result, our subscription model has attracted 192,000 users by the end of the year, which represents around 13% of total active retail custom- ers. Going forward, our goal is to shift customers from a classic banking service model to the subscription model, which will help us to provide more tailored of- ferings to our customers, increase their loyalty, reduce the churn rate, and generate more stable and long- term fee and commission income for the bank. TBC BANK MANAGEMENT REPORT 2021New Branch Design 39 TBC BANK MANAGEMENT REPORT 2021• Customer lifetime value – this project is another very important step towards customer centricity, as it envisages assessment of such metrics as: cus- tomer engagement scores, customer churn, and estimating customer lifetime value. Launched and scaled projects: • Subscriptions model for mass retail customers – as described in our sub-section “getting closer to our customers” above. • TBC Concept service model for affluent custom- ers – as described in our TBC concept sub-section below. • Next best product in retail – this project aims to increase conversions by developing tailored offers based on a state-of-art system algorithm, which is available in all our sales channels. The project proved to be very successful in increasing custom- er satisfaction levels and increasing the conversion rate. • Deposit pricing and profitability improvement – this project envisages effective management of our retail deposits via tailored offerings to clients. When opening a term deposit, every single cus- tomer receives an alternative offer, which is the best possible proposition for him/her under the given conditions. In 2021, 32% of all newly opened or renewed term deposits were placed with alter- native terms. Further develop our affluent sub-segment, TBC Con- cept In 2020, TBC’s affluent banking moved from stan- dard banking to an innovative, subscription banking business model, which offers our customers various subscription packages better tailored to their specific needs. Our “fully digital package” became especial- ly relevant during the pandemic, as it allows our cus- tomers to manage their daily banking operations and receive financial advice online, while having access to all private banking customer benefits. In 2021, we also BUSINESS REVIEW RETAIL BANKING CONTINUED Another important initiative during the year was the launch of TBC Z, a new sub-brand of TBC targeting the young generation, in October 2021. Under TBC Z, we offer a set of banking products and services tailored to customers between ages of 6-17 (pupils) and 18-23 (students) via our web platform www.tbcz.ge. Parents of pupils can track their children's accounts via inter- net and mobile banking, set maximum daily limits for their spending and withdrawals, and receive SMS no- tifications about transactions made by their child. The platform also offers various discounts and activities to cardholders tailored to their interests regarding edu- cation, entertainment, hobbies, transportation and so on. In the last three months of 2021, our youth segment reached 165,000 active customers. Furthermore, this year we took up a new challenge – to become the number one choice for Georgian citizens working abroad – by providing simple, convenient and relevant financial services. For this purpose, we set up a dedicated team and started to explore the needs of the diaspora in order to create tailored products and ser- vices, as well as enhance the existing digital platforms to launch dedicated services for them. Today, there are around 1.3 million emigrants living abroad, which trans- lates into 350 thousand potential clients, further sup- porting our growth, according to our estimates. We also continued to run our wide-scale loyalty pro- gramme, Ertguli, which is part of our retail custom- er-centric approach and allows our customers to gath- er loyalty points by paying with TBC cards at more than 300 partner companies as well as access special offers and discounts. Customers gain more points by paying with credit cards compared to debit cards. This pro- gramme both helps us to build customer loyalty and facilitates payment business and card usage. Continue to leverage our advanced data analytical capabilities Within the scope of our three-year data analytical road- map, which was developed in 2018 with the support of a leading global consultancy firm, we have launched and scaled up the following projects in the retail seg- ment, generating an extra GEL 20 million in 2021. Ongoing projects • Consumer and mortgage loan price optimiza- tion and process automation – this is an on-going project, which is continuously fine-tuned. Based on detailed analysis of clients’ spending behavior, risk profile and other characteristics, we determine the price sensitivity for each customer and devel- op tailored offerings for each individual client. The customer level price calculation process is fully automated and integrated into the loan origination system. 40 TBC BANK MANAGEMENT REPORT 2021Further develop our affluent sub-segment, TBC Concept In 2020, TBC’s affluent banking moved from standard banking to an innovative, subscription banking business mod- el, which offers our customers various subscription packages better tailored to their specific needs. Our “fully digital package” became especially relevant during the pandemic, as it allows our customers to manage their daily banking operations and receive financial advice online, while having access to all private banking customer benefits. In 2021, we also launched a new package, which is designed for individuals who need a wider range of financial tools and are interested in brokerage services to better manage their funds. In addition, within this package, we offered our clients two new premium cards: Visa Signature and Mastercard World Elite, which offer its holders a wide range of services, privileges, discounts and VIP services all over the world. We also continued to successfully operate our TBC Concept Flagship space, which was opened in 2020 and allows us to seamlessly merge banking with lifestyle. As a conceptual space, it was strategically developed to have 80% lifestyle and 20% banking areas. The areas of the Flagship space include self-service and personal banking zones, exhibitions, library and co-working spaces as well as a cafe. As a result, the Flagship space became a favorite spot for banking, recreational activities and co-working for many of our Concept clients. During 2021, TBC Concept has maintained its strong positioning in lifestyle offerings for its clients. With an increased data-centered approach, TBC Concept has offered its clients over 300 special offers and promotions throughout the year revolving around travel (discovering Georgia during the pandemic), shopping (mainly online), recreational ac- tivities, online platforms and much more. Furthermore, we continue to offer our Concept clients concierge services, which cover trip planning, studying abroad, restaurant reservation, flower delivery, dry cleaning, laundry, car service and much more. We are also proud that our affluent banking services, together with the wealth management service offered by our CIB segment, won several prestigious awards: THE BEST PRIVATE BANK IN GEORGIA 2021 from PWM and the Banker magazine THE BEST PRIVATE BANK IN GEORGIA 2022 from Global Finance magazine TBC CONCEPT Loan Portfolio (GEL million) +7.9% 4,061 3,763 Deposit Portfolio (GEL million) +11.5% 3,125 2,804 # of Customers +7.0% 103,162 96,385 2020 2021 2020 2021 2020 2021 OUTLOOK Going forward, in line with our aspiration to make life easier for our customers, we will continue to accelerate sales growth in digital channels. Furthermore, our focus is to further strengthen our position in the Georgian regions and increase the number of active clients, as well as increase the non-mortgage share of our total loan portfolio. 41 TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW MSME BANKING MSME Banking Our goal is to be a reliable partner and supporter of Georgian businesses from startups to well established enterprises, by providing a full range of convenient products and solutions at every stage of their development. We are also dedicated to developing a strong local business community by fostering various initiatives and programmes. Tornike Gogichaishvili DIVERSIFIED MSME PORTFOLIO WITH A STRONG PRESENCE IN THE AGRICULTURE, TRADE AND HOSPITALITY & LEISURE SECTORS 15.0% 15.3% Agriculture Trade Hospitality & Leisure Construction Food Industry Real Estate Services Transportation Healthcare Pawn Shops Automotive Manufacturing Oil & Gas Other 1.2% 1.6% 2.6% 2.6% 3.2% 3.3% 5.1% 5.2% 13.2% 12.8% 8.1% 10.8% 42 OVERVIEW Over the years, TBC Bank has established itself as a leading partner for micro, small and medium enterprises (MSMEs) by supporting their growth and development. As a result of our continuous efforts, 63%1 of all newly-registered businesses in Georgia choose TBC.We continue to provide all-round support to business-es by offering them all the necessary tools and services in an environment still widely shaped by the COVID-19 pandemic. Our strategic priorities are expanding to digital and payment solutions, growing our share in the micro sub-segment, and enhancing our renowned business support programme. Our efforts, combined with the revival of business ac-tivities, led to an increase in the MSME loan book of 23.3% to GEL 4,141 million during 2021, on a constant currency basis. Over the same period, the deposit portfolio increased by 19.1% and reached GEL 1,564 million, without the FX effect. In 2021, our net profit in the MSME segment mounted to GEL 165.5 million. More information about the financial performance of the MSME segment is provided in the financial review section on pages 72-78.TBC BANK MANAGEMENT REPORT 202181,000 24.4% 98% 63% 10.5% OUR MAIN STRATEGIC PRIORITIES Growing our presence in the micro sub-segment, while maintaining leadership in the SME sub-segment As we strive to support MSME businesses of all sizes, this year we focused on increasing our presence among the smallest MSME clients, the micro sub-segment3. In order to increase our presence in this sub-segment, we undertook several initiatives: • We continued the automatization of the loan approval process in the micro sub-segment, the implementation of which was hindered last year due to the pandemic. In 2021, we successfully launched fully automatic loan approv- als so that loans up to GEL 100,000 could be approved automatically using pre-determined rules and a scoring model, thus significantly decreasing the time-to-yes period. • We also changed the staff motivation system of our front-office employees with a higher focus on rewarding loan issuances with smaller ticket sizes. As a result, our micro sub-segment loan portfolio grew by 26.9% in 2021. On the SME side, in order to further streamline our processes, we implemented a financial statement automatization tool, which automatically generates a business entity’s financial statements based on inputted data. This tool signifi- cantly speeds up the loan approval process, as well as eliminates the possibility of human error. As a result, the time- to-yes decreased by around two days for these loans. 1 Out of which 40,000 are legal entities and 41,000 are individuals with business loans 2 Data is for January-September 2021, source: www.napr.gov.ge, the National Agency of Public Registry 3 Includes business loans up to GEL 1 million 43 2021 HIGHLIGHTSNUMBER OF ACTIVE CUSTOMERS1OF NEWLY REGISTERED LEGAL ENTITIES CHOSE TBC BANK2MSME SHARE IN TOTAL LOAN BOOKMSME SHARE IN TOTAL DEPOSIT PORTFOLIOOF OUR ACTIVE CUSTOMERS USE BUSINESS INTERNET OR MOBILE BANKINGTBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW MSME BANKING CONTINUED We are pleased that our consistent efforts towards innovation and digitalization have been recognized internationally with multiple awards from Global Finance: Best Corporate/Institutional Online Portal 2021 in the world; Best Corporate/Institutional Online Portal 2021 in Central and Eastern Europe; Best Integrated Corporate/ Institutional Banking Site 2021 in Central and Eastern Europe ; Best Corporate/Institutional Mobile Banking App 2021 in Central and Eastern Europe ; Most Innovative Corporate/ Institutional Digital Bank 2021 in Central and Eastern Europe. Increasing digitalization In 2021, our digital services remained in high demand, as the trends set by the pandemic largely continued into this year. Around 98% of our active legal custom- ers use business Internet or mobile banking, with DAU/ MAU ratio standing at 26% by the end of 2021. This year, the most notable innovation among our dig- ital offerings was the introduction of open banking in our mobile banking application. Open banking brings together all the accounts of a client at various Georgian banks and allows them to check their accounts in one place. This functionality was particularly useful for our business clients, as around half of them have accounts in more than one bank. Previously, in order to check their balances and transactions, clients had to log into separate banking apps and switch between them. We have also been actively upgrading our business app, which was launched in 2020 to make it more con- venient for our MSME clients. A number of new fea- tures have been added to the app in order to better accommodate our customers’ needs, such as imple- menting a new module for utility payments and auto- matic payments as well as allowing transfers using any foreign currency. Fine-tuning our payments solutions In 2021, we continued to introduce innovative and con- venient payment solutions for our customers: • In e-commerce, we launched an alternative pay- ments method for small businesses, which allows merchants to process e-commerce payments in a simpler and cheaper way than using a tradition- al e-commerce checkout. After receiving an order from a client, merchants are able to generate a pay- ment link through a dedicated platform and send the link to the customer. Upon clicking the link, the client then chooses a suitable payment option: any bank’s mobile or internet banking, QR payment through TBC’s mobile bank, Apple Pay, or payment with our loyalty programme Ertguli points. • Furthermore, in order to facilitate online payments, we launched a new platform, Payments Space (available on www.tbcpayments.ge) for our mer- chants, which allows them to easily control their daily transactions, receive analytical reports and manage their payments products. The platform is free of charge. • On the POS side, we introduced Android POS solu- tion, which is a smarter alternative to the traditional POS, aimed primarily at small & medium business- es. Thanks to its operational system (Android), it is more flexible, allowing to add non-payment func- tionality to POS terminals and offering better cus- tomer experience for merchants and customers. As of 31 December 2021, we already had 100 active Android POS terminals. Enhancing our business support programme We are committed to facilitating the success of our business clients by providing them with a full-scale business support programme, enriched with ex- tensive educational resources and technological tools, which are accessible from a single platform www.tbcbusiness.ge. We have the largest business education programme in Georgia, which has attracted over 30,000 attendees through around 1,000 lectures over the past eight years. The programme has been developed in partnership 44 TBC BANK MANAGEMENT REPORT 2021with the Asian Development Bank and provides free access to live lectures on various relevant topics, such as technology, digital marketing, human resources etc. In order to help businesses find and utilize the most suitable tools and software, we created an online plat- form www.businesstools.ge. This platform connects developers with users and offers a convenient way to find, compare and review various programmes created for accounting, IT management, project management and other fields. We continue to offer our business customers Business Club, a unique subscription model that combines a bundle of financial products and services with exten- sive non-financial offerings, such as exclusive face-to- face and group meetings, seminars and workshops with market-leading specialists in various areas, as well as special offers from our partners. Around 30% of our MSME legal clients are Business Club members. In order to reward innovation and creativity, as well as encourage entrepreneurs, we have established several renowned annual events: • The Annual Business Award Ceremony, estab- lished back in 2015, aims to identify outstanding businesses in Georgia, help them develop, gain publicity and recognition and inspire other en- trepreneurs. This year, the event was organized in partnership with EFSE and Forbes Georgia and attached 41.3 million views in media, while top of mind awareness reached 70%1. Over the years, the ceremony has attracted more than 3,000 business- es from various fields. • The Annual Apps Challenge, which was first es- tablished in 2020. This year, 40 teams entered the competition with unique and innovative app ideas, for the chance to become one of three winners and receive funding to bring their ideas to life. Additional support for startups and rural enterprises Since 2017, we have run Startuperi, a start-up orient- ed project offering full-scale support to companies in an early stage of development. The programme aims to foster entrepreneurship by providing easily acces- sible funding, media & PR support, free educational programmes and conferences, as well as partnerships with large companies in Georgia. The outstanding portfolio of the programme is comprised of 493 active loans, in the total amount of GEL 196.9 million as of 31 December 2021. In order to foster business development in rural areas and help to create new job opportunities, we are ac- tively supporting local businesses by providing afford- able finance. We partnered with three government pro- grammes, “Produce in Georgia”, “Host in Georgia” and “Preferential Agro Credit”, to support agricultural and hospitality businesses. The programmes offer lowered interest rates through governmental subsidies. In 2021, we disbursed 2,096 loans in the amount of GEL 530.0 million within these programmes. OUTLOOK Going forward, we will stay focused on providing our clients with a superior customer experience, simplify- ing and digitalizing our products, increasing our pres- ence in the small micro sub-segment in the regions, further developing our subscription model, as well as remaining the best business supporter in the country. 1 Based on survey conducted by an independent research company, ACT 45 TBC BANK MANAGEMENT REPORT 202146 TBC BANK MANAGEMENT REPORT 202147 TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW CORPORATE & INVESTMENT BANKING Corporate & Investment Banking Real Estate Energy & Utilities Hospitality & Leisure Food Industry Construction Trade Healthcare Automotive Agriculture Individual Oil & Gas Services Financial Services Transportation Other 48 Our goal is to be the number one trusted strategic partner for large enterprises and high net worth clients by helping them to grow and prosper. We distinguish ourselves by sector specific, tailor-made solutions as well as strong industry and product expertise, which are the key value drivers for our clients. George Tkhelidze A WELL-DIVERSIFIED LOAN PORTFOLIO WITH A STRONG PRESENCE IN ALL MAJOR SECTORS OF GEORGIAN ECONOMY 5.5% 1.3% 1.4% 2.1% 2.4% 3.0% 3.1% 3.1% 4.2% 4.8% 9.1% 21.0% 16.4% 10.1% 12.5% OVERVIEW Over the past decades, TBC Bank’s CIB business has been a leading provider of corporate and investment banking solutions in Georgia, helping businesses to optimize their funding structure and effectively man-age their risks. We hold the number one market posi-tion across all major products including loans, depos-its and trade finance products. We offer a full suite of lending and transactional products, advisory services in managing and structuring complex transactions, leading trade finance capabilities, strong sector exper-tise across all major industries of the economy, as well as additional financial resources via partnerships with International Financial Institutions and government programmes. Since January 2021, we have integrat-ed our wealth management (WM) business into our CIB business in order to better serve our clients with a combined offering, as the majority of our high net worth individuals are shareholders and C-level execu-tives in our CIB clients. During 2021, we continued to expand our business and attract new large and medium corporate borrow-ers operating in different industries. As a result, our gross loan book amounted to GEL 6,548 million, up by 19.5% year-on-year on a constant currency basis, while the deposit portfolio stood at GEL 7,379 million, up by 33.1% year-on-year without the FX effect. Over the same period, the corporate guarantees and letters of credit portfolio amounted to GEL 1,939 million, broadly stable at constant currency basis. In terms of profitabil-ity, our net profit in the CIB segment amounted to GEL 380.7 million. More information about the financial performance of the CIB segment is provided in the financial review section on pages 72-78.TBC BANK MANAGEMENT REPORT 202139.1% 38.6% 48.0% 40.5% 49.6% 7,000 1 Based on data published by the National Bank of Georgia as of 31 December 2021; in this context, corporate refers to legal entities. 2 Out of which 4,340 are corporate clients and 2,660 Wealth Management clients. 49 2021 HIGHLIGHTSCIB LOAN MARKET SHARE1CIB DEPOSITS MARKET SHARE1CIB LOAN SHARE IN TOTAL PORTFOLIOCIB DEPOSIT SHARE IN TOTAL PORTFOLIOCIB GUARANTEE AND LETTER OF CREDITS MARKET SHARE1NUMBER OF CUSTOMERS2OUR MAIN STRATEGIC PRIORITIES IN 2021 Corporate bankingImproved client coverage modelIn 2021, we revised our business model to ensure more focused coverage of our corporate clients and created three separate, dedicated divisions: strategic clients (top 50 groups of related companies), large and medium sized corpo-rates (industry teams) and vulnerable clients. The new structure enabled us to better tailor our offerings to the needs of different customer groups and proactively manage our credit risk. As a result, the share of large and medium sized customers in our CIB portfolio increased by 5.7 pp to 38.1%, while our NPL ratio in CIB improved by 1.0pp and amount-ed to 1.4% by the end of 2021. Increased focus on transaction bankingWe also set up a new dedicated team to manage non-lending business covering FX transactions, deposits, cash management solutions and other non-lending products, with specific product expertise and sales capabilities, in order to better serve our CIB customers and diversify our non-interest income streams. One of the initiatives rolled out by this team includes the introduction of new bulk cash deposit machines to our branches, which provide a fast and secure way of depositing large amount of cash to bank accounts. By the end of 2021, we have already installed 38 new machines in our branches and clients’ premises. Going forward, we are planning to add 12 more machines and expect to collect at least GEL 500 million in incremental cash from corporate clients per year. In 2021, the volume of FX transactions from corporate clients amounted to GEL 14,266 million, up by 52% year-on-year, while cash management volumes from corporate clients increased by GEL 934 million or 23.5% year-on-year and amounted to GEL 4,906 million.Commercial Excellence Transformation Programme We achieved good progress in our commercial excellence transformation project, which was launched last year. In 2021, the project resulted in an additional c. GEL 10 million net banking income and reduced time spent on back office tasks by 15%. Within the scope of this project, an advanced IT tool was developed that provides a 360 degree view on each client, based on industry benchmarks, publicly available and internal data. It also calculates customer profitability and con-ducts simulation analysis. As a result, our bankers are able to better understand and capture the potential of existing and target clients and use this information in account planning, customer profitability management, decision-mak-ing, and negotiations with clients. TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW CORPORATE & INVESTMENT BANKING CONTINUED Investment Banking – TBC Capital TBC Capital is a wholly-owned investment banking subsidiary of TBC Bank and a licensed brokerage firm. TBC Capital was established in 1999 and has been a leader in investment, brokerage and corporate finance solutions. As a member of TBC Group, the company is uniquely positioned to help clients of all backgrounds meet their financial objectives from structuring to executing deals or advising on complex corporate transactions. TBC Capital is also a shareholder in the Georgian Stock Exchange and contributes to the development of its infrastructure and the integra- tion of the domestic capital market into international markets. Staying active on bond markets In 2021, TBC Capital maintained its leadership position in terms of total bonds issued on the Georgian market. As the economy rebounded from the pandemic, we conducted several milestone transactions including acting as a Joint Lead Manager, together with a number of leading international investment banks, on two Eurobond placements: US$ 500 million by Georgian Railway and US$ 75 million Additional Tier-1 Capital Bonds by TBC Bank and as a Co-Man- ager on US$ 500 million Eurobond issued by Government of Georgia. On the local market, TBC Capital acted as Sole Arranger for GEL 35 million bond placement by Nikora Trade and as a Joint Lead Manager on US$ 12 million placement by Lisi Lake Development. TBC Capital was also active in private bond placements and acted as Sole Arranger on US$ 31 million private bond placement for TBC PLC as well as three private bond placements for EBRD and FMO. As a result, the public and private corporate, as well as government bonds issued by TBC Capital during the year accounted for 52%1 of total bonds issued. In addition, this year, TBC Capital introduced a new real estate advisory service and already closed two deals with the total value of c. US$ 26.4 million. LISI EBRD NIKORA JSC TBC BANK TBC BANK GROUP PLC US$ 12,000,000 3 YEAR PUBLIC PLACEMENT 6.50 % GEL 87,000,000 3 YEAR PRIVATE PLACEMENT 3M TIBR GEL 35,000,000 3 YEAR PUBLIC PLACEMENT 3M TIBR + 3.50 % US$ 75,000,000 ADDITIONAL TIER ONE PERPETUAL BONDS US$ 31,000,000 3 YEAR PRIVATE PLACEMENT DECEMBER 2021 PLACEMENT AGENT NOVEMBER 2021 LEAD MANAGER NOVEMBER 2021 PLACEMENT AGENT OCTOBER 2021 JOINT LEAD MANAGER AUGUST 2021 PLACEMENT AGENT GEORGIAN RAILWAY LISI FMO GEORGIA US$ 500,000,000 7 YEAR PUBLIC PLACEMENT 4.00 % GREEN NOTES GEL 157,500,000 1.5 YEAR PRIVATE PLACEMENT 3M TIBR GEL 34,000,000 5 YEAR PRIVATE PLACEMENT NBG 3M CD US$ 500,000,000 5 YEAR PUBLIC PLACEMENT 2.75 % JUNE 2021 JOINT LEAD MANAGER JUNE 2021 LEAD MANAGER MAY 2021 LEAD MANAGER APRIL 2021 CO-MANAGER Enhancing our research services TBC Capital’s research division provides access to comprehensive data and analytical insights for large corporate borrowers and investors. Its coverage comprises regular macro, sectoral, equity market, and fixed income updates as well as in-depth analytical reports on significant developments and events. This year, the research division con- tinued to provide corporate borrowers and investors with regular updates on the recovery of the Georgian economy through its regular, weekly, monthly and quarterly publications and online events. In addition, it successfully launched 50 TBC BANK MANAGEMENT REPORT 2021 AWARDS • Best Treasury and Cash Management Bank in Georgia 2022 • Best Trade Finance Provider in Georgia 2022 • Best Foreign Exchange Provider in Georgia 2022 • Best Private Bank in Georgia 2022 • Best Investment Bank in Georgia 2021 Global Finance • Best Private Bank in Georgia 2021 PWM and the Banker magazines coverage of equity markets and provided the audi- ence with weekly updates on developments in glob- al equity markets. Furthermore, our research division closely monitored the recovery of the tourism and real estate sectors through its monthly sector watch se- ries. Overall, in 2021 TBC Capital published more than 200 publications. The full list of reports is available at www.tbccapital.ge. The coverage of our reports continues to increase both locally and among international investors and analysts. Our macro updates are also broadcast on a regular ba- sis via local business media online channel. Moreover, in 2021 TBC Capital started to produce regular vid- eo updates on some of the most important research findings and economic developments to diversify its format of content. In addition, throughout the year we organized several large-scale online conferences for our customers, covering challenges and trends in the Georgian economy from a macro as well as a sectoral perspective. In 2021, TBC Capital became research contributor to Bloomberg and Refinitiv, targeting wider international audience interested in Georgia. Private Banking - TBC Wealth Management TBC WM is Georgia’s leading wealth management franchise, serving around 2,700 resident and non-res- ident high net worth clients. We offer a wide range of personalized banking, investment and insurance prod- ucts that are carefully designed to meet the individual financial goals of our customers and maximize their wealth. In addition, our clients benefit from exclusive lifestyle offerings for major elite events happening in the country. We also have a representative office in Israel, TBC Invest, which acts as an intermediary with high net worth clients from Israel and offers fast and efficient consulting services on the ground. In 2021, we rebranded TBC VIP to TBC Wealth Man- agement and launched a dedicated WM webpage (www.tbcwm.ge) for our existing and potential clients, which provides comprehensive information about our operations. In addition, we introduced a new product – Visa Infinite, Visa’s most elite card, exclusively for WM clients. Considered a symbol of recognition, the prestigious Visa Infinite provides clients with comfort and bespoke benefits, both in Georgia and across the world. 1 Based on internal estimates 51 TBC BANK MANAGEMENT REPORT 2021ENTRÉE - CASE STUDY The Georgian bakery network “Entrée” has been present in the Georgian market since 2008 and has emerged as one of the country’s most suc- cessful fast casual dining concepts in recent years. We became Entrée’s partner in 2011 and have stood by their side since then. In summer 2021, with our support, Entrée opened a new facility in Notting Hill, London and serves cus- tomers with Georgian cuisine along with French dishes. This is our second cooperation with En- trée; the first was in 2015, when Entrée success- fully launched its first café abroad in Baku. OUR BUSINESS MODEL53 TBC BANK MANAGEMENT REPORT 2021BUSINESS REVIEW MAJOR SUBSIDIARIES TBC Pay We aspire to become the largest payments provider in Georgia by further strengthening our digital capabilities as well as diversifying and fine-tuning our services. Additionally, we plan to become the largest payments aggregator in Georgia by implementing open banking capabilities. c. 4,205 +40% YoY 54 TBC Pay is a leading payments provider in Georgia offering individuals and businesses convenient pay-ment solutions. TBC Pay is a wholly owned subsidiary of TBC Bank and has been operating since 2008. TBC Pay offers a wide range of services including utility payments, mobile top-ups, loan repayments and mon-ey transfers through its wide and easily accessible dis-tribution network.TBC Pay mainly services its customers via c. 4,205 self-service terminals conveniently distributed across the country. These terminals allow customers to con-duct a range of payments instantly on a 24/7 basis, us-ing both cash and cards. In addition, TBC Pay operates a website (www.tbcpay.ge), along with a mobile app, which of-fers a simple and engaging interface. In 2021, we also added international cards to our digital payments channels. Overall, in 2021, the number of payments conducted through digital channels increased by 49% year-on-year, while number of active digital users reached c. 51,000. For businesses with large cash operations, TBC Pay offers cash management services, in the form of spe-cialized cash boxes. After depositing cash into these boxes, the sum is automatically transferred to the company’s bank account. The cash boxes are secured through a strong authorization process. In order to support the increased scale of business, the company is streamlining its processes and implement-ing new technologies. In 2021, TBC Pay successfully completed agile transformation in its IT department and started to roll it out in other departments as well. In addition, the company began implementing an enter-prise-wide software, which is planned to be launched next year. Over 2021, the volume of transactions conducted through self-service and cash management terminals as well as digital channels grew by 40% to GEL 5,636 million. Over the same period, net commission income reached GEL 38 million, up by 15% year-on-year, while EBITDA amounted to GEL 23 million, up by 8% year-on-year. 2021 HIGHLIGHTSNUMBER OF SELF-SERVICE TERMINALSGEL 5.6 blnVOLUME OF PAYMENT TRANSACTIONSTBC BANK MANAGEMENT REPORT 2021TBC Leasing Our aspiration is to further strengthen our leading market position via developing tailored solutions, as well as dedicated digital offerings. In addition, our priority is to increase the share of green/ renewable and energy efficient projects. 77% 2,265 GEL 254 mln 1 Based on internal estimates 55 TBC Leasing, a wholly-owned subsidiary of TBC Bank, was established in 2003 and has since become a lead-ing leasing services provider in the Georgian market. TBC Leasing serves both individuals and business clients, offering them a full range of leasing solutions and advisory services, including financial leasing, oper-ating leasing, sale and leasebacks tailored to custom-ers’ needs. TBC Leasing serves its retail customers at its service centers and at partner vendors’ sales points. As for business clients, TBC Leasing actively leverages TBC Bank’s digital channels and branches.As of 31 December 2021, our leasing portfolio stood at GEL 254 million and remained broadly stable on a con-stant currency basis. 88% of the portfolio was related to legal entities, with strong positions in the construction, service and manufacturing sectors. The remaining 12% of the portfolio originated from individual clients and consisted of new and used cars, with respective shares in the total retail portfolio of 51% and 49%. In 2021, net profit of TBC Leasing amounted to GEL 11.6 million.TBC Leasing continues its active engagement in fi-nancing of green, renewable and energy efficient as-sets. Over the past three years, our green leasing port-folio increased by 57% and amounted to GEL 5 million. In 2021, the company launched a PV solar panel grant programme in cooperation with the Green for Growth Fund (GGF), EU4Energy and Finance in Motion, which enables legal entities as well as individuals to signifi-cantly decrease the design and installation costs of solar panels. In January 2021, Fitch credit rating agency maintained TBC Leasing’s existing long term credit rating of BB-, which is the highest credit rating among Georgia’s non-banking institutions, and, in April 2021, revised the outlook of the credit rating from Negative to Stable. This credit rating will increase TBC Leasing’s credit-worthiness and helps us to attract new creditors and lower the cost of funding. During 2021, the company successfully raised additional funding of US$ 30 mil-lion, in the form of senior loans, from Development Financial Institutions as well as International Financial Institutions. Finally, we remain dedicated to raising awareness among the Georgian population regarding the bene-fits of leasing solutions, as the Georgian leasing market is still highly underpenetrated with a leasing to GDP ratio of just 1%1.2021 HIGHLIGHTSMARKET SHARE 1NUMBER OF CUSTOMERSLEASING PORTFOLIOTBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR COLLEAGUES Our Colleagues Engaged and happy colleagues are key to our successful and sustainable development. We are committed to providing a safe and inclusive work environment with equal opportunities for learning and career advancement 66% 85% 19% 35% 56 TBC BANK MANAGEMENT REPORT 2021OVERVIEW We aspire to be most desired employer in the coun-try, attracting and developing top talent, nourishing our corporate values and keeping our employees engaged and motivated in order to support the Group in achiev-ing its ambitious strategic goals. We also work closely with each business division in order to better under-stand their needs and assist them in overcoming their individual challenges. In the post-pandemic world, more and more compa-nies are moving towards remote or hybrid working conditions. We were one of the first companies in Georgia to allow all our back-office employees to work remotely. Our HR campaign “work from where you want” was very well received by our employees and today the vast majority of our back-office employees work outside the office. Importantly, this initiative not only resulted in improved employee satisfaction levels, but also increased efficiency across the Group. In order to maintain close contact with our employees in this new digital reality, our senior management regularly holds online meetings with employees to update them regarding the Group’s achievements and future plans, and address any concerns that they might have. In addition, we continue to expand our agile working practices to the wider organization in order to become even more flexible and efficient in today’s fast chang-ing environment. For more information about our HR practices, please refer to pages 84-109 of our Sustainability Report, which is available at www.tbcbankgroup.com.OUR MAIN STRATEGIC PRIORITIES Talent acquisition and developmentOur goal is to attract the best talent on the market, with the support of an extensive selection process, tailored to the specific needs of each position and role. We ac-tively monitor the labour market both in Georgia and abroad, to maintain a pool of prospective qualified tal-ents for key roles including but not limited to: finance, business, tech positions and other. This year we launched a talent management pro-gramme, which aims to identify top talent within the company and support their development. Within the 2021 HIGHLIGHTSEMPLOYEE NET PROMOTER SCORE1EMPLOYEE HAPPINESS INDEX2INTERNAL PROMOTIONS WOMEN IN MIDDLE MANAGERIAL POSITIONS3scope of this programme, we introduced an exten- sive leadership programme for middle management in partnership with a leading international training company. This programme includes four modules: a strategic mindset, managing change, cross-functional trust, and leadership. Going forward, we plan to intro- duce tailored development programmes for selected candidates and offer targeted rotations to expand the required skill sets. In order to support our highly digital business model, we have increased our focus on building strong tech- nical capacity in-house. Currently, around 600 of our workforce at the Bank are IT specialists. Our initiatives in this regard include establishing an IT academy in 2019, which offers courses in front-end and back-end development, Android and IOS mobile development, as well as user experience research and strategy. This programme is free of charge for selected candidates and is run by experienced staff members and leading professionals from relevant fields. Since its establish- ment, we have trained up to 580 people and recruited 230 people. In addition, we have strengthened our IT team with international expertise by hiring leading spe- cialists from abroad. We also plan to introduce special development programmes and career maps for our IT specialists in order to ensure a high retention rate. For low-level positions, we run a wide-scale internship programme to attract the best students from Geor- gia’s leading universities. After successful completion of a one-year internship, the brightest candidates are offered employment in various departments, includ- ing finance, risks, corporate, marketing, IT and data analytics. Overall, since its establishment back in 2011, we have recruited up to 500 students within this pro- gramme. We offer competitive remuneration packages to our employees, which are comprised of a fixed salary, performance based bonuses and a benefits package, which includes medical insurance, critical disease and life insurance, paid annual and sick leave, as well as six months of fully paid maternity and paternity leave. Additional benefits include monetary gifts in case of marriage and childbirth, as well as extra day-offs for employees with three and more children. Since 2011, we operate TBC Academy, which pro- vides a wide range of learning programmes to our employees. During 2021, more than 1,000 employees participated in various courses such as business de- velopment, banking, change management, leadership, financial analytics and many more. In addition, we provide financial support to our employees to attend various external courses and gain international certi- fications such as MBA, CFA, FRM, ACCA and others. Furthermore, we run mandatory training for all employ- ees of the bank in the areas such as code of conduct and ethics, information security, environmental issues and operational risks. Performance management Through our effective performance management sys- tem, we strive to promote a growth mindset, boost em- ployee productivity and reinforce a feedback culture. Our performance management system is based on three core principles: clarity, fairness and integrity. We make sure that our colleagues have a clear under- standing of their role in the company and are actively engaged in setting their personal goals. Employees are also given appropriate coaching by their supervisors to help them achieve these goals. Regular employee feedback and constructive dialogue are important parts of our performance appraisal system and have been incorporated into middle management’s KPIs starting from 2021. We use different assessment systems for front and back office staff, depending on the positions held. We assess our back office staff with the manage- ment by-objectives (MBO) system, a personnel man- agement technique where managers and employees work together to set, record and monitor goals for the financial year. Goals are written down annually and are continually monitored by managers to check progress, including semi-annual direct feedback from supervi- sors. Rewards are based on the achievement of goals. We have a uniform scoring system for all employees within the MBO, which ensures fairness throughout the organization. For our middle managers, as well as employees who are part of the agile structure, we also run a 360-de- gree feedback system that provides each employee with the opportunity to receive performance feed- back from his/her supervisor, peers and subordinates. 360-degree feedback allows our employees to under- stand how their performance is viewed by others; it also helps them to identify their strengths and weak- nesses and develop new skills. This year, 360-degree feedback was extended to other roles as well. For front-office employees we use a target-based per- formance assessment system, wherein performance is linked to specific KPIs, including quantitative and qual- itative components. Within the target-based system, employees are assessed monthly, quarterly or annually depending on their positions. 1 Employee Net Promoter Score was measured in October 2021 by an independent consultant for the Bank’s employees. 2 The index was measured in July 2021 for the Bank’s employ- ees by an independent consultant. 3 Branch managers, division and department heads, as well as directors of the Group’s subsidiaries. 57 TBC BANK MANAGEMENT REPORT 202158 TBC BANK MANAGEMENT REPORT 202159 TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR COLLEAGUES CONTINUED Employee engagement and motivation Our goal is to create a value driven organization, in which employees share the same values and are led and driven by the common mission “to make life eas- ier” for our customers. We also strive to create a fami- ly-friendly environment, in which employees can bet- ter balance their family and work. Our key initiatives in this regard are as follows: • Our CEO plays an important role in promoting our corporate culture through active, regular communi- cation about our core values in-person and online. • Top management regularly conducts online meet- ings with employees to keep them up-to-date on the Group’s strategy, performance and recent achievements. Staff have an opportunity to ask questions and share feedback. In addition, we con- duct an open dialogue with our staff via a Facebook group, in which we regularly share the Group’s achievements, as well as success stories of individ- ual employees. • We also strive to create a positive and collaborative working environment by offering maximum flexi- bility to back office employees in terms of working hours and remote working conditions. In addition, our agile structure supports open communication between various teams and encourages employee empowerment. • We care for our employees’ development and en- courage them to actively participate in internal se- lection process for higher grade positions. In 2021, the promotion rate in the bank was around 19%. • To accurately measure our employee satisfaction and engagement levels, we run an annual feedback survey in partnership with leading international uni- versities and research firms. The results of the sur- vey are thoroughly analyzed and presented to the management board to plan future actions. In 2021, we developed a gender policy, which provides clear guidance for ensuring the proactive and con- sistent integration of gender equality in all aspects of the Group’s work, inside the Group, in the marketplace and in the community at large. The ultimate goal is to achieve gender equality, develop TBC’s own approach to integrating a gender perspective in company’s work and apply gender equality principles when working with stakeholders and partners. The full policy is avail- able at our www.tbcbankgroup.com. We have also developed a KPI and action plan at the Bank level to increase the number of women in middle managerial positions from the current level of 36% to 40% by 2023. In 2022, we will expand our approach to other subsid- iaries of the Group and work on elaboration of separate action plans. To demonstrate our commitment to this course, since August 2021, TBC has become a signatory to the UN Women Empowerment Principles (WEPs)1. SUPERVISORY BOARD 4 5 5 2 2 3 2019 2020 2021 SENIOR MANAGEMENT Equality and diversity 6 6 We have created a sustainable and successful busi- ness in which all employees are treated equally and fairly and are supported and coached to succeed. We provide a safe work environment free from any kind of discrimination in which each and every employee is valued, respected and treated equally regardless of gender, age, marital status, sexual orientation, race, ethnicity, religious and political beliefs or disability. We take special care of our colleagues with disabilities and strive to improve our workplace to make it more flex- ible for them. Furthermore, we support them to have the same access to learning, development and job op- portunities. We put a special emphasis on promoting and support- ing women in their careers. 5 1 1 1 2019 2020 2021 Female Male 1 For more details about these principles please refer to www.weps.org 60 TBC BANK MANAGEMENT REPORT 2021MIDDLE MANAGERIAL POSITIONS1 ALL EMPLOYEES 5,493 4,917 4,681 204 204 115 101 99 185 2,299 2,451 2,624 2019 2020 2021 2019 2020 2021 Female Male We have a good mix of people comprised of employees with extensive work experience and young and bright tal- ents with innovative and fresh ideas who have just graduated from top universities in Georgia and abroad. We believe that age diversity creates a more dynamic and high-performing team that leads to better results. AGE DIVERSITY STATISTICS OF 2021 3% 10% 39% 48% Under 29 years 30-39 years 40-49 years Over 50 1 Branch managers, division and department heads, as well as directors of the Group’s subsidiaries 61 TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR COLLEAGUES CONTINUED ETHICAL STANDARDS, RESPONSIBLE CONDUCT AND SAFETY AT WORK In order to gain customers’ and partners’ trust and successfully do our business, we have to ensure that the behavior of our employees and our business decisions are in line with the highest standards of ethics. As we are a part of a community and have diverse stakeholders, every decision we make impacts employees, custom- ers, business partners, other stakeholders and society as a whole. The Group’s code of ethics is a “moral compass” assisting us with our decision-making framework. It serves as a guidance for our team on ethical conduct and for making the right decisions in specific circumstances. For many years, TBC has been promoting ethical conduct in all its activities. We have invested time and energy in identifying non-ethical and dishonest behavior risks and creating prevention mechanisms. We have in place a set of internal policies and procedures and we closely monitor their execution. These policies lead to greater awareness of unacceptable behavior and promote a ‘speak up’ culture in which all employees feel listened to and protected when reporting any suspected misconduct. These policies and procedures consist of the following: • Code of Ethics; • Code of Conduct; • Anti-Bribery, Anti-Corruption and Prevention of the Facilitation of Tax Evasion Policy; • • Human rights policy. Incident response policy; These policies apply to all employees of the Group and can be found on our IR website at www.tbcbankgroup.com. The Compliance Department regularly conducts employee training sessions in order to raise awareness and high- light the importance of anti-corruption, anti-bribery and ethical and human rights issues. Periodic audits are also conducted by the Internal Audit Department to identify any violations or inappropriate behavior. No such material instances were identified during 2021. 62 TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR CUSTOMERS Our Customers As a customer-centric company, we strive to provide our customers with a superior experience by offering them relevant, innovative and affordable products and services through our convenient and flexible distribution channels. 1 September 2022. As of 31 December 2021, we have disbursed 425 mortgages with a total amount of GEL 49.1 million under this programme. In order to ensure the safety and well-being of our cus- tomers and employees, our branches and offices are equipped with all the necessary safety measures in line with the recommendations of the World Health Orga- nization and National Center for Disease Control and Public Health of Georgia. In addition, we ran extensive awareness campaigns and introduced various incen- tives to encourage vaccination among our employees. By the end of the year, around 85% of our employees were vaccinated or were scheduled to get a vaccine. CUSTOMER SATISFACTION COMES FIRST Providing an unparalleled customer experience and ensuring the satisfaction of all of our customers is one of our core values. First and foremost, we treat our cus- tomers fairly by providing them with full information regarding our products and services, inform them of significant risks and give advice with the client’s best interests in mind. Our Code of Ethics, which is available at www.tbcbankgroup.com, defines TBC’s expecta- tions in terms of transparency and fairness in our rela- tionships with our customers. In case our customers are left unsatisfied with any as- pect of our service, they may file a complaint through various channels, including call centers, branches, internet bank or the website www.tbcbank.ge. Com- plaints are discussed and addressed by customer support and complaint management groups, who an- alyze each complaint, prepare recommendations and 63 TBC BANK MANAGEMENT REPORT 2021MEETING THE NEEDS OF OUR CUSTOMERS We operate an advanced omni-channel distribution model, which allows our customers to conduct their banking operations seamlessly and is comprised of a wide network of modern, customer-centric branches, award-winning internet and mobile banking platforms, contemporary payment infrastructure as well as a call center. Our services are available even in remote areas of the country through our online banking, which also en-ables fully digital onboarding for retail and MSME cus-tomers. As Georgia is still largely a cash-based society, especially in the regions, the availability of self-service terminals and ATMs is also essential for fostering finan-cial inclusion.In the post-COVID world, the demand for digital solu-tions has remained high. Therefore, we have continued to enrich our digital offerings with more innovative products and services. In 2021, we launched an end-to-end fast consumer loans disbursement process in our mobile banking, which allows our customers to receive loans online. In addition, we upgraded our online lend-ing platform www.tbccredit.ge, giving more flexibility to our clients. Furthermore, we implemented “open banking” for both retail and business clients, which en-ables them to check the balances on accounts opened in other Georgian banks, as well as receive analysis of their income and expenses via our online banking. For more information regarding our new digital services, please see the Business review on pages 36-55.While digitalization remains one of our top priorities, we also make sure to keep our branches as accommo-dating and comfortable as possible. For this reason, in 2021 we began remodeling our branches, creating a more open and inviting atmosphere in order to facili-tate communication with less formality. More informa-tion regarding our new branch concept is given in the retail section of the Business review on pages 36-41. Equally important is the provision of affordable financ-ing to our clients. For this purpose, we have run a large-scale start-up support programme since 2017. For more information, please refer to our MSME section on pages 42-47. In addition, since September 2021, we have enrolled into the governmental programme of subsidized mortgages. This programme offers interest payment subsidies on mortgages up to GEL 200,000, issued to families with three or more children, or fam-ilies with a child born between 1 September 2021 and tory trainings and testing for all employees of the bank. In addition, we run different simulations on regular basis, in order to prepare our employees for various real life situations and threats. • We operate a 24/7 customer hotline, which ad- dresses our clients’ concerns in a timely manner. In addition, we help our customers to develop safe banking habits, by regularly informing them regard- ing the risks of phishing and other fraudulent activi- ties via social media and digital channels. In addition to our layered defense system, we have cyber insurance policy in place, covering all rele- vant cyber, privacy and multimedia liabilities and expenses of TBC in order to manage contingen- cies and recover from possible serious disruptions. • TBC Bank has not experienced any material informa- tion security breach in the last three years. We are fully compliant with the National Bank of Geor- gia’s cyber security requirements, such as the Cyber Security Framework Document, which is based on the National Institute of Standards and Technology (NIST) Cyber Security Framework. In 2021 we also adopt- ed Payment Service (PSD2) Directive (EU) 2012/2366, which further aligned our operations with international and local best practices and enabled us to offer open banking capabilities to our clients. In November 2021, the Bank achieved ISO 27001 cer- tification of our Information Security Management System. Furthermore, in December 2021, Ernst & Young Tbilisi office conducted two audits, assessment against Cyber Security Management Framework and assessment against SWIFT CSCF for the Bank. As a result, no critical findings and major non-compliances were identified during these exercises. Cyber Security Management Framework is defined by National Bank of Georgia. Equally important is protecting our customers’ privacy and data integrity. We only process personal data for specific business purposes and do so lawfully, fairly and in a transparent manner. Our clients are provid- ed with information regarding the processing of their data and are informed of their rights, which they may exercise through defined communication channels. Our Global Data Protection Policy is in line with ap- plicable laws imposed by Georgian government and also meets certain relevant requirements of EU Gen- eral Data Protection Regulation (GDPR). The full policy is available on our IR website www.tbcbankgroup.com. OUR STAKEHOLDERS OUR CUSTOMERS CONTINUED address the people responsible. Clients are notified of the outcome of their complaints in due course. In order to evaluate the quality of our services, we con- duct various external surveys and request feedback from our clients on regular basis. Collecting this data allows us to analyze our performance and set goals for continuous improvement. In addition, we conduct internal surveys of different scopes across various di- visions of the Bank. These internal surveys help us to further pinpoint issues on a more detailed level and address them more thoroughly. In 2021, we launched an innovative Customer Experi- ence Appetite and Pain Management project accross the Bank. This project envisages three-week work- shops, in which each team selects the metrics to best evaluate its customer service and rates its performance against these metrics in order to assess their current progress and find further areas of improvement. Fur- thermore, the project helps to determine problematic or “pain” areas for the customers. Once these problems are identified, they are assigned to the people respon- sible, who are tasked with resolving them. We believe that this project will bring our customer experience to a new level. WE TAKE CUSTOMER INFORMATION SECURITY AND DATA PRIVACY SERIOUSLY With the rise of digitalization, it is more and more cru- cial for us to ensure that our customers’ personal infor- mation is well-secured. For this reason, we constantly fine-tune our cyber security measures and procedures in order to stay well ahead of any data security threats and risks. Our cyber security procedures are regulated by an Information Security Policy. We operate a dedicated Information Security Depart- ment, which reports to the Chief Risk Officer and the Information Security Steering Committee. The latter was established in order to improve information secu- rity and business continuity management processes as well as minimize information security risks. In order to prevent and mitigate various cyber securi- ty risks, we have several dedicated tools and control mechanisms in place: • The Security Operations Center continuously monitors unusual occurrences across the organiza- tion’s network in order to detect potentially nega- tive incidents and respond to them effectively. • The Data Leak Prevention System automatically identifies data leakage, blocks the process and no- tifies a responsible person. • We conduct an annual, full-scale information and cyber security threat assessment against regional and international best practices, and we regularly perform cyber-attack readiness exercises among our employees. • To further increase our employees’ awareness of cyber security risks, we annually conduct manda- 64 TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR COMMUNITY Our Community We are committed to creating a better future for our community by rolling out large-scale, high impact projects in the following areas: business development, youth support and the preservation of cultural heritage. accounting for around 85% of the total spent during the year. This year, as part of our ESG strategy, we set a specific target for social impact procurement, which should amount to at least GEL 5 million by the end of 2023. For more details, please refer to our ESG strategy on pages 24-35. For more information about our supply chain manage- ment, please refer to pages 148-151 of our Sustainability Report available at www.tbcbankgroup.com. SUPPORTING THE YOUNG GENERATION We aspire to support our young generation in their pro- fessional development through various initiatives and projects: • “TBC Scholarship” is one of our largest social re- sponsibility projects, which was introduced in 2018 and aims to discover and support young talents. Since the launch of the project, TBC has supported 350 talented youth in receiving proper education and advancing their professional development. This year, 45 more people joined the programme. The project participants include artists, athletes, scientists and inventors. • Since 2019, TBC Bank has sponsored the Tbilisi International Book Festival, the largest event in the country in the book sector bringing together writ- ers, publishers and readers. This year, the 23rd Tbili- si International Book Festival was held. • For the last seven years, TBC Bank has been the main partner of the “Leonardo da Vinci” Young Re- searchers and Innovators Annual Competition for high school students. The purpose of the compe- 65 TBC BANK MANAGEMENT REPORT 2021ENCOURAGING MSME BUSINESS DEVELOPMENT AND ENTREPRENEURSHIPTBC distinguishes itself through advocacy and sup-port for startups and MSME businesses. In order to address the social and economic challenges in the country, the development of small and medium busi-nesses is vital. It contributes to the reduction of un-employment and boosts economic growth. We assist businesses through the provision of both financial and non-financial support, including: easing access to cap-ital, sharing knowledge and expertise, and developing products and services specially customized for busi-ness needs. For this reason, in 2021, TBC partnered with international organizations for the following initiatives:• TBC Bank has been a crucial contributor to US-AID’s new initiative of establishing the Grace Hop-per Award, which intends to recognize and inspire more Georgian women in the information and communication technology (ICT) industry. This year, several female startup representatives were recognized for their outstanding performance in the ICT field. TBC Bank helped the development of the project via a large scale communications cam-paign, awarded winners in two categories (emerg-ing leader and tech startup), and provided skills and business development opportunities specifically tailored to the needs of the award winners.• TBC Bank has signed a memorandum with UNDP Georgia to support early-stage social entrepre-neurs, to empower young people and improve access to finance in the regions. This programme focuses on educating students in the field of so-cial entrepreneurship and offers them a ten-month training course to implement their own business ideas. TBC Bank provided monetary awards, as well as media and marketing support.For more information about our business support pro-grammes, please refer to our MSME section on pages 42-47. PRIORITIZING LOCAL BUSINESSES AMONG OUR SUPPLIERSWe are committed to responsible purchasing practic-es and work with companies that uphold our values and comply with our procurement standards and code of ethics. Furthermore, we prioritize local suppliers1 in order to support Georgian businesses. In 2021, around 90% of the Bank’s suppliers were Georgian companies, OUR STAKEHOLDERS OUR COMMUNITY CONTINUED tition is to popularize STEM among students and help them develop creative thinking and practical skills. TBC Bank provides marketing support for the competition, allocates its facilities, and awards the winners. Since the beginning of the partnership, TBC Bank has awarded 24 students. • Furthermore, we run several academies for stu- dents in different fields, such as IT and Risk, in order to help them master professions that are in high de- mand. All courses are offered free of charge and are run by experienced staff members. We also contin- ue to run TBC Camp, a programme that was estab- lished in 2019 and envisages the conduct of a Stock Pitch Competition for fourth year finance students. This competition is integrated in the syllabus of the university’s’ curriculum and is comprised of inten- sive online lectures, trainings and the preparation of real investment cases in selected companies, which are presented to a panel of judges. Selected teams are awarded special prizes. • This year, TBC launched a new subscription model “TBC Z”, which is tailored to the specific needs of the young generation and includes student cards with special benefits, cashbacks and various dis- counts. For more details, please refer to the retail section of our Business review on pages 36-41. PRESERVING CULTURAL HERITAGE TBC has always played an active role in preserving Georgian heritage. Our major current projects include the following: • Since 2003, TBC has been the major sponsor of the Saba Literary award, which is the most im- portant literary event in the country. This year, up to 300 books were reviewed and the win- ners were revealed in ten categories. We also run www.saba.com.ge, the largest online platform for Georgian electronic and audio books, which was established in 2012 and provides access to over 6,700 audio and electronic books to around 380,000 users. • Our cooperation with the Georgian National Mu- seum and Vani Archeological Museum, one of the first archeological museums in the Caucasus re- gion, started in 2019. We support the museums in presenting national treasures in modern and digital formats to the public. This year, the Vani Archeo- logical Museum, together with TBC Bank, hosted a unique archeological exhibition from the Pompeii Archeological Park. • We have been promoting Georgian textile in coop- eration with the Art Palace of Georgia since 2020. The project aims to give new life to the tradition- al and historical textiles of Georgia that were worn centuries ago. This year more than 1,000 items were created by new startups and designers. • This year we supported a new project, which aims 66 to further promote the Georgian textile, as well as support women in the rural communities. Adjarian embroidery is a part of dowry tradition in the re- mote mountainous villages of a Georgian region Adjara. This craft was created and mastered by the local women, who have passed it down to genera- tions for centuries. Within the scope of this project, a documentary film was created as well as exhibi- tion and a panel discussion were held to popularize this lesser-known tradition. • The Georgian Fonts Competition “Georgian -A” was launched in 2017 and aims to adapt the Geor- gian alphabet to the modern world in order to spread and popularize it both inside the country and abroad. Within the framework of the competi- tion, the participants are requested to develop new Georgian fonts, with the winning fonts being digi- talized with TBC’s support. Since the launch of the project, about 350 fonts have been developed and 30 have been digitalized. SUPPORTING UKRAINIAN PEOPLE We would like to demonstrate our support to the Ukrainian people over the recent events. TBC is in- volved in a number of initiatives in this regard. We have waived the fees on international bank transfers from TBC Bank to Ukraine. We have also set up a local bank- ing account, which allows our customers to make do- nations to the Ukrainian charity fund. On its part, TBC has allocated GEL 200,000. In addition, we facilitate delivery of humanitarian aid to Ukraine. 1 Local suppliers include Georgian resident companies that sell locally produced, as well as imported goods or services. TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM Our Environmental Management System As the largest financial institution in the country, we believe that we can make a positive contribution towards tackling the climate change and accelerating transition to a low-carbon economy. CALCULATION OF GREENHOUSE GAS (“GHG”) EMISSIONS Since banking is not a high-polluting activity, the imple- mentation of an internal EMS to address the Group’s consumption of resources is not expected to have a significant impact on the surrounding environment. However, TBC Bank has reviewed all the operation- al activities, procured items, and outsourced services that it can control (present and planned), and has iden- tified all the material environmental aspects relevant to the business. These are sub-categorised into indirect and direct environmental aspects, analyzed based on a comprehensive scorecard, and managed accordingly. TBC Bank has established a comprehensive internal environmental system to manage and report its GHG emissions within the Group and is committed to re- ducing its GHG emissions by closely monitoring its consumption of energy, water and paper. The guide- lines for documenting environmental data were devel- oped and responsible staff was assigned in subsidiary companies to collect and provide the required data. TBC Bank also commissioned G&L Management LTD, an independent Health, Safety, and Environment (HSE) consulting company, to verify the measurements of its GHG emissions. 67 TBC BANK MANAGEMENT REPORT 2021TBC Bank has a comprehensive Environmental Policy in place, which governs our Environmental Manage-ment System (“EMS”) within the Group and ensures that we comply with applicable environmental, health and safety and labour regulations, use sound environ-mental, health and safety, and labour practices, and take reasonable steps to make sure that our customers also fulfill their environmental and social responsibil-ities. Our Environmental Policy is fully compliant with Georgian environmental legislation and follows inter-national best practices (the full policy is available at www.tbcbankgroup.com). Our Environmental and Social Risk Management (ESRM) team is comprised of three full-time employ-ees and is part of the SME and Corporate Business Credit Risk Department, which reports directly to the Chief Risk Officer. Our ESRM team is responsible for overseeing the operation of our EMS across the Group. It also provides assistance to our subsidiaries on envi-ronmental and social issues and conducts trainings on a regular basis. The ESRM team reports environmental management plans and results to the Environmental Committee on a quarterly basis. Our EMS is based on four pillars: • Internal environmental activities;• Environmental and social risk management in lend-ing; • Sustainable finance; and • External communications.Since 2020, the Bank has held ISO 14001:2015 certifica-tion, which serves as testament that our EMS is in full compliance with international standards.In 2021, TBC Bank released its second full-scale Sus-tainability Report, which was prepared in reference to Global Reporting Initiative (GRI) standards and helps the company to understand its role and influence on sustainable development issues such as climate change, human rights and social welfare. OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM CONTINUED Total GHG emissions (CO2) (tonnes) and KPIs Scope1** Fuel Combustion (heating, vehicles,generators) Scope2 (Electricity consumption) Scope3 (International flights) Total emissions (tCO2) Total emission per full time employee (tCO2/pp) Water consumption per employee (m3/pp) Printing paper per person in reams * The data is given for the Bank only ** Scope 1 : 2019* 1,897 1,088 564 3,549 0.57 14.40 19.62 2020 2,970 1,524 106 4,600 0.65 10.72 13.46 2021 2022 KPI (increase) 3,102 1,499 18 4,619 0.60 9.54 13.50 Below 4% Below 2% - Below 3% Below 3% Below 1.5% Below 0.4% a. 1,505 CO2e emissions in tonnes (from combustion of fuel (NG) from owned operation and facilities of TBC Bank) in 2021 compared to 1,609 CO2e in 2020 and 1,318 CO2e in 2019. b. 1,500 CO2e emissions in tonnes (from owned vehicles of TBC Bank) in 2021 compared to 1,285 tCO2e in 2020 and 491 tCO2e in 2019. c. 97 CO2e emissions in tonnes (from owned generators of TBC Bank) in 2021 compared to 76 tCO2e in 2020 and 88 tCO2e in 2019. Scope 1 - In 2021, this indicator increased by 4% compared to 2020 on the Group level (versus the 2021 target level of 6% reduction). On standalone basis, the Bank managed to reduce it by 6% (93,000 CO2kge) year-on-year. However, this positive impact was offset by increase of fuel consumption by the vehicles of our subsidiary companies. Scope 2 – In 2021, total electricity consumption of the Group remained broadly stable year-on-year (compared to the 2021 target level of 5% reduction), while the Bank managed to reduce it by 7% (around 95,800 CO2kge) over the same period . Scope 3 - Due to the COVID-19 pandemic, business flights decreased by around 83% compared to 2020. Overall, total emissions remained broadly stable in 2021 compared to 2020 levels, while total emission per full time employee decreased by 8% over the same period, compared to the 2021 target level of 5% reduction. In 2021, the water consumption per employee decreased by 11% year-on-year compared to the 2021 target level of 5% reduction, while usage of printing paper remained broadly the same. Calculation methodology To calculate the GHG inventory, we took following steps: we set the organizational boundaries, established the oper- ational scope, and developed a structured approach for data collection and the calculation of carbon dioxide (CO2) equivalent. This report describes all emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 (Scope 1 and 2) and, additionally, the emissions under Scope 3 that are applica- ble to the business. In preparing emissions data, the emissions factors from the UK Government’s Greenhouse Gas Conversion Factors for Company Reporting 2017 and National IPCC emission factors for electricity (tCO2*/ MWhe) were used. The required data was collected and a report was developed for the TBC Bank’s main activities, as follows: Scope 1 (the combustion of fuel and operation of facilities) includes emissions from the combustion of natural gas, diesel and/or petrol in equipment at TBC Bank’s owned and controlled sites. The combustion of petrol, diesel fuel, natural gas etc. in TBC Bank’s owned transportation vehicles. Scope 2 (purchased electricity for own use (lighting, office appliances, cooling, etc.) includes emissions from the use of electricity at TBC Bank’s owned and controlled sites. To calculate the emissions, the conversion factor for National IPCC emission factors for electricity (tCO2*/MWhe) was used. Scope 3 includes emissions from air business travels (a short haul, a medium haul, a long haul and an international haul); it should be noted that information on the travel class was considered and an “economy class” conversion factor has been used for the emissions calculation from the following link: www.atmosfair.de. 68 TBC BANK MANAGEMENT REPORT 2021ENVIRONMENTAL AND SOCIAL RISK MANAGEMENT IN LENDING We are committed to ensuring that our customers fulfill their environmental and social responsibilities. For this pur- pose, we have Environmental and Social Risk Management (ESRM) Procedures in place, which are fully integrat- ed into the credit risk management process and ensure that appropriate, risk-based, sector specific, environmental and social risk assessment is applied to our commercial lending activities. Our procedures incorporate appropriate consideration of IFC’s Performance Standards and EBRD’s Performance Requirements. This approach enables us to effectively manage credit and reputational risks that could arise from the environmental and social non-compliance by our clients. We closely screen and assess our business portfolio distribution in terms of environmental and social risk categories and strive to reduce the share of impactful industries. In some cases, E&S risk categories differ. When categorizing the transaction according to E&S risk category, priority is given to the higher risk. BUSINESS LOANS PORTFOLIO BREAKDOWN BY E&S CATEGORIES A category 0.3% 0.3% High Medium Low 30.0% 29.1% 11.1% 9.8% 2021 2020 58.6% 60.8% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Low Risk – transactions with minimal or no adverse social or environmental impacts, which are not generally subject to further assessment (beyond their identification as such), except for the requirement for customer’s [assent/cer- tification/disclosure] of compliance/non-compliance with local and national environmental, health and safety and labour laws and regulations. Medium Risk – transactions with limited potential for adverse social or environmental impacts that are few in num- ber, generally site-specific, largely reversible, clearly evident at the time of the assessment, and readily addressed through mitigation measures, which typically require a limited or focused environmental and/ or social assessment, or straight-forward application of environmental sitting, pollution standards, design criteria, or construction standards. High Risk – transactions with potentially highly significant, negative and/or long-term environmental and/or social impacts, the magnitude of which may be difficult to determine at the loan application stage, which typically require analysis of environmental and social risks and impacts in the context of the total area of influence of the customer’s operations. As part of the risk assessment, the client will identify individuals and groups that may be differentially or disproportionately affected by its operations. Category A – transactions with potentially significant adverse social or environmental impacts that may be diverse, irreversible or unprecedented, the assessment of which usually requires inputs from independent external experts and may require the involvement of IFI E&S specialists in the due diligence assessment process. In addition, we strive to make a positive contribution to the development of private companies and assist them in proper management of environmental and social risks related to their business activities. In case we identify any non-compliance with local legislative requirements and/or TBC’s standards, we develop an Environmental and Social Action Plans (ESAP) for our clients to assist them in enhancing their environmental performance and closely monitor its implementation. 