Half-year Report

Released : 16 Aug 2017 07:00

RNS Number : 0959O
Bgeo Group PLC
16 August 2017
 

 

 

 

 

 

BGEO Group PLC

2nd quarter and half-year 2017 results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

www.bgeo.com



 

About BGEO Group  

The Group: BGEO Group PLC ("BGEO"- LSE: BGEO LN) is a UK incorporated holding company of a Georgia-focused investment platform. BGEO invests, via its subsidiaries, in the banking and non-banking sectors in Georgia (BGEO and its subsidiaries, together the "Group"). BGEO aims to deliver on a 4x20 strategy: (1) at least 20% ROAE from its Banking Business; (2) at least 20% growth of its Banking Business retail loan book; (3) at least 20% IRR; and (4) up to 20% of the Group's profit from its Investment Business. On 3 July 2017 BGEO announced its intention to demerge BGEO Group PLC into a London-listed banking business (the "Banking Business") and a London-listed investment business (the "Investment Business") by the end of the first half of 2018.

The Banking Business, currently representing at least 80% of the Group's profit, will comprise: a) retail banking and payment services, b) corporate investment banking and wealth management operations and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("BOG" or the "Bank") is the core entity of the Group's Banking Business. The Banking Business will continue to target to benefit from the underpenetrated banking sector in Georgia primarily through its retail banking services.

The Investment Business, currently representing up to 20% of the Group's profit, will comprise the Group's stakes in Georgia Healthcare Group PLC ("Healthcare Business" or "GHG") - an LSE (London Stock Exchange PLC) premium-listed company, Georgia Global Utilities ("Utility and Energy Business" or "GGU"), m2 Real Estate ("Real Estate Business" or "m2") and Teliani Valley ("Beverage Business" or "Teliani"). In addition, Aldagi, which is the Group's property and casualty insurance business, is expected to be transferred from the Banking Business to the Investment Business. As a result, the Group's 2Q17 and HY17 results, including the comparative information, are prepared in light of the expected transfer and therefore, Aldagi is presented under the Investment Business results. Georgia's fast-growing economy provides opportunities in a number of underdeveloped local markets and the Investment Business will target to capture growth opportunities in the Georgian corporate sector.   

COMPANY INFORMATION

BGEO Group PLC

Registered Address

84 Brook Street

London W1K 5EH

United Kingdom

www.BGEO.com

Registered under number 7811410 in England and Wales

Incorporation date: 14 October 2011

Stock Listing

London Stock Exchange PLC's Main Market for listed securities

Ticker: "BGEO.LN"

Contact Information

BGEO Group PLC Investor Relations

Telephone: +44(0)2031784052; +995322444190

E-mail: ir@BGEO.com

Auditors

Ernst & Young LLP

25 Churchill Place

Canary Wharf

London E14 5EY

United Kingdom

Registrar

Computershare Investor Services PLC

The Pavilions

Bridgewater Road

Bristol BS13 8AE

United Kingdom

Please note that Investor Centre is a free, secure online service run by our Registrar, Computershare, giving you convenient access to information on your shareholdings. Investor Centre Web Address - www.investorcentre.co.uk. Investor Centre Shareholder Helpline - +44 (0)370 873 5866

Share price information

BGEO shareholders can access both the latest and historical prices via our website, www.BGEO.com

Name of authorised official of issuer responsible for making notification: Giorgi Alpaidze, Head of Finance, Funding and Investor Relations



 

CONTENT

 

 

4

2Q17 and 1H17 Results Highlights



7

Chief Executive Officer's Statement



9

Financial Summary



11

Discussion of Results



11

Discussion of Banking Business Results



15

Discussion of Segment Results



15


Retail Banking

18


Corporate Investment Banking

21


Utility and Energy Business

25


Healthcare Business

27


Real Estate Business

30


Property and Casualty Insurance Business



33

Selected Financial and Operating Information



38

Principal Risks and Uncertainties



43

Responsibility Statements



44

Interim Condensed Consolidated Financial Statements



45

Independent Review Report

47

Interim Condensed Consolidated Financial Statements

55

Selected Explanatory Notes



84

Annex



85

2Q17 and 1H17 Results Conference Call Details

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BGEO Group PLC announces the Group's second quarter 2017 and first half 2017 consolidated results. Unless otherwise noted, numbers are for 2Q17 and comparisons are with the 2Q16. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

BGEO HIGHLIGHTS

Strong results driven by improving macroeconomic environment and continued outstanding execution

GEL thousands, except per share information

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y

BGEO










Profit before income tax

128,146

46,501

175.6%

113,288

13.1%


241,434

143,460

68.3%

Basic earnings per share

3.10

2.46

26.0%

2.64

17.4%


5.74

4.57

25.6%

Book value per share

59.75

51.46

16.1%

58.00

3.0%


59.75

51.46

16.1%

Total equity attributable to shareholders of the Group

2,249,782

1,970,892

14.2%

2,208,898

1.9%


2,249,782

1,970,892

14.2%

Total assets

13,171,740

10,323,223

27.6%

12,606,524

4.5%


13,171,740

10,323,223

27.6%











Banking Business










Revenue

212,039

177,478

19.5%

213,788

-0.8%


425,827

355,471

19.8%

Cost of credit risk

40,016

27,965

43.1%

48,019

-16.7%


88,036

62,805

40.2%

Profit

87,330

71,752

21.7%

83,127

5.1%


170,457

138,326

23.2%

Loans to customers and finance lease receivables

6,579,996

5,507,414

19.5%1

6,470,771

1.7%1


6,579,996

5,507,414

19.5%1

Client deposits and notes

5,655,341

4,820,169

17.3%2

5,622,023

0.6%2


5,655,341

4,820,169

17.3%2











ROAE

23.5%

22.3%


23.1%



23.4%

21.4%


ROAA

3.2%

3.3%


3.1%



3.1%

3.1%


Net interest margin

7.3%

7.5%


7.4%



7.3%

7.5%


Loan yields

14.3%

14.1%


14.0%



14.1%

14.3%


Cost of funds

4.8%

4.8%


4.6%



4.7%

4.9%


Cost / Income

38.1%

38.1%


36.0%



37.1%

38.0%


Cost of risk

2.2%

2.0%


2.4%



2.3%

2.1%


Leverage (times)

6.7

5.7


6.6



6.7

5.7


NBG (Basel II) Tier I Capital Adequacy Ratio

10.6%

10.2%


10.1%



10.6%

10.2%


NBG Liquidity Ratio

44.1%

43.5%


37.4%



44.1%

43.5%












Investment Business










Revenue

120,083

45,643

163.1%

87,914

36.6%


207,997

89,114

133.4%

EBITDA

66,493

23,436

183.7%

42,927

54.9%


109,421

50,028

118.7%

Profit before income tax

37,532

10,897

244.4%

25,753

45.7%


63,285

33,648

88.1%

Continued rebound in economic activity during 2Q17 and HY17. The Georgian economy gained traction in 1H17, growing by 4.5% as external demand stabilized and government initiatives strengthened consumer demand and business confidence. In 1H17, the combination of goods export growth, robust tourist arrivals, recovery in remittances and modest increase in imports improved the current account deficit and stabilized the currency. The GEL strengthened 1.6% during 2Q17, adding to the 7.6% appreciation during 1Q17 and reflecting favourable external conditions and the related uptick in growth. The National Bank of Georgia intervened with close to $90mln purchases in 1H17 to curb the GEL's appreciation pressure.

Inaugural local currency denominated international bond issuance by Bank of Georgia. On 24 May 2017, JSC Bank of Georgia priced GEL 500mln 11.0% notes due 2020 (the "Issuance"). The Issuance, described as a landmark transaction for Georgia, was the first international local currency bond offering from the wider CIS region (excluding Russia) in the past ten years.

As of 14 August 2017, GEL 255mln liquid assets were held at the holding company level, of which, GEL 218mln was unallocated and GEL 37mln was pledged as collateral for borrowings from local financial institutions.

Monetisation of GHG value on track. On 17 May 2017, we sold 9.5mln GHG shares (the "Sale"), representing approximately 7.2% of GHG's existing ordinary issued share capital, at a price of 330 pence per share. As a result of the Sale, the Group received total gross proceeds of GEL 98.0mln (US$ 40.4mln/GBP 31.4mln) and realized a gain of GEL 63.4mln (US$26.1mln), which was recorded through an increase in shareholders' equity in 2Q17. Following the Sale, we continue to hold 75,118,503 shares in GHG, or 57.0% of GHG's issued share capital.

$2.6 million capital returned to shareholders through buyback and cancellation programme during 2Q17. As of 30 June 2017, we have repurchased and cancelled 88,000 shares for a total consideration of $3.8mln since the commencement of the programme. An additional $6mln capital was returned through management trust buybacks in 2Q17.

