London, 15 April 2014
ANNUAL REPORT 2013 AND DIVIDEND ANNOUNCEMENT
Bank of Georgia Holdings PLC (the Company) (LSE: BGEO LN) has today published its Annual Report and Accounts for the financial year ended to 31 December 2013 (the Annual Report 2013).
A copy of the Annual Report 2013 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm.
The Annual Report 2013 is also available on the Company's website at www.bogh.co.uk. The Directors of the Company have also declared their intention to recommend an annual dividend in the amount of GEL 2.0 per share (payable in British Pounds Sterling), subject to approval by the shareholders at the Company's Annual General Meeting, scheduled for 28 May 2014. The Notice of Annual General Meeting will be dispatched to shareholders on or about 28 April 2014.
As a holding company whose principal assets are the shares of its subsidiaries, the Company relies primarily on dividends from its subsidiaries, principally JSC Bank of Georgia (the Bank), Georgia's leading bank, to generate reserves necessary to pay dividends to its shareholders.
If the annual dividend is approved at the Company's Annual General Meeting on 28 May 2014, the Company envisions the following dividend timetable:
Ex-Dividend Date 4 June 2014
Record Date 6 June 2014
Currency Conversion Date 9 June 2014
Payment Date 18 June 2014
The additional information set out below, which is extracted from the Annual Report 2013, is included in compliance with Disclosure and Transparency Rule 6.3.5. This information should be read in conjunction with the Company's preliminary results announcement issued on 18 February 2014 and the Annual Report 2013 as a whole. References to page numbers and notes in the extracts are to page numbers and notes in the Annual Report 2013. In addition, the capitalised terms have the meanings as they appear in the Annual Report 2013.
Appendix 1- Principal Risks and Uncertainties
The principal risks and uncertainties relating to the Company are set out on pages 20 to 27 of the Annual Report 2013. The following is extracted in full and unedited form from the Annual Report 2013.
Macroeconomic Risks and Political Risks Related to Georgia
Difficult global economic conditions have had, and may continue to have, a material adverse effect on the Group
The Group's business and performance are affected by macroeconomic and market conditions in Georgia and globally. In recent years, the global economy has experienced a severe downturn, with the financial services industry facing unprecedented turmoil. A shortage of liquidity, limited availability of funding, pressure on capital, deteriorating asset quality and significant price volatility across a wide range of asset classes put financial institutions, including the Group, under considerable pressure. Many developed economies entered into recession and growth slowed in many emerging economies, including Georgia. There continue to be concerns that certain countries and markets may experience "double-dip" or prolonged recessions, with certain markets experiencing heightened volatility over an extended period of time.
The financial crisis was accompanied by a number of related developments, including an erosion of confidence in financial institutions, increased currency volatility, increased counterparty risk and the risk of systemic failures. Such circumstances have caused disruptions in financial markets worldwide, leading to liquidity and funding difficulties in the international banking system. Access to capital, the credit markets, foreign direct investment and other forms of liquidity were significantly impaired and the cost of financing for financial institutions increased considerably. As a result, the cost of borrowing in wholesale debt markets increased for the Group and there were periods when it was not possible to raise finance in debt capital markets. The financial crisis also had a significant adverse effect on the valuation of assets and the capital position of many financial institutions globally.
The persistence or re-emergence of these conditions and their effects could create new dangers for the banking sector, both globally and in Georgia, which is ongoing and could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Regional tensions could have an adverse effect on the local economy and the Group
Georgia, which is bordered by Russia, Azerbaijan, Armenia and Turkey, could be adversely affected by social, political and military unrest within its borders and in surrounding countries. In particular, Georgia has had ongoing disputes in the breakaway regions of Abkhazia and the Tskhinvali Region/South Ossetia and with Russia since the restoration of its independence in 1991. In the past, these disputes have led to sporadic violence and breaches of peace-keeping operations. In August 2008, the conflict in the Tskhinvali Region/South Ossetia escalated as Georgian troops engaged with local militias and Russian forces that crossed the international border, and Georgia declared a state of war (the 2008 Conflict). Although Georgia and Russia signed a ceasefire, Russia has recognised the independence of the breakaway regions and tensions remain as Russian troops continue to occupy Abkhazia and the Tskhinvali Region/South Ossetia. Russia is also opposed to the eastward expansion of the North Atlantic Treaty Organisation, potentially including ex-Soviet republics such as Georgia and Ukraine. In November 2013, Georgia's Association Agreement with the EU, which includes a Deep and Comprehensive Free Trade Agreement, was initialled at the Eastern Partnership Summit in Vilnius. The signing of the agreement, which is expected in June 2014, could potentially be met with strong opposition from Russia.
In addition, relations between Georgia's principal neighbours, Azerbaijan and Armenia, remain tense, and there are sporadic instances of violence between these two countries. Any future deterioration or worsening of Georgia's relationship with Russia, including those related to border and territorial disputes, any major changes in Georgia's relations with Western governments and institutions (in particular in terms of national security), any changes in Georgia's importance to Western energy supplies, any changes in the amount of aid granted to Georgia or the ability of Georgian manufacturers to access world export markets, or any significant deterioration in relations between Azerbaijan and Armenia, may have a negative effect on the political and economic stability of Georgia.