69 TBC BANK MANAGEMENT REPORT 2021OUR STAKEHOLDERS OUR ENVIRONMENTAL MANAGEMENT SYSTEM CONTINUED GREEN LENDING DEVELOPMENT We acknowledge the importance of sustainable lending and are actively involved in developing a standardized ap- proach to sustainable finance, including energy efficiency, renewable energy and resource efficiency financing for our retail and business clients. TBC is a leading partner in Georgia in local renewable energy financing, including hydropower stations. In 2021, TBC Bank became the first commercial bank in the Caucasus region to receive accreditation by the Green Climate Fund (GCF). The accreditation will enable the Bank to have direct access to GCF funding to finance projects for adaptation to, and mitigation of, climate change and contribute to combatting climate change in Georgia. This year, we also conducted local market research to determine TBC’s green criteria, which have been adapted to the Georgian reality, and developed Green Lending Procedures. This research was done in cooperation with the Green for Growth Fund (GGF) Technical Assistance Facility, represented by Finance in Motion GmbH, and was fi- nanced by the European Union under the EU4Energy Initiative. These procedures will help the Bank to identify green and environmentally friendly initiatives and encourage private companies to move to sustainable investment in their businesses, thus contributing to climate change mitigation. During 2021, our sustainable portfolio achieved 761,446 CO2kg/a in CO2 savings according to the date provided by our green facility fund providers. Over the same period, our renewable energy portfolio impact (avoided GHG emis- sions) amounted to 9,455 kg/a according to the estimates of the external consultant under the Green for Growth Fund (GGF) Technical Assistance Facility represented by Finance in Motion GmbH financed by the European Union under the EU4Energy Initiative. OUR SUSTAINABLE PORTFOLIO BREAKDOWN 2% 6% 9% Renewable Energy (RE) Youth Support Energy Efficiency (EE) Women in Business (WiB) 83% Note: Our sustainable loan portfolio includes energy efficiency, youth support and women in business loans financed by special purpose funds re- ceived from IFIs, as well as loans financing renewable energy, which include all hydro power plants financed by the Bank SUPPLY CHAIN MONITORING As one of the largest purchasers in the country, we acknowledge and understand the social, economic and envi- ronmental impact of our procurement decisions and operations as well as our requirements towards suppliers. In 2019, we developed an Environmental and Social Risk Management Questionnaire in order to screen suppliers. We also regularly assess our long-term contractor companies’ environmental and social risks. In case we identify any non-compliance with our E&S standards, our ESRM team develops implementation Environmental and Social Action Plans (“ESAPs”) for each company and monitors their implementation 70 TBC BANK MANAGEMENT REPORT 2021RAISING ENVIRONMENTAL AWARENESS AMONG TBC EMPLOYEES We believe that raising environmental awareness among our employees is vital for the effective implementation of EMS and to encourage new eco-friendly ideas and initiatives within the organization. For this purpose, we actively run various Environmental and Social training programmes, which include: “Welcome” training; • • Training for new employees; • E&S training for credit staff; • Annual mandatory online EMS e-learning course for all staff, followed by a self-evaluation test; and • Mandatory on-boarding training. In 2021, 95% of all staff, including senior management, successfully passed an online course and a self-evaluation test about TBC’s EMS. To ensure effective communication, video materials were created that briefly describe TBC’s environmental man- agement system. EXTERNAL COMMUNICATION TBC pays significant attention to external communication about E&S matters with existing and potential customers and other stakeholders. The feedback and recommendations received from our stakeholders and other interested parties enable us to continuously improve our E&S performance. Our grievance mechanism enables any interested party to provide complaints with regards to E&S issues via our website www.tbcbank.com.ge. All complaints are thoroughly analysed and addressed in a timely manner. In 2021, no such complaints were received. TBC Bank also takes an active part in raising awareness of renewable energy, climate change adaptation and green financing opportunities in Georgia. For this purpose, in partnership with the European Bank for Reconstruction and Development (EBRD)’s Green Economy Financing Facility programme (GEFF), we organized a Green Economy forum and also participated in the Annual Sustainable Finance Forum organized by GreenPact, discussing green finance practices with regional and local banks. 71 TBC BANK MANAGEMENT REPORT 2021FINANCIAL REVIEW Financial Review Income Statement Highlights In thousands of GEL Net interest income Net fee and commission income Other operating non-interest income Total credit loss recovery/(allowance)* Operating income after expected credit and non-financial asset impairment losses Losses from modifications of financial instrument Operating expenses Profit before tax Income tax (expense)/credit Profit for the period 2021 995,792 224,887 177,229 21,034 1,418,942 (1,726) (454,993) 962,223 (119,278) 842,945 2020 (as restated) Change YoY 827,699 168,779 118,585 (356,381) 758,682 (41,015) (385,469) 332,198 5,062 337,260 20.3% 33.2% 49.5% NMF 87.0% -95.8% 18.0% NMF NMF NMF * Certain amounts do not correspond to 2020 Consolidated Statement of Profit or Loss and Other Comprehensive Income as they reflect the re- classification made by the management between net impairment of non-financial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the financial statements. Balance sheet and capital highlights In thousands of GEL Total assets Gross loans Customer deposits Total equity CET 1 capital (Basel III) Tier 1 capital (Basel III) Total capital (Basel III) Risk-weighted assets (Basel III) Key Ratios ROE ROA NIM Cost to income Cost of risk NPL to gross loans NPL provision coverage ratio Total NPL coverage ratio CET 1 CAR (Basel III) Tier 1 CAR (Basel III) Total CAR (Basel III) Leverage (Times) 72 31-Dec-21 31-Dec-20 Change YoY 24,039,512 22,398,962 16,954,553 15,200,515 14,884,145 3,590,055 2,759,894 3,379,414 4,102,927 12,634,295 2,830,180 1,911,233 2,385,181 3,137,912 20,217,629 18,301,477 7.3% 11.5% 17.8% 26.8% 44.4% 41.7% 30.8% 10.5% 2021 26.3% 3.7% 5.0% 32.5% -0.3% 2.4% 99.2% 174.6% 13.7% 16.7% 20.3% 6.7x 2020 Change YoY 12.9% 1.7% 4.7% 34.6% 2.4% 4.7% 85.6% 159.4% 10.4% 13.0% 17.1% 7.9x 13.4 pp 2.0 pp 0.3 pp -2.1 pp -2.7 pp -2.3 pp 13.6 pp 15.2 pp 3.3 pp 3.7 pp 3.2 pp -1.2x TBC BANK MANAGEMENT REPORT 2021NET INTEREST INCOME In 2021, net interest income amounted to GEL 995.8 million, up by 20.3% YoY, whereby interest income and interest expense increased by 12.2% and 4.8%, respectively. The YoY increase in interest income was primarily related to an increase in interest income from loans, which was related both an increase in the gross loan portfolio of GEL 1,754.0 million, or 11.5%, and a rise in loan yield of 0.1 pp. The upper loan rate was due a shift of the portfolio composition towards GEL loans. The increase in interest expense was primarily related to an increase in interest expense from deposits, which was due to an increase in the respective portfolio of GEL 2,249.9 million, or 17.8%. Over the same period, the cost of depos- its declined by 0.2 pp. In addition, the change in the liability structure towards deposits (from 65% as of 31 December 2020 to 73% as of 31 December 2021, as mentioned above) had a positive effect on the cost of funding. As a result, the cost of funding decreased by 0.4 pp YoY and stood at 4.4% in 2021. In 2021, our NIM stood at 5.0%, up by 0.3 pp YoY. In thousands of GEL Interest income Interest expense Net gains from currency swaps Net interest income NIM NON-INTEREST INCOME 2021 2020 Change YoY 1,863,077 1,660,838 (895,428) (854,089) 28,143 995,792 5.0% 20,950 827,699 4.7% 12.2% 4.8% 34.3% 20.3% 0.3 pp Total other non-interest income increased by 39.9% YoY and amounted to GEL 402.1 million in 2021. The YoY growth was driven by a strong rebound across all categories, further amplified by a gain from sale of one of our investment properties in the amount of GEL 26.3 million in 2Q 2021 (the gain from this transaction is included in other operating income). In thousands of GEL Non-interest income Net fee and commission income 2021 2020 Change YoY 224,887 168,779 33.2% 17.3% NMF 39.9% Net gains from currency derivatives, foreign currency operations and translation 124,194 105,855 Other operating income Total other non-interest income CREDIT LOSS ALLOWANCE 53,035 12,730 402,116 287,364 Total credit loss allowance in 2021 amounted to GEL 21.0 million. This significant decrease on a YoY basis was driven by improved performance across all segments in 2021 and by a high base in 2020, due to the reflection of COVID-19 impact on the credit loss allowances. In thousands of GEL Credit loss recovery/(allowance) for loans to customers Credit loss recovery/(allowance) for other transactions* Total credit loss recovery/(allowance)* Operating income after expected credit and non-financial asset impairment losses* Cost of risk 2021 43,176 (22,142) 21,034 1,418,942 -0.3% 2020 (as restated) Change YoY (330,811) (25,570) (356,381) 758,682 NMF -13.4% NMF 87.0% 2.4% -2.7 pp * Certain amounts do not correspond to 2020 operating income after expected credit and non-financial asset impairment losses as they reflect the reclassifications made by the management between net impairment of non-financial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the financial statements. NMF – no meaningful figures 73 TBC BANK MANAGEMENT REPORT 2021 OPERATING EXPENSES In 2021, our total operating expenses expanded by 18.0% YoY. In 2021, the increase in our operating expenses was mainly driven by staff costs, due to higher performance related costs, including management’s variable compensation. At the same time, the increase in administrative and other expenses across the board was due to low base in 2020 and increased business activities. The cost to income ratio stood at 32.5%, down by 2.1 pp YoY. In thousands of GEL Operating expenses Staff costs Provisions for liabilities and charges Depreciation and amortization Administrative & other operating expenses* Total operating expenses* Cost to income 2021 (255,747) - (70,622) (128,624) (454,993) 32.5% 2020 (as restated) Change YoY (206,887) (2,600) (64,068) (111,914) (385,469) 34.6% 23.6% -100.0% 10.2% 14.9% 18.0% -2.1 pp * Certain amounts do not correspond to 2020 operating expense figures as they reflect the reclassifications made by the management between net impairment of non-financial assets and administrative and other operating expenses. For more information, please refer to the note 2 of the financial statements. NET INCOME In 2021, our record high profitability was driven by strong income generation across all categories, as well as strong performance on asset quality side. As a result, our ROE stood at 26.3%, ROA stood at 3.7%. In thousands of GEL Losses from modifications of financial instruments Profit before tax Income tax (expense)/credit Profit for the year ROE ROA FUNDING AND LIQUIDITY 2021 (1,726) 962,223 (119,278) 842,945 26.3% 3.7% 2020 Change YoY (41,015) 332,198 5,062 337,260 12.9% 1.70% -95.8% NMF NMF NMF 13.4 pp 2.0 pp In 2021, we utilized excess liquidity generated in 2020 and our liquidity coverage ratio, as defined by the NBG was 115.8%, above the 100% limit, while the LCR in GEL and FC stood at 107.7% and 120.8% respectively, above the respec- tive limits of 75% and 100%. As of 31 December 2021, NSFR stood at 127.3%, compared to the regulatory limit of 100%. Minimum net stable funding ratio, as defined by the NBG Net stable funding ratio as defined by the NBG Net loans to deposits + IFI funding Leverage (Times) Minimum total liquidity coverage ratio, as defined by the NBG Minimum LCR in GEL, as defined by the NBG Minimum LCR in FC, as defined by the NBG Total liquidity coverage ratio, as defined by the NBG LCR in GEL, as defined by the NBG LCR in FC, as defined by the NBG 31-Dec-21 31-Dec-20 Change YoY 100.0% 127.3% 101.3% 6.7x 100.0% 75%* 100.00% 115.8% 107.7% 120.8% 100.0% 126.0% 100.7% 7.9x 100.0% n/a 100.0% 134.2% 132.2% 134.9% 0.0 pp 1.3 pp 0.6 pp -1.2x 0.0 pp NMF 0.0 pp -18.4 pp -24.5 pp -14.1 pp * In May 2021, NBG restored the NBG GEL LCR limit, which was temporarily removed for one year 74 TBC BANK MANAGEMENT REPORT 2021FINANCIAL REVIEW CONTINUED REGULATORY CAPITAL On a YoY basis, the Bank’s CET1, Tier 1 and Total capital adequacy ratios increased by 3.3 pp, 3.7 pp and 3.2 pp, respec- tively. This increase was mainly driven by strong net income generation, the issuance of an AT1 Bond in November 2021 in the amount of USD 75 million, and by local currency appreciation, which was partially offset by an increase in the loan book. In thousands of GEL CET 1 Capital Tier 1 Capital Total Capital Total Risk-weighted Exposures Minimum CET 1 ratio CET 1 Capital adequacy ratio Minimum Tier 1 ratio Tier 1 Capital adequacy ratio Minimum total capital adequacy ratio Total Capital adequacy ratio LOAN PORTFOLIO 31-Dec-21 31-Dec-20 Change YoY 2,759,894 3,379,414 4,102,927 1,911,233 2,385,181 3,137,912 20,217,629 18,301,477 11.7% 13.7% 14.0% 16.7% 18.4% 20.3% 7.4% 10.4% 9.2% 13.0% 13.7% 17.1% 44.4% 41.7% 30.8% 10.5% 4.3 pp 3.3 pp 4.8 pp 3.7 pp 4.7 pp 3.2 pp As of 31 December 2021, the gross loan portfolio reached GEL 16,954.6 million, up by 11.5% YoY or by 17.3% on a con- stant currency basis. The proportion of gross loans denominated in foreign currency decreased by 5.7 pp YoY and accounted for 53.7% of total loans, while on a constant currency basis the proportion of gross loans denominated in foreign currency was down by 3.4 pp YoY and stood at 56.0%. As of 31 December 2021, our market share in total loans stood at 38.8%, down by 0.2 pp YoY, while our loan market share in legal entities was 39.1%, up by 0.5 pp over the same period, and our loan market share in individuals stood at 38.6%, down by 0.8 pp YoY. In thousands of GEL Loans and advances to customers Retail – Retail loans GEL – Retail loans FC CIB – CIB loans GEL – CIB loans FC MSME – MSME loans GEL – MSME loans FC 31-Dec-21 31-Dec-20 Change YoY 6,265,507 3,580,468 2,685,039 6,547,741 2,188,776 4,358,965 4,141,305 2,082,204 2,059,101 5,846,274 3,007,482 2,838,792 5,831,871 1,599,857 4,232,014 3,522,370 1,559,127 1,963,243 7.2% 19.1% -5.4% 12.3% 36.8% 3.0% 17.6% 33.5% 4.9% 11.5% Total loans and advances to customers 16,954,553 15,200,515 The comparative numbers for 2020 do not correspond with the numbers disclosed in 2020 report, since they include re-segmentation effects as de- scribed in note 28 of the financial statements, with the exception of standard annual re-segmentation. 75 TBC BANK MANAGEMENT REPORT 2021Loan yield – Loan yield GEL – Loan yield FC Retail Loan Yield – Retail loan yield GEL – Retail loan yield FC CIB Loan Yield – CIB loan yield GEL – CIB loan yield FC MSME Loan Yield – MSME loan yield GEL – MSME loan yield FC 2021 10.2% 15.1% 6.5% 11.5% 16.1% 6.1% 9.0% 13.7% 7.0% 10.2% 14.9% 6.0% 2020 Change YoY 10.1% 15.2% 6.7% 11.5% 16.5% 6.6% 8.6% 13.2% 7.0% 10.2% 14.9% 6.3% 0.1 pp -0.1 pp -0.2 pp 0.0 pp -0.4 pp -0.5 pp 0.4 pp 0.5 pp 0.0 pp 0.0 pp 0.0 pp -0.3 pp The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. LOAN PORTFOLIO QUALITY On a YoY basis, total par 30 improved by 0.6 pp. The decrease was mainly driven by the Retail segment on the back of write-offs of the unsecured loans and strong performance of the mortgage portfolio. Our NPL ratio improved by 2.3 pp YoY and amounted to 2.4%. The recovery was observed in all segments, mainly driven by resumed repayments on COVID-19 restructured loans. Par 30 Retail CIB MSME Total loans 31-Dec-21 31-Dec-20 Change YoY 2.2% 0.6% 4.0% 2.0% 3.5% 1.0% 3.7% 2.6% -1.3 pp -0.4 pp 0.3 pp -0.6 pp The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. Non-performing Loans 31-Dec-21 31-Dec-20 Change YoY Retail CIB MSME Total loans 2.5% 1.4% 4.0% 2.4% 5.8% 2.4% 6.5% 4.7% -3.3 pp -1.0 pp -2.5 pp -2.3 pp The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. NPL coverage 31-Dec-21 31-Dec-20 Provision Coverage Total Coverage Provision Coverage Total Coverage Retail CIB MSME Total 157.0% 56.8% 68.0% 99.2% 222.7% 126.4% 155.5% 174.6% 102.4% 77.1% 66.4% 85.6% 170.3% 148.0% 150.5% 159.4% The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. In addition, in 2021 the management changed collateral coverage methodology and applied a more conservative approach. The total NPL coverages for 2020 have been recalculated per updated method- ology. 76 TBC BANK MANAGEMENT REPORT 2021FINANCIAL REVIEW CONTINUED COST OF RISK The total cost of risk for 2021 stood at -0.3%, driven by improved performance across all segments in 2021 and by a high base in 2020 due to the reflection of COVID-19 impact on the credit loss allowances. Cost of risk Retail CIB MSME Total 2021 0.4% -1.0% -0.2% -0.3% 2020 3.8% 0.6% 3.0% 2.4% Change YoY -3.4 pp -1.6 pp -3.2 pp -2.7 pp The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. DEPOSIT PORTFOLIO The total deposits portfolio increased by 17.8% YoY across all segments and amounted to GEL 14,884.1 million, while on a constant currency basis the total deposit portfolio increased by 23.1% over the same period. The proportion of deposits denominated in foreign currency was down by 3.2 pp YoY and accounted for 62.8% of total deposits, while on a constant currency basis the proportion of deposits denominated in foreign currency decreased by 1.6 pp YoY and stood at 64.4%. As of 31 December 2021, our market share in deposits amounted to 40.4%, up by 3.2 pp YoY, and our market share in deposits to legal entities stood at 40.5%, up by 6.0 pp over the same period. Our market share in deposits to individ- uals stood at 40.3%, up by 0.8 pp YoY. In thousands of GEL Customer Accounts Retail – Retail deposits GEL – Retail deposits FC CIB – CIB deposits GEL – CIB deposits FC MSME – MSME deposits GEL – MSME deposits FC 31-Dec-21 31-Dec-20 Change YoY 5,629,823 1,492,325 4,137,498 7,378,552 2,970,310 4,408,242 1,564,150 761,493 802,657 4,975,661 1,236,594 3,739,067 5,778,914 1,890,889 3,888,025 1,368,490 661,941 706,549 13.1% 20.7% 10.7% 27.7% 57.1% 13.4% 14.3% 15.0% 13.6% 17.8% Total Customer Accounts* 14,884,145 12,634,295 * Total deposit portfolio includes Ministry of Finance deposits in the amount of GEL 511 million and GEL 312 million as of 31 December 2020 and 31 December 2021, respectively. The comparative numbers for 2020 do not correspond with the numbers disclosed in 2020 report, since they include re-segmentation effects as de- scribed in note 28 of the financial statements, with the exception of standard annual re-segmentation. Deposit rate – Deposit rate GEL – Deposit rate FC Retail Deposit Yield – Retail deposit rate GEL – Retail deposit rate FC CIB Deposit Yield – CIB deposit rate GEL – CIB deposit rate FC MSME Deposit Yield – MSME deposit rate GEL – MSME deposit rate FC 2021 3.4% 6.7% 1.5% 2.2% 4.9% 1.3% 4.3% 8.5% 2.0% 0.8% 1.4% 0.2% 2020 Change YoY 3.6% 6.5% 2.0% 2.6% 5.3% 1.7% 4.4% 8.1% 2.5% 0.9% 1.6% 0.3% -0.2 pp 0.2 pp -0.5 pp -0.4 pp -0.4 pp -0.4 pp -0.1 pp 0.4 pp -0.5 pp -0.1 pp -0.2 pp -0.1 pp The comparative ratios for 2020 do not correspond with the ratios disclosed in 2020 report, since they include re-segmentation effects as described in note 28 of the financial statements, with the exception of standard annual re-segmentation. 77 TBC BANK MANAGEMENT REPORT 2021 RATIOS Ratios (based on monthly averages, where applicable) 2021 2020 Profitability ratios: ROE ROA Cost to income NIM Loan yield Deposit rate Cost of funding Asset quality & portfolio concentration: Cost of risk PAR 90 to Gross Loans NPLs to Gross Loans NPL provision coverage Total NPL coverage** Credit loss level to Gross Loans Related Party Loans to Gross Loans Top 10 Borrowers to Total Portfolio Top 20 Borrowers to Total Portfolio Capital & liquidity positions: Net Loans to Deposits plus IFI*** Funding Net Stable Funding Ratio Liquidity Coverage Ratio Leverage CET 1 CAR (Basel III) Tier 1 CAR (Basel III) Total 1 CAR (Basel III) 26.3% 3.7% 32.5% 5.0% 10.2% 3.4% 4.4% -0.3% 1.2% 2.4% 99.2% 174.6% 2.4% 0.1% 6.9% 10.6% 101.3% 127.3% 115.8% 6.7x 13.7% 16.7% 20.3% 12.9% 1.7% 34.6% 4.7% 10.1% 3.6% 4.8%* 2.4% 1.5% 4.7% 85.6% 159.4% 4.0% 0.0% 7.9% 12.1% 100.7% 126.0% 134.2% 7.9x 10.4% 13.0% 17.1% *The Group enters into swap agreements denominated in foreign currencies with a view to decrease cost of funding. Respective interest effect is presented within net interest income, but has not been previously included in the cost of funding ratio calculation. As the contracts reached significant volume, the Group revisited the presentation of effects in the cost of funding ratio and decided to include interest effect from swap agreements in the calculation of cost of funding. The change was made retrospectively and ratios of previous periods have also been restated. ** In 2021 the management changed collateral coverage methodology and applied a more conservative approach. The total NPL coverage for 2020 have been recalculated per updated methodology. *** International Financial Institutions The ratio definitions are given on pages 267-268. 78 TBC BANK MANAGEMENT REPORT 2021FINANCIAL REVIEW CONTINUEDMATERIAL EXISTING AND EMERGING RISKS Material Existing and Emerging Risks The emergence of the COVID-19 pandemic has en- hanced the critical importance of risk management to the Group’s strategy. During the COVID-19 era, it is even more essential to identify emerging risks and uncertainties that could adversely impact the Group’s performance, financial condition and prospects. This section analyses the material principal and emerging risks and uncertainties the Group faces. However, we cannot exclude the possibility of the Group’s perfor- mance being affected by risks and uncertainties oth- er than those listed below. More details regarding risk management practices can be found on pages 88-103. At the time of writing this report, there is uncertainty around the war in Ukraine, its potential impact is sum- marized in the emerging risks section. The Supervisory Board has undertaken a robust as- sessment of both the principal and emerging risks facing the Group and the long-term viability of the Group’s operations, in order to determine whether to adopt the going concern basis of accounting. Based on the review and analysis the Supervisory Board con- firmed that they have a reasonable expectation of the Group’s viability over the next three years up to 1 Janu- ary 2025 and that the Group will be able to continue its operations and meet its liabilities as they fall due over the three year period from 1 January 2022 to 1 January 2025. PRINCIPAL RISKS AND UNCERTAINTIES 1. Credit risk is an integral part of the Group’s busi- ness activities Risk description Credit risk is the greatest material risk faced by the Group, given the Group is engaged principally in tra- ditional lending activities. The Group’s customers in- clude legal entities as well as individual borrowers. Due to the high level of dollarization in Georgia’s fi- nancial sector, currency-induced credit risk is a com- ponent of credit risk, which relates to risks arising from foreign currency-denominated loans to unhedged borrowers in the Group’s portfolio. Credit risk also in- cludes concentration risk, which is the risk related to credit portfolio quality deterioration as a result of large exposures to single borrowers or groups of connected borrowers, or loan concentration in certain economic industries. Losses may be further aggravated by unfa- vorable macroeconomic conditions. These risks are de- scribed in more detail as a separate principal risk. COVID-19 has increased uncertainty and caused signif- icant economic disruptions in many sectors, particularly in the hospitality & leisure, real estate management and development sectors. Such economic disruptions run the risk of deteriorating the financial standing of bor- rowers and increase the Group’s credit risk. Risk mitigation A comprehensive credit risk assessment framework is in place with a clear division of duties among the par- ties involved in the credit analysis and approval process. The credit assessment process differs by segment, and is further differentiated across various product types to reflect the differing natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an individual basis, whereas the deci- sion-making process for smaller retail and micro loans is largely automated. The rules for manual and automat- ed underwriting are developed by units within the risk function, which are independent from the origination and business development units. The credit scoring and underwriting models are developed by an inde- pendent Credit Modelling team, within the risk function and the developed models are then validated as well by another independent Model Risk Management team, also from the risk function. In the case of corporate and medium-sized business borrowers, the loan review pro- cess is conducted within specific sectoral teams, which accumulate deep knowledge of the corresponding sectoral developments. The Group uses a robust monitoring system to react promptly to macro and micro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tailored to the specifics of in- dividual segments, as well as encompassing individual credit exposures, overall portfolio performance and ex- ternal trends that may impact the portfolio’s risk profile. Additionally, the Group uses a comprehensive portfolio supervision system to identify weakened credit expo- sures and take prompt, early remedial actions, when necessary. 79 TBC BANK MANAGEMENT REPORT 2021The Group’s credit portfolio is highly diversified across customer types, product types and industry segments, which minimizes credit risk at the Group level. As of 31 December 2021, the retail segment represented 37.0% of the total portfolio, which was comprised of 65.6% mortgage and 34.4% non-mortgage exposures. No single business sector represented more than 9.4% of the total portfolio at the end of 2021. Collateral represents the most significant credit risk mitigation tool for the Group, making effective col- lateral management one of the key risk management components. Collateral on loans extended by the Group may include, but is not limited to, real estate, cash deposits, vehicles, equipment, inventory, precious metals, securities and third party guarantees. The Group has a largely collateralised portfolio in all its segments, with real estate representing a major share of collateral. As of 31 December 2021, 77.3% of the Group’s portfolio was secured by cash, real estate or gold. A sound collateral management framework en- sures that collateral serves as an adequate mitigating factor for credit risk management purposes. Additionally, the Bank actively performs stress testing and scenario analysis in order to check the resilience of borrowers under various stress conditions. The stress tests entail assumptions about the depreciation of the local currency, GDP growth, sectoral growth, unem- ployment, inflation, changes in real estate and com- modity prices, changes in interest rates, and loan and deposit portfolio developments. The Bank carries out intensive financial monitoring to identify borrowers’ weakened financial and business prospects in order to offer them a restructuring plan that is tailored to their individual needs. 2. The Group faces currency-induced credit risk due to the high share of loans denominated in foreign currencies in the Group’s portfolio Risk description A potential material GEL depreciation is one of the most significant risks that could negatively impact portfolio quality, due to the large presence of foreign currencies on the Group’s balance sheet. As of 31 De- cember 2021, 53.7% of the Group’s total gross loans and advances to customers (before provision for loan impairment) were denominated in foreign currencies. The income of many customers is directly linked to foreign currencies via remittances, tourism or exports. Nevertheless, customers may not be protected against significant fluctuations in the GEL exchange rate against the currency of the loan. The US$/GEL rate re- mained volatile throughout 2021, with the average cur- rency exchange rate of GEL weakening by 3.6% year- on-year. The GEL remains in free float and is exposed to many internal and external factors that in some cir- cumstances could result in its depreciation. Risk mitigation Particular attention is paid to currency-induced credit risk, due to the high share of loans denominated in for- eign currencies in the Group’s portfolio. The vulnerabil- ity to exchange rate depreciation is monitored in order to promptly implement an action plan, as and when needed. The ability to withstand a certain amount of exchange rate depreciation is incorporated into the credit underwriting standards, which also include sig- nificant currency depreciation buffers for unhedged borrowers. In addition, the Group holds significant cap- ital against currency-induced credit risk. Given the experience and knowledge built through re- cent currency volatility, the Group is in a good position to promptly mitigate exchange rate depreciation risks. In January 2019, government authorities continued their efforts to reduce the economy’s dependence on foreign currency financing by increasing the cap to GEL 200,000 under which loans must be disbursed in the local currency. In addition, under the NBG’s responsible lending regulations, unhedged retail borrowers are re- quired to have much conservative Payment-to-Income (PTI) and Loan-to-Value (LTV) thresholds. The Bank has set a strategy to decrease the share of foreign currency loans in total portfolio. Annual tar- gets have been defined in the medium-term strategy, gradually decreasing the foreign currency share. The Assets and Liabilities Committee (ALCO) is closely monitoring the achievement of these targets. 3. The Group’s performance may be compromised by adverse developments in the economic environment Risk description A potential slowdown in economic growth in Georgia will likely have an adverse impact on the repayment capacity of borrowers, restraining their future invest- ment and expansion plans. These occurrences would be reflected in the Group’s portfolio quality and profit- ability, and would also impede portfolio growth rates. Negative macroeconomic developments could com- promise the Group’s performance in various ways, such as exchange rate depreciation, a spike in interest rates, rising unemployment, a decrease in household disposable income, falling property prices, worsening loan collateralization, or falling debt service capabilities of companies as a result of decreasing sales. Potential political and economic instability in neighboring coun- tries and its main trading/economic partners could negatively affect Georgia’s economic outlook through worsening current and financial accounts in the bal- ance of payments (e.g. decreased exports, tourism in- flows, remittances and foreign direct investments). The exogenous nature of the COVID-19 shock implies the potential for a quick recovery compared to con- ventional business cycles. While the observed restart 80 TBC BANK MANAGEMENT REPORT 2021MATERIAL EXISTING AND EMERGING RISKS CONTINUEDwas certainly expected, the Georgian economy has rebounded at a speed that exceeded initial expecta- tions, with real GDP increasing by 10.4% year-on-year, according to the preliminary data of the National Sta- tistics Office of Georgia (Geostat), as opposed to 4.7% - estimated at the beginning of the year. Economic growth was also up by 2.9% compared to the 2019 level. Importantly, this growth was broad based and was reflected in all sources of inflows as well as in domes- tic demand. The latter was fueled by a reversal of the shock amplifier (low credit and high savings of foreign currency in 2020), pent-up demand coupled with low US$ deposit yields, a stronger GEL, and the impact of eased lockdowns. Stronger domestic demand was also reflected in higher imports of goods. By the end of 2021, annual inflation remained elevated at 13.9%, because of a low base effect a year ago, due to state subsidies on utilities. In 2021, the NBG again intervened significantly on the FX market, mostly in the first half of the year. Over the course of the year, the NBG increased its policy rate from 8.0% to 10.5%. For more details on the developments in the Georgian economy in 2021, please refer to the economic over- view section on pages 12-15. Risk mitigation To decrease its vulnerability to economic cycles, the Group identifies cyclical industries and proactively manages its underwriting approach and clients with- in its risk appetite framework. The Group has in place a macroeconomic monitoring process that relies on close, recurrent observation of the economic develop- ments in Georgia and neighboring countries to identi- fy early warning signals indicating imminent economic risks. This system allows the Group to promptly assess significant economic and political occurrences and analyze their implications for the Group’s performance. These implications are duly translated into specific action plans with regards to reviewing underwriting standards, risk appetite metrics or limits, including the limits for each of the most vulnerable industries. Ad- ditionally, the stress testing and scenario analysis ap- plied during the credit review and portfolio-monitoring processes enable the Group to evaluate the impact of macroeconomic shocks on its business in advance. Resilience towards a changing macroeconomic en- vironment is incorporated into the Group’s credit un- derwriting standards. As such, borrowers are expected to withstand certain adverse economic developments through prudent financials, debt-servicing capabilities and conservative collateral coverage. Taking into account the impact of the COVID-19 crisis on Georgia’s economy, the Group has adjusted its risk management framework leveraging its already exist- ing stress testing practices. This included more thor- ough and frequent monitoring of the portfolio as well as stress testing, to ensure close control of changes in capital, liquidity, and portfolio quality in times of in- creased uncertainty. 4. The Group faces the risk of not meeting the min- imum regulatory requirements under the increasing capital requirement framework, which may com- promise growth and strategic targets. Additionally, adverse changes in FX rates may impact capital ad- equacy ratios Risk description In December 2017, the NBG introduced a new capital adequacy framework. Under the updated regulation, capital requirements consist of a Pillar 1 minimum re- quirement, combined buffers (systemic, countercycli- cal and conservation buffers) and Pillar 2 buffers. The initial regulation included a phase-in schedule that gradually introduced the buffer over a four-year period. In response to the COVID-19 pandemic, the NBG im- plemented certain countercyclical measures related to capital adequacy requirements, temporarily decreas- ing conservation and two-thirds of CICR buffers and postponing the phase-in schedule for pillar 2 buffers. The Bank has restored all released buffers since July 2021, lifting any restrictions on capital distribution. The NBG outlined a new schedule for the gradual in- troduction of pillar 2 buffers, with the phase-in of con- centration risk and Net GRAPE buffers beginning in March 2021 and due to be fully introduced by March 2023. In December 2021, the systemic buffer increased from 2.0% to 2.5%, as previously planned. The Bank’s capital- ization as of December 2021 stood at: • • 13.7% for CET 1 with an updated regulatory mini- mum requirement of 11.7%; 16.7% for Tier 1 with an updated regulatory mini- mum requirement of 14.0%; and • 20.3% for Total capital with an updated regulatory minimum requirement of 18.4%. The ratios were well above the respective regulatory minimums. In 2021, the NBG proposed amendments in the CICR buffer calculation methodology. According to the new methodology, which will be effective from March of 2023, current fixed CICR rate (75%) will be flexible in the range of 40% to 100% depending on the share of foreign currency loans in total portfolio: the lower is the share, the lower will be the CICR buffer requirement. GEL volatility has been and remains a significant risk to the Bank’s capital adequacy. A 10% GEL depreciation would translate into a 0.8pp, 0.7pp and 0.6 pp drop in the Bank’s CET 1, Tier 1 and Total regulatory capital ad- equacy ratios, respectively. 81 TBC BANK MANAGEMENT REPORT 2021Risk mitigation The Group undertakes stress testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Such analyses indicate that the Group holds sufficient capital to meet the current min- imum regulatory requirements. Capital forecasts, as well as the results of the stress testing and what-if sce- narios, are actively monitored with the involvement of the Bank’s Management Board and Risk Committee to ensure prudent management and timely action, when needed. 5. The Group is exposed to regulatory and enforce- ment action risk Risk description The Bank’s activities are highly regulated and thus face regulatory risk. The NBG can increase prudential re- quirements across the whole sector as well as for spe- cific institutions within it. Therefore, the Group’s prof- itability and performance may be compromised by an increased regulatory burden. The NBG sets lending limits and other economic ratios (including, inter alia, lending, liquidity and investment ratios) in addition to mandatory capital adequacy ratios. Under Georgian banking regulations, the Bank is re- quired, among other things, to comply with minimum reserve requirements and mandatory financial ratios, and to regularly file periodic reports. The Bank is also regulated by the tax code and other relevant laws in Georgia. Following the parent company’s listing on the London Stock Exchange’s premium segment, the Group became subject to increased regulations from the UK Financial Conduct Authority. In addition to its banking operations, the Group also offers other regu- lated financial services products, including leasing and brokerage services. The Group takes all necessary steps with the intention of ensuring compliance with relevant legislation and regulations. The Group is also subject to financial cov- enants in its debt agreements. For more information, see pages 245-250 in the Group’s Audited Financial Statements. Risk mitigation The Group has established systems and processes to ensure full regulatory compliance, which are embedded in all levels of the Group’s operations. The dedicated compliance department reports directly to the Chief Executive Officer and has a primary role in the manage- ment of regulatory compliance risk. The Group’s Risk Committee is responsible for regulatory compliance at the Supervisory Board level. In terms of banking regula- tions and Georgia’s taxation system, the Group is closely engaged with the regulator to ensure that new proce- dures and requirements are discussed in detail before their implementation. Although the decisions made by regulators are beyond the Group’s control, significant regulatory changes are usually preceded by a consulta- tion period that allows all lending institutions to provide feedback and adjust their business practices. 6. The Group is exposed to concentration risk Risk description The Group has large individual exposures to sin- gle-name borrowers whose potential default would entail increased credit losses and higher impairment charges. The Group’s portfolio is well diversified across sectors, resulting in only a moderate vulnerability to sector concentration risks. However, should exposure to common risk drivers increase, the risks are expected to amplify correspondingly. The Group’s maximum exposure to the single largest industry (Real Estate) stood at 9.4% of the loan portfolio as of 31 December 2021. At the end of 2021, exposure to the 20 largest borrowers stood at 10.6% of the loan portfolio. Risk mitigation The Group constantly monitors the concentrations of its exposure to single counterparties, as well as sectors and common risk drivers, and introduces limits for risk mitigation. As part of its risk appetite framework, the Group limits both single-name and sector concen- trations. Any considerable change in the economic or political environment in Georgia or in neighbouring countries would trigger the Group to review of the risk appetite criteria to mitigate the emerging risk of con- centration. Stringent monitoring tools are in place to ensure compliance with the established limits. Due to the increased uncertainty caused by the COVID-19 pandemic, close monitoring was carried out consis- tently, based on macro expectations, to estimate the performance of our top 20 corporate borrowers. In addition, the Bank has dedicated restructuring teams to manage borrowers who face financial dif- ficulties. When deemed necessary, clients are trans- ferred to such teams for more efficient handling and, ultimately, to limit any resulting credit risk losses. The NBG’s new capital framework introduced a concentra- tion buffer under Pillar 2 that helps to ensure that the Group remains adequately capitalised to mitigate con- centration risks. 7. Liquidity risk is inherent in the Group’s operations Risk description While the Group currently has sufficient financial re- sources available to meet its obligations as they fall 82 TBC BANK MANAGEMENT REPORT 2021MATERIAL EXISTING AND EMERGING RISKS CONTINUEDdue, liquidity risk is inherent in banking operations and can be heightened by numerous factors. These include an overreliance on, or an inability to access, a particular source of funding, as well as changes in credit ratings or market-wide phenomena, such as the global financial crisis that took place in 2007. Access to credit for companies in emerging markets is signifi- cantly influenced by the level of investor confidence and, as such, any factors affecting investor confidence (e.g. a downgrade in credit ratings, central bank or state interventions, or debt restructurings in a relevant indus- try) could influence the price or the availability of fund- ing for companies operating in any of these markets. The Group was in compliance with the minimum li- quidity requirements set by the NBG, which include the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). As of 31 December 2021, the net loan to deposits plus international financial institution funding ratio stood at 101.3%, the liquidity coverage ra- tio at 115.8%, and the net stable funding ratio at 127.3%. These figures are all comfortably above the NBG’s minimum requirements or guidance for such ratios. In May 2021, the NBG restored the NBG GEL LCR limit (>=75%), which had been removed for one year as one of countercyclical measures implemented in relation to liquidity requirements as a result of COVID-19. Risk mitigation To mitigate this risk, the Group holds a solid liquidity position and performs an outflow scenario analysis for both normal and stress circumstances to make sure that it has adequate liquid assets and cash inflows. The Group maintains a diversified funding structure to manage the respective liquidity risks. There is ad- equate liquidity to withstand significant withdrawals of customer deposits, but the unexpected and rapid withdrawal of a substantial amount of deposits could have a material adverse impact on the Group’s busi- ness, financial condition, and results of operations and/ or prospects. As part of its liquidity risk management framework, the Group has a liquidity contingency plan in place outlin- ing the risk indicators for different stress scenarios and respective action plans. The liquidity risk position and compliance with internal limits are closely monitored by the Assets and Liabilities Management Committee (ALCO). Due to its high liquidity position in foreign currency, the Bank made prepayments of some IFI resources in the amount of US$ 237.4 million in late 2020 and through- out 2021. In addition, over the same period the Bank performed a cost-optimization process and attracted cheaper resources from FIs. 8. Group’s income is heavily reliant on Net Interest Income Risk description Net interest income accounts for the majority of the Group’s total income. Consequently, fluctuations in its NIM affect the results of operations. The new regula- tions as well as high competition could drive interest rates down, compromising the Group’s profitability. At the same time, the cost of funding is largely exogenous to the Group and is derived from both local and inter- national markets. In 2021, the NIM increased by 0.3pp year-on-year to 5.0%, driven by an increase in loan yields, a decrease in the foreign currency (FC) cost of fund and optimi- zations in wholesale funding, further accompanied by increased loan larisation. The Bank manages its exposure to interest rate risk, fol- lowing the NBG IRR regulation introduced in Septem- ber 2020. As of 31 December 2021, GEL 4,148 million in assets (18%) and GEL 2,180 million in liabilities (11%) were floating in GEL currency, whereas GEL 8,054 mil- lion of assets (34%) and GEL 761 million of liabilities (4%) were floating, related to the LIBOR/Euribor/FED/ECB rates. The Bank was in compliance with the Economic Value of Equity (EVE) sensitivity limit set by the NBG at 15% of Tier 1 capital, with the ratio standing at 2.9% by 31 December 2021. Risk mitigation In 2021 the Bank used excess liquidity to redeem costly institutional funding and negotiated the reduction of long-term funding margins, thereby aiding the gains in NIM. The Bank continues to focus on fee and commis- sion income growth to safeguard from possible margin compressions on lending and deposit products in the future. To meet the asset-liability objectives and manage the interest rate risk, the Bank uses the high quality invest- ment securities portfolio, long-term funding and deriv- ative contracts. 9. The threat posed by cyber-attacks has increased in recent years and continues to grow. The risk of po- tential cyber-attacks, which have become more so- phisticated, may lead to significant security breach- es. Such risks change rapidly and require continued focus and investment Risk description No cyber-security breaches have happened at the Bank in recent years. Nonetheless, the Group’s rising dependency on IT systems increases its exposure to potential cyber-attacks. 83 TBC BANK MANAGEMENT REPORT 2021Risk mitigation In order to mitigate the risks associated with cyber-at- tacks and ensure clients’ security, the Group continu- ously updates and enhances its in-depth security strat- egy, which covers multiple preventive and detective controls ranging from the data and end-point comput- ers to edge firewalls. A Security Operations Center has been built, which monitors every possible anomaly that is identified across the organization’s network in order to detect potential incidents and respond to them effectively. At least once a year, a full information security and cy- ber security threat analysis is performed, taking into consideration the relevant regional and sector specific perspectives. Also at least once a year, a presentation is given to the Risk Committee of the Supervisory Board, with a deep dive into the information security matters. At least once every two years, as part of this analysis, an external consultant is contracted to assess the effi- ciency of our capabilities against industry best practic- es and real world cyber-attack scenarios. This analysis gives the Group a broad overview as well as detailed insight, which help to further enhance its information and cyber security systems. In addition, cyber-attack readiness exercises are performed on a regular basis. These exercises evaluate the actual position of the Group in this area and provide a benchmark against international best practices. Our employees play a crucial role in information secu- rity. As a result, annual mandatory training sessions are conducted for all employees, which are comprised of remote learning courses on security issues, fraud and phishing simulations as well as informative emails to further assist our employees with information security matters. New employees are also given training as part of the onboarding process. These measures ensure that employees are fully aware of their responsibilities and are prepared for various security threats. The Information Security Steering Committee gov- erns information and cyber security to ensure that rel- evant risks are at an acceptable level and that continu- ous improvement of the management processes are achieved. Disaster recovery plans are in place to ensure business continuity in case of need. Since the beginning of the COVID-19 pandemic, the Group has activated secure remote working policies, which ensure that homeworking environments are protected against relevant cyber-threats while the se- curity team provides effective oversight of teleworking channels. Although there has been a noticeable in- crease in phishing attempts against employees, there have been no major incidents. The Security Operation Center and Threat Hunting teams have successfully adopted effective remote collaboration and commu- nication tools and practices. In 2021, the Bank achieved ISO 27001 certification of its information security management system. That demonstrates that the Bank is following robust infor- mation security practices effectively, in order to protect its information and information systems from different types of threats. TBC Bank has not experienced any ma- terial information security breach in the last three years. In December 2021, Ernst & Young Tbilisi office con- ducted two audits, assessment against Cyber Securi- ty Management Framework and assessment against SWIFT CSCF for the Bank. As a result, no critical findings and major non-compliances were identified during these exercises. Cyber Security Management Framework is defined by National Bank of Georgia, which is based on NIST Cyber Security Management Framework. 10. External and internal fraud risks are part of the operational risk inherent in the Group’s business. Considering the increased complexity and diversifi- cation of operations, together with the digitalisation of the banking sector, fraud risks are evolving. Unless proactively managed, fraud events may materially impact the Group’s profitability and reputation Risk description External fraud events may arise from the actions of third parties against the Group, most frequently involv- ing events related to banking cards, loans and client phishing. Internal frauds arise from actions committed by the Group’s employees, and such events happen less frequently. During the reporting period, the Group faced several instances of fraud, none of which had a material impact on the Group’s profit and loss state- ment. As a result of the COVID-19 pandemic, the threat of fraud and the rapid growth in digital crime has been exacerbated and fraudsters are adopting new tech- niques and approaches to exploit various possibilities to illegally obtain funds. Therefore, unless properly monitored and managed, the potential impact can be- come substantial. Risk mitigation The Group actively monitors, detects and prevents risks arising from fraud events and permanent monitor- ing processes are in place to detect unusual activities in a timely manner. The risk and control self-assess- ment exercise focuses on identifying residual risks in key processes, subject to the respective corrective ac- tions. Given our continuous efforts to monitor and mit- igate fraud risks, together with the high sophistication of our internal processes, the Group ensures the timely identification and control of fraud-related activities. 11. The Group remains exposed to some reputational risk Risk Description There are reputational risks to which the Group may be exposed, such as risks related to anti-banking cam- 84 TBC BANK MANAGEMENT REPORT 2021MATERIAL EXISTING AND EMERGING RISKS CONTINUEDpaigns, increased cases of phishing and other cyber- crimes, as well as risks associated with the digitalization process, such as digital service interruptions affecting digital bank, ATM and payment terminal operations. However, none of the aforementioned risks is unique to the Group. Risk Mitigation To mitigate the possibility of reputational risks, the Group works continuously to maintain strong brand recognition among its stakeholders. The Group fol- lows all relevant internal policies and procedures to minimize the impact of direct/indirect reputational risks. The Group monitors its brand value through pub- lic opinion studies/surveys and by receiving feedback from stakeholders on an ongoing basis. Dedicated internal and external marketing and com- munications teams are in place, which actively monitor media coverage on a daily basis. These teams monitor risks, develop scenarios and create respective contin- gency plans. The Group tries to identify early warning signs of potential reputational or brand damage in or- der to both mitigate and elevate it to the attention of the Supervisory Board before it escalates. The Communications and Cyber-security teams con- duct extensive awareness-raising campaigns on cy- ber-security and financial literacy, involving the media, the Banking Association of Georgia and Edufin (TBC’s in-house financial education platform) aimed at mitigat- ing and preventing cyber threats and phishing cases. 12. The Group faces the risk that its strategic initia- tives do not translate into long-term sustainable val- ue for its stakeholders Risk Description The Group may face the risk of developing a business strategy that does not safeguard long-term value cre- ation in an environment of changing customer needs, competitive environment and regulatory restrictions. In addition, increased uncertainty together with the major economic and social disruptions caused by the COVID-19 pandemic may hamper the Group’s ability to effectively develop and execute its strategic initia- tives in a timely manner and thereby compromise its capacity for long-term value creation. Please see the Group’s main strategic priorities in our business strategy and key performance indicators sec- tion on pages 18-23. Risk Mitigation The Group conducts annual strategic review sessions involving the Bank’s top and middle management in order to ensure that it remains on the right track and as- sesses business performance from different perspec- tives, concentrating its analysis on key trends and mar- ket practices, both in regional and global markets. In addition, the Bank continuously works with the world’s leading consultants in order to enhance its strategy. Further, the Group conducts quarterly analyses and monitors the metrics used to measure strategy execu- tion, and in case of any significant deviations, it takes corrective or mitigation actions. 13. The Group is exposed to risks related to its ability to attract and retain highly qualified employees Risk Description The Group faces the risk of losing of key personnel or the failure to attract, develop and retain skilled or qual- ified employees. In particular, the strategic decision to transform into a digital company entails increased demands on high calibre IT professionals across the Group. In addition, in order to adapt to the fast chang- ing business environment, the Group needs to foster an “Agile” culture and equip employees with the nec- essary skills. In addition, the COVID-19 pandemic has created additional HR challenges in relation to safe- guarding employees’ health and wellbeing, maintain- ing high efficiency levels, strong internal communica- tion and a strong corporate culture. Risk Mitigation The Group pays significant attention to human capi- tal management strategies and policies, which include approaches to the recruitment, retention and devel- opment of talent, and offers competitive reward pack- ages to its employees. The Group has also developed and implemented an “Agile” framework that aims to in- crease employee engagement and satisfaction. More- over, the Bank set up an IT and Risk academy to attract and train young professionals. The best students are offered employment at the Bank. In addition, the Bank has an in-house academy that provides a range of courses for employees in different fields. To ensure the maintenance of an effective internal communication system whilst working from home, we enhanced different digital channels to engage with our employees. Regular management meetings are con- ducted with staff in order to keep them updated with the Group’s strategic initiatives and financial position as well as address their concerns during this highly uncertain period. In order to further promote and en- hance our corporate culture, the Bank’s internal Face- book group has become more active by, for example, posting employee profiles and sharing success stories. Additionally, the new remote working policy adopted by the Bank gives the possibility to attract new talent from beyond Georgia. 85 TBC BANK MANAGEMENT REPORT 2021EMERGING RISKS Risk mitigation Emerging risks are those that have large unknown components and may affect the performance of the Group over a longer time horizon. We believe the fol- lowing risks have the potential to increase in signifi- cance over time and could have a similar impact on the Group as the principal risks. The Group actively employs stress testing and other risk measurement and monitoring tools to ensure that early triggers are identified and translated into specif- ic action plans to minimize the negative impact on the Bank’s capital adequacy, liquidity, and portfolio quality in times of increased uncertainty. 1. The Group’s performance may be compromised by adverse developments in the region, in particular the war in Ukraine Risk description While inflows to the Georgian economy are quite di- versified, the country is still vulnerable to geopolitical and economic developments in its region. In particular, the Russian invasion of Ukraine and the consequent sanctions imposed on Russia have an adverse impact on the Georgian economy. As of 2021, Ukraine and Russia’s share of Georgia’s ex- ports, remittances, tourism, and FDI inflows amount- ed to around 21%. Specifically, Ukraine and Russia accounted for 7% and 14% of exports, 4% and 18% of remittance inflows, and 15% and 12% of total tourism inflows, respectively. Ukraine and Russia’s share of FDI exposure was lower at 1% and 6%, respectively, mainly comprised of reinvested earnings from previous waves of FDI. Importantly, over half of Georgia’s exports to Russia and Ukraine are re-exports, while around 50% of tourism and remittance inflows from these countries are spent on imports. These factors decrease the over- all net negative impact from lost inflows. At the same time, the adverse spillover effect from Georgia’s other economic partners should also be taken into account. Before the Russian invasion of Ukraine, TBC Capital estimated that the Georgian economy would grow by around 6.0% in 2022, 5.5% in 2023 and 5.0% in 2024 – close to its trend rate of around 5.2%. According to the World Bank’s projections1 as of January 2022, the Georgian economy was forecast to grow by 5.5% and 5.0% in 2022 and 2023, respectively. In fact, the Jan- uary growth data released by Geostat shows a very strong growth momentum. Although the 18.0% real YoY expansion was mainly on the back of a low base effect, growth was also strong at 4.4% when compared to January 2020, before the pandemic started, and much higher than in prior months when looking at the same, consistent measurement. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia, there will be adverse implications for the growth outlook, as well as for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risk. 2. The Group is exposed to the risks arising from cli- mate change Risk description The risks associated with climate change have a physical impact, arising from more frequent and se- vere weather changes, and a transitional impact that may entail extensive policy, legal and technological changes to reduce the ecological footprint of house- holds and businesses. For the Group, both of these risks could materialize through the impairment of asset values and deteriorating creditworthiness of our cus- tomers, which could result in a reduction of the Group’s profitability. The Group may also become exposed to reputational risks as a result of its lending to, or other business operations with, customers deemed to be contributing to climate change. Risk mitigation The Group’s objective is to act responsibly and man- age the environmental and social risks associated with its operations in order to minimize negative impacts on the environment. This approach enables us to reduce our ecological footprint by using resources efficiently and promoting environmentally friendly measures in order to mitigate the effects of climate change. The Group has in place an Environmental Policy, which governs its Environmental Management Sys- tem (“EMS”) and ensures that the Group’s operations adhere to the applicable environmental, health and safety and labour regulations and practices. We take all reasonable steps to support our customers in ful- filling their environmental and social responsibilities. The management of environmental and social risks is embedded in the Group’s lending process through the application of the EMS. The Group has developed risk management procedures to identify, assess, man- age and monitor environmental and social risks. These procedures are fully integrated in the Group’s credit risk management process. Our Environmental Policy is fully compliant with Georgian environmental legis- lation and follows international best practices (the full policy is available at www.tbcbankgroup.com). For the detailed information on the Environmental Manage- ment System, please refer to pages 67-71. 86 TBC BANK MANAGEMENT REPORT 2021MATERIAL EXISTING AND EMERGING RISKS CONTINUEDTo extend the Group’s positive impact on the envi- ronment and climate change mitigation, by the end of 2021, the Bank introduced the Green Lending Frame- work within the organization, which will encourage private companies, as well as individuals to run their businesses energy and resource-efficiently and more eco-friendly. In order to increase the understanding of climate-re- lated risks on the Bank’s loan portfolio, the Bank per- formed a high-level sectoral risk assessment, since different sectors might be vulnerable to different cli- mate-related risks over different time horizons. The risk assessment focuses on economic sectors such as energy, oil and gas, metals and mining, tourism, ag- riculture, food industry, healthcare, construction and real estate. According to the maturity structure of the loan portfolio, the largest part of assets is distributed in the time horizons that are much shorter that the im- pacts of climate change, especially of physical risks, can be materialized in Georgia. On the other hand, the understanding of climate related risks, which have longer-term impacts need to be increased in coming years, therefore, if the bank will have a plausible find- ings and conclusions, it will further develop the ap- proach, how to consider climate risks in mitigation. Furthermore, the Group’s portfolio has a strong collat- eral coverage with around 77% of the loan book, col- lateralized with cash, real estate or gold. The collateral evaluation procedure covers monitoring approach, therefore, the necessity of changes in collateral values is identified based on the regular collateral monitoring process. For more details, please see our ESG strategy section on pages 24-35. In June 2021, the Group released its full-scale sustain- ability report for the year 2020 in reference to Global Reporting Initiative (GRI) standards. The Global Report- ing Initiative (GRI) helps the private sector to realize and understand its role and influence on sustainable devel- opment issues such as climate change, human rights and governance. The report is designed for all interest- ed parties and groups in Georgia as well as abroad and aims to give them clear, fact-based information about the social, economic and environmental impact of our activities in 2020. It presents our endeavours for creat- ing value for our employees, clients, suppliers, partners and society as a whole. The Sustainability Report 2020 is available at www.tbcbankgroup.com. 3. The Group’s performance may be affected by the LIBOR discontinuation and transition Risk description There are a number of different types of financial in- struments on the Group’s balance sheet, each of which carries interest rates benchmarked to the London In- terbank Offered Rate (“LIBOR”). LIBOR is also used by the Group in its risk measurement, accounting and valuation processes. In 2017, the UK’s Financial Con- duct Authority (FCA) announced that it has agreed with LIBOR panel banks to sustain LIBOR until the end of 2021 and called upon financial sector participants to start working towards a transition to other reference rates. On 5 March 2021, the FCA announced the dates that panel bank submissions for all LIBOR setting will cease, after which representative LIBOR rates will no longer be available: • • immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar set- tings; and immediately after 30 June 2023, in the case of the remaining US dollar settings. The majority of the Bank’s US$ floating portfolio is linked to 6 month US$ LIBOR, while the EUR floating portfolio is linked to the Euro Interbank Offered Rate (Euribor), the discontinuation of which was not de- clared. The discontinuation of LIBOR and the process of tran- sition exposes the Group to execution, conduct, finan- cial and operational risks, and may result in earnings volatility, customer complaints and legal proceedings, or have other adverse impact on the Group’s business and operations. Risk mitigation The Group actively monitors international and local transition-related developments to regulate and align the Group’s transition process with market practice. On 29 July, 2021 the Alternative Reference Rates Com- mittee (ARRC) announced its recommendation to use Term SOFR Rates published by CME Group, Inc. (CME). The ARRC recommendation allows loan agreements to use term SOFR in place of LIBOR, either as a replace- ment for LIBOR (whether pursuant to the operation of a fallback provision or otherwise) or in new deals. The interest rate alternatives to US$ LIBOR recommended previously were backward looking and have met with tepid acceptance. The Group formed a steering committee to ensure a smooth transition away from LIBOR including the ef- forts to introduce forward-looking term rates linked to SOFR. The steering committee raises awareness of the transition, both internally and externally, to ensure that staff have the necessary knowledge and tools to facili- tate the transition and that all of the Group’s customers are treated fairly. 1 World Bank, Global Economic Prospects, January 2022. 87 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT Risk Management OVERVIEW The Group operates a strong, independent, business-minded risk management system. Its main objective is to con- tribute to the sustainability of risk-adjusted returns through the implementation of an efficient risk management sys- tem. The Group has adopted four primary risk management principles to better accomplish its major objectives: • Govern risks transparently to obtain understanding and trust. Consistency and transparency in risk-related pro- cesses and policies are preconditions for gaining the trust of multiple stakeholders. Communicating risk goals and strategic priorities to governing bodies and providing a comprehensive follow-up in an accountable manner are key priorities for staff responsible for risk management; • Manage risks prudently to promote sustainable growth and resilience. Risk management acts as a backstop against excessive risk-taking. Capital adequacy management and strong forward-looking tools and deci- sion-making ensure the Group’s sustainability and resilience; • Ensure that risk management underpins the implementation of strategy. Staff responsible for risk management provide assurance on the feasibility of achieving objectives through risk identification and management. Iden- tifying and adequately pricing risks, as well as taking risk mitigation actions, supports the generation of desired returns and the achievement of planned targets; • Use risk management and risk based decision making to gain a competitive advantage. Comprehensive, trans- parent and prudent risk governance facilitates understanding and trust from multiple stakeholders, ensuring the sustainability and resilience of the business model and the positioning of risk management as the Group’s com- petitive advantage and strategic enabler. Risk management framework The Group’s risk management framework incorporates all the necessary components for comprehensive risk gov- ernance and is comprised of enterprise risk management, credit, financial and non-financial risk management, risk reporting and supporting IT infrastructure, cross-risk analytical tools and techniques such as capital adequacy man- agement and stress testing. The following diagram depicts the risk management framework: 88 TBC BANK MANAGEMENT REPORT 2021CAPITAL ADEQUACY MANAGEMENT AND STRESS TESTING GOVERNANCE The Group conducts its risk management activities within the framework of its unified risk management system. The involvement of all governance levels in risk management, the clear segregation of authority and effective communi- cation between the different entities facilitate clarity regarding the Group’s strategic and risk objectives, adherence to its established risk appetite and sound risk management. The Group’s governance structure ensures adequate over- sight and accountability, as well as a clear segregation of duties. The Supervisory Board has overall responsibility to set the tone at the top of the Group and monitor compliance with the established objectives, while the Management Board governs and directs the Group’s daily activities. 89 TBC BANK MANAGEMENT REPORT 20211 1 SUPERVISORY BOARD RISK COMMITTEE AUDIT COMMITTEE TECHNOLOGY AND DATA COMMITTEE ESG AND ETHICS COMMITTEE RISK COMMITTEE OPERATIONAL RISK COMMITTEE ESG COMMITTEE ENVIRONMENTAL COMMITTEE The risk governance structure consists of two board levels, including the Supervisory Board and the Management Board of the Bank. The Supervisory Board has a Risk Committee that supervises the risk profile and risk governance practices within the Group, as well as an Audit Committee that is responsible for implementing key accounting pol- icies and facilitating internal and external auditor activities. The Supervisory Board also has an ESG and Ethics Com- mittee, which supports the Supervisory Board in its oversight of the strategy, policies, initiatives and programmes of the Group in relation to ESG matters, and a Technology and Data Committee, which supports the Supervisory Board in its oversight of key enablers of the strategy, data and cyber issues, and the company’s IT resources. The Management Board’s Risk Committee was established to guide Group-wide risk management activities and monitor major risk trends to ensure that the risk profile complies with the established risk appetite. The Management Board’s Operational Risk Committee makes decisions related to operational risk governance, while the Assets and Liabilities Management Committee (ALCO) is responsible for the implementation of asset-liability management pol- icies. The Management Boards’ Information Security Steering Committee governs information and cyber-security to ensure that relevant risks are at an acceptable level and that management processes are continuously improved. In addition, the ESG Committee is established at the Management Board level and takes responsibility for implement- ing the Group’s ESG strategy and approving its action plans, while the Environmental Committee supervises the proper implementation and functioning of the Environmental Management System in the Group. The Supervisory Board and the Bank’s senior management govern risk objectives through the Risk Appetite State- ment, which establishes the desired risk profile and risk limits. The statement also sets monitoring and reporting re- sponsibilities and escalation paths for different trigger events, and limits breaches, which prompt risk teams to frame and implement established mitigation actions. To effectively incorporate the Group’s risk appetite into day-to-day operations, Risk Appetite Statement metrics are cascaded into more granular limits at the business unit level, estab- lishing risk allocation across different segments and activities. The process of setting and cascading the risk appetite is undertaken in parallel with the business planning process. The interactive development of business and risk plans aligns the plans by solving risk-return trade-offs in the pro- cess and increases the feasibility of achieving targets. Supervisory Board level oversight, coupled with the permanent involvement of senior management in the Group’s risk management and the exercise of top-down risk allocation by enterprise risk management function, ensures clarity regarding risk objectives, intense monitoring of the risk profile against the risk appetite, the prompt escalation of risk-related concerns and the establishment of remediation actions. 