1 As of 30 June 2017 loans and finance lease receivables growth on a constant currency basis was 17.4% and 2.7% on y-o-y and q-o-q basis, respectively

2 As of 30 June 2017 client deposits and notes growth on a constant currency basis was 15.7% and 2.3% on y-o-y and q-o-q basis, respectively

 

BANKING BUSINESS HIGHLIGHTS

Sustainable profit and balance sheet growth as loan book continues to shift to retail segment

§ Retail Banking ("RB") delivered strong growth across all its business lines. Retail Banking revenue reached GEL 141.8mln in 2Q17, up 25.6% y-o-y and up 0.4% q-o-q, with half year revenue totalling GEL 283.0mln, up 29.1% y-o-y. The number of Retail Banking clients reached 2.2mln at the end of 2Q17, up 9.4% from 2.0mln at the end of 2Q16 and up by 2.0% from 1Q17

§ Retail Banking achieved a new milestone as the retail loan book's share in the total portfolio reached 66% for the first time in the Bank's history and was above our target of 65% at 30 June 2017, two years ahead of time. The Retail Banking net loan book reached GEL 4,155.3mln at 30 June 2017, up 34.1% y-o-y and up 6.8% q-o-q. The growth on a constant-currency basis was 32.3% y-o-y, well above our strategic target of 20%+, and 7.6% q-o-q. RB's loan portfolio share reached 66.1% at 30 June 2017 (59.0% at 30 June 2016 and 62.6% at 31 March 2017)

§ Retail Banking client deposits increased to GEL 2,613.3mln at 30 June 2017, up 32.2% y-o-y and up 9.2% q-o-q. Growth on a constant-currency basis was 29.6% y-o-y and 10.4% q-o-q

§ New loyalty program Plus+ launched on 5 July 2017. Plus+ is part of RB's customer-centric approach and offers different status levels to customers and reward points that accumulate based on the client's business with the Bank and can be redeemed into partner companies' products and/or services, at client's request. We launched the program as part of our efforts to increase the Mass Retail segment's product to client ratio from 1.7 to 3.0

§ Solo - our premium banking brand - continues its strong growth momentum. As of 30 June 2017, the number of Solo clients reached 24,984, up 67.7% from 14,896 a year ago and up 15.4% from 21,657 at 31 March 2017. We are well on track to achieve our target of 40,000 Solo clients by the end of 2018. During 2Q17 we also launched Solo Club, a membership group within Solo, which offers exclusive access to Solo's products and offers ahead of other Solo clients at a higher fee. This includes American Express Platinum cards, which were also launched during 2Q17 and are available to Solo Club members only. At 30 June 2017, Solo Club had 944 members

§ Solo continues to invest in its lifestyle brand and hosted several exclusive events. Solo announced in 2Q17 that it will be organizing Sir Elton John's concert at Black Sea Arena, a brand new indoor arena located in western Georgia with the total capacity of over 9,000 people. The announcement was met with strong demand resulting in all tickets being sold out in less than two hours after the launch. As a result, Solo agreed an additional concert with Sir Elton John for the following day. Tickets for the second concert were also quickly sold out

§ Our Retail Banking product to client ratio remained at 2.0 in 2Q17, flat y-o-y and q-o-q. We continued the transformation of our retail banking operations from the product-based model into the client-centric model. We completed the implementation of the client-centric model in 38 branches as of 30 June 2017 and currently have twelve additional branches in pipeline. We continue to see outstanding growth in sales volumes and the number of products sold to our clients in transformed branches, contributing to 34.1% y-o-y growth in retail loan book

§ Continued investment in digital penetration growth. Bank of Georgia launched a new fully-transformed, user-friendly, multi-feature mobile banking application in May 2017. The new application allows customers to get instant access to online banking services, including balance checking, fund transfers, bill payments, top-up mobile phone balance, and etc. The new mobile banking application received very positive reception. Since its launch on 29 May 2017, and over the course of the following two months, approximately 141,000 downloads were made by the Bank's customers, while the previous application had less than 120,000 downloads since its launch. 755,000 online transactions were performed during the same period using the new application

§ Bank of Georgia won the exclusive right to operate the public transportation payment system in Tbilisi. In July 2017, Bank of Georgia won an auction, organised by Tbilisi City Hall, for the modernisation of the public transportation payment system in Tbilisi, Georgia. The Bank had a similar 10 year contract since 2007 and as a result of the win, Bank of Georgia will continue as the sole provider of payment support services to the public transportation network, and operate mass retail branches in Tbilisi metro (i.e. subway) stations for the next ten years. Bank of Georgia will pay a total consideration of GEL 22.2mln and, as part of the auction mandate, implement a modern payment system for public transportation network in Tbilisi, including payment processing using Visa and MasterCard cards, and create a digital platform for ticket reservations and purchases through mobile applications

§ Corporate Investment Banking's ("CIB") net loan book amounted to GEL 2,037.8mln at 30 June 2017, down 1.3% y-o-y, and down 8.5% q-o-q. On a constant-currency basis, the loan portfolio was down 3.5% y-o-y and down 7.3% q-o-q. Reductions were mainly related to winding down of the corporate banking relationship with two large borrowers together with CIB's risk deconcentration strategy. The top 10 CIB client exposure was reduced to 11.1% at the end of 2Q17, down from 11.3% at 30 June 2016 and at 31 March 2017. However, this deconcentration resulted in a decreased cost of risk, which positively impacted the CIB's ROAE, reaching 20.0% in 2Q17 (2Q16:17.2% and 1Q17: 18.3%) and 19.1% in 1H17 (1H16: 17.4%)

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,682.9mln, up 29.3% y-o-y and up 7.3% q-o-q, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart

INVESMENT BUSINESS HIGHLIGHTS

Our healthcare business, GHG, continued to deliver strong revenue performance across healthcare services and pharmacy businesses, while the medical insurance business continued to refocus on more profitable clients.

§  GHG recorded net revenue of GEL 183.9mln (up 82.2% y-o-y and flat q-o-q) and GEL 369.8mln (up 113.6% y-o-y) during 2Q17 and 1H17, respectively. During 2Q17, GHG achieved further diversification of its revenues, whereby the total net revenue mix was 34%, 59% and 7% from the healthcare services business, the pharmacy business and the medical insurance business, respectively

§  GHG delivered EBITDA of GEL 26.1mln (up 54.6% y-o-y and up 4.1% q-o-q) and GEL 51.2mln (up 50.4% y-o-y) during 2Q17 and 1H17, respectively. The y-o-y growth was primarily driven by GHG's expansion into the Pharmacy business, which resulted in GHG becoming the number one player in the pharmacy market, similar to GHG's position in the healthcare services market

§  GHG reported profit before income tax of GEL 11.3mln (up 79.8% y-o-y and down 13.5% q-o-q) and GEL 24.3mln (up 44.9% y-o-y) during 2Q17 and 1H17, respectively

Our real estate business, m2, continued its strong residential project execution and development of portfolio of yielding assets. In 2Q17, m2 achieved sales of US$ 7.6mln, selling a total of 90 apartments, compared to US$ 8.8mln sales and 104 apartments sold in 2Q16. In 2Q17, m2 recognised net revenue of GEL 22.9mln3 (GEL 1.1mln in 2Q16 (see footnote 3 below for y-o-y difference in revenue recognition) and GEL 2.6mln in 1Q17) and delivered a net profit of GEL 21.6mln (GEL 0.2mln in 2Q16 and GEL 0.6mln in 1Q17).  In 1H17, m2 recognised revenue of GEL 25.5mln (GEL 7.7mln in 1H16) and achieved a net profit of GEL 22.2mln (GEL 4.8mln in 1H16). The significant y-o-y and q-o-q increase in revenue and profit in 2Q17 was attributable to the GEL 21.3mln gain from revaluation of investment property (refer to the m2 segment discussion below for more details).

Our utility and energy business, GGU, delivered a strong revenue and cost-efficiency performance in 1H17 and achieved revenue of GEL 60.6mln (up 6.7% y-o-y), EBITDA of GEL 30.1mln (up 13.0% y-o-y) and profit of GEL 13.8mln (up 28.5% y-o-y)4.

Our property and casualty insurance business, Aldagi, delivered a strong performance and achieved net underwriting profit of GEL 7.2mln in 2Q17 (up 6.1% y-o-y and up 1.4% q-o-q) and GEL 14.3mln in 1H17 (up 15.0% y-o-y), EBITDA of GEL 4.3mln in 2Q17 (flat y-o-y and q-o-q) and GEL 8.6mln in 1H17 (up 15.2% y-o-y), and net profit of GEL 3.8mln in 2Q17 (up 29.9% y-o-y and up 2.4% q-o-q) and GEL 7.6mln in 1H17 (up 25.6% y-o-y).

Our beverages business, Teliani, achieved a significant milestone and launched its first mainstream beer production in June 2017 and is on track to accelerate its expansion into all of its three main segments. The newly launched beer, Icy, was well-received by the local market and continues to gain popularity and market share during the early days of its existence, achieving 16% market share by the end of July. Teliani is on track to brew Heineken in the first quarter of 2018 under a ten-year exclusive licence agreement to produce Heineken brands in Georgia and to sell in Caucasus region countries.

§  Teliani has continued to expand its product portfolio, with the noteworthy addition of the exclusive right to import and distribute Lavazza coffee in Georgia, and winning other non-alcoholic beverage distribution contracts to further diversify its distribution portfolio

3 Effective 1 January 2017, the Group, inclusive of m2, early adopted the new revenue recognition standard, IFRS 15, which requires revenue recognition according to the percentage of completion method. Prior to 1 January 2017, m2 recognized revenues under IAS 18 upon completion and handover of the units to customers. As a result, the reported revenue figures for 2017 and 2016 are not comparable

4 Since BGEO owned 25% of GGU’s equity stake until July 2016, we reported our share of GGU’s profits under “profit from associates” in our income statement during this period. We started consolidating GGU’s financial results from 21 July 2016, when we completed the acquisition of the remaining 75% equity stake in GGU, as part of our Investment Business and included it in the segment results discussion as a separate business

 


 

CHIEF EXECUTIVE OFFICER'S STATEMENT

 

I am pleased that all of the Group's businesses have continued to perform strongly throughout the first half of 2017, supported by the robust and improving period of economic growth in the country.  The Group's profit of GEL 231.8 million in the first half of the year increased by 16.9% compared to the first half of 2016 which also benefited from a number of one-off items.  Excluding the impact of these net non-recurring items, profit before tax increased by 29.7%, reflecting 14.8% growth in the Banking Business and 100.4% growth in the Investment Business.

In the Banking Business half year profit before non-recurring items and income tax grew by 14.8% year-on-year supported, in particular by excellent franchise growth in the retail bank, which led to net interest income increasing by 24.4%. Margins have remained broadly stable, despite the continuing impact of high levels of excess liquidity and the issuance in May 2017 of the GEL 500 million Eurobond, as a greater share of retail loans in the total loan portfolio supported higher blended loan yield in the second quarter of 2017.  The Return on Average Equity in the banking business was 23.4% for the first half of the year, compared to 21.4% in the first half of 2016. There was an even stronger performance in the Group's investment businesses where both EBITDA and profit before non-recurring items and income tax more than doubled in the first half.