In addition, the Group may be affected by social, political and military unrest in relations between Russia and Ukraine in relation to Crimea or otherwise. The social unrest in Ukraine in early 2014 resulted in an escalation of military tensions between Russia and Ukraine in February and March 2014. This resulted in international uncertainty and periods of heightened volatility in financial markets and impacted the economic stability of Russia and Ukraine, and have resulted in political and economic sanctions being imposed by Western Governments against Russia. Russia and Ukraine accounted for 6.5% and 6.6%, respectively of Georgia's total exports in 2013. While the direct impacts on Georgian economy are not likely to be great, the indirect impact of increased tensions, sanctions or even war could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
As most of the Group's businesses operate only within Georgia, the Group's success is dependent on a number of economic, political and other factors affecting Georgia that are beyond its control
Georgia accounted for over 90% of the Group's total consolidated revenue in 2012 and 2013. Therefore, macroeconomic factors relating to Georgia, such as GDP, inflation, interest rates and currency exchange rates, as well as unemployment and personal income have a material impact on loan losses, margins and customer demand for the Group's products and services, which materially affects the Group's business, financial condition and results of operations. Market turmoil and economic deterioration in Georgia can also have a material adverse effect on the liquidity, businesses or financial condition of the Group's borrowers, which in turn can increase the Group's non-performing loans, impair its loans and other financial assets and result in decreased demand for the Group's products. In such an environment, consumer spending can decline and the value of assets used as collateral for the Group's secured loans, including real estate, could also decrease significantly, which could reduce recoveries on defaulting loans. Any of these conditions could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
There can be no assurance that the Georgian economy will return to higher growth rates or that it will not experience a further deterioration.
Following the collapse of the Soviet Union, the Georgian economy became highly dollarised. The dollarisation rate of the banking system has fluctuated significantly in recent years. Although the NBG has adopted measures to support the development of Georgia's domestic money markets, the dollarisation rate could adversely impact the effectiveness of the implementation of the NBG's monetary and exchange rate policies, which could negatively impact the purchasing power of the Lari, restrict future GDP growth in Georgia and depress Georgia's investment climate. Any of these effects could have a material adverse effect on the Georgian economy and, therefore, a material adverse effect on the Group's business, its financial condition and the results of its operations.
Instability or a lack of growth in the domestic currency market may have an adverse effect on the development of Georgia's economy and, in turn, have an adverse effect on the Group
Although the Lari is a fully convertible currency, there is generally no market outside Georgia for the exchange of Lari. A market exists within Georgia for the conversion of Lari into other currencies, but it is limited in size. While the Government of Georgia has stated that these reserves will be sufficient to sustain the domestic currency market in the short term, a lack of growth of this currency market may hamper the development of Georgia's economy, which could have a material adverse effect on the businesses of the Group's corporate customers and, in turn, a material adverse effect on the Group's business, its financial condition and the results of its operations.
In addition, there has historically been significant instability in the Lari to US Dollar exchange rate, although during 2012 and 2013 the exchange rate has remained relatively stable but with a gradual further depreciation against the US dollar through to the end of 2013. The ability of the Government of Georgia and the NBG to limit any volatility of the Lari will depend on a number of political and economic factors, including the NBG's and the Government's ability to control inflation, the availability of foreign currency reserves and foreign direct investment and other currency inflows. Any failure to do so, or a major depreciation or further devaluation of the Lari, could adversely affect Georgia's economy.
The Group is subject to the effects of high and sustained inflation within the Georgian economy. In the period between 2010 and 2013, according to Geostat, Georgia experienced periods of both inflation and deflation and the rate of inflation also fluctuated greatly. High and sustained inflation could lead to market instability, a financial crisis, a reduction in consumer purchasing power and erosion of consumer confidence. On the other hand, deflation, whilst increasing the purchasing power of the Lari, could adversely affect foreign investment and the Group's profitability in its lending activities. Any of these events could lead to a deterioration in the performance of Georgia's economy and negatively affect the businesses of the Group's customers, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations
Political and governmental instability in Georgia could have a material adverse effect on the local economy and the Group
Since the restoration of its independence in 1991, Georgia has undergone a major political transformation from a constituent republic in a federal socialist state to an independent sovereign democracy. Georgia has had major recent changes in government and in its constitution and laws, the latter in connection with a transition from a presidential to a parliamentary system of government. The current President (who acts as head of state with only limited powers) and Prime Minister are both from the same party, which won parliamentary elections in 2012 and presidential elections in 2013, sweeping the prior government, which had been in place since 2004, from power.