1 These terms are defined in the glossary on page 266 90 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUEDThe daily management of individual risks is based on the three lines of defence principle. While business lines are the primary owners of risks, risk teams act as the second line of defence by sanctioning transac- tions, tools and techniques for risk identification, analy- sis, measurement, monitoring and reporting. The com- mittees established at operational levels are charged with making transaction-level decisions as part of a framework comprised of clear and sophisticated dele- gations of authority, based on the “four-eyes” principle. All new products and projects pass through risk teams to ensure that the risks are comprehensively analysed. These control arrangements allow the Group to make informed decisions that are adequately priced and not to take any risks exceeding the Group’s established targets. Credit, liquidity, market, operational and other non-financial risks are each managed by dedicated teams. The Group’s strong and independent risk-man- agement structure enables the fulfilment of all required risk management functions within the second line of defence by highly skilled professionals, with a bal- anced mix of credentials in the banking sector in local and international markets. In addition to the risk teams subordinated to the Chief Risk Officer, the compliance department reports directly to the CEO and is specif- ically in charge of anti-money laundering and compli- ance risk management. As a third line of defence, the internal audit department is responsible for providing independent and objective assurance and recommen- dations to the Group to promote the further improve- ment of operations and risk management. ENTERPRISE RISK MANAGEMENT A centralised Enterprise Risk Management (ERM) func- tion is in place to ensure the effective development, communication and implementation of risk strategy and risk appetite across the Group. The ERM function facilitates cross-risk activities such as aggregation, an- alytics and reporting and addresses issues that are not specific to a single type of risk. Accordingly, the ERM function complements the role of other risk functions to ensure the coverage of key risk activities and re- sponsibilities and builds capabilities in a centralised team. The major ERM functions can be summarised as follows: • Risk appetite development, cascading and moni- toring are essential elements of the Group’s strate- gy. A risk budget is allocated to individual business lines to ensure the achievement of aggregated metrics; • Stress-testing exercises are one of the crucial tools for effective risk identification, measurement and mitigation. In that regard, the Group continuously advances its stress-testing capabilities and tools. Various scenario analysis and stress testing meth- ods are conducted by the Bank to ensure that it maintains adequate capital in order to withstand the given stress scenario and remain in a stable fi- nancial condition; • Long term capital planning and continuous work on capital optimisation and analytics are also key aspects of the Bank’s risk management procedures; • Development and update of Internal Capital Ade- quacy Assessment Procedure (ICAAP); • Consistency of risk management practices within the Bank is also an important task of the ERM. A risk management function dedicated to promoting consistency ensures that risks are identified, mea- sured and governed in an optimal manner within the Bank, and reported and understood on a con- solidated basis; • Estimating expected losses, monitoring and ana- lytics across various segments and products are further key features of our strategy; • All risk metrics are aggregated and analysed to assess the Group’s risk profile on a consolidated basis. Regular reports on the Bank’s risk profile are submitted to the Management Board and to the Supervisory Board’s Risk Committee. CREDIT RISK MANAGEMENT As a provider of banking services, the Group is exposed to the risk of losses due to the failure of a customer or counterparty to meet their obligations to settle out- standing amounts in accordance with agreed terms. Credit risk is the greatest material risk faced by the Group since it is engaged mainly in traditional lending activities. Therefore, the Group dedicates significant resources to its management. The major objectives of credit risk management are to put in place a sound credit approval process for informed risk-taking and procedures for effective risk identification, monitoring and measurement. The Group adopts segment and product-specific ap- proaches for prudent and efficient credit risk manage- ment. Therefore, the corporate, MSME and retail port- folios are managed separately to address the specifics of individual segments. Corporate and MSME (except micro) borrowers have larger exposures and are man- aged on an individual basis, whereas micro and retail borrowers are managed on a portfolio basis. The major credit risk functions can be summarised as follows: Credit approval The Group strives to ensure a sound credit-granting process by establishing well defined lending criteria and building up an efficient process to assess a bor- rower’s risk profile. A comprehensive credit risk assess- ment framework is in place with a clear segregation of duties among parties involved in the credit analysis and approval process. The credit assessment process is distinct across segments, and is further differentiat- 91 TBC BANK MANAGEMENT REPORT 2021ed across various product types to reflect the differing natures of these asset classes. Corporate, SME and larger retail and micro loans are assessed on an indi- vidual basis, whereas the decision making process for smaller retail and micro loans is largely automated. Af- ter a thorough assessment of borrowers’ requirements, credit analysts, in the case of corporate borrowers, and loan officers, in the case of SME borrowers, prepare a presentation containing certain key information in rela- tion to the potential borrower and submit it for review to the business underwriting risk management unit. An underwriting risk manager ensures that the project analysis provided by the credit analyst/loan officer is complete, that all risks and mitigating factors are iden- tified and adequately addressed, and that the loan is properly structured. Business underwriting risk manag- ers specialise in a particular sector to be aware of cur- rent industry trends and developments. A multi-tiered system of loan approval committees is in place with different approval levels to consider the borrower’s overall indebtedness and risk profile. These committees are responsible for reviewing credit appli- cations and approving exposures, with different com- mittees based on the size and risk of the loan. At the highest level, the Chief Executive Officer, Corporate Business Director and Chief Risk Officer are involved. In addition, exposures to the 20 largest borrowers or for amounts exceeding 5% of the Bank’s regulatory capital would require review and approval by the Su- pervisory Board Risk Committee. Loan officers submit the credit applications for retail and micro exposures to the respective underwriting risk management units. Depending on the amount of the loan, a loan approval committee will review the loan request based on spec- ified limits regarding the risk level of the customer. For the underwriting of unsecured loans, point-of-sale loans and credit cards, an income verification process is performed in line with the regulations on responsi- ble lending. For decision-making, internal scorecard models and ratings provided by the credit bureau are utilized. Different scorecard models are developed based on the type of product and the borrowers’ seg- ment, taking into consideration various internal and ex- ternal data. The performance of scorecard models is closely monitored to ensure that decisions are in line with predefined risk limits. The credit scoring and un- derwriting models are developed by an independent Credit Modelling team, within the risk function and the developed models are then validated as well by an in- dependent Model Risk Management team, also from the risk function. Currency-induced credit risk The Group faces currency-induced credit risk, given that a large part of its exposure is denominated in for- eign currency. However, limits have been established within the risk appetite framework to ensure that the Group continues its efforts toward minimising the share of foreign currencies in the portfolio. Various management tools and techniques are applied to mitigate the inherent currency-induced credit risk in the loan book, encompassing all phases of credit risk management. In January 2019, the government contin- ued its efforts to reduce the economy’s dependence on foreign currency financing by increasing the cap to GEL 200,000, under which loans must be disbursed in local currency. In addition, the NBG, under its responsi- ble lending initiative, which came into force on 1 Jan- uary 2019, introduced significantly more conservative PTI and LTV thresholds for unhedged retail borrowers, further limiting the exposure to currency induced cred- it risk. Whilst the PTI and LTV thresholds remain con- servative for unhedged borrowers, in April 2020, the NBG eased the regulations for hedged borrowers. The Group applies conservative lending standards to unhedged borrowers with exposures denominated in foreign currencies to ensure that they can withstand a certain amount of forex depreciation without cred- it quality deterioration. In addition to the measures in place throughout the underwriting process, the Group actively monitors and assesses the quality of loans de- nominated in foreign currencies through stress testing exercises and holds sufficient capital buffers against unexpected losses. In the event of a material currency depreciation, the Group has tools in place to acceler- ate its monitoring efforts, identify customers with po- tential weaknesses and introduce prompt mitigation. The Bank has set a strategy to decrease the share of foreign currency loans in portfolio. Annual targets have been defined in the medium-term strategy, gradually decreasing the foreign currency share. The Assets and Liabilities Committee (ALCO) is closely monitoring the achievement of these targets. Credit concentration risk The Group is exposed to concentration risk, defined as a potential deterioration in portfolio quality due to large exposures or individual industries. It has established a set of tools to efficiently manage concentration risk and, in particular, concentrations of single names and sectors in the portfolio. The Group is subject to con- centration limits on single names and the largest 20 borrowers, and is focused on optimising the structure and quality of the latter portfolio. In addition, the Group imposes limits on individual sectors with more con- servative caps applied for high-risk sectors, which are defined based on comprehensive analysis of industry cycles and outlook. Credit concentrations are moni- tored monthly. Trends in the risk positions are analysed in detail and corrective actions are recommended, should new sources of risk or positive developments emerge. Along with managing concentration levels in the portfolio, the Group estimates unexpected losses 92 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUEDand the respective economic capital for concentra- tions of both single name borrowers and sectors us- ing the Herfindahl-Hirschman Index, thus ensuring that sufficient capital is held against concentration risk. Collateral management policy Collateral represents the most significant credit risk mitigation tool for the Group, making effective collater- al management one of the key risk management com- ponents. Collateral on loans extended by the Group may include, but is not limited to, real estate, cash de- posits, vehicles, equipment, inventory, precious metals, securities and third-party guarantees. The collateral accepted against a loan depends on the type of credit product and the borrower’s credit risk. The Group has a largely collateralised portfolio in all segments, with real estate representing a major share of collateral. A centralised unit for collateral management governs the Group’s view and strategy in relation to collateral management, and ensures that collateral serves as an adequate mitigating factor for credit risk management. The collateral management framework consists of a policy-making process, a sound independent valua- tion process, a haircut system throughout the under- writing process, collateral monitoring (including reval- uations and statistical analysis) and collateral portfolio analysis. The Collateral Management and Appraisal Depart- ment (CMAD) defines Collateral Management Policy & Collateral Management Procedures (approved by the Supervisory Board), purchases an appraisal service that must be in line with International Valuation Standards (IVS), acting NBG regulations and internal rules (poli- cy/ procedures and etc.), authorizes appraisal reports, and manages the collateral monitoring process (assets with high fair value are revaluated annually, while statis- tical monitoring is used for collaterals with low value). The CMAD uses a mixed quality check scheme for val- uation: appraisal reports are reviewed internally by its staff and separately by an external company. Almost all activities under collateral management are automated through an in-house web application. The collateral management function uses market research conduct- ed under the Real Estate Market laboratory (REM lab) project. Credit monitoring The Group’s risk management policies and process- es are designed to identify and analyse risk in a timely manner and to monitor adherence to predefined lim- its by means of reliable and timely data. The Group dedicates considerable resources to gain a clear and accurate understanding of the credit risk faced across various business segments. The Group uses a robust monitoring system to react promptly to macro and mi- cro developments, identify weaknesses in the credit portfolio and outline solutions to make informed risk management decisions. Monitoring processes are tai- lored to the specifics of individual segments, as well as encompassing individual credit exposure, overall portfolio performance and external trends that may impact on the portfolio’s risk profile. The Risk Commit- tee reviews reports relating to the credit quality of the loan portfolio quarterly. By comparing current data with historical figures and analysing forecasts, the manage- ment believes that it can identify risks and respond to them by amending its policies in a timely manner. Restructuring and collections The Group uses a comprehensive portfolio supervision system to identify weakened credit exposures and take prompt, early remedial actions when necessary. The collection and recovery processes are initiated when the borrower does not meet the agreed payments or the borrower’s financial standing is weakened, poten- tially jeopardizing the repayment of the loan. Dedicat- ed units manage weakened borrowers across all busi- ness segments, with collection and recovery strategies tailored to business segments and individual exposure categories. Apart from standard, business-as-usual restructur- ings that is done across all branches of the bank, the restructuring unit’s primary goal is to rehabilitate bor- rowers and transfer exposures back to the performing category. The sophistication and complexity of the rehabilitation process differs based on the type and size of an exposure. Business loans are transferred to the recovery unit when there is a strong probability that a material portion of the principal amount will not be paid, and the main stream of recovery is no longer the borrower’s cash flow. Loan recovery plans may include all available sources of loan recovery, such as selling the borrower’s assets, realising collateral or payments under guarantees. The Group’s goal in the recovery process is to nego- tiate a loan recovery strategy with the borrower and secure cash recoveries to the extent possible, or to negotiate repayment through the sale or repossession of collateral. Collection functions for retail and micro loans support customers who are experiencing dif- ficulties in fulfilling their obligations. Such customers may miss payments or notify the Bank about their dif- ficulty with loan repayments. A centralised team mon- itors retail borrowers in delinquency, which, coupled with branches’ efforts, aims to maximise collection. Special software from FICO is used for early collection management purposes. Collection strategies are defined based on the size and type of exposure. Specific strategies are tailored to different subgroups of customers, reflecting their respective risk levels, so that greater effort is dedicat- ed to customers with a higher risk profile. Both secured 93 TBC BANK MANAGEMENT REPORT 2021and unsecured loans are transferred to the internal re- covery unit, whereas for unsecured loans the Bank also collaborates with external collection agencies. The forms of collaboration normally include outsourcing of agencies’ collection services - when they act on behalf of the bank while dealing with borrowers, or selling of specific part of unsecured portfolios to external com- panies in order to secure immediate cash recoveries. To recover collateralized loans, a recovery plan is out- lined that considers the individual borrower’s specif- ics and may involve loan repayments under revised schedules or the sale of collateral. Once the exposure is transferred to the recovery unit, if the Group is un- able to negotiate acceptable terms with the borrower, the Group may initiate collateral repossession, which is usually a standard process with limited legal complica- tions, and may include court, arbitration or notary pro- cedures. Qualified incumbent lawyers support the re- structuring and recovery units to ensure that litigation and repossession processes are carried out efficiently. Measurement of Expected Credit Losses Since January 2018, the Group has been using a pro- visioning methodology that is in line with IFRS 9 re- quirements. The methodology makes it possible to assess loan-loss provisions and allowances accurately with the incorporation of forward-looking information. The methodology, along with a corresponding IT pro- visioning tool, was developed with support from De- loitte and representatives of the Group’s risk, finance and IT departments. The IFRS 9 models are complex and make it possible to incorporate expectations of macro developments based on predefined scenarios. The expected credit loss (ECL) measurement is based on four components used by the Group: (i) the probability of default (PD); (ii) exposure at default (EAD); (iii) loss given default (LGD); and (iv) discount rate. The Group uses a three-stage model for the ECL measurement and classifies its bor- rowers across three stages: • Stage I – the Group classifies its exposures as Stage I if no significant deterioration in credit quali- ty has occurred since the initial recognition, and the instrument was not credit-impaired when initially recognised; • Stage II – the exposure is classified as Stage II if any significant deterioration in credit quality has been identified since the initial recognition but the finan- cial instrument is not considered credit-impaired; and • Stage III – the exposures for which the credit-im- paired indicators have been identified are classi- fied as Stage III instruments. The ECL amount differs depending on exposure allo- cation to one of the three stages: • Stage I instruments – the ECL represents that por- tion of the lifetime ECL that can be attributed to default events occurring within the subsequent 12 months from the reporting date; • Stage II instruments – the ECL represents the life- time ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a financial instrument. Generally, lifetime is set equal to the remaining contractual maturity of the financial instrument. Factors such as the existence of contractual repayment schedules, options for the extension of repayment maturity and monitor- ing processes held by the Group affect the lifetime determination; • Stage III instruments – a default event has already occurred and the lifetime ECL is estimated based on the expected recoveries. The Group actively reviews and monitors the results produced from the IFRS 9 models to ensure that the respective results adequately capture the expected losses. FINANCIAL RISK MANAGEMENT Liquidity risk management Liquidity risk is the risk that the Group either may not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or may only be able to access those resources at a high cost. Both funding and market liquidity risks can emerge from a number of factors that are beyond the Group’s control. Due to financial market instability, fac- tors such as a downgrade in credit ratings or other neg- ative developments may affect the price or the ability to access the funding necessary to make payments in respect of the Group’s future indebtedness. Liquidity risk is managed by the Financial Risk Man- agement and Treasury departments and is monitored by the Management Board and the Assets and Liabili- ties Management Committee (ALCO), within their pre- defined functions. The principal objectives of the Group’s Liquidity Risk Management Policy are to: • ensure the availability of funds to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; recognise any structural mismatch existing within the Group’s statement of financial position and set monitoring ratios to manage funding in line with the Group’s well-balanced growth; and • • monitor liquidity and funding on an ongoing basis to ensure that approved business targets are met without compromising the Group’s risk profile. 94 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUEDThe Management Board reviews the Liquidity Risk Management Policy, which is then presented to the Risk Commit- tee and approved 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 the Group will not be able to efficiently meet both expected and unexpected current and future cash flows without affecting either its daily operations or its financial condition under both normal conditions and during a crisis. Liquidity risk is measured by the Bank in accordance with NBG requirements. Addition- ally, the Group applies, in accordance with best practice, stress tests and “what if” scenario analyses and monitors the various liquidity risk parameters that the Group has developed internally. To manage funding liquidity risk, in accordance with NBG requirements, the Bank currently monitors the following Basel III based parameters: • For Short-term Liquidity Risk Management, the Bank applies the Liquidity Coverage Ratio (LCR); and • For Long-term Liquidity Risk Management, the Bank applies the Net Stable Funding Ratio (NSFR). In 2017, the NBG introduced its own LCR for liquidity risk management purposes. In addition to the Basel III guide- lines, the ratio applies conservative approaches to the deposit withdrawal rates, depending on the client group’s concentration. Since September 2017, the Bank has also monitored compliance with the NBG’s LCR limits. In addi- tion to the total LCR limit, the NBG has also defined limits per currency for the GEL and foreign currencies (FC). The LCR is calculated by reference to the qualified liquid assets divided by 30-day cash net outflows. It is used to help manage short-term liquidity risks. To promote larization in the country of Georgia, the NBG defines a lower limit for the GEL LCR than that for the FC LCR. Since October 2019, FC Mandatory Reserves have been considered at 100% within high quality liquid assets for NBG LCR purposes. In addition, in the same period, NBG lowered FC mandatory reserves requirements from 30% to 25%. Since July 2021, the NBG regulation on mandatory FC reserve requirement has been further adjusted, to reflect the decreased share of FC deposits in total deposits. The FC mandatory reserve requirement will be reduced by 1% for every 2% decrease in the share of FC in total deposits. The initiative will have a positive effect on the capital adequacy position of the Bank. In September 2019, the NBG introduced a Net Stable Funding Ratio (NBG NSFR) for funding liquidity risk manage- ment purposes. The NSFR is calculated by dividing the available stable funding by the required stable funding. It is used for long-term liquidity risk management to promote resilience over a longer time horizon by creating additional incentives for the Bank to rely on more stable sources of funding on a continuing basis. On a monthly basis, the Bank monitors compliance with the set limit for the NBG NSFR. As of 31 December 2021, the ratios were well above the prudential limits set by the NBG, as follows: Minimum net stable funding ratio, as defined by the NBG Net stable funding ratio as defined by the NBG Minimum total liquidity coverage ratio, as defined by the NBG Minimum LCR in GEL, as defined by the NBG Minimum LCR in FC, as defined by the NBG Total liquidity coverage ratio, as defined by the NBG LCR in GEL, as defined by the NBG LCR in FC, as defined by the NBG 31-Dec-21 31-Dec-20 31-Dec-19 100% 127.3% 100.0% 75% 100.0% 115.8% 107.7% 120.8% 100% 126.0% 100.0% n/a 100.0% 134.2% 132.2% 134.9% 100% 126.7% 100.0% 75.0% 100.0% 110.1% 83.7% 128.4% Market liquidity risk is the risk that the Group 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, the Group follows the Basel III guidelines on high-quality liquidity asset eligibility to ensure that the Group’s high-quality liquid assets can be sold without causing a significant movement in price, and with minimum loss of value. In addition, the Group has a liquidity contingency plan, which forms part of its overall prudential liquidity policy. The plan is designed to ensure that the Group can meet its funding and liquidity require- ments and maintain its core business operations in any deteriorating liquidity conditions that could arise outside the ordinary course of business. Funding and maturity analysis The Group’s principal sources of liquidity include customer deposits and accounts, borrowings from local and in- ternational banks and financial institutions, subordinated loans from international financial institution investors, local 95 TBC BANK MANAGEMENT REPORT 2021interbank short-duration term deposits and loans, proceeds from sales of investment securities, principal repayments on loans, interest income, and fee and commission income. The Supervisory Board believes that a strong and diversi- fied funding structure is one of the Group’s differentiators. The Group relies on relatively stable deposits from Georgia as the main source of funding. The Group also monitors deposit concentration for large deposits and sets limits for deposits by non-Georgian residents in its deposit portfolio. To maintain and further enhance its liability structure, the Group sets targets for deposits and funds received from international financial institution investors in its risk appetite via the respective ratios. The loan to deposit and IFI funding ratio (defined as the total value of net loans divided by the sum of total value of deposits and funds received from international financial institutions) stood at 101.3%, 100.7% and 104.3%, as at 31 December 2021, 2020 and 2019, respectively. The management believes that, in spite of a substantial portion of customers’ accounts being on demand, the diver- sification of these deposits by the number and type of depositors, coupled with the Group’s past experience, 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 the estimation of maturities for its current deposits. The estimate is based on statistical methods applied to historic information about the fluctuations of customer account balances. Market risk The Group 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 re- lated instruments and equities in the “trading book” (financial instruments or commodities held for trading purposes); and (b) foreign exchange risk and commodities risk throughout the Group. The Group’s strategy is not to be involved in trading financial instruments or investments in commodities. Accord- ingly, the Group’s only exposure to market risk is foreign exchange risk in its “structural book”, comprising its regular commercial banking activities which have no trading, arbitrage or speculative intent. Foreign exchange risk The NBG requires the Bank to monitor both balance sheet and total aggregate balance (including off-balance sheet) open currency positions and to maintain the latter within 20% of the Bank’s regulatory capital. For the year ended 31 December 2021, the Bank maintained an aggregate balance open currency position of 0.5%. 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 that are more conservative than those set by the NBG and the Supervisory Board. The heads of the treasury and financial risk management departments separately monitor the Bank’s compliance with these limits daily. Compliance with these limits is also reported daily to the Management Board and periodically to the Supervisory Board and its Risk Committee. On a Group-wide level, foreign-exchange risk is monitored and reported monthly. To assess the currency risk, the Bank performs a VAR sensitivity analysis on a quarterly basis. The analysis calculates the effect on the Group’s income determined by the worst possible movements of currency rates against the Georgian Lari, with all other variables held constant. During the years ended 31 December 2021, 2020 and 2019, the 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) 31-Dec-21 (1,496) (1,030) 31-Dec-20 (1,806) (1,315) 31-Dec-19 (1,234) (852) Interest rate risk management Interest rate risk arises from potential changes in market interest rates that can adversely affect the value of the Group’s financial assets and liabilities. This risk can arise from maturity mismatches between assets and liabilities, as well as from the re-pricing characteristics of such assets and liabilities. The major part of deposits, and part of the loans of- fered by the Group, are at fixed interest rates, while a portion of the Group’s borrowing is based on a floating interest rate. The Group’s floating rate borrowings are, to a certain extent, hedged because the NBG pays a floating interest rate on the minimum reserves that the Bank holds with it. Furthermore, many of the Bank’s loans to customers con- 96 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUEDtain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, there- by limiting exposure to interest rate risk. The manage- ment also believes that the Bank’s interest rate margins provide a reasonable buffer to mitigate the effect of a possible adverse interest rate movement. The Group employs an advanced framework to man- age interest rate risk by establishing appropriate Risk Appetite limits, monitoring compliance with them and preparing forecasts. The Group measures four types of interest-rate risk based on the source of the risk: (i) re-pricing risk; (ii) yield curve risk; (iii) basis risk; and (iv) optionality (em- bedded option) risk. The Group considers numerous stress scenarios, in- cluding different yield curve shifts and behavioural ad- justments 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 within the Risk Appetite framework ap- proved by Supervisory Board. Counterparty risk Through performing banking services such as lending in the interbank money market, settling a transaction in the interbank foreign exchange market, entering into interbank transactions related to trade finance or in- vesting in securities, the Bank is exposed to the risk of losses due to the failure of a counterparty bank to meet its obligations. To manage counterparty risk, the Bank defines limits on an individual basis for each counterparty, while on a portfolio basis it limits the expected loss from both treasury and trade finance exposures. As of 31 Decem- ber 2021, the Bank’s interbank exposure was concen- trated with banks that external agencies, such as Fitch, Moody’s and Standard and Poor’s, have assigned high A-grade credit ratings. CAPITAL RISK MANAGEMENT Capital risk is the risk that the Group may not have a sufficient level of capital to maintain its normal busi- ness activities, and to meet its regulatory capital re- quirements under normal or stressed operating condi- tions. The management’s objectives in terms of capital management are to maintain appropriate levels of cap- ital to support the business strategy, meet regulatory and stress testing-related requirements and safeguard the Group’s ability to continue as a going concern. The Group undertakes stress testing and sensitivity analysis to quantify extra capital consumption under different scenarios. Capital forecasts, as well as the results of the stress testing and what-if scenarios, are actively moni- tored with the involvement of the Bank’s management to ensure prudent capital management and timely ac- tions when needed. In 2021, the Group and the Bank complied with all regulatory capital requirements. In December 2017, the NBG adopted amendments to the regulations relating to capital adequacy require- ments. The changes include amendments to the regu- lation on capital adequacy requirements for commer- cial banks, and the introduction of new requirements (i) on additional capital buffer requirements for commer- cial banks within Pillar 2; (ii) on the determination of the countercyclical buffer rate; and (iii) on the identification of systematically important banks and determining systemic buffer requirements. The purpose of these amendments is to improve the quality of banks’ regu- latory capital and achieve better compliance with the Basel III framework. Pillar 1 minimum requirements plus combined buffer requirements. The amendments to the regulation on capital adequacy requirements for commercial banks have made Pillar 1 minimum requirements in Georgia compatible with the framework established by the Ba- sel Committee of Banking Supervision. The amend- ments included: • • the separation of the 2.5% conservation buffer, which was previously merged with minimum cap- ital requirements. The updated minimum regula- tory capital requirements are 4.5%, 6.0% and 8.0% for Common Equity Tier 1 capital, Tier 1 capital and Total regulatory capital, respectively; and the introduction of a requirement that banks hold an additional combined buffer through Common Equity Tier 1 Capital, consisting of conservation, countercyclical and systemic buffers. The rate for the conservation buffer has been set at 2.5% of RWAs, while a 0% rate has been set for the countercyclical buffer. The countercyclical buffer can vary within the range of 0% to 2.5% and will be re- viewed periodically, based on the prevailing financial and macroeconomic environment. In addition, the NBG designated certain commercial banks in Geor- gia as domestic systemically important banks (DSIBs) for which individual systemic buffers have been intro- duced, which means that the DSIBs will be required to set aside more Common Equity Tier 1 capital relative to RWAs, with the requirements being phased in from the end of 2018 to the end of 2021. In particular, the fol- lowing systemic buffers and compliance timeframes have been set by the NBG in relation to the Bank: 1.0% for the period from 31 December 2018 to 31 December 2019, 1.5% for the period from 31 December 2019 to 31 December 2020, 2.0% for the period from 31 December 2020 to 31 December 2021, and 2.5% from 31 December 2021 onwards. Pillar 2 requirements. In accordance with the Basel III framework, the NBG also introduced additional capital buffer requirements for commercial banks within Pil- 97 TBC BANK MANAGEMENT REPORT 2021lar 2 that are based on a supervisory review and assessment process and deal with bank-specific risks that are not sufficiently covered under Pillar 1, including an unhedged currency induced credit risk buffer and a net General Risk Assessment Programme (GRAPE) buffer. The NBG has also introduced a credit portfolio concentration buffer and a net stress test buffer. The credit portfolio concentration buffer became effective from 1 April 2018, and the need for the net stress buffer will be assessed based on the regulatory stress testing results. Although the net stress test buffer has been effective since 1 October 2020, it is currently set at 0%. Under the NBG regulation, 56% of the capital required under Pillar 2 should be held through Common Equity Tier 1 capital, while 75% of the capital should be held through Tier 1 capital and 100% of the capital should be held through Total regulatory capital. Temporary Measures In response to the COVID-19 pandemic, in March 2020, the NBG implemented certain countercyclical measures in relation to capital adequacy requirements, including postponing the phasing-in of Pillar 2 buffers. According to the new schedule communicated by the NBG in October 2020, the phase-in of concentration risk and the Net GRAPE buffers will continue from March 2021 and will be fully introduced by the end of March 2023. In June 2021, the NBG announced its decision to restore the CICR and conservation buffers. Banks are required to fully restore the CICR buffer by the end of 2022 and the conservation buffer by the end of 2023. As of 30 June 2021, TBC Bank was in full compliance with the fully restored minimum requirements and confirmed to the NBG that it would fully restore temporarily released capital buffers by July 2021, which lifted regulatory restrictions on capital distributions. The following table presents the capital adequacy ratios and minimum requirements set by the NBG: In thousands of GEL CET 1 capital Tier 1 capital Tier 2 capital Total 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 CET 1 ratio CET 1 capital adequacy ratio Minimum Tier 1 ratio Tier 1 capital adequacy ratio Minimum total capital adequacy ratio Total capital adequacy ratio NON-FINANCIAL RISK MANAGEMENT Operational risk management 31-Dec-21 2,759,894 3,379,414 723,513 4,102,927 18,091,753 21,981 2,103,895 20,217,629 11.73% 13.65% 13.99% 16.72% 18.38% 20.29% 31-Dec-20 1,911,233 2,385,181 752,731 3,137,912 16,322,524 106,379 1,872,574 18,301,477 7.40% 10.40% 9.20% 13.00% 13.70% 17.10% 31-Dec-19 1,871,892 2,281,706 692,323 2,974,029 13,825,677 15,429 1,749,821 15,590,927 10.40% 12.00% 12.50% 14.60% 17.50% 19.10% One of the main risks that the Group faces is operational risk, which is the risk of loss resulting from internal and exter- nal fraud events, inadequate process or products, business disruptions and systems failures, human error or damages to assets. Operational risk also implies losses driven by legal, reputational, compliance or cybersecurity risks. The Group is exposed to many types of operational risk, including: fraudulent and other internal and external criminal activities; breakdowns in processes, controls or procedures; and system failures or cyber-attacks from an external party with the intention of making the Group’s services or supporting infrastructure unavailable to its intended users, which in turn may jeopardize sensitive information and the financial transactions of the Group, its clients, counterpar- ties or customers. Moreover, the Group is subject to risks that cause disruption to systems performing critical functions or business dis- ruption arising from events wholly or partially beyond its control, such as natural disasters, transport or utility failures 98 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUED etc., which may result in losses or reductions in service to customers and/or economic losses to the Group. The operational risks discussed above are also appli- cable where the Group relies on outsourcing services from third parties. Considering the dynamic environ- ment and sophistication of both banking services and possible fraudsters, the importance of constantly im- proving processes, controls, procedures and systems is heightened to ensure risk prevention and reduce the risk of loss to the Group. To oversee and mitigate operational risk, the Group maintains an operational risk management framework, which is an overarching document that outlines the general principles for effective operational risk man- agement and defines the roles and responsibilities of the various parties involved in the process. Policies and procedures enabling the effective management of operational risks complement the framework. The Management Board ensures a strong internal control culture within the Group, where control activities are an integral part of operations. The Supervisory Board sets the operational risk appetite and the Operational Risk Committee oversees compliance with the limits. The Operational Risk Committee discusses the Group’s operational risk profile and risk mitigation recommen- dations on a regular basis. The operational risk management department acts as a second line of defence. It is responsible for imple- menting the framework and appropriate policies and procedures to enable the Group to manage operation- al risks, as well as monitoring operational risk events, risk exposures against risk appetite and material con- trol issues. The department is also responsible for the day-to-day management of operational risks, using a range of techniques that include, but are not limited to: • running risk and control self-assessments (RCSA), which are aimed at detecting possible gaps in op- erations and processes with the purpose of sug- gesting appropriate corrective actions; • collecting internal risk events and conducting root- cause analyses for further risk mitigation purposes; forming a unified operational loss database for fur- ther quantitative and qualitative analysis; • • analyzing internal fraud events and monitoring key risk indicators; • performing new risk assessments and validating the launch of new products, services or procedures; • providing business advisory services regarding non-standard cases; • monitoring IT incident occurrence and overseeing activities targeted at solving identified problems; and • obtaining insurance policies to transfer the risk of losses from operational risk events. The operational risk management department has re- inforced its risk assessment teams and methodologies to further fine-tune the existing control environment. The same applies to the set of actions directed to homogenise operational risk management process- es throughout the Group’s member companies. The operational risk management department reports to the Chief Risk Officer. Various policies, processes and procedures are in place to control and mitigate opera- tional risks, including, but not limited to: • • • • • the New Risk Assessment Policy, which enables thorough risk evaluation prior to the adoption of new products, services, or procedures; the Outsourcing Risk Management Policy, which enables the Group to control outsourcing (vendor) risk arising from adverse events and risk concen- trations due to failures in vendor selection, insuffi- cient controls and oversight over a vendor and/or services provided by a vendor, and other impacts on the vendor; the Risk and Control Self-Assessment (RCSA) Pol- icy, which enables the Group to continuously eval- uate existing and potential risks, establish risk mit- igation strategies and systematically monitor the progress of risk mitigation plans. The completion of these plans is also part of the respective manag- ers’ key performance indicators; the Operational Risk Event Identification Policy, which enables the Group to promptly report on operational risk events, perform systematic root- cause analysis of such events and take corrective measures to prevent the reoccurrence of signifi- cant losses; and the Special Operational Risk Awareness Pro- gramme, which provides regular training to the Group’s employees and strengthens the Group’s internal risk culture. During the reporting period, one of the key operational risk management focus areas was the Risk and Con- trol Self-Assessment (RCSA) exercise, under which the Bank’s top priority processes were reviewed and areas of improvement were identified. The Operational Risk Management Framework and its complementing policies were updated to ensure ef- fective execution of the operational risk management programme. Additionally, the Bank has developed a bank-wide operational risk registry. Compliance The first line of defence is responsible for compliance risk, strongly supported by the compliance depart- ment as the second line of defense. The Chief Com- pliance Officer oversees compliance activities and reports quarterly to the relevant committee of the Su- pervisory Board, with a disciplinary reporting line to the CEO. The Bank’s Compliance Programme provides 99 TBC BANK MANAGEMENT REPORT 2021Compliance Policies, trainings, risk-based oversight and ensures compliance with regulatory requirements. The compliance department manages regulatory risk by: • ensuring that applicable changes in laws and regu- lations are implemented by the process owners in a timely manner; • participating in the new product/process risk ap- proval process; • conducting analysis of customer complaints, the operational risk event database, internal audit find- ings and litigation cases to proactively reveal pro- cess weaknesses; and • conducting an annual risk and control self-assess- ment (RCSA) of the internal processes. The Compliance Department ensures that all out- comes of the above mentioned analysis and process- es are addressed in a timely and appropriate manner. ology. Overall group-wide residual risks for the year 2021 were assessed as medium. The compliance de- partment addresses areas of attention in a timely and proper manner. As part of its ongoing supervision in 2021, the National Bank of Georgia (NBG) conducted a complex inspec- tion of the Bank, covering the period from January 2018 to June 2019. The NBG assessed the Bank’s AML/ CTF measures with regard to client risk classification and risk-related due diligence measures; the UBO (Ultimate Beneficial Owner) identification process of entities with complex ownership structures; the Bank’s awareness of international transactions; the detection of suspicious transactions and other processes. The NBG’s overall assessment of these processes was ad- equate or mainly adequate and effective. As part of its findings, the NBG classified two clients as not properly identified and applied the relevant regulatory penalty in relation to those two clients. Anti-money laundering (AML) Information Security The Group aims to protect its customers, sharehold- ers and society from financial crime and any resulting threat. The Group is fully committed to comply with ap- plicable EU, UK, Georgian laws and regulations related to financial crime. It also seeks to meet the respective industry best standards. The Group has implemented internal policies, procedures and detailed instructions designed to prevent itself from being used or involved in money laundering, financing of terrorism or in oth- er unlawful activities such as bribery, corruption or tax evasion. The Group’s AML/CTF compliance pro- gramme, as implemented, comprises written policies, procedures, internal controls and systems including, but not limited to: policies and procedures to ensure compliance with AML laws and regulations; KYC and customer due diligence procedures; a customer ac- ceptance policy; customer screening against a global list of terrorists and specially designated nationalities relevant financial and other sanctions lists; regular staff training and awareness raising; and procedures for monitoring and reporting suspicious activities of the Bank’s customers. As part of the second line of defence, the AML unit seeks to manage risk in accordance with the risk appe- tite defined by the Group and promotes a strong risk culture throughout the organization. The Group has a sophisticated, artificial intelli- gence-based AML solution in place to enable the AML unit to comply with the Sanctions Policy, monitor clients’ transactions and identify suspicious behavior. The AML unit works on constantly improving the soft- ware to increase operational efficiency and decrease false-positive alerts. The Bank performs an enterprise-wide AML Risk As- sessment annually, in line with the approved method- In order to manage the risks associated with cyber-at- tacks and ensure the security of clients, the Group continuously updates and enhances its in-depth secu- rity strategy, which covers multiple preventive and de- tective controls ranging from the data and end-point computers to edge firewalls. A newly built Security Operations Center monitors any anomaly that is identified across the organization’s network in order to detect potential incidents and re- spond to them effectively. At least once a year, a full information security and cy- ber security threat analysis is performed, taking into consideration the relevant regional and sector specif- ic perspectives. Also at least once a year, a presenta- tion is given to the Risk Committee of the Supervisory Board, with a deep dive into the information security matters. At least once every two years, as part of this analysis, an external consultant is contracted to assess the efficiency of our capabilities against industry best practices and real world cyber-attack scenarios. This analysis gives the Group a detailed review and insight, which helps to further enhance the information and cyber security systems. In addition, cyber-attack readi- ness exercises are performed on a regular basis. These exercises evaluate the actual position of the Group in this area and provide a benchmark against internation- al best practices. An Information Security Steering Committee has been established to continuously improve information secu- rity and business continuity management processes and minimise information security risks. The commit- tee has been formed to centralise the information se- curity function, including physical security, HR security, data security, IT security and business continuity. 100 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUEDThe Group invests in effective information security risk management, incident management and awareness programmes, which are enhanced with automated tools that ensure acceptable levels of information se- curity risk within the organisation. Whenever preven- tive controls are not applicable, comprehensive busi- ness continuity and incident response plans ensure the Group’s ability to operate on an ongoing basis and limit losses in the event of a severe business disrup- tion. Since employees play a crucial role in informa- tion security, regular mandatory training sessions are conducted for all employees, comprised of remote learning courses on security issues, fraud and phishing simulations, and informative emails to further assist our employees with information security matters. New em- ployees are also given this training as part of the induc- tion process. These measures ensure that employees are fully aware of their responsibilities and are prepared for various security threats. In 2021, the Bank achieved ISO 27001 certification of its information security management system. That demonstrates that the Bank is following robust infor- mation security practices effectively, in order to protect its information and information systems from different types of threats. TBC Bank has not experienced any material information security breach in the last three years. In December 2021, Ernst & Young Tbilisi office con- ducted two audits, assessment against Cyber Securi- ty Management Framework and assessment against SWIFT CSCF. As a result no critical findings and major non-compliances were identified during these exer- cises. Cyber Security Management Framework is de- fined by National Bank of Georgia, which is based on NIST Cyber Security Management Framework. Model Risk Management In line with the NBG’s requirements, international regu- latory guidance and best practices, TBC Bank defines a model as a quantitative method, system, or approach that applies statistical, economic, financial, or mathe- matical theories, techniques, and assumptions to pro- cess input data into quantitative estimates. A model has three components: an information input compo- nent, an information-processing component and a re- porting component. Model risk is defined as the risk of adverse consequences (e.g., financial loss, reputational damage, etc.) arising from decisions based on incor- rect or misused model outputs. TBC Bank’s Model Risk Management (MRM) function, reports directly to Chief Risk Officer, and its policy, ap- proved by both the Management Board and the Su- pervisory Board, defines the framework within which it operates. Two main components of the framework are governance and validation. MRM acts as a second line of defence and aims to consistently identify, quantify, minimize and mitigate model related risks across TBC Group. The governance component of the MRM defines the roles and responsibilities for the entirety of the mod- el lifecycle. It sets standards and procedures that en- compass all phases of the lifecycle, from planning and development through initial validation, model use, monitoring, ongoing validation and model retirement. It is also responsible for managing the model inventory and keeping model risk within the risk appetite. The validation component of the MRM is responsible for technical as well as conceptual evaluation of the model in question, in accordance to the standards and procedures set by governance. The MRM uses a risk- based approach during the initial and ongoing model validation process. Legal Risk The Bank’s legal department manages all legal and re- lated matters concerning the activities of the Bank. In accomplishing its mission to ensure that such activities fully conform with all applicable laws and regulations, the legal team delivers a wide array of professional legal services: it (i) interacts with internal and external clients, outside counsels, government and regulatory entities; (ii) issues memos and opinions; (iii) drafts standardized and individual contracts; (iv) prepares corporate resolu- tions; (v) provides regulatory updates; and (vi) represents the Bank in courts, other dispute resolution venues and before other third parties. The legal team, which com- prises lawyers with diverse backgrounds and experi- ence, consists of the following key divisions: regulatory and legal compliance, corporate, dispute resolution, legal support and corporate governance teams. Each division functions within clear and distinct job descrip- tions corresponding to the relevant knowledge, skill and capabilities of its members. As part of the Bank’s agile transformation effort, several lawyers are working with- in and/or in close cooperation with teams in charge of specific commercial projects. The department ensures effective execution of its duties through different pro- cesses and procedures. The Bank’s General Counsel manages the legal de- partment. S/he determines key business objectives for all legal teams, introduces the policies and vision, and ensures the effective performance of their duties. The General Counsel reports to the Management Board, the Supervisory Board, and their respective committees on existing legal risks, their mitigation strategies and the vi- sion for their effective management in the future. Sustainability Risks Sustainability risk management is done within a frame- work of established processes for risk management. According to our vision, a sustainable bank is a prof- itable institution that offers adequate, affordable and need-based services to its clients, treats its employees, suppliers and all other stakeholders with a high sense of responsibility, and strongly supports the develop- 101 TBC BANK MANAGEMENT REPORT 20211. developing and maintaining policies and proce- dures to ensure that the respective departments and individual employees comply with the provi- sions set out by regulatory provisions, best practic- es, the Code of Conduct and the Code of Ethics; 2. maintaining liaison with the compliance depart- ment regarding the administration of policies and procedures and the investigation of complaints re- garding the conduct of the department, its manag- er and/ or its employees; 3. ensuring that the product information provided to clients by front-line employees is accurate and complete, and is conveyed (both in written and oral form) in a simple and understandable way, regard- less of the level of sophistication of a given client; 4. maintaining records of client conversations and emails that contain sensitive and sales-related in- formation, including information pertaining to the acquisition of new clients and making complex product offers to existing and prospective clients; 5. delivering timely, on-going training for new em- ployees regarding proper conduct and ensuring that all employees stay up to date on evolving compliance standards within the Group through periodic training; 6. developing an open culture that encourages em- ployees to speak up without fear of punishment. Specifically, this means setting up processes for the prevention and detection of conflicts of inter- est, creating ethical incentives and bonus formulas, and aligning incentives and disciplinary practices to the Group’s risk appetite; and 7. employing qualified staff and sufficient human and technological resources to investigate, analyse, implement and monitor sales and after-sales activ- ities. This approach ensures that the management of conduct risk is not limited to risk management units, including the compliance department, but is fully embraced by front-line departments and that proper conduct is fully integrated into the required job skills. ment of society. It is also a technologically advanced and environmentally aware bank that is trusted by so- ciety. The sustainability risks are related to the Group’s different roles as a lender, asset manager, service pro- vider, purchaser and employer. Of particular interest in the area of sustainability are risks related to com- pliance, conduct and digitalization, as well as human rights, working conditions, the environment, climate change, financial crime, and information and IT secu- rity. Sustainable development policies and manage- ment structures are represented in various policy doc- uments and management domains. The Group has developed several thematic policies and codes that regulate various social and environ- mental protection issues related to company activity. They include: the Code of Ethics, the Incident Man- agement Policy, the Anti-Corruption Policy, the Per- sonal Data Protection Policy, the Conflict of Interests Management Policy, Green Purchase Recommenda- tions etc. In 2021, the ESG Coordination Department was created in order to support the establishment of an integrated ESG framework synergizing business, social, environmental and governance aims. The de- partment reports to the Chief Risk Officer. For more details about sustainability management, please see our ESG strategy section on pages 24-35. Conduct risk Conduct risk is defined as the risk to the delivery of fair outcomes for customers and other stakeholders. The Group’s Code of Ethics serves as a moral compass for all staff and sets high ethical standards that each employee is required to uphold. The Group’s employees undertake and perform their responsibilities with honesty and integrity. They are critical to maintaining trust and confidence in its oper- ations and upholding important values of trust, loyalty, prudence and care. Additionally, the Group’s management understands that it bears responsibility for a diversified group of domestic and international investors, and needs to embrace the rules and mechanisms of protecting cus- tomers and maintaining the confidence of investors and financial markets. The Group’s directors strive to establish the “tone from the top,” which sets out the messages describing and illustrating the core compo- nents of good conduct. In managing conduct risk, the Group entrusts different departments and divisions with carrying out the task of managing, mitigating and eliminating conduct risk across all of the Group’s operations with clients and other stakeholders. The compliance, human capital, and operational risk departments cooperate to create a unified conduct risk management framework and assist business lines and departments, in the following ways: 102 TBC BANK MANAGEMENT REPORT 2021RISK MANAGEMENT CONTINUED103 TBC BANK MANAGEMENT REPORT 2021104 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021TBC AT A GLANCEGovernance 105 TBC BANK ANNUAL REPORT AND ACCOUNTS 2021CORPORATE GOVERNANCE STATEMENT Corporate Governance Joint Stock Company TBC Bank (the “Bank”) is the main subsidiary of TBC Bank Group PLC, a company incorporated in England and Wales and listed on the premium segment of the London Stock Exchange The Bank’s Corporate Governance is in compliance with the requirements of the National Bank of Geor- gia’s Code on Corporate Governance for Commercial Banks, dated 26 September 2018, as amended from time to time (the “Code”). At the same time, the Bank also complies with the highest standards of corporate governance as prescribed by the UK Corporate Gover- nance Code. In addition, the Bank has in place an effective internal control system in order to ensure accurate and reliable financial reporting. The Bank has a well-defined frame- work of accountability and delegation of authority, as well as policies and procedures that include financial planning and reporting; preparation of monthly man- agement accounts; project governance; information security; and review of the disclosures within the an- nual report and accounts from the respective leads, to appropriately disclose all relevant developments in the year and to meet the requirements of a true and fair presentation. The Supervisory Board ensures that the Bank’s gov- ernance structure enables adequate oversight and accountability, as well as a clear segregation of duties. The involvement of all governance levels in risk man- agement, the clear segregation of authority, and effec- tive communications between different entities facili- tate clarity regarding the strategic and risk objectives, adherence to the established risk appetite, risk budget and sound risk management. The centralised Enter- prise Risk Management (ERM) function ensures effec- tive development, communication and implementa- tion of risk strategy and risk appetite across the Group. The main shareholder of the Bank is TBC Bank Group PLC, which holds 99.9% of the Bank’s share capital. The rights of the shareholders are governed by the Law of Georgia on Entrepreneurs and the Law on the Activi- ties of Commercial Banks and also set out in the Char- ter of the Bank publicly available at www.tbcbank.ge. The Board of Directors of TBC Bank Group PLC (the “PLC Board”) is the principal decision-making body of the Bank and is responsible for promoting the Group’s purpose, culture, values and long term success strate- gy and the delivery of sustainable value to stakeholders by. The PLC Board is responsible for establishing and overseeing the strategic direction of the Bank. In addition, the affairs of the Bank are supervised by a Supervisory Board (the “Supervisory Board”) of the Bank. There is also equivalent committee structure of the Supervisory Board as the PLC Board’s committees. There are, therefore, in practice two equivalent super- visory bodies within the Group represented by the PLC Board and the Supervisory Board, which are separate but interconnected together with committees. The work of the PLC Board, the Supervisory Board and their respective committees is carefully balanced, dividing functions according to whether they are supervising the matters that affect the Group or those concerning solely the Bank. As a result, the Group’s governance structure ensures adequate oversight and accountabil- ity, as well as clear segregation of duties. Composition of PLC Board and the Supervisory Board including re- spective committees mirror at both levels in terms of non-executive membership. At the date of this report, in line with the “indepen- dence” criteria set by the NBG Code, the Supervisory Board comprises comprised of eight independent, non-executive members: Arne Berggren (Chairman), Tsira Kemularia (Senior Independent member), Maria Luisa Cicognani, Per Anders Fasth, Thymios P. Kyriako- poulos, Eran Klein, Nino Suknidze and Rajeev Sawhney. The Supervisory Board has established four principal Committees: • The Risk Committee focuses on the possible risks and capital issues of the Bank. • The Audit Committee deals with the external au- ditors, internal controls and financial reporting, as well as, communication with the market and with the regulators. • The Remuneration Committee leads the remu- neration-related issues, such as the right level of compensation to attract and retain people and bal- ancing this with the level of compensation that is acceptable for our stakeholders. • The Corporate Governance and Nomination Com- mittee is response for talent management and nomination and succession planning for the Super- visory Board and the executive team. Two new committees, established in 2021, provide fur- ther support the Supervisory Board in three key strate- 106 TBC BANK MANAGEMENT REPORT 2021gic areas – technology, ESG Strategy and climate change. The Technology and Data Committee supports the Su- pervisory Board in its oversight of key enablers of the strategy, data and cyber issues, and the Company IT resources. The ESG and Ethics Committee ensures that the Bank stays focused on the ESG issues that are key for all our stake- holders. Both committees started operating in 2022. The Bank recognises the importance of ensuring diversity and sees significant benefit to our business in having the Supervisory Board and management team that is drawn from a diverse range of backgrounds, since this brings the required expertise, cultural diversity and different perspectives to the board discussions and helps to improve the quality of decision making. There are three female members on the Supervisory Board. In addition, there are a number of talented women in key positions, who report directly to the CEO of the Bank and other members of the management board within the Bank. As at 31 December 2021, 17% of Group’s top management and 35% of Group’s middle management roles were per- formed by females. Moreover, 68% of employees across the Group’s entire workforce were female. Responsibility statement The Management Report and Financial Statements have been prepared in accordance with applicable laws and regulations. We confirm that to the best of our knowledge that: • The Group’s (the Bank together with its subsidiaries) and the Bank’s Financial Statements, which have been pre- pared in accordance with the IFRS standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bank and the undertakings included in the consolidation taken as a whole; • The Management Report includes a fair review of the development and performance of the business and of the position of the Bank and the Group, together with a description of the principal risks and uncertainties they face; and • The Management Report and Financial Statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for the shareholders to assess the Bank’s and Group’s position, performance, business and strategy. This responsibility statement was approved by the Supervisory Board and Management Board: Vakhtang Butskhrikidze CEO 28 April 2022 Arne Berggren Chairman 28 April 2022 107 TBC BANK MANAGEMENT REPORT 2021SUPERVISORY BOARD BIOGRAPHIES Joined the Bank in August 2019; Appointed as Chairman on 1 March 2021 Experience • Experience in international financial institutions and advising governments • Board membership and committee chairing experience in other UK-listed banks • Experience in investment banking activities and in leading bank restructur- ings • Deep understanding of strategic planning and implementation Arne has worked in the financial services industry for more than 25 years. He has held several senior leadership and advisory roles at prominent financial intuitions including the IMF, World Bank, Swedbank, Carnegie Investment Bank AB and the Swedish Ministry of Finance and Bank Support Authority. Arne had a leading role in the handling of the Swedish banking crisis in 1991-93. During the Asian crisis, he assisted the FRA in Thailand and FSC/ KAMCO in South Korea with the han- dling of problem assets. During his career, Arne has also served as the CEO of en- tities outside the financial industry and as an independent non-executive director at the Turkish asset management company, LBT Varlik Yonetim and Slovenian bank asset management company, DUBT Ltd. Current External non-executive appointments • Board member of Bank of Cyprus • Board member of Piraeus Bank Committee membership • Chair of the Corporate Governance and Nomination Committee • Member of the Remuneration Committee Joined the Bank in September 2018; Appointed as SID on 15 September 2021 Experience • Deep experience with more than 23 years’ experience across the energy and petrochemicals industries including regulated commodity trading and finan- cial services • Chartered Director with the Institute of Directors in London, UK • Former member of the British-Georgian Society and former Chair of the Georgian Community in the UK • Relevant experience and expertise in information security risk management Tsira held various roles covering market risk management and commodity trad- ing at companies including Dynegy Inc. in the US and UK and at Shell Interna- tional Trading and Shipping Ltd (STASCO) in London. She served in different managerial roles in M&A and Commercial Finance, Group Treasury and Trading and Supply in the UK, Moscow and Barbados between 2005 and 2016. From 2016 to 2019, Tsira was the Head of Group Pensions Strategy and Standards at Shell International Ltd based in London. Since 2019, Tsira is the Head of Internal Audit and Investigations for Shell’s global Trading and Supply organization, which is the world’s biggest commodity trading and supply business. Current External non-executive appointments • Trustee Director of the British Gas Trustee Solutions Ltd, a closed pension fund (post British Gas acquisition by Shell) • Trustee Director, Shell Trustee Solutions Ltd • Board member of FaRiG ( Friends of Academic Research in Georgia) Committee membership • Member of the Audit Committee • Member of the ESG and Ethics Committee • Senior Independent Director • Designated Non-Executive Director for Workforce Engagement ARNE BERGGREN Chairman TSIRA KEMULARIA, CDir Senior Independent Non-Executive Supervisory Board Member 108 TBC BANK MANAGEMENT REPORT 2021Joined the Bank in September 2018 Experience • Extensive experience in international banking, financial institutions and cor- porate governance • Deep understanding of the UK Corporate Governance and directors’ remu- neration framework • Strong leadership skills through significant board membership and chairing experience • Extensive international strategic advisory experience in emerging and growth economies Maria Luisa has extensive experience in the field of banking, financial institutions and corporate governance. She worked at the European Bank for Reconstruction and Development (London) between 1993 and 2005. Subsequently, she was a director of Financial Institutions at Merrill Lynch and Head of Financial Institutions at Renaissance Capital in London and Moscow, as well as a Managing Director of Mediobanca (London). During 2014-16, Maria Luisa served as a non-executive member of the board of Azimut Global Counseling Srl (Italy) and Azimut Interna- tional Holding SA (Luxemburg). She has previously served as a Chairperson of Moneta Money Bank (listed on the Prague Stock Exchange), and in 2020-21 she was an independent non-executive director of UBI Banca (Italy). Current External non-executive appointments • Chairperson of Mobius Investment Trust, an LSE-listed company • Chairperson of Arafa Holding, listed on the Cairo Stock Exchange Committee membership • Chair of the Remuneration Committee • Member of the Risk Committee • Member of the Corporate Governance and Nomination Committee Joined the Bank in July 2021 Experience • Extensive experience in banking, credit, capital markets and legal • Significant risk, corporate governance, strategy and structuring experience • Strong Emerging Markets banking and stakeholder management experience • Relevant experience and expertise in information security risk management Eran is an experienced international banker and lawyer who held senior roles over two decades in leading financial institutions such as Commerzbank, Citibank, ING Financial Markets and Deutsche Bank across both developed and emerging markets. Eran accumulated valuable knowledge in capital markets, SME finance, retail lending, corporate governance, liquidity and balance sheet management, as well as in risk management, audit and strategy implementation. Currently, he also serves as a non-executive director and risk committee chair at Privatbank, the largest bank in Ukraine. Current External non-executive appointments • Non-Executive Director and Chair of the Risk Committee at Privatbank, Ukraine. MARIA LUISA CICOGNANI Independent Non-Executive Supervisory Board Member ERAN KLEIN Independent Non-Executive Supervisory Board Member Committee membership • Chair of the ESG and Ethics Committee • Member of the Technology and Data Committee • Member of the Risk Committee 109 TBC BANK MANAGEMENT REPORT 2021SUPERVISORY BOARD BIOGRAPHIES CONTINUED PER ANDERS FASTH Independent Non-Executive Supervisory Board Member Joined the Bank in July 2021 Experience • Extensive experience as CEO and senior executive with more than 20 years at leading financial institutions • More than 30 years of accumulated experience as an independent non-ex- ecutive director • Strong listed company governance, leadership and strategic advisory skills • Relevant experience in the financial information technologies (Fintech) and credit management industries across Europe • Relevant experience and expertise in information security risk management Per Anders served as a senior executive for 20 years, at the leading North-Euro- pean bank SEB and as a CEO at SBAB Bank, Hoist Finance and European Res- olution Capital. Per Anders has deep strategic consulting experience from 10 years at top-tier consultancies McKinsey & Company and QVARTZ (now Bain & Company). He has been a non-executive director of several financial institutions in Scandinavia and Greece where was a board member of Piraeus Bank S.A., a leading listed Greek Bank. In addition, he has extensive professional experience from having worked in the Nordic and Baltic countries, Germany, Luxembourg, Slovenia, the UK and Ukraine where he was an advisor to the World Bank and the Ministry of Finance. Current External non-executive appointments • Chairman of Lyra Financial Wealth, a wealth management company • Chairman of Pepins Group, listed on Nordic GM for SMEs • Board member of Atle Investment Management/Services Committee membership • Chair of the Audit Committee • Member of the Risk Committee • Member of the Remuneration Committee Joined the Bank in November 2021 Experience • Strong global corporate leadership experience of more than 40 years • Significant advisory and executive experience with technology and cyberse- curity companies • Extensive expertise in personnel management • Relevant experience and expertise in information security risk management Rajeev is a corporate growth executive with 40 years’ global experience in digital technologies, serving across various industry sectors in Europe, North America and Asia. Currently, Rajeev serves as Executive Chairman and a non-executive director of OXSIGHT Ltd, a medical equipment developer and an Oxford Uni- versity spin off. He was formerly a senior advisor to the CEO at global IT services firm Zensar Ltd in the UK and member of the advisory board at Garble Cloud Inc., a cybersecurity company in Silicon Valley, USA. Prior to that, Rajeev gained strong operational experience as President of HCL Technologies and at Mphasis, a Hewlett Packard company. RAJEEV SAWHNEY Independent Non-Executive Supervisory Board Member Current External non-executive appointments • Executive Chairman and board member of OXSIGHT Ltd Committee membership • Chair of the Technology and Data Committee • Member of the ESG and Ethics Committee • Member of the Corporate Governance and Nomination Committee 110 TBC BANK MANAGEMENT REPORT 2021Joined the Bank in November 2021 Experience • Strong financial services background • Extensive experience in major financial services sector transactions and list- ings as a leading legal counsel • Strong governance, regulatory and risk management experience, including at an LSE-listed company • Experienced at advising companies across a range of sectors, including tele- communications, pharmaceuticals, energy and commerce Nino is a business lawyer, with 19 years experience in the Georgian market and deep expertise in various areas of practice including banking, finance, corpo- rate, regulatory, competition and capital markets. Currently, Nino is the managing partner of the law firm Suknidze & Partners LLC. During 2017-20, she served as general counsel at JSC Bank of Georgia. Before joining the bank, she held vari- ous positions at the Georgian offices of international law firms Dentons and DLA Piper for more than 11 years. Current External non-executive appointments • Vice President at Georgian Chamber of Commerce and Industry • Board member at Care Caucasus, a charity organisation in Georgia Committee membership • Member of the Audit Committee • Member of the Remuneration Committee • Member of the Corporate Governance and Nomination Committee Joined the Bank in July 2021 Experience • Extensive experience as an investor, portfolio manager, risk taker and balance sheet planner • Experience in balance sheet de-risking and deep operational and gover- nance restructuring • Transformation leadership and crisis management spanning across systemic banks and Fintech • Strong financial, risk and asset management advisory skills to companies and government entities