From a macroeconomic perspective Georgia has delivered strong growth, estimated at 4.5% during the first half of 2017, with inflation remaining well contained excluding one-off factors. In addition, during the first half of the year, the Lari has remained strong against the US dollar, appreciating by 9.1%, Foreign Direct Investment continues to flow into a wide variety of sectors, and tourist numbers - the most significant driver of US$ inflows for the country - continue to rise strongly, by over 30% in the first seven months of 2017.  The National Bank of Georgia has continued to buy US dollars on a regular basis to mitigate further appreciation of the Lari.  During the first half of the year they bought approximately $90 million and Georgia's US dollar reserves of $3.0 billion at 30 June 2017 increased to their highest level since 2013.

Turning to the business, at the BGEO Group level, half year revenue growth was 43.2% year-on-year, supported by a combination of strong organic growth and a number of acquisitions in the Investment Business. The Banking business delivered revenue growth of 19.8% as Retail banking net interest income increased by 33.9%, reflecting continued strong franchise and customer lending growth, and this offset the expected decline in the corporate loan portfolio as we wound down the corporate banking relationship with two significant corporate borrowers.  We have now achieved our targeted rebalancing of the retail/corporate business mix to further improve the return profile of the Bank and reduce concentration risk in the corporate lending portfolio. Retail Banking now represents 66% of our customer lending and Corporate Banking represents 34%, and the rebalancing of our portfolio and the deconcentration of corporate risk targets have been achieved, with the Banking Business delivering a 23.5% return on average equity in the second quarter of 2017.

In addition to the strong retail lending growth, the Retail Bank made strong progress in building out its customer centric approach with the launch in July 2017 of its new loyalty reward program, Plus+ and continued its investment in digital penetration growth.  In July 2017, we won the exclusive right to modernise the public transportation payment system in Tbilisi and continue as the sole provider of the Tbilisi Metro's payment support systems for the next ten years.  In addition, Solo, our premium banking brand, has continued to deliver strong momentum, with customer numbers increasing to nearly 25,000, up 15.4% during the last quarter and up 67.7% over the last twelve months.

The strength of the Georgian economy has supported asset quality during the first half of the year, which has remained reasonably robust and in line with our expectations for a cost of risk ratio of c2.0% through the economic cycle. The annualised cost of risk ratio in 2Q17 was 2.2%, compared to 2.4% in 1Q17.  In addition, we have started to achieve a reduction in the ratio of NPL's to Gross Loans, which fell from 4.6% in the first quarter of 2017, to 4.4% in the second quarter.  Our provisions coverage ratios also continued to rise - from 87.1% at the end of the first quarter of 2017, to 90.2% at the end of the second quarter.

In addition to the strong earnings performance, the Bank's already high returns have further improved and, despite carrying almost GEL 800 million of excess liquidity, the return on average equity increased from 23.1% in the first quarter, to 23.5% in the second quarter, compared to 21.4% in the first half of 2016.

The Group's capital and funding position continues to remain strong, with capital being held both in the regulated banking business and at the holding company level. Within the bank, the NBG (Basel 2/3) Tier 1 Capital Adequacy ratio was 10.6%, 40 basis points higher than last year, partly reflecting the continued de-dollarisation of the Bank's lending portfolio and comfortably ahead of the Bank's minimum capital requirement. From a funding perspective, the Bank's NBG Liquidity ratio was 44.1%, and the Liquidity Coverage Ratio was 187.7%, reflecting the significant excess liquidity held by the Bank.  The Bank also completed its first local currency Eurobond in May 2017 raising GEL 500 million which provides a strong Lari funding platform to continue growing the Group's more capital efficient Lari lending portfolios.

Within our Investment Businesses, Georgia Healthcare Group has continued in its significant business roll-out phase in a number of key areas and, in the first half of 2017, made strong progress in integrating its recent Pharmacy acquisitions and delivering key organic growth priorities, such as the Sunstone and Deka hospital redevelopment projects.  All this has been achieved whilst adapting to recently implemented changes in Georgia's Universal Healthcare Programme and seeking to develop a more diverse stream of revenues, particularly in the pharmacy and Polyclinic businesses. In the first half of 2017, EBITDA of GEL 51.2 million represented a 50.4% increase half-on-half.  In the healthcare services business, the EBITDA margin was 27.5% in the second quarter of 2017, compared to 25.3% in the first quarter of the year, despite the impact of our significant ongoing investment in the launch of the Sunstone and Deka hospital facilities. 

GHG remains well positioned to deliver further progress in the second half of 2017 and, in particular, to more than double 2015 healthcare services revenues by 2018, whilst achieving a more than 30% EBITDA margin.  In May 2017, the Group sold 9.5 million GHG shares, reducing its stake in GHG by 7.2% to 57.0%, and received gross proceeds of GEL98.0 million to realize a gain on sale of GEL63.4 million, which was recorded as an increase in the Group's shareholders' equity.  This sale of GHG shares reflects the first tranche in the Group's strategy to monetise its investment in the business and the proceeds are being utilized towards the Group's previously announced $50 million share buyback and cancellation programme. As a result, GEL 218 million unallocated liquid assets were held at the Group level.

Our water utility and energy business, GGU, continued to focus on improving efficiency and delivered a 6.7% growth in revenues to GEL 60.6 million in the first half, compared to GEL 56.8 million in the first half of 2016.  Over the same time period, EBITDA increased by 13.0% to GEL 30.1 million and profit increased by 28.5% to GEL 13.8 million. Our real estate business, m2 Real Estate, continues to demonstrate its strong execution skills and, in the first half of 2017, sold a total of 233 apartments with a total sales value of $17.7 million, in addition to further increasing its portfolio of yielding assets.  The business also benefited from a revaluation of three under construction commercial properties in the second quarter of the year and, consequently, booked a profit of GEL 22.2 million for the first half of the year.

Our beverages business, Teliani, achieved a significant milestone in June 2017 when it launched its first mainstream beer, ICY, into the local market.  The beer has been well received and is gaining popularity quickly, to support the long-term target of gaining 30% market share in the Georgian market.  Our property and casualty insurance business, Aldagi, continues to develop a strong portfolio of new products, and this has supported a 26.4% y-o-y growth in net earned premiums in 2Q17 and Aldagi's position as the clear market leader in the fast-developing Georgian P&C insurance market.

On 3 July 2017, the Group announced its intention to demerge BGEO Group PLC into two separately London-listed businesses: a banking business, Bank of Georgia PLC, and an investment business, BGEO Investments PLC.  The Board believes a demerger of the businesses will deliver additional long-term value to shareholders by creating two distinct entities, each of which will have enhanced growth opportunities in the strongly growing Georgian economy. Both businesses are already leaders in their respective fields, with separate strategic, capital, and economic characteristics and strong and knowledgeable management teams.  We expect the demerger to benefit the two businesses in a number of areas, most specifically by providing greater flexibility for each business to manage its own capital and human resources and pursue strategic options appropriate to its respective sector, whilst avoiding the potential for cross-business conflicts of interest.  The Board believes that the demerger is the best way to enable the individual businesses to grow faster and develop independently over the next few years.  We expect the demerger, which will be subject to shareholder approval, to take a number of months to implement and the process is currently expected to complete in the first half of 2018.

Supported by the strength of Georgia's macroeconomic performance, the Group has delivered another half-year of strong business performance, and continued strong returns in both the banking business and the investment businesses which, in the second quarter of 2017, almost tripled profit before tax and non-recurring items, compared to the second quarter of last year. The Group is well positioned to continue to deliver this excellent performance in the second half of 2017 and beyond.

Irakli Gilauri,  

Group CEO of BGEO Group PLC


FINANCIAL SUMMARY

INCOME STATEMENT (QUARTERLY)

BGEO Consolidated


Banking Business5


Investment Business

GEL thousands unless otherwise noted 

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q



















Net banking interest income 

160,099

128,200

24.9%

160,335

-0.1%


160,308

128,753

24.5%

160,880

-0.4%


-

-

-

-

-

Net fee and commission income 

31,027

29,239

6.1%

29,786

4.2%


31,402

29,524

6.4%

30,193

4.0%


-

-

-

-

-

Net banking foreign currency gain

19,282

16,492

16.9%

19,700

-2.1%


19,282

16,492

16.9%

19,700

-2.1%


-

-

-

-

-

Net other banking income

780

2,407

-67.6%

2,783

-72.0%


1,047

2,709

-61.4%

3,015

-65.3%


-

-

-

-

-

Gross insurance profit 

9,418

8,409

12.0%

10,223

-7.9%


-

-

-

-

-


10,010

9,287

7.8%

10,785

-7.2%

Gross healthcare and pharmacy profit 

51,333

30,832

66.5%

52,342

-1.9%


-

-

-

-

-


51,333

30,832

66.5%

52,342

-1.9%

Gross real estate profit 

22,679

2,427

NMF

2,718

NMF


-

-

-

-

-


22,914

2,427

NMF

2,974

NMF

Gross utility and energy profit

21,935

-

NMF

17,444

25.7%


-

-

-

-

-


22,032

-

NMF

17,527

25.7%

Gross other investment profit 

13,864

3,123

NMF

4,297

NMF


-

-

-

-

-


13,794

3,097

NMF

4,286

NMF

Revenue 

330,417

221,129

49.4%

299,628

10.3%


212,039

177,478

19.5%

213,788

-0.8%


120,083

45,643

163.1%

87,914

36.6%

Operating expenses 

(133,071)

(88,462)

50.4%

(120,741)

10.2%


(80,786)

(67,558)

19.6%

(77,053)

4.8%


(53,590)

(22,207)

141.3%

(44,987)