Continuing economic and political reform are important to the future of Georgia. The previous government and current government have both been committed to reform and to business - and investor-friendly policies, but there can be no assurance that such business - and investor-friendly policies will continue or will not be reversed. While the recent elections and transitions of power have been peaceful, there can be no assurance that future elections will also be peaceful. The next elections to be held in Georgia are municipal elections scheduled for May and June 2014. There can be no assurance that the recent constitutional reforms will be stable, that the government will pursue the necessary reforms or that its policies will not change. Changes in government policy and any political instability may have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Risks Relating to the Group's Lending Activities
The Group may not be able to maintain the quality of its loan portfolio
The quality of the Group's loan portfolio is affected by changes in the creditworthiness of its customers, the ability of customers to repay their loans on time, the statutory priority of claims against customers and the Group's ability to enforce its security interests on customers' collateral should such customers fail to repay their loans and whether the value of such collateral is sufficient to cover the full amounts of those loans. In addition, the quality of the Group's loan portfolio may deteriorate for various other reasons, including factors beyond the Group's control such as any negative developments in Georgia's economy resulting in the financial distress or bankruptcy of the Group's customers or the unavailability or limited availability of credit information concerning certain customers, and other factors, such as a failure of the Group's risk management procedures or a rapid expansion of the Group's loan portfolio. The Group's impairment charges and, in turn, its cost of credit risk, could increase if a single large borrower defaults or a material concentration of smaller borrowers default. There can be no assurance that in the longer term the Group's loan portfolio quality will not deteriorate and that the Group's loan impairment charges will not increase, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group's loan portfolio for its Corporate Banking segment is somewhat concentrated, with the Group's top 10 corporate borrowers accounting for 16.8% of the Group's total loan portfolio as of 31 December 2013 (gross of allowance for impairment). To the extent that the Group grows its loan portfolio by entering into additional arrangements with existing counterparties, it will increase its credit and general counterparty risk with respect to those counterparties.
Collateral values may decline
The Group held collateral against 88.6% of the Group's total gross loans as of 31 December 2013. The main forms of collateral taken by the Group in its corporate lending are charges over real estate, equipment, inventory and trade receivables. The main form of collateral taken by the Group in its retail lending is a mortgage over residential property. Downturns in the residential and commercial real estate markets or a general deterioration of economic conditions in the industries in which the Group's customers operate may result in illiquidity and a decline in the value of the collateral securing the Group's loans, including a decline to levels below the outstanding principal balance of those loans.
In addition, declining or unstable prices of collateral in Georgia may make it difficult for the Group to accurately value collateral held by it. If the fair value of the collateral held by the Group declines significantly in the future, the Group could be required to record additional provisions and could experience lower than expected recovery levels on collateralised loans. If any of these risks materialise, they could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Significant changes or volatility in the Group's Net Interest Margin could have an adverse effect on the Group
The Group derives the majority of its total net income from net interest income. As a result, the Group's operations are affected by fluctuations in its NIM. In particular, the Group's banking operations depend on the management of key factors that affect the Group's NIM, such as interest rates, competition for loans and deposits, customer demand and costs of funding. These key factors are influenced by factors beyond the Group's control, such as global and local economic conditions, the resources of the Group's competitors and consumer confidence. Interest rates are highly sensitive to many factors beyond the Group's control, including monetary policies and domestic and international economic and political conditions and the reserve policies of the NBG.
A mismatch of interest-earning assets and interest-bearing liabilities in any given period resulting from changes in any of the key factors outlined above, or otherwise, could reduce the Group's NIM. Any reduction in the Group's NIM caused by changes in the key factors outlined above, or otherwise, could have a material adverse effect on the Group's net interest income, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
In addition, any increase in interest rates may result in an increase in the periodic instalment amounts paid by the Group's customers. Such an increase may result in difficulties related to the repayment of the assumed loans, which, in turn, may lead to a decrease in the quality of the Group's loan portfolio and an increase in impairment provisions for loans extended to the Group's customers, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Currency fluctuations have affected, and may continue to affect, the Group
A substantial portion of the total assets of the Group, especially its loan portfolio, is denominated in foreign currencies, primarily US dollars, while the majority of customers who have their loans denominated in foreign currencies earn their income in Lari. Those customers are usually not protected against the fluctuations of the exchange rates of the Lari against the currency of the loan. Consequently, any depreciation of the Lari against the currency of the loan may result in difficulties in repayment of the loans, which, in turn, may lead to a decrease in the quality of the Group's loan portfolio and an increase in impairment provisions for loans extended to the Group's customers, which may have a material adverse effect on the Group's business, its financial condition and the results of its operations.
In addition, the Group's operations are affected by the Lari to Belarusian Rouble exchange rates as these affect the value of the Group's equity interests in Joint Stock Company Belarusky Narodny Bank (BNB), its Belarusian subsidiary, on a consolidated basis and a depreciation of the Belarusian Rouble against the Lari has the effect of reducing BNB's contribution to the Group's consolidated capital. Such changes could affect its ability to comply with contractual covenants based on the Basel I Total Capital Adequacy ratio, calculated on a consolidated basis.