Thymios is an internationally experienced banking executive specialising in op- erational transformation, balance sheet and risk management, financial engineer- ing and portfolio management. He serves on the board of the Hellenic Corpora- tion of Assets and Participations, the Greek sovereign wealth fund, and is Chair of its Investment and Risk Committee. Thymios was an executive general manager and chief risk officer of Piraeus Bank S.A, a leading listed Greek Bank, managing director at Goldman Sachs Inc. in the fixed income currencies and commodities trading division, and has held board and executive roles in Insurtech, Fintech, fi- nancial services and management consulting companies. Current External non-executive appointments • Board member of the Hellenic Corporation Of Assets And Participations Committee membership • Chair of the Risk Committee • Member of the Audit Committee • Member of the Technology and Data Committee NINO SUKNIDZE Independent Non-Executaive Supervisory Board Member THYMIOS P. KYRIAKOPOULOS Independent Non-Executaive Supervisory Board Member 111 TBC BANK MANAGEMENT REPORT 2021THE BANK’S MANAGEMENT BOARD BIOGRAPHIES Experience • Leading banker in the Caucasus and Eastern European region • Extensive strategic and financial leadership experience of over 25 years • Robust knowledge and expertise of strategic planning and development, startup and fintech management, mergers and acquisitions, and equity and debt capital debt raising and investor relations Vakhtang has more than 30 years of banking and financial industry experience. He led the Group from its founding in Georgia in 1992 as a start up to the current market-leading financial technologies institution. He joined TBC Bank as a Se- nior Manager in 1993 and became Chairman of the Management Board in 1996. Since 1998, he has held the position of Chief Executive Officer of JSC TBC Bank . Vakhtang is a prominent banker in the Caucasus and Easter European region and has received several prestigious awards, including the Best Banker 2011 award from the GUAM Organization for Democracy and Economic Developmentand was named CEO of the Year 2014 for Central and Eastern Europe and the CIS by EMEA Finance magazine. In March 2019, he won the Special Award for Respon- sible Capitalism in Adversity from the prestigious FIRST organisation - a multi- disciplinary international affairs organization, which aims to enhance dialogue between leaders in industry, finance and government. Current External non-executive appointments • Board member of the Association of Banks of Georgia • Board member of the Business Association of Georgia • Member of the Visa Central & Eastern Europe, Middle East and Africa (CE- MEA) Business Council Giorgi was appointed as Deputy CEO and CFO of JSC TBC Bank in October 2020. He joined the Bank as a Deputy CFO in March 2020. Giorgi has 25 years global leadership experience in financial services. Before join- ing TBC, Giorgi was a Director and Head of Capital Risk and Stress Testing at Natwest Markets N.V. in Amsterdam. Prior to that, Giorgi held a number of key leadership positions at Barclays Bank in London between 2008 and 2019, includ- ing as a Director at Barclays Treasury, the Head of Barclays Internal Large Exposure and the Head of Barclays Central Planning. During his work at Barclays, Giorgi also served as Barclays Bank PLC Solo Capital and Leverage Management Lead and the Head of Strategic Planning at Barclaycard UK. In his earlier career, Giorgi held various senior managerial positions at several Georgian organisations. Giorgi holds an MBA from the Judge Business School at the University of Cam- bridge. VAKHTANG BUTSKHRIKIDZE CEO GIORGI MEGRELISHVILI Deputy CEO Chief Financial Officer 112 TBC BANK MANAGEMENT REPORT 2021Tornike was appointed to his current role as Deputy CEO of JSC TBC Bank and Head of Retail in January 2020. Additionally, Tornike is leading the MSME bank- ing since January 2021. He joined TBC in 2018 as Chief Operating Officer (COO). Tornike has more than 20 years’ financial services and operations management experience in Georgia and Central and Eastern Europe. Prior to joining TBC, he has served as a Deputy CEO and Chief Operating Officer at the Bank of Georgia Group and served at various other key positions at the same institution before that. During 2008-2010, Tornike held the position of CFO at BG Bank Ukraine (a subsidiary of Bank of Georgia). Earlier in his career, Tornike held the position of the CEO of Aldagi, an insurance company in Georgia, served as the chief finan- cial officer of UEDC PA consulting and held various managerial positions at BCI Insurance. Tornike holds an MBA from the Caucasus School of Business and an executive diploma from Said Business School in Oxford. Nino was appointed to her current role as Chief Risk Office of JSC TBC Bank in 2020. Prior to that, Nino held progressively senior positions at TBC after she first joined the Bank in 2000. Nino was appointed as Deputy CEO of the Bank in 2006, leading TBC’s retail and MSME businesses at various times. Nino also serves on the supervisory board of TBC’s key subsidiary TBC Leasing. Nino has more than 25 years’ financial services and banking experience in Geor- gia. In her earlier career, Nino held various leadership and managerial positions at JSC TbilCom Bank and the Barents Group. Nino holds an MBA from the European School of Management in Tbilisi. TORNIKE GOGICHAISHVILI Deputy CEO Retail & MSME Banking NINO MASURASHVILI Deputy CEO Chief Risk Officer 113 TBC BANK MANAGEMENT REPORT 2021THE BANK’S MANAGEMENT BOARD BIOGRAPHIES CONTINUED George was appointed to his current role at the Bank in November 2016, leading the Corporate and Investment Banking businesses. George is also responsible for the Bank’s Wealth Management and leasing businesses since January 2021. George first joined TBC in 2014 as Deputy CEO and the Chief Risk Officer. George has more than 20 years of experience in global financial services. Prior to joining TBC, he worked for Barclays Investment Bank, where he held the position of Vice President in the Financial Institutions Group (FIG), EMEA. Before that, he was an Associate Director in the Barclays Bank Debt Finance and Restructuring teams. During his career at Barclays in London, George worked on and execut- ed multiple M&A, debt and capital markets transactions with European financial institutions. In his earlier career in Georgia, George served as the Chief Executive Officer at Aldagi, the leading insurance company in Georgia and held progres- sively senior positions at the same company prior to that. George is Stanford Executive Program (SEP) graduate, holds an MBA from the London Business School and a Master of Laws degree (LLM) in International Commercial Law from the University of Nottingham. GEORGE TKHELIDZE Deputy CEO Corporate & Investment Banking Wealth Management Nikoloz was appointed to his current role as Deputy CEO of JSC TBC Bank in January 2021, leading Brand Experience, Marketing and Payments. He joined the Bank in 2014 as the Deputy CEO in charge of Marketing and MSME banking. Ad- ditionally, Nikoloz has been leading TBC’s digital banking platform, Space, since 2018. Nikoloz has more than 15 years’ experience in the banking industry in Central Asia, CEE and Europe. Prior to joining TBC Bank, Nikoloz was the managing director at Kaspi Bank, a leading retail bank in Kazakhstan. At Bank of Austria, UniCred- it Group, he served as the senior sales support expert in the CEE retail division, responsible for Turkey, Kazakhstan, Ukraine and Serbia. At ATF Bank, UniCred- it Group in Kazakhstan, he was in charge of the retail banking division. Earlier in his career in Georgia, Nikoloz served as the head of the retail banking division of Bank Republic Georgia, Société Générale Group, and held several leadership and managerial positions at Bank of Georgia. Nikoloz holds an MBA from IE Business School in Spain and a masters degree in International Economics from Georgian Technical University. NIKOLOZ KURDIANI Deputy CEO Brand Experience Marketing & Payments 114 TBC BANK MANAGEMENT REPORT 2021115 TBC BANK MANAGEMENT REPORT 2021FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report TO THE SHAREHOLDERS AND MANAGEMENT OF JSC TBC BANK K N A B C B T C S J F O T N E M E G A N A M D N A S R E D L O H E R A H S E H T O T T R O P E R ’ I S R O T D U A T N E D N E P E D N I Materiality Group scoping Key audit matters • Overall Group materiality: GEL 48.1 million, which represents 5% of the Group’s actual profit before tax. • Overall Bank materiality: GEL 48.7 million, which represents 5% of Bank’s actual profit before tax. • Our scoping was driven by legal entity contribution to profit before tax and other key financial metrics. We also considered overall cover- age in assessing the appropriateness of our scoping. • Audit matter which was of most significance in the audit of the consol- idated and separate financial statements is: – Expected credit loss allowance for loans and advances to customers; 118 OUR OPINION In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consoli-dated and separate financial position of JSC TBC Bank (the “Bank”) and its subsidiaries (together – the “Group”) as at 31 December 2021, and the Group’s and the Bank’s consolidated and separate financial performance and consolidat-ed and separate cash flows for the year then ended in accordance with International Financial Reporting Standards, with the requirements of the order N284/04 of the President of the National Bank of Georgia dated 26 December 2018, and with the requirements of the Law of Georgia on Accounting, Reporting and Auditing.What we have auditedThe Group’s and the Bank’s consolidated and separate financial statements comprise: • the consolidated and separate statements of financial position as at 31 December 2021; • the consolidated and separate statements of profit or loss and other comprehensive income for the year then ended; • the consolidated and separate statements of changes in equity for the year then ended; • the consolidated and separate statements of cash flows for the year then ended; and • the notes to the consolidated and separate financial statements, which include significant accounting policies and other explanatory information.BASIS FOR OPINIONWe conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated and separate financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. IndependenceWe are independent of the Group and the Bank in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code. OUR AUDIT APPROACH Overview As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated and separate financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and con- sidering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated and separate financial statements are free from material misstatement. Mis- statements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated and separate financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group and Bank materiality for the consolidated and separate financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated and separate financial statements as a whole. Overall Group and Bank materiality Group: GEL 48.1 million (2020: GEL 23.8. million) Bank: GEL 48.7 million (2020: GEL 22.7 million) How we determined it 5% of annual profit before tax (2020: 5% of the average profit before tax for the last three years). Rationale for the materiality benchmark applied Profit before tax is a primary measure used by the shareholders in assessing the performance of the Group and the Bank and is a generally accepted benchmark for determining audit materiality. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 119 Key audit matter How our audit addressed the key audit matter Expected credit loss allowance for loans and advanc- es to customer Refer to pages 134 to 150 (Significant Accounting Pol- icies), pages 150 to 154 (Critical accounting estimates and judgements in applying accounting policies), and pages 162 to 185 (Note 9 - Loans and advances to cus- tomers). We focused on this area as the management estimates regarding the material financial statement line item of expected credit loss (‘ECL’) allowance are complex and require a significant degree of judgement Under IFRS 9 management is required to determine the credit loss allowance expected to occur over ei- ther a 12 month period or the remaining life of an asset, depending on the stage allocation of the individual as- set. This staging is determined by assessing whether or not there has been a significant increase in credit risk (‘SICR’) or default of the borrower since loan orig- ination. Some of the criteria applied by management for such an assessment are judgemental and involve qualitative assessment of borrowers’ creditworthiness. It is also necessary to consider the impact of different future macroeconomic conditions in the determina- tion of ECLs. There is an increased level of uncertainty in the macroeconomic forecasts due to the impact of COVID-19 on the economy. Management has designed and implemented a num- ber of models to achieve compliance with the require- ments of IFRS 9. Among others, management has applied judgement to the models in situations where past experience was not considered to be reflective of future outcomes due to limited or incomplete data. Management has also considered the need for incor- porating post-model adjustments which would cover the aspects not fully captured by existing models. We have considered the following to be significant for the determination of ECL. – The appropriateness of model methodologies (in- cluding their ability to reflect the ongoing impact of COVID-19 through appropriate calibration of existing assumptions) and critical judgements and estimates used to determine the expected credit losses; – Judgemental criteria applied for identification of SICR, involving qualitative assessment of borrow- ers’ creditworthiness relevant to corporate and SME portfolios; – Critical assumptions applied in the determination of loss given default (‘LGD’) and probability of de- fault (‘PD’); – Assessment of model limitations and use of post model adjustments (‘PMAs’) if required to address such risks; and – Assessment of the key assumptions related to forward-looking information (‘FLI’) including the appropriateness of scenario weightings and mac- roeconomic variables. We understood and evaluated the design of the key controls over the determination of ECL allowance and tested their operating ef- fectiveness. These controls included among others: – Controls over model performance monitoring, including peri- odic reviews of the policy and models, testing model estimates against actual outcomes and approval of model methodology changes; – Review and approval of the key judgements and assumptions used for determining LGDs, PDs and FLI; – Controls over key parameters calculation by the calculation en- gine; – Controls over regular monitoring of the financial standing of the borrowers; – Controls over ECL calculation and analysis of results; and – The Management Risk Committee’s review and approval of judgemental assumptions and assessment of ECL modelled outputs. We noted no exceptions in the design or operating effectiveness of the above controls. In addition we performed the substantive pro- cedures described below. We assessed whether the IFRS 9 ECL model methodologies de- veloped by management are appropriate, engaging our credit risk modelling specialists and our industry knowledge. This included an evaluation of the judgemental criteria set by management for de- termining whether there had been a SICR (applicable to corporate and SME portfolios), and the critical judgements and assumptions applied in determination of LGDs, PDs and FLI. We concluded that management’s judgements in deriving SICR, LGDs, PDs and FLI were reasonable. We independently verified the calculation of ECL and assessed whether the ECL calculations were consistent with the approved model methodologies. We critically evaluated key aspects of model monitoring and vali- dation (“backtesting” of projected ECL) performed by management relating to model performance and stability and critically assessed the monitoring results. The results were interpreted in the context of COVID-19 circumstances and explanations were obtained for devi- ations from the expectation. Where relevant, particular assumptions made in the ECL estimation process were updated to address the results of backtesting. We challenged management in respect of the appropriateness of the macroeconomic models as well as weightings applied to each macroeconomic scenario. We checked that macroeconomic as- sumptions and scenario weightings used by the Bank are reason- able. We challenged management in respect of the completeness and ongoing appropriateness of PMAs recognised. We assessed the PMAs applied including judgements and assumptions used and calculations involved. As a result, we checked that the PMAs were recognised where existing models were not able to capture the emerging risks, and management’s judgements are reasonable. 120 INDEPENDENT AUDITOR’S REPORT CONTINUEDHow we tailored our Group and Bank audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the con- solidated and separate financial statements as a whole, taking into account the structure of the Group and the Bank, the accounting processes and controls, and the industry in which the Group and the Bank operates. The Group’s banking activities are primarily carried out in Georgia, with small subsidiary operations in two other coun- tries. The Group’s business activities comprise of four segments for which it manages and reports its operating re- sults and financial position, namely Retail Banking, Corporate and Investment Banking, Micro Small and Medium Enterprises (‘MSME’) and Corporate Centre. The Bank is the largest component of the Group. Its main operations are Retail and Commercial banking, with all significant operations based in Georgia. Accounting functions and management of the Bank are primarily based in Georgia, and represents 99% of the group assets and 99% of profit before tax. We also performed other audit pro- cedures including testing information technology general controls and other relevant controls related to financial reporting, to mitigate the risk of material misstatement. Our audit approach and team was also designed to reflect the structure of the group. We did not use component au- ditors for audit of in-scope areas. Based on the procedures we performed over the reporting units our audit scoping/ coverage accounted for 98% of revenue and 99% of total assets of the group. OTHER INFORMATION Management is responsible for the other information. The other information comprises the Management Report (but does not include the consolidated and separate financial statements and our auditor’s report thereon). Our opinion on the consolidated and separate financial statements does not cover the Management Report. In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the Management Report and, in doing so, consider whether the Management Report is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report that fact. We have nothing to report in this regard. In addition, we are required by the Law of Georgia on Accounting, Reporting and Auditing to express an opinion whether certain parts of the Management Report comply with respective regulatory normative acts and to consider whether the Management Report includes the information required by the Law of Georgia on Accounting, Reporting and Auditing. Based on the work undertaken in the course of our audit, in our opinion: • • • the information given in the Management Report for the financial year for which the consolidated and separate financial statements are prepared is consistent with the consolidated and separate financial statements; the information given in the Management Report complies with the requirements of paragraph 6 and paragraph 7 (c), (g) of article 7 of the Law of Georgia on Accounting, Reporting and Auditing; the information given in the Management Report includes the information required by paragraph 7 (a), (b), (d) – (f) and paragraph 8 of article 7 of the Law of Georgia on Accounting, Reporting and Auditing. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated and separate financial state- ments in accordance with International Financial Reporting Standards, with the requirements of the order N284/04 of the President of the National Bank of Georgia dated 26 December 2018, and with the requirements of the Law of Georgia on Accounting, Reporting and Auditing, and for such internal control as management determines is neces- sary to enable the preparation of consolidated and separate financial statements that are free from material misstate- ment, whether due to fraud or error. In preparing the consolidated and separate financial statements, management is responsible for assessing the Group’s and the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s and the Bank’s financial reporting pro- cess. 121 AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that in- cludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influ- ence the economic decisions of users taken on the basis of these consolidated and separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepti- cism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forg- ery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s and the Bank’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Bank to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the under- lying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activ- ities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and tim- ing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical re- quirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Levan Kankava. PricewaterhouseCoopers Georgia LLC (Reg.# SARAS-F-775813) PricewaterhouseCoopers Georgia LLC, I/C 405220611 King David Business Centre, 7th floor, #12 M. Aleksidze Street, Tbilisi 0171, Georgia Tel: +995 (32) 250 80 50, www.pwc.com/ge Levan Kankava (Reg.# SARAS-A-592839) Tbilisi, Georgia 28 April 2022 122 INDEPENDENT AUDITOR’S REPORT CONTINUEDCONSOLIDATED STATEMENT OF FINANCIAL POSITION 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 measured at fair value through other comprehensive income Bonds carried at amortised cost Finance lease receivables Investment properties Current income tax prepayment Deferred income tax asset Other financial assets Other assets Premises and equipment Right of use assets Intangible assets Goodwill Investments in associates TOTAL ASSETS LIABILITIES Due to credit institutions Customer accounts Other financial liabilities Current income tax liability Deferred income tax liability Debt securities in issue Provision for liabilities and charges Other liabilities Lease liabilities Subordinated debt TOTAL LIABILITIES EQUITY Share capital Share premium Retained earnings Share based payment reserve Fair value reserve of investment securities measured at fair value through other comprehensive income Cumulative currency translation reserve Net assets attributable to owners Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Note 31 December 2021 31 December 2020 31 December 2019 6 7 8 9 10 11 13 17 35 35 12 14 15 16 15 18 19 20 23 35 35 21 22 24 36 25 26 27 39 1,595,460 42,237 2,086,113 16,547,185 1,938,196 - 252,340 22,892 84 2,056 442,207 373,892 378,657 58,001 267,406 28,197 4,589 1,601,599 19,690 2,098,506 14,594,269 1,527,268 1,059,946 270,978 68,689 69,762 2,134 161,002 256,646 362,863 49,746 223,577 28,197 4,090 994,479 15,597 1,591,829 12,349,399 985,293 1,021,568 256,660 72,667 25,695 2,173 115,211 247,201 329,529 57,086 159,109 29,459 2,655 24,039,512 22,398,962 18,255,610 2,984,075 14,884,145 120,620 86,302 10,979 1,583,699 15,845 83,623 56,522 623,647 4,485,873 12,634,295 211,242 27 13,084 1,419,513 17,451 59,969 54,588 672,740 3,593,901 10,112,002 95,643 818 18,806 1,213,598 16,979 70,366 59,316 591,035 20,449,457 19,568,782 15,772,464 21,014 521,190 3,117,079 (52,521) (10,862) (5,938) 3,589,962 93 3,590,055 24,039,512 21,014 521,190 2,355,105 (73,130) 11,157 (5,261) 2,830,075 105 2,830,180 22,398,962 21,014 521,190 2,016,119 (62,669) (6,399) (6,691) 2,482,564 582 2,483,146 18,255,610 The consolidated and the separate financial statements on pages 123 to 263 were approved by the Supervisory Board on 28 April 2022 and signed on its behalf by: Vakhtang Butskhrikidze Chief Executive Officer Giorgi Megrelishvili Chief Financial Officer The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 123 TBC BANK FINANCIAL STATEMENTS 2021CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME in thousands of GEL Interest income Interest income calculated using effective interest method Other interest income Interest expense Net interest gains on currency swaps Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains from currency derivatives, foreign currency operations and translation Net gains/(losses) from disposal of investment securities measured at fair value through other comprehensive income Other operating income Share of profit of associates Other operating non-interest income Credit loss recovery/(allowance) for loans to customers Credit loss recovery/(allowance) for finance lease receivables Credit loss recovery/(allowance) for performance guarantees and credit related commitments Credit loss allowance for other financial assets Credit loss recovery/(allowance) for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortization Provision for liabilities and charges Administrative and other operating expenses Operating expenses Losses from modifications of financial instruments Profit before tax Income tax (expense)/credit Profit for the year Other comprehensive (expense)/income for the year Items that may be reclassified subsequently to profit or loss: Movements in fair value reserve for investment securities measured at fair value through other comprehensive income Exchange differences on translation to presentation currency Other comprehensive (expense)/income for the year TOTAL COMPREHENSIVE INCOME FOR THE YEAR Profit is attributable to: – Shareholders of the Group – Non-controlling interest Profit for the year Total comprehensive income is attributable to: – Shareholders of the Group – Non-controlling interest Total comprehensive income for the year Note 31 December 2021 31 December 2020 (restated) 31 December 2019 (restated) 29 29 29 29 29 30 30 32 31 9 13 22 12 33 15,16,17 22 34 35 10 1,863,077 1,805,196 57,881 (895,428) 28,143 995,792 378,160 (153,273) 224,887 124,194 11,156 41,042 837 177,229 43,176 236 1,204 (14,461) 2,594 (11,715) 1,418,942 (255,747) (70,622) - (128,624) (454,993) (1,726) 962,223 (119,278) 842,945 (22,020) (677) (22,697) 820,248 842,929 16 842,945 820,232 16 820,248 1,660,838 1,608,751 52,087 (854,089) 20,950 827,699 290,496* (121,717)* 168,779 105,855 (624) 13,354 – 118,585 (330,811) (7,760) 3,238 (13,408) (1,810) (5,830)* 758,682* (206,887) (64,068) (2,600) (111,914)* (385,469)* (41,015) 332,198 5,062 337,260 17,633 1,588 19,221 356,481 337,238 22 337,260 356,459 22 356,481 1,435,106 1,387,172 47,934 (670,422) 28,556 793,240 280,618* (101,492)* 179,126 102,435 169 17,576 632 120,812 (82,030) 582 (2,156) (7,717) (291) (2,743)* 998,823* (226,008) (57,319) (2,105) (124,184)* (409,616)* – 589,207 (43,522) 545,685 (15,175) 241 (14,934) 530,751 545,612 73 545,685 530,678 73 530,751 * Certain amounts do not correspond to the 2020 and 2019 financial statements as they reflect the certain restatements as described in Note 2. The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 124 TBC BANK FINANCIAL STATEMENTS 2021 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - - 33,762 (62,840) (19) - (40) 582 22 - (19) (80,911) 204 2,483,146 337,260 19,221 17,472 (27,932) 1,013 Share based pay- ments reserve Fair value reserve for investment securities at FVTOCI Cumu- lative currency trans- lation reserve Retained earnings Total equity excluding non-con- trolling interests Non-con- trolling interest Total Equity Note Share Capital Share premium 21,014 – 521,190 – (33,591) – 8,775 - (6,933) - 1,551,176 545,612 2,061,631 545,612 568 73 2,062,199 545,685 (15,175) 241 - (14,934) - (14,934) (15,175) 241 545,612 530,678 73 530,751 in thousands of GEL Balance as of 1 January 2019 Profit for the year Other comprehensive (loss)/income Total comprehensive (loss)/income for 2019 Share based payment expense Share based payment recharge by parent company Purchase of additional interest from NCI Dividends declared Other movements 27 – – - - - - - – – - - - - - – – 33,762 (62,840) – – - - - - - 1 - - - - - - - 33,762 (62,840) - (80,911) (80,911) 1 242 244 Balance as of 31 December 2019 Profit for the year 21,014 – 521,190 – (62,669) – (6,399) – (6,691) 2,016,119 337,238 – 2,482,564 337,238 Other comprehensive income Total comprehensive income for 2020 Share based payment expense Share based payment recharge by parent company Other movements 27 – – – – – – – – – – 17,472 – (27,932) 17,633 1,588 – 19,221 17,633 1,588 337,238 356,459 22 356,481 – – – – – – 17,472 (27,932) – – – (1) (77) (158) 1,748 1,512 (499) Balance as of 31 December 2020 Profit for the year 21,014 – 521,190 – (73,130) – 11,157 – (5,261) 2,355,105 842,929 – 2,830,075 842,929 105 16 2,830,180 842,945 Other comprehensive loss for 2021: Effect of change in business model Other effects during the period Total comprehensive (loss)/income for 2021 Share based payment expense Dividends declared Other movements 2 27 – – – – – – – – – – – – – – – – – – 20,609 – – (22,020) (677) - (22,697) - (22,697) 26,062 – (48,082) (677) – – 26,062 (48,759) - - 26,062 (48,759) (22,020) (677) 842,929 820,232 16 820,248 – – 1 – – – - 20,609 (81,872) (81,872) 917 918 - (48) 20 20,609 (81,920) 938 Balance as of 31 December 2021 21,014 521,190 (52,521) (10,862) (5,938) 3,117,079 3,589,962 93 3,590,055 The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 125 TBC BANK FINANCIAL STATEMENTS 2021 CONSOLIDATED STATEMENT OF CASH FLOWS in thousands of GEL Note 31 December 2021 31 December 2020 31 December 2019 Cash flows from/(used in) operating activities Interest received Interest received on currency swaps Interest paid Fees and commissions received Fees and commissions paid Income/(expense) from trading in foreign currencies Other operating income received Staff costs paid Administrative and other operating expenses paid Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Net change in operating assets Due from other banks and mandatory cash balances with the National Bank of Georgia Loans and advances to customers Finance lease receivables Other financial assets Other assets Net change in operating liabilities Due to other banks Customer accounts Other financial liabilities Other liabilities and provision for liabilities and charges Net cash flows from/(used in) from operating activities Cash flows (used in) / from investing activities Acquisition of investment securities measured at fair value through other comprehensive income Proceeds from disposal of investment securities measured at fair value through other comprehensive income Proceeds from redemption at maturity of investment securities measured at fair value through other comprehensive income Dividends received Acquisition of subsidiaries, net of cash acquired Acquisition of bonds carried at amortised cost Proceeds from redemption of bonds carried at amortised cost Acquisition of premises, equipment and intangible assets Proceeds from disposal of premises, equipment and intangible assets Proceeds from disposal of investment properties Net cash from/(used in) investing activities Cash flows (used in)/from financing activities Proceeds from other borrowed funds Redemption of other borrowed funds Repayment of principal of lease liabilities Redemption of subordinated debt Proceeds from debt securities in issue Redemption of debt securities in issue Share based payment recharge paid Dividends paid Net cash flows (used in)/from financing activities Effect of exchange rate changes on cash and cash equivalents Net (decrease)/increase 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 29 32 10 10 10 11 11 15 36 36 36 36 36 36 6 6 1,953,538 28,143 (841,066) 361,844 (152,984) 113,043 25,904 (258,274) (130,891) (7,100) 1,092,157 1,455,624 20,950 (841,146) 297,030 (129,445) (92,191) 10,216 (203,247) (103,274) (44,285) 370,232 1,359,528 28,556 (657,671) 282,715 (105,207) 79,287 18,356 (198,345) (132,181) (68,166) 606,872 390,174 (341,901) (14,811) (2,993,309) (1,059,684) (2,013,577) 9,493 (229,236) 14,975 139,893 2,606,998 (112,238) 40,277 959,184 (2,010) (58,914) 33,750 (32,294) 1,457,569 132,679 (5,128) 494,299 (44,268) 26,582 2,702 (1,938) 274,769 10,205 8,432 (1,145,032) (797,285) (763,531) (1,781,816) 1,025,775 287,917 240,603 412,204 165,632 1,598,536 - - - - (107,544) 20,826 23,639 577,615 1,750,443 (3,337,495) (12,825) (12,562) 242,287 - - (81,920) (1,452,072) (90,866) (6,139) 1,601,599 1,595,460 694 - (639,824) 413,038 (153,791) 3,450 13,513 - 410 (613,383) 216,871 (120,677) 13,225 13,681 (672,902) (432,550) 4,031,812 (3,319,427) (13,251) – 31,601 – (27,932) – 702,803 82,920 607,120 994,479 1,601,599 1,819,899 (1,392,897) (6,453) (104,079) 1,176,049 (14,296) (62,840) (80,911) 1,334,472 73,186 (169,924) 1,164,403 994,479 The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 126 TBC BANK FINANCIAL STATEMENTS 2021 SEPARATE STATEMENT OF FINANCIAL POSITION 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 measured at fair value through other comprehensive income Bonds carried at amortised cost Investment properties Current income tax prepayment Other financial assets Other assets Premises and equipment Intangible assets Right of use assets Goodwill Investments in subsidiaries and associates TOTAL ASSETS LIABILITIES Due to credit institutions Customer accounts Debt securities in issue Other financial liabilities Current income tax liability Deferred income tax liability Provisions for liabilities and charges Other liabilities Lease liabilities Subordinated debt TOTAL LIABILITIES EQUITY Share capital Share premium Retained earnings Share based payment reserve Fair value reserve of investment securities measured at fair value through other comprehensive income TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Note 31 December 2021 31 December 2020 31 December 2019 6 7 8 9 10 11 17 12 14 15 15 16 18 19 20 21 23 35 22 24 36 25 26 27 1,565,400 16,722 2,086,113 16,549,460 1,958,198 - 22,022 - 442,305 321,009 352,743 249,356 56,244 27,502 32,451 1,536,717 13,717 2,098,506 14,611,204 1,547,330 1,059,946 67,812 69,166 173,075 226,892 335,124 210,602 46,699 27,502 33,142 978,870 12,709 1,591,829 12,416,985 983,131 1,021,568 71,801 25,126 119,593 197,904 302,190 152,393 55,571 27,502 33,080 23,679,525 22,057,434 17,990,252 2,757,243 14,932,402 1,539,518 92,613 86,681 10,979 15,845 75,263 54,328 592,333 20,157,205 21,014 521,190 3,043,459 (52,521) (10,822) 3,522,320 23,679,525 4,230,013 12,746,959 1,381,009 186,487 - 13,083 17,451 52,083 51,215 639,641 19,317,941 21,014 521,190 2,259,159 (73,129) 11,259 2,739,493 22,057,434 3,418,798 10,177,027 1,213,598 58,809 - 18,347 16,978 60,371 58,476 562,060 15,584,464 21,014 521,190 1,933,412 (62,669) (7,159) 2,405,788 17,990,252 The consolidated and separate financial statements on pages 123 to 263 were approved by the Supervisory Board on 28 April 2022 and signed on its behalf by: Vakhtang Butskhrikidze Chief Executive Officer Giorgi Megrelishvili Chief Financial Officer The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 127 TBC BANK FINANCIAL STATEMENTS 2021SEPARATE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME in thousands of GEL Interest income Interest expense Net interest gains on currency swaps Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains from currency derivatives, foreign currency operations and translation Net gains/(losses) from disposal of Investment securities measured at fair value through other comprehensive income Other operating income Share of profit of associates Other operating non-interest income Credit loss recovery/(allowance) for loan to customers Credit loss recovery/(allowance) for performance guarantees and credit related commitments Credit loss allowance for other financial assets Credit loss recovery/(allowance) for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortisation Provision for provision for liabilities and charges Administrative and other operating expenses Operating expenses Losses from modifications of financial instruments Profit before tax Income tax (expense)/credit Profit for the year Other comprehensive (expense)/income for the year: Items that may be reclassified subsequently to profit or loss: Movement in fair value reserve for investment securities measured at fair value through other comprehensive income Other comprehensive (expense)/income for the year TOTAL COMPREHENSIVE INCOME FOR THE YEAR Note 31 December 2021 31 December 2020 (restated) 31 December 2019 (restated) 29 29 29 30 30 32 9 38 12 10 33 22 34 35 1,803,709 (878,444) 28,143 953,408 349,598 (176,028) 173,570 124,879 11,156 86,170 810 223,015 37,633 1,204 (5,979) 2,670 (10,205) 1,375,316 (232,291) (62,653) - (103,668) (398,612) (1,726) 974,978 (109,813) 865,165 (22,081) (22,081) 843,084 1,609,791 (839,830) 20,950 790,911 263,981* (139,583)* 124,398 108,101 (624) 6,120 - 113,597 (323,651) 3,238 (9,844) (1,915) (4,490)* 692,244* (186,395) (55,761) (2,600) (90,153)* (334,909)* (37,131) 320,204 5,264 325,468 1,387,720 (657,579) 28,556 758,697 250,954* (115,159)* 135,795 103,210 169 15,452 633 119,464 (84,562) (2,156) (2,173) (291) (1,886)* 922,888* (205,026) (50,726) (2,105) (101,053)* (358,910)* - 563,978 (43,101) 520,877 17,632 (15,933) 17,632 343,100 (15,933) 504,944 * Certain amounts do not correspond to the 2020 and 2019 financial statements as they reflect the certain restatements as described in Note 2. The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 128 TBC BANK FINANCIAL STATEMENTS 2021SEPARATE STATEMENT OF CHANGES IN EQUITY in thousands of GEL Balance as of 1 January 2019 Profit for the year Other comprehensive loss Total comprehensive (loss)/income for 2019 Share based payment expense Share based payment recharge by parent company Dividends declared Other movements Balance as of 31 December 2019 Profit for the year Other comprehensive income Total comprehensive income for 2020 Share based payment expense Share based payment recharge by parent company Other movements Balance as of 31 December 2020 Profit for the year Other comprehensive loss for 2021: Effect of change in business model Other effects during the period Total comprehensive (loss)/income for 2021 Share based payment expense Dividends declared Other movements 21,014 521,190 (62,669) (7,159) 1,933,412 2,405,788 Note Share Capital Share premium Share based payments reserve 21,014 – 521,190 – (33,591) – 27 27 2 27 – – – – – – – – – – – – – – 33,762 (62,840) – – – – – – – – – – – – – – 21,014 – 521,190 – – – – – – – – – – – – – – – – – – 17,472 (27,932) – (73,129) – – – – – 20,609 – (1) Fair value reserve of investment securities measured at FVOCI 8,775 - (15,933) (15,933) – – – (1) Retained earnings 1,493,408 520,877 - Total 2,010,796 520,877 (15,933) 520,877 504,944 – – 33,762 (62,840) (80,911) (80,911) 38 37 – 325,468 – 325,468 – 325,468 17,632 343,100 17,472 – (27,932) 279 1,065 2,259,159 865,165 - - - 865,165 – (81,872) 1,007 2,739,493 865,165 (22,081) 26,062 (48,143) 843,084 20,609 (81,872) 1,006 17,632 17,632 – – 786 11,259 – (22,081) 26,062 (48,143) (22,081) – – – Balance as of 31 December 2021 21,014 521,190 (52,521) (10,822) 3,043,459 3,522,320 The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 129 TBC BANK FINANCIAL STATEMENTS 2021 SEPARATE STATEMENT OF CASH FLOWS in thousands of GEL Cash flows from operating activities Interest received Interest received on currency swaps Interest paid Fees and commissions received Fees and commissions paid Income/(expense) from trading in foreign currencies Other operating income received Staff costs paid Administrative and other operating expenses paid Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Net change in operating assets Due from other banks and mandatory cash balances with the National Bank of Georgia Loans and advances to customers Other financial assets Other assets Net change in operating liabilities Due to other banks Customer accounts Other financial liabilities Other liabilities and provision for liabilities and charges Net cash flows from/(used in) operating activities Cash flows (used in) / from investing activities Acquisition of investment securities measured at fair value through other comprehensive income Proceeds from disposal of investment securities measured at fair value through other comprehensive income Proceeds from redemption at maturity of investment securities measured at fair value through other comprehensive income Dividends received Cash received from capital reductions in subsidiaries and contributions paid in subsidiaries Acquisition of bonds carried at amortised cost Proceeds from redemption of bonds carried at amortised cost Acquisition of premises, equipment and intangible assets Proceeds from disposal of premises, equipment and intangible assets Proceeds from disposal of investment property Net cash from/(used in) investing activities Cash flows (used in)/ from financing activities Proceeds from other borrowed funds Redemption of other borrowed funds Repayment of principal of lease liabilities Redemption of subordinated debt Proceeds from debt securities in issue Dividends paid Share based payment recharge paid Net cash flows (used in)/ from 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 Note 31 December 2021 31 December 2020 31 December 2019 29 32 10 10 10 11 11 15 6 6 1,896,294 28,143 (827,586) 347,743 (175,738) 108,379 18,839 (235,399) (103,865) (60) 1,056,750 414,144 (2,981,673) (236,092) 32,810 139,332 2,532,369 (96,287) 39,348 900,701 1,402,828 20,950 (826,633) 270,516 (147,379) (91,996) 4,803 (182,627) (80,965) (44,040) 325,457 (338,835) (993,187) (45,601) 6,882 (32,294) 1,499,686 125,129 (459) 546,778 1,310,626 28,556 (663,802) 253,250 (118,969) 79,618 9,543 (178,518) (110,569) (68,508) 541,227 (20,393) (2,042,091) 477 19,332 (1,938) 300,888 3,456 5,019 (1,194,023) (797,285) (783,530) (1,781,432) 1,025,775 412,204 52,593 1,101 - - (93,626) 20,609 24,423 645,794 1,692,815 (3,267,884) (10,797) (12,562) 236,820 (81,872) - (1,443,480) (74,332) 28,683 1,536,717 1,565,400 287,917 165,632 694 (667) (639,824) 413,038 (142,367) 4,510 12,849 (681,748) 3,860,292 (3,209,347) (15,784) – – – (27,932) 607,229 85,588 557,847 978,870 1,536,717 240,603 1,598,536 5,211 - (613,383) 216,871 (112,345) 10,140 12,446 (423,353) 1,703,411 (1,270,653) (6,960) (104,079) 1,196,422 (80,911) (62,840) 1,374,390 66,468 (176,518) 1,155,388 978,870 The notes set out on pages 131 to 263 form an integral part of these consolidated and separate financial statements. 130 TBC BANK FINANCIAL STATEMENTS 2021 NOTES TO THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS 1. INTRODUCTION Principal activity. JSC TBC Bank (hereafter 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 regula- tions. 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 is a parent of a group of companies (hereaf- ter the “Group”) incorporated in Georgia and Azerbaijan; their primary business activities include providing banking, leasing, brokerage and card processing services to corporate and individual customers. The Bank has been operating since 20 January 1993 under a general banking license issued by the National Bank of the Georgia (“NBG”). The Bank’s registered address and place of business is 7 Marjanishvili Street, 0102 Tbilisi, Georgia. The Bank was registered by District Court of Vake and the registration number is 204854595. The Bank has 147 (2020:149; 2019:148) branches within Georgia. TBC Bank Group PLC (“TBCG”) is a public limited liability company, incorporated in England and Wales. TBCG held 99.88% of the share capital of JSC TBC Bank as at 31 December 2021 (2020: 99.88%, 2019: 99.88%), thus representing the Bank’s ultimate parent company. TBC Bank Group PLC’s registered legal address is Highdown House, Yeoman Way, Worthing, West Sussex, United Kingdom, BN99 3HH. Registered number of TBC Group PLC is 10029943. The following shareholders directly owned more than 3% of the total outstanding shares of the Group. Other share- holders individually owned less than 3% of the outstanding shares. As of 31 December 2021, 2020, and 2019 the Group had no ultimate controlling party. Shareholders TBC Bank Group PLC Other Total % of ownership interest held as of 31 December 2021 99.88% 0.12% 100.00% 2020 99.88% 0.12% 100.00% 2019 99.88% 0.12% 100.00% As of 31 December 2021, 31 December 2020 and 31 December 2019, the shareholder structure of TBC Bank Group PLC by beneficiary ownership interest was as follows: Shareholders Institutional and retail investors International Financial Institutions Founders* Other shareholders** Total 2021 74.31% 7.84% 14.61% 3.24% Ownership interest % as of 31 December 2020 74.79% 7.84% 14.64% 2.73% 2019 68.70% 8.04% 16.26% 7.00% 100.00% 100.00% 100.00% * Founders include direct and indirect ownerships of Mamuka Khazaradze, Badri Japaridze. ** Other includes individual as well as corporate shareholders. 131 TBC BANK FINANCIAL STATEMENTS 20211. INTRODUCTION CONTINUED Subsidiaries and associates. The consolidated financial statements include the following principal subsidiaries: Subsidiary name JSC TBC Bank United Financial Corporation JSC TBC Capital LLC TBC Leasing JSC TBC Kredit LLC TBC Pay LLC TBC Invest LLC Index LLC Proportion of voting rights and ordinary share capital held as of 31 December 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion 99.88% 99.88% 99.88% Tbilisi, Georgia 1992 Principal activities Banking 99.53% 99.53% 99.53% Tbilisi, Georgia 1997 Card processing 100.00% 100.00% 100.00% Tbilisi, Georgia 1999 Brokerage 100.00% 100.00% 100.00% Tbilisi, Georgia 100.00% 100.00% 100.00% Baku, Azerbaijan 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Tbilisi, Georgia Ramat Gan,Israel 1999 2003 Leasing Non-banking credit institution 2009 Processing 2011 PR and marketing 100.00% 100.00% 100.00% Tbilisi, Georgia 2011 Real estate management Asset Management TBC Capital Asset Management LLC 100.00% N/A N/A Tbilisi, Georgia 2021 The Group has investments in the following associates: Proportion of voting rights and ordinary share capital held as of 31 December Associate name 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion Principal activities CreditInfo Georgia JSC 21.08% 21.08% 21.08% Tbilisi, Georgia Tbilisi Stock Exchange JSC Georgian Central Securities Depository JSC Georgian Stock Exchange JSC1 28.87% 28.87% 28.87% Tbilisi, Georgia 22.87% 22.87% 27.70% Tbilisi, Georgia 2019 Finance, service Kavkasreestri JSC1 10.03% 10.03% 10.03% Tbilisi, Georgia 17.33% 17.33% 17.33% Tbilisi, Georgia 2005 2019 Financial intermediation Finance, service 2019 2019 Finance, service Finance, service The country of registration or incorporation is also the principal area of operation of each of the above subsidiaries. The Group’s corporate structure consists of a number of related undertakings, comprising subsidiaries and associ- ates, which are not consolidated or equity accounted due to immateriality. A full list of these undertakings, the country of incorporation and the ownership of each share class is set out below. 132 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED1. INTRODUCTION CONTINUED Proportion of voting rights and ordinary share capital held as of 31 December Subsidiary name 2021 2020 2019 Principal place of business or incorporation Year of incorpora- tion Principal activities TBC Invest International Ltd2 100.00% 100.00% 100.00% Tbilisi, Georgia 2016 Investment Vehicle University Development Fund2 Natural Products of Georgia LLC2 TBC Trade LLC Georgia Large Cap Diversified Credit Portfolio JSC 33.33% 25.00% 33.33% 33.33% 25.00% 25.00% 100.00% 100.00% 100.00% Tbilisi, Georgia Tbilisi, Georgia Tbilisi, Georgia 100.00% N/A N/A Tbilisi, Georgia 2007 2001 2008 2021 Education Trade, Service Trade, Service Asset Management Operating environment of the Group. Georgia, where Group’s most activities are located, displays certain charac- teristics of an emerging market. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations (Note 35). In 2021 the Georgian economy rebounded at 10.4%. While the restart was certainly expected, the Georgian economy has rebounded at a speed exceeding even the most op- timistic scenarios. Importantly, the growth was broad based and has been reflected in all sources of inflows, as well as in domestic demand. The latter was fuelled by the reversal of the excess pandemic period related savings in an affluent segment being supported by the low USD deposit rates. The credit growth was also strong, while, the fiscal stance was slightly contractionary on the back of still large, however, much lower deficit than a year ago. At the same time, Georgia continues to face downside risks to economic growth due to prolongation of the pandemic, internal and external political tensions, possible military conflicts in the region, as well as undesirable side effects of the Fed’s sooner-than-expected rate hike. COVID-19 new cases continue to surge at an unprecedented speed. However, a much less severity of Omicron now appears to be well confirmed. At the same time, Georgia, among some other region countries, faces vaccination pro- cess challenges, lagging behind the world average. In 2022, compared with 2021, the growth will much more depend on the continued recovery in tourism inflows and therefore, the materialization of pandemic related and other risks could severely restrict economic activity in Georgia, negatively impacting business environment and clients of the Group. Management is taking necessary measures to ensure sustainability of the Group’s operations and support its cus- tomers and employees. There is continuous work on stress testing to better understand possible implications for the group of certain adverse scenarios. In addition, the Management took additional measures to identify inefficient processes and further supported the financial condition of the Group through optimisation. The future effects of the current economic situation and the above measures are difficult to predict and manage- ment’s current expectations and estimates could differ from actual results. For the purpose of measurement of expected credit losses (“ECL”) the Group uses supportable forward-looking in- formation, including forecasts of macroeconomic variables. As with any economic forecast, however, the projections and likelihoods of their occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different from those projected. Note 37 provides more information of how the Group incorporated forward-looking information in the ECL models. Since February 2022 ongoing political tension in the region escalated as a result of Russian invasion in Ukraine. This has negatively impacted commodity and financial markets, and increased volatility, particularly with regard to foreign exchange rates. As a result of sanctions imposed from a number of countries, many companies left Russian market and as a result ceased providing services and products to Russian Market. There is an expectation of further sanc- tions and limitations on business activity of companies operating in Russia. To avoid the severe effects on Georgian economy the Georgian Government has not joined on all sanctions, but the full nature and possible effects of the imposed restrictions against Russia and Ukrainian economy downturn are yet unknown. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia and economic links with these countries, there will be adverse implications for the growth outlook, as well as, for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risks. 1 The Group has a significant influence on Georgian Stock Exchange JSC and Kavkasreestri JSC held as an investment in associates. 2 Dormant 133 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation. These consolidated and separate financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) under the historical cost convention as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of financial instruments categorised at fair value through profit or loss (“FVTPL”) and at fair value through other comprehensive income (“FVOCI”) and with the requirements of the Law of Georgia on Accounting, Reporting and Auditing. The principal accounting policies applied in the preparation of these consolidated and separate financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. Climate Change. The Group as a responsible lender continues to develop its assessment of the potential impacts that climate change and the transition to a low carbon economy may have on the assets and liabilities recognised and presented in its financial statements. During the year the Group has performed a high level sectoral risk assessment as different sectors might be vulnerable to different climate-related risks over different time horizons. On the other hand, the understanding of climate related risks, which have longer-term impacts need to be increased in coming years. At 31 December 2021, management specifically considered the potential impact of climate change and the transition to a low carbon economy on at a high level sectoral risk assessment. See more details outlined in risk man- agement disclosures in note 37. Presentation currency. These financial statements are presented in thousands of Georgian Lari (“GEL thousands”), unless otherwise indicated. Changes in presentation of the net impairment of non-financial assets. During 2021, the Group reclassified impair- ment/recovery of non-financial assets from “Administrative and other operating expenses” to “Net impairment of non-financial assets”. Significant part of any impairment/recoveries recorded are related to repossessed assets and investment properties. Management believes, that those type of assets are not actively used in daily operations, but are primarily targeted for sale in future. Considering nature of those expenses/recovery such presentation is more ap- propriate and would increase understandability and clarity of the Group’s audited consolidated and separate annual financial statements. The presentation of comparative figures has been adjusted to confirm to the presentation of the current period amounts: Effect on consolidated statement of profit or loss and other comprehensive income In thousands of GEL Net impairment of non-financial assets Administrative and other operating expenses In thousands of GEL Net impairment of non-financial assets Administrative and other operating expenses 31 December 2020 (as originally presented) - (117,744) 31 December 2019 (as originally presented) - (126,927) Effect on separate statement of profit or loss and other comprehensive income In thousands of GEL Net impairment of non-financial assets Administrative and other operating expenses In thousands of GEL Net impairment of non-financial assets Administrative and other operating expenses 31 December 2020 (as originally presented) - (94,643) 31 December 2019 (as originally presented) - (102,939) Reclassification (5,830) 5,830 Reclassification (2,743) 2,743 Reclassification (4,490) 4,490 Reclassification (1,886) 1,886 31 December 2020 (as restated) (5,830) (111,914) 31 December 2019 (as restated) (2,743) (124,184) 31 December 2020 (as restated) (4,490) (90,153) 31 December 2019 (as restated) (1,886) (101,053) 134 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Restatement of cashbacks and incentive payments received for card operations. To further foster clarity of the consolidated statement of comprehensive income, the Group has re-considered the presentation of cash backs and incentive payments received from Visa and Mastercard for card operations. The amount of cash backs and in- centive payments receivable depend on the scale of Groups operations with Visa and Mastercard cards and related commission expenses paid to them. Management believes, presenting commission expenses made to Visa and Mastercard net of cash backs and incentive payments received from them, will increase clarity and understandability of the financial statements and related accounting treatments. As a result of reclassification, management has moved cashbacks and incentive payments from Visa and Mastercard from “Fee and commission income” to “Fee and com- mission expense”. The presentation of comparative figures has been adjusted to confirm to the presentation of the current period amounts: Effect on consolidated statement of profit or loss and other comprehensive income In thousands of GEL Fee and commission income Fee and commission expense In thousands of GEL Fee and commission income Fee and commission expense 31 December 2020 (as originally presented) 298,496 (129,717) 31 December 2019 (as originally presented) 284,428 (105,302) Effect on separate statement of profit or loss and other comprehensive income In thousands of GEL Fee and commission income Fee and commission expense In thousands of GEL Fee and commission income Fee and commission expense 31 December 2020 (as originally presented) 271,981 (147,583) 31 December 2019 (as originally presented) 254,764 (118,969) Reclassification (8,000) 8,000 Reclassification (3,810) 3,810 Reclassification (8,000) 8,000 Reclassification (3,810) 3,810 31 December 2019 (as restated) 290,496 (121,717) 31 December 2019 (as restated) 280,618 (101,492) 31 December 2020 (as restated) 263,981 (139,583) 31 December 2019 (as restated) 250,954 (115,159) Business model change. The Group historically used Ministry of Finance (MoF) securities to invest the excess mon- etary resources and receive interest charges in return of the investment. In majority of the cases the securities were held till their maturity and the Group has not been engaged in trading activities for profit making purposes. As a result, according to their business model such securities were classified under hold to collect category and were recorded as “Bonds carried at amortised cost” in the consolidated and separate statements of financial position. Towards the end of 2020 Ministry of Finance launched a new primary dealer platform to increase liquidity of the se- curities, to further encourage the trading of Government notes and develop Georgian securities market. Third party dealers were established for trading between the Ministry of Finance and investors. The platform was to expand investor data base and enhance liquidity of secondary market. JSC TBC Bank was given primary dealer status in the platform that enabled to act as an intermediary between investors and the Ministry of Finance by executing an order on behalf of investors. As secondary market became more active, the Group began to monitor beneficial market opportunities and started selling Ministry of Finance securities in beneficial cases, provided the sale wouldn’t impact significantly the liquidity position of the Group and would generate strong profit compared to collecting principal and interest till their maturity. As a result, practices for managing treasury securities changed by the end of 2020. 135 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Respective change in Management’s processes caused changes in existing business model from hold to collect to hold to collect and sell. Accordingly MOF securities had been re-classified from “Bonds carried at amortised cost” to “Investment securities measured at fair value through other comprehensive income” in the consolidated and separate statements of financial position, with respective effects also accounted in the audited consolidated annual financial statement of profit or loss and other comprehensive income. According to IFRS 9 requirement the change has been accounted for prospectively from the reclassification date. The reclassification date represents the first day of the first reporting period following the change in business model that results in an entity reclassifying financial assets, which is 1 January 2021. Management believes that such presentation is more appropriate for the nature of the transactions. Based on business model assessment performed, Management considered respective securities should have been carried at fair value through other comprehensive income (FVTOCI). Internally performed test of solely payment of principal and interest (‘SPPI’) had shown, that those securities were held for collection of contractual cash flows and for selling, where those cash flows represented SPPI, and they were not designated at fair value through profit and loss (FVTPL). Subsequent period sales recorded during 2021 has also demonstrated respective changes in business operations of the Group.. Effect on consolidated statement of financial position: In thousands of GEL Fair value reserve Bonds carried at amortised cost Investment securities measured at fair value through other comprehensive income Effect on separate statement of financial position: Balance as at 31 December 2020 Change in business model Balance as at 1 January 2021 11,157 1,059,946 1,527,268 26,062 (1,059,946) 1,086,008 37,219 - 2,613,276 In thousands of GEL Fair value reserve Bonds carried at amortised cost Investment securities measured at fair value through other comprehensive income Balance as at 31 December 2020 Change in business model Balance as at 1 January 2021 11,259 1,059,946 1,547,330 26,062 (1,059,946) 1,086,008 37,321 - 2,633,338 Consolidated financial statements. Subsidiaries are those investees, including structured entities, that the Group controls because it (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 an- other 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 the majority of voting power in it. 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 in- vestee’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. Business combinations and goodwill accounting. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured at the fair value of the consideration, including contingent consid- eration, given at the acquisition date. Acquisition-related costs are recognised as an expense in the profit or loss in the period in which they are incurred. 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. 136 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED The Group measures the non-controlling interest that represents the current ownership’s 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 acquired entity. Non-con- trolling interests that are not present ownership interests are measured at fair value. Goodwill is measured by deducting the acquiree’s net assets 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, af- ter the 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 ar- rangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs incurred for issuing equity instruments are deducted from the 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 that are not owned, directly or indirectly, by the Bank. Non-controlling interest forms a separate component of the Group’s equity. Associates. Associates are entities over which the Group has significant influence (directly or indirectly), but not con- trol, generally accompanying a shareholding of between 20 and 50 per cent of the voting rights. Investments in as- sociates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Divi- dends received from associates reduce the carrying value of the investments in associates. Other post-acquisition changes in Group’s share of net assets of an associate are recognised as follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented sepa- rately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impair- ment of the asset transferred. Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the statement of changes in equity. Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or significant influ- ence, any retained interest in the entity is re-measured 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 re- tained 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. 137 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Financial instruments – key measurement terms. 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 the price in an active market. An active market is one in which transactions for the asset or the liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The 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 owned 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 (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date. 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 the 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 mea- surements are valuations not solely based on 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. 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 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 incurred if the transaction had not taken place. Transac- tion costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, bro- kers 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 (“AC”) 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 expected credit losses. Accrued interest includes the 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 state- ment of financial position. Repayments for loans are accounted for penalties in the first place, then accrued interest and after that principal amount. The effective interest method is a method of allocating interest income or interest expense over the term of the fi- nancial instrument 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). For assets that are purchased or originated defaulted (“POCI”) at initial rec- ognition, the effective interest rate is adjusted for credit risk, i.e. it is calculated based on the expected cash flows on initial recognition instead of contractual payments. Initial recognition of financial instruments. Financial instruments at FVTPL are initially recorded at fair value. All other financial instruments are initially recorded at fair value adjusted for 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 138 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 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. After the initial recognition, an ECL (expected credit loss) allowance is recognised for financial assets measured at AC and investments in debt instruments measured at FVOCI, resulting in an immediate accounting loss. All purchases and sales of financial assets that require delivery within the time frame set 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. Financial assets – classification and subsequent measurement – measurement categories. The Group classifies financial assets in the following measurement categories: FVTPL, FVOCI and AC. The classification and subsequent measurement of debt financial assets depends on: (i) the Group’s business model for managing the related assets portfolio and (ii) the cash flow characteristics of the asset. Financial assets – classification and subsequent measurement – business model. The business model drives clas- sification of financial assets. Management applied judgement in determining the level of aggregation and portfolios of financial instruments when performing the business model assessment. When assessing sales transactions, the Group considers their historical frequency, timing and value, reasons for the sales and expectations about future sales activity. Sales transactions aimed at minimising potential losses due to credit deterioration are considered consistent with the “hold to collect” business model. Other sales before maturity, not related to credit risk management activ- ities, are also consistent with the “hold to collect” business model, provided that they are infrequent or insignificant in value, both individually and in aggregate. The Group assesses significance of sales transactions by comparing the value of the sales to the value of the portfolio subject to the business model assessment over the average life of the portfolio. In addition, sales of financial asset expected only in stress case scenario, or in response to an isolated event that is beyond the Group’s control, is not recurring and could not have been anticipated by the Group, are regarded as incidental to the business model objective and do not impact the classification of the respective financial assets. The “hold to collect and sell” business model means that assets are held to collect the cash flows, but selling is also integral to achieving the business model’s objective, such as, managing liquidity needs, achieving a particular yield, or matching the duration of the financial assets to the duration of the liabilities that fund those assets. The residual category includes those portfolios of financial assets, which are managed with the objective of realising cash flows primarily through sale, such as where a pattern of trading exists. Collecting contractual cash flow is often incidental for this business model. Financial assets – classification and subsequent measurement – cash flow characteristics. Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assess- es whether the cash flows represent solely payments of principal and interest (“SPPI”). Financial assets with embed- ded derivatives are considered in their entirety when determining whether their cash flows are consistent with the SPPI feature. In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement, i.e. interest includes only consideration for credit risk, time value of money, other basic lending risks and profit margin. Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrange- ment, the financial asset is classified and measured at FVTPL. The SPPI assessment is performed on initial recogni- tion of an asset and it is not subsequently reassessed. The judgements applied by the Group in performing the SPPI test for its financial assets is discussed below: The time value of money element may be modified, for example, if a contractual interest rate is periodically reset but the frequency of that reset does not match the tenor of the debt instrument’s underlying base interest rate, for exam- ple a loan pays three months interbank rate but the rate is reset every month. The effect of the modified time value of money was assessed by comparing relevant instrument’s cash flows against a benchmark debt instrument with SPPI cash flows, in each period and cumulatively over the life of the instrument. The Group applied a threshold of 10% to determine whether differences against a benchmark instruments are significantly different. In case of a scenario with cash flows that significantly differ from the benchmark, the assessed instrument’s cash flows are not SPPI and the instrument is then carried at FVTPL. The Group identified and considered contractual terms that change the timing or amount of contractual cash flows. The SPPI criterion is met if a loan allows early settlement and the prepayment amount substantially represents prin- 139 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED cipal and accrued interest, plus a reasonable additional compensation for the early termination of the contract. The asset’s principal is the fair value at initial recognition less subsequent principal repayments, ie instalments net of in- terest determined using the effective interest method. As an exception to this principle, the standard also allows instruments with prepayment features that meet the following condition to meet SPPI: (i) the asset is originated at a premium or discount, (ii) the prepayment amount represents contractual amount and accrued interest and a reason- able additional compensation for the early termination of the contract, and (iii) the fair value of the prepayment feature is immaterial at initial recognition. Financial assets – reclassification. Financial instruments are reclassified only when the business model for manag- ing the portfolio as a whole changes. The reclassification has a prospective effect and takes place from the beginning of the first reporting period that follows after the change in the business model. The Group changed its business model in 2020 in relation to the securities held at amortized cost. Details and subsequent measurement are dis- cussed in Note 2. Financial assets impairment - expected credit loss (ECL) allowance. The Group assesses, on a forward-looking ba- sis, the ECL for debt instruments measured at AC and FVOCI and for the exposures arising from loan commitments and financial guarantee contracts. The Group measures ECL and recognises credit loss allowance at each reporting date. The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by eval- uating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions. The Group applies a three stage model for impairment, based on changes in credit quality since initial recognition: • Stage 1: A financial instrument that is not defaulted on initial recognition is classified in Stage 1. Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 Months ECL”); • Stage 2: If the Group identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis (“Lifetime ECL”). If a SICR is no longer observed, instrument will move back to Stage 1. Financial instrument moves back from stage 2 to stage 1 with 6 month cure period in case of loans previously having default flag, while restructured loans remain in stage 2 until the restructured status is removed. In order to remove restructured status, borrower should make at least 12 consecutive payments, unless financial monitoring is performed. Refer to Note 37 for a description of how the Group determines, on a forward-looking basis, when a SICR has occurred; • Stage 3: Defaulted assets are transferred to Stage 3 and allowance for Lifetime ECL is recognized. The Group’s definition of defaulted assets and definition of default is based on the occurrence of one or more loss events, described further in Note 37. Change in ECL is recognized in the statement of profit or loss with a corresponding allowance reported as a decrease in carrying value of the financial asset on the statement of financial position. For financial guarantees and credit com- mitments, provision for ECL is reported as a liability in Provisions for Liabilities and Charges. Gross carrying amount and write offs. Gross carrying amount of a financial asset is the amortised cost of a financial asset, before adjusting for any loss allowance. The Group directly reduces the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. The latter includes penalties under the local regulation requirements. The loans are collectively assessed for write off based on overdue days criteria or are individually evaluated, depending on the loan segment and product type. Financial assets – derecognition and modification. 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 transfer- ring substantially all 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 restrictions on the sale. The Group sometimes renegotiates or otherwise modifies the contractual terms of the financial assets. The Group assesses whether the modification of contractual cash flows is substantial considering certain factors. Based on below shown internally developed methodology there are certain qualitative triggers which lead to asset derecognition with no further quantitative testing required. These qualitative criteria are included in the list below: 140 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED • Change in contract currency; • Consolidation of two or more loans into one new loan; • Change in counterparty; • Loan with no predetermined payment schedule is changed with loan with schedule or vice versa; • Change in contractual interest rate due to market environment changes. The Group compares the original and revised expected cash flows to assets whether the risks and rewards of the asset are substantially different as a result of the contractual modification. It should be assessed whether change in contractual cash flow is significant (significance defined as 10% change). If the test result is above 10% threshold, loan should be derecognized, whereas if the test is passed and result is below or equal to 10%, financial asset can be assessed as modified. If the risks and rewards do not change, the modified asset will not be substantially different (exceed 10% test) from the original asset and the modification does not result in derecognition. The Group recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effective interest rate or, when applicable, the revised effective interest rate and recognises a modification gain or loss in profit or loss. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Payment holidays granted by the Group in response to COVID-19 pandemic are treated as contractual modifications of the respective loans and advances if they do not lead to derecognition as guided by the policy stated above. Their impact of modifications on the gross carrying amount (net modification loss) is presented in profit or loss within losses from modifications of financial instruments. The implication of COVID-19 impact on ECL methodology is de- scribed in Note 37. Financial liabilities – measurement categories. Financial liabilities are classified as subsequently measured at AC, except for (i) financial liabilities at FVTPL: this classification is applied to derivatives, financial liabilities held for trading (e.g. short positions in securities), contingent consideration recognised by an acquirer in a business combination and other financial liabilities designated as such at initial recognition and (ii) financial guarantee contracts and loan commitments. Financial liabilities – derecognition and modification. Financial liabilities are derecognised when they are extin- guished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). An exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms and conditions of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are sub- stantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new con- version features attached to the instrument are also considered. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Modifications of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, with any gain or loss recognised in profit or loss, unless the economic substance of the difference in carrying values is attributed to a capital transaction with owners. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash and cash equivalents include cash on hand, amounts due from the National Bank of Georgia (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 AC because: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. Features mandated solely by legislation, such as the bail-in legislation in certain coun- tries, do not have an impact on the SPPI test, unless they are included in contractual terms such that the feature would apply even if the legislation is subsequently changed. 141 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED The payments or receipts presented in the statement of cash flows represent the Group’s transfers of cash and cash equivalents, 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 pay- ments 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 National Bank of Georgia. Mandatory cash balances with NBG are carried at AC and represent mandatory reserve deposits that are not available to finance the Group’s day to day operations. Hence they are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows. Due from other banks. Amounts due from other banks are recorded when the Group advances money to counter- party banks. Amounts due from other banks are carried at AC when: (i) they are held for the purposes of collecting contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at fair value through profit or loss (FVTPL). Otherwise they are carried at fair value (FV). Investments in debt securities. Based on the business model and the cash flow characteristics, the Group classifies investments in debt securities as carried at AC, fair value through other comprehensive income (FVOCI) or FVTPL. Debt securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI, and if they are not voluntarily designated at FVTPL in order to significantly reduce an accounting mismatch. Debt securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where those cash flows represent SPPI, and if they are not designated at FVTPL. Interest income from these assets is calcu- lated using the effective interest method and recognised in profit or loss. An impairment allowance estimated using the expected credit loss model is recognised in profit or loss for the year. All other changes in the carrying value are recognised in OCI. When the debt security is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from OCI to profit or loss. Investments in debt securities are carried at FVTPL if they do not meet the criteria for AC or FVOCI. The Group may also irrevocably designate investments in debt securities at FVTPL on initial recognition if applying this option significantly reduces an accounting mismatch between financial assets and liabilities being recognised or measured on different accounting bases. Investments in equity securities. Financial assets that meet the definition of equity from the issuer’s perspective, i.e. instruments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer’s net assets, are considered as investments in equity securities by the Group. Investments in equity securities are measured at FVTPL, except where the Group elects at initial recognition to irrevocably designate an equity invest- ments at FVOCI. The Group’s policy is to designate equity investments as FVOCI when those investments are held for strategic purposes other than solely to generate investment returns. When the FVOCI election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. Impairment losses and their reversals, if any, are not measured separately from other changes in fair value. Dividends continue to be recognised in profit or loss when the Group’s right to receive payments is established except when they represent a recovery of an investment rather than a return on such investment. Loans and advances to customers. Loans and advances to customers are recorded when the Group advances mon- ey to purchase or originate a loan due from a customer. Based on the business model and the cash flow characteris- tics, the Group classifies loans and advances to customers into one of the following measurement categories: (i) AC: loans that are held for collection of contractual cash flows and those cash flows represent SPPI and loans that are not voluntarily designated at FVTPL, and (ii) FVTPL: loans that do not meet the SPPI test or other criteria for AC or FVOCI are measured at FVTPL. Impairment allowances are determined based on the forward-looking ECL models. Note 37 provides information about inputs, assumptions and estimation techniques used in measuring ECL, including an explanation of how the Group incorporates forward-looking information in the ECL models. Repossessed collateral. Repossessed collateral represents non-financial assets acquired by the Group to settle overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equip- ment, investment property or repossessed collateral 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. Repossessed assets are recorded at the lower of cost or net realisable value. 142 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Loan commitments. The Group issues commitments to provide loans. These commitments are irrevocable or re- vocable only in response to a material adverse change. Such commitments 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 (i) the remaining unamortised balance of the amount at initial recognition, plus (ii) the amount of the loss allowance determined based on the expected credit loss model, unless the commitment is to provide a loan at a below market interest rate, in which case the measurement is at the higher of these two amounts. The carrying amount of the loan commitments represents a liability. Financial guarantees. Financial guarantees require the Group to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial 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 guarantee. At the end of each reporting period, the guarantees are measured at the higher of (i) the amount of the loss allowance for the guaranteed exposure determined based on the expected loss model and (ii) the remaining unamortised balance of the amount at initial recognition. In addition, an ECL loss allowance is recognised for fees receivable that are recognised in the statement of financial position as an asset. Performance guarantees. Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts transfer non-financial performance risk in addition to 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 report- ing 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. Where the Group has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts, such amounts will be recognised as an asset upon transfer of the loss compensation to the guarantee’s beneficiary. These fees are recognised within fee and commission income in profit or loss. 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. The lender provides funds to the borrower and receives security as collateral. Securities sold under such sale and repurchase agreements are not derecognized. The securities are not reclassified in the statement of financial position unless the transferee has, by contract, the right or custom to sell or repledge the securities, in which case they are reclassified as repurchase receiv- ables. The corresponding liability is presented within amounts due to credit institutions. The repurchase agreements are short-term in nature. Investment securities at fair value through other comprehensive income or bonds carried at amortised cost reclassified to repurchase receivables continue to be carried at fair value or amortised cost respec- tively in accordance with the accounting policies for these categories of assets. Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Group, are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between the sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method. Securities lent to counterparties for a fixed fee are retained in the financial statements in their original category in the statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately. Securities borrowed for a fixed fee are not recorded in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year within gains less losses arising from trading securities. The obligation to return the securities is recorded at fair value in other borrowed funds. Based on classification of securities sold under the sale and repurchase agreements, the Group classifies repurchase receivables into one of the following measurement categories: AC, FVOCI, and FVTPL. Finance lease receivables. Where the Group is a lessor in a lease that substantially transfers all risks and rewards incidental to ownership to the lessee, the assets leased out are presented as finance lease receivables and carried at the present value of the future lease payments. Finance lease receivables are initially recognised at commencement 143 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED (when the lease term begins) using a discount rate determined at inception (the early 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 in- come 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 receivables 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. The ECL is determined in the same way as for loans and advances measured at AC and recognised through an allowance account to write down the receivables’ net carrying amount to the present value of expected cash flows discounted at the interest rates implicit in the lease investments. There is a ‘three stage’ approach which is based on the change in credit quality of financial lease receivables since initial recognition. Immediate loss that is equal to the 12-month ECL is recorded on initial recognition of financial leases that are not defaulted. In case of a significant in- crease in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The estimated future cash flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease. 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 the finance lease contract is transferred to the lessees at the end of the con- tracts 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: • Leased assets (inventory and equipment); • Down payment; • Real estate properties; • Third party guarantees. The financial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets’ carrying value (“over-collateralised as- sets”) and (ii) those assets where collateral and other credit enhancements are less than the assets’ carrying value (“under-collateralised assets”). The Group classifies its portfolio into three stages: • Stage 1 – assets for which no significant increase of credit risk since initial recognition is identified; • Stage 2 – assets for which significant increase in credit risk since initial recognition is identified; • Stage 3 – defaulted exposures. For stage 1 exposures the Group creates 12 months expected credit losses, whereas for stage 2 and stage 3 lifetime expected credit losses are created. For the Stage 2 classification purposes the Group applies both quantitative and the qualitative criteria including, but not limited to: • 30 days past due (DPD) overdue; • Downgrade of the risk category of the borrower since initial recognition; Default definition includes criteria such as: (i) 90 DPD overdue (ii) distressed restructuring and (iii) other criteria indicat- ing the borrower’s unlikeness to repay the liabilities. The Group incorporates forward looking information (FLI) for both individual and collective assessment. For FLI pur- poses the Group defines three scenarios, which are: • Baseline (most likely); • Upside (better than most likely); • Downside (worse than most likely). The Group derives the baseline macro scenario and takes into account projections from various external sources – the National Bank of Georgia, Ministry of Finance, IMF as well as other IFIs - to ensure the alignment to the consensus 144 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED market expectations. Refer to Note 37 for the description of how the Group incorporates FLI in ECL calculations. Upside and downside scenarios are defined based on the framework developed by the Bank’s macroeconomic unit. The Group calculates expected impairment losses for each scenario. In order to come up with the final expected credit loss figures the bank applies probability weighted average approach where probabilities of each scenario are used as weights. In relation to COVID-19, payment holidays are accounted on the same basis as disclosed above within paragraph of financial assets- derecognition and modification. Receivables from terminated leases. The Group 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 finance lease receivables. Receivables are accounted for at AC less ECL. Prepayment for purchase of leasing assets. Prepayment for purchase of leasing assets comprises of advance pay- ments made to purchase assets for transfer into leases. Such advances are accounted for as non-financial assets. On commencement of the leases, advances towards lease contracts are transferred into finance lease receivables. Due to credit institutions. Amount due to credit institutions are recorded when counterparty banks advance money or other assets to the Group. The non-derivative liability is carried at AC. If the Group purchases its own debt, it is re- moved 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 AC. Subordinated debt. Subordinated debt can only be paid in the event of a liquidation after the claims of other higher priority creditors have been met and is included in the Bank’s “tier 2” capital. Subordinated debt is carried at AC. Debt securities in issue. Debt securities in issue include promissory notes, bonds, certificates of deposit and deben- tures issued by the Group. Debt securities are stated at AC. 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 recognized 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 pur- pose 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 ac- counting. 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. When derivative instruments are entered into with a view to decrease cost of funding, respective interest effect is presented as a separate line of statement of comprehensive income, within net interest income. Goodwill. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for im- pairment 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. This is 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 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. 145 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recover- able amount and the impairment loss is recognised in profit or loss for the year. 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 for the year (within other operating income or expenses). 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. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the esti- mates used to determine the asset’s value in use or fair value less costs to sell. Depreciation. Land and construction in progress are not depreciated. Depreciation on other items of premises and equipment and right-of-use assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows: Asset Premises Furniture and fixtures Computers and office equipment Motor vehicles Other equipment Right-of-use assets Leasehold improvements Intangible assets Useful life 30 – 110 years; 5 – 8 years; 3 – 8 years; 4 – 5 years; 2 – 10 years; term of the underlying lease; term of the underlying lease or if not defined, not more than 7 years. 1 – 20 years; 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 was 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 that the Groups owns to earn rental income or for capital ap- preciation, or both, and that it does not occupy. Investment property is stated at cost less accumulated depreciation and provision for impairment, where required. It is amortised on a straight line basis over an expected useful lives of 30 to 50 years. In case of any indication that the 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 re- pairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment. 146 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Intangible assets. The Group’s intangible assets other than goodwill have definite useful lives and primarily include capitalised computer software. Acquired computer software licences are capitalised on the basis of the costs in- curred to acquire and bring to use the specific software. Development costs that are directly associated with iden- tifiable and unique software controlled by the Group are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs and direct overheads of the software development team. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 20 years. Accounting for leases by the Group as a lessee. The Group leases office, branches and service centre premises. Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the re- maining balance of the liability for each period. The right-of-use asset is recognised at cost and depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable; • variable lease payment that are based on an index or a rate; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: the amount of the initial measurement of lease liability; • • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs, and • restoration costs. As an exception to the above, the Group accounts for short-term leases and leases of low value assets by recognising the lease payments as an operating expense on a straight line basis. In determining the lease term, management of the Group considers all facts and circumstances that create an eco- nomic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The Group applied the Amendment to IFRS 16 to COVID-19 related rent concessions granted by lessors 2020 and ex- tension of this amendment in 2021, respectively. These concessions were recorded as a reduction in the lease liability and variable rent in the period in which they were granted. The amount was not material to the financial statements. Accounting for operating leases by the Group as a lessor. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Income taxes. Income taxes are provided in the 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 of 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 rec- ognised, 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 tax authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes, other than on income, are recorded within administrative and other operating expenses. 147 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED 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 differ- ences on initial recognition of an asset or a liability in a transaction other than a business combination if the transac- tion, 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 that is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of reporting period that are expected to apply to the extent of time 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 con- trols the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or oth- erwise in the foreseeable future. Uncertain tax positions. The Group’s uncertain tax positions are reassessed by the management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by the 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 the 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 obli- gation, and a reliable estimate of the amount of the obligation can be made. Material provisions include provision for performance guarantees, credit related commitments. Share capital. Ordinary shares with discretionary dividends are classified as equity. Incremental costs directly attrib- utable 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 financial statements are authorised for issue, are disclosed in the sub- sequent events note. Income and expense recognition. Interest income and expense are recorded for all debt instruments, other than those at FVTPL, using the effective interest method. As part of interest income or expense this method defers 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. The group does not have Interest income on debt instruments at FVTPL. 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 trans- action 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 FVTPL. Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for (i) financial assets that have become defaulted (Stage 3), for which interest income is calculated by apply- ing the effective interest rate to their AC, net of the ECL provision, and (ii) financial assets that are purchased or origi- nated defaulted, for which the original credit-adjusted effective interest rate is applied to the AC. 148 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED All other fees, commissions and other income and expense items are generally recorded when earned 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. Fee and commission income. Fee and commission income is recognised over time on a straight line basis as the ser- vices are rendered, when the customer simultaneously receives and consumes the benefits provided by the Group’s performance. Such income includes recurring fees for account maintenance, account servicing fees, account sub- scription fees, annual plastic card fees etc. Variable fees are recognised only to the extent that management deter- mines that it is highly probable that a significant reversal will not occur. Other fee and commission income is recognised at a point in time when the Group satisfies its performance obliga- tion, usually upon execution of the underlying transaction. The amount of fee or commission received or receivable represents the transaction price for the services identified as distinct performance obligations. Such income includes fees for arranging a sale or purchase of foreign currencies on behalf of a customer, fees for processing payment trans- actions, plastic card transactions, merchant fees, fees for cash settlements, collection or cash disbursements, etc. Foreign currency translation. The Group’s presentation currency is the Georgian Lari. Group’s and the Bank’s func- tional currency is the Georgian Lari. The functional currency of each of the Group’s consolidated entities is the curren- cy of the primary economic environment in which the entity operates. Transactions in foreign currencies are initially recorded in the functional currency, converted at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the territories where 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. The 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 ii. of the respective reporting period; Income and expenses are translated at average exchange rates (unless this average is not a reasonable approxi- mation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expens- es 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. After losing control over a foreign operation, the exchange differences previously recognised in other comprehen- sive 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 2021 the closing rate of exchange used for translating foreign currency balances was GBP 1 = 4.1737 (2020: GBP 1 = GEL 4.4529; 2019: GBP 1 = GEL 3.7593); USD 1 = 3.0976 (2020: USD 1 = GEL 3.2766; 2019: USD 1 = GEL 2.8677); EUR 1 = 3.5040 (2020: EUR 1 = GEL 4.0233; 2019: EUR 1 = GEL 3.2095). 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 in- tention 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 Group’s employees. 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. 149 TBC BANK FINANCIAL STATEMENTS 20212. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Share based payments. A share-based payment arrangement is an agreement between the entity and another party (including an employee) that entitles the other party to receive cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares) of the entity or another group entity, or equity in- struments (including shares or share options) of the entity or another group entity, provided the specified vesting con- ditions, if any, are met. Under the share-based compensation plan the Group receives services from the 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 the 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 the 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-mar- keting 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 scheme is accounted for under share based payment reserve. The Bank pays recharge amount to the TBC Bank Group PLC and the share based reserve is debited correspondingly when treasury shares are purchased by employee benefit trust (EBT). When portions of a single grant vest on two or more dates the entity applies graded vesting for accounting of share based payment arrangement. Vesting period of each tranche of the grant ends when the employee owns the shares with no further service restrictions. Under graded vesting scheme the expense for earlier years is higher than for later years. Each tranche is expensed over its own service period with a credit entry being equity. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Critical Judgements and Estimates The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on the Management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements and estimates 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 include following: Judgements and estimates related to ECL measurement Measurement of ECLs is a significant estimate that involves determination of methodology, development of models and preparation of data inputs (details of ECL measurement methodology are disclosed in Note 37). Expert manage- ment judgement is an also an essential part of calculating expected credit losses. Management considers the significant management judgements and estimates in calculating ECL as follows: Judgements used to define criteria used in definition of default. The Bank defines default using both quantitative and qualitative criteria. Borrower is classified as defaulted if: • any amount of contractual repayments is past due more than 90 days; or • factors indicating the borrower’s unlikeliness-to-pay. In addition, default exit criteria is defined using judgement as well as whether default should be applied on a borrower or exposure level. For more details on the methodology please see Note 37. Judgements used to define criteria for assessing, if there has been a significant increase in credit risk (SICR) which is defined using both quantitative and qualitative criteria. Qualitative factors usually include judgements around delinquency period of more than 30 days on contractual re- payments; exposure is restructured, but is not defaulted; borrower is classified as “watch”. On a quantitative basis the Bank assess change in probability of default parameter for each particular exposure since initial recognition and compares it to the predefined threshold. When absolute change in probability of default ex- ceeds the applicable threshold, SICR is deemed to have occurred and exposure is transferred to Stage 2. Quantitative indicator of SICR is applied to retail and micro segments, where the Bank has sufficient number of observations. 150 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED The table below represents the sensitivity analysis of (i) 20% decrease of SICR thresholds (quantitative criteria applied for retail and micro exposures described above. (ii) 10% increase in total number of stage 2 borrowers. In thousands of GEL 2021 20% decrease in SICR thresholds 10% increase in number of Stage 2 contracts Increase credit loss allowance on loans and advances by GEL 2,470. Change of the Bank’s cost of credit risk ratio by 2 basis points. Increase credit loss allowance on loans and advances by GEL 2,511. Change of the Bank’s cost of credit risk ratio by 2 basis points. 2020 Increase credit loss allowance on loans and advances by GEL 2,543. Change of the Bank’s cost of credit risk ratio by 2 basis points. Increase credit loss allowance on loans and advances by GEL 3,311. Change of the Bank’s cost of credit risk ratio by 2 basis points. 2019 Increase credit loss allowance on loans and advances by GEL 1,954. Change of the Bank’s cost of credit risk ratio by 2 basis points. Increase credit loss allowance on loans and advances by GEL 2,380. Change of the Bank’s cost of credit risk ratio by 2 basis points. Judgements used for calculation of credit risk parameters namely exposure at default (EAD), probability of default (PD) and loss given default (LGD). The judgements include and are not limited by: i. definition of the segmentation for risk parameters estimation purposes, ii. decision whether simplified or more complex models can be used, iii. time since default date after which no material recoveries are expected, iv. collateral haircuts from market value as well as the average workout period for collateral discounting. The table below describes sensitivity on 10% increase of PD and LGD estimates: In thousands of GEL 2021 2020 2019 10% increase (decrease) in PD estimates 10% increase (decrease) in LGD estimates Increase (decrease) credit loss allowance on loans and advances by GEL 25,043 (GEL 18,905). Increase (decrease) credit loss allowance on loans and advances by GEL 24,901 (GEL 26,013). Increase (decrease) credit loss allowance on loans and advances by GEL 17,427 (GEL 17,547). Change of the Bank’s cost of credit risk ratio by 16 (12) basis points Change of the Bank’s cost of credit risk ratio by 18 (19) basis points. Change of the Bank’s cost of credit risk ratio by 16 (16) basis points. Increase (decrease) credit loss allowance on loans and advances by GEL 39,900 (GEL 35,129). Change of the Bank’s cost of credit risk ratio by 26 (22) basis points. Increase (decrease) credit loss allowance on loans and advances by GEL 50,719 (GEL 53,813). Change of the Bank’s cost of credit risk ratio by 37 (39) basis points. Increase (decrease) credit loss allowance on loans and advances by GEL 24,758 (GEL 26,604). Change of the Bank’s cost of credit risk ratio by 22 (24) basis points. Estimates used for forward-looking macroeconomic scenarios and judgements made for their probability weight- ings. For forward-looking information purposes the Bank defines three macro scenarios. The scenarios are defined as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy. Estimates applied in differentiating between these three scenarios represent GDP, USD/GEL rate, RE price, employ- ment levels, monetary policy rate and other macro variables. Under usual conditions, the scenario weights applied are 50%, 25% and 25% for the base case, upside and downside scenarios respectively. As at 31 December 2021 the weights applied are 50%, 25% and 25% for the base, upside and downside scenarios respectively, (31 December 2020: 60%, 10% and 30% and 31 December 2019: 50%, 25% and 25%). Based on the changes of the macro environment the Bank modifies the weightings based on expert judgement.. 151 TBC BANK FINANCIAL STATEMENTS 20213. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED The table below describes the unweighted ECL for each economic scenario as at 31 December 2021: In thousands of GEL Corporate MSME Consumer Mortgage Total Baseline 48,220 112,592 180,003 63,080 403,895 Upside 46,752 104,856 176,638 59,464 387,710 Downside 59,640 122,768 183,600 68,491 434,499 Weighted 50,731 113,101 180,050 63,486 407,368 The table below describes the unweighted ECL for each economic scenario as at 31 December 2020: In thousands of GEL Corporate MSME Consumer Mortgage Total Baseline 96,039 155,709 240,827 96,351 588,926 Upside 94,607 149,480 238,427 95,496 578,010 Downside 135,188 166,582 245,072 98,329 645,171 Weighted 107,641 159,910 241,825 96,870 606,246 The following table describes the key macroeconomic variables under each scenario for future 3-year period as at 31 December 2021: Growth rates YoY, % GDP USD/GEL rate (EOP) RE Price (in USD) Employment Monetary policy rate (EOP, Level) Baseline 2023 5.5% 3.25 2.1% 1.0% 7.5% 2022 6.0% 3.30 1.6% 1.0% 8.5% 2024 5.0% 3.20 2.6% 0.5% 7.0% Upside 2023 8.2% 2.87 6.3% 1.7% 2022 7.8% 2.95 4.6% 1.5% 8.0% 6.8% 2024 8.3% 2.80 7.7% 1.3% 6.1% Downside 2022 4.1% 3.55 -1.6% 0.6% 2023 2.8% 3.55 -2.5% 0.4% 2024 1.7% 3.52 -3.5% -0.2% 9.4% 8.7% 8.4% The following table describes the key macroeconomic variables under each scenario for future 3-year period as at 31 December 2020: Growth rates YoY, % GDP USD/GEL rate (EOP) RE Price (in USD) Employment Monetary policy rate (EOP, Level) Baseline 2022 7.4% 3.1 5.2% 1.0% 7.0% 2021 4.2% 3.2 -3.5% 2.6% 7.5% 2023 5.3% 3.0 7.5% 1.0% 6.5% Upside 2022 8.3% 2.8 4.6% 1.3% 6.7% 2021 4.9% 3.0 -2.1% 2.8% 7.3% 2023 6.5% 2.7 6.9% 1.3% 6.1% Downside 2021 2.7% 3.5 -5.7% 2.4% 8.4% 2022 5.2% 3.4 6.3% 0.7% 8.3% 2023 2.6% 3.3 4.2% 0.6% 8.1% The Bank assessed the impact of changes in GDP growth, unemployment and monetary policy rate variables on ECL as a most critical estimates applied in ECL assessment. The sensitivity analysis was performed separately for each of the variable to show their significant in ECL assess- ment, but changes in those variables may not happen in isolation as various economic factors tend to be correlated across the scenarios. The variables were adjusted in all three macroeconomic scenarios and the staging has been maintained unchanged. From the assessment of forward looking scenarios, management is comfortable with the scenarios capturing the non-linearity of the losses. 152 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED The table below shows the impact of +/-20% change in GDP growth, unemployment and monetary policy variables across all scenarios on the Bank’s ECL as at 31 December 2021: in thousands of GEL Impact on ECL 20% increase (9,036) 20% decrease 10,359 20% increase 4,805 20% decrease (4,541) 20% increase 4,045 20% decrease (3,493) Change in GDP growth Change in unemployment Change in Monetary Policy The table below shows the impact of +/-20% change in GDP growth and unemployment variables across all scenar- ios on the Bank’s ECL as at 31 December 2020: in thousands of GEL Impact on ECL 20% increase 20% decrease 20% increase 20% decrease 20% increase 20% decrease (6,973) 7,323 3,899 (3,083) 4,136 (3,234) Change in GDP growth Change in unemployment Change in Monetary Policy Individual assessment: Individual assessment is mainly used for stage 2 and stage 3 individually significant borrowers. For selecting individually significant exposures, the management uses the following estimated thresholds above which exposures1 are selected for individual review: for stage 2 - to GEL 10 million and for stage 3 - GEL 4 million. Additionally, the Bank may arbitrarily designate selected exposures to individual measurement of ECL based on the Bank’s credit risk management or underwriting departments’ decision. The individual assessment takes into account latest available information in order to define ECL under baseline, upside and downside scenarios. Use of post model overlays and adjustments Below we define what we call post model adjustments or overlays for ECL estimation purposes. Post model adjustments We call PMAs specific set of management adjustments to address known model limitations, either in model meth- odology or model inputs. PMAs are made based on analysis of model inputs and parameters to determine the re- quired modifications in order to improve model accuracy. Post model overlays Post model overlays (PMOs) reflect management judgement that mainly rely on expert judgement and are applied directly to expected credit losses at an aggregated level. Once implemented, Post Model overlays and adjustments are re-assessed at each reporting date to determine the validity of the adjustments. The appropriateness of PMAs and PMOs is subject to rigorous review and challenge. Post model overlays and adjustments review and approval process goes through same phases as made for ECL pro- cess governance that is described in note: 37 - under risk governance section. As a result of Covid-19 pandemic, the Bank applied expert judgement to the measurement of the expected credit losses in the form of post model adjustments (PMAs). The adjustments made were all in model adjustments, which means that we made adjustments either to model inputs or its parameters and run the models based on the updated adjustments. No post model overlays has been processed during the year (2020 nil). Below, are summarized in model PMAs applied as of YE 2020 and 2021. Total effect of all PMAs amounted to GEL 16,107 thousand and GEL 105,502 thousand for YE 2021 and YE 2020 respectively: • Default definition: The bank applied additional default criteria to exposures particularly impacted by the pan- demic-related restrictions. This included exposures that were granted several phases of covid-19 related grace periods or restructurings. The criteria included lower days past due threshold and deterioration in debt coverage ratios for those exposures to facilitate the early identification of impaired exposures. PMA was applicable as of YE 2020 and is no longer valid as of YE 2021 as covid-19 related grace periods or restructurings are no longer in place. • Stage 2 definition: As a result of Covid-19 pandemic, the Bank applied certain PMAs to SICR criteria (significant increase in credit risk) to facilitate the early identification of increased risk exposures. The criteria is based on the repayment history of the exposures after the second stage grace period and availability of the recent financial monitoring information for the vulnerable business borrowers. PMA was applicable as of YE 2020 and is no longer valid as of YE 2021 as Covid-19 pandemic related grace periods are no longer in place. 1 Total exposure of the bank toward the borrower or group of interconnected borrowers. 153 TBC BANK FINANCIAL STATEMENTS 20213. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES CONTINUED • Loss given default (LGD) – Recovery rate: For YE 2020, in the LGD modelling the Bank reduced the recovery rates for retail (mortgage, secured consumer & unsecured) and micro exposures in stage 3 to reflect the expect- ed impact of the pandemic-related restrictions. In 2021, the Bank re-assessed the adjustment and based on the analysis of recoveries, made certain modifications to PMAs applied as of YE 2020. Mortgage portfolio – recov- ery rate downward adjustment was totally removed, as based on the analysis observed recoveries managed to reach pre-pandemic level. Unsecured consumer portfolio, recoveries were improved, however it was still lower compared to the pre-pandemic level, therefore, recovery rate downward adjustment was maintained, but it was decreased compared to YE 2020. Adjustments for other portfolios, namely, secured consumer and micro seg- ments - remained unchanged compared to YE 2020, as material improvement in recoveries were not observed. • Loss given default (LGD) – Collateral haircut/AWT1: In order to capture an impact of expected real estate price drop on ECL, downward adjustment to the collateral values was applied for stage 3 SME and stage 3 non-signif- icant corporate exposures, as of YE 2020. As of YE 2021 the adjustment is no longer incorporated in line with the updated macro assumptions for real estate price. However, for that particular portfolios (SME, non-significant cor- porate) the Bank extended AWT (average workout period) from 1 Year2 to 2 years in 2021, in order to reflect delayed recoveries, observed in 2021, mainly driven by covid-19 pandemic. An adjustment was applied across all stages. • Full prepayment ratio (FPR): As of YE 2020, the Bank applied downward adjustment to FPR ratio which is used for exposure at default modeling (EAD). The adjustment was made based on the expectations that full prepayments will be lower compared to the pre-pandemic levels. In 2021 the Bank analyzed actual prepayments and based on the analytics either maintained the adjustment or decreased/totally removed it. • Credit Bureau scores: In December 2020, the Bank has adjusted CB-Score/risk grade as available score did not reflect respective period creditworthiness of particular exposure due to the Covid-19 related grace periods. As of December 2021, CB-Score approximation was already removed and the Bank directly uses the CB-Scores pro- vided by the external credit bureau. Following Table presents effects of PMAs on ECL. Some of the effects are dependent on each other, therefore the sum of individual effects of PMAs do not equal to the total effect posted on ECL as a result of PMAs: In thousands of GEL Default definition Stage 2 definition Loss given default (LGD) – Recovery rate Loss given default (LGD) – Collateral haircut/AWT3 Full prepayment ratio (FPR): Credit Bureau scores 2021 - - 12,835 2,754 512 - 2020 34,304 2,906 45,578 3,116 2,166 17,708 4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS The following amended standards became effective during 2021: Covid-19-Related Rent Concessions – Amendments to IFRS 16 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021). In May 2020 an amendment to IFRS 16 was issued that provided an optional practical expedient for lessees from as- sessing whether a rent concession related to COVID-19, resulting in a reduction in lease payments due on or before 30 June 2021, was a lease modification. An amendment issued on 31 March 2021 extended the date of the practical expedient from 30 June 2021 to 30 June 2022. The application of the amendment did not have any impact on the right-of-use asset and no material effect on lease liabilities and income statement. 154 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED4. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS CONTINUED Interest rate benchmark (IBOR) reform – phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 August 2020 and effective for annual periods beginning on or after 1 January 2021). The Phase 2 amendments address issues that arise from the implementation of the reforms, including the replace- ment of one benchmark with an alternative one. The amendments cover the following areas: • Accounting for changes in the basis for determining contractual cash flows as a result of IBOR reform: For instru- ments to which the amortised cost measurement applies, the amendments require entities, as a practical expe- dient, to account for a change in the basis for determining the contractual cash flows as a result of IBOR reform by updating the effective interest rate using the guidance in paragraph B5.4.5 of IFRS 9. As a result, no immediate gain or loss is recognised. This practical expedient applies only to such a change and only to the extent it is neces- sary as a direct consequence of IBOR reform, and the new basis is economically equivalent to the previous basis. Insurers applying the temporary exemption from IFRS 9 are also required to apply the same practical expedient. IFRS 16 was also amended to require lessees to use a similar practical expedient when accounting for lease mod- ifications that change the basis for determining future lease payments as a result of IBOR reform. • End date for Phase 1 relief for non-contractually specified risk components in hedging relationships: The Phase 2 amendments require an entity to prospectively cease to apply the Phase 1 reliefs to a non-contractually specified risk component at the earlier of when changes are made to the non-contractually specified risk component, or when the hedging relationship is discontinued. No end date was provided in the Phase 1 amendments for risk components. • Additional temporary exceptions from applying specific hedge accounting requirements: The Phase 2 amend- ments provide some additional temporary reliefs from applying specific IAS 39 and IFRS 9 hedge accounting requirements to hedging relationships directly affected by IBOR reform. • Additional IFRS 7 disclosures related to IBOR reform: The amendments require disclosure of: (i) how the entity is managing the transition to alternative benchmark rates, its progress and the risks arising from the transition; (ii) quantitative information about derivatives and non-derivatives that have yet to transition, disaggregated by sig- nificant interest rate benchmark; and (iii) a description of any changes to the risk management strategy as a result of IBOR reform. Libor is the most frequently used floating rate within the Group, as a result, below analysis is primarily concentrated on Libor change. Libor Change On 5 March 2021, the IBA confirmed its intention to cease the publication of GBP, CHF, EUR, and JPY LIBOR (all ten- ors) and USD LIBOR (one week and two-month tenors) at the end of 2021. The remaining USD LIBOR tenors will be published by IBA until the end of June 2023. The Bank has not yet re-negotiated the existing contracts in USD LIBOR and will follow extended timeline. Most Libor benchmarks are expected to transition to respective near risk-free rate (RFR) benchmarks. Under these amendments, the changes to the basis for determining the contractual cash flows are reflected by ad- justing the effective interest rate, as allowed by practical expedient. No immediate gain or loss is recognised. These revisions of effective interest rate are only applicable when the change is necessary as a direct consequence of inter- est rate benchmark reform, and the new basis for determining the contractual cash flows is economically equivalent to the previous basis. The Group does not have any exposure to GBP, CHF, EUR or JPY LIBOR contracts and has no impact of the cessation. For EUR floating assets and liabilities, EURIBOR is used as the default benchmark in the Group. For all new contracts, the rate fallback provisions are in place to avoid future complications in case there will be changes to EURIBOR benchmark. In USD, the Group has exposure to Libor, predominantly in contracts with 6 Month USD Libor benchmark. For the new customer contracts, the plan is to move fully from USD LIBOR to the RFRs in 2022. 1 AWT - average workout period 2 AWT is set to 1 year according to the ECL methodology. As of YE 2020, no changes to the methodology was applied in terms of AWT. 3 As described above, collateral haircuts were applied as of YE 2020. As for the AWT, it was only applicable as of YE 2021. 155 TBC BANK FINANCIAL STATEMENTS 20214. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS CONTINUED In the table below is the breakdown by financial statement components yet to transition to the alternative benchmark: Non derivative financial assets Loans and advances to customers - Currency EUR Cessation Date TBD* Non derivative financial liabilities Contingencies and commitments Derivatives Subordinated debt - Due to credit institutions 88,761 Letters of credit - Undrawn credit lines - Derivatives - USD TBD* USD 30-Jun-23 24,831 26,139 - - USD 30-Jun-23 5,432,142 281,604 USD 30-Jun-23 1,460 - 5,484,572 281,604 - 2,858 361,360 30,992 483,971 - - 1,032 11 4,771 909,315 - - - 3,613 - - 4,771 910,358 3,613 In thousands of GEL Index 6M Euribor 1M Libor 3M Libor 6M Libor 12M Libor Total * To be determined. Financial risks resulting from the cessation of LIBOR and the development of market liquidity in new Benchmarks will also affect the Group throughout transition. The differences in Libor and the new benchmark rates will create a basis risk that we may need to actively manage through appropriate financial hedging. Basis risk in may arise out of the asymmetric adoption of RFRs across assets and liabilities and across currencies and products. In addition, this may limit the ability to hedge effectively. Where appropriate, portfolio immunization or cash flow matching strategies will be used during the transition for risk minimization purposes. The hedging is expected to be done via available interest rate derivatives for respective RFRs. The continued orderly transition from LIBOR has been the Group’s key objective through 2021 and were grouped into two work streams: 1. The development of alternative rate and RFR product capabilities. 2. The transition of legacy Libor contracts. The Groups initiatives in connection with LIBOR transition include: Implementing rate fall back provisions, where appropriate; a. b. The Group continues to engage with market participants and the regulator to address market-wide challenges associated with USD LIBOR transition, including the efforts to introduce forward-looking term rates linked to SOFR; c. To educate and inform clients on LIBOR transition and the necessity to prepare for the cessation of LIBOR; 5. NEW ACCOUNTING PRONOUNCEMENTS The Group has not early adopted any of the amendments effective after 31 December 2021 and it expects they will have an insignificant effect, when adopted, or management is assessing the scale of impact on the consolidated financial statements of the Group and the separate financial statements of the Bank. IFRS 17 “Insurance Contracts” (issued on 18 May 2017 and effective for annual periods beginning on or after 1 Jan- uary 2021, deferred to 1 January 2023 by the amendments to IFRS 17). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial per- formance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires recognition and measurement of groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin). Insurers will be recognising the profit from a group of insurance contracts over the period they provide insurance coverage, and as they are released from risk. If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately. 156 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED5. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). The amendments include a number of clarifications intended to ease implementation of IFRS 17, simplify some re- quirements of the standard and transition. The amendments relate to eight areas of IFRS 17, and they are not intended to change the fundamental principles of the standard. The following amendments to IFRS 17 were made: • Effective date: The effective date of IFRS 17 (incorporating the amendments) has been deferred by two years to annual reporting periods beginning on or after 1 January 2023; and the fixed expiry date of the temporary exemp- tion from applying IFRS 9 in IFRS 4 has also been deferred to annual reporting periods beginning on or after 1 January 2023. • Expected recovery of insurance acquisition cash flows: An entity is required to allocate part of the acquisition costs to related expected contract renewals, and to recognise those costs as an asset until the entity recognises the contract renewals. Entities are required to assess the recoverability of the asset at each reporting date, and to provide specific information about the asset in the notes to the financial statements. • Contractual service margin attributable to investment services: Coverage units should be identified, considering the quantity of benefits and expected period of both insurance coverage and investment services, for contracts under the variable fee approach and for other contracts with an ‘investment-return service’ under the general model. Costs related to investment activities should be included as cash flows within the boundary of an insur- ance contract, to the extent that the entity performs such activities to enhance benefits from insurance coverage for the policyholder. • Reinsurance contracts held – recovery of losses: When an entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts, or on addition of onerous underlying contracts to a group, an entity should adjust the contractual service margin of a related group of reinsurance contracts held and recognise a gain on the reinsurance contracts held. The amount of the loss recovered from a reinsurance contract held is determined by multiplying the loss recognised on underlying insurance contracts and the percentage of claims on underlying insurance contracts that the entity expects to recover from the reinsurance contract held. This re- quirement would apply only when the reinsurance contract held is recognised before or at the same time as the loss is recognised on the underlying insurance contracts. • Other amendments: Other amendments include scope exclusions for some credit card (or similar) contracts, and some loan contracts; presentation of insurance contract assets and liabilities in the statement of financial position in portfolios instead of groups; applicability of the risk mitigation option when mitigating financial risks using rein- surance contracts held and non-derivative financial instruments at fair value through profit or loss; an accounting policy choice to change the estimates made in previous interim financial statements when applying IFRS 17; in- clusion of income tax payments and receipts that are specifically chargeable to the policyholder under the terms of an insurance contract in the fulfilment cash flows; and selected transition reliefs and other minor amendments. Transition option to insurers applying IFRS 17 – Amendments to IFRS 17 (issued on 9 December 2021 and effective for annual periods beginning on or after 1 January 2023). The amendment to the transition requirements in IFRS 17 provides insurers with an option aimed at improving the usefulness of information to investors on initial application of IFRS 17. The amendment relates to insurers’ transition to IFRS 17 only and does not affect any other requirements in IFRS 17. The transition requirements in IFRS 17 and IFRS 9 apply at different dates and will result in the following one-time classification differences in the comparative informa- tion presented on initial application of IFRS 17: accounting mismatches between insurance contract liabilities mea- sured at current value and any related financial assets measured at amortised cost; and if an entity chooses to restate comparative information for IFRS 9, classification differences between financial assets derecognised in the compar- ative period (to which IFRS 9 will not apply) and other financial assets (to which IFRS 9 will apply). The amendment will help insurers to avoid these temporary accounting mismatches and, therefore, will improve the usefulness of com- parative information for investors. It does this by providing insurers with an option for the presentation of compara- tive information about financial assets. When initially applying IFRS 17, entities would, for the purpose of presenting comparative information, be permitted to apply a classification overlay to a financial asset for which the entity does not restate IFRS 9 comparative information. The transition option would be available, on an instrument-by-instrument basis; allow an entity to present comparative information as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset, but not require an entity to apply the impairment requirements of IFRS 9; and require an entity that applies the classification overlay to a financial asset to use reasonable and supportable information available at the transition date to determine how the entity expects that financial asset to be classified applying IFRS 9. 157 TBC BANK FINANCIAL STATEMENTS 20215. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). IAS 1 was amended to require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendment provided the definition of material accounting policy information. The amendment also clarified that accounting policy information is expected to be material if, without it, the users of the financial statements would be unable to understand other material information in the financial statements. The amendment provided illustrative examples of accounting policy information that is likely to be considered material to the entity’s financial statements. Further, the amendment to IAS 1 clarified that immaterial accounting policy informa- tion need not be disclosed. However, if it is disclosed, it should not obscure material accounting policy information. To support this amendment, IFRS Practice Statement 2, ‘Making Materiality Judgements’ was also amended to pro- vide guidance on how to apply the concept of materiality to accounting policy disclosures. Deferred tax related to assets and liabilities arising from a single transaction – Amendments to IAS 12 (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023). The amendments to IAS 12 specify how to account for deferred tax on transactions such as leases and decommis- sioning obligations. In specified circumstances, entities are exempt from recognising deferred tax when they recog- nise assets or liabilities for the first time. Previously, there had been some uncertainty about whether the exemption applied to transactions such as leases and decommissioning obligations – transactions for which both an asset and a liability are recognised. The amendments clarify that the exemption does not apply and that entities are required to recognise deferred tax on such transactions. The amendments require companies to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018- 2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022). The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of PPE any proceeds received from selling items produced while the entity is preparing the asset for its intended use. The proceeds from selling such items, together with the costs of producing them, are now recognised in profit or loss. An entity will use IAS 2 to measure the cost of those items. Cost will not include depreciation of the asset being tested because it is not ready for its intended use. The amendment to IAS 16 also clarifies that an entity is ‘testing whether the asset is functioning properly’ when it assesses the technical and physical performance of the asset. The financial performance of the as- set is not relevant to this assessment. An asset might therefore be capable of operating as intended by management and subject to depreciation before it has achieved the level of operating performance expected by management. The amendment to IAS 37 clarifies the meaning of ‘costs to fulfil a contract’. The amendment explains that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract; and an allocation of other costs that relate directly to fulfilling. The amendment also clarifies that, before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract. IFRS 3 was amended to refer to the 2018 Conceptual Framework for Financial Reporting, in order to determine what constitutes an asset or a liability in a business combination. Prior to the amendment, IFRS 3 referred to the 2001 Conceptual Framework for Financial Reporting. In addition, a new exception in IFRS 3 was added for liabilities and contingent liabilities. The exception specifies that, for some types of liabilities and contingent liabilities, an entity applying IFRS 3 should instead refer to IAS 37 or IFRIC 21, rather than the 2018 Conceptual Framework. Without this new exception, an entity would have recognised some liabilities in a business combination that it would not recognise under IAS 37. Therefore, immediately after the acquisition, the en- tity would have had to derecognise such liabilities and recognise a gain that did not depict an economic gain. It was also clarified that the acquirer should not recognise contingent assets, as defined in IAS 37, at the acquisition date. The amendment to IFRS 9 addresses which fees should be included in the 10% test for derecognition of financial liabilities. Costs or fees could be paid to either third parties or the lender. Under the amendment, costs or fees paid to third parties will not be included in the 10% test. Illustrative Example 13 that accompanies IFRS 16 was amended to remove the illustration of payments from the lessor relating to leasehold improvements. The reason for the amendment is to remove any potential confusion about the treatment of lease incentives. 158 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED5. NEW ACCOUNTING PRONOUNCEMENTS CONTINUED IFRS 1 allows an exemption if a subsidiary adopts IFRS at a later date than its parent. The subsidiary can measure its assets and liabilities at the carrying amounts that would be included in its parent’s consolidated financial statements, based on the parent’s date of transition to IFRS, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. IFRS 1 was amended to allow entities that have taken this IFRS 1 exemption to also measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to IFRS. The amendment to IFRS 1 extends the above exemption to cumulative translation differences, in order to reduce costs for first-time adopters. This amendment will also apply to associates and joint ventures that have taken the same IFRS 1 exemption. The requirement for entities to exclude cash flows for taxation when measuring fair value under IAS 41 was removed. This amendment is intended to align with the requirement in the standard to discount cash flows on a post-tax basis. Classification of liabilities as current or non-current – Amendments to IAS 1 (issued on 23 January 2020 and effec- tive for annual periods beginning on or after 1 January 2022). These narrow scope amendments clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities are non-current if the entity has a substantive right, at the end of the reporting period, to defer settlement for at least twelve months. The guidance no longer requires such a right to be unconditional. Management’s expectations whether they will subsequently exercise the right to defer settlement do not affect classification of liabilities. The right to defer only exists if the entity complies with any relevant conditions as of the end of the reporting period. A liability is classified as current if a condition is breached at or before the reporting date even if a waiver of that condition is obtained from the lender after the end of the reporting period. Conversely, a loan is classified as non-current if a loan covenant is breached only after the reporting date. In addition, the amendments include clarifying the classification requirements for debt a company might settle by con- verting it into equity. ‘Settlement’ is defined as the extinguishment of a liability with cash, other resources embodying economic benefits or an entity’s own equity instruments. There is an exception for convertible instruments that might be converted into equity, but only for those instruments where the conversion option is classified as an equity instru- ment as a separate component of a compound financial instrument. Amendment to IFRS 4 – deferral of IFRS 9 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). The amendments to IFRS 4 addressed the temporary accounting consequences of the different effective dates of IFRS 9 and the forthcoming IFRS 17. The amendments to IFRS 4 extended the expiry date of the temporary exemp- tion from applying IFRS 9 until 2023 in order to align the effective date of IFRS 9 with the new IFRS 17. The fixed ex- piry date of the temporary exemption from applying IFRS 9 in IFRS 4 has been deferred to annual reporting periods beginning on or after 1 January 2023. Classification of liabilities as current or non-current, deferral of effective date – Amendments to IAS 1 (issued on 15 July 2020 and effective for annual periods beginning on or after 1 January 2023). The amendment to IAS 1 on classification of liabilities as current or non-current was issued in January 2020 with an original effective date 1 January 2022. However, in response to the Covid-19 pandemic, the effective date was deferred by one year to provide companies with more time to implement classification changes resulting from the amended guidance. Amendments to IAS 8: Definition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). The amendment to IAS 8 clarified how companies should distinguish changes in accounting policies from changes in accounting estimates. 159 TBC BANK FINANCIAL STATEMENTS 20216. 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 2021 2020 2019 831,035 747,195 646,394 134,262 102,289 35,133 630,247 588,343 186,623 45 163,851 126,359 Total gross amount of cash and cash equivalents 1,595,589 1,601,678 994,509 Less: credit loss allowance by stages Stage 1 Stage 2 Stage 3 (129) (129) - - (79) (79) - - (30) (30) - - Total cash and cash equivalents 1,595,460 1,601,599 994,479 94% of the correspondent accounts and overnight placements with other banks are placed with OECD (The Orga- nization for Economic Co-operation and Development) banking institutions (31 December 2020: 89%; 31 December 2019: 85%). As at 31 December 2021 GEL 45 thousand was placed on interbank term deposits with one non-OECD bank and none with OECD banks (2020: GEL 25,030 thousand with non-OECD bank and GEL 163,838 thousand with one OECD bank; 2019: GEL 11,348 thousand with one non-OECD bank and GEL 115,012 thousand with two OECD banks). Interest rate analysis of cash and cash equivalents is disclosed in Note 37. The credit-rating of correspondent accounts and overnight placements with other banks is as follows: in thousands of GEL AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B Not rated 2021 69,943 2,117 425,554 1,795 23,766 70,886 2020 – 1,891 417,938 1,896 35,753 – 7 64,985 12,569 367 1,519 13,367 8,343 14 – 897 – 1,858 9,072 53,684 15 354 2019 – – 66,805 13,816 – 20,286 69,302 – 733 2,970 12,336 375 – – Total correspondent accounts and overnight placements with other banks 630,247 588,343 186,623 160 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED6. CASH AND CASH EQUIVALENTS CONTINUED The credit rating of placements with and receivables from other banks with original maturities of less than three months stands as follows: in thousands of GEL A- BBB+ BB B+ Not rated Total placements with and receivables from other banks with original maturities of less than three months 2021 2020 2019 – – – – 45 45 – 115,012 163,837 – – 14 – 1,718 9,629 – 163,851 126,359 The table illustrates the ratings by international agencies Standard & Poor’s and Fitch Ratings. When different credit ratings are designated by the agencies, the highest designated rating for this asset is used, for those financial insti- tutions which are not assigned credit ratings country ratings are used. As at 31 December 2021 there were no invest- ment securities held as collateral against placements with other banks under the reverse repo agreements (2020: nil; 2019: nil). 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 2021, 2020 and 2019. Credit ratings of placements with other banks with original maturities of more than three months were as follows: in thousands of GEL AA- A+ BBB+ BBB- BBB BB B+ Total placements with other banks with original maturities of more than three months 2021 – 2020 31 2019 – 13,099 10,908 9,541 21 2,943 – 1,468 24,706 98 2,010 – 5,943 700 – – 2,493 1,388 2,175 42,237 19,690 15,597 As at 31 December 2021 the Group had two placements, with original maturities of more than three months and with aggregated amounts above GEL 5,000 thousand (2020: nil; 2019: nil). The total aggregated amount of placements with other banks with original maturities of more than three months was GEL 28,428 thousand (2020: GEL2,012 thou- sand; 2019: Nil) or 67.3% of the total amount due from other banks (2020: 4.0%; 2019: 40.8%). As at 31 December 2021 GEL 13,819 thousand, (2020: GEL 11,744 thousand ; 2019: GEL 11,836 thousand ) were kept on deposits as restricted cash under an arrangement with a credit card company or credit card related services with oth- er banks. Refer to Note 41 for the estimated fair value of amounts due from other banks. Interest rate analysis of due from other banks is disclosed in Note 37. For the purpose of ECL measurement due from other banks balances are included in Stage 1. The ECL for these bal- ances as at 31 December 2021 is GEL 9.9 thousand (2020: GEL 8 thousand; 2019: GEL 9 thousand). 8. MANDATORY CASH BALANCES WITH NATIONAL BANK OF GEORGIA Mandatory cash balances with the National Bank of Georgia (“NBG”) represent amounts deposited with the NBG. Res- ident 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 10.5%, (0.25%) and (0.7%) annual interest in GEL, USD and EUR respectively on mandatory reserves with NBG in 2021 (2020: 8.0%, (0.25%) and (0.7%) in GEL, USD and EUR respectively; 2019: 9.0%, 1.25% and (0.7%) in GEL, USD and EUR respectively). In August 2021, Fitch Ratings has affirmed Georgia’s Long-Term Foreign and Local Currency Issuer Default Rating (IDRs) at ‘BB’. The Outlook was revised to stable from negative. The issue ratings on long-term senior unsecured bonds were affirmed at ‘BB’. The Country Ceiling Rating was affirmed at ‘BBB-’, short-term foreign and local-currency IDRs at ‘B’. 161 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS in thousands of GEL Corporate loans Consumer loans Mortgage loans Loans to micro, small and medium enterprises Total gross loans Less: credit loss allowance Stage 1 Stage 2 Stage 3 Total loans and advances to customers 2021 2020 2019 6,547,741 5,690,749 4,660,473 2,153,066 2,011,585 1,884,006 4,112,441 4,141,305 3,942,102 3,556,079 3,169,197 2,948,279 16,954,553 15,200,515 12,661,955 (407,368) (606,246) (312,556) (101,972) (130,228) (95,689) (120,417) (142,915) (82,687) (184,979) (333,103) (134,180) 16,547,185 14,594,269 12,349,399 As of 31 December 2021 GEL 16,948,195 thousand of gross loans and advances to customers and GEL 398,735 thou- sand of credit loss allowance were attributable to the Bank (2020: GEL 15,198,858 thousand and GEL 587,654 thou- sand; 2019: GEL 12,720,562 and GEL 303,577 thousand). As at 31 December 2021 loans and advances to customers carried at GEL 843,006 thousand have been pledged to local banks or other financial institutions as collateral with respect to other borrowed funds (2020: GEL 889,353 thou- sand; 2019: GEL 474,480 thousand). Total credit loss allowance includes PMAs amounted to GEL 16,107 thousand and GEL 105,502 thousand for YE 2021 and YE 2020, respectively. The following tables disclose the changes in the credit loss allowance and gross carrying amount for loans and ad- vances to customers carried at amortised cost between the beginning and the end of the reporting period. Below main movements in the table are described: • Transfers occur between Stage 1, 2 and 3, due to significant increases (or decreases) of credit risk or exposures becoming defaulted in the period, and the consequent “step up” (or “step down”) between 12-month and Lifetime ECL. It should be noted, that: Ɩ For loans, which existed at the beginning of the period, opening exposures are disclosed as transfer amounts; Ɩ For newly issued loans, exposures upon issuance are disclosed as transfer amounts; • New originated or purchased gives us information regarding gross loans issued and corresponding credit loss allowance created during the period (however, exposures which were issued and repaid during the period and issued to refinance existing loans are excluded); • Derecognised during the period refers to the balance of loans and credit loss allowance at the beginning of the period, which were repaid during the period. Exposures which were issued and repaid during the period, written off or refinanced by other loans, are excluded; • Net repayments refer to the net changes in gross carrying amounts, which is loan disbursements less repayments; • Write-offs refer to write off of loans during the period; • Foreign exchange movements refer to the translation of assets denominated in foreign currencies and effect to translation in presentational currency for foreign subsidiary; • Net re-measurement due to stage transfers and risk parameters changes refers to the movements in ECL as a result of transfer of exposure between stages or changes in risk parameters and forward looking expectations; • Re-segmentation refers to the transfer of loans from one reporting segment to another. In 2021, the Group has reassessed its definition of segments as disclosed in Note 28. Wealth Management business with high net worth individuals has been transferred from retail to corporate segment and space segment has been fully transferred from MSME to retail segment due to changes in segment definitions. Other transfers between seg- ments were primarily due to changes in client size and specifications compared to prior period. All tables with comparatives below are prepared by the segmentation that was relevant during each prior year. For presentation purposes, amounts are rounded to the nearest thousands of GEL, which in certain cases is disclosed as nil. 162 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Total loans in thousands of GEL Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 11,860,559 2,448,126 891,830 15,200,515 130,228 142,915 333,103 606,246 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (1,734,485) 2,099,936 (365,451) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Net re-measurement due to stage transfers, changes in risk parameters and repayments1 (366,906) (262,234) 629,140 1,950,513 (1,780,706) (169,807) - - - (66,102) 162,746 (96,644) (83,962) (39,902) 123,864 143,565 (93,518) (50,047) - - - 7,369,167 - - 7,369,167 115,394 - - 115,394 (2,161,851) (162,437) (192,679) (2,516,967) 22,759 (16,651) (50,522) (44,414) (1,809,284) (267,445) (66,207) (2,142,936) - - - - - - - - (158,517) (33,483) 122,486 (69,514) Movements without impact on credit loss allowance charge for the period: Write-offs Changes in accrued interest Modification Foreign exchange movements - - (193,678) (193,678) 11,271 (3,229) 1,870 5,346 1,930 2,466 9,912 9,742 - - - - - - (193,678) (193,678) - - - - (612,165) (140,411) (28,626) (781,202) (1,393) (1,690) (3,583) (6,666) At 31 December 2021 14,512,165 1,933,530 508,858 16,954,553 101,972 120,417 184,979 407,368 1 Movements with impact on credit loss allowance charge for the period differs from statement of profit or loss with amount of recoveries GEL 44,642 thousands in 2021 (2020: GEL 21,136 thousands, 2019: GEL 33,801 thousands) The amount of recoveries include recoveries from sale of written off portfolio in the amount of GEL 11.6 million sold In August 2021. 