19.1%

Operating income before cost of credit risk / EBITDA

197,346

132,667

48.8%

178,887

10.3%


131,253

109,920

19.8%

136,735

-4.1%


66,493

23,436

183.7%

42,927

54.9%

Profit from associates

606

1,952

-69.0%

514

17.9%


394

-

NMF

514

-23.3%


212

1,952

-89.1%

-

NMF

Depreciation and amortisation of investment business

(12,787)

(4,949)

158.4%

(11,470)

11.5%


-

-

-

-

-


(12,787)

(4,949)

158.4%

(11,470)

11.5%

Net foreign currency gain (loss) from investment business

(64)

(2,583)

-97.5%

6,529

NMF


-

-

-

-

-


(64)

(2,583)

-97.5%

6,529

NMF

Interest income from investment business 

1,783

44

NMF

1,751

1.8%


-

-

-

-

-


3,513

790

NMF

2,997

17.2%

Interest expense from investment business

(13,385)

(2,498)

NMF

(10,307)

29.9%


-

-

-

-

-


(15,515)

(3,933)

NMF

(12,328)

25.9%

Operating income before cost of credit risk 

173,499

124,633

39.2%

165,904

4.6%


131,647

109,920

19.8%

137,249

-4.1%


41,852

14,713

184.5%

28,655

46.1%

Cost of credit risk 

(42,645)

(29,387)

45.1%

(49,245)

-13.4%


(40,016)

(27,965)

43.1%

(48,019)

-16.7%


(2,629)

(1,422)

84.9%

(1,226)

114.4%

Profit before non-recurring items and income tax

130,854

95,246

37.4%

116,659

12.2%


91,631

81,955

11.8%

89,230

2.7%


39,223

13,291

195.1%

27,429

43.0%

Net non-recurring items

(2,708)

(48,745)

-94.4%

(3,371)

-19.7%


(1,017)

(46,351)

-97.8%

(1,695)

-40.0%


(1,691)

(2,394)

-29.4%

(1,676)

0.9%

Profit before income tax expense

128,146

46,501

175.6%

113,288

13.1%


90,614

35,604

154.5%

87,535

3.5%


37,532

10,897

244.4%

25,753

45.7%

Income tax (expense) benefit

(4,520)

64,735

NMF

(5,115)

-11.6%


(3,284)

36,148

NMF

(4,408)

-25.5%


(1,236)

28,587

NMF

(707)

74.8%

Profit

123,626

111,236

11.1%

108,173

14.3%


87,330

71,752

21.7%

83,127

5.1%


36,296

39,484

-8.1%

25,046

44.9%

Earnings per share (basic)

3.10

2.46

26.0%

2.64

17.4%


2.30

1.84

25.3%

2.17

5.9%


0.80

0.62

28.2%

0.47

70.9%

Earnings per share (diluted)

2.97

2.46

20.7%

2.55

16.5%


2.20

1.84

20.0%

2.10

5.0%


0.77

0.62

22.8%

0.45

69.5%

 

INCOME STATEMENT (HALF YEAR)

BGEO Consolidated


Banking Business5


Investment Business

GEL thousands unless otherwise noted 

1H17

1H16

Change

y-o-y


1H17

1H16

Change

y-o-y


1H17

1H16

Change

y-o-y













Net banking interest income 

320,434

256,712

24.8%


321,188

258,247

24.4%


-

-

-

Net fee and commission income 

60,812

56,954

6.8%


61,594

57,417

7.3%


-

-

-

Net banking foreign currency gain

38,982

33,929

14.9%


38,982

33,929

14.9%


-

-

-

Net other banking income

3,563

5,140

-30.7%


4,063

5,878

-30.9%


-

-

-

Gross insurance profit 

19,641

14,825

32.5%


-

-

-


20,795

16,582

25.4%

Gross healthcare and pharmacy profit 

103,675

57,123

81.5%


-

-

-


103,675

57,123

81.5%

Gross real estate profit 

25,398

8,413

201.9%


-

-

-


25,889

8,413

207.7%

Gross utility and energy profit

39,379

-

NMF


-

-

-


39,559

-

NMF

Gross other investment profit 

18,161

6,952

161.2%


-

-

-


18,079

6,996

158.4%

Revenue 

630,045

440,048

43.2%


425,827

355,471

19.8%


207,997

89,114

133.4%

Operating expenses 

(253,812)

(171,495)

48.0%


(157,840)

(135,085)

16.8%


(98,576)

(39,086)

152.2%

Operating income before cost of credit risk / EBITDA

376,233

268,553

40.1%


267,987

220,386

22.0%


109,421

50,028

118.7%

Profit from associates

1,120

3,818

-70.7%


909

-

NMF


211

3,818

-94.5%

Depreciation and amortisation of investment business

(24,257)

(10,068)

140.9%


-

-

-


(24,257)

(10,068)

140.9%

Net foreign currency gain (loss) from investment business

6,465

(3,396)

NMF


-

-

-


6,465

(3,396)

NMF

Interest income from investment business 

3,535

1,341

163.6%


-

-

-


6,512

2,433

167.7%

Interest expense from investment business

(23,694)

(3,879)

NMF


-

-

-


(27,846)

(6,832)

NMF

Operating income before cost of credit risk 

339,402

256,369

32.4%


268,896

220,386

22.0%


70,506

35,983

95.9%

Cost of credit risk 

(91,888)

(65,530)

40.2%


(88,036)

(62,805)

40.2%


(3,852)

(2,725)

41.4%

Profit before non-recurring items and income tax

247,514

190,839

29.7%


180,860

157,581

14.8%


66,654

33,258

100.4%

Net non-recurring items

(6,080)

(47,379)

-87.2%


(2,711)

(47,769)

-94.3%


(3,369)

390

NMF

Profit before income tax expense

241,434

143,460

68.3%


178,149

109,812

62.2%


63,285

33,648

88.1%

Income tax (expense) benefit

(9,635)

54,824

NMF


(7,692)

28,514

NMF


(1,943)

26,310

NMF

Profit

231,799

198,284

16.9%


170,457

138,326

23.2%


61,342

59,958

2.3%

Earnings per share (basic)

5.74

4.57

25.6%


4.47

3.55

26.1%


1.27

1.02

23.7%

Earnings per share (diluted)

5.51

4.57

20.6%


4.29

3.55

21.1%


1.22

1.02

18.8%

 

5 Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 33, 34 and 35

 

BALANCE SHEET


BGEO Consolidated


Banking Business


Investment Business

GEL thousands unless otherwise noted


Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q


Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q


Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q




















Liquid assets


3,942,743

2,925,345

34.8%

3,606,926

9.3%


3,775,371

2,882,581

31.0%

3,398,386

11.1%


549,425

308,750

78.0%

537,226

2.3%

     Cash and cash equivalents


1,454,387

1,059,359

37.3%

1,285,483

13.1%


1,401,728

1,033,832

35.6%

1,198,302

17.0%


349,166

251,557

38.8%

359,628

-2.9%

     Amounts due from credit institutions


1,090,259

876,655

24.4%

1,090,111

0.0%


976,811

861,753

13.4%

970,653

0.6%


152,634

53,444

185.6%

174,248

-12.4%

     Investment securities


1,398,097

989,331

41.3%

1,231,332

13.5%


1,396,832

986,996

41.5%

1,229,431

13.6%


47,625

3,749

NMF

3,350

NMF

Loans to customers and finance lease receivables


6,517,773

5,469,120

19.2%

6,408,711

1.7%


6,579,996

5,507,414

19.5%

6,470,771

1.7%


-

-

-

-

-

Property and equipment


1,453,730

852,680

70.5%

1,388,938

4.7%


336,909

327,441

2.9%

333,388

1.1%


1,112,486

525,239

111.8%

1,055,550

5.4%

Total assets


13,171,740

10,323,223

27.6%

12,606,524

4.5%


11,094,468

9,076,612

22.2%

10,587,570

4.8%


2,528,807

1,557,071

62.4%

2,417,249

4.6%

Client deposits and notes


5,319,398

4,554,012

16.8%

5,294,462

0.5%


5,655,341

4,820,169

17.3%

5,622,023

0.6%


-

-

-

-

-

Amounts due to credit institutions


3,077,869

1,892,437

62.6%

3,133,422

-1.8%


2,602,303

1,766,999

47.3%

2,662,909

-2.3%


538,534

163,730

NMF

532,573

1.1%

     Borrowings from DFI


1,343,492

991,054

35.6%

1,376,864

-2.4%


1,088,054

957,227

13.7%

1,143,408

-4.8%


255,438

33,827

NMF

233,456

9.4%

     Short-term loans from NBG


999,159

278,500

NMF

1,005,404

-0.6%


999,159

278,500

NMF

1,005,404

-0.6%


-

-

-

-

-

     Loans and deposits from commercial banks


735,218

622,883

18.0%

751,154

-2.1%


515,090

531,272

-3.0%

514,097

0.2%


283,096

129,903

117.9%

299,117

-5.4%

Debt securities issued


1,582,431

1,065,516

48.5%

1,157,082

36.8%


1,312,990

990,370

32.6%

827,025

58.8%


319,033

79,136

NMF

335,773

-5.0%

Total liabilities


10,628,342

8,113,842

31.0%

10,153,771

4.7%


9,649,000

7,720,731

25.0%

9,198,665

4.9%


1,430,877

703,571

103.4%

1,353,401

5.7%

Total equity


2,543,398

2,209,381

15.1%

2,452,753

3.7%


1,445,468

1,355,881

6.6%

1,388,905

4.1%


1,097,930

853,500

28.6%

1,063,848

3.2%

 

 

 

 

 

 