The Group's risk management methods may prove ineffective at mitigating credit risk
Losses relating to credit risk may arise if the risk management policies, procedures and assessment methods implemented by the Group to mitigate credit risk and to protect against credit losses prove less effective than expected. The Group employs qualitative tools and metrics for managing risk that are based on observed historical market behaviour. These tools and metrics may fail to predict future risk exposures, especially in periods of increased volatility or falling valuations, or in periods in which there is a rapid expansion of the Group's loan portfolio. In addition, even though the Group requires regular financial disclosure by its corporate customers, customer financial statements may not always present a complete and accurate picture of each customer's financial condition. Furthermore, some of the Group's corporate customers may not have extensive or externally verified credit histories, and their accounts may not be audited by a reputable external auditor. Therefore, notwithstanding the Group's credit risk evaluation procedures, the Group may be unable to evaluate effectively the current financial condition of each prospective corporate borrower and to evaluate effectively the ability of such corporate borrower to repay its loans when due. Similarly, the financial condition of some private individuals transacting business with the Group is difficult to assess and predict, as some retail borrowers have no or very limited credit history. Accordingly, the risk management systems employed by the Group may prove insufficient in measuring and managing risks and this may have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Additional Risks Arising Principally from the Group's Banking Activities
The Group faces liquidity risk
The Group becomes exposed to liquidity risk when the maturities of its assets and liabilities do not coincide. Liquidity risk is inherent in banking operations and can be heightened by a number of factors, including an overreliance on, or an inability to access, a particular source of funding, changes in credit ratings or market-wide phenomena such as financial market instability and natural disasters. Substantially all of the Group's amounts due to customers have maturities of one year or less or are payable on demand. The Group seeks to manage its liquidity risk by, among other things, maintaining a diverse funding base comprising short-term sources of funding (including retail and corporate customer deposits, inter-bank borrowing and borrowing from the NBG) and longer- term sources of funding (including borrowing from international credit institutions, sales and purchases of securities and long-term debt securities).
The Group's current liquidity may be affected by unfavourable financial market conditions. If assets held by the Group in order to provide liquidity become illiquid or their value drops substantially, the Group may therefore be required, or may choose to rely on other sources of funding to finance its operations and expected future growth. However, there is only a limited amount of funding available on the Georgian inter-bank market and the Group's recourse to other funding sources may pose additional risks, including the possibility that other funding sources may be more expensive and less flexible. In addition, the Group's ability to access such external funding sources is directly connected with the level of credit lines available to the Group, and this, in turn, is dependent on the Group's financial and credit condition, as well as general market liquidity.
In addition, the Group is exposed to the risk of unexpected, rapid withdrawal of deposits by its customers in large volumes. Circumstances in which customers are more likely to rapidly withdraw deposits in large volumes include, among others, a severe economic downturn, a loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. If a substantial portion of the Group's customers rapidly or unexpectedly withdraw their demand or term deposits or do not roll over their term deposits upon maturity, this could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group is subject to certain regulatory capital requirements
The Bank, in common with other regulated financial institutions in Georgia, is required to comply with certain capital adequacy and regulatory ratios set by the NBG. The Bank believes it is currently in compliance with all such ratios.
In December 2010, the Basel Committee on Banking Supervision published the Basel III rules setting out certain changes to capital requirements applicable to banks. Implementation of the new combined regulation based on Basel II and Basel III will occur at a national level in 2014. The NBG is currently in the process of implementing Basel II and Basel III in Georgia. On 28 October 2013, the NBG published a regulation for capital adequacy based on Basel II and Basel III, which makes adjustments to certain Basel II and Basel III rules, including those relating to foreign currency additional risk weights, specific measurements and risk estimates. As notified by the NBG, the Group expects the implementation of BII and BIII on 30 June 2014 for Pillar I and 30 September 2014 for Pillar II.
In addition, BNB is licensed by the NBRB and is required to comply with certain capital adequacy ratios and minimum share capital requirements set by the NBRB. BNB has not been in compliance with the minimum level of regulatory capital required by NBRB in order to hold deposits from individuals (set at the equivalent of €25 million for this purpose) since May 2011 and had received a temporary waiver in respect of this breach. As of 31 March 2014, BNB was in compliance with the minimum capital requirements set by NBRB however, there is no assurance that BNB will be able to comply with the minimum level of regulatory capital in the future that it will be able to obtain a further waiver from the NBRB thereafter.
The Group's ability to comply with applicable capital adequacy and regulatory ratios could be affected by a number of factors, some of which are beyond the Group's control, including:
- the Group's ability to raise capital;
- losses resulting from a deterioration in the Group's asset quality, a reduction in income levels, an increase in expenses or a combination of some or all of these factors;
- a decline in the values of the Group's securities portfolio;
- changes in accounting rules or in the guidelines regarding the calculation of the capital adequacy ratios; and
- increases in minimum capital adequacy ratios imposed by the NBG.