163 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Total loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 11,551,934 757,094 352,927 12,661,955 95,689 82,687 134,180 312,556 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) (1,834,720) 1,871,883 (37,163) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (456,349) (195,488) 651,837 116,479 (115,394) (1,085) – – – (10,824) 23,099 (12,275) (53,436) (27,314) 80,750 15,269 (14,677) (592) – – – 3,361,543 – – 3,361,543 110,226 – – 110,226 (922,671) (83,851) (23,487) (1,030,009) 12,225 789 (13,151) (137) Net repayments (982,755) (60,770) (42,984) (1,086,509) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (45,959) 70,894 186,167 211,102 Movements without impact on credit loss allowance charge for the period: Write-offs Foreign exchange movements Modifications – – (66,028) (66,028) – – (66,028) (66,028) 1,042,872 280,445 59,787 1,383,104 7,038 7,437 24,052 38,527 (15,774) (5,793) (1,974) (23,541) – – – – At 31 December 2020 11,860,559 2,448,126 891,830 15,200,515 130,228 142,915 333,103 606,246 164 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Total loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 9,226,512 791,969 354,101 10,372,582 96,812 95,784 141,534 334,130 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (646,985) 682,879 (35,894) (151,728) (138,204) 289,932 269,543 (264,141) (5,402) – – – (22,811) 34,649 (11,838) (11,259) (24,668) 35,927 28,411 (26,682) (1,729) – – – 4,403,046 – – 4,403,046 72,517 – – 72,517 (535,371) (165,034) (183,020) (883,425) (1,331) (16,526) (23,859) (41,716) Net repayments (1,293,956) (177,292) 56,480 (1,414,768) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (67,845) 19,033 128,776 79,964 Movements without impact on credit loss allowance charge for the period: Write-offs Foreign exchange movements – – (140,161) (140,161) – – (140,161) (140,161) 280,873 26,917 16,891 324,681 1,195 1,097 5,530 7,822 At 31 December 2019 11,551,934 757,094 352,927 12,661,955 95,689 82,687 134,180 312,556 165 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 4,574,134 955,187 161,428 5,690,749 53,995 8,194 45,452 107,641 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (260,069) 331,488 (71,419) - (6,701) 12,127 (5,426) (93,919) (25,017) 118,936 - (30,508) (391) 30,899 461,963 (405,275) (56,688) - 27,590 (8,265) (19,325) - - - 2,604,204 - - 2,604,204 39,357 - - 39,357 (1,034,926) (10,074) (35,273) (1,080,273) (3,172) 102 (16,258) (19,328) Net repayments (414,977) (82,387) (32,038) (529,402) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (55,960) (10,378) (12,081) (78,419) Movements without impact on credit loss allowance charge for the period: Re-segmentation 213,296 29,590 6,401 249,287 476 314 2,897 3,687 Write-offs Changes in accrued interest Modification Foreign Exchange movements - - (340) 1,988 (3,035) 3,917 719 608 996 (340) 2,870 2,323 - - - - - - (340) (340) - - - - (308,969) (78,537) (4,171) (391,677) (673) (393) (801) (1,867) At 31 December 2021 5,743,444 712,548 91,749 6,547,741 24,404 1,310 25,017 50,731 166 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 4,434,685 104,409 121,379 4,660,473 39,153 1,969 39,628 80,750 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (750,779) 750,779 – (57,281) (14,021) 71,302 20,142 (20,142) 854,821 – – – – – – 227 (227) 854,821 14,830 – (7,395) 7,395 – (1,394) (1,307) 2,701 – – – 14,830 – – (285,949) (20,839) (7,919) (314,707) (3,328) (1,915) (3,800) (9,043) Net repayments (145,390) 16,644 (32,056) (160,802) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – 6,388 1,006 1,974 9,368 Movements without impact on credit loss allowance charge for the period: Re-segmentation Write-offs Modifications Foreign exchange movements 21,785 – – – – (5,380) (2,541) (1,758) (864) 21,785 (5,380) (5,163) 76 – – – – – – 76 (5,380) (5,380) – – 484,641 140,115 14,966 639,722 5,438 1,273 10,329 17,040 At 31 December 2020 4,574,134 955,187 161,428 5,690,749 53,995 8,194 45,452 107,641 167 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Corporate in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,903,313 138,715 135,261 3,177,289 32,940 4,994 43,571 81,505 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (126,154) 137,126 (10,972) (27,531) (5,261) 32,792 72,484 (71,151) (1,333) – – – (2,876) 5,184 (2,308) (2,914) (192) 3,106 2,806 (2,806) – – – 25,355 – – 1,638,709 – – 1,638,709 25,355 – 1,988 (31,192) (13,862) (43,066) (2,544) (1,064) (9,094) (12,702) Net repayments (186,958) (70,285) (27,812) (285,055) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (14,698) (4,398) 1,621 (17,475) Movements without impact on credit loss allowance charge for the period: Re-segmentation Foreign exchange movements 55,356 711 – 56,067 103,478 5,746 7,305 116,529 176 908 76 175 – 252 2,732 3,815 At 31 December 2019 4,434,685 104,409 121,379 4,660,473 39,153 1,969 39,628 80,750 168 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 2,661,786 631,347 262,946 3,556,079 24,490 46,853 88,567 159,910 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (466,965) 534,711 (67,746) (71,234) (94,868) 166,102 570,554 (537,576) (32,978) - - - (10,917) 29,516 (18,599) (14,450) (10,455) 24,905 36,444 (28,030) (8,414) - - - 2,023,430 - - 2,023,430 16,667 - - 16,667 (522,685) (44,334) (33,607) (600,626) (688) (1,613) (11,988) (14,289) Net repayments (475,809) (61,832) (30,299) (567,940) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (26,678) (3,534) 32,293 2,081 Movements without impact on credit loss allowance charge for the period: Re-segmentation (80,868) 6,542 (4,798) (79,124) (3,824) 78 (4,898) (8,644) Write-offs Changes in accrued interest Modifications Foreign exchange movements - - (40,086) (40,086) 14,130 1,126 1,449 16,705 1,208 369 424 2,001 - - - - - - (40,086) (40,086) - - - - (133,705) (22,146) (13,283) (169,134) (557) (581) (1,400) (2,538) At 31 December 2021 3,519,842 413,339 208,124 4,141,305 20,487 32,234 60,380 113,101 169 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 2,650,261 204,699 93,319 2,948,279 18,341 18,593 29,211 66,145 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (539,299) 546,322 (7,023) (103,564) (83,981) 187,545 31,201 (30,770) (431) – – – (6,860) 8,580 (1,720) (8,258) (9,097) 17,355 3,130 (2,954) (176) – – – 1,033,189 – – 1,033,189 23,407 – – 23,407 (303,253) (33,879) (5,525) (342,657) (1,314) (157) (1,759) (3,230) Net repayments (290,204) (26,683) (11,097) (327,984) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (5,102) 29,155 55,752 79,805 Movements without impact on credit loss allowance charge for the period: Re-segmentation Write-offs Foreign exchange movements Modifications (22,888) – – – – (22,888) (15,696) (15,696) (76) – – – – (76) (15,696) (15,696) 209,565 57,071 22,178 288,814 1,222 2,733 5,600 9,555 (3,222) (1,432) (324) (4,978) – – – – At 31 December 2020 2,661,786 631,347 262,946 3,556,079 24,490 46,853 88,567 159,910 170 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Loans to micro, small and medium enterprises in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,210,617 193,157 92,820 2,496,594 19,273 22,379 29,362 71,014 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (181,576) 186,581 (5,005) (51,354) (42,338) 93,692 49,093 (48,292) (801) – – – (3,097) 5,142 (2,045) (2,568) (6,711) 9,279 6,191 (5,872) (319) – – – 1,312,100 – – 1,312,100 11,981 – – 11,981 (354,274) (47,777) (48,874) (450,925) (2,356) (2,582) (6,102) (11,040) Net repayments (333,112) (42,333) (14,348) (389,793) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (11,134) 6,047 26,965 21,878 Movements without impact on credit loss allowance charge for the period: Re-segmentation (55,356) (786) – (56,142) (176) (78) – (254) Write-offs Foreign exchange movements – – (28,963) (28,963) 54,123 6,487 4,798 65,408 – 227 – (28,963) (28,963) 268 1,034 1,529 At 31 December 2019 2,650,261 204,699 93,319 2,948,279 18,341 18,593 29,211 66,145 171 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 1,556,559 267,296 187,730 2,011,585 48,372 66,352 127,101 241,825 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (404,297) 469,103 (64,806) (107,233) (99,591) 206,824 319,163 (287,805) (31,358) - - - (46,034) 83,035 (37,001) (22,505) (25,955) 48,460 57,187 (45,306) (11,881) - - - 1,410,607 - - 1,410,607 57,565 - - 57,565 (408,992) (55,937) (87,562) (552,491) 23,943 (14,452) (11,487) (1,996) Net repayments (491,278) (53,145) 29,536 (514,887) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (67,672) 541 94,437 27,306 Movements without impact on credit loss allowance charge for the period: Re-segmentation (30,782) 491 2,385 (27,906) 3,400 348 2,861 6,609 Write-offs Changes in accrued interest Modification Foreign exchange movements - - (151,635) (151,635) (1,447) (1,248) (4,446) 2,098 437 828 (7,141) 3,363 - - - - (151,635) (151,635) - - - - - - (14,490) (2,201) (1,738) (18,429) 23 230 123 376 At 31 December 2021 1,829,908 237,400 85,758 2,153,066 54,279 64,793 60,978 180,050 172 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 1,593,262 216,817 73,927 1,884,006 36,724 52,439 44,793 133,956 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (165,248) 178,014 (12,766) (114,928) (58,650) 173,578 40,086 (39,544) (542) – – – (3,846) 9,861 (6,015) (24,678) (14,790) 39,468 11,333 (10,945) (388) – – – 669,973 – – 669,973 62,912 – – 62,912 (219,243) (14,197) (9,175) (242,615) 11,426 220 (4,949) 6,697 Net repayments (287,650) (19,815) 3,789 (303,676) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (45,618) 29,130 96,489 80,001 Movements without impact on credit loss allowance charge for the period: Re-segmentation Write-offs Foreign exchange movements Modifications 831 – – – – 831 (44,356) (44,356) 45,457 6,440 4,033 55,930 (5,981) (1,769) (758) (8,508) – – 119 – – – 437 – – – (44,356) (44,356) 2,059 2,615 – – At 31 December 2020 1,556,559 267,296 187,730 2,011,585 48,372 66,352 127,101 241,825 173 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Consumer loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 1,641,978 265,687 81,851 1,989,516 42,903 59,245 54,575 156,723 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (166,459) 176,428 (9,969) (60,362) (67,012) 127,374 81,453 (80,023) (1,430) – – – (16,454) 21,029 (4,575) (5,682) (16,168) 21,850 16,851 (16,013) (838) – – – 641,207 – – 641,207 34,363 – – 34,363 (101,437) (39,416) (125,004) (265,857) 3,706 (11,085) (7,972) (15,351) Net repayments (460,554) (42,061) 109,208 (393,407) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (38,995) 15,212 91,149 67,366 Movements without impact on credit loss allowance charge for the period: Re-segmentation 2,583 1,092 572 4,247 Write-offs Foreign exchange movements – – (110,243) (110,243) 14,853 2,122 1,568 18,543 15 – 17 97 – 122 184 296 (110,243) (110,243) 663 802 At 31 December 2019 1,593,262 216,817 73,927 1,884,006 36,724 52,439 44,793 133,956 174 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2021 3,068,080 594,296 279,726 3,942,102 3,371 21,516 71,983 96,870 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (603,154) 764,634 (161,480) (94,520) (42,758) 137,278 598,833 (550,050) (48,783) - - - (2,450) 38,068 (35,618) (16,499) (3,101) 19,600 22,344 (11,917) (10,427) - - - 1,330,926 - - 1,330,926 1,805 - - 1,805 (195,248) (52,092) (36,237) (283,577) 2,676 (688) (10,789) (8,801) Net repayments (427,220) (70,081) (33,406) (530,707) - - - - Net re-measurement due to stage transfers, changes in risk parameters and repayments - - - - (8,207) (20,112) 7,837 (20,482) Movements without impact on credit loss allowance charge for the period: Re-segmentation (101,646) (36,623) (3,988) (142,257) (52) (740) (860) (1,652) Write-offs Changes in accrued interest Modification Foreign exchange movements - - (1,617) (1,617) (3,400) 1,321 (72) 516 950 (2,522) 218 2,055 - - - - - - (1,617) (1,617) - - - - (155,001) (37,527) (9,434) (201,962) (186) (946) (1,505) (2,637) At 31 December 2021 3,418,971 570,243 123,227 4,112,441 2,802 22,080 38,604 63,486 175 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2020 2,873,726 231,169 64,302 3,169,197 1,471 9,686 20,548 31,705 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (379,394) 396,768 (17,374) (180,576) (38,836) 219,412 25,050 (24,938) (112) – – – 7,277 (2,737) (4,540) (19,106) (2,120) 21,226 579 (551) (28) – – – 803,560 – – 803,560 9,077 – – 9,077 (114,226) (14,936) (868) (130,030) 5,441 2,641 (2,643) 5,439 Net repayments (259,511) (30,916) (3,620) (294,047) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (1,627) 11,603 31,952 41,928 Movements without impact on credit loss allowance charge for the period: Re-segmentation Write-offs Foreign exchange movements Modifications 272 – – – – (596) 272 (596) – – – – – – (596) (596) 303,209 76,819 18,610 398,638 259 2,994 6,064 9,317 (4,030) (834) (28) (4,892) – – – – At 31 December 2020 3,068,080 594,296 279,726 3,942,102 3,371 21,516 71,983 96,870 176 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED Gross carrying amount Credit loss allowance Mortgage loans in thousands of GEL Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total At 1 January 2019 2,470,604 194,410 44,169 2,709,183 1,696 9,166 14,026 24,888 Movements with impact on credit loss allowance charge for the period: Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period (172,796) 182,744 (9,948) (12,481) (23,593) 36,074 66,513 (64,675) (1,838) – – – (384) 3,294 (2,910) (95) (1,597) 1,692 2,563 (1,991) (572) – – – 811,030 – – 811,030 818 – – 818 (81,648) (46,649) 4,720 (123,577) (137) (1,795) (691) (2,623) Net repayments (313,332) (22,613) (10,568) (346,513) – – – – Net re-measurement due to stage transfers, changes in risk parameters and repayments – – – – (3,018) 2,172 9,041 8,195 Movements without impact on credit loss allowance charge for the period: Re-segmentation (2,583) (1,017) – – (572) (955) (4,172) (955) 108,419 12,562 3,220 124,201 Write-offs Foreign exchange movements (15) – 43 (95) – 532 (184) (955) (294) (955) 1,101 1,676 At 31 December 2019 2,873,726 231,169 64,302 3,169,197 1,471 9,686 20,548 31,705 177 TBC BANK FINANCIAL STATEMENTS 20219. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2021: in thousands of GEL Corporate loans risk category – Very low – Low – Moderate – Default Gross carrying amount Credit loss allowance Carrying amount Consumer loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Mortgage loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Loans to MSME risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Stage 1 (12months ECL) 5,491,018 246,591 5,835 – 5,743,444 (24,404) 5,719,040 1,180,163 542,853 106,892 - - 1,829,908 (54,279) 1,775,629 3,069,543 328,538 20,890 – – 3,418,971 (2,802) 3,416,169 2,836,336 673,872 9,634 – – 3,519,842 (20,487) 3,499,355 31 December 2021 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 4,275 598,209 110,064 – 712,548 (1,310) 711,238 16,309 55,552 138,340 27,199 - 237,400 (64,793) 172,607 78,659 353,765 122,855 14,964 – 570,243 (22,080) 548,163 41,741 250,173 86,859 34,566 – 413,339 (32,234) 381,105 – – – 91,749 91,749 (25,017) 66,732 - - - - 85,758 85,758 (60,978) 24,780 – – – – 123,227 123,227 (38,604) 84,623 – – – – 208,124 208,124 (60,380) 147,744 Total 5,495,293 844,800 115,899 91,749 6,547,741 (50,731) 6,497,010 1,196,472 598,405 245,232 27,199 85,758 2,153,066 (180,050) 1,973,016 3,148,202 682,303 143,745 14,964 123,227 4,112,441 (63,486) 4,048,955 2,878,077 924,045 96,493 34,566 208,124 4,141,305 (113,101) 4,028,204 178 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2020: in thousands of GEL Corporate loans risk category – Very low – Low – Moderate – Default Gross carrying amount Credit loss allowance Carrying amount Consumer loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Mortgage loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Loans to MSME risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2020 Stage 1 (12months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 4,324,191 248,246 1,697 – 4,574,134 (53,995) 4,520,138 1,010,723 453,899 91,937 – – 1,556,559 (48,372) 1,508,187 2,852,661 186,597 28,822 – – 3,068,080 (3,371) 3,064,709 2,252,448 395,733 13,605 – – 2,661,786 (24,490) 2,637,296 6,178 913,832 35,177 – 955,187 (8,194) 946,993 20,041 64,950 159,726 22,579 – 267,296 (66,352) 200,944 97,936 334,579 154,372 7,409 – 594,296 (21,516) 572,780 145,445 348,147 121,925 15,830 – 631,347 (46,853) 584,494 – – – 161,428 161,428 (45,452) 115,976 – – – – 187,730 187,730 (127,101) 60,629 – – – – 279,726 279,726 (71,983) 207,743 – – – – 262,946 262,946 (88,567) 174,379 Total 4,330,369 1,162,078 36,874 161,428 5,690,749 (107,641) 5,583,108 1,030,764 518,849 251,663 22,579 187,730 2,011,585 (241,825) 1,769,760 2,950,597 521,176 183,194 7,409 279,726 3,942,102 (96,870) 3,845,232 2,397,893 743,880 135,530 15,830 262,946 3,556,079 (159,910) 3,396,169 179 TBC BANK FINANCIAL STATEMENTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The credit quality of loans to customers carried at amortised cost is as follows at 31 December 2019: in thousands of GEL Corporate loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Consumer loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Mortgage loans risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Loans to MSME risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Stage 1 (12months ECL) 4,094,403 339,960 322 – – 4,434,685 (39,153) 4,395,532 1,107,490 330,361 155,411 – – 1,593,262 (36,724) 1,556,538 2,668,691 182,049 22,986 – – 2,873,726 (1,471) 2,872,255 2,223,262 407,106 19,893 – – 2,650,261 (18,341) 2,631,920 31 December 2019 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 7,882 75,872 19,827 828 – 104,409 (1,969) 102,440 5,436 17,620 176,815 16,946 – 216,817 (52,439) 164,378 17,970 80,289 121,743 11,167 – 231,169 (9,686) 221,483 23,114 87,244 80,947 13,394 – 204,699 (18,593) 186,106 – – – – 121,379 121,379 (39,628) 81,751 – – – – 73,927 73,927 (44,793) 29,134 – – – – 64,302 64,302 (20,548) 43,754 – – – – 93,319 93,319 (29,211) 64,108 Total 4,102,285 415,832 20,149 828 121,379 4,660,473 (80,750) 4,579,723 1,112,926 347,981 332,226 16,946 73,927 1,884,006 (133,956) 1,750,050 2,686,661 262,338 144,729 11,167 64,302 3,169,197 (31,705) 3,137,492 2,246,376 494,350 100,840 13,394 93,319 2,948,279 (66,145) 2,882,134 180 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The contractual amounts outstanding on loans to customers that have been written off partially or fully, but are still subject to enforcement activity was principal amount GEL 19,238 thousand (31 December 2020: GEL 47,933 thousand; 31 December 2019: 109,719 Thousand GEL), accrued interest GEL 4,963 thousand (31 December 2020: GEL 10,584 thousand; 31 December 2019: GEL 27,998 thousand) and accrued off balance sheet penalty GEL 115,371 thousand (31 December 2020: GEL 135,418 thousand; 31 December 2019: GEL 113,855 thousand). Economic sector risk concentrations within the customer loan portfolio are as follows: in thousands of GEL Individual Real Estate Hospitality, Restaurants & Leisure Energy & Utilities Construction Food Industry Trade Agriculture Healthcare Services Automotive Transportation Pawn Shops Financial Services Metals and Mining Communication Other 2021 Amount 6,407,171 1,591,277 1,350,184 1,095,387 1,041,416 994,780 860,286 838,719 406,608 348,738 309,043 224,066 159,851 112,937 43,132 41,191 1,129,767 % 38% 9% 8% 7% 6% 6% 5% 5% 2% 2% 2% 1% 1% 1% 0% 0% 7% 2020* Amount 5,948,341 1,460,821 1,368,887 1,078,504 667,904 898,597 708,559 642,024 369,645 268,982 263,276 159,857 168,571 78,923 229,368 46,406 841,850 % 39% 10% 9% 7% 4% 6% 5% 4% 2% 2% 2% 1% 1% 1% 2% 0% 5% 2019* Amount 5,046,804 1,076,102 988,467 1,089,643 576,923 785,539 616,475 498,783 305,152 212,661 183,912 134,223 203,633 96,430 99,321 43,329 704,558 % 40% 8% 8% 9% 5% 6% 5% 4% 2% 2% 1% 1% 2% 1% 1% 0% 5% Total gross loans and advances to customers 16,954,553 100% 15,200,515 100% 12,661,955 100% * Management has re-visited the logic for disclosing the Economic sector risk concentrations within the customer loan portfolio for 2020 and 2019 year and corrected any discrepancies identified. As a result, amounts disclosed in the table were amended to reflect more accurate results. As of 31 December 2021 the Group had 188 borrowers (2020: 157 borrowers; 2019: 125 borrowers) with aggregated gross loan amounts above GEL 10,000 thousand. The total aggregated amount of these loans was GEL 5,017,758 thousand (2020: GEL 4,562,506 thousand; 2019: GEL 3,669,817 thousand) or 29.6% of the gross loan portfolio (2020: 30.0%; 2019: 29.0%). The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. There are three key types of collateral: • Real estate; • Movable property including fixed assets, inventory and precious metals; • Financial assets including deposits, shares, and third party guarantees. The financial effect of collateral is presented by disclosing the collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed the assets’ carrying value (“over-collateralised as- sets”) and (ii) those assets where collateral and other credit enhancements are less than the assets’ carrying value (“under-collateralised assets”). 181 TBC BANK FINANCIAL STATEMENTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The effect of collateral as at 31 December 2021: in thousands of GEL Corporate loans Consumer loans Mortgage loans Loans to micro, small and mediumenterprises Total Over-collateralised Assets Under-collateralised Assets 31 December 2021 Carrying value of the assets 3,929,725 648,355 3,672,323 3,098,087 Fair value of collateral 8,578,057 3,117,799 9,877,124 7,035,782 Carrying value of the assets Fair value of collateral 2,618,016 1,504,711 440,118 1,043,218 878,667 23,910 156,248 419,978 11,348,490 28,608,762 5,606,063 1,478,803 The effect of collateral as at 31 December 2020: Over-collateralised Assets Under-collateralised Assets 31 December 2020 in thousands of GEL Corporate loans Consumer loans Mortgage loans Loans to micro, small and medium enterprises Carrying value of the assets 4,603,143 869,317 3,703,164 3,114,829 Fair value of collateral 9,630,768 2,231,778 7,915,172 7,102,534 Carrying value of the assets Fair value of collateral 1,087,606 1,142,268 238,938 441,250 477,701 20,474 158,292 157,047 813,514 Total 12,290,453 26,880,252 2,910,062 The effect of collateral as at 31 December 2019: in thousands of GEL Corporate loans Consumer loans Mortgage loans Loans to micro, small and medium enterprises Total 31 December 2019 Over-collateralised Assets Under-collateralised Assets Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral 3,682,456 950,847 2,949,426 2,579,002 10,161,731 8,481,849 2,232,728 6,171,802 5,983,285 978,017 933,159 219,771 369,277 310,419 37,658 107,183 164,979 22,869,664 2,500,224 620,239 As at 31 December 2021 loans and advances to customers which were 1. over-collateralised and 2. credit loss allow- ance was 0, amounted to GEL 1,576,220 thousand (2020: GEL 1,694,328 thousand, 2019: GEL 965,978 thousand). 182 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The effect of collateral by classes as at 31 December 2021 1: Over-collateralised Assets Under-collateralised Assets 31 December 2021 in thousands of GEL Cash Cover Gold Inventory Real Estate Unsecured and secured solely by third party guarantees Carrying value of the assets 271,396 91,525 331,047 10,654,522 - Fair value of collateral 310,681 115,404 1,313,628 26,869,049 - Carrying value of the assets Fair value of collateral 207,788 15,917 253,934 1,861,299 3,267,125 147,871 15,657 138,523 1,176,752 - Total 11,348,490 28,608,762 5,606,063 1,478,803 The effect of collateral by classes as at 31 December 2020: in thousands of GEL Cash Cover Gold Inventory Other Real Estate Unsecured and secured solely by third party guarantees Total 31 December 2020 Over-collateralised Assets Under-collateralised Assets Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral 332,438 115,139 753,658 137,749 10,697,040 254,429 12,290,453 358,847 158,008 2,149,849 849,249 23,217,956 146,343 26,880,252 12,937 37,856 24,536 7,960 428,092 2,398,681 2,910,062 39,109 37,946 24,498 20,313 395,398 296,250 813,514 The effect of collateral by classes as at 31 December 2019: in thousands of GEL Cash Cover Gold Inventory Other Real Estate Unsecured and secured solely by third party guarantees Total 31 December 2019 Over-collateralised Assets Under-collateralised Assets Carrying value of the assets Fair value of collateral Carrying value of the assets Fair value of collateral 309,228 140,627 794,209 146,762 8,435,227 335,678 10,161,731 333,329 174,531 2,221,293 1,256,843 18,547,991 335,677 22,869,664 25,299 49,118 33,916 8,558 225,511 2,157,822 2,500,224 35,507 66,943 33,740 11,361 212,902 259,786 620,239 1 In 2020 and 2019 annual financial statements third party guarantees and unsecured loans were separately presented. 183 TBC BANK FINANCIAL STATEMENTS 2021 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The financial effect of collateral is determined by comparing the fair value of collateral to outstanding gross loans and advances in the reporting date. Stage 3 loans presented by segments and collateral classes as at 31 December 2021 are the following: 31 December 2021 in thousands of GEL Cash Cover Gold Inventory Real Estate Unsecured and secured solely by third party guarantees Total Corporate Consumer Mortgage 19 - 8,359 62,463 20,908 91,749 6 - - 32,281 53,471 85,758 13 - - 117,443 5,771 123,227 Loans to micro, small and medium enterprises 267 294 527 189,533 17,503 208,124 Stage 3 loans presented by segments and collateral classes as at 31 December 2020 are the following: 31 December 2020 in thousands of GEL Corporate Consumer Mortgage Cash Cover Gold Inventory Other Real Estate Unsecured and secured solely by third party guarantees Total 21 - 15,991 - 97,824 47,592 161,428 36 1,717 8,909 - 65,645 111,423 187,730 38 - 185 - 273,577 5,926 279,726 Loans to micro, small and medium enterprises 47 430 4,250 54 231,925 26,240 262,946 Stage 3 loans presented by segments and collateral classes as at 31 December 2019 are the following: 31 December 2019 in thousands of GEL Corporate Consumer Mortgage Cash Cover Gold Inventory Other Real Estate Unsecured and secured solely by third party guarantees Total 18 - 9,675 1,245 92,652 17,789 121,379 89 1,289 4,819 - 29,084 38,646 73,927 78 - 13 - 61,918 2,293 64,302 Loans to micro, small and medium enterprises 724 400 1,702 50 82,511 7,932 93,319 184 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 9. LOANS AND ADVANCES TO CUSTOMERS CONTINUED The gross carrying amount of loans by stages that have been modified since initial recognition at a time when the loss allowance was measured at an amount equal to lifetime expected credit losses and for which the loss allowance has changed during the reporting period to an amount equal to 12-month expected credit losses loans are the following: in thousands of GEL Stage 1 Stage 2 Stage 3 Total 2021 487,742 431,160 50,792 969,694 2020 737,197 1,602,759 293,205 2,633,161 2019 119,637 82,754 25,513 227,904 At the central level a specific unit manages collateral to ensure that they serve as an adequate mitigation for credit risk management purposes. In line with the Group’s internal policies, collateral provided to loans are evaluated by the Internal Appraisal Group (external reviewers are used in case of loans to related parties or specific cases when complex objects are appraised). The Internal Appraisal Group is part of the collateral management unit and, in order to ensure adequate and objective appraisal procedures, it is independent from the loan granting process. Real estate collateral of significant value is re-evaluated annually by internal appraisers. Statistical methods are used to monitor the value of real estate collateral that are of non-significant value and other types of collateral such as movable assets and precious metals. In some instances, where the discounted recovery from the liquidation of collateral (adjusted for the liquidity haircut and discounted for the period of expected workout time) is larger than the estimated exposure at default, no credit loss allowance is recognised. Collateral values include the contractual price of third-party guarantees, which, due to their nature, are capped at the loan’s carrying value. The values of third-party guarantees in the tables above amounted to GEL 857,891 thou- sand, GEL 564,701 thousand and GEL 595,464 thousand as of 31 December 2021, 2020 and 2019, respectively. These third-party guarantees are not taken into consideration when assessing the impairment allowance. Refer to Note 42 for the estimated fair value of each class of loans and advances to customers. Interest rate analysis of loans and ad- vances to customers is disclosed in Note 37. Information on related party balances is disclosed in Note 44. For the year ended 31 December 2021 amortised cost of loans with lifetime ECL immediately before contractual mod- ification that was not a derecognition event was GEL 2,110,117 thousand (31 December 2020: GEL 2,805,274 thousand; 31 December 2019: GEL 520,916 thousand). During 2021, gains less losses recognised in profit or loss on modifications of loans with lifetime ECL that did not lead to derecognition was GEL 205 thousand (2020: GEL 10,411 thousand, 2019: GEL 978 thousand). For the year ended 31 December 2021 gross carrying amount of loans that were contractually modified (without derecognition) in the past when measured at lifetime ECL and which were reclassified to Stage 1 (12 months ECL) during the current year was GEL 994,526 thousand (31 December 2020: GEL 2,219,539 thousand; 31 December 2019: GEL 384,174 thousand). 185 TBC BANK FINANCIAL STATEMENTS 202110. INVESTMENT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME in thousands of GEL Corporate bonds Ministry of Finance of Georgia treasury bills Ministry of Finance of Uzbekistan treasury bills Certificates of deposit of the National Bank of Georgia Less: credit loss allowance by stages Stage 1 Stage 2 Stage 3 2021 707,253 1,231,024 1,683 - (2,818) (2,818) - - 2020 666,133 839,839 1,951 21,687 (3,258) (3,258) - - 2019 611,694 330,096 1,596 40,346 (1,438) (1,438) - - Total investment securities measured at fair value through other comprehensive income before corporate shares 1,937,142 1,526,352 982,294 Corporate shares – unquoted 1,054 916 2,999 Total investment securities measured at fair value through other comprehensive income 1,938,196 1,527,268 985,293 All debt securities in 2021, 2020 and 2019 except for corporate bonds and Uzbekistan treasury bills are issued by the Government of Georgia and National Bank of Georgia. Country rating for Georgia stands at BB with stable outlook (as assigned by Fitch rating agency in August 2021). Latest country rating for Uzbekistan stands at BB-. 70.2% of corporate bonds are issued by triple A rated international financial institutions, 0.4% of corporate bonds are issued by BB- rated international financial institutions,13.2% of corporate bond are issued at B+ rating, 15.0% of cor- porate bonds are issued by B and 1.2% by B- rated corporations. The investees have not published recent financial information about their operations, their shares are not quoted and recent trade prices are not publicly accessible. The Group designated investments in corporate shares disclosed in the above table as equity securities at FVOCI. The FVOCI designation was made because the investments are expected to be held for strategic purposes rather than with a view to profit on a subsequent sale, and there are no plans to dispose of these investments in the short or medium term. As at 31 December 2021 investment securities measured at fair value through other comprehensive income carried at GEL 383,790 thousand have been pledged with local banks or financial institutions as a collateral with respect to other borrowed funds (2020: GEL 699,483 thousand; 2019: GEL 696,961 thousand). Refer to Note 19. As at 31 December 2021 the principal equity investment securities measured at fair value through other comprehen- sive income are as follows: in thousands of GEL Nature of business Country of registration GRDC Property development Georgian Stock Exchange Stock exchange Other Total corporate shares Various Netherlands Antilles Georgia Various 2021 365 – 689 1,054 2020 365 – 551 916 2019 365 2,111 523 2,999 186 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED10. INVESTMENT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME CONTINUED The movements in investment securities measured at fair value through other comprehensive income are as follows: in thousands of GEL 2021 2020 2019 Carrying amount as of 31 December 2020 Transfer from investment securities measured at amortised cost due to changes in business model1 Revaluation at transfer date Carrying amount as of 1 January Purchases Disposals Redemption at maturity Revaluation Interest income accrued Interest income received Effect of translation to presentation currency Transfer to investment in associate Change in credit loss allowance Carrying amount as of 31 December 11. BONDS CARRIED AT AMORTISED COST in thousands of GEL Ministry of Finance of Georgia treasury bills Total gross amount of bonds carried at amortised cost Less: credit loss allowance Stage 1 Stage 2 Stage 3 Total bonds carried at amortised cost 1,527,268 1,059,946 26,062 2,613,276 797,285 (1,025,775) (412,204) (45,696) 185,424 (169,068) (5,486) - 440 - - - - - - 985,293 763,530 (92,103) 1,005,239 1,781,817 (213,362) (165,632) (1,598,534) 17,633 103,516 (93,493) 11,825 (1,481) (1,820) (15,156) 74,043 (58,539) 10,087 – (302) 1,938,196 1,527,268 985,293 29 2021 - - - - - - - 2020 1,062,111 1,062,111 (2,165) (2,165) - - 2019 1,023,474 1,023,474 (1,906) (1,906) - - 1,059,946 1,021,568 1 Refer to note 2 for detailed explanation of changes in business model 187 TBC BANK FINANCIAL STATEMENTS 2021 11. BONDS CARRIED AT AMORTISED COST CONTINUED The movements in bonds carried at amortised cost are as follows: in thousands of GEL Carrying amount as of 31 December 2020 Transfer from investment securities measured at amortised cost due to changes in business model1 Movement in credit loss allowance due to changes in business model Carrying amount at 1 January Disposals Purchases Redemption at maturity Interest income accrual Interest income received Effect of translation to presentation currency Change in credit loss allowance Carrying amount as of 31 December 2021 1,059,946 (1,062,113) 2,167 - - - - - - - - - 2020 2019 - - - 1,021,568 (195,814) 639,825 (413,038) 95,888 (88,224) – (259) - - - 653,703 (27,241) 613,383 (216,674) 58,597 (59,222) 13 (991) 1,059,946 1,021,568 For the disclosure of bonds’ fair value carried at amortised cost refer to Note 42. An analysis on interest rate for bonds carried at amortised cost is disclosed in Note 37. As at 31 December 2021 none of the bonds carried at amortised cost have been pledged to local banks or financial institutions as collateral with respect to other borrowed funds (2020: GEL 843,303 thousand; 2019: GEL 579,142 thou- sand). Refer to Note 19. None of the bonds carried at amortised cost as at 31 December 2021, 2020 and 2019 were either overdue or defaulted. 12. OTHER FINANCIAL ASSETS in thousands of GEL Derivative financial assets Receivables from sales of non-financial assets Receivables on credit card services and money transfers Receivable on terminated leases Advance to promotional service provider Receivables from plastic card service providers Investment held at fair value through profit or loss Receivables on guarantees / letters of credit Trade receivable Leasing assets receivables Rental income receivables Other Total gross amount of other financial assets Less: Credit loss allowance Total other financial assets 188 2021 199,233 72,650 62,881 46,346 17,681 14,472 11,125 9,766 6,827 2,073 1,349 49,611 494,014 (51,807) 442,207 2020 30,783 19,962 25,227 23,207 15,766 - 17,239 1,943 3,562 2,266 3,243 58,832 202,030 (41,028) 161,002 2019 5,849 32,844 21,895 21,837 14,055 - - 1,695 4,420 3,866 2,833 36,784 146,078 (30,867) 115,211 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED12. OTHER FINANCIAL ASSETS CONTINUED As at 31 December 2021, 2020 and 2019, presentation of other financial assets gross carrying amount, except insur- ance and reinsurance receivables and credit loss allowance by IFRS 9 stages is as follows: Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 184,241 634 17,155 202,030 28,860 – 12,168 41,028 (2,913) 3,125 (212) (56,547) - 56,547 118 (10) (108) - - - (1,609) 1,609 - (32,325) - 32,325 288,584 - - 288,584 13,197 (27,988) 31,838 (196) 306 (646) (129) (2,148) (30,332) (305) 3,135 (772) 35,279 (1,547) - (31) (2,867) (3,172) - - (37) (3,470) (3,538) - - - - - - - - 13,197 - - - - - - (3,832) 134 7,990 4,292 Other financial assets in thousands of GEL At 1 January 2021 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Changes to ECL measurement model assumptions At 31 December 2021 416,687 3,730 73,597 494,014 3,955 1,706 46,146 51,807 1 Refer to note 2 for detailed explanation of changes in business model 189 TBC BANK FINANCIAL STATEMENTS 202112. OTHER FINANCIAL ASSETS CONTINUED Other financial assets in thousands of GEL At 1 January 2020 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments* Foreign exchange movements* Changes to ECL measurement model assumptions* Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 129,539 25 16,514 146,078 18,207 12,656 30,869 (751) 751 – (484) – 484 60 (10) (50) – – – 145,179 – – 145,179 10,106 (97,574) (6) (1,989) (99,569) (401) 7,747 525 (111) (15) 1,937 259 9,573 769 – – – – – 103 845 6 1 – (1) (4) 5 (4) (1) – 4 – – – – (1) – – (2) – – 10,106 (1,848) (2,250) – 153 – 256 1,204 2,047 12,168 41,028 At 31 December 2020 184,241 634 17,155 202,030 28,860 *Management has re-visited the logic for disclosing the movement between stages for 2020 and corrected any discrepancies identified. As a result, amounts disclosed in net repayments, foreign exchange movements and changes to ECL measurement model assumptions were amended to reflect more accurate results. 190 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12. OTHER FINANCIAL ASSETS CONTINUED Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 134,977 74 47,302 182,353 13,145 14 14,935 28,094 (21) 23 (55) (15) (2) 70 47 (47) – – – – (4) 4 (1) (15) 4 (4) – 16 – – – – 105,754 – – 105,754 21,675 (115,851) (11) (30,852) (146,714) (16,644) 4,565 – (1,134) 123 – 1 – 3,431 1,254 1,130 – – – – 31 – 13 – – – 21,675 (2,255) (18,886) – – – – (6) (41) (16) Other financial assets in thousands of GEL At 1 January 2019 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Changes to ECL measurement model assumptions At 31 December 2019 129,539 25 16,514 146,078 18,206 6 12,655 30,867 The credit quality of Other Financial Assets is as follows at 31 December 2021: in thousands of GEL Other Financial Assets risk category – Very low – Low – Moderate – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2021 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 416,310 280 97 - 416,687 (3,955) 412,732 - 3,583 147 - 3,730 (1,706) 2,024 - - - 73,597 73,597 (46,146) 27,451 Total 416,310 3,863 244 73,597 494,014 (51,807) 442,207 191 TBC BANK FINANCIAL STATEMENTS 202112. OTHER FINANCIAL ASSETS CONTINUED The credit quality of Other Financial Assets is as follows at 31 December 2020: in thousands of GEL Other Financial Assets risk category – Very low – Low – Moderate – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2020 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 183,894 261 86 – 184,241 (28,860) 155,381 – 10 624 – 634 – 634 – – – 17,155 17,155 (12,168) 4,987 The credit quality of Other Financial Assets is as follows at 31 December 2019: in thousands of GEL Other Financial Assets risk category – Very low – Low – Moderate – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2019 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 129,218 234 87 – 129,539 (18,206) 111,333 1 1 23 – 25 (6) 19 – – – 16,514 16,514 (12,655) 3,859 Total 183,894 271 710 17,155 202,030 (41,028) 161,002 Total 129,219 235 110 16,514 146,078 (30,867) 115,211 Impaired receivables include receivables on terminated leases and other receivables for which credit loss allowance was assessed individually. Receivable’s overdue status is a primary factor for the Group to consider a receivable as impaired. As of 31 December 2021 GEL 464,953 thousand of gross other financial assets and GEL 22,648 thousand of credit loss allowance were attributable to the Bank (2020: GEL 193,220 thousand and GEL 20,145 thousand; 2019: GEL 133,153 thousand and GEL 13,559 thousand). 192 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED13. FINANCE LEASE RECEIVABLES As at 31 December 2021 finance lease receivables of GEL 262,046 thousand (2020: GEL 271,660 thousand; 2019: GEL 256,660 thousand) are represented by leases of fixed assets excluding land and buildings. Finance lease payments receivable (gross investment in the leases) and their present values are as follows: in thousands of GEL Lease payments receivable at the end of 2021 Unearned finance income Credit loss allowance Present value of lease payments receivable as at 31 December 2021 Lease payments receivable at the end of 2020 Unearned finance income Credit loss allowance Present value of lease payments receivable as at 31 December 2020 Lease payments receivable at the end of 2019 Unearned finance income Credit loss allowance * For fair values refer to Note 42. Present value of lease payments receivable as at 31 December 2019 Due in 1 year Due between 1 and 2 year Due between 2 and 3 year Due between 3 and 4 year Due between 4 and 5 year Due in 5 year or more Total 129,836 98,520 55,544 28,065 11,848 6,868 330,681 (32,106) (3,698) (19,805) (3,144) (9,777) (1,769) (4,332) (699) (1,460) (304) (1,078) (169) (68,558) (9,783) 94,032 75,571 43,998 23,034 10,084 5,621 252,340 132,984 102,136 65,085 31,307 13,922 7,662 353,096 (32,916) (4,794) (20,745) (1,829) (10,906) (1,886) (4,656) (928) (1,712) (425) (986) (335) (71,921) (10,197) 95,274 79,562 52,293 25,723 11,785 6,341 270,978 147,959 97,959 55,978 25,236 9,333 4,637 (41,969) (1,430) (23,467) (492) (10,470) (475) (3,914) (222) (1,089) (86) (748) (80) 341,102 (81,657) (2,785) 104,560 74,000 45,033 21,100 8,158 3,809 256,660 The table below illustrates the movements in the credit loss allowance of finance lease receivables: in thousands of GEL Credit loss allowance at the beginning of the year Amounts written off during the year as uncollectible Credit loss allowance/(reversal of loss allowance) during the year Credit loss allowance at the end of the year 2021 10,197 (178) (236) 9,783 2020 2,785 (348) 7,760 10,197 2019 3,602 (235) (582) 2,785 193 TBC BANK FINANCIAL STATEMENTS 202113. FINANCE LEASE RECEIVABLES CONTINUED The following table discloses the changes in the credit loss allowance and gross carrying amount for finance lease receivables between the beginning and the end of the reporting period: Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 171,152 60,769 49,254 281,175 2,914 3,419 3,864 10,197 (27,924) 30,085 (2,161) (9,135) (1,952) 11,087 47,278 (38,439) (8,839) - - - (181) 193 (12) (83) (107) 190 1,318 (1,042) (276) - - - 109,604 9,178 2,456 121,238 1,589 2,374 559 4,522 (58,654) (11,429) (21,386) (91,469) (955) (597) (3,398) (4,950) (36,612) (4,109) (4,847) (45,568) (3,110) (1,353) (1,096) (5,559) (1,832) 977 3,161 2,306 - - - (42) - (42) - - - - (1,843) (738) 2,794 (61) (103) - (54) - (96) 213 in thousands of GEL At 1 January 2021 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Other movements Changes due to change in credit quality At 31 December 2021 190,767 43,727 27,629 262,123 2,759 3,418 3,606 9,783 194 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED13. FINANCE LEASE RECEIVABLES CONTINUED As restated Gross carrying amount Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Credit loss allowance Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 205,615 23,799 30,031 259,445 1,999 96 690 2,785 (42,299) 44,590 (2,291) (26,393) (1,642) 28,035 5,615 (4,945) (670) - - - (330) 415 (85) (624) (22) 646 14 (14) - - - - 85,964 18,654 10,101 114,719 1,258 509 432 2,199 (40,360) (13,560) (11,171) (65,091) (331) (63) (323) (717) (22,860) (9,575) (8,476) (40,911) 7,306 3,405 3,559 14,270 (1,436) - 43 - 136 (1,257) - - - 4 (83) 1,007 - 22 59 - 348 (4) - 374 (28) 2,417 2,160 5,584 in thousands of GEL At 1 January 2020 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2)* – to defaulted (from Stage 1 and Stage 2 to Stage 3)* – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1)* New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Other movements Changes due to change in credit quality At 31 December 2020 171,152 60,769 49,254 281,175 2,914 3,419 3,864 10,197 * Management has re-visited the logic for disclosing the movement between stages for 2020 and corrected any discrepancies identified. As a result, amounts disclosed in transfers between stages were amended to reflect more accurate results. As previously reported Gross carrying amount Credit loss allowance in thousands of GEL At 1 January 2020 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Other movements Partial repayment Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 205,532 23,799 30,031 259,362 96 690 2,785 Total 2,785 5,615 (4,945) (669) (41,908) 44,590 (2,290) - 391 14 (13) - - (121) 415 (85) 209 (26,117) (1,642) 28,035 276 (472) (23) 646 152 85,964 18,654 10,101 114,719 (40,360) (13,560) (11,171) (65,091) 1,258 (331) 509 (63) 432 2,199 (323) (717) - - - - 1,007 2,417 2,160 5,584 6,723 3,405 3,558 13,685 (1,436) (22,860) 43 (9,575) 135 (8,476) (1,257) (40,911) (357) (83) - 22 59 - 348 (4) - 13 (28) - At 31 December 2020 174,716 64,210 43,575 282,502 3,103 3,787 3,956 10,845 195 TBC BANK FINANCIAL STATEMENTS 202113. FINANCE LEASE RECEIVABLES CONTINUED in thousands of GEL At 1 January 2019 Transfers: – to lifetime (from Stage 1 and Stage 3 to Stage 2) – to defaulted (from Stage 1 and Stage 2 to Stage 3) – to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) New originated or purchased Derecognised during the period Net repayments Foreign exchange movements Other movements Gross carrying amount Credit loss allowance Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Stage 1 (12-months ECL) Total Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) Total 178,171 10,861 18,372 207,404 2,045 205 1,352 3,602 (5,951) 6,598 (647) (22,099) (2,941) 25,040 4,968 (2,972) (1,996) – – – 138,634 18,663 5,836 163,133 1,319 (55,562) (4,849) (10,407) (70,818) (38,828) (2,253) (9,448) (50,529) 2,622 3,660 170 522 1,022 2,259 3,814 6,441 (858) (467) – – (14) 14 (27) (65) 1 (1) 89 – 92 – – – – 81 1,489 (154) (1,536) (2,548) 8 – – 96 701 242 – – – – 690 2,785 At 31 December 2019 205,615 23,799 30,031 259,445 1,999 All clients from Covid-19 affected sectors, which is in turn determined by TBC Leasing’s credit risk department, using sector forecasts derived by Group’s macro economists’ team, where these sectors show significant declines, are moved to stage 2 unless obviously they fall in stage 3. Also restructurings that where categorized as good before grace period, are not removed from stage 2 pool because of application of grace period. Compared to 2020 year end, the need for overlays decreased. the group has more clarity related to the repayment capacity of it’s borrowers as and majority of the borrowers resumed payments after graces. As at 31 December 2021, credit quality of finance lease receivables is analysed below: in thousands of GEL Finance lease receivables risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2021 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 161,019 29,748 - - - 190,767 (2,759) 188,008 4,397 8,993 15,797 14,540 - 43,727 (3,418) 40,309 - - - - 27,629 27,629 (3,606) 24,023 Total 165,416 38,741 15,797 14,540 27,629 262,123 (9,783) 252,340 196 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED13. FINANCE LEASE RECEIVABLES CONTINUED As at 31 December 2020, credit quality of finance lease receivables is analysed below: in thousands of GEL Finance lease receivables risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2020 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 152,660 18,492 – – – 171,152 (2,914) 168,238 423 55,260 4,737 349 – 60,769 (3,419) 57,350 – – – – 49,254 49,254 (3,864) 45,390 As at 31 December 2019, credit quality of finance lease receivables is analysed below: in thousands of GEL Finance lease receivables risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2019 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for de- faulted) 175,468 30,147 – – – 205,615 (1,999) 203,616 – 13,688 6,361 3,750 – 23,799 (96) 23,703 – – – – 30,031 30,031 (690) 29,341 Total 153,083 73,752 4,737 349 49,254 281,175 (10,197) 270,978 Total 175,468 43,835 6,361 3,750 30,031 259,445 (2,785) 256,660 The effect of collateral as at 31 December 2021: Over-collateralised Assets Under-collateralised Assets 31 December 2021 in thousands of GEL Finance lease receivables Total Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral 221,676 221,676 366,792 366,792 40,447 40,447 31,842 31,842 The effect of collateral as at 31 December 2020: 31 December 2020 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Finance lease receivables Total Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral 218,272 218,272 362,426 362,426 62,903 62,903 51,783 51,783 197 TBC BANK FINANCIAL STATEMENTS 2021 13. FINANCE LEASE RECEIVABLES CONTINUED The effect of collateral as at 31 December 2019: 31 December 2019 Over-collateralised Assets Under-collateralised Assets in thousands of GEL Finance lease receivables Total Gross carrying value of the assets Fair value of collateral Gross carrying value of the assets Fair value of collateral 228,651 228,651 365,934 365,934 30,794 30,794 22,292 22,292 14. OTHER ASSETS in thousands of GEL Current other assets Repossessed collateral Prepayments for other assets Prepayments for purchase of leasing 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 2021 2020 2019 255,785 54,730 28,829 8,203 6,624 354,171 10,224 5,229 2,380 120 1,768 19,721 373,892 174,197 39,970 11,450 7,103 2,412 235,132 8,619 7,525 3,461 157 1,752 21,514 256,646 152,134 33,106 31,417 5,016 2,880 224,553 6,321 10,248 3,287 190 2,602 22,648 247,201 Repossessed collateral represents real estate assets acquired by the Group in settlement of overdue loans. The Group expects to dispose of the assets in the foreseeable future. The assets do not meet the definition of non-current assets held for sale and are classified as inventories in accordance with IAS 2 “Inventories”. The assets were initially recognised at fair value when acquired. In 2021, collateral repossessed for settlement of impaired loans amounted to GEL 131,917 thousand (2020: GEL 51,043 thousand; 2019: GEL 78,945 thousand). As at 31 December 2021 repossessed collateral of the bank before impairment is comprised of lands to GEL 12,475 thousand and buildings to GEL 245,875 thousand. (2020: GEL 10,790 thousand and GEL 165,403 thousand, 2019: GEL 15,905 thousand and GEL 142,018 thousand). With regards to certain repossessed collateral, the Group has granted previous owners a right to repurchase the re- possessed collateral 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 24 months from the repossession date, during this time the repossessed collateral may not be disposed to third parties. In some cases prolongation of repurchase right is offered to the own- ers of the property. As at 31 December 2021, the carrying value of the repossessed collateral subjected to the repur- chase agreement was GEL 124,687 thousand (2020: GEL 26,309 thousand; 2019: GEL 62,578 thousand). 198 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 15. PREMISES, EQUIPMENT AND INTANGIBLE ASSETS in thousands of GEL Carrying amount as of 1 January 2019 Cost as at 1 January 2019 Accumulated depreciation/amortisation including accumulated impairment loss Additions Transfers within premises and equipment Transfers from investment property Transfer to financial leases or repossessed assets Disposals Effect of translation to presentation currency - cost Effect of translation to presentation currency - accumulated depreciation Impairment reversal/(charge) Depreciation/amortisation charge Elimination of accumulated depreciation/ amortisation on disposals Carrying amount as of 31 December 2019 Cost as at 31 December 2019 Accumulated depreciation/amortisation including accumulated impairment loss Additions Transfer within premises and equipment Disposals Effect of translation to presentation currency - cost Effect of translation to presentation currency - accumulated depreciation Impairment charge Depreciation/amortisation charge Elimination of accumulated depreciation/ amortisation on disposals Transfer to Inventory Transfer to right of use assets Carrying amount as of 31 December 2020 Cost as at 31 December 2020 Accumulated depreciation/amortisation including accumulated impairment loss Additions Transfers within premises and equipment Disposals Effect of translation to presentation currency - cost Effect of translation to presentation currency - accumulated depreciation Impairment (charge)/reversal Depreciation/amortisation charge Elimination of accumulated depreciation/ amortisation on disposals Carrying amount as of 31 December 2021 Cost as at 31 December 2021 Accumulated depreciation/amortisation including accumulated impairment loss Land, premises and leasehold improvements Office and other equipment* Construction in progress Total premises and equipment Intangible assets Total 162,429 201,740 87,921 214,516 63,719 63,719 314,069 479,975 108,505 164,705 422,574 644,680 (39,311) (126,595) - (165,906) (56,200) (222,106) 3,897 3,597 - - (5,498) 48 (48) - 25,061 36 - (1,439) (11,345) 75 (45) 43 (5,399) (22,352) 1,956 8,397 53,903 66,799 120,702 24,945 (3,633) 1,817 - 1,817 - (1,439) - - - - 1,817 (1,439) (4,647) (21,490) (479) (21,969) - - (6) - - 123 (93) 37 23 (25) - 146 (118) 37 (27,751) (16,281) (44,032) 10,353 567 10,920 160,982 203,784 86,352 226,947 82,195 82,195 329,529 512,926 159,109 231,048 488,638 743,974 (42,802) (140,595) - (183,397) (71,939) (255,336) 8,889 5,365 (2,901) 150 (139) (2,016) (5,159) 32,094 - (4,668) 170 (94) (1,204) (20,669) 406 5,222 (395) (2,842) 162,340 210,034 (39) (310) 96,854 252,990 26,934 (5,365) (95) - - - - - - - 67,917 87,885 155,802 - (7,664) 320 - (3) 49 - (7,667) 369 (233) (48) (281) (3,220) (25,828) (676) (22,742) (3,896) (48,570) 5,628 (434) (3,152) 3 - - 5,631 (434) (3,152) 103,669 103,669 362,863 566,693 223,577 318,303 586,440 884,996 (47,694) (156,136) - (203,830) (94,726) (298,556) 10,606 2,888 (12,312) (66) 52 (7,787) (5,346) 38,097 - (12,243) (68) 66 354 (19,823) 8,093 7,925 10,422 (2,888) (1,693) - - (483) - - 59,125 103,226 162,351 - - - (26,248) (30,080) (56,328) (134) 118 (7,916) (25,169) (23) 21 (92) (30,994) (157) 139 (8,008) (56,163) 16,018 1,771 17,789 158,468 203,363 111,162 279,130 109,027 109,027 378,657 591,520 267,406 391,334 646,063 982,854 (44,895) (167,968) - (212,863) (123,928) (336,791) *Office and other equipment include furniture and fixtures, computer and office equipment, motor vehicles as well as other equipment 199 TBC BANK FINANCIAL STATEMENTS 202115. PREMISES, EQUIPMENT AND INTANGIBLE ASSETS CONTINUED As of 31 December 2021 GEL 352,743 thousand of premises and equipment and GEL 249,356 thousand of intangible assets were attributable to the Bank (2020: 335,124 thousand and GEL 210,602 thousand; 2019: GEL 302,190 thousand and GEL 152,393 thousand). On 10 August 2021, the Bank entered into a sale agreement to dispose of Space platform, which carried out the Group’s digital banking operations. The disposal was effected in order to support the Groups plan for further expan- sion. The disposal was completed on 10 August 2021, on which date control of Space platform passed to the Space International JSC (subsidiary of TBC Bank Group PLC). The carrying value of the assets sold were GEL 24,615 thou- sand, which was sold for the consideration of GEL 24,615 thousand, having no effect on Group’s consolidated result, as far as, transaction happened between the two Group companies. On 18 June 2021, the Group sold land and buildings, where some of its back office functions is currently located, for cash consideration of USD 25 million. USD 5 million (GEL 16.5 million) has already been received, while the remaining USD 20 million (GEL 63.2 million) will be received until 30 April 2022. Selling of those assets was part of the Group’s plan to gradually prepare for relocation to new headquarter, which is in the process of construction. Under the ex- isting plan the Group will gradually discharge the occupied part of the buildings up until 30 April 2022 and staff will be distributed to existing offices before the new headquarter will be completed. During this period the property is being leased back using IFRS 16 exemption for short term leases. Net carrying amount of disposed properties was GEL 37,416 thousand, out of which net balance disposed from premises and equipment were GEL 5,442 thousand, while the remaining part was disposed from investment property (Note 17). Net gain on disposal from the sale was recognised as part of other operating income in the audited annual financial statements of profit or loss in the amount of GEL 26,294 thousand. The depreciation and amortisation charge presented on the face of the statement of profit or loss and other compre- hensive income include depreciation and amortisation charge of premises and equipment, investment properties and intangible assets. Construction in progress consists of construction and refurbishment of branch premises and the Bank’s new head- quarters. Upon completion, assets are to be transferred to premises. Land and premises of the bank before impairment comprised of land GEL 12,950 thousand and buildings GEL 188,906 thousand (2020: GEL 11,000 thousand and GEL 191,495 thousand, 2019: GEL 25,793 thousand and GEL 219,497 thou- sand) 16. RIGHT OF USE ASSETS The Group leases offices, branches and service centres. Rental contracts are typically made for fixed periods of 1 to 15 years. Leases are recognised as a right-of-use asset and a corresponding liability from the date when the leased asset be- comes available for use by the Group. The right of use assets by class of underlying items is analysed as follows: in thousands of GEL Carrying amount at 1 January Additions of new contracts Increases in value from substuntial changes in contractual terms Disposals Depreciation charge Carrying amount at 31 December 2021 Premises 2020 Premises 2019 Premises 49,746 5,650 17,549 (1,234) (13,710) 58,001 57,086 - 8,180 (955) (14,565) 49,746 60,232 16,571 - (7,340) (12,377) 57,086 The lease agreements do not impose any covenants, other than the security interests in the leased assets that are held by the lessor. Leased assets cannot be used as collateral for borrowings. Extension and termination options are included in a number of property leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of ex- tension and termination options held are exercisable only by the Group and not by the respective lessor. 200 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED16. RIGHT OF USE ASSETS CONTINUED Expenses relating to short-term leases and to leases of low-value assets that are not classified as short-term leases are included in administrative and other operating expenses: in thousands of GEL Expense relating to short-term leases Expense relating to leases of low-value assets 2021 5,325 7,112 2020 5,760 6,990 17. INVESTMENT PROPERTIES in thousands of GEL Cost as of 1 January Accumulated depreciation and impairment as of 1 January Carrying amount as of 1 January Transfer to premises and equipment Transfer from repossessed collateral Addition from foreclosure Disposals Depreciation charge Elimination of depreciation on disposal Impairment charge Cost as of 31 December Accumulated depreciation and impairment as of 31 December Carrying amount of investment properties as of 31 December 2019 7,388 6,154 2019 86,884 (2,588) 84,296 (1,817) 4,914 47 Note 15 2021 73,876 (5,187) 68,689 – 1,874 – 2020 76,521 (3,854) 72,667 – 10,367 – (42,524) (13,012) (13,507) (749) 1,022 (5,420) 33,226 (10,334) 22,892 (929) 159 (563) 73,876 (5,187) 68,689 (933) 717 (1,050) 76,521 (3,854) 72,667 In 2021, the Group disposed its certain investment properties, out of which most part accounted to the single sale described in Note 15. As of 31 December 2021, investment properties comprised of 44 lots (2020: 58 lots; 2019: 63 lots ) of land and 102 build- ings (2020: 111 buildings; 2019: 111 buildings). The investment property of the bank before impairment comprised of land GEL 4,834 thousand and buildings GEL 24,222 thousand (2020: GEL 26,703 thousand and GEL 42,723 thousand, 2019: GEL 32,630 thousand and GEL 39,558 thousand) located in Tbilisi and other regions of Georgia with the fair val- ue amounting to GEL 29,493 thousand (2020: GEL 120,959 thousand; 2019: GEL 123,325 thousand). For disclosure purposes a latest fair valuation exercise was carried out for investment properties as of 31 December 2021. The valuation was carried out by external valuators who hold a recognised and relevant professional qualifica- tion and who have recent experience in valuation of assets of similar location and category. In the process of compar- ison, they have used three comparative analogues (registered sale and/or offer for sale), in which prices were applied adjustments based on the difference between subject assets and analogues. The fair value of assets has been esti- mated by using the market and cost approaches due to the market situation, particularly based on a sufficient number of registered sales and proposals by the date of valuation. In thousands of GEL (except for range of inputs) Fair value as of 31 December 2021 (valuation date) Valuation technique Unobservable inputs Range of unobser-vable inputs (weighted average) Land Buildings 6,214 Sales comparison approach Price per square meter 0.23 – 1,736 (93) 23,279 Sales comparison approach Price per square meter 1.1 – 7,738 (971) Sensitivity of the input to fair value – increase/(decrease) in the price per square metre by 20% would result in in- crease/(decrease) in fair value by GEL 2,448 thousand/ (GEL 2,705 thousand). 201 TBC BANK FINANCIAL STATEMENTS 2021 17. INVESTMENT PROPERTIES CONTINUED Where the Group is the lessor, the future minimum lease payments receivable under non-cancellable operating leas- es, were as follows: in thousands of GEL Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than 5 years Total operating lease payments receivable 18. GOODWILL Movements in goodwill arising on the acquisition of subsidiaries are: in thousands of GEL Carrying amount as of 1 January Impairment loss Carrying amount as of 31 December Goodwill Impairment Test 2021 29 – – – – – 29 2020 82 – – – – – 82 2019 207 230 – – – – 437 2021 28,197 - 28,197 2020 29,459 (1,262) 28,197 2019 29,459 - 29,459 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 JSC Bank Republic Bank Republic Retail Bank Republic Corporate Bank Republic MSME Bank Republic Other LLC Bonaco CGU Micro JSC United Financial Corporation LLC TBC Kredit Total carrying amount of goodwill 2021 24,166 11,088 7,491 4,791 796 2,567 769 695 – 28,197 2020 24,166 11,088 7,491 4,791 796 2,567 769 695 – 2019 24,166 11,088 7,491 4,791 796 2,567 769 695 1,262 28,197 29,459 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 the management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. While assessing the Goodwill for potential impairment in 2020 the Group has identified goodwill generated from LLC TBC Kredit to be impaired. 202 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED18. GOODWILL CONTINUED Assumptions used for value-in-use calculations is following: in thousands of GEL JSC Bank Republic** Growth rate beyond five years of free cash flow to equity Pre-tax discount rate CGU Micro 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 LLC Bonaco Growth rate beyond five years of free cash flow to equity Pre-tax discount rate *p.a. means per annum. **Assumptions related to JSC Bank Republic are similar for all related CGU’s. 2021 2020 2019 5.2% p.a* 17.1% p.a. 5.2% p.a. 12.3% p.a. 5.2% p.a. 12.1% p.a. - - 5.2% p.a. 24.6% p.a. 5.2% p.a. 19.7% p.a. 5.2% p.a. 15.1% p.a. - - 5.2% p.a. 12.4% p.a. 5.2% p.a. 11.4% p.a. 4.6% p.a. 16.5% p.a. 4.6% p.a. 10.4% p.a. 4.6% p.a. 15.5% p.a. 2.7% p.a. 16.4% p.a. 4.6% p.a. 10.2% p.a. Pre-tax discount rate used for value-in-use calculations is the assumption to which the recoverable amount is most sensitive. The management determined the budgeted gross margin based on past performance and its market ex- pectations. The weighted average long term growth rates used are consistent with the forecasts included in the industry reports. The discount rates reflect specific risks related to the relevant CGUs. If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic Retail had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carry- ing value of goodwill or carrying value of net assets of the CGU. Recoverable amount of Bank Republic Retail CGU exceeds its carrying amount by GEL 2,269,542 thousand (2020: GEL 619,250 thousand; 2019: GEL 3,068,466 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 41.86% p.a. (2020: 35.49% p.a.; 2019: 39.87% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic Corporate had been 10 percentage points higher than the 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. Recoverable amount of Bank Republic Corporate CGU exceeds its carrying amount by GEL 1,744,639 thousand (2020: GEL 410,824 thousand; 2019: GEL 2,316,056 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 29.47% p.a. (2020: 30.87% p.a.; 2019: 36.34% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Bank Republic MSME had been 10 percentage points higher than the 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. Recoverable amount of Bank Republic MSME CGU exceeds its carrying amount by GEL 611,733 thousand (2020: GEL 389,641 thousand; 2019: GEL 1,210,045 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 28.41% p.a. (2020: 35.87% p.a.; 2019: 36.52% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of CGU Micro had been 10 per- centage points higher than the 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. Recoverable amount of CGU Micro exceeds its carrying amount by GEL 510,490 thousand (2020: GEL 370,815 thousand; 2019: GEL 732,567 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 29.62% p.a. (2020: 45.25% p.a.; 2019: 29.74% p.a.). 203 TBC BANK FINANCIAL STATEMENTS 2021 18. GOODWILL CONTINUED If the revised estimated pre-tax discount rate applied to the discounted cash flows of JSC United Financial Corpora- tion had been 10 percentage points higher than the management’s estimates, the Group would not need to reduce the carrying value of goodwill or carrying value of net assets of the CGU. Recoverable amount of JSC United Financial Corporation CGU exceeds its carrying amount by GEL 151,060 thousand (2020: GEL 23,116 thousand; 2019: GEL 8,222 thousand). The CGUs’ carrying amount would equal its value in use at a discount rate of 53.79% p.a. (2020: 24.23% p.a.; 2019: 19.53% p.a.). If the revised estimated pre-tax discount rate applied to the discounted cash flows of LLC Bonaco had been 10 per- centage points higher than the 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. Recoverable amount of LLC Bonaco CGU exceeds its car- rying amount by GEL 17,447 thousand (2020: GEL 116,174 thousand; 2019: GEL 500,031 thousand). The CGU’s carrying amount would equal its value in use at a discount rate of 37.49% p.a. (2020: 25.75% p.a. 2019: 49.45% p.a.). 19. DUE TO CREDIT INSTITUTIONS in thousands of GEL Due to other banks Correspondent accounts and overnight placements Deposits from banks Total due to other banks Other borrowed funds 2021 2020 2019 181,905 142,752 324,657 43,298* 97,496* 140,794 27,747* 139,267* 167,014 Borrowings from foreign banks and international financial institutions 1,653,245 2,370,656 2,005,900 Borrowing from Ministry of Finance of Georgia Borrowings from other financial institutions Borrowings from other local banks and financial institutions Borrowings from National Bank of Georgia Total other borrowed funds Total amounts due to credit institutions - - 24,754 981,419 2,659,418 2,984,075 - 58,948 32,185 1,883,290 4,345,079 4,485,873 536 41,456 62,916 1,316,079 3,426,887 3,593,901 * Management has re-visited the logic for disclosing the Due to other banks for 2020 and 2019 year and corrected any discrepancies identified. As a result, amounts disclosed in the table were amended to reflect more accurate results. As of 31 December 2021 for the purposes of maturity analysis of financial liabilities (Note 37) the above-mentioned due to other banks are included within the amounts for which repayment is expected within 3 months. 20. 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/settlement accounts Term deposits Total customer accounts 204 2021 2020 2019 577,020 364,121 4,865,920 932,480 4,444,586 3,700,018 14,884,145 504,019 590,426 3,512,078 763,035 3,487,017 3,777,720 12,634,295 616,397 298,177 3,161,526 363,217 2,712,910 2,959,775 10,112,002 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 20. CUSTOMER ACCOUNTS CONTINUED State and public organisations include government owned profit orientated businesses. Economic sector concen- trations within customer accounts are as follows: in thousands of GEL Individuals Trade Financial services Services Construction Energy & utilities Government sector Real estate Transportation Healthcare Hospitality & leisure Agriculture Metals and mining Other 31 December 2021 31 December 2020* 31 December 2019 Amount 8,144,604 1,237,807 1,226,110 718,050 598,856 542,425 480,046 418,062 403,249 194,648 155,778 78,810 32,675 653,025 % 55% 8% 8% 5% 4% 4% 3% 3% 3% 1% 1% 1% 0% 4% Amount 7,264,737 % 58% Amount 5,672,685 % 56% 873,995 771,510 526,227 610,321 384,660 647,856 323,547 332,850 131,936 99,770 58,005 18,458 590,423 7% 6% 4% 5% 3% 5% 3% 3% 1% 1% 0% 0% 4% 741,385 351,537 446,876 596,703 322,331 505,494 322,416 308,268 98,294 110,816 50,915 12,264 572,018 7% 3% 4% 6% 3% 5% 3% 3% 1% 1% 1% 0% 6% Total gross loans and advances to customers 14,884,145 100% 12,634,295 100% 10,112,002 100% *Management has re-visited the logic for disclosing the Economic sector risk concentrations within the customer accounts portfolio for 2020 year and corrected any discrepancies identified. As a result, amounts disclosed in the table were amended to reflect more accurate results. As of 31 December 2021 the Group had 141 customers (2020: 117 customers; 2019: 93 customers) with balances above GEL 10,000 thousand. Their aggregate balance was GEL 4,754,533 thousand (2020: GEL 3,898,678 thousand; 2019: GEL 2,872,119 thousand) or 32% of total customer accounts (2020: 31%; 2019: 28%). In 2020 and 2019 annual financial statements the above disclosure was measured using GEL 3,000 thousand threshold and number of customers us- ing respective threshold were 454 (GEL 5,630,143 thousand) and 361 (GEL 4,327,035 thousand). As of 31 December 2021 included in customer accounts are deposits of GEL 28,379 thousand and GEL 109,404 thou- sand (2020: GEL 4,903 thousand and GEL 94,348 thousand; 2019: GEL 9,555 thousand and GEL 101,615 thousand) held as collateral for irrevocable commitments under letters of credit and guarantees issued, respectively. The latter is discussed in Note 38. As of 31 December 2021, deposits held as collateral for loans to customers amounted to GEL 576,261 thousand (2020: GEL 512,637 thousand; 2019: 469,205 thousand). Refer to Note 42 for the disclosure of the fair value of each class of customer accounts. Information on related party balances is disclosed in Note 44. 205 TBC BANK FINANCIAL STATEMENTS 2021 21. DEBT SECURITIES IN ISSUE in thousands of GEL Bonds issued on Irish Stock Exchange Bonds issued on Irish Stock Exchange Bonds issued on Irish Stock Exchange Bonds issued on Georgian Stock Exchange Baku Stock Exchange CJSC Total debt securities in issue Carrying amount as of 31 December 2021 Currency Maturity Date Coupon rate Effective interest rate USD USD USD GEL AZN 918,504 6/19/2024 5.8% 392,840 228,174 38,532 5,649 1,583,699 10/3/2024 2/4/2027 10.8% 8.9% 3/20/2023 TIBR 3M+3.25% 12.0% 9/23/2023 6.4% 11.4% 9.9% 12.5% 12.4% in thousands of GEL Bonds issued on Irish Stock Exchange Bonds issued on Irish Stock Exchange Bonds issued on Georgian Stock Exchange Total debt securities in issue Currency USD USD GEL Carrying amount as of 31 December 2020 966,793 414,216 38,504 1,419,513 Carrying amount as of 31 December Coupon Maturity rate Date 5.8% 6/19/2024 10/3/2024 10.8% 3/20/2023 TIBR 3M+3.25% Effective interest rate 6.4% 11.4% 12.5% in thousands of GEL Bonds issued on Irish Stock Exchange Bonds issued on Irish Stock Exchange Total debt securities in issue Currency USD USD 2019 Maturity Date 6/19/2024 10/3/2024 842,471 371,127 Coupon rate 5.8% 10.8% 1,213,598 Effective interest rate 6.4% 11.4% On 28 October 2021, the Bank completed the transaction of USD 75 million 8.894% yield Additional Tier 1 Capital Perpetual Subordinated Notes issue (“AT1 Notes”) and successfully returned to the international capital markets. The AT1 Notes are listed on the regulated market of Euronext Dublin and are rated B- by Fitch. On 23 September 2021 the TBC Kredit completed the transaction of AZN 3 million 2-year 12% named, interest-baring, paperless, unsecured bonds issue (the “Notes”). On 20 March 2020, TBC Leasing with the help of TBC Capital placed senior secured bonds of amount GEL 58.4 million on the Georgian Stock Exchange. The percentage of securities is variable, 3.25% added to the 3-month Tbilisi Interbank Interest rate. Fitch rates the bonds ‘BB-‘. On 3 July 2019 the Bank completed the transaction of a debut inaugural USD 125 million 10.75% yield Additional Tier 1 Capital Perpetual Subordinated Notes issue (“AT1 Notes”). The AT1 Notes are listed on the regulated market of Euronext Dublin and are rated B- by Fitch. The AT1 Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the first dual-listed international offering of additional Tier 1 Capital Notes from Georgia. On 19 June 2019 the Bank completed the transaction of a debut USD 300 million 5-year 5.75% (6% yield) senior un- secured bonds issue. The Notes are listed on the regulated market of Euronext Dublin and are rated Ba2 by Moody’s and BB- by Fitch. The Notes have been simultaneously listed on JSC Georgian Stock Exchange, making it the first dual-listed international offering of senior unsecured Notes from Georgia. 206 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 22. PROVISION FOR PERFORMANCE GUARANTEES, CREDIT RELATED COMMITMENTS AND LIABILITIES AND CHARGES Movements in credit loss allowance for performance guarantees, credit related commitment and liabilities and charges are as follows: in thousands of GEL Balance as of 1 January 2019 Charges less releases recorded in profit or loss Utilization of provision Effect of translation to presentation currency Balance as of 31 December 2019 (Releases)/charges recorded in profit or loss Effect of translation to presentation currency Balance as of 31 December 2020 Charges/(releases) recorded in profit or loss Effect of translation to presentation currency Balance as of 31 December 2021 Performance guarantees 4,393 3,069 - 4 Credit related commitments 5,424 (913) - - 7,466 (3,568) 529 4,427 384 (191) 4,620 4,511 330 583 5,424 (1,588) (212) 3,624 Provision for other liabilities and charges 4,000 2,105 (1,104) - 5,001 2,600 - 7,601 - - 7,601 Total 13,817 4,261 (1,104) 4 16,978 (638) 1,112 17,452 (1,204) (403) 15,845 Credit related commitments and performance guarantees: Impairment allowance estimation methods differ for (i) letter of credits and guarantees and (ii) undrawn credit lines. For letter of credits and guarantees allowance estimation purposes the Group applies the staged approach and clas- sifies them in stage 1, stage 2 or stage 3. Significant stage 3 guarantees are assessed individually. Non-significant stage 3 as well as all stage 1 and stage 2 guarantees and letter of credits are assessed collectively using exposure, marginal probability of conversion, loss given default and discount factor. Amount of the expected allowance differs based on the classification of the facility in the respective stage. For impairment allowance assessment purposes for undrawn exposures the Group distinguishes between revocable and irrevocable loan commitments. For revocable commitments the Group does not create impairment allowance. As for the irrevocable undisbursed exposures the Group estimates utilization parameter (which represents expected limit utilization percentage conditional on the default event) in order to convert off-balance part of the exposure to on-balance. Once the respective on balance exposure is estimated, the Group applies the same impairment framework approach as the one used for the respective type of on balance exposures. 207 TBC BANK FINANCIAL STATEMENTS 202123. OTHER FINANCIAL LIABILITIES Other financial liabilities comprise the following: in thousands of GEL Debit or credit card payables Trade payables Liabilities to asset and service providers of finance leases Transfers in transit Derivative financial liabilities Liabilities related to co-financing of hotels and restaurants sectors Payable to deposit insurance agency Security deposits for finance lease receivables Prepayments related to guarantees Other accrued liabilities Total other financial liabilities Note 41 2021 28,963 27,307 18,295 15,136 10,216 1,638 1,033 906 516 16,610 120,620 2020 6,408 31,598 10,851 2,156 121,183* 13,771 930 91 1,152 23,102* 211,242 2019 13,259 21,223 25,923 - 20,440 315 549 1,171 879 11,884 95,643 *Management has revisited the classification of margin call deposits balance from one of forward exchange contracts, as far as, it does not represent the derivative instrument. To improve clarity and understandability of financial statements such deposit has been transferred from derivative financial liabilities in the amount of GEL 5,270 thousand to other accrued liabilities sub categories within other financial liability note. As of 31 December 2021 GEL 92,613 thousand of other financial liabilities were attributable to the Bank (2020: GEL 186,487 thousand; 2019: GEL 58,809 thousand). Refer to Note 42 for disclosure of the fair value of other financial liabilities. 24. 