BANKING BUSINESS RATIOS

2Q17

2Q16

1Q17


1H17

1H16








ROAA

3.2%

3.3%

3.1%


3.1%

3.1%

ROAE

23.5%

22.3%

23.1%


23.4%

21.4%

Net Interest Margin

7.3%

7.5%

7.4%


7.3%

7.5%

Loan Yield

14.3%

14.1%

14.0%


14.1%

14.3%

Liquid assets yield

3.4%

3.3%

3.3%


3.3%

3.2%

Cost of Funds

4.8%

4.8%

4.6%


4.7%

4.9%

Cost of Client Deposits and Notes

3.6%

4.0%

3.5%


3.5%

4.2%

Cost of Amounts Due to Credit Institutions

6.6%

5.9%

6.3%


6.4%

5.9%

Cost of Debt Securities Issued

7.1%

7.0%

6.0%


6.5%

7.1%

Cost / Income

38.1%

38.1%

36.0%


37.1%

38.0%

NPLs To Gross Loans To Clients

4.4%

4.4%

4.6%


4.4%

4.4%

NPL Coverage Ratio

90.2%

85.8%

87.1%


90.2%

85.8%

NPL Coverage Ratio, Adjusted for discounted value of collateral

131.5%

129.7%

126.9%


131.5%

129.7%

Cost of Risk

2.2%

2.0%

2.4%


2.3%

2.1%

NBG (Basel II) Tier I Capital Adequacy Ratio

10.6%

10.2%

10.1%


10.6%

10.2%

NBG (Basel II) Total Capital Adequacy Ratio

15.6%

15.5%

15.2%


15.6%

15.5%


 

DISCUSSION OF RESULTS

Discussion of Banking Business Results

 

The Group's Banking Business is primarily comprised of three segments. (1) Retail Banking operations in Georgia principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfer and settlement services, and handling customers' deposits for both individuals as well as legal entities. Retail Banking targets the emerging retail, mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate Investment Banking comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus.

 

REVENUE

GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Banking interest income 

272,946

216,867

25.9%

267,121

2.2%


540,068

442,697

22.0%

Banking interest expense 

(112,638)

(88,114)

27.8%

(106,241)

6.0%


(218,880)

(184,450)

18.7%

Net banking interest income 

160,308

128,753

24.5%

160,880

-0.4%


321,188

258,247

24.4%

Fee and commission income 

45,903

40,605

13.0%

43,702

5.0%


89,605

78,978

13.5%

Fee and commission expense 

(14,501)

(11,081)

30.9%

(13,509)

7.3%


(28,011)

(21,561)

29.9%

Net fee and commission income 

31,402

29,524

6.4%

30,193

4.0%


61,594

57,417

7.3%

Net banking foreign currency gain

19,282

16,492

16.9%

19,700

-2.1%


38,982

33,929

14.9%

Net other banking income

1,047

2,709

-61.4%

3,015

-65.3%


4,063

5,878

-30.9%

Revenue 

212,039

177,478

19.5%

213,788

-0.8%


425,827

355,471

19.8%











Net Interest Margin

7.3%

7.5%


7.4%



7.3%

7.5%


Average interest earning assets

8,799,432

6,910,093

27.3%

8,860,417

-0.7%


8,852,691

6,961,999

27.2%

Average interest bearing liabilities

9,389,773

7,367,637

27.4%

9,412,122

-0.2%


9,442,232

7,529,522

25.4%

Average net loans and finance lease receivables, currency blended

6,527,839

5,297,175

23.2%

6,638,473

-1.7%


6,599,211

5,375,526

22.8%

     Average net loans and finance lease receivables, GEL

2,284,483

1,495,886

52.7%

2,035,225

12.2%


2,158,329

1,493,367

44.5%

     Average net loans and finance lease receivables, FC

4,243,356

3,801,289

11.6%

4,603,248

-7.8%


4,440,882

3,882,159

14.4%

Average client deposits and notes, currency blended

5,713,292

4,842,117

18.0%

5,730,360

-0.3%


5,736,084

4,934,173

16.3%

    Average client deposits and notes, GEL

1,513,772

1,262,461

19.9%

1,382,631

9.5%


1,455,723

1,245,576

16.9%

    Average client deposits and notes, FC

4,199,520

3,579,656

17.3%

4,347,729

-3.4%


4,280,361

3,688,597

16.0%

Average liquid assets, currency blended

3,621,790

2,809,312

28.9%

3,514,002

3.1%


3,592,112

2,877,511

24.8%

    Average liquid assets, GEL

1,449,760

1,127,479

28.6%

1,374,729

5.5%


1,421,911

1,138,243

24.9%

    Average liquid assets, FC

2,172,030

1,681,833

29.1%

2,139,273

1.5%


2,170,201

1,739,268

24.8%

Excess liquidity (NBG)

791,681

625,340

26.6%

406,213

94.9%


791,681

625,340

26.6%

Liquid assets yield, currency blended

3.4%

3.3%


3.3%



3.3%

3.2%


    Liquid assets yield, GEL

7.1%

7.4%


7.3%



7.2%

7.5%


    Liquid assets yield, FC

0.9%

0.5%


0.7%



0.8%

0.4%


Loan yield, currency blended

14.3%

14.1%


14.0%



14.1%

14.3%


    Loan yield, GEL

22.3%

23.8%


22.5%



22.4%

23.1%


    Loan yield, FC

10.0%

10.3%


10.3%



10.1%

10.6%


Cost of Funds, currency blended

4.8%

4.8%


4.6%



4.7%

4.9%


    Cost of Funds, GEL

7.0%

7.0%


6.7%



6.8%

6.8%


    Cost of Funds, FC

3.7%

4.2%


3.8%



3.8%

4.3%


 

Performance highlights

§ Strong Banking Business revenue. We recorded quarterly revenue of GEL 212.0mln in 2Q17 (up 19.5% y-o-y and flat q-o-q), ending the half year 2017 with revenue of GEL 425.8mln (up 19.8% y-o-y). Y-o-y revenue growth both in 2Q17 and half year 2017 was primarily driven by the increase in net banking interest income, which resulted from strong loan book growth, net fee and commission income and net banking foreign currency gain, and was partially offset by decreases in net other banking income  

§ Net banking interest income. Our net banking interest income was up 24.5% y-o-y and flat q-o-q in 2Q17 and up 24.4% y-o-y in half year 2017. The y-o-y increase in net banking interest income was primarily driven by strong performance in our Retail Banking operations, supported by modest growth in CIB's net banking interest income

§ Our NIM was 7.3% in 2Q17, within our target range of 7.25% - 7.75%, withstanding some market pressures, particularly in the corporate segment. 2Q17 loan yield and liquid assets yield were up 20bps and 10bps y-o-y, respectively, while cost of funds remained flat y-o-y at 4.8%. However, 2Q17 NIM was down by 20 bps y-o-y as a result of the NBG's decision in 2Q16 mandating an increase in minimum reserve requirements leading to a decreased portion of average net loans and finance lease receivables in total average interest-earning assets (from 76.7% in 2Q16 to 74.2% in 2Q17). On a q-o-q basis, loan yield and liquid assets yield were up 30bps and 10bps, respectively, and cost of funds also increased by 20bps. However, NIM was down by 10bps q-o-q due to an increased portion of average liquid assets in total average interest-earning assets as a result of the increased excess liquidity driven by the proceeds from GEL 500mln Lari denominated bonds in June 2017

§ Loan yield. Currency blended loan yield increased to 14.3% in 2Q17 (up 20bps y-o-y and up 30bps q-o-q). While local and foreign currency loan yields decreased y-o-y and q-o-q, overall growth of loan yield y-o-y and q-o-q reflects continued shift in portfolio mix towards higher return local currency denominated loans. On a half year basis, due to increased competition, the loan yield decreased to 14.1%, or by 20bps y-o-y driven by 70bps and 50bps decline in the local and foreign currency denominated loan yields, respectively. Such decline was partially offset by the increased share of high-yielding local currency denominated loans in the total loan portfolio mix

§ Liquid assets yield. Our liquid assets yield increased to 3.4% (up 10bps y-o-y and q-o-q) in 2Q17 and to 3.3% (up 10bps y-o-y) in 1H17. The foreign currency denominated liquid assets yield increased by 40pbs y-o-y and 20bps q-o-q in 2Q17 and 40 bps y-o-y in 1H17 as a result of the US Federal Reserve's decisions in December 2016, March 2017 and June 2017 to raise interest rates by 75bps in aggregate, which triggered similar increases on interest rates paid by a) The National Bank of Georgia (the "NBG") on the Bank's obligatory reserves (foreign currency only) and b) correspondent banks on deposits placed by the Bank

§ Cost of funds. Cost of funds stood at 4.8% in 2Q17 (flat y-o-y and up 20bps q-o-q) and at 4.7% (down 20bps y-o-y) in 1H17. The foreign currency denominated cost of funds decreased by 50bps y-o-y both in 2Q17 and 1H17 and by 10bps q-o-q in 2Q17. While the local currency denominated cost of funds stayed flat y-o-y both in 2Q17 and 1H17, it increased by 30bps q-o-q in 2Q17 as a result of a) an increase in cost of debt securities issued following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17, b) an increase in cost of client deposits due to the market competition and c) the increased cost of amounts due to credit institutions as a result of increase in NBG's monetary policy rate

§ De-dollarisation efforts increased the GEL denominated loan book to 36.8% of the total at 30 June 2017, compared to 27.7% a year ago. Dollarisation of our loan book decreased since last year as the demand for local currency denominated loans outpaced the demand for foreign currency denominated loans. The trend was supported by the Georgian government's "de-dollarisation" initiatives: a) a one-off program, effective from 15 January 2017 until 25 March 2017, allowing qualified borrowers to convert eligible US dollar denominated loans into GEL, at a discount compensated by the government, at the client's election and b) a new regulation, effective from 15 January 2017, restricting issuance of new loans in foreign currency with amounts less than GEL 100,000 (equivalent). At 30 June 2017, 36.8% of our net loans were denominated in GEL as compared to 27.7% at 30 June 2016 and 33.5% at 31 March 2017

§ Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 17.3% y-o-y and 0.6% q-o-q to GEL 5,655.3mln primarily driven by strong deposit generation in Retail Banking operations. Retail banking client deposits and notes grew by 32.2% y-o-y and 9.2% q-o-q to GEL 2,613.3mln, while CIB client deposits grew by 4.7% y-o-y, but were down 7.0% q-o-q to GEL 2,723.7mln. We also increased our borrowings from DFIs by 13.7% y-o-y to GEL 1,088.1mln, in order to support growth in local currency lending. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, stood at 97.6% (95.3% at 30 June 2016 and 95.6% at 31 March 2017)

§ Net fee and commission income. Net fee and commission income performance is mainly driven by the strong performance in our settlement operations supported by the success of our Express banking franchise. This was partially offset by a decline in the CIB's fees from guarantees and letters of credit, driven by the deconcentration efforts in the CIB segment as we re-position our exposures to higher credit quality clients. Excluding the CIB's income from guarantees and letters of credit, net fee and commission income was GEL 28.6mln (up 9.4% y-o-y and up 6.0% q-o-q) in 2Q17 and GEL 55.6mln (up 13.0% y-o-y) in 1H17

§ Net banking foreign currency gain. In line with the behaviour of the GEL exchange rate, i.e. high volatility during 1Q17 and absence of volatility during 2Q17, the net banking foreign currency gain was up 16.9% y-o-y and down 2.1% q-o-q in 2Q17, respectively, and up 14.9% y-o-y in 1H17. RB and CIB businesses together contributed 85.4% and 88.2% to the total 2Q17 and 1H17 net banking foreign currency gain, respectively

§ Net other banking income. The 61.4% y-o-y and 65.3% q-o-q decrease in 2Q17 and 30.9% y-o-y decline in half year 2017 in net other banking income was largely driven by modest losses on derivative financial instruments recorded in 2Q17

 



 

OPERATING INCOME BEFORE NON-RECURRING ITEMS; COST OF CREDIT RISK; PROFIT FOR THE PERIOD

GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Salaries and other employee benefits

(47,507)

(38,972)

21.9%

(44,279)

7.3%


(91,786)

(77,012)

19.2%

Administrative expenses

(22,286)

(18,760)

18.8%

(22,519)

-1.0%


(44,805)

(38,506)

16.4%

Banking depreciation and amortisation

(10,197)

(9,162)

11.3%

(9,525)

7.1%


(19,722)

(18,092)

9.0%

Other operating expenses 

(796)

(664)

19.9%

(730)

9.0%


(1,527)

(1,475)

3.5%

Operating expenses 

(80,786)

(67,558)

19.6%

(77,053)

4.8%


(157,840)

(135,085)

16.8%

Profit from associate

394

-

NMF

514

-23.3%


909

-

NMF

Operating income before cost of credit risk 

131,647

109,920

19.8%

137,249

-4.1%


268,896

220,386

22.0%

Impairment charge on loans to customers 

(37,756)

(26,819)

40.8%

(41,341)

-8.7%


(79,097)

(59,036)

34.0%

Impairment charge on finance lease receivables

(67)

(130)

-48.5%

(139)

-51.8%


(207)

(643)

-67.8%

Impairment charge on other assets and provisions

(2,193)

(1,016)

115.8%

(6,539)

-66.5%


(8,732)

(3,126)

179.3%

Cost of credit risk 

(40,016)

(27,965)

43.1%

(48,019)

-16.7%


(88,036)

(62,805)

40.2%

Profit before non-recurring items and income tax

91,631

81,955

11.8%

89,230

2.7%


180,860

157,581

14.8%

Net non-recurring items 

(1,017)

(46,351)

-97.8%

(1,695)

-40.0%


(2,711)

(47,769)

-94.3%

Profit before income tax 

90,614

35,604

154.5%

87,535

3.5%


178,149

109,812

62.2%

Income tax (expense) benefit

(3,284)

36,148

NMF

(4,408)

-25.5%


(7,692)

28,514

NMF

Profit

87,330

71,752

21.7%

83,127

5.1%


170,457

138,326

23.2%

 

§ Operating expenses increased to GEL 80.8mln in 2Q17 (up 19.6% y-o-y and up 4.8% q-o-q) and GEL 157.8mln in 1H17 (up 16.8% y-o-y). In 1H17, growth in revenues outpaced growth in operating expenses leading to y-o-y positive operating leverage of 2.9%, which represents an improvement compared to y-o-y negative operating leverage of 5.0% in 1H16. 2Q17 y-o-y and q-o-q and 1H17 y-o-y changes in operating expenses were driven by:

-       an increase in salaries and employee benefits by 21.9% y-o-y and 7.3% q-o-q in 2Q17 and by 19.2% y-o-y in 1H17 mainly reflects organic growth of RB

-       an increase in administrative expenses y-o-y by 18.8% in 2Q17 and by 16.4% in 1H17, primarily driven by marketing, rent and repair and maintenance costs as compared to the same periods last year. The increase was attributable to the combined effect of the larger branch network and the higher average quarterly and half year exchange rate during 2Q17 and 1H17 as the vast majority of branch rental agreements are denominated in US dollars

§ Cost of Risk ratio. Banking Business Cost of Risk ratio was 2.2% in 2Q17, up 20bps y-o-y and down 20bps q-o-q. CIB 2Q17 Cost of Risk ratio was down 100bps y-o-y and up 20bps q-o-q, while RB Cost of Risk ratio was up 80bps y-o-y, largely driven by headwinds from GEL's depreciation in 4Q16, and down 30bps q-o-q. On a half year basis, the Banking Business Cost of Risk ratio was 2.3%, up 20bps y-o-y in 1H17, primarily driven by 80bps increase in the RB Cost of Risk ratio, partially offset by improvement in the CIB loan portfolio quality performance

§ Quality of the Banking Business loan book remained strong in 2Q17 as evidenced by following closely monitored metrics:

GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Non-performing loans










NPLs

304,320

251,383

21.1%

311,940

-2.4%


304,320

251,383

21.1%

NPLs to gross loans

4.4%

4.4%


4.6%



4.4%

4.4%


NPLs to gross loans, RB

1.7%

1.5%


1.7%



1.7%

1.5%


NPLs to gross loans, CIB

8.3%

7.6%


8.2%



8.3%

7.6%


NPL coverage ratio

90.2%

85.8%


87.1%



90.2%

85.8%


NPL coverage ratio adjusted for the discounted value of collateral

131.5%

129.7%


126.9%



131.5%

129.7%












Past due dates










Retail loans - 15 days past due rate

1.5%

1.2%


1.4%



1.5%

1.2%


Mortgage loans - 15 days past due rate

1.0%

0.6%


0.9%



1.0%

0.6%


§ Income tax (expense) benefit. Income tax expense decreased by 25.5% q-o-q in 2Q17 primarily as a result of the changes in the local tax code that were approved by the Parliament of Georgia in June 2017. The 2Q17 y-o-y and 1H17 y-o-y movements in income taxes reflect the impacts of changes in corporate taxation model, approved by the Parliament of Georgia in May 2016, which resulted in the write off of Banking Business net deferred tax liabilities

§ As a result, the Banking Business profit was GEL 87.3mln in 2Q17 (up 21.7% y-o-y and up 5.1% q-o-q) and GEL 170.5mln in 1H17 (up 23.2%), while ROAE increased to 23.5% in 2Q17 (up 120bps y-o-y and up 40bps q-o-q) and to 23.4% in 1H17 (up 200bps y-o-y)

§ BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 2.3mln in 2Q17 (up from GEL0.2mln in 2Q16 and up from GEL 0.7mln in 1Q17) and GEL 2.9mln in 1H17 (down 33.6% y-o-y); BNB's earnings were negatively impacted by increased levels of cost of risk due to the weak macro-economic conditions in Belarus in 2016 and 1Q17, while during 2Q17 the Belarus economy started to show early signs of stabilization. BNB's cost of credit risk in 2Q17 improved by 42.5% q-o-q

§ BNB's loan book reached GEL 369.6mln at 30 June 2017, up 19.0% y-o-y and up 10.2% q-o-q, mostly reflecting an increase in corporate and consumer loans. Client deposits were GEL 263.7mln at 30 June 2017, up 30.3% y-o-y and up 11.8% q-o-q. The increase in client deposits was partially attributable to the agreement signed with BelSwissBank in June 2017, which allowed BNB to manage and service current and term deposit accounts and card operations of BelSwissBank's customers

§ BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. As at 30 June 2017, total CAR was 14.6%, well above 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 9.0%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") for BNB was 12.5% in 2Q17 (negative 3.9% in 2Q16 and 3.2% in 1Q17) and 8.2% in 1H17 (9.8% in 1H16)

BANKING BUSINESS BALANCE SHEET HIGHLIGHTS

GEL thousands, unless otherwise noted 

Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q







Liquid assets

3,775,371

2,882,581

31.0%

3,398,386

11.1%

Liquid assets, GEL

1,567,431

1,178,629

33.0%

1,298,701

20.7%

Liquid assets, FC

2,207,940

1,703,952

29.6%

2,099,685

5.2%

Net loans and finance lease receivables

6,579,996

5,507,414

19.5%

6,470,771

1.7%

Net loans and finance lease receivables, GEL

2,423,340

1,523,585

59.1%

2,170,530

11.6%

Net loans and finance lease receivables, FC

4,156,656

3,983,829

4.3%

4,300,241

-3.3%

Client deposits and notes

5,655,341

4,820,169

17.3%

5,622,023

0.6%

Amounts due to credit institutions

2,602,303

1,766,999

47.3%

2,662,909

-2.3%

Borrowings from DFIs

1,088,054

957,227

13.7%

1,143,408

-4.8%

Short-term loans from central banks

999,159

278,500

258.8%

1,005,404

-0.6%

        Loans and deposits from commercial banks

515,090

531,272

-3.0%

514,097

0.2%

Debt securities issued

1,312,990

990,370

32.6%

827,025

58.8%

Liquidity and CAR ratios






Net loans / client deposits and notes

116.4%

114.3%


115.1%


Net loans / client deposits and notes + DFIs

97.6%

95.3%


95.6%


Liquid assets as percent of total assets

34.0%

31.8%


32.1%


Liquid assets as percent of total liabilities

39.1%

37.3%


36.9%


NBG liquidity ratio

44.1%

43.5%


37.4%


Excess liquidity (NBG)

791,681

625,340

26.6%

406,213

94.9%

NBG (Basel II) Tier I Capital Adequacy Ratio

10.6%

10.2%


10.1%


NBG (Basel II) Total Capital Adequacy Ratio

15.6%

15.5%


15.2%


Our Banking Business balance sheet remains highly liquid (NBG Liquidity ratio of 44.1%) and strongly capitalised (Tier I ratio, NBG Basel 2/3 of 10.6%) with a well-diversified funding base (Client Deposits and notes to Total Liabilities of 58.6%).