Failure to maintain the minimum capital adequacy and other regulatory ratios may have a material adverse effect on the Group. Moreover, a breach of regulatory requirements relating to the minimum capital adequacy and other regulatory ratios may result in entities in the Group being subject to regulatory or administrative sanctions, which could impact the Group's ability to conduct its business, and result in an increase in the operating costs of the Group and loss of reputation, all of which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group's businesses are subject to substantial regulation and oversight and future changes in regulation, fiscal or other policies are unpredictable
The Bank is required to comply with Georgian banking regulations. In addition to mandatory capital adequacy ratios, the NBG is authorised to set lending limits and other economic ratios in Georgia, with which the Bank is required to comply. Under Georgian banking regulations, the Bank is required to, among other things, comply with minimum reserve requirements and mandatory financial ratios and file periodic reports. In addition to its banking operations, the Group also provides other regulated financial services and offers financing products, including brokerage and pension fund operations, insurance and healthcare products through its Insurance and Healthcare subsidiary and services such as asset management, that are subject to governmental supervision. In addition, if regulations change or if the Group acquires or expands its businesses, the Group may become subject to additional rules and regulations at a national, international or supranational level, which may impact the Group's operations. Additionally, the business, financial condition and results of operations of the Group's activities in Belarus are affected by legal regulations, instructions and recommendations, including those issued by the NBRB and the NBG.
The Group may be unable to enforce, or may experience difficulties and delays in enforcing, the security which has been granted to it by its customers. For example, the Parliament has in the recent past established, or considered establishing, moratoriums or restrictions on enforcement measures over certain properties that are secured as collateral in financing transactions. Any of these actions, and any future changes to laws or regulations, may restrict the ability of the Group to enforce security granted by its customers and may otherwise impair the value of such collateral, which in turn may result in illiquidity of the collateral, increase of credit risk and emergence of bad loans and may have negative effects on the economy and the Georgian banking sector, including the Bank. Furthermore, such legislative changes may decrease the inflow of foreign investments in Georgia, which could have a negative effect on the economy, which could, in turn, have a material adverse effect on the Group's business, financial condition and results of operations. If any of these risks materialise, they could have a material adverse effect on the Group's business, its financial condition and the results of its operations
In addition, the current Georgian Dream coalition government is in the process of preparing and finalising a range of new initiatives, including anti-monopoly regulations and changes to the regulation of the Healthcare sector. Certain of the Government's proposals, including the decision adopted in the beginning of 2014 to establish a state insurance company to provide a basic insurance package for every Georgian citizen, could have a material impact on the business, financial condition and results of operations of the Group in general, and on the Group's insurance and healthcare subsidiary Aldagi in particular.
The corporate income tax rate in Georgia is 15%. Under the Economic Liberty Act which entered into force on 1 January 2014, subject to certain exceptions, referenda are required to be held before raising taxes and tax rates. However, no assurance can be given that there will not be a future increase in corporate income tax in Georgia. Any significant increase in the rate of corporate income tax in Georgia or other changes in taxation policy could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Future changes in regulation, fiscal or other policies are unpredictable and there is often a delay between the announcement of a change and the publication of detailed rules relating to such change. There can be no assurance that the current regulatory environment in which the Group operates will not be subject to significant change in the future, including as a result of a change in government in Georgia or Belarus, or that the Group will be able to comply with any or all resulting regulations.
The Group is subject to operational risk inherent in its business activities, which includes the risk that the Group is highly dependent on its information technology systems and is subject to the risk of cyber attacks
The Group is subject to the risk of incurring losses or undue costs due to the inadequacies or failure of internal processes or systems or human error, or from errors made during the execution or performance of operations, clerical or record-keeping errors, business disruptions (caused by various factors such as software or hardware failures and communication breakdowns), failure to execute outsourced activities, criminal activities (including credit fraud and electronic crimes), unauthorised transactions, robbery and damage to assets.
The Group's operations are highly dependent on its information technology systems. The proper functioning of the Group's payment systems, financial controls, risk management, credit analysis and reporting, accounting, customer service and other information technology systems, as well as the communication networks within the Group, are critical to the Group's operations. Any critical system failure, prolonged loss of service availability or material breach of data security (particularly involving confidential customer data) could cause serious damage to the Group's ability to service its customers, could result in significant compensation costs, could breach regulations under which the Group operates and could cause long-term damage to the Group's business and brand. For example, failure to protect the Group's operations from cyber attacks could result in the loss of customer data or other sensitive information. The threats are increasingly sophisticated and there can be no assurance that the Group will be able to prevent all threats.
Any failure of the Group's risk management system to detect unidentified or unanticipated risks, or to correct operational risks, or any failure of third parties adequately to perform outsourced activities could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Risks Affecting the Group's Non-Banking Activities
The Group's Insurance and Healthcare subsidiary, Aldagi, is subject to the risks inherent in the insurance industry
Aldagi Insurance operates in the property and casualty, life and health insurance industry. In the ordinary course of business, Aldagi seeks to reduce losses that may arise from catastrophes or other events through reinsurance. Under such reinsurance arrangements, reinsurers assume a portion of the losses and related expenses, however, Aldagi remains liable as the direct insurer on all risks reinsured. Consequently, ceded reinsurance arrangements do not eliminate Aldagi's obligation to pay under its insurance policy for losses insured, which could cause a material increase in Aldagi's liabilities and a reduction in its profitability. Moreover, Aldagi is subject to its reinsurers' credit risk and solvency and their willingness to make payments under the terms of reinsurance arrangements with respect to its ability to recover amounts due from them.