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 2021 45,984 17,046 13,075 7,518 83,623 2020 28,957 12,370 10,390 8,252 59,969 2019 42,017 11,669 11,161 5,519 70,366 All of the above liabilities are expected to be settled within twelve months after the year-end. 25. SUBORDINATED DEBT As of 31 December 2021, subordinated debt comprised of: in thousands of GEL Grant Date Maturity Date Currency Outstanding amount in original currency Outstanding amount in GEL Asian Developement Bank Private lenders Global Climate Partnership Fund European Fund for Southeast Europe Green for Growth Fund BlueOrchard Microfinance Fund BlueOrchard Microfinance Fund European Fund for Southeast Europe European Fund for Southeast Europe ResponsAbility SICAV (Lux) Micro and SME Finance Fund ResponsAbility SICAV (Lux) - Financial Inclusion Fund ResponsAbility SICAV (Lux) - Microfinance Leaders Total subordinated debt 10/18/2016 6/8/2017 11/20/2018 12/21/2018 12/18/2015 12/14/2018 12/14/2018 12/18/2015 3/15/2016 12/31/2026 12/19/2024 11/20/2028 12/21/2028 12/16/2030 12/15/2025 12/14/2028 12/16/2030 3/17/2031 11/30/2018 11/30/2028 11/30/2018 11/30/2018 11/30/2028 11/30/2028 USD USD USD USD USD USD USD USD USD USD USD USD 50,486 35,304 25,097 20,079 15,189 14,966 14,954 7,594 7,592 5,930 3,115 1,005 156,386 109,427 77,739 62,195 47,048 46,360 46,321 23,523 23,517 18,369 9,649 3,113 623,647 208 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 25. SUBORDINATED DEBT CONTINUED As of 31 December 2020, subordinated debt comprised of: in thousands of GEL Asian Developement Bank Private Lenders Global Climate Partnership Fund European Fund for Southeast Europe Green for Growth Fund BlueOrchard Microfinance Fund BlueOrchard Microfinance Fund Subordinated Bond (Private lender) European Fund for Southeast Europe European Fund for Southeast Europe ResponsAbility SICAV (Lux) Micro and SME Finance Fund ResponsAbility SICAV (Lux) - Financial Inclusion Fund KfW KfW Micro and SME Finance Leaders Total subordinated debt Grant Date Maturity Date Currency Outstanding amount in orig- inal currency Outstanding amount in GEL 10/18/2016 6/8/2017 11/20/2018 12/21/2018 12/18/2015 12/14/2018 12/14/2018 8/31/2018 12/18/2015 3/15/2016 12/31/2026 12/19/2024 11/20/2028 12/21/2028 12/18/2025 12/14/2025 12/14/2028 1/25/2023 12/18/2025 3/15/2026 11/30/2018 11/30/2028 11/30/2018 5/4/2015 6/10/2014 11/30/2018 11/30/2028 5/8/2021 5/8/2021 11/30/2028 USD USD USD USD USD USD USD USD USD USD USD USD GEL GEL USD 50,438 25,217 25,096 20,079 15,244 14,949 14,941 10,102 7,633 7,631 5,930 3,115 6,737 6,161 1,005 165,266 82,628 82,230 65,789 49,950 48,983 48,956 33,098 25,010 25,004 19,430 10,206 6,737 6,161 3,292 672,740 As of 31 December 2019, subordinated debt comprised of: in thousands of GEL Asian Developement Bank Private Lenders Global Climate Partnership Fund European Fund for Southeast Europe Green for Growth Fund BlueOrchard Microfinance Fund BlueOrchard Microfinance Fund Subordinated Bond (Private lender) European Fund for Southeast Europe European Fund for Southeast Europe ResponsAbility SICAV (Lux) Micro and SME Finance Fund ResponsAbility SICAV (Lux) - Financial Inclusion Fund KfW KfW Micro and SME Finance Leaders Total subordinated debt Grant Date Maturity Date Currency Outstand- ing amount in original currency Outstanding amount in GEL 10/18/2016 6/8/2017 11/20/2018 12/21/2018 12/18/2015 12/14/2018 12/14/2018 8/31/2018 12/18/2015 3/15/2016 11/30/2018 11/30/2018 5/4/2015 6/10/2014 11/30/2018 10/18/2026 12/19/2024 11/20/2028 12/21/2028 12/18/2025 12/14/2025 12/14/2028 1/25/2023 12/18/2025 3/15/2026 11/30/2028 11/30/2028 5/8/2021 5/8/2021 11/30/2028 USD USD USD USD USD USD USD USD USD USD USD USD GEL GEL USD 50,585 25,218 25,089 20,074 15,305 14,924 14,920 10,101 7,663 7,662 5,935 3,117 6,739 6,162 1,006 145,064 72,317 71,948 57,565 43,890 42,798 42,786 28,976 21,975 21,971 17,020 8,940 6,739 6,162 2,884 591,035 The subordinated debt ranks after all other creditors in case of liquidation. Refer to Note 42 for the disclosure of the fair value of subordinated debt. Information on related party balances is disclosed in Note 44. In the event of any liquidation and/or significant financial distress with respect to the Borrower, the Lender agrees that the claims of the Lender in respect of the principal of, and interest on, the Loan and all other amounts payable under this Agreement shall be subordinated and subject in right of payment to the prior payment of claims of depositors and unsecured creditors of the Borrower, except for claims which are themselves so subordinated. 209 TBC BANK FINANCIAL STATEMENTS 2021 25. SUBORDINATED DEBT CONTINUED Unless otherwise agreed with the Regulatory Authority, any voluntary or mandatory prepayment of the Loan or can- cellation of this Agreement can be made no earlier than five calendar years after the Disbursement Date of the Loan and shall require the prior written consent of the Regulatory Authority. The purpose of the Facility is to provide the Borrower with funding to be used by the Borrower as an instrument that qualifies as Tier 2 Capital to increase its lending capacity and to provide a capital cushion for the Borrower in accor- dance with the provisions of this Agreement. 26. SHARE CAPITAL in thousands of GEL As of 31 December 2019 As of 31 December 2020 As of 31 December 2021 Number of ordinary shares Share Capital 52,539,769 52,539,769 52,539,769 21,014 21,014 21,014 Each share has a nominal value of GEL 0.4 (31 December 2020: GEL 0.4 per share, 31 December 2019: GEL 0.4 per share). All issued ordinary shares are fully paid and entitled to dividends. in thousands of GEL Dividends payable at 1 January Dividends declared during the year Dividends paid during the year: Dividends payable at 31 December Dividends per share declared during the year 2021 Interim - 81,872 (81,872) - GEL 1.56 2020 - - - - - 2019 Ordinary - 80,911 (80,911) - GEL 1.54 On August 11, 2021, JSC TBC Bank’s shareholders agreed on a dividend of GEL 1.56 per share. The dividend was recorded on August 20, 2021 and on September 7, 2021 shareholders received the payment of the total GEL 81,872 thousand dividends. In 2020, taking into consideration the unprecedented uncertainty triggered by the COVID-19 outbreak, the Board of Directors has decided not to recommend a dividend. The decision was approved by shareholders of the Group. On 19 April 2019, at the annual general meeting JSC TBC Bank’s shareholders agreed on a dividend of GEL 1.54 per share, based on the 2018 audited financial statements. The dividend was recorded on 28 May 2019 and on 12 July 2019 shareholders received the payment of the total GEL 80,911 thousand dividends. 27. SHARE BASED PAYMENTS June 2015 arrangement: In June 2015, the Bank’s Supervisory Board approved management compensation scheme for the top and middle management which was enforced from 2015 through 2018. According to the scheme, each year, subject to predefined performance conditions, a certain number of shares were awarded to the Group’s top managers and most of the mid- dle ones. The performance features key performance indicators (KPIs) divided into (i) corporate and (ii) individual. The corporate KPIs are mainly related to achieving profitability, efficiency, and portfolio quality metrics set by the Board as well as non-financial indicators with regards to customers’ experience and employees’ engagement. The individual performance indicators are set on an individual basis and are used to calculate the number of shares to be awarded to each employee. According to the scheme, members of top management also received the fixed number of shares. Once awarded, all shares carry service conditions and, before those conditions are met, are eligible to dividends; however they cannot be sold or transferred to third parties. 210 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED27. SHARE BASED PAYMENTS CONTINUED Service conditions foresee continuous employment until the gradual transfer of the full title to the scheme partici- pants is complete. Shares for each of the 2015, 2016, 2017 and 2018 tranche gradually ran over on the second, third and fourth year following the performance appraisal. Eighty percent of the shares are vested in 3 years after being awarded. Under this compensation system the total vesting period extended to March 2022. In 2015 the Group considered 17 June as the grant date. Based on the management’s estimate of reached targets, as of 31 December 2015 1,908,960 shares were granted under the entire scheme of 2015-2018. The shares were gradually awarded to the members as per the described scheme. At the grant date the fair value amounted to GEL 24.64 per share, as quoted on the London Stock Exchange. Following the listing on the Premium segment of the London Stock Exchange, the share-based payment scheme re- mained conceptually the same and was only updated to reflect the Group’s new structure, whereby TBC Bank Group PLC distributed its shares to the scheme’s participants, instead of JSC TBC Bank. The respective shares’ value was recharged to JSC TBC Bank. As a result, the accounting of the scheme did not change in the financial statements. The share based payment scheme for middle management and other eligible employees continued under existing terms after 2018, except for vesting conditions that changed from 10%, 10%, 80% to 33%, 33%, 34% for the 3 year peri- od, starting from 2019. December 2018 arrangements: A new compensation system was approved by shareholders at the AGM on 21 May 2018 and came into effect on 1 January 2019 and it covered the period 2019-2021 inclusive. On 28 December 2018, the Board of Directors approved the following details for this new compensation schemes for the top management and the Group considered that as a grant date. All schemes are equity settled and accounted respectively. Deferred share salary plan Part of the top management salary is paid with shares with the objective of closely promoting the long-term success of the Group and aligning senior executive directors’ and shareholders’ interests. Shares are usually delivered during the first quarter of the second year (i.e. the year after the performance year) and the exact date is determined by the Board. 50% of the shares have 1 year deferral period and the remaining 50% is deferred for 2 years from the delivery date. The shares are registered in the trustees name as nominee for the participants and the participants are entitled to receive dividends. Starting from 2021, deferred share salary is no longer subject to the deferral and will be vested immediately upon delivery. Where applicable, deferred share salary is paid in part under the JSC TBC Bank’s Management Board members service contract with TBC Bank JSC, with TBC PLC or other Group subsidiaries (as relevant and as applicable). Initial salaries are set and approved by the Supervisory Board and Board of Directors. The Remuneration Committee assists both Boards in compensation related matters and makes respective recommendations. Deferred compensation is subject to the Group’s malus and clawback policies until the shares are vested. If at any time after making the deferred compensation there is a material misstatement in the financial results for the year in respect of which the compensa- tion was formally granted, the Remuneration Committee has the right to cause some or all of the deferred compen- sation for that year or any subsequent financial year that is unvested (or unpaid) to lapse (or not be paid). The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. Deferred Bonus plan The annual bonus for the top management is determined as to the extent that the annual KPIs have been met. Shares are usually delivered during the first quarter of the second year (i.e. the year after the performance year): and the exact date is determined by the Board. 50% of the shares have 1 year deferral period and the remaining 50% is deferred for 2 years from the delivery date. The shares are registered in the trustees name as nominee for the participants and the participants are entitled to receive dividends. Annual KPIs are set by the Remuneration Committee at the beginning of each year in relation to that year and ap- proved by the Board. To the extent that the KPIs are achieved, the Remuneration Committee may recommend to the 211 TBC BANK FINANCIAL STATEMENTS 202127. SHARE BASED PAYMENTS CONTINUED Board whether an award may be made and the amount of such award. The Group does not pay guaranteed bonuses to executive directors. The nature of the KPIs with their specific weightings and targets is disclosed in the published annual report. Awards are subject to the Group’s malus and clawback policies until the shares are vested. If at any time after making the award there is a material misstatement in the financial results for the year in respect of which the award was formally granted, the Remuneration Committee can recommend to the Board that some or all of the award for that year or any subsequent financial year that is unvested (or unpaid) to lapse (or not be paid). Where appli- cable, deferred share bonus is paid in part under the JSC TBC Bank’s Management Board members service contract with TBC JSC, with TBC PLC or other Group subsidiaries (as relevant and as applicable). The number of shares is calculated based on the average share price of the last 10 days preceding the committee decision date. Long Term Incentive Plan (LTIP) Long term incentive plan is used to provide a strong motivational tool to achieve long term performance conditions and to provide rewards to the extent those performance conditions are achieved. Performance conditions are cho- sen to align the Group’s and the Bank’s executive directors’ interests with strategic objectives of the Group over multi- year periods and encourage a long-term view. In order for the shares to be delivered, the executive directors need to meet rolling performance conditions over the 3 year performance period. More details about the LTIP and share based payments are given in Remuneration Committee report. During 2020 the management of JSC TBC Bank has forfeited their rights to deferred share bonuses and long-term incentive plan grants attributable to 2020.The above mentioned decision had no effect on the incentive schemes for 2019 and 2021 years. Decision has been agreed with remuneration committee details of which are given in remuner- ation report. 212 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED27. SHARE BASED PAYMENTS CONTINUED Tabular information on the schemes is given below: in thousands of GEL Number of unvested shares at the beginning of the period Number of shares granted Number of shares granted - Deferred salary Number of shares granted - Deferred bonus Number of shares granted - LTIP Number of shares granted - Middle management, subsidiaries’ management and other eligible employees Number of shares granted Change in estimates of number of shares expected to be granted* Change in estimates for 2019-2021 all awards Change in estimates for 2020 award for Deferred salary, 2021 awards for Deferred bonus and LTIP Management forfeiture of rights for 2020 bonus 31 December 2021 31 December 2020 31 December 2019 3,028,818 3,141,541 2,121,129 – – – – – – 285,047 471,778 459,751 321,453 528,325 396,525 321,453 528,325 1,613,101 (361,739) – (57,058) – – 479,580 (428,451) – – Change in estimates of number of shares expected to be granted* (361,739) 51,129 (57,058) Change in estimate of number of shares expected to vest based on changes in share price and exchange rate - 2020 performance (169,753) – Change in estimate of number of shares expected to vest based on perfor- mance conditions, share price and exchange rate - 2019 performance Change in estimate of number of shares expected to vest based on perfor- mance conditions - 2018 performance Number of shares vested 2015 year award – 80% vesting 2016 year award – 10% vesting 2016 year award – 80% vesting 2017 year award – 10% vesting 2017 year award – 80% vesting 2018 year award – 10% vesting 2019 year award – MM 33% vesting 2019 year award – TM 50% vesting Number of shares vested Number of unvested shares at the end of the period Expense recognised as staff cost during the period (GEL thousand) – – – – – – (451,251) (57,102) (47,401) (137,779) (693,533) 2,125,246 19,352 – – (71,847) – (16,501) – – (413,544) (105,527) – (101,259) – – (620,330) 3,028,818 16,522 (405,573) (51,693) – (61,864) – – – – (519,130) 3,141,541 33,857 * The maximum amount is fixed for deferred share compensations for top management, the exact number will be calculated as per policy. Tax part of the existing bonus system is accounted under equity settled basis. Staff costs related to equity settled part of the share based payment schemes are recognised in the income state- ment on a straight line basis over the vesting period of each relevant tranche and corresponding entry is credited to share based payment reserve in equity. On 31 December 2021 based on level of achievement of key performance indicators the management has reassessed the number of shares that will have to be issued to the participants of the share based payment system by decreasing estimated number of shares to vest by 169,753 (31 December 2020: decreased estimated number of shares to vest by 71,847; 31 December 2019: decreased estimated number of shares to vest by 16,501). In 2019 the Group established employee benefit trust (EBT) Executive Equity Compensation Trustee – Sanne Fiducia- ry Services Limited (the “Trustee”) which acts as the trustee of the Group’s share based payments plan. It purchases Group’s shares from the open market and holds them before they are awarded to participants and vesting date is due. The number of shares to be purchased and held are instructed by the Remuneration committee of the TBC Bank Group PLC. As at 31 December 2021 the share number held by Trustee was 641,391 (31 December 2020: 778,183; 31 December 2019: 595,380), which represents 1.2% of total outstanding shares (31 December 2020: 1.4%; 31 December 2019: 1.1%). 213 TBC BANK FINANCIAL STATEMENTS 202128. SEGMENT ANALYSIS The Management Board is the chief operating decision maker and it reviews the Group’s internal reporting in order to assess the performance and to allocate resources. In 2021 the Group made following re-segmentations: • Standard annual re-segmentation after which some of the clients were reallocated to different segments – GEL 93,916 thousand of loans and GEL 75,268 thousand of customer accounts were transferred from MSME to Cor- porate segment. • Wealth Management business with high net worth individuals has been transferred from retail to corporate seg- ment in the amount of GEL 141,122 thousand of loans and GEL 2,289,076 thousand of customer accounts due to changes in segment definitions. • Space segment has been fully transferred from MSME to retail segment in the amount of GEL 33,709 thousand of loans and GEL 9,717 thousand of customer accounts due to changes in segment definitions. The underlying rationale was the composition of product base, offered by Space to its customers. The majority of such products are consumer, fast consumer and installment loans, which by their nature represent the retail segment. In the tables below is disclosed the information as of 31 December 2020 and 2019 both with and without re-segmen- tations effect. Other transfers between segments were primarily due to changes in client size and specifications compared to prior period. The operating segments are determined as follows: • Corporate – a legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or which has been granted facilities of more than GEL 5.0 million. Some other business customers may also be assigned to the CIB segment or transferred to the MSME segment on a discretionary basis. In addition, CIB includes Wealth Management private banking services to high-net-worth individuals with a threshold of US$ 250,000 on assets under management (AUM), as well as on discretionary basis; • Retail – non-business individual customers; or individual customers of the fully digital bank, Space; • MSME – business customers who are not included in the CIB segment; Corporate centre and other operations - comprises of 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 profit before income tax. The reportable segments are the same as the operating segments. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group’s total revenue in 2021, 2020 or 2019. The vast majority of the Group’s revenues are attributable to Georgia. A geographic analysis of origination of the Group’s assets and liabilities is given in Note 37. Allocation of indirect expenses is performed based on drivers identified for each type of cost if possible. If there is no identifiable driver for any type of expense/overhead cost, those expenses are allocated between segments based on the same logic as applied for the expenses with similar nature (e.g. other operating expenses would follow the pattern of closest category of operating expenses). Intersegment transfer pricing methodology is internally created tool, which is based on matched maturity logics. It is used to manage liquidity and interest rate risks. Corporate centre borrows monetary amounts (deposits) from business segments, therefore, each of segment is com- pensated on each deposit based on its currency, duration, type and liquidity requirements. Business segments then borrow money from corporate centre, to fund loans, on which each segment pays agreed price to corporate centre, based on each loans currency, type (fixed or floating), duration, capital requirement. 214 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED28. SEGMENT ANALYSIS CONTINUED A summary of the Group’s reportable segments for the years ended 31 December 2021, 2020 and 2019 is provided below: Segment disclosure below is prepared with the effect of 2021 re-segmentations as described above. in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 31 December 2021 Interest income Interest expense Net interest gains on currency swaps Inter-segment interest income/(expense) Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains from currency derivatives, foreign currency operations and translation Net gains from disposal of investment securities measured at fair value through other comprehensive income Other operating income Share of profit of associate Other operating non-interest income Credit loss recovery/(allowance) for loans to customers Credit loss recovery for performance guarantees and credit related commitments Credit loss recovery for finance lease receivables Credit loss allowance for other financial assets Credit loss recovery for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortization Administrative and other operating expenses Operating expenses Losses from modifications of financial instruments Profit before tax Income tax expense Profit for the year Total gross loans and advances to customers reported Total customer accounts reported Total credit related commitments and performance guarantees 562,014 678,815 384,337 237,911 1,863,077 (278,005) - 71,408 355,417 112,479 (81,033) (119,200) - (169,947) 389,668 212,922 (38,282) 31,446 174,640 (11,162) - (154,827) 218,348 52,811 (33,874) 18,937 (487,061) 28,143 253,366 32,359 (52) (84) (136) (895,428) 28,143 - 995,792 378,160 (153,273) 224,887 57,102 35,942 27,496 3,654 124,194 1,411 - - 9,745 11,156 2,706 - 61,219 59,743 636 - (521) 1,096 (7,950) 8,879 - 44,821 (23,742) 877 - 28,373 7,175 28,580 837 42,816 - 41,042 837 177,229 43,176 369 199 - 1,204 - (3,307) - (36) - - - 236 (10,633) 236 (14,461) 1,498 2,594 (1,360) (2,369) (11,715) 501,086 582,413 271,672 63,771 1,418,942 (49,009) (5,258) (16,394) (70,661) (945) 429,480 (48,779) 380,701 6,547,741 7,378,552 (134,138) (51,480) (77,593) (263,211) (688) 318,514 (32,189) 286,325 6,265,507 5,629,823 (52,956) (11,626) (20,384) (84,966) (93) 186,613 (21,137) 165,476 4,141,305 1,564,150 (19,644) (2,258) (14,253) (36,155) - 27,616 (17,173) 10,443 - 311,620 (255,747) (70,622) (128,624) (454,993) (1,726) 962,223 (119,278) 842,945 16,954,553 14,884,145 3,201,286 178,556 381,201 - 3,761,043 215 TBC BANK FINANCIAL STATEMENTS 202128. SEGMENT ANALYSIS CONTINUED For comparison purposes segment disclosure below is prepared with the effect of 2021 re-segmentations as de- scribed above. in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 31 December 2020 Interest income Interest expense Net interest gains on currency swaps Inter-segment interest income/(expense) Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains/(loss) from currency derivatives, foreign currency operations and translation Net losses from disposal of investment securities measured at fair value through other comprehensive income Other operating income Other operating non-interest income Credit loss allowance for loans to customers Credit loss recovery/(allowance) for performance guarantees and credit related commitments Credit loss allowance for finance lease receivables Credit loss allowance for other financial assets Credit loss allowance for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortisation Provision for liabilities and charges Administrative and other operating expenses Operating expenses Losses from modifications of financial instruments Profit/(loss) before tax Income tax (expense)/credit Profit/(loss) for the year Total gross loans and advances to customers reported Total customer accounts reported Total credit related commitments and performance guarantees 476,649 616,536 321,304 246,349 1,660,838 (230,061) - 59,132 305,720 84,671 (55,456) (116,507) - (135,612) 364,417 168,320 (43,133) 29,215 125,187 55,911 28,581 (11,057) - (121,732) 188,515 37,740 (22,997) 14,743 25,699 (496,464) 20,950 198,212 (30,953) (235) (131) (366) (854,089) 20,950 - 827,699 290,496* (121,717)* 168,779 (4,336) 105,855 - - - (624) (624) 1,855 6,939 57,766 (30,434) 35,520 (205,180) 391 26,090 (95,197) 4,169 (791) - 13,354 118,585 (330,811) 3,546 (241) (67) - 3,238 - (5,600) - (1,476) (876) - - - - (7,760) (6,332) (7,760) (13,408) (934) (1,810) (5) (3,672) (795) (1,358) (5,830)* 359,332 314,555 133,289 (48,494) 758,682* (38,223) (4,460) (400) (13,684) (56,767) (6,345) 296,220 (19,863) (108,411) (45,939) (2,200) (68,756) (225,306) (23,633) 65,616 23,759 (44,761) (10,340) - (15,836) (70,937) (7,153) 55,199 2,337 276,357 5,925,787 5,854,182 89,375 5,846,274 4,975,661 57,536 3,428,454 1,293,222 (15,492) (3,329) - (13,638) (32,459) (3,884) (84,837) (1,171) (86,008) - 511,230 (206,887) (64,068) (2,600) (111,914)* (385,469)* (41,015) 332,198 5,062 337,260 15,200,515 12,634,295 3,146,940 176,937 308,480 - 3,632,357 *Certain amounts do not correspond to the 2020 consolidated financial statements as they reflect the certain restatements as described in Note 2. 216 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED28. SEGMENT ANALYSIS CONTINUED Segment disclosure below is prepared without the effect of 2021 re-segmentations as described above. in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 31 December 2020 Interest income Interest expense Net interest gains on currency swaps Inter-segment interest income/(expense) Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains/(loss) from currency derivatives, foreign currency operations and translation Net losses from disposal of investment securities measured at fair value through other comprehensive income Other operating income Other operating non-interest income Credit loss allowance for loans to customers Credit loss recovery/(allowance) for performance guarantees and credit related commitments Credit loss allowance for finance lease receivables Credit loss allowance for other financial assets Credit loss allowance for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortisation Provision for liabilities and charges Administrative and other operating expenses Operating expenses Losses from modifications of financial instruments Profit/(loss) before tax Income tax (expense)/credit Profit/(loss) for the year Total gross loans and advances to customers reported Total customer accounts reported Total credit related commitments and performance guarantees 462,203 617,125 335,161 246,349 1,660,838 (208,556) - 34,455 288,102 57,949 (8,698) (184,738) - (59,379) 373,008 206,377 (101,887) 49,251 104,490 (12,020) - (125,599) 197,542 26,405 (11,001) 15,404 (448,775) 20,950 150,523 (30,953) (235) (131) (366) (854,089) 20,950 - 827,699 290,496* (121,717)* 168,779 51,443 31,561 27,187 (4,336) 105,855 - - - (624) (624) 1,855 6,901 429 53,298 (29,089) 38,462 (201,652) 27,616 (100,070) 4,169 (791) - 13,354 118,585 (330,811) 3,546 - (5,600) (876) (241) - (1,476) - (67) - 3,238 - - - (7,760) (6,332) (934) (7,760) (13,408) (1,810) (5) (3,590) (877) (1,358) (5,830)* 358,627 309,001 139,548 (48,494) 758,682* (34,068) (4,296) (400) (11,968) (50,732) (6,345) 301,550 (18,695) (109,492) (45,256) (2,200) (64,719) (221,667) (23,633) 63,701 21,360 (47,835) (11,187) - (21,589) (80,611) (7,153) 51,784 3,568 282,855 85,061 5,690,749 5,953,687 4,001,068 7,255,020 55,352 3,556,079 1,378,207 (15,492) (3,329) - (13,638) (32,459) (3,884) (84,837) (1,171) (86,008) – – (206,887) (64,068) (2,600) (111,914)* (385,469)* (41,015) 332,198 5,062 337,260 15,200,515 12,634,295 3,125,279 189,288 317,790 – 3,632,357 *Certain amounts do not correspond to the 2020 consolidated financial statements as they reflect the certain restatements as described in Note 2. 217 TBC BANK FINANCIAL STATEMENTS 202128. SEGMENT ANALYSIS CONTINUED For comparison purposes segment disclosure below is prepared with the effect of 2021 re-segmentations as de- scribed above. in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 31 December 2019 Interest income Interest expense Net interest gains on currency swaps Inter-segment interest income/(expense) Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains/(loss) from currency derivatives, foreign currency operations and translation Net gains from disposal of investment securities measured at fair value through other comprehensive income Other operating income Share of profit of associates Other operating non-interest income Credit loss recovery/(allowance) for loans to customers Credit loss (allowance)/recovery for performance guarantees and credit related commitments Credit loss recovery for finance lease receivables Credit loss recovery/(allowance) for other financial assets Credit loss allowance for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortisation Provision for liabilities and charges Administrative and other operating expenses Operating expenses Profit/(loss) before tax Income tax (expense)/credit Profit for the year Total gross loans and advances to customers reported Total customer accounts reported Total credit related commitments and performance guarantees 360,688 587,154 291,051 196,213 1,435,106 (148,464) - 11,216 223,440 49,928 (7,091) (147,099) - (73,263) 366,792 203,391 (84,838) 42,837 118,553 (9,966) - (99,022) 182,063 25,787 (9,081) 16,706 (364,893) 28,556 161,069 20,945 1,512 (482) 1,030 (670,422) 28,556 - 793,240 280,618* (101,492)* 179,126 50,985 30,726 23,087 (2,363) 102,435 - - - 169 169 4,322 - 55,307 3,262 (2,691) - 2,211 (142) 8,204 - 38,930 (81,569) 411 - (3,545) - - (2,743) 1,082 - 24,169 (3,723) 124 - (11) - - 3,968 632 2,406 - 17,576 632 120,812 (82,030) - (2,156) 582 (6,372) (149) 582 (7,717) (291) - (2,743)* 324,224 436,829 219,328 18,442 998,823* (36,630) (2,509) - (14,043) (53,182) 271,042 (29,048) (132,722) (45,429) - (74,356) (252,507) 184,322 (17,557) 241,994 166,765 4,904,244 4,896,594 3,920,816 4,811,788 (45,773) (7,170) - (15,021) (67,964) 151,364 (15,369) 135,995 2,861,117 1,153,349 (10,883) (2,211) (2,105) (20,764) (35,963) (17,521) 18,452 931 - 226,049 (226,008) (57,319) (2,105) (124,184)* (409,616)* 589,207 (43,522) 545,685 12,661,955 10,112,002 2,468,261 190,598 300,992 - 2,959,851 *Certain amounts do not correspond to the 2019 consolidated financial statements as they reflect the certain restatements as described in Note 2. 218 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED28. SEGMENT ANALYSIS CONTINUED Segment disclosure below is prepared without the effect of 2021 re-segmentations as described above. in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 31 December 2019 Interest income Interest expense Net interest gains on currency swaps Inter-segment interest income/(expense) Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net gains/(loss) from currency derivatives, foreign currency operations and translation Net gains from disposal of investment securities measured at fair value through other comprehensive income Other operating income Share of profit of associates Other operating non-interest income Credit loss recovery/(allowance) for loans to customers Credit loss (allowance)/recovery for performance guarantees and credit related commitments Credit loss recovery for finance lease receivables Credit loss recovery/(allowance) for other financial assets Credit loss allowance for financial assets measured at fair value through other comprehensive income Net impairment of non-financial assets Operating income after expected credit and non-financial asset impairment losses Staff costs Depreciation and amortisation Provision for liabilities and charges Administrative and other operating expenses Operating expenses Profit/(loss) before tax Income tax (expense)/credit Profit for the year Total gross loans and advances to customers reported Total customer accounts reported Total credit related commitments and performance guarantees 356,654 582,788 299,451 196,213 1,435,106 (166,857) – 31,352 221,149 49,387 (7,059) 42,328 (152,566) – (66,951) 363,271 203,448 (84,870) 118,578 (10,153) – (101,423) 187,875 26,271 (9,081) 17,190 (340,846) 28,556 137,022 20,945 1,512 (482) 1,030 (670,422) 28,556 – 793,240 280,618* (101,492)* 179,126 49,852 30,726 24,220 (2,363) 102,435 – – – 169 169 2,952 – 52,804 3,262 (2,691) – 2,211 (142) 9,563 – 40,289 (77,324) 411 – (3,545) – - (2,743) 1,093 – 25,313 (7,968) 124 – (11) – - 3,968 632 2,406 – – 582 (6,372) (149) 17,576 632 120,812 (82,030) (2,156) 582 (7,717) (291) - (2,743)* 318,921 438,937 222,523 18,442 998,823* (36,630) (2,509) – (14,043) (53,182) 265,739 (29,048) (131,583) (45,429) – (70,255) (247,267) 191,670 (18,101) (46,912) (7,170) – (19,122) (73,204) 149,319 (14,825) 236,691 4,660,473 3,250,046 173,569 5,053,203 5,672,685 134,494 2,948,279 1,189,271 (10,883) (2,211) (2,105) (20,764) (35,963) (17,521) 18,452 931 – – (226,008) (57,319) (2,105) (124,184)* (409,616)* 589,207 (43,522) 545,685 12,661,955 10,112,002 2,451,769 205,433 302,649 – 2,959,851 * Certain amounts do not correspond to the 2019 consolidated financial statements as they reflect the certain restatements as described in Note 2. 219 TBC BANK FINANCIAL STATEMENTS 202128. SEGMENT ANALYSIS CONTINUED in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations Total 2021 – Fee and commission income – Other operating income Total Timing of revenue recognition: – At point in time – Over a period of time 112,479 2,706 212,922 8,879 52,811 877 115,185 221,801 53,688 (52) 28,580 28,528 378,160 41,042 419,202 115,185 - 220,246 1,555 53,688 - 28,575 (47) 417,694 1,508 in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations 2020 – Fee and commission income – Other operating income Total Timing of revenue recognition: – At point in time – Over a period of time 57,949 1,855 59,804 59,804 - 206,377 6,901 213,278 210,986 2,292 26,405 429 26,834 26,834 - (235) 4,169 3,934 3,934 - in thousands of GEL Corporate Retail Micro, small and medium enterprises Corporate centre and other operations 2019 – Fee and commission income – Other operating income Total Timing of revenue recognition: – At point in time – Over a period of time 49,387 203,448 2,952 52,339 9,563 213,011 52,311 28 211,531 1,480 26,271 1,093 27,364 27,359 5 1,512 3,968 5,480 5,480 - Total 290,496 13,354 303,850 301,558 2,292 Total 280,618 17,576 298,194 296,681 1,513 220 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 28. SEGMENT ANALYSIS CONTINUED Reportable segments’ assets were reconciled to total assets as follows: in thousands of GEL Total segment assets (gross loans and advances to customers) Credit loss allowance Cash and cash equivalents Mandatory cash balances with National Bank of Georgia Due from other banks Investment securities measured at fair value through other comprehensive income Bonds carried at amortised cost Current income tax prepayment Deferred income tax asset Other financial assets Finance lease receivables Other assets Premises and equipment Intangible assets Investment properties Goodwill Right of use assets Investments in associates 31 December 2021 31 December 2020 31 December 2019 16,954,553 (407,368) 1,595,460 2,086,113 42,237 15,200,515 (606,246) 1,601,599 2,098,506 19,690 12,661,955 (312,556) 994,479 1,591,829 15,597 1,938,196 1,527,268 985,293 - 84 2,056 442,207 252,340 373,892 378,657 267,406 22,892 28,197 58,001 4,589 1,059,946 69,762 2,134 161,002 270,978 256,646 362,863 223,577 68,689 28,197 49,746 4,090 1,021,568 25,695 2,173 115,211 256,660 247,201 329,529 159,109 72,667 29,459 57,086 2,655 Total assets per statement of financial position 24,039,512 22,398,962 18,255,610 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 Lease Liabilities 31 December 2021 31 December 2020 31 December 2019 14,884,145 2,984,075 1,583,699 86,302 10,979 15,845 120,620 83,623 623,647 56,522 12,634,295 4,485,873 1,419,513 27 13,084 17,451 211,242 59,969 672,740 54,588 10,112,002 3,593,901 1,213,598 818 18,806 16,979 95,643 70,366 591,035 59,316 Total liabilities per statement of financial position 20,449,457 19,568,782 15,772,464 221 TBC BANK FINANCIAL STATEMENTS 202129. INTEREST INCOME AND EXPENSE in thousands of GEL 2021 2020 2019 Interest income calculated using effective interest method Loans and advances to customers Bonds carried at amortised cost* Investment securities measured at fair value through other comprehensive income* Due from other banks Other financial assets Other interest income Finance lease receivables Total interest income Interest expense Customer accounts Due to credit institutions Subordinated debt Debt securities in issue Other interest expense Lease liabilities Total interest expense Net interest gains on currency swaps Net interest income * 2021 reflects changes in business model of financial securities described in Note 2. 1,601,966 - 185,424 13,491 4,315 1,393,856 95,888 103,516 13,870 1,621 57,881 52,087 1,863,077 1,660,838 (469,873) (256,746) (53,338) (113,146) (2,325) (895,428) 28,143 995,792 (402,728) (288,857) (55,716) (104,182) (2,606) (854,089) 20,950 827,699 1,225,201 58,597 74,043 27,915 1,416 47,934 1,435,106 (327,154) (226,899) (63,693) (50,248) (2,428) (670,422) 28,556 793,240 As of 31 December 2021 GEL 1,831,852 thousand of interest income and GEL 878,444 thousand of interest expense were attributable to the Bank (2020: GEL 1,630,741 thousand of interest income and GEL 839,830 thousand of interest expense; 2019: GEL 1,416,276 thousand of interest income and GEL 657,579 thousand of interest expense). During 2021 interest accrued on defaulted loans amounted to GEL 36,105 thousand (2020: GEL 69,285 thousand; 2019: GEL 14,372 thousand). During 2021 capitalized interest expense in the amount of GEL 1,756 thousand (2020: GEL 1,403 thousand, 2019: nil), was attributable to the development of the Group’s headquarters. The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation is weighted average of interest bearing liabilities by currencies: 7.7% in GEL, 2.9% in USD and 1.3% in EUR. (2020: 7.7% in GEL, 3.6% in USD and 1.1% in EUR, 2019: nil) 222 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30. FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income and expense of the Group are as follows: in thousands of GEL 2021 2020 (restated) 2019 (restated) Fee and commission income in respect of financial instruments not at fair value through profit or loss: – Card operations – Settlement transactions – Guarantees issued – Cash transactions – Issuance of letters of credit – Foreign exchange operations – Other Total fee and commission income Fee and commission expense in respect of financial instruments not at fair value through profit or loss: – Card operations – Settlement transactions – Cash transactions – Guarantees and letters of credit received – Other Total fee and commission expense Net fee and commission income 188,749 108,046 42,125 7,383 2,906 3,259 25,692 378,160 115,998 18,052 6,062 4,628 8,533 153,273 224,887 139,000* 84,366 35,761 8,305 6,200 1,952 14,912 290,496 93,597* 13,041 6,618 4,148 4,313 121,717 168,779 135,015* 81,933 28,738 13,212 5,215 2,841 13,664 280,618 78,752* 13,729 4,731 3,628 652 101,492 179,126 * Certain amounts do not correspond to the 2020 and 2019 financial statements as they reflect the reclassifications as described in Note 2. Fee and commission income and expense of the Bank are as follows: in thousands of GEL 2021 2020 (restated) 2019 (restated) Fee and commission income in respect of financial instruments not at fair value through profit or loss: – Card operations – Settlement transactions – Guarantees issued – Cash transactions – Issuance of letters of credit – Foreign exchange operations – Other Total fee and commission income Fee and commission expense in respect of financial instruments not at fair value through profit or loss: – Card operations – Settlement transactions – Cash transactions – Guarantees and letters of credit received – Other Total fee and commission expense Net fee and commission income 185,842 79,617 44,960 13,825 73 3,262 22,019 349,598 124,191 16,143 23,843 4,628 7,223 176,028 173,570 137,011* 59,746 35,761 11,105 6,388 1,959 12,011 263,981 101,065* 11,427 19,225 4,148 3,718 139,583 124,398 131,919* 56,257 28,738 14,884 5,703 2,842 10,611 250,954 85,558* 11,406 14,395 3,628 172 115,159 135,795 * Certain amounts do not correspond to the 2020 and 2019 financial statements as they reflect the reclassifications as described in Note 2. 223 TBC BANK FINANCIAL STATEMENTS 2021 31. OTHER OPERATING INCOME in thousands of GEL Gain from sale of investment properties Gain on disposal of premises and equipment Gain from sale of inventories of repossessed collateral Revenues from operational leasing Revenues from sale of cash-in terminals Other Total other operating income 2021 22,933 5,347 3,087 2,300 294 7,081 41,042 2020 1,003 496 1,559 3,172 477 6,647 13,354 2019 938 2,115 2,755 3,046 926 7,796 17,576 In 2021, the Group disposed its certain investment properties and premises, out of which most part accounted to the single sale described in Note 15. Revenue from operational leasing is wholly attributable to investment properties. The carrying value of the repos- sessed collateral disposed in the year ended 31 December 2021 was GEL 48,029 thousand (2020: GEL 22,423 thou- sand; 2019: GEL 32,306 thousand). 32. NET GAINS FROM CURRENCY DERIVATIVES, FOREIGN CURRENCY OPERATIONS AND TRANSLATION Net gains from currency derivatives, foreign currency operations and translation for the following years are as follows: in thousands of GEL Net gains/(losses) from trading in foreign currencies Net gains from foreign exchange translation Net gains/(losses) from derivative financial instruments Total net gains from currency derivatives, foreign currency operations and translation 33. STAFF COSTS Staff costs of the Group are as follows: in thousands of GEL Salaries and bonuses Share based compensation Other compensation cost Salaries and other employee benefits Staff costs of the Bank are as follows: in thousands of GEL Salaries and bonuses Share based compensation Other compensation cost Salaries and other employee benefits 2021 113,043 10,862 289 124,194 2021 220,584 19,352 15,811 255,747 2021 198,837 19,352 14,102 232,291 2020 (96,484) 202,331 8 105,855 2020 181,200 16,522 9,165 206,887 2020 161,833 16,522 8,040 186,395 2019 79,287 23,428 (280) 102,435 2019 180,856 33,624 11,528 226,008 2019 160,941 33,624 10,461 205,026 224 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED33. STAFF COSTS CONTINUED Share based compensation represents remuneration paid in shares and is excluded as non-cash in the consolidated and separate statements of cash flows. Breakdown of monthly average number of employees by categories is as follows: Number of employees of the Group are as follows: Position Top Management Middle Management Other Employees Total Temporary Permanent Temporary Permanent Temporary Permanent Number of employees of the Bank are as follows: Position Top Management Middle Management Other Employees Total Temporary Permanent Temporary Permanent Temporary Permanent 2021 - 6 - 295 1,047 6,370 7,718 2021 - 6 - 226 1,000 5,728 6,960 2020 - 6 - 301 1,193 5,869 7,369 2020 - 6 - 225 1,062 5,366 6,659 2019 - 7 5 231 1,341 5,396 6,980 2019 - 7 3 216 1,140 4,935 6,301 34. ADMINISTRATIVE AND OTHER OPERATING EXPENSES Administrative and other operating expenses of the Group are as follows: in thousands of GEL Intangible asset maintenance Professional services Advertising and marketing services Occupancy and rent** Taxes other than on income Utilities services Insurance Premises and equipment maintenance Communications and supply Stationery and other office expenses Personnel training and recruitment Transportation and vehicle maintenance Security services Loss on disposal of premises and equipment Loss on disposal of repossessed collateral Charity Business trip expenses Other 2021 2020 (restated) 2019 (restated) 19,131 19,085 17,375 12,437 9,850 8,192 7,999 6,589 5,615 4,431 2,553 2,365 1,787 1,229 598 417 337 8,634 15,504 16,229 17,046 12,750 8,217 6,518 7,640 5,509 5,203 5,322 1,447 1,610 1,822 93 181 1,530 507 4,786* 12,885 19,027 18,344 13,076 6,851 6,800 6,083 9,208 5,555 4,638 2,904 2,027 2,001 937 1,310 1,990 2,163 8,385* Total administrative and other operating expenses 128,624 111,914* 124,184* * Certain amounts do not correspond to the 2020 and 2019 financial statements as they reflect the reclassification of net impairment of non-financial assets as described in Note 2. **Includes short-term leases, low value leases, VAT and other relevant tax expense on lease contracts recognised under IFRS 16 scope 225 TBC BANK FINANCIAL STATEMENTS 202134. ADMINISTRATIVE AND OTHER OPERATING EXPENSES CONTINUED Administrative and other operating expenses of the Bank are as follows: in thousands of GEL Professional services Advertising and marketing services Intangible asset maintenance Occupancy and rent** Utilities services Premises and equipment maintenance Taxes other than on income Communications and supply Stationery and other office expenses Personnel training and recruitment Insurance Security services Loss on disposal of premises and equipment Transportation and vehicle maintenance Loss on disposal of repossessed collateral Charity Business trip expenses Other 2021 2020 (restated) 2019 (restated) 19,547 16,621 16,500 9,634 7,852 6,200 5,584 4,553 4,108 2,389 2,214 1,619 1,117 634 583 417 297 3,799 14,968 16,358 13,590 10,372 6,308 5,640 5,148 4,226 5,012 1,345 1,778 1,647 85 442 23 1,488 449 1,274* 17,323 17,491 11,307 9,412 6,576 8,586 3,669 4,682 4,353 2,760 1,292 1,875 938 640 1,270 1,975 2,024 4,880* Total administrative and other operating expenses 103,668 90,153* 101,053* * Certain amounts do not correspond to the 2020 and 2019financial statements as they reflect the reclassification of net impairment of non-financial assets as described in Note 2. **Includes short-term leases, low value leases, VAT and other relevant tax expense on lease contracts recognised under IFRS 16 scope Auditors’ remuneration is included within professional services expenses above and comprises: in thousands of GEL 31 December 2021 Audit of TBC Bank Group and subsidiaries annual financial statements Review of TBC Bank Group and subsidiaries interim financial statements Other assurance services Total auditors’ remuneration 31 December 2020 Audit of TBC Bank Group and subsidiaries annual financial statements Review of TBC Bank Group and subsidiaries interim financial statements Other assurance services Total auditors’ remuneration 31 December 2019 Audit of TBC Bank Group and subsidiaries annual financial statements Review of TBC Bank Group and subsidiaries interim financial statements Other assurance services Total auditors’ remuneration Audit 1,623 – – 1,623 1,711 – – 1,711 1,165 – – 1,165 Audit Related Other Services – 480 – 480 – 215 – 215 – 463 – 463 – – 932 932 – – 25 25 – – 864 864 Total 1,623 480 932 3,035 1,711 215 25 1,951 1,165 463 864 2,492 Fees presented in the tables above are exclusive of taxes. For the year ended 31 December 2021, GEL 910 thousands (included in the table in other assurance services) is attributable to the services in relation to issuance of AT1 Notes in October 2021. 226 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 35. INCOME TAXES Income tax credit/(expense) comprise of the following: in thousands of GEL Current tax charge Deferred tax credit Total Income tax expense/(credit) for the year 2021 121,305 (2,027) 119,278 2020 612 (5,674) (5,062) 2019 44,690 (1,168) 43,522 Current income tax liability to the regulatory authorities is generally paid on a quarterly basis. The amount is calcu- lated by dividing previous year current income tax amount by 4 equal portion. In 2021, no prepayments for current income tax were made as the 2020 resulted in tax loss and there was no current income tax payable. Accordingly, at the end of 2021 Bank had income tax payable, whilst in 2020 and 2019, income tax asset. The income tax rate applicable to the majority of the Group’s income was 15% (2020: 15%; 2019: 15%). The income tax rate applicable to the majority of subsidiaries income ranged from 15% to 20% (2020: 15% - 20%; 2019: 15% - 20%). Reconciliation between the expected and the actual taxation credit/expense is provided below. in thousands of GEL Statutory rate Profit before tax Theoretical tax charge at statutory rate 15%-20% 2021 2020 2019 15% – 20% 15% – 20% 15% – 20% 545,154 88,419 962,223 144,310 332,198 50,230 Tax effect of items which are not deductible or assessable for taxation purposes: – Income which is exempt from taxation – Non-deductible expenses – Expected effects of change in tax legislation – Other differences Total Income tax expense/(credit) for the year (25,447) 158 343 (86) 119,278 (26,877) (2,322) (23,226) (2,867) (5,062) (22,002) (2,083) (55) (20,757) 43,522 Differences between financial reporting framework 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% (2020: 15%; 2019: 15%) for Georgia and 20% for Azerbaijan (2020: 20%; 2019: 20%). Income which is exempt from taxation includes interest income from placements in NBG, Georgian government Treasury bills and IFI securities. Revaluation of investment securities held at FVOCI did not result in recognition of deferred tax assets/liabilities (since majority of securities were either tax exempt or were not supposed to be sold before Estonian model transition date discussed below) and its tax effect was not recognised in OCI. Non-deductible expenses include penalties paid and charity expenses towards beneficiary which are not registered charity organi- zations. On 13 May 2016 the Government of Georgia enacted the changes in the Tax Code of Georgia effective from 1 January 2019, for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops and from 1 January 2017 for other entities. However, during 2018 Georgian Government changed transition date to 1 Jan- uary 2023 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops. The new code impacts the recognition and measurement principles of the Group’s income tax and it also affects the Group’s deferred income tax assets/liabilities. Companies do not have to pay income tax on their profit before tax (earned since 1 January 2017 or 1 January 2023 for commercial banks, credit unions, insurance organizations, mi- crofinance organizations and pawnshops) until that profit is distributed in a form of dividend or other forms of profit distributions. Once dividend is paid, 15% income tax is payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form, to the foreign non-resident legal entities and foreign and domestic individuals. The dividends paid out to the resident legal entities are tax exempted. Apart from dividends’ distribution, the tax is still payable on expenses or other payments incurred not related to economic activities, free delivery of goods/services and/or transfer of funds and representation costs that exceed the maximum amount determined by the Income Tax Code of Georgia, in the same month they are incurred. 227 TBC BANK FINANCIAL STATEMENTS 2021 35. INCOME TAXES CONTINUED Deferred tax assets/liabilities are re-measured to the amounts that are estimated to be utilized in the period from 1 January 2021 to 31 December 2022. in thousands of GEL Tax effect of deductible/(taxable) temporary differences and tax loss carry forwards Premises and equipment Loans and advances to customers Other financial assets Due to credit institutions Other financial liabilities Other liabilities Share based payment Tax loss carried forward Net deferred tax liability Recognised deferred tax asset Recognised deferred tax liability Net deferred tax liability in thousands of GEL Tax effect of deductible/(taxable) temporary differences and tax loss carry forwards Premises and equipment Loans and advances to customers Other financial assets Due to credit institutions Other financial liabilities Other liabilities Share based payment Tax loss carried forward Net deferred tax liability Recognised deferred tax asset Recognised deferred tax liability Net deferred tax liability in thousands of GEL Tax effect of deductible/(taxable) temporary differences and tax loss carry forwards Premises and equipment Loans and advances to customers Other financial assets Due to credit institutions Subordinated debt Other financial liabilities Other liabilities Share based payment Net deferred tax liability Recognised deferred tax asset Recognised deferred tax liability Net deferred tax liability 1 January 2021 (Credited)/ Charged to profit or loss 31 December 2021 (3,781) (18,617) 2,608 (1,684) (461) (2,333) 1,368 11,950 (10,950) 2,134 (13,084) (10,950) 2,619 5,218 1,502 1,316 584 1,411 1,327 (11,950) 2,027 (78) 2,105 2,027 (1,162) (13,399) 4,110 (368) 123 (922) 2,695 - (8,923) 2,056 (10,979) (8,923) 1 January 2020 (Credited)/ Charged to profit or loss 31 December 2020 (11,363) (8,822) 4,802 (2,486) 792 (1,800) 2,253 – (16,624) 2,173 (18,797) (16,624) 7,582 (9,795) (2,194) 802 (1,253) (533) (885) 11,950 5,674 (39) 5,713 5,674 (3,781) (18,617) 2,608 (1,684) (461) (2,333) 1,368 11,950 (10,950) 2,134 (13,084) (10,950) 1 January 2019 (Credited)/ Charged to profit or loss 31 December 2019 (20,748) 2,864 2,317 (3,641) (70) (41) 864 663 (17,792) 1,992 (19,784) (17,792) 9,385 (11,686) 2,485 1,155 70 833 (2,664) 1,590 1,168 181 987 1,168 (11,363) (8,822) 4,802 (2,486) – 792 (1,800) 2,253 (16,624) 2,173 (18,797) (16,624) 228 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 35. INCOME TAXES CONTINUED In the context of the Group’s current structure and Georgian tax legislation, tax losses and current tax assets of differ- ent 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. 36. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES The table below sets out movements in the Group’s liabilities from financing activities for each of the periods pre- sented. The items of these liabilities are those that are reported as financing activities in the statement of cash flows. in thousands of GEL Liabilities from financing activities at 1 January 2019 Proceeds from principal movement Redemption of principal Net interest movement** Other non-cash movements* Foreign exchange adjustments Liabilities from financing activities at 31 December 2019 Proceeds from principal movement Redemption of principal Net interest movement** Other non-cash movements* Foreign exchange adjustments Liabilities from financing activities at 31 December 2020 Proceeds from principal movement Redemption of principal Net interest movement** Other non-cash movements* Foreign exchange adjustments Liabilities from financing activities at 31 December 2021 Other borrowed funds Debt securities in Issue Subordinated debt Lease Liabilities Total 2,872,071 13,343 650,919 60,232 3,596,565 1,819,899 (1,392,897) 5,225 - 122,589 1,176,049 (14,296) 1,140 - 37,362 - (104,079) (1,338) - 45,533 - (6,453) 383 2,818 2,336 2,995,948 (1,517,725) 5,410 2,818 207,820 3,426,887 1,213,598 591,035 59,316 5,290,836 4,031,812 (3,319,427) 6,851 - 198,956 31,601 - (2,133) - 176,447 - - (812) - 82,517 - (13,251) 236 1,947 6,340 4,063,413 (3,332,678) 4,142 1,947 464,260 4,345,079 1,419,513 672,740 54,588 6,491,920 1,750,443 (3,337,495) (30,002) - (68,607) 242,287 - 2,710 - (80,811) - (12,562) (191) - (36,340) - (12,825) 63 18,462 (3,766) 1,992,730 (3,362,882) (27,420) 18,462 (189,524) 2,659,418 1,583,699 623,647 56,522 4,923,286 * Other non-cash movements represent additions less terminations for finance lease contracts. **Net interest movement includes interest accrued and interest paid. Interest paid on other borrowed funds, debt securities in issue, subordinated debt and lease liabilities is included in operating cash flow interest paid caption. 37. FINANCIAL AND OTHER RISK MANAGEMENT Credit Quality. Depending on the type of financial asset the Group may utilize different sources of asset credit quality information including credit ratings assigned by the international rating agencies (Standard & Poor’s, Fitch), credit scoring information from credit bureau and internally developed credit ratings. Financial assets are classified in an internally developed credit quality grades by taking into account the internal and external credit quality information in combination with other indicators specific to the particular exposure (e.g. delinquency). The Group defines following credit quality grades: • Very low risk – exposures demonstrate strong ability to meet financial obligations; • Low risk – exposures demonstrate adequate ability to meet financial obligations; • Moderate risk – exposures demonstrate satisfactory ability to meet financial obligations; • High risk – exposures that require closer monitoring, and • Default – exposures in default, with observed credit impairment. 229 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED Expected credit loss (ECL) measurement ECL is a probability-weighted estimate of the present value of future cash shortfalls. An ECL measurement is unbi- ased and is determined by evaluating a range of possible outcomes. ECL measurement is based on four components used by the Group: Probability of Default (“PD”), Exposure at Default (“EAD”), Loss Given Default (“LGD”) and Discount Rate. The estimates consider forward looking information, that is, ECLs reflect probability weighted development of key macroeconomic variables that have an impact on credit risk. The Group uses is a three-stage model for ECL measurement and classifies its borrowers across three stages: The Group classifies its exposures as Stage 1 if no significant deterioration in credit quality occurred since initial recog- nition and the instrument was not defaulted when initially recognized. The exposure is classified to Stage 2 if the significant deterioration in credit quality was identified since initial recognition but the financial instrument is not considered defaulted. The exposures for which the defaulted indicators have been identified are classified as Stage 3 instruments. The Expected Credit Loss (ECL) amount differs depending on exposure allocation to one of the Stages. In the case of Stage 1 instruments, the ECL represents that portion of the lifetime ECL that can be attributed to default events potentially occurring within the next 12 months from the reporting date. In case of Stage 2 instruments, the ECL represents the lifetime ECL, i.e. credit losses that can be attributed to possible default events during the whole lifetime of a financial instrument. Generally, lifetime is set equal to the remaining contractual maturity of the financial instrument. Factors such as existence of contractual repayment schedules, options for extension of repayment ma- turity and monitoring processes held by The Group affect the lifetime determination. In case of Stage 3 instruments, default event has already incurred and the lifetime ECL is estimated based on the expected recoveries. Definition of default Financial assets for which the Group observed occurrence of one or more loss events are classified in Stage 3.. The Group uses both quantitative and qualitative criteria for the definition of default. The borrower is classified as defaulted if at least one of the following occurred: • Any amount of contractual repayments is past due more than 90 days; • Factors indicating the borrower’s unlikeliness-to-pay. In case of individually significant borrowers The Group additionally applies criteria including but not limited to: Bank- ruptcy proceedings, significant fraud in the borrower’s business that significantly affected its financial condition, breach of the contract terms etc. For SME and corporate borrowers default is identified on the counterparty level, meaning that all the claims against the borrower are treated as defaulted. As for retail and micro exposures, facility level default definition is applied considering additional pulling effect criteria. If the amount of defaulted exposure ex- ceeds predefined threshold, all the claims against the borrower are classified as defaulted. Once financial instrument is classified as defaulted, it remains as such until it no longer meets any of the default criteria for a consecutive period of six months, in which case exposure is considered to no longer be in default (i.e. to have cured). Probation period of six months has been determined on analysis of likelihood of a financial instrument returning to default status after curing. Exposures which are moved to stage 2 from default state are kept there for certain period before transferring to Stage 1 and classified as fully performing instruments again. Significant increase in credit risk (“SICR”) Financial assets for which the Group identifies significant increase in credit risk since its origination are classified in Stage 2. SICR indicators are recognized at financial instrument level even though some of them refer to the borrower’s characteristics. The Group uses both quantitative and qualitative indicators of SICR. Quantitative criteria On a quantitative basis The Group assess change in probability of default parameter for each particular exposure since initial recognition and compares it to the predefined threshold. When absolute change in probability of default exceeds the applicable threshold, SICR is deemed to have occurred and exposure is transferred to Stage 2. Quantita- tive indicator of SICR is applied to retail and micro segments, where the Group has sufficient number of observations. Qualitative criteria Financial asset is transferred to Stage 2 and lifetime ECLs is measured if at least one of the following SICR qualitative criteria is observed: 230 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED • delinquency period of more than 30 days on contractual repayments; • exposure is restructured, but is not defaulted; • borrower is classified as “watch”. The Group has not rebutted the presumption that there has been significant increase in credit risk since origination when financial asset becomes more than 30 days past due. This qualitative indicator of SICR together with debt restructuring is applied to all segments. Particularly for corporate and SME segment the Group uses downgrade of risk category since origination of the financial instrument as a qualitative indicator of SICR. Based on the results of the monitoring borrowers are classified across different risk categories. In case there are certain weaknesses present, which if materialized may lead to loan repayment problems, borrowers are classified as “watch” category. Although watch borrowers’ financial standing is sufficient to repay obligations, these borrowers are closely monitored and spe- cific actions are undertaken to mitigate potential weaknesses. Once the borrower is classified as “watch” category it is transferred to Stage 2. If any of the SICR indicators described above occur financial instrument is transferred to Stage 2. Financial asset may be moved back to Stage 1, if SICR indicators are no longer observed. ECL measurement The Group utilizes two approaches for ECL measurement – individual assessment and collective assessment. Indi- vidual assessment is mainly used for stage 2 and stage 3 individually significant borrowers. Additionally, the Group may arbitrarily designate selected exposures to individual measurement of ECL based on the Group’s credit risk management or underwriting departments’ decision. The Group uses the discounted cash flow (DCF) method for the determination of recovery amount under individual assessment. In order to ensure the accurate estimation of recoverable amount The Group may utilize scenario anal- ysis approach. Scenarios may be defined considering the specifics and future outlook of individual borrower, sector the borrower operates in or changes in values of collateral. In case of scenario analysis The Group forecasts recover- able amount for each scenario and estimates respective losses. Ultimate ECL is calculated as the weighted average of losses expected in each scenario, weighted by the probability of scenario occurring. As for the non-significant and non-impaired significant borrowers The Group estimates expected credit losses col- lectively. For the collective assessment and risk parameters estimation purposes the exposures are Grouped into a homogenous risk pools based on similar credit risk characteristics. Common credit risk characteristics of the Group include but are not limited to: Stage (Stage 1, Stage 2 or Stage 3), type of counterparty (individual vs business), type of product, rating (external or internal), overdue status, restructuring status, months in default category or any other char- acteristics that may differentiate certain sub-segments for risk parameter’s estimation purposes. Number of pools differs for different products/ segments considering specifics of portfolio and availability of data within each pool. Collective ECL is the sum of the multiplications of the following credit risk parameters: EAD, PD and LGD, that are defined as explained below, and discounted to present value using the instrument’s effective interest rate. The key principles of calculating the credit risk parameters: Exposure at default (EAD) The EAD represents estimation of exposure to credit risk at the time of default occurring during the life of financial instrument. The EAD parameter used for the purpose of the ECL calculation is time-dependent, i.e. the Group allows for various values of the parameter to be applied to subsequent time periods during the lifetime of an exposure. Such structure of the EAD is applied to all Stage 1 and Stage 2 financial instruments. In case of Stage 3 financial instruments and defaulted POCI assets, the EAD vector is one-element with current EAD as the only value. EAD is determined differently for amortising financial instruments with contractual repayment schedules and for revolving facilities. For amortising products EAD is calculated considering the contractual repayments of principal and interest over the 12-month period for facilities classified in Stage 1 and over lifetime period for remaining instruments. It is additionally adjusted to include effect of reduction in exposure due to prepayments - Namely full prepayment ratio. Full Pre- payment Rate (FPR) parameter represents the probability that a financial instrument will be fully prepaid during the particular period to maturity. For the purpose of calculating Full Prepayment Ratio, the Group make the analysis of the historical data of the contracts fully prepaid until the maturity. 231 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED Probability of default (PD) Probability of default parameter describes the likelihood of a default of a facility over a particular time horizon. It pro- vides an estimate of the likelihood that a borrower will be unable to meet its contractual debt obligations. The PD parameter is time-dependent (i.e. has a specific term structure) and is applied to all non-defaulted contracts. Taking into account specific nature of different segments of clients for which the PD is estimated as well as unique char- acteristics that drive their default propensity, the PD is modelled differently for Retail and Micro segments and Cor- porate and SME segments. PD assessment approach is also differentiated for different time horizons and is further adjusted due to expected influence of macroeconomic variables as forecasted for the period (see ‘Forward Looking Information” section for further details on incorporation of macroeconomic expectations in ECL calculation). FLI ad- justment is applied on PD for the three-year period, given the uncertainty involved in the macroeconomic forecasts for the longer time horizon. Two types of PDs are used for calculating ECLs: 12-month and lifetime PD. Lifetime PDs represent the estimated probability of a default occurring over the remaining life of the financial instrument and it is a sum of the 12 months marginal PDs over the life of the instrument. The Group generally uses number based approach of PD model construction, however for the nonhomogeneous portfolios exposure-weighted approach is utilised. The Group uses different statistical approaches such as the extrapolation of 12-month PDs based on migration ma- trixes, developing lifetime PD curves based on the historical default data and gradual convergence of long-term PD with the long-term default rate. Loss given default (LGD) The LGD parameter represents the share of an exposure that would be irretrievably lost if a borrower defaults. For Stage 1 and Stage 2 financial instruments, the LGD is estimated for each period in the instrument’s lifetime and re- flects the share of the expected EAD for that period that will not be recovered over the remaining lifetime of the instrument after the default date. For Stage 3 financial instruments, the LGD represents the share of the EAD as of reporting date that will not be recovered over the remaining life of that instrument. Assessment of LGD varies by the type of counterparty, segment, type of product, securitization level and availability of historical observations. The general LGD estimation process employed by the Group is based on the assumption that after the default of the exposure, two mutually exclusive scenarios are possible. The exposure either leaves the default state (cure scenario) or does not leave the default state and will be subject to recovery process (non-cure scenario). The probability that an exposure defaults again in the cure scenario is involved in the estimation process. Risk parameters applicable to both scenarios, i.e. cure rates and recovery rates, are estimated by means of migration matrices approach, where risk Groups are defined by consecutive months-in-default. For each LGD portfolio the Group defines the recovery hori- zon, since the default date after which no material recoveries are assumed. Recovery horizon is defined by data ana- lytics and expert judgment. For certain portfolios based on the limitations of observations alternative versions of the general approach may be applied. For significant corporate exposures, the Group uses the LGD modelling approach that is based on realized recoveries from historical defaults, adjusted with approximation of future recoveries from individually assessed defaulted exposures. In order to model LGD for SME and non-significant corporate borrowers, the Group is estimating recoverable amount directly from the collateral and assumes that no recoveries from cash is expected. In order to estimate recoverable amount from the collateral the Group is applying respective haircuts defined for different types of collateral and discounts them using effective interest rate over the realization period. In addition, at each reporting date, the Group makes the decision which historical data horizon should be used in order to model recoveries. Forward-looking information The measurement of unbiased, probability weighted ECL requires inclusion of forward looking information obtain- able without undue cost or effort. For forward-looking information purposes the Group defines three macro scenari- os. The scenarios are defined as baseline (most likely), upside (better than most likely) and downside (worse than most likely) scenarios of the state of the Georgian economy. To derive the baseline macro-economic scenario, the Group takes into account forecasts from various external sources – the National Bank of Georgia, Ministry of Finance, Inter- national Monetary Fund (“IMF”) as well as other International Financial Institutions (“IFI”’s) – in order to ensure the to the consensus market expectations. Upside and downside scenarios are defined based on the framework developed by the Group’s macroeconomic unit. The Group uses statistical models and historical relationship between the various macroeconomic factors and de- fault observations to derive forward-looking adjustments. In case these models do not provide reasonable results 232 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED either from statistical or business perspective, the Group may apply expert judgment or use alternative approach. As at 31 December 2021, the Group uses same approaches as in 31 December 2020. The Group employs statistical models to derive forward looking adjustment in all segments except for corporate. In corporate segment, due to the availability of comprehensive borrower-level financial information and insignificance of the statistical models, The Group uses stress test approach instead. The baseline, upside and downside scenarios were assigned probability weighing of 50%, 25% and 25%, respectively. The forward looking information is incorporated in both individual and collective assessment of expected credit losses. Model maintenance and validation The Group regularly reviews its methodology and assumptions to reduce any difference between the estimates and the actual credit loss. Such back-testing is performed at least once a year. As part of the back-testing process, the Group evaluates actual realization of the risk parameters and their consistency with the model estimates. Additionally staging criteria are also analysed within the back-testing process. The results of back-testing the ECL measurement methodology are communicated to the Group Management and further actions for tuning the models and assump- tions are defined after discussions between authorised persons. Risk governance ECL impairment models were developed by internal credit risk governance division with the involvement of exter- nal consultants. The division runs the models to calculate ECL each month. They are also responsible for model back-testing, analytics and governance. Economic scenarios and probability weights are prepared by macro-financial analysis unit. All the assumptions, in- cluding PMAs and PMOs used in the ECL measurement go through of review and approval process: • Chief Economist reviews and approves the forward-looking scenarios and respective weights; • Internal allowance committee reviews and approves appropriateness of the estimates and judgements as well as PMAs and PMOs used in ECL measurement on a regular basis; internal committee includes Head of ERM, Heads of Portfolio Credit Risk Management divisions and CRO, who ultimately approves ECL results as of each reporting date; Climate risk. The Group’s largest operations are located in Georgia hence the climate risk overview is done by the management from Georgian perspective. The Georgia’s 2030 Climate Change Strategy and Climate Action Plan lays out different policy measures on which TBC Bank based its identification of the potential impact of the pol- icy measures on different economic sectors. As a summary of the potential impact of the various transition risks and physical risks identified, the transitional risks in Georgia are low, considering, that trade and services domi- nate the Georgian economy, the policy measures outlined in the Georgia’s 2030 Climate Change Strategy will have overall low impact on the economic sectors, especially in short and medium term. The Georgia’s 2030 Cli- mate Change Strategy takes into consideration that Georgia is a transitional and growing economy, and there- fore the government strategy is not to impede the growth of the GDP with policy measures and rather to support a smooth transition where necessary. It is worth noting, that the economic sectors most affected by transitional risks world-wide such as mining crude petroleum, natural gas and metal ores, manufacturing coke and refined pe- troleum products are present to the extremely limited extend in Georgia, resulting in a low overall impact of tran- sitional measures on economic growth, if any. In order to increase the understanding of climate-related risks on its loan portfolio, the Bank performed a high-level sectoral risk assessment, as different sectors might be vulnera- ble to different climate-related risks over different time horizons. The maturity structure of the loan portfolio shows that the largest part of assets is distributed in the time horizons that are much shorter that the impacts of climate change, especially of physical risks, can be materialized in Georgia. Therefore, the bank has not made any adjust- ment to the level of provisions purely related to climate risk. On the other hand, the understanding of climate re- lated risks, which have longer-term impacts need to be increased in coming years, therefore, if the bank will have a plausible findings and conclusions, it will further develop the approach, how to consider climate risks in provision- ing. No post model adjustments (PMAs) or Post model overlays (PMOs) have been posted for 2021 in this regard. 