§ Liquidity. The NBG liquidity ratio stood at 44.1% at 30 June 2017, compared to 43.5% at 30 June 2016 and 37.4% at 31 March 2017, and against a regulatory minimum requirement of 30.0%. Liquid assets increased to GEL 3,775.4mln at 30 June 2017, up 31.0% y-o-y and up 11.1% q-o-q, largely driven by a) the increase in obligatory reserves as a result of the change in respective NBG regulation in 2Q16, b) increase in local currency corporate bonds, which are used by the Bank as collateral for short-term borrowings from the NBG, and c) proceeds from the GEL 500mln Lari denominated bonds in June 2017

§ Diversified funding base. Short-term borrowings from the NBG grew by 258.8% y-o-y due to the increase in local currency sourcing from International Financial Institutions whose GEL-denominated bonds were pledged as collateral against NBG loans. Debt securities issued grew by 32.6% y-o-y and 58.8% q-o-q primarily due to the issuance of GEL 500mln Lari denominated bonds in June 2017

§ Loan book. Our net loan book and financial lease receivables balance reached GEL 6,580.0mln at 30 June 2017, up 19.5% y-o-y and up 1.7% q-o-q. As of 30 June 2017, retail book represented 66.1% of the total loan portfolio (59.0% at 30 June 2016 and 62.6% at 31 March 2017), above our target to increase RB's share in total loan book to 65% for the first time in the Bank's history. The growth on a constant-currency basis was 17.4% y-o-y and 2.7% q-o-q. While both local and foreign currency portfolios experienced strong y-o-y growth, the local currency loan portfolio demonstrated a dramatic increase of 59.1% y-o-y and 11.6% q-o-q, partially driven by the Georgian government's "de-dollarisation" initiatives and our goal to increase the share of local currency loans in our portfolio  

 

 



 

Discussion of Segment Results

 

The segment results discussion is presented for Retail Banking (RB), Corporate Investment Banking (CIB), Utility & Energy Business (GGU), Healthcare Business (GHG), Real Estate Business (m2) and Property and Casualty Insurance Business (Aldagi).

 

Banking Business Segment Result Discussion

 

Retail Banking (RB)

 

Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is itself represented by the following four sub-segments: (1) the emerging retail segment (through our Express brand), (2) retail mass market segment and (3) SME and micro businesses (through our Bank of Georgia brand), and (4) the mass affluent segment (through our Solo brand).

 

GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











INCOME STATEMENT HIGHLIGHTS










Net banking interest income 

112,575

84,574

33.1%

111,511

1.0%


224,086

167,406

33.9%

Net fee and commission income 

23,970

21,742

10.2%

22,245

7.8%


46,215

40,981

12.8%

Net banking foreign currency gain

6,060

5,473

10.7%

6,492

-6.7%


12,552

9,063

38.5%

Net other banking income

(851)

1,035

NMF

982

NMF


131

1,746

-92.5%

Revenue 

141,754

112,824

25.6%

141,230

0.4%


282,984

219,196

29.1%

Salaries and other employee benefits

(29,763)

(24,325)

22.4%

(27,865)

6.8%


(57,628)

(47,932)

20.2%

Administrative expenses

(16,084)

(12,756)

26.1%

(16,835)

-4.5%


(32,919)

(27,277)

20.7%

Banking depreciation and amortisation

(8,644)

(7,597)

13.8%

(7,991)

8.2%


(16,634)

(14,981)

11.0%

Other operating expenses 

(511)

(393)

30.0%

(475)

7.6%


(988)

(888)

11.3%

Operating expenses 

(55,002)

(45,071)

22.0%

(53,166)

3.5%


(108,169)

(91,078)

18.8%

Profit from associate

394

-

NMF

514

-23.3%


909

-

NMF

Operating income before cost of credit risk

87,146

67,753

28.6%

88,578

-1.6%


175,724

128,118

37.2%

Cost of credit risk

(31,746)

(17,543)

81.0%

(33,687)

-5.8%


(65,433)

(35,727)

83.1%

Profit before non-recurring items and income tax 

55,400

50,210

10.3%

54,891

0.9%


110,291

92,391

19.4%

Net non-recurring items 

(760)

(31,819)

-97.6%

(482)

57.7%


(1,242)

(32,379)

-96.2%

Profit before income tax 

54,640

18,391

197.1%

54,409

0.4%


109,049

60,012

81.7%

Income tax (expense) benefit

(1,776)

28,702

NMF

(3,592)

-50.6%


(5,368)

24,858

NMF

Profit

52,864

47,093

12.3%

50,817

4.0%


103,681

84,870

22.2%











BALANCE SHEET HIGHLIGHTS










Net loans, Currency Blended

4,155,326

3,098,341

34.1%

3,891,063

6.8%


4,155,326

3,098,341

34.1%

Net loans, GEL

2,044,087

1,303,077

56.9%

1,783,345

14.6%


2,044,087

1,303,077

56.9%

Net loans, FC

2,111,239

1,795,264

17.6%

2,107,718

0.2%


2,111,239

1,795,264

17.6%

Client deposits, Currency Blended

2,613,302

1,976,985

32.2%

2,393,754

9.2%


2,613,302

1,976,985

32.2%

Client deposits, GEL

747,234

521,986

43.2%

616,383

21.2%


747,234

521,986

43.2%

Client deposits, FC

1,866,068

1,454,999

28.3%

1,777,371

5.0%


1,866,068

1,454,999

28.3%

of which:










Time deposits, Currency Blended

1,505,265

1,216,762

23.7%

1,426,012

5.6%


1,505,265

1,216,762

23.7%

Time deposits, GEL

286,649

211,463

35.6%

255,955

12.0%


286,649

211,463

35.6%

Time deposits, FC

1,218,616

1,005,299

21.2%

1,170,057

4.2%


1,218,616

1,005,299

21.2%

Current accounts and demand deposits, Currency Blended

1,108,037

760,223

45.8%

967,742

14.5%


1,108,037

760,223

45.8%

Current accounts and demand deposits, GEL

460,585

310,523

48.3%

360,428

27.8%


460,585

310,523

48.3%

Current accounts and demand deposits, FC

647,452

449,700

44.0%

607,314

6.6%


647,452

449,700

44.0%











KEY RATIOS




















ROAE Retail Banking

26.5%

29.2%


27.2%



26.9%

26.6%


Net interest margin, currency blended

8.6%

9.1%


8.8%



8.7%

9.2%


Cost of risk

3.1%

2.3%


3.4%



3.2%

2.4%


Cost of funds, currency blended

5.9%

6.1%


5.3%



5.6%

6.3%


Loan yield, currency blended

16.4%

16.9%


15.9%



16.1%

17.2%


Loan yield, GEL

24.2%

25.5%


24.9%



24.5%

25.4%


Loan yield, FC

9.2%

10.2%


9.4%

 

 

9.2%

10.5%

 

Cost of deposits, currency blended

3.0%

3.4%


3.0%



3.0%

3.5%


Cost of deposits, GEL

4.6%

4.9%


4.4%



4.5%

4.8%


Cost of deposits, FC

2.4%

2.9%


2.6%



2.5%

3.1%


Cost of time deposits, currency blended

4.4%

5.0%


4.4%



4.4%

5.1%


Cost of time deposits, GEL

9.0%

9.8%


8.7%



8.8%

9.8%


Cost of time deposits, FC

3.4%

4.0%


3.6%



3.4%

4.2%


Current accounts and demand deposits, currency blended

1.0%

0.9%


0.9%



1.0%

0.9%


Current accounts and demand deposits, GEL

1.7%

1.3%


1.4%



1.6%

1.2%


Current accounts and demand deposits, FC

0.6%

0.6%


0.6%



0.6%

0.7%


Cost / income ratio

 

 

38.8%

39.9%


37.6%



38.2%

41.6%


 

Performance highlights

§ Retail Banking delivered another successful quarterly result across all its segments and generated total revenues of GEL 141.8mln in 2Q17 (up 25.6% y-o-y and flat q-o-q) and revenue of GEL 283.0mln in 1H17 (up 29.1% y-o-y)

§ RB's net banking interest income experienced 33.1% y-o-y increase in 2Q17 and 33.9% y-o-y increase in 1H17 as a result of the strong growth in the Retail Banking loan portfolio, while q-o-q growth in 2Q17 was modest at 1.0%. Record quarterly net banking interest income also reflects the benefits from the increase in the local currency loan portfolio, which generated 15.0ppts and 15.3ppts higher yield than the foreign currency loan portfolio during 2Q17 and 1H17, respectively

§ The Retail Banking net loan book reached GEL 4,155.3mln, up 34.1% y-o-y and up 6.8% q-o-q. Our local currency denominated loan book grew at a faster pace (up 56.9% y-o-y and 14.6% q-o-q) than the foreign currency denominated loan book (up 17.6% y-o-y and 0.2% q-o-q). As a result, the loan book dollarisation decreased to 50.8% at 30 June 2017 from 57.9% at 30 June 2016 and 54.2% at 31 March 2017