The failure of any reinsurer to meet its financial obligations to Aldagi could negatively impact Aldagi's financial condition and results of operations. In addition, the availability, amount and cost of reinsurance depend on general market conditions which may fluctuate. Reinsurance may not be available to Aldagi at commercially reasonable rates, or at all, and any decrease in the amount of Aldagi's reinsurance will increase its risk of loss.
Aldagi establishes reserves for reported claims, incurred but not reported claims and unearned premiums. Reserves do not represent an exact calculation of liability, but instead represent estimates of what the ultimate settlement and administration of claims will cost based on an assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency of claims, legal theories of liability and other factors. There can be no assurance that actual claims will not materially exceed its claims reserves and have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Government of Georgia undertook a range of new initiatives relating to the regulation of healthcare in Georgia. In 2013, under the state-funded Universal Health Care Programme (the Healthcare Programme), the Government has begun to provide a basic insurance package for every Georgian citizen not already covered by any insurance, including certain vulnerable groups such as pensioners, students and children already covered by the Healthcare Programme in place since 2007. The coverage of the groups described above under the Healthcare Programme is currently provided through private insurance companies. In 2014, the Government announced its intention to establish a state insurance company to provide basic universal healthcare coverage for Georgian citizens (rather than through private insurance companies), under the Government's Healthcare Programme.
The Group's insurance subsidiary, Aldagi, currently provides Government-funded insurance coverage to certain groups, such as the socially vulnerable, pensioners, students and children that fall under the Healthcare Programme. The establishment of a state insurance company to provide basic insurance coverage for all citizens of Georgia will result in the elimination in the Government-funded insurance policies that Aldagi provides thereby reducing Aldagi's revenues.
The Group's real estate subsidiary, m2 Real Estate, is subject to the risks of developing and selling real estate
The Group's real estate subsidiary m2 Real Estate, is primarily engaged in developing affordable residential properties for sale and rent. Real estate property investments are subject to varying degrees of risk, which affect the level of income from the value of, properties including:
- changes in the Georgian economic climate;
- local conditions such as a surplus of similar properties or a reduction in demand for the property;
- the attractiveness of the property to tenants and purchasers;
- occupancy rates and the ability to collect rent from tenants;
- laws and governmental regulations, including environmental regulation, tax laws and insurance regulations; and
- acts of nature, such as earthquakes, floods and other extreme weather events that may damage property.
In addition, m2 Real Estate's projects are subject to the general risks associated with construction and development, including:
- cost overruns due to increased material, labour or other costs, which could make completion of the project unprofitable;
- the inability to obtain, or delays in obtaining, required zoning, land use, building, occupancy, and other Governmental permits and authorisations, which could result in increased costs and delays in completion or could require m2 Real Estate to abandon a project entirely; and
- m2 Real Estate may be unable to complete construction and leasing of a property on schedule.
Any of these factors could have a material adverse effect on the financial condition and operating results of m2 Real Estate, which may have a material adverse effect on the Group's business, its financial condition and the results of its operations.
Other Risks Affecting the Group
The Group may not successfully implement its strategy
The Group aims to achieve long-term sustainable growth and profitability through a secure, modern and universal banking model, as well as to maintain and enhance its leading market position in Georgia. In addition, the Group's strategy is to diversify its business through the addition of businesses and services that have strong synergies with its banking operations. The Group intends to exit from its other non-core operations, including through the sale of Joint Stock Company Liberty Consumer (Liberty Consumer), its remaining equity interest in BG Bank and, in due course, its interest in BNB. In addition, from time to time, the Group may seek to pursue selective acquisitions in Georgia and abroad.
There can be no assurance that the Group will be able to achieve its major strategic objectives, including in respect of its synergistic businesses, such as Insurance and Healthcare, which may be affected by market conditions, potential legal and regulatory impediments and other factors, or that it will be able to exit from its non-core operations at a satisfactory price, or at all. See "Description of Business - Synergistic Businesses - Insurance and Healthcare". Any failure by the Group to achieve its strategic objectives could have a material adverse impact on the Group's reputation, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group faces competition
In recent years the Georgian banking sector has become increasingly competitive. According to the NBG, at 31 December 2013, there were 21 commercial banks operating in Georgia, 20 of which are foreign controlled. Additionally, in Belarus, the Group competes with a wide range of local (including state-owned) and international banks.