233 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED Details of climate related risks and steps taken are disclosed in the material existing and emerging risks section of the annual report. 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. Table below includes geographical concentration by country of incorporation. Loans and advances to OECD and Non-OECD resident customers, as well as to Georgian customers, are issued to the entities most of which are based and performing in Georgia. The geographical concentration of the Group’s assets and liabilities as of 31 December 2021 is set out below by coun- try of incorporation: in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents Due from other banks Mandatory cash balances with National Bank of Georgia Loans and advances to customers Investment securities measured at fair value through OCI Finance lease receivables 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 Lease liabilities Subordinated debt Total financial liabilities Non-financial liabilities Total liabilities Net balance sheet position Performance guarantees Credit related commitments 987,932 26,174 2,086,113 16,104,160 1,440,168 246,328 439,224 21,330,099 1,131,337 22,461,436 1,325,363 12,805,769 1,578,050 120,343 56,253 109,427 15,995,205 194,364 16,189,569 6,271,867 724,710 2,178,835 593,004 16,033 - 126,415 496,377 - 2,749 1,234,578 - 1,234,578 1,612,336 1,029,719 - 270 - 357,834 3,000,159 - 3,000,159 (1,765,581) 675,323 4,197 14,524 30 - 316,610 1,651 6,012 234 339,061 4,437 343,498 46,376 1,048,657 5,649 7 269 156,386 1,257,344 2,385 1,259,729 (916,231) 165,661 12,317 1,595,460 42,237 2,086,113 16,547,185 1,938,196 252,340 442,207 22,903,738 1,135,774 24,039,512 2,984,075 14,884,145 1,583,699 120,620 56,522 623,647 20,252,708 196,749 20,449,457 3,590,055 1,565,694 2,195,349 234 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The geographical concentration of the Group’s assets and liabilities as at 31 December 2020 is set out below by country of incorporation: in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents Due from other banks Mandatory cash balances with National Bank of Georgia Loans and advances to customers Investment securities measured at fair value through OCI Bonds carried at amortised cost Finance lease receivables 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 Lease liabilities Subordinated debt Total financial liabilities Non-financial liabilities Total liabilities Net balance sheet position Performance guarantees Credit related commitments 906,270 6,638 2,098,506 14,111,683 1,206,673 1,059,946 270,632 156,866 19,817,214 1,060,212 20,877,426 2,362,648 10,709,378 1,419,513 210,887 52,923 115,394 14,870,743 86,100 14,956,843 5,920,583 745,511 1,868,011 686,110 13,052 – 131,066 318,682 – – 3,976 1,152,886 433 1,153,319 2,110,307 911,146 – 340 – 390,941 3,412,734 59 3,412,793 (2,259,474) 746,871 4,678 9,219 – – 351,520 1,913 – 346 160 363,158 5,059 368,217 12,918 1,013,771 – 15 1,665 166,405 1,194,774 4,372 1,199,146 (830,929) 258,659 8,627 1,601,599 19,690 2,098,506 14,594,269 1,527,268 1,059,946 270,978 161,002 21,333,258 1,065,704 22,398,962 4,485,873 12,634,295 1,419,513 211,242 54,588 672,740 19,478,251 90,531 19,568,782 2,830,180 1,751,041 1,881,316 235 TBC BANK FINANCIAL STATEMENTS 2021 37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The geographical concentration of the Group’s assets and liabilities as at 31 December 2019 is set out below by coun- try of incorporation: in thousands of GEL Georgia OECD Non-OECD Total Assets Cash and cash equivalents Due from other banks Mandatory cash balances with National Bank of Georgia Loans and advances to customers Investment securities measured at fair value through OCI Bonds carried at amortised cost Finance lease receivables 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 Lease liabilities Subordinated debt Total financial liabilities Non-financial liabilities Total liabilities Net balance sheet position Performance guarantees Credit related commitments 692,905 3,530 1,591,829 11,775,027 985,293 1,021,568 255,596 113,535 16,439,283 921,821 17,361,104 1,813,684 8,469,206 1,213,598 96,081 59,316 100,993 11,752,878 100,081 11,852,959 5,508,145 603,910 1,485,032 287,063 12,067 – 166,155 – – – 1,431 466,716 27 466,743 1,744,130 733,778 – 316 – 343,861 2,822,085 829 2,822,914 (2,356,171) 232,328 4,476 14,511 – – 408,217 – – 1,064 245 424,037 3,726 427,763 36,087 909,018 – 9 – 146,181 1,091,295 5,296 1,096,591 (668,828) 622,646 11,459 994,479 15,597 1,591,829 12,349,399 985,293 1,021,568 256,660 115,211 17,330,036 925,574 18,255,610 3,593,901 10,112,002 1,213,598 96,406 59,316 591,035 15,666,258 106,206 15,772,464 2,483,146 1,458,884 1,500,967 Market risk. The Bank follows the Basel Committee’s definition of market risk as the risk of losses in on- and off-bal- ance 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 invest- ments in commodities. Accordingly, the Bank’s exposure to market risk is primarily limited to foreign exchange rate risk in the structural book. 236 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED 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 mis- matches 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 2021, the Bank maintained an aggregate open currency position of 0.5% of regulatory capital (2020: 3.4%; 2019: 0.5%). 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. On 13 August 2018 the NBG introduced new regulation on changes to OCP (“open currency position”) calculation method, according to this regulation, from March 2019 special reserves assigned to FC balance-sheet assets would be deductible gradually for OCP calculation purposes. As a result of COVID-19 pandemic, the NBG implemented countercyclical measure in relation to OCP requirements: suspended the phasing in of special reserved planned to be fully implemented by July 2022. Currency risk management framework is governed through the Market Risk Management Policy. The table below summarises the Group’s exposure to foreign currency exchange rate risk at the balance sheet date. While managing open currency position the Group considers part of the provisions to be denominated in the USD, Euro and other currencies. Gross amount of currency swap deposits is included in Derivatives. Therefore, total financial assets and liabilities below are not traceable with either balance sheet or liquidity risk management tables, where net amount of gross currency swaps is presented. As of 31 December 2021 in thousands of GEL Georgian Lari US Dollar Euro Other Total As of 31 December 2020 in thousands of GEL Georgian Lari US Dollar Euro Other Total As of 31 December 2019 in thousands of GEL Georgian Lari US Dollar Euro Other Total Monetary financial assets Monetary financial liabilities Derivatives Net position 10,245,525 8,088,897 4,420,441 148,875 22,903,738 7,430,412 10,991,513 1,686,875 143,908 (339) 2,914,442 (2,725,047) (39) 2,814,774 11,826 8,519 4,928 20,252,708 189,017 2,840,047 Monetary financial assets Monetary financial liabilities Derivatives Net position 8,730,317 7,990,323 4,555,906 56,712 21,333,258 7,166,701 10,872,233 1,316,382 122,935 19,478,251 224,700 2,861,675 (3,237,938) 61,163 1,788,316 (20,235) 1,586 (5,060) (90,400) 1,764,607 Monetary financial assets Monetary financial liabilities Derivatives Net position 7,479,851 6,827,012 2,968,554 54,619 17,330,036 5,760,987 8,765,374 1,036,267 103,630 (96,378) 1,950,510 (1,924,856) 56,133 15,666,258 (14,591) 1,622,486 12,148 7,431 7,122 1,649,187 237 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED US Dollar strengthening by 20% (weakening 20%) would increase Group’s profit or loss and equity in 2021 by GEL 2,365 thousand (decrease by GEL 2,365 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s profit or loss and equity in 2021 by GEL 1,704 thousand (decrease by GEL 1,704 thousand). US Dollar strengthening by 20% (weakening 20%) would decrease Group’s profit or loss and equity in 2020 by GEL 4,047 thousand (increase by GEL 4,047 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s profit or loss and equity in 2020 by GEL 317 thousand (decrease by GEL 317 thousand). US Dollar strengthening by 20% (weakening 20%) would increase Group’s profit or loss and equity in 2019 by GEL 2,430 thousand (decrease by GEL 2,430 thousand). Euro strengthening by 20% (weakening 20%) would increase Group’s profit or loss and equity in 2019 by GEL 1,486 thousand (decrease by GEL 1,486 thousand). Interest rate risk. Interest rate risk arises from potential changes in the 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 biggest share of the Bank’s deposits and the part of the loans are at fixed interest rates, while a portion of the Bank’s borrowings is at a floating interest rate. In case of need, the Bank also applies for interest rate risk hedging in- struments in order to mitigate interest rate risk. Furthermore, many of the Bank’s loans to customers contain a clause allowing it to adjust the interest rate on the loan in case of adverse interest rate movements, thereby limiting the Bank’s exposure to interest rate risk. The management also believes that the Bank’s interest rate margins provide a reasonable buffer to mitigate the effect of possible adverse interest rate movements. The Group employs an advanced framework for the management of interest rate risk by establishing appropriate Risk Appetite limits, monitoring compliance with them and preparing forecasts. From September, 2020 the NBG in- troduced regulation on interest rate risk and set the limit for Economic Value of Equity (EVE) sensitivity at 15% of NBG Tier 1 Capital. The main principles and assumptions of NBG IRR methodology are in line with Basel standards and EBA guidelines developed for IRR management purposes. As of 31 December 2021 the Bank was in compliance with the regulatory requirement with EVE=2.9%. According to NBG guidelines the net interest income sensitivity under parallel shifts of interest rate scenarios are maintained for monitoring purposes, while EVE sensitivity is calculated under 6 predefined stress scenarios of interest rate changes and the limit is applied to the worst case scenario result. Interest rate risk is managed by the financial risk management department and is monitored by the ALCO, which decides on actions that are necessary for effective interest rate risk management and follows up on their implemen- tation. The major aspects of interest rate risk management development and the respective reporting are periodically provided to the Management Board, the Supervisory Board and the Risk Committee. Following main assumptions under NBG IRR Regulation and EBA 2018 guidelines, at 31 December 2021, if interest rates had been 200 basis points higher, with all other variables held constant, profit would have been GEL 129 million higher, mainly as a result of higher interest income on variable interest assets (2020: GEL 95 million). If interest rates at 31 December, 2021 had been 200 basis points lower with all other variables held constant, profit for the year would have been GEL 40 million lower, mainly as a result of lower interest income on variable interest assets (2020: GEL 31 million). At 31 December, 2021, if interest rates had been 200 basis points lower, with all other variables held constant, other comprehensive income would have been GEL 57.0 million higher (2020: GEL 24.0 million; 2019: GEL 9.4 million), as a result of an increase in the fair value of fixed rate financial assets measured at fair value through other comprehensive income and repurchase receivables. If interest rates at 31 December, 2021 had been 200 basis points higher with all other variables held constant, Other comprehensive income would have been GEL 60.8 million lower (2020: GEL 35 million; 2019: GEL 9.1 million), as a result of decrease in the fair value of fixed rate financial assets measured at fair value through other comprehensive income. The Bank calculates the impact of changes in interest rates using both Net Interest Income and Economic Value sen- sitivity. 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, 238 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED the Bank uses parallel shifts in interest rates as well as number of different scenarios. TBC Bank closely monitors the adverse effect of possible parallel yield curve shift scenarios on net interest income over a one-year period to ensure compliance with the predefined risk appetite of the Bank. In order to manage interest rate risk the Bank establishes appropriate limits. The Bank monitors compliance with the limits and prepares forecasts. ALCO decides on actions that are necessary for effective interest rate risk management and follows up on the implementation. Periodic reporting is done to Management Board and the Board’s Risk Com- mittee. Liquidity Risk. The liquidity risk is the risk that TBC Bank either does not have sufficient financial resources available to meet all of its obligations and commitments as they fall due, or can access those resources only at a high cost. The risk is managed by the Financial Risk Management and Treasury Departments and is monitored by the ALCO. The principal objectives of the TBC Bank’s liquidity risk management policy are to: (i) ensure the availability of funds in order to meet claims arising from total liabilities and off-balance sheet commitments, both actual and contingent, at an economic price; (ii) recognise any structural mismatch existing within TBC Bank’s statement of financial position and set monitoring ratios to manage funding in line with well-balanced growth; and (iii) monitor liquidity and funding on an on-going basis to ensure that approved business targets are met without compromising the risk profile of the Bank. The liquidity risk is categorised into two risk types: the funding liquidity risk and the market liquidity risk. Funding liquidity risk is the risk that TBC will not be able to efficiently meet both expected and unexpected current and future cash flow and collateral needs without affecting either its daily operations or its financial condition. To manage funding liquidity risk TBC Bank uses the Liquidity Coverage ratio and the Net Stable Funding ratio set, forth under Basel III, and defined further by the NBG. In addition the Bank performs stress tests and “what-if” scenario anal- ysis. In 2017, for liquidity risk management purposes National Bank of Georgia introduced Liquidity Coverage Ratio (“NBG LCR”), where in addition to Basel III guidelines conservative approaches are applied to the deposits’ withdrawal rates depending on the clients group’s concentration. From September, 2017 the Bank also monitors compliance with NBG LCR limits. In 2019, for long-term liquidity risk management purposes NBG introduced Net Stable Funding Ratio (“”NBG NSFR”). From September, 2019, on a monthly basis the Bank monitors compliance with the set limit for NBG NSFR. 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 buckets and ensure that NBG LCR limits, are met on a daily 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 Bank to rely on more stable sources of funding on a continu- ous basis. The Bank also monitors deposit concentration for large deposits and set limits for non-Georgian residents deposits share in total deposit portfolio. The management believes, that a strong and diversified funding structure is one of TBC Bank’s differentiators. The Bank relies on relatively stable deposits from Georgia as the main source of funding. In order to maintain and further enhance the liability structure TBC Bank sets the targets for deposits and IFI funding within the Bank’s risk appetite. Maturity analysis. The table below summarizes the maturity analysis of the Group’s financial liabilities, based on re- maining undiscounted contractual obligations as of 31 December 2021 subject-to-notice repayments are treated as if notice were to be given immediately. However, the Group expects, that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indi- cated by the Group’s deposit retention history. 239 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The maturity analysis of undiscounted financial liabilities as of 31 December 2021 is as follows: in thousands of GEL Due to credit institutions Customer accounts – individuals Customer accounts – other Other financial liabilities Lease liabilities Subordinated debt Debt securities in issue Gross settled swaps and forwards: – Inflows – Outflows Performance guarantees Financial guarantees Letters of credit Other credit related commitments Total potential future payments for financial obligations Less than 3 months 1,439,008 5,307,483 5,467,638 118,915 3,445 5,331 6,736 603,531 606,431 1,596,458 357,896 20,619 1,672,865 From 3 to 12 months 569,512 1,714,014 330,231 1,658 10,329 60,491 109,343 27,350 28,069 - - 96,112 - From 1 to 5 Years 1,162,095 1,184,616 850,626 47 42,201 338,052 1,608,370 402,077 408,674 - - 64,687 - Over 5 years 7,407 85,094 439,336 - 5,705 478,851 242,651 - - - - - - Total 3,178,022 8,291,207 7,087,831 120,620 61,680 882,725 1,967,100 1,032,958 1,043,174 1,596,458 357,896 181,418 1,672,865 15,999,294 2,892,409 5,257,291 1,259,044 25,408,038 The maturity analysis of undiscounted financial liabilities as of 31 December 2020 is as follows: in thousands of GEL Due to credit institutions Customer accounts – individuals Customer accounts – other Other financial liabilities Lease liabilities Subordinated debt Debt securities in issue Gross settled swaps and forwards: – Inflows – Outflows Performance guarantees* Financial guarantees Letters of credit Other credit related commitments Less than 3 months From 3 to 12 months 2,138,399 4,275,412 4,077,900 204,218 3,098 14,388 1,351 2,937,065 3,045,427 1,751,076 318,935 10,820 1,401,539 1,156,117 1,828,748 502,224 6,486 9,029 75,845 59,356 260,379 263,330 - - 90,559 – From 1 to 5 Years 2,678,130 1,282,427 619,298 537 35,298 1,474,185 1,407,320 103,181 113,820 - - 59,463 – Over 5 years 146,206 53,444 492,887 – 5,849 1,635,830 – – - - - - – Total 6,118,852 7,440,031 5,692,309 211,241 53,274 3,200,248 1,468,027 3,300,625 3,422,577 1,751,076 318,935 160,842 1,401,539 Total potential future payments for financial obligations 14,305,498 3,731,315 7,567,297 2,334,216 27,938,326 240 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED The maturity analysis of undiscounted financial liabilities as of 31 December 2019 is as follows: in thousands of GEL Due to credit institutions Customer accounts – individuals Customer accounts – other Other financial liabilities Lease liabilities Subordinated debt Debt securities in issue Gross settled swaps and forwards: -Inflows -Outflows Performance guarantees* Financial guarantees Letters of credit Other credit related commitments Total potential future payments for financial obligations Less than 3 months From 3 to 12 months 1,590,089 3,407,952 3,722,452 85,338 4,367 2,351 – 1,241,090 1,249,533 1,458,884 241,124 41,132 1,150,110 616,417 1,658,316 339,114 6,151 12,508 55,182 56,797 415,656 421,347 - - 19,687 – From 1 to 5 Years 3,724,084 699,554 250,328 4,917 57,058 1,283,737 1,156,801 160,951 164,099 - - 48,914 – Over 5 years 435,233 27,344 142,043 – 11,988 2,330,270 – - - - - - – Total 6,365,823 5,793,166 4,453,937 96,406 85,921 3,671,540 1,213,598 1,817,697 1,834,979 1,458,884 241,124 109,733 1,150,110 11,712,242 2,769,863 7,228,541 2,946,878 24,657,524 *In 2021 the Management took more conservative approach for the classification of performance guarantees contractual maturities by pulling the whole contractual amount into the less than 3 months bucket. As far as, contractually (which may differ from behavioral maturity) performance guaran- tee contracts can be reimbursed at any point in time Management considers that the amended approach will be more prudent for contractual analysis disclosure. Comparable periods has also been amended respectively to reflect the similar logic (2020: less than 3 months GEL 211,607 thousand, from 3 to 12 months GEL 588,883 thousand, from 1 to 5 years GEL 937,975 thousand and over 5 years GEL 12,610 thousand; 2019: less than 3 months GEL 115,997 thousand, from 3 to 12 months GEL 332,833 thousand, from 1 to 5 years GEL 909,502 thousand and over 5 years GEL 100,552 thousand). The undiscounted financial liability analysis gap does not reflect the historical stability of the current accounts. Their liquidation has historically taken place over a longer period than the one indicated in the tables above. These balanc- es are included in amounts due in less than three months in the tables above. Term deposits included in the customer accounts are classified based on remaining contractual maturities, accord- ing to the Georgian Civil Code, however, individuals have the right to withdraw their deposits prior to maturity if they partially or fully forfeit their right to accrued interest and the Group is obliged to repay such deposits upon the depositor’s demand. Based on the Bank’s deposit retention history, the Management does not expect that many cus- tomers will require repayment on the earliest possible date; accordingly, the table does not reflect the management’s expectations as to actual cash outflows. The Group does not use the above undiscounted maturity analysis to manage liquidity as it shows contractual terms purely and disregard the actual expected behaviour of the instruments. Instead, the Group monitors the liquidity gap analysis based on the expected maturities. In particular, expected maturities disclosure include customers’ deposits and contingent liabilities according to their behavioral analysis, while for undiscounted cash flow disclosure purpos- es, demand deposits and issued guarantees are put in on demand bucket. 241 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As at 31 December 2021 the analysis by expected maturities is as follows: 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 Investment securities measures at fair value through OCI Finance lease receivable Other financial assets Total financial assets Due to credit institutions Customer accounts Debt securities in issue Other financial liabilities Lease liabilities Subordinated debt Total financial liabilities Performance guarantees Financial guarantees Other credit related commitments Credit related commitments and performance guarantees Net liquidity gap as of 31 December 2021 Cumulative gap as of 31 December 2021 Less than 3 months 1,595,460 24,791 2,085,709 From 3 to 12 months From 1 to 5 Years - 723 - - 2,943 - Over 5 years - 13,780 Total 1,595,460 42,237 404 2,086,113 1,400,962 3,317,830 6,660,667 5,167,726 16,547,185 1,938,196 28,961 435,807 7,509,886 1,419,171 1,166,917 5,261 118,915 3,611 2,337 2,716,212 4,620 3,624 64,196 72,440 - - - 1,938,196 62,684 3,021 3,384,258 500,592 104,189 100,349 1,658 9,637 19,042 735,467 - - - 155,074 3,379 6,822,063 1,057,079 - 1,328,307 47 38,130 179,963 2,603,526 - - - 5,621 - 5,187,531 7,233 13,613,039 149,782 - 5,144 422,305 14,197,503 - - - 252,340 442,207 22,903,738 2,984,075 14,884,145 1,583,699 120,620 56,522 623,647 20,252,708 4,620 3,624 64,196 - - - 72,440 4,721,234 4,721,234 2,648,791 7,370,025 4,218,537 11,588,562 (9,009,972) 2,578,590 2,578,590 242 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 37. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As at 31 December 2020 the analysis by expected maturities is as follows*: 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 Investment securities measures at fair value through OCI Bonds carried at amortised cost Finance lease receivables Other financial assets Total financial assets Due to credit institutions Customer accounts Debt securities in issue Other financial liabilities Lease liabilities Subordinated debt Total financial liabilities Performance guarantees Financial guarantees Other credit related commitments Credit related commitments and performance guarantees Net liquidity gap as of 31 December 2020 Cumulative gap as of 31 December 2020 Less than 3 months 1,601,599 11,736 2,098,506 From 3 to 12 months From 1 to 5 Years Over 5 years – 7,954 – – – – – – – Total 1,601,599 19,690 2,098,506 1,555,791 2,512,138 6,117,467 4,408,873 14,594,269 1,527,268 27,026 23,064 147,348 6,992,338 2,116,091 1,273,664 121 204,218 2,978 11,747 3,608,819 4,427 5,424 100,214 110,065 3,273,454 3,273,454 – 149,132 73,213 1,993 2,744,430 1,007,035 382,857 56,031 6,486 8,680 16,369 1,477,458 – – – – – 1,527,268 559,823 168,447 11,652 6,857,389 1,322,468 – 1,363,361 538 33,933 258,110 2,978,410 – – – 323,965 6,254 9 4,739,101 40,279 10,977,774 – – 8,997 386,514 11,413,564 – – – 1,059,946 270,978 161,002 21,333,258 4,485,873 12,634,295 1,419,513 211,242 54,588 672,740 19,478,251 4,427 5,424 100,214 – – – 110,065 1,266,972 4,540,426 3,878,979 8,419,405 (6,674,463) 1,744,942 1,744,942 *Management has re-visited the logic for disclosing the expected maturity analysis for 2020 year and corrected any discrepancies identified. As a result, amounts disclosed in the table were amended to reflect more accurate results. 243 TBC BANK FINANCIAL STATEMENTS 202137. FINANCIAL AND OTHER RISK MANAGEMENT CONTINUED As of 31 December 2019 the analysis by expected maturities is as follows: 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 Investment securities measures at fair value through OCI Bonds carried at amortised cost Finance lease receivables Other financial assets Total financial assets Due to credit institutions Customer accounts Debt securities in issue Other financial liabilities Lease liabilities Subordinated debt Total financial liabilities Performance guarantees Financial guarantees Other credit related commitments Credit related commitments and performance guarantees Net liquidity gap as of 31 December 2019 Cumulative gap as of 31 December 2019 Less than 3 months 994,479 12,685 1,591,829 From 3 to 12 months From 1 to 5 Years Over 5 years – - – – 2,912 – – - – Total 994,479 15,597 1,591,829 1,303,715 2,307,064 5,108,649 3,629,971 12,349,399 985,293 122,889 34,448 112,263 5,157,601 1,573,720 1,088,948 – 80,592 – 530 2,743,790 7,466 4,511 100,212 112,189 2,301,622 2,301,622 – 215,711 70,398 2,946 2,596,119 427,794 175,996 56,797 10,133 4,530 – 675,250 – – – – – 985,293 555,379 148,542 2 5,815,484 1,496,459 - 1,156,801 4,918 46,625 113,278 2,818,081 – – – 127,589 3,272 – 3,760,832 95,928 8,847,058 – – 8,161 477,227 12,685 – – – 1,021,568 256,660 115,211 17,330,036 3,593,901 10,112,002 1,213,598 95,643 59,316 591,035 15,665,495 7,466 4,511 100,212 – – – 112,189 1,920,869 4,222,491 2,997,403 7,219,894 (5,667,542) 1,552,352 1,552,352 The Management believes that the Group has sufficient liquidity to meet its current on and off-balance sheet obli- gations. 244 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED38. CONTINGENCIES AND COMMITMENTS Legal proceedings. When determining the level of provision to be set up with regards to such claims, or the amount (not subject to provisioning) to be disclosed in the financial statements, the management seeks both internal and external professional advice. The management believes that the provision recorded in these financial statements is adequate and the amount (not subject to provisioning) need not be disclosed as the probability of material adverse effect on the financial condition or the results of future operations of the Group is remote. Tax legislation. Georgian and Azerbaijani tax and customs legislation is subject to varying interpretations, and chang- es, which can occur frequently. The management’s interpretation of the legislation as applied to the Group’s transac- tions and activity may be challenged by the relevant authorities. Fiscal periods remain open to review by the author- ities in respect of taxes for five calendar years preceding the review period. To respond to the risks, the Group has engaged external tax specialists to carry out periodic reviews of Group’s taxation policies and tax filings. The Group’s management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax and customs positions will be sustained. Accordingly, as of 31 December 2021, 2020 and 2019 no material provision for potential tax liabilities has been recorded. Compliance with covenants. The Group is subject to certain financial and non-financial covenants primarily related to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group includ- ing mandatory prepayment and declaration of default. The Group was in compliance with all covenants as of 31 De- cember 2021, 31 December 2020 and 31 December 2019. Group’s financial covenants mainly consist of three major sub-categories. Key covenants within each category and their compliance status are disclosed below: Covenant Description Liquidity Net stable funding ratio (NSFR) Liquidity coverage ratio (LCR) Net loan to deposit and funding ratio Capital Adequacy Tier 1 capital ratio Total capital ratio Asset Quality Net problem loans to total capital Status Complied Complied Complied Complied Complied Complied Covid-19 pandemic didn’t have major negative effects on the compliance of Group’s financial covenants in 2020, except for the asset quality ratios. Due to bank’s immediate action to request the waiver from lenders, at the end of 2020 all waivers were granted with the pre-defined validity period. In 2021, as the probability of non-compliance was relatively high due to unforeseen negative consequences of Covid-19 on Group’s operations, bank continued to work with the lenders on this matter, with the core objective to either prolong the waivers or amend the asset quality ratios. Before pandemic, covenants in loan agreements with IFIs incorporated non-performing loans exposures, which has been composed of restructured loans. As pandemic evolved, the number of restructurings has increased significantly due to loan repayment grace periods granted to borrowers back in 2020, partially in line with imposed Government programs. Although, majority of such borrowers remained healthy, the number of restructured loan exposures has still increased. As a result, the Group has renegotiated the NPL ratio with majority of IFIs, replacing non-performing loans exposures that included restructured loans, by stage 3 loans according to IFRS 9. Respective change has been successfully implemented in the vast majority of covenants with IFI’s. Alternatively, for the two lenders the Group has extended renegotiated compliance terms existing in relation to the asset quality ra- tios. Apart from asset quality ratios for other financial covenants the Group has sufficient headroom for any potential violation risks to materialise. Management of Capital. The Bank manages capital requirements under regulatory rules. The Bank complied with all its imposed capital requirements throughout the reporting period. 245 TBC BANK FINANCIAL STATEMENTS 202138. 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 the irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, that are underwritten by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to prolong credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss is lower than the total unused commitments since most commitments to extend credit are contingent upon customers main- taining specific credit standards. The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term ones. As of 31 December 2021 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Undrawn credit lines Letters of credit issued Financial guarantees issued Total credit related commitments (before provision) Stage 1 1,628,437 170,174 343,536 2,142,147 Stage 2 40,572 208 8,510 49,290 Stage 3 3,856 - 56 3,912 Credit loss allowance for credit related commitments Stage 1 Stage 2 Stage 3 Undrawn credit lines Letters of credit issued Financial guarantees issued Credit loss allowance for credit related commitments Total credit related commitments (1,961) (320) (734) (3,015) 2,139,132 (578) - (9) (587) 48,703 (22) - - (22) 3,890 As of 31 December 2020 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Undrawn credit lines Letters of credit issued Financial guarantees issued Total credit related commitments (before provision) Stage 1 1,222,916 158,131 303,046 1,684,093 Stage 2 165,798 1,464 14,571 181,833 Stage 3 12,825 1,247 1,318 15,390 Credit loss allowance for credit related commitments Stage 1 Stage 2 Stage 3 Undrawn credit lines Letters of credit issued Financial guarantees issued Credit loss allowance for credit related commitments Total credit related commitments (3,246) (376) (795) (4,417) 1,679,676 (986) - (4) (990) 180,843 (15) - (2) (17) 15,373 246 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED38. CONTINGENCIES AND COMMITMENTS CONTINUED As of 31 December 2019 outstanding credit related commitments presented by stages are as follows: in thousands of GEL Undrawn credit lines Letters of credit issued Financial guarantees issued Total credit related commitments (before provision) Credit loss allowance for credit related commitments Undrawn credit lines Letters of credit issued Financial guarantees issued Credit loss allowance for credit related commitments Total credit related commitments Stage 1 Stage 2 1,124,862 109,299 240,205 18,548 - 550 1,474,366 19,098 Stage 3 6,700 434 369 7,503 Stage 1 (2,096) (473) (1,244) (3,813) 1,470,553 Stage 2 Stage 3 (514) - (2) (516) 18,582 (182) - - (182) 7,321 The credit quality of contingencies and commitments is as follows at 31 December 2021: in thousands of GEL Undrawn credit lines risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Letters of credit issued risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Financial guarantees issued risk category – Very low – Low – Moderate – High – Default Gross carrying amount Credit loss allowance Carrying amount Stage 1 (12-months ECL) 31 December 2021 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 1,537,915 86,611 3,911 - - 1,628,437 (1,961) 1,626,476 167,570 2,604 - - - 170,174 (320) 169,854 331,437 12,099 - - - 343,536 (734) 342,802 1,794 30,143 7,764 871 - 40,572 (578) 39,994 - - 208 - - 208 - 208 1,733 1,367 5,108 302 - 8,510 (9) 8,501 - - - - 3,856 3,856 (22) 3,834 - - - - - - - - - - - - 56 56 - 56 Total 1,539,709 116,754 11,675 871 3,856 1,672,865 (2,561) 1,670,304 167,570 2,604 208 - - 170,382 (320) 170,062 333,170 13,466 5,108 302 56 352,102 (743) 351,359 247 TBC BANK FINANCIAL STATEMENTS 2021 38. CONTINGENCIES AND COMMITMENTS CONTINUED The credit quality of contingencies and commitments is as follows at 31 December 2020: in thousands of GEL Undrawn credit lines risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount Letters of credit issued risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount Financial guarantees issued risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2020 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 1,157,753 62,193 2,963 7 - 1,222,916 (3,246) 1,219,670 157,992 139 - - - 158,131 (376) 157,755 268,333 34,713 - - - 303,046 (795) 302,251 3,820 146,114 14,723 1,141 - 165,798 (986) 164,812 - 1,464 - - - 1,464 - 1,464 100 14,471 - - - 14,571 (4) 14,567 - - - - 12,825 12,825 (15) 12,810 - - - - 1,247 1,247 - 1,247 - - - - 1,318 1,318 (2) 1,316 Total 1,161,573 208,307 17,686 1,148 12,825 1,401,539 (4,247) 1,397,292 157,992 1,603 - - 1,247 160,842 (376) 160,466 268,433 49,184 - - 1,318 318,935 (801) 318,134 248 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 38. CONTINGENCIES AND COMMITMENTS CONTINUED The credit quality of contingencies and commitments is as follows at 31 December 2019: in thousands of GEL Undrawn credit lines risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount Letters of credit issued risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount Financial guarantees issued risk category - Very low - Low - Moderate - High - Default Gross carrying amount Credit loss allowance Carrying amount 31 December 2019 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for defaulted) 1,027,350 92,030 5,480 2 - 1,124,862 (2,096) 1,122,766 108,476 823 - - - 109,299 (473) 108,826 233,004 7,027 174 - - 240,205 (1,244) 238,961 2,706 5,589 9,455 798 - 18,548 (514) 18,034 - - - - - - - - - 62 488 - - 550 (2) 548 - - - - 6,700 6,700 (182) 6,518 - - - - 434 434 - 434 - - - - 369 369 - 369 Total 1,030,056 97,619 14,935 800 6,700 1,150,110 (2,792) 1,147,318 108,476 823 - - 434 109,733 (473) 109,260 233,004 7,089 662 - 369 241,124 (1,246) 239,878 The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not neces- sarily represent future cash requirements, as these financial instruments may expire or terminate without being fund- ed. Non-cancellable commitments as of 31 December 2021 were GEL 251,903 thousand (2020: GEL 579,915 thousand; 2019: GEL 472,485 thousand). Performance guarantees. Performance guarantees are contracts that provide compensation in case of another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. The risk under the performance guarantee contracts is the possibility that the insured event occurs (i.e.: the failure to perform the contractual obli- gation by another party). The key risks the Group faces are significant fluctuations in the frequency and severity of payments incurred on such contracts, relative to expectations. Outstanding amount of performance guarantees and respective provision as of 31 December 2021 is GEL 1,565,694 thousand and GEL 4,620 thousand (2020: GEL 1,751,041 thousand and GEL 4,427 thousand, 2019: GEL 1,458,884 thou- sand and GEL 7,466 thousand). 249 TBC BANK FINANCIAL STATEMENTS 2021 38. CONTINGENCIES AND COMMITMENTS CONTINUED Fair value of credit related commitments were GEL 3,624 thousand as of 31 December 2021 (2020: GEL 5,424 thou- sand; 2019: GEL 4,511 thousand). Total credit related commitments and performance guarantees are denominated in currencies as follows: in thousands of GEL Georgian Lari US Dollar Euro Other Total 2021 898,178 901,092 220,068 68,840 2,088,178 2020 1,208,199 1,584,878 776,307 62,973 3,632,357 2019 1,155,422 1,203,296 542,303 58,830 2,959,851 Capital expenditure commitments. As of 31 December 2021, the Group has contractual capital expenditure com- mitments amounting to GEL 104,162 thousand (2020: GEL 14,631 thousand; 2019: GEL 33,723 thousand). Out of total amount as at 31 December 2021, contractual commitments related to the head office construction amounted GEL 79,004 thousand (2020: GEL 4,853 thousand). 39. NON-CONTROLLING INTEREST The following table provides information for each subsidiary with a non-controlling interest as of 31 December 2021: in thousands of GEL United Financial Corporation JSC Proportion of non-controlling interest’s voting rights held 0.47% Profit attributable to non-controlling interest 16 Accumulated non-controlling interest in the subsidiary 93 The summarised financial information of these subsidiaries was as follows as of and for the year ended 31 December 2021: in thousands of GEL United Financial Corporation JSC Current assets 4,173 Non- current assets 16,352 Current liabilities 1,838 Non- current liabilities 3,593 Revenue 16,691 Profit 3,113 Total com- prehensive income 3,113 Net cash flows (626) The following table provides information for each subsidiary with a non-controlling interest as of 31 December 2020: in thousands of GEL United Financial Corporation JSC Proportion of non-controlling interest’s voting rights held 0.47% Profit attributable to non-controlling interest 22 Accumulated non-controlling interest in the subsidiary 105 The summarised financial information of these subsidiaries was as follows as of and for the year ended 31 December 2020: in thousands of GEL United Financial Corporation JSC Current assets 5,269 Non- current assets 17,803 Current liabilities 504 Non- current liabilities 257 Revenue 14,716 Profit 4,573 Total com- prehensive income 4,573 Net cash flows 676 250 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED39. NON-CONTROLLING INTEREST CONTINUED The following table provides information for each subsidiary with a non-controlling interest for the year ended as of 31 December 2019: in thousands of GEL TBC Leasing JSC* United Financial Corporation JSC Proportion of non-controlling interest’s voting rights held 0.39% 0.47% Profit attributable to non-controlling interest 11 62 Accumulated non-controlling interest in the subsidiary - 582 * In May 2019 the Group purchased remaining 0.39% shareholding from TBC Leasing JSC shareholders and became 100% owner of the company. The summarised financial information of these subsidiaries was as follows as of and for the year ended 31 December 2019: in thousands of GEL TBC Leasing JSC TBC Kredit LLC Current assets Non- current assets Current liabilities Non- current liabilities Revenue Profit 180,282 172,275 133,198 182,804 29,894 6,861 10,605 14,140 6,238 5,730 4,543 2,221 United Financial Corporation JSC 9,507 8,821 155 435 12,023 4,725 Total com- prehensive income Net cash flows 6,861 2,221 4,725 719 473 (622) 40. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES As of 31 December 2021, financial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: Gross amounts before offsetting in the state- ment of financial position (a) Gross amounts set off in the statement of financial position (b) Net amount after offset- ting 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 Other financial assets: – Receivables on credit card services and money transfers Assets subject to offsetting, master netting and similar arrangement Liabilities Other financial liabilities: 70,501 7,620 62,881 70,501 7,620 62,881 – Payables on credit card services and money transfers 36,583 7,620 28,963 Liabilities subject to offsetting, master netting and similar arrangement 36,583 7,620 28,963 - - - - - - - - 62,881 62,881 28,963 28,963 251 TBC BANK FINANCIAL STATEMENTS 2021 40. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES CONTINUED As of 31 December 2020, financial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: Gross amounts before offsetting in the state- ment of financial position (a) 25,245 25,245 8,800 8,800 Gross amounts set off in the statement of financial position (b) Net amount after offset- ting in the statement of financial position (c)=(a)-(b) Amounts subject to master netting and similar arrangements not set off in the statement of finan- cial position Financial instruments (d) Cash collateral received (e) Net amount of exposure (c)-(d)-(e) 18 18 18 18 25,227 25,227 8,782 8,782 – – – – – – – – 25,227 25,227 8,782 8,782 in thousands of GEL Assets Other financial assets: – Receivables on credit card services and money transfers Assets subject to offsetting, master netting and similar arrangement Liabilities Other financial liabilities: – Payables on credit card services and money transfers Liabilities subject to offsetting, master netting and similar arrangement As of 31 December 2019, financial instruments subject to offsetting, enforceable master netting and similar arrange- ments were as follows: Gross amounts before offsetting in the state- ment of financial position (a) Gross amounts set off in the statement of financial position (b) Net amount after offset- ting in the statement of financial position (c)=(a)-(b) Amounts subject to master netting and similar arrangements not set off in the statement of finan- cial position Financial instruments (d) Cash collateral received (e) Net amount of exposure (c)-(d)-(e) in thousands of GEL Assets Other financial assets: – Receivables on credit card services and money transfers Assets subject to offsetting, master netting and similar arrangement Liabilities Other financial liabilities: 24,139 2,244 21,895 24,139 2,244 21,895 – Payables on credit card services and money transfers 17,518 2,244 15,274 Liabilities subject to offsetting, master netting and similar arrangement 17,518 2,244 15,274 252 – – – – – – – – 21,895 21,895 15,274 15,274 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 40. OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES CONTINUED 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 arrangements have been netted-off in these financial statements and the instrument has been presented as either asset or liability at a 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. 41. 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 Total 2021 2020 199,233 30,783 2019 5,849 (10,216) (121,183) (20,440) 189,017 (90,400) (14,591) Foreign Exchange Forwards and gross settled currency swaps. Foreign exchange derivative financial instruments the Group entered are generally traded in an over-the-counter market with professional counterparties on standardised contractual terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities) condi- tions 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 ex- change forwards contracts and gross settled currency swaps the Group entered. 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. 253 TBC BANK FINANCIAL STATEMENTS 202141. DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED In thousands of GEL Foreign exchange forwards and gross settled currency swaps: fair values, at the balance sheet date, of 2021 2020 2019 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 – USD payable on settlement (-) (412,621) (528,905) (476,671) (145,313) (123,836) (14,480) – USD receivable on settlement (+) 3,355,801 500,167 360,514 3,123,145 338,080 1,750,746 – GEL payable on settlement (-) (115,337) (485,231) (175,849) (25,589) (822) (204,470) – GEL receivable on settlement (+) 394,562 205,667 291,022 135,116 108,914 - – EUR payable on settlement (-) (3,096,222) (9,883) (175,014) (3,262,892) (333,796) (1,616,299) – EUR receivable on settlement (+) 54,955 326,103 199,968 – Other payable on settlement (-) – Other receivable on settlement (+) (1,031) 19,126 (19,165) (2,904) 1,031 9,717 54,350 - - 16,048 (1,631) 2,892 9,191 (2,887) 57,759 Fair value of foreign exchange forwards and gross settled currency swaps Net fair value of foreign exchange forwards and gross settled currency swaps 199,233 (10,216) 30,783 (121,183) 5,849 (20,440) 189,017 (90,400) (14,591) 254 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED42. FAIR VALUE DISCLOSURES (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised as follows: 31 December 2021 31 December 2020 31 December 2019 Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value in thousands of GEL Assets carried at fair value Financial assets Investment securities measured at fair value through other comprehensive income – Certificates of Deposits of National Bank of Georgia – Corporate Bonds – Ministry of Finance of Uz- bekistan treasury bills – Ministry of Finance Treasury Bills – Corporate shares - - - - - - 704,435 1,683 1,231,024 - - - - - - – 21,687 – 21,687 21,687 – 40,346 – 40,346 40,346 704,435 704,435 – 664,563 – 664,563 664,563 – 611,000 – 611,000 611,000 1,683 1,683 – 1,950 – 1,950 1,950 – 1,596 – 1,596 1,596 1,231,024 1,231,024 – 838,152 – 838,152 838,152 – 329,353 – 329,353 329,353 - 1,054 1,054 1,054 - - 916 916 916 - - 2,999 2,999 2,999 Investment securities measured at fair value through profit and loss – – Foreign ex- change forwards and gross settled currency swaps, included in other financial assets or due from banks Investment held at fair value through profit or loss Total assets recurring fair value measurements Liabilities carried at fair value Financial liabilities Foreign exchange forwards and gross settled currency swaps, included in other financial liabilities Total liabilities recurring fair value measurements - 199,233 - 199,233 199,233 – 30,783 – 30,783 30,783 – 5,849 – 5,849 5,849 - - 11,125 11,125 11,125 – – 17,239 17,239 17,239 – – – – – - 2,136,375 12,179 2,148,554 2,148,554 – 1,557,135 18,155 1,575,290 1,575,290 – 988,144 2,999 991,143 991,143 - 10,216 - 10,216 10,216 – 121,183 – 121,183 121,183 – 20,440 – 20,440 20,440 - 10,216 - 10,216 10,216 – 121,183 – 121,183 121,183 – 20,440 – 20,440 20,440 There were no transfers between levels 1 and 2 during the year ended 31 December 2021 (2020 none, 2019: none). The description of the valuation technique and the description of inputs used in the fair value measurement for level 2 measurements: 255 TBC BANK FINANCIAL STATEMENTS 2021 42. FAIR VALUE DISCLOSURES CONTINUED in thousands of GEL 2021 2020 2019 Valuation technique Inputs used Fair value at 31 December Assets carried at fair value – Certificates of Deposits of NBG, Ministry of Finance Treasury Bills, Government notes, Cor- porate bonds 1,937,142 1,526,352 982,295 – Foreign exchange forwards and gross settled currency swaps, included in due from banks 199,233 30,783 5,849 Total assets recurring fair value measurements at level 2 2,136,375 1,557,135 988,144 Discounted cash flows (“DCF”) Forward pricing using present value calculations Government bonds yield curve Official exchange rate, risk-free rate Liabilities carried at fair value – Foreign exchange forwards included in other financial liabilities 10,216 121,183 20,440 Total liabilities recurring fair value measurements at level 2 10,216 121,183 20,440 Forward pricing using present value calculations Official exchange rate, risk-free rate in thousands of GEL Assets carried at fair value 2021 2020 2019 Valuation technique Inputs used – Investment held at fair value through profit or loss 11,125 17,239 - Discounted cash flows (“DCF”) – Corporate shares 1,054 916 2,999 Discounted cash flows (“DCF”) Total assets recurring fair value measurements at level 3 12,179 18,155 2,999 Government bonds yield curve Government bonds yield curve There were no changes in the valuation technique for the level 2 and level 3 recurring fair value measurements during the year ended 31 December 2021 (2020: none; 2019: none). Sensitivity of the input to fair value – increase/(decrease) in projected cash flows by 10% would result in increase/ (decrease) in fair value by GEL 886 thousand/ (GEL 886 thousand). Fair value measurement analysis by level in the fair value hierarchy is disclosed in Note 2. 256 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 42. 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: in thousands of GEL Financial assets 31 December 2021 31 December 2020 31 December 2019 Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value Level 1 Level 2 Level 3 Total fair Value Carrying value Cash and cash equivalents 831,034 764,426 Due from other banks Mandatory cash balances with the NBG and NBU Loans and advances to customers: - 42,237 - 2,086,113 - - - 1,595,460 1,595,460 747,195 854,404 1,601,599 1,601,599 646,394 348,085 42,237 42,237 2,086,113 2,086,113 19,690 2,098,506 – – – 19,690 19,690 2,098,506 2,098,506 15,597 1,591,829 – – – 994,479 994,479 15,597 15,597 1,591,829 1,591,829 – – – – Corporate loans Consumer loans Mortgage loans Loans to micro, small and medium enterprises Bonds carried at amortised cost Finance lease receivables Other financial assets Non-financial assets Investment properties, at cost Total assets Financial liabilites Customer accounts Due to credit institutions Other financial liabilities Subordinated debt Total liabilities Debt securities in issue 1,671,435 - - - - - - - - - - - - - - 6,492,668 6,492,668 6,497,010 2,304,534 2,304,534 1,973,016 4,522,528 4,522,528 4,048,955 4,126,318 4,126,318 4,028,204 - 251,855 231,849 - - 251,855 252,340 231,849 231,849 29,493 29,493 22,892 – – – – 5,728,134 5,728,134 5,583,107 2,025,055 2,025,055 1,769,759 4,032,243 4,032,243 3,845,233 3,508,881 3,508,881 3,396,170 1,086,008 – 1,086,008 1,059,946 – – – 274,402 274,402 270,978 112,980 112,980 112,980 105,628 105,628 68,689 – – – – 4,838,348 4,838,348 4,579,723 1,876,364 1,876,364 1,750,050 3,354,901 3,354,901 3,137,491 2,891,382 2,891,382 2,882,135 990,537 – 990,537 1,021,568 – – – 265,165 265,165 256,660 109,362 109,362 109,362 123,324 123,324 72,667 831,034 2,892,776 17,959,245 21,683,055 20,778,076 747,195 4,058,608 15,787,323 20,593,126 19,826,657 646,394 2,946,048 13,458,846 17,051,288 16,411,561 - 9,888,470 4,966,775 14,855,245 14,884,145 – 7,503,114 5,153,793 12,656,907 12,634,295 – 6,490,267 3,633,289 10,123,556 10,112,002 - - - - - 1,671,435 1,583,699 1,463,830 – 2,986,631 2,986,631 2,984,075 166,926 166,926 166,926 626,503 626,503 623,647 – – – 4,490,464 144,645 677,246 – - - - 1,463,830 1,419,513 1,136,297 – 4,490,464 4,485,873 144,645 144,645 677,246 672,740 – – – 3,600,318 134,519 594,892 – – – – 1,136,297 1,136,297 3,600,318 3,593,901 134,519 134,519 594,892 591,035 - - - 1,671,435 9,888,470 8,746,835 20,306,740 20,242,492 1,463,830 12,815,469 5,153,793 19,433,092 19,357,066 1,136,297 10,819,996 3,633,289 15,589,582 15,567,754 – – – – – – – – – – – – – – – – – – – – The fair values in the level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valua- tion technique. The fair value of unquoted fixed interest rate instruments was calculated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of investment properties was estimated using market comparatives (refer to Note 17). Amounts due to credit institutions were discounted at the Group’s own incremental borrowing rate. Liabilities due on demand were discounted from the first date that the Group could be required to pay the amount. Amounts due to credit institutions, subordinated debt and other financial liabilities were moved from level 2 to level 3. There were no changes in the valuation technique for the level 2 and level 3 measurements of assets and liabilities not measured at fair values in the year ended 31 December 2021 (2020: none; 2019: none). 257 TBC BANK FINANCIAL STATEMENTS 2021 43. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY For the measurement purposes, IFRS 9, classifies financial assets into the categories discussed in Note 2. The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2021: 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 measured at FVOCI Bonds carried at amortised cost Other financial assets Total financial asset subject to IFRS 9 measurement categories Finance lease receivables Non-financial assets Total assets Amortised cost 1,595,460 42,237 2,086,113 16,547,185 - - 231,849 Fair value through other comprehensive income Fair value through profit or loss - - - - 1,938,196 - - - - - - - - 210,358 Total 1,595,460 42,237 2,086,113 16,547,185 1,938,196 - 442,207 20,502,844 1,938,196 210,358 22,651,398 - - 20,502,844 - - 1,938,196 - - 210,358 252,340 1,135,774 24,039,512 The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 December 2020: 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 measured at FVOCI Bonds carried at amortised cost Other financial assets Total financial asset subject to IFRS 9 measurement categories Finance lease receivables Non-financial assets Total assets Amortised cost 1,601,599 19,690 2,098,506 14,594,269 – 1,059,946 112,980 Fair value through other comprehensive income Fair value through profit or loss – – – – 1,527,268 – – – – – – – – 48,022 Total 1,601,599 19,690 2,098,506 14,594,269 1,527,268 1,059,946 161,002 19,486,990 1,527,268 48,022 21,062,280 – – 19,486,990 – – 1,527,268 – – 48,022 270,978 1,065,704 22,398,962 258 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 43. 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 2019: 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 measured at FVOCI Bonds carried at amortised cost Other financial assets Total financial asset subject to IFRS 9 measurement categories Finance lease receivables Non-financial assets Total assets Amortised cost 994,479 15,597 1,591,829 12,349,399 – 1,021,568 113,124 Fair value through other comprehensive income Fair value through profit or loss – – – – 985,293 – – – – – – – – 2,087 Total 994,479 15,597 1,591,829 12,349,399 985,293 1,021,568 115,211 16,085,996 985,293 2,087 17,073,376 – – 16,085,996 – – 985,293 – – 2,087 256,660 925,574 18,255,610 As of 31 December 2021, 2020 and 2019 all of the Group’s financial liabilities except for derivatives are carried at am- ortised cost. Derivatives belong to the assets fair value through profit or loss measurement category under IFRS 9. 44. RELATED PARTY TRANSACTIONS Pursuant to IAS 24 “Related Party Disclosures”, parties are generally considered to be related if the parties are under common control or one party has the ability to control the other or it can exercise significant influence over the other party in taking financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form: • Parties with material ownership stake (more than 5% beneficial ownership stake for 2021, 2020 and 2019) in the Group or with representatives in the Board of Directors are considered as Significant Shareholders. Their close family members and related companies with ownership stake of more than 50% are also considered as significant shareholders. • The key management personnel include members of the Group’s Board of Directors, the Management Board of the Bank and their close family members. Transactions between Group and its subsidiaries also meet the definition of related party transactions. Where these are eliminated on consolidation, they are not disclosed in the Group Financial Statements. The definition of the related party is different per standards of National Bank of Georgia and is regulated by the pub- lished Decree N 26/04 of the Governor of the National Bank of Georgia.. 259 TBC BANK FINANCIAL STATEMENTS 2021 44. RELATED PARTY TRANSACTIONS CONTINUED As of 31 December 2021, 2020 and 2019 the outstanding balances with related parties were as follows: in thousands of GEL Contractual interest rate Significant share- holders Key mana- gement personnel Immediate parent Companies under com- mon control 2021 Gross amount of loans and advances to customers Credit loss allowance for loans and advances to customers Customer accounts Guarantees Other borrowed funds from EBRD 2020 Gross amount of loans and advances to customers Credit loss allowance for loans and advances to customers Customer accounts Guarantees Other borrowed funds from EBRD 2019 Gross amount of loans and advances to customers Credit loss allowance for loans and advances to customers Customer accounts Guarantees Other borrowed funds from EBRD 4.0%-36.0% – 0%-12.5% – 0.86%-12.85% 4.0% – 33.0% – 0.0% – 12.5% – 0.98%–11.09% 24 – 19,460 – 360,889 54 – 16,574 – 411,765* 0.4% – 48.0% – 0.0% – 10.2% – 4.5% – 11.55% 77 – 16,418 – 243,040* 12,394 6 23,620 – – 6,869 4 16,555 – – 9,624 1 13,098 – – – – 14,614 – – – – 37,275 – – – – 47,426 – – – – 38,870 211 – – – 24,441 35 – 99 – 15,991 97 – The income and expense items with related parties except from key management compensation for the year 2021, 2020 and 2019 were as follows: in thousands of GEL 2021 Interest income - loans and advances to customers Interest expense on customer accounts Interest expense with EBRD Fee and commission income Administrative and other operating expenses (excluding staff costs) 2020 Interest income - loans and advances to customers Interest expense on customer accounts Interest expense with EBRD Fee and commission income Administrative and other operating expenses (excluding staff costs) 2019 Interest income - loans and advances to customers Interest expense on customer accounts Interest expense with EBRD Fee and commission income Administrative and other operating expenses (excluding staff costs) Significant shareholders Key man- agement personnel Immediate parent Companies under common control 5 98 36,819 27 – 8 – 29,580* 21 – 7 87 22,826* 123 68 384 673 – 72 431 346 1 – 24 323 620 197 – 342 978 – 1,649 – – – – 7 – 5 – 42 5,814 – – – – 2,324 – 407 – – 6 – 58 – – 1,135 – 2 – * The management has added and separately disclosed the interest expense incurred for EBRD borrowings for current and comparative periods, considering, the data was incomplete and that the latter represents more than 5% shareholder of the Group. Other borrowed funds from EBRD were GEL 411,765 thousand and GEL 243,040 thousand as at 31 December 2020 and 2019. Interest expense with EBRD for the year 2020 and 2019 were GEL 29,580 thousand and GEL 22,826 thousand. 260 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED 44. RELATED PARTY TRANSACTIONS CONTINUED The aggregate loan amounts advanced to, and repaid, by related parties during 2021, 2020 and 2019 were as follows: in thousands of GEL 2021 Amounts advanced to related parties during the year Amounts repaid by related parties during the year 2020 Amounts advanced to related parties during the year Amounts repaid by related parties during the year 2019 Amounts advanced to related parties during the year Amounts repaid by related parties during the year Significant shareholders Key management personnel Immediate parent Companies under common control 67 (97) 107 (76) 1,512 (3,146) 5,131 (5,311) 3,750 (8,193) 15,137 (17,747) – – – – 48 – – – – – – – As of 31 December 2021, 2020 and 2019 transactions and balances of TBC Bank JSC with its subsidiaries were as follows: in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 Gross amount of loans and advances granted to subsidiaries Customer accounts of subsidiaries Other Financial Assets Other Assets Other Financial Liabilities Investment in subsidiaries 13,699 48,258 23,515 - 10,830 30,020 28,472 112,665 23,994 112 24,192 31,120 86,518 65,025 22,061 19 22,268 30,426 The income and expense items for JSC TBC Bank with its subsidiaries were as follows: in thousands of GEL 31 December 2021 31 December 2020 31 December 2019 Interest income Interest expense Fee and commission income Fee and commission expense Foreign exchange translation gains less losses Other operating income Administrative and other operating expense 3,880 5,914 6,572 25,964 - 52,286 7,507 5,278 5,509 25,229 248 - 4,144 771 2,109 5,527 16,471 2,415 54 4,477 223 Compensation of the key management personnel and Supervisory Board members is presented below: In thousands of GEL Salaries and short-term bonuses Cash settled bonuses related to share- based compensation Equity-settled share-based compensation Total 2021 2020 2019 Expense 12,095 – 11,299 23,394 Accrued liability – – – – Expense 7,484 – 11,514 18,998 Accrued liability – – – – Expense 7,376 (1,627) 25,695 31,444 Accrued liability – – – – 261 TBC BANK FINANCIAL STATEMENTS 2021 45. EVENTS AFTER REPORTING PERIOD Since February 2022 ongoing political tension in the region escalated as a result of Russian invasion in Ukraine. This has negatively impacted commodity and financial markets, and increased volatility, particularly with re- gard to foreign exchange rates. As a result of sanctions imposed from a number of countries, many companies left Russian market and as a result ceased providing services and products to Russian Market. There is an expec- tation of further sanctions and limitations on business activity of companies operating in Russia. To avoid the se- vere effects on Georgian economy the Georgian Government has not joined on all sanctions, but the full na- ture and possible effects of the imposed restrictions against Russia and Ukrainian economy downturn are yet unknown. However, taking into account Georgia’s vulnerability to developments in Ukraine and Russia and economic links with these countries, there will be adverse implications for the growth outlook, as well as, for the other macro variables, which may also negatively affect the Bank’s capital adequacy, liquidity and credit risks. Russian entities have been restricted from having access to the Euro and US$ financial markets includ- ing removing access to the international SWIFT system and in such a situation this could further impact the Group’s ability to transfer or receive funds from Russia. At this stage, it is not possible for the Manage- ment to predict with any degree of certainty the impact of all this uncertainty on the future operations of the Group. However, Group’s Management believes, the war in Ukraine is non-adjusting event and close- ly monitors the current economic environment to adjust the Groups performance accordingly where needed. In March 2022, the Bank obtained the funding resource of EUR 20 million from European Fund for South- east Europe S.A. (“EFSE”) and USD 50 million from Proparco, with the maturities of 3 and 5 years, respective- ly. USD 9.2 million from the European Bank for Reconstruction and Development (“EBRD”) and USD 15 mil- lion from the City Bank, also have been obtained in March 2022, with agreements maturities of 6 months each. 262 TBC BANK FINANCIAL STATEMENTS 2021NOTES TO THE FINANCIAL STATEMENTS CONTINUED A FULL LIST OF RELATED UNDERTAKINGS AND THE COUNTRY OF INCORPORATION IS SET OUT BELOW Company Name JSC TBC Bank United Financial Corporation JSC TBC Capital LLC TBC Leasing JSC TBC Kredit LLC TBC Pay LLC TBC Invest LLC Index LLC TBC Invest International Ltd University Development Fund JSC CreditInfo Georgia Natural Products of Georgia LLC Mobi Plus JSC Mineral Oil Distribution Corporation JSC Georgian Card JSC Georgian Securities Central Depositor JSC JSC Givi Zaldastanishvili American Academy In Georgia United Clearing Centre GRDC Banking and Finance Academy of Georgia Swift Tbilisi's City JSC TBC Trade LLC Tbilisi Stock Exchange JSC Georgian Stock Exchange JSC Kavkasreestri JSC TBC Capital Asset Management LLC Georgia Large Cap Diversified Credit Portfolio JSC Country of incorporation 7 Marjanishvili Street, 0102, Tbilisi, Georgia 154 Agmashenebeli Avenue, 0112, Tbilisi, Georgia 11 Chavchavadze Avenue, 0179, Tbilisi, Georgia 80 Chavchavadze Avenue, 0162,, Tbilisi, Georgia 71-77, 28 May Street, AZ1010, Baku, Azerbaijan 7 Marjanishvili Street, 0102, Tbilisi, Georgia 7 Jabonitsky street, , 52520, Tel Aviv, Israel 8 Tetelashvili,0102,, Tbilisi, Georgia 7 Marjanishvili Street, 0102, Tbilisi, Georgia 1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia 2 Tarkhnishvili street, 0179, Tbilisi, Georgia 1 Chavchavadze Avenue, 0128 , Tbilisi, Georgia 45 Vajha Pshavela Street, 0177, Tbilisi, Georgia 11 Tskalsadeni Street, 0153, Tbilisi, Georgia 106 Beliashvili Street, 0159, Tbilisi Georgia 74 Chavchavadze Avenue, 0162, Tbilisi, Georgia 37 Chavchavadze Avenue, 0162, Tbilisi Georgia 5 Sulkhan Saba Street, 0105, Tbilisi, Georgia 2 Vagzali Square, 0112, Tbilisi, Georgia 123, Agmashenebeli Avenue, 0112, Tbilisi, Georgia 1 Adele Avenue, B-1310, La Hulpe, Belgium 15 Rustaveli Avenue, 0108, Tbilisi Georgia 11A Chavchavadze Ave, 0179, Tbilisi, Georgia floor 2th block 8, 71 Vazha Pshavela Ave, Tbilisi, Georgia floor 7th block 10, 71 Vazha Pshavela Ave, Tbilisi, Georgia 6 Bagrationi st. saburtalo, Tbilisi , georgia 7 Marjanishvili Street, 0102, Tbilisi, Georgia 7 Marjanishvili Street, 0102, Tbilisi, Georgia 263 TBC BANK FINANCIAL STATEMENTS 2021264 TBC BANK MANAGEMENT REPORT 2021OUR ESG STRATEGY CONTINUEDADDITIONAL INFORMATION 265 TBC BANK MANAGEMENT REPORT 2021GLOSSARY Active customers Clients who have at least one active product or performed at least one transaction during the last 3 months. Active retail digital users Includes unique digital users of TBC Bank, Space app and TBC Pay mobile app, who logged in at least once for the past 3 months. Active merchant terminals Active merchant terminals include POS terminals and e-commerce with at least one transaction conducted during the month. Bank Board Chairman Code Joint Stock Company TBC Bank Board of Directors of TBC Bank Group PLC Chairman of the Supervisory Board of Joint Stock Company TBC Bank The UK Corporate Governance Code Consumer loans offloading Consumer loans offloading ratios includes the number of consumer loans disbursed via the remote channels divided by total number of such loans issued. Corporate and Investment Banking segment Daily active digital users (DAU) DAU/MAU Deposit offloading ENPS (Employee Net Promoter Score) Group Management Board Monthly active digital users (MAU) MSME (Micro, Small and Medium) segment NPS (Net Promoter Score) Retail offloading ratio Retail segment Supervisory Board TBC Bank TBC Bank Group PLC A legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or which has been granted facilities of more than GEL 5.0 million. Some other business customers may also be assigned to the CIB segment or transferred to the MSME segment on a discretionary basis. In addition, CIB includes Wealth Management private banking services to high-net-worth individuals with the threshold of US$ 250,000 on assets under management (AUM), as well as on discretionary basis. Monthly average number of digital users who logged into our digital channels at least once per day. Average daily active digital users divided by monthly active digital users. DAU/MAU is calculated for the Bank internet and mobile banking only. Deposit offloading ratio includes the number of time and savings deposits opened via remote channels divided by total number of such deposits opened. The employee net promoter score measures employee loyalty and reflects the likelihood of our colleagues recommending their workplace to their friends and family Joint Stock Company TBC Bank and its subsidiaries Management Board of Joint Stock Company TBC Bank The number of digital users who logged into our digital channels at least once a month Business customers who are not included in the CIB segment Net promoter score measures how willing customers are to recommend our products and services to others. The retail offloading ratios measures the share of transactions conducted in our remote channels, that is outside the branches. Non-business individual customers, including the fully-digital bank, Space Supervisory Board of Joint Stock Company TBC Bank Joint Stock Company TBC Bank and its subsidiaries A public limited company registered in England and Wales. It is the parent company of JSC TBC Bank (the Bank) and a group of companies that principally operate in Georgia in the financial sector and other closely related fields. TBC Bank Group PLC is listed on the London Stock Exchange under the symbol TBCG. TBC JSC TBC PLC Joint Stock Company TBC Bank TBC Bank Group PLC 266 TBC BANK MANAGEMENT REPORT 2021RATIO DEFINITIONS Ratio Name Profitability ROE ROA Cost to income IFRS based IFRS based IFRS based NIM IFRS based Loan yields IFRS based Deposit rates IFRS based Cost of funding IFRS based Asset quality & portfolio concetration Cost of risk IFRS based PAR 90 to Gross Loans NPLs to Gross Loans NPL provision coverage Total NPL coverage Credit loss level to Gross Loans Related Party Loans to Gross Loans Top 10 Borrowers to Total Portfolio Top 20 Borrowers to Total Portfolio IFRS based IFRS based IFRS based IFRS based IFRS based IFRS based IFRS based IFRS based Capital & liquidity positions Ratio Type Ratio definitions Return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders’ equity attributable to the JSC’s equity holders for the same period; annualised where applicable. Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period; annualised where applicable. 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). Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities (excluding CIB shares), net investment in finance lease, net loans, and amounts due from credit institutions. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable. Cost of funding equals sum of the total interest expense and net interest gains on currency swaps (entered for funding management purposes), divided by monthly average interest bearing liabilities; annualized where applicable. Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with a well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period. NPL provision coverage equals total credit loss allowance for loans to customers divided by the NPL loans. Total NPL coverage equals total credit loss allowance plus the minimum of collateral amount of the respective NPL loan (after applying haircuts in the range of 0%-50% for cash, gold, real estate and PPE) and its gross loan exposure divided by the gross exposure of total NPL loans. Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period. Related party loans to total loans equals related party loans divided by the gross loan portfolio. Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio. Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio. Net Loans to Deposits plus IFI Funding Net Stable Funding Ratio IFRS based Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions. Regulatory based Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as defined by NBG in line with Basel III guidelines. Calculations are made for the Bank only, based on local standards. 267 TBC BANK MANAGEMENT REPORT 2021RATIO DEFINITIONS CONTINUED Liquidity Coverage Ratio Regulatory based Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as defined by the NBG. Calculations are made for the Bank only, based on local standards. Leverage CET 1 CAR (Basel III) Tier 1 CAR (Basel III) Total CAR (Basel III) IFRS based Leverage equals total assets to total equity. Regulatory based Regulatory based CET 1 CAR equals CET 1 capital divided by total risk weighted assets, both calculated in accordance with requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local standards. Tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local standards. Regulatory based Total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the requirements of the NBG Basel III standards. Calculations are made for the Bank only, based on local standards. Notes to table: IFRS based ratios are calculated using financial information prepared under IFRS standards, while regulatory ratios are calculated for the Bank only in accordance with local accounting standards. 268 TBC BANK MANAGEMENT REPORT 2021ABBREVIATIONS ACCA Association of Chartered Certified Accountants AFS Available for sale ALCO Asset-liability management committee APM ATM BNY Alternative performance measure Automated teller machine Bank of New York CAGR Compounded annual growth rate CAR CEE CEO CFA CFO CGU CIB CIS COR CRM CRO Capital adequacy ratio Central and Eastern Europe Chief executive officer Chartered Financial Analyst Chief financial officer Cash generating unit Corporate investment banking The Commonwealth of Independent States Cost of risk Customer relationship management Chief risk officer CSAT Customer satisfaction CSR CVP DCF EBRD ECL EECG Corporate social responsibility Cost volume profit Discounted cash flows European Bank for Reconstruction and Development Expected credit losses Energy Efficiency Centre Georgia EFSEDF The Development Facility of the European Funds for Southeast Europe Europe, Middle East and Africa Employee Net Promoter Score Earnings per share Enterprise risk management EMEA ENPS EPS ERM ESRM Environmental and social risk management EU EUR FDI European Union Euro Foreign direct investment FTSE Financial Times Stock Exchange FVOCI Fair value through other comprehensive income FVPL Fair value through profit or loss GBP GDP GDR GEL GHG GWP Great British pound, national currency of the UK Gross domestic product Global depositary receipt Georgian lari, national currency of Georgia Greenhouse gas Gross written premium HNWI High-net-worth individuals HR Human resources IAS IASB IDR IFC IFI IFRIC IFRS IMF IPCC IPO IT JSC KPI LED LSE LTV International Accounting Standards International Accounting Standards Board Issuer default rating International Finance Corporation International financial institution International Financial Reporting Interpretations Committee International Financial Reporting Standards International Monetary Fund Intergovernmental Panel on Climate Change Initial public offering Information technology Joint stock company Key performance indicators Light-emitting diode London Stock Exchange Loan to value MBA Master of Business Administration MBO Management-by-objectives MSME Micro, small and medium-sized enterprises NBG NCI NIM NPL NPS OCI National Bank of Georgia Non-controlling interest Net interest margin Non-performing loans Net promoter score Other comprehensive income OECD Organisation for Economic Cooperation and Development Public limited company Point of sale Purchasing power parity Payment to income PLC POS PPP PTI PWC PricewaterhouseCoopers ROA ROE SME SPPI STEM UK US$ VAR VIP WB WRI Return on average assets Return on average equity Small and medium-sized enterprises Solely payments of principal and interest Science, technology, engineering and mathematics United Kingdom of Great Britain and Northern Ireland The US dollar, national currency of the United States Value-at-risk Very important person World Bank World Resources Institute 269 TBC BANK MANAGEMENT REPORT 2021

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