Increased competition may have a negative impact on the Group's ability to sustain its margin and fee levels, particularly if the Group's competitors possess greater financial resources (especially in the case of banks with foreign capital investment or banks which are branches or subsidiaries of non-resident foreign banks, by way of access to funding from foreign capital or their parent entity), access to lower-cost funding and a broader offering of products than the Group, or if the Group's competitors merged to significantly enhance their financial resources, access to funding and product offerings. In addition, increasing competition could lead to significant pressure on the Group's market share. Increasing competition in the banking industry has already led to and may, in the future, continue to lead to increased pricing pressures on the Group's products and services, which could have a material adverse effect on the Group's business, financial condition and results of operations.
There can be no assurance that the current regulatory environment in which the Group operates with respect to competition and anti-monopoly matters will not be subject to significant change in the future. Anti-monopoly matters with respect to the banking services sector are currently handled by the NBG. However, the Georgian Government may, in the future, seek to legislate or regulate competition and anti-monopoly matters in the Georgian banking industry through a Governmental agency other than the NBG. The introduction of any anti-monopoly restrictions may have an effect on the growth rates of the Group, restrict the Group's ability to make future acquisitions or lead to the Group being compulsorily required to sell some of its assets or exit or reduce business areas.
The Group depends on its key management and qualified personnel
The Group's current senior management team includes a number of persons that the Bank Management Board believes contribute significant experience and expertise in the banking and other industries in which the Group operates. The Group's ability to continue to retain, motivate and attract qualified and experienced banking and management personnel is vital to the Group's business. There can be no assurance that the Group will be able to successfully recruit and retain the necessary qualified personnel. The loss or diminution in the services of members of the Group's senior management team or an inability to recruit, train or retain necessary personnel could have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group's insurance policies may not cover, or fully cover, certain types of losses
The Group generally maintains insurance policies covering its assets, operations and certain employees in line with general business practices in Georgia. The Group seeks to insure against a range of risks, including fire, lightning, flooding, theft, vandalism and third-party liability. The Group also maintains Bankers' Blanket Bond and Directors' and officers' liability insurance. However, there can be no assurance that all types of potential losses are insured or that policy limits would be adequate to cover them. Any uninsured loss or a loss in excess of insured limits could adversely affect the Group's existing operations and could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
The Group faces certain risks associated with conducting international operations
The Group's financial results have in the past been adversely affected by write-downs of goodwill associated with its investments in Joint Stock Company BG Bank (BG Bank) and BNB, as well as the weak economic environment in Ukraine and a material devaluation of the Belarusian Rouble. As part of its revised strategy to concentrate on the Georgian market the Group disposed of an 80% equity interest in BG Bank in February 2011. The Group will continue to seek to exit from its international operations (including its remaining equity interest in BG Bank and, in due course, BNB) at an appropriate time. While it holds these assets, the Group will continue to be subject to risks relating to these operations, including certain political and economic risks, compliance risks and foreign currency exchange risks, as well as the risk of failure to market adequately to potential customers in other countries Any failure to manage such risks may cause the Group to incur increased liabilities, which could, in turn, have a material adverse effect on the Group's business, its financial condition and the results of its operations.
If the Group fails to comply with any applicable laws and regulations relating to money laundering, terrorist financing or tax compliance, this could have an adverse effect on the Group
The Group is subject to Georgian, foreign and international laws, regulations and practices relating to, among other things, money laundering, terrorist financing and tax compliance. The Group has implemented comprehensive anti-money laundering, "know- your-customer", "know your corresponding bank" and "know your employee" policies and is in the process of implementing such policies throughout its financial subsidiaries (including insurance and brokerage subsidiaries). However, if the Group fails to comply with any such laws and regulations, this could have a material adverse effect on the Group's business, its financial condition and the results of its operations. In addition, involvement in such activities may carry criminal or regulatory fines and sanctions.
The Group is also subject to the US Foreign Account Tax Compliance Act (FATCA). As foreign financial institutions for purposes of FATCA, from 1 July 2014, entities within the Group will be subject to a 30%. US withholding tax on certain types of income derived from US sources (including interest and dividends) unless the members of the Group become participating foreign financial institutions or are otherwise deemed compliant with FATCA. While the Group believes that its preparations and options are sufficient to ensure compliance by the Group with FATCA, if entities within the Group suffer FATCA withholding on payments to them, this may have a material adverse effect on the Group's business and, in turn, on its financial condition and the results of its operations.
Other Risks Relating to Emerging Markets
The uncertainties of the judicial system in Georgia, or any arbitrary or discriminatory state action taken in Georgia in the future, may have a material adverse effect on the local economy, which could and in turn, have an adverse effect on the Group
Georgia is still developing an adequate legal framework required for the proper functioning of a market economy. The recent nature of much of Georgian legislation and the rapid evolution of the Georgian legal system place the quality and the enforceability of laws in doubt and result in ambiguities and inconsistencies in their application. In addition, the court system in Georgia is understaffed and its judges are generally less experienced in the area of business and corporate law than is the case in certain other countries. The uncertainties of the Georgian judicial system could have a negative effect on the Georgian economy, which could, in turn, have a material adverse effect on the Group's business, financial condition and operational results. In addition, to varying degrees, the same uncertainties of the judicial system in Georgia as discussed above apply to Belarus.
Uncertainties in the tax system in Georgia and Belarus may result in the Group facing tax adjustments or fines in the future and there may be changes in current tax laws and policies.
In Georgia and Belarus, tax laws have not been in force for significant periods of time, are often unclear in their implementation and application and are subject to frequent changes, which results in complexities for the Group. Differing opinions regarding the interpretation of various provisions exist both among and within Governmental ministries and organisations, including the tax authorities, creating uncertainties, inconsistencies and areas of conflict. There can be no assurance that the current tax laws or Government tax policies will not be subject to change in the future, including any changes introduced as a result of a change of government. Such changes could include the introduction of new taxes, an increase in the tax rates applicable to the Group or its customers or the introduction of a bank levy. Any such changes in the tax laws or Governmental tax policies may have a material adverse effect on the Group.
There are additional risks associated with investing in emerging markets such as Georgia
Financial or political instability in emerging markets also tends to have a material adverse effect on the capital markets of emerging economies and the wider economy as investors generally move their money to more developed markets, which may be considered to be more stable. These risks may be compounded by incomplete, unreliable, unavailable or untimely economic and statistical data on Georgia.
Appendix 2 - Directors' Responsibility Statement
The following statement relates to, and is extracted from page 100 to 101 of, the Annual Report 2014. The statement was signed by order of the Board of Directors of the Company by Kate Bennett Rea, on behalf of KB Rea Ltd., Company Secretary. Responsibility is for the full Annual Report 2013 and not the extracted information presented in this announcement or in the Company's preliminary results announcement issued on 18 February 2014.
Statement of Directors' responsibilities
We are responsible for preparing the Annual Report, the Director's Remuneration Report and the accompanying Consolidated Financial Statements in accordance with applicable law and regulations. Company law requires us to prepare financial statements for each financial year. Under the law, we have elected to prepare the accompanying Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applicable law.
Under company law, we must not approve the accompanying Consolidated Financial Statements unless we are satisfied that they give a true and fair view of the state of affairs of the Group and BGH and of the profit or loss of the Group and BGH for that period.
In preparing the accompanying Consolidated Financial Statements, we are required to:
a) select suitable accounting policies and then apply them consistently;
b) make judgements and accounting estimates that are reasonable and prudent;
c) state whether they have been prepared in accordance with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and
d) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
We are also responsible for keeping adequate accounting records that are sufficient to show and explain BGH's and the Group's transactions, to disclose with reasonable accuracy at any time the financial position of BGH and the Group, and to enable us to ensure that the Financial Statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. We have further responsibility for safeguarding the assets of BGH and the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities.
We are also responsible for the maintenance and integrity of BGH's website. Legislation
in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of us listed in the Board of Directors section of this Annual Report who held office at the date of this Annual Report confirms that to the best of his knowledge:
(a) the accompanying Consolidated Financial Statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of BGH and the Group taken as a whole; and
(b) the Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of BGH and Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
In accordance with section 418(2) of the Companies Act 2006, each of us that held office at the date of the approval of this Directors' Report confirms that, so far as he is aware, there is no relevant audit information of which BGH's auditors are unaware and each of us has taken all steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company's statutory auditors are aware of such information."
Cautionary Statement and Directors' Liability
The Annual Report 2013 has been prepared for, and only for, the members of the Company, as a body, and no other persons. Neither the Company nor the Directors accept or assume any liability to any person to whom the Annual Report 2013 is shown or into whose hands it may come except to the extent that such liability arises and may not be excluded under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Section 90A of the Financial Services and Markets Act 2000.
The Annual Report 2013 contains certain forward looking statements with respect to the Group's financial condition, results, strategy, plans and objectives. These statements are not forecasts or guarantees of future performance and involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed, implied or forecast by these forward looking statements. All forward-looking statements in the Annual Report 2013 are based on information known to the Group as at the date of the Annual Report 2013 and the Group has no obligation publicly to update or revise any forward looking statements, whether as a result of new information or future events. Nothing in the Annual Report 2013 should be construed as a profit forecast.
About Bank of Georgia Holdings PLC
Bank of Georgia Holdings PLC is a UK-incorporated holding company of Bank of Georgia. Bank of Georgia is the leading Georgian bank, based on total assets (with a 33.8% market share), total loans (with a 32.5% market share) and total deposits (with a 30.4% market share) as of 31 December 2013, all data based on standalone financial information filed by banks in Georgia with the National Bank of Georgia. The Bank offers a broad range of corporate banking, retail banking, wealth management, brokerage and insurance services to its clients.
Bank of Georgia has, as of the date hereof, the following credit ratings:
Standard & Poor's
'B1/NP' (FC) & 'Ba3/NP' (LC)
For further information, please visit www.bgh.co.uk, www.bog.ge/ir or contact:
Chief Executive Officer
Deputy CEO, Finance
Head of Investor Relations
+995 322 444 109
+995 322 444 126
+995 322 444 256
This news report is presented for general informational purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy any securities