§ The loan book growth was a product of continued strong loan origination levels delivered across all major Retail Banking segments:

 

Retail Banking loan book by products

GEL million, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Loan Originations










Consumer loans

349

245

42.6%

302

15.4%


651

446

45.9%

Mortgage loans

226

160

41.2%

213

6.1%


439

322

36.4%

Micro loans

236

180

30.9%

237

-0.1%


473

330

43.3%

SME loans

133

128

3.7%

119

11.7%


252

230

9.6%

POS loans

56

52

6.7%

43

30.9%


99

96

3.2%











Outstanding Balance










Consumer loans

1,054

709

48.6%

944

11.7%


1,054

709

48.6%

Mortgage loans

1,282

957

34.0%

1,187

8.0%


1,282

957

34.0%

Micro loans

918

604

52.1%

873

5.2%


918

604

52.1%

SME loans

480

389

23.4%

463

3.5%


480

389

23.4%

POS loans

108

108

-0.5%

108

-0.5%


108

108

-0.5%

 

§ Retail Banking client deposits increased to GEL 2,613.3mln, up 32.2% y-o-y and up 9.2% q-o-q, notwithstanding a decrease in the cost of deposits of 40bps y-o-y and flat q-o-q in 2Q17 and decrease of 50bps y-o-y in 1H17. The dollarisation level of our deposits decreased to 71.4% at 30 June 2017 from 73.6% at 30 June 2016 and from 74.3% at 31 March 2017. This is in line with the current decreasing trend of cost on foreign currency denominated deposits (down 50 bps y-o-y and down 20 bps q-o-q in 2Q17 and down 60bps y-o-y in 1H17). The spread between the cost of RB's client deposits in GEL and foreign currency widened to 2.2ppts during 2Q17 (GEL: 4.6%; FC: 2.4%) compared to 2.0ppts in 2Q16 (GEL: 4.9%; FC: 2.9%) and 1.8ppts in 1Q17 (GEL: 4.4%; FC: 2.6%). For the first half year 2017, the spread was 2.0ppts (GEL: 4.5%; FC: 2.5%) compared to 1.7ppts in 1H16 (GEL: 4.8%; FC: 3.1%). Local currency denominated deposits increased at a faster pace to GEL 747.2mln (up 43.2% y-o-y and 21.2% q-o-q), as compared to foreign currency denominated deposits that grew to GEL 1,866.1 mln (up 28.3% y-o-y and up 5.0% q-o-q)

§ Retail Banking NIM was 8.6% in 2Q17, down 50bps y-o-y and down 20bps q-o-q. The lower NIM y-o-y was attributable to a 50bps decrease in loan yield, while the cost of funds only decreased by 20bps. On a q-o-q basis, loan yield was up by 50bps and cost of funds was up by 60bps, thus, leading to 20bps decrease in NIM. For the half year 2017, Retail Banking NIM was 8.7%, down 50bps y-o-y. The lower NIM was the result of a 110bps decrease in loan yield, which was partially offset by 70bps decrease in cost of funds in 1H17

§ Strong growth in Retail Banking net fee and commission income. The 2Q17 10.2% y-o-y and up 7.8% q-o-q and 1H17 12.8% y-o-y growth rates reflect an organic increase in our fee and commission income and the underlying growth in both our Express Banking and Solo platforms described below

§ RB cost to income ratio remained well-controlled at 38.8% in 2Q17 (down by 110 bps y-o-y and up 120bps q-o-q) and at 38.2% in 1H17 (down 340bps y-o-y). The significant y-o-y improvement resulted from the increasing utilisation of our Solo lounges coupled with the growth of the Express Banking franchise, which has the most cost-efficient model among our three Retail Banking segments

§ RB cost of risk remains contained with signs of improvement in 2Q17. RB cost of credit risk was GEL 31.7mln in 2Q17 (up 81.0% y-o-y and down 5.8% q-o-q) and GEL 65.4mln in 1H17 (up 83.1% y-o-y). As a result, Cost of Risk ratio was 3.1% in 2Q17, up from 2.3% in 2Q16 and down from 3.4% in 1Q17, while on a half year basis, Cost of Risk ratio was 3.2% in 1H17, up from 2.4% in 1H16. The increase in cost of risk mainly reflected the following two factors: a) an increased pace of loan growth in express and micro express loan portfolio during 1Q17 and 2Q17, which are characterised with the highest cost of risk ratios in the RB's loan portfolio and the highest loan yields and b) impact from a major fire at one of the largest shopping centres located in downtown Tbilisi, which destroyed the inventory of some of RB's Micro and SME clients and negatively affected their creditworthiness in 1Q17. The latter has triggered the y-o-y increase in 1H17 Cost of Credit Risk, while its absence in 2Q17 positively affected Cost of Risk on a q-o-q basis

§ The number of Retail Banking clients reached 2.2mln, up 9.4% y-o-y and up 2.0% q-o-q, while the number of total cards outstanding amounted to 2,117,652, up 8.8% y-o-y and up 0.9% q-o-q

§ Our Express Banking business continues to deliver strong growth as we further develop our mass market Retail Banking strategy, as demonstrated by the following performance indicators

Express Banking performance indicators

Volume information in GEL thousands

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Express Banking Customers










Number of new customers

11,990

7,709

55.5%

16,645

-28.0%


28,635

19,768

44.9%

Number of customers

500,602

445,118

12.5%

488,612

2.5%


500,602

445,118

12.5%











Express Cards










Number of Express Cards issued

130,566

126,823

3.0%

129,128

1.1%


259,694

239,729

8.3%

Number of Express Cards outstanding

1,335,238

1,195,380

11.7%

1,315,489

1.5%


1,335,238

1,195,380

11.7%











Express Pay terminals










Number of Express Pay terminals

2,789

2,681

4.0%

2,723

2.4%


2,789

2,681

4.0%

Number of transactions via Express Pay terminals

26,385,633

31,005,384

-14.9%

25,159,733

4.9%


51,545,366

59,827,664

-13.8%

Volume of transactions via Express Pay terminals

1,008,436

742,236

35.9%

968,802

4.1%


1,977,238

1,404,964

40.7%











POS terminals










Number of Desks

9,205

7,447

23.6%

8,814

4.4%


9,205

7,447

23.6%

Number of Contracted Merchants

5,133

3,848

33.4%

4,740

8.3%


5,133

3,848

33.4%

Number of POS terminals

11,303

9,044

25.0%

10,774

4.9%


11,303

9,044

25.0%

Number of transactions via POS terminals

11,416,810

6,806,210

67.7%

9,741,855

17.2%


21,158,665

12,826,535

65.0%

Volume of transactions via POS terminals

323,901

198,999

62.8%

266,106

21.7%


590,007

375,736

57.0%











Internet Banking










Number of Active Users

166,874

98,505

69.4%

167,769

-0.5%


166,874

98,505

69.4%

Number of transactions via Internet Bank

1,752,594

1,423,797

23.1%

1,719,348

1.9%


3,471,942

2,696,935

28.7%

Volume of transactions via Internet Bank

334,094

291,138

14.8%

321,649

3.9%


655,742

507,980

29.1%











Mobile Banking










Number of Active Users

127,129

58,162

118.6%

83,726

51.8%


127,129

58,162

118.6%

Number of transactions via Mobile Bank

1,232,713

606,244

103.3%

979,894

25.8%


2,212,607

1,093,838

102.3%

Volume of transactions via Mobile Bank

122,222

57,480

112.6%

94,371

29.5%


216,593

93,418

131.9%

-       Growth in the client base was due to the increased offering of cost-effective remote channels. The strong increase to 500,602 customers in 2Q17 continues the sustained growth in our client base over recent periods and was the main driver of the increase in our Retail Banking net fee and commission income

-       The utilisation of Express Pay terminals continued to grow in 2Q17. The 2Q17 and 1H17 volume of transactions increased to  GEL 1,008.4mln and GEL 1,977.2mln, while the number of transactions were both down both y-o-y and q-o-q. This decrease resulted from management's decision to introduce transaction fees on non-banking transactions processed through Express Pay terminals. However, while this introduction negatively affected the number of transactions, the decrease was more than offset by the total fees charged to the clients leading to 41.0% y-o-y increase in 2Q17 in fee income from express pay terminals

-     For mobile banking applications, the number of transactions and the volume of transactions continues to show outstanding growth, primarily due to the introduction of  a new mobile banking application in May 2017

§ The number of Solo clients reached 24,984 at the end of 2Q17, up 201.7% since its re-launch in April 2015. We have now launched 11 Solo lounges, of which 8 are located in Tbilisi, the capital city, and 3 in major regional cities of Georgia. In 2Q17, annualised profit per Solo client was GEL 1,445 compared to a profit of GEL 49 and GEL 68 per Express and mass retail clients, respectively. Product to client ratio for Solo segment was 6.5, compared to 3.3 and 1.7 for Express and mass retail clients, respectively. While Solo clients currently represent 1.1% of our total retail client base, they contributed 22.2% to our retail loan book, 37.8% to our retail deposits, 13.6% and 17.3% to our net interest income and to our net fee and commission income, respectively, in 2Q17. Our goal is to significantly increase our market share in this segment, which stood below 13% at the beginning of 2015 when we launched Solo in its current format

§ As a result of the above described factors, Retail Banking profit reached GEL 52.9mln in 2Q17 (up 12.3% y-o-y and up 4.0% q-o-q) and GEL 103.7mln in 1H17 (up 22.2% y-o-y). Retail Banking continued to deliver an outstanding ROAE, which stood at 26.5% in 2Q17 (29.2% in 2Q16 and 27.2% in 1Q17) and at 26.9% in 1H17 (26.6% in 1H16)

 



 

Corporate Investment Banking (CIB)

 

CIB provides (1) loans and other credit facilities to Georgia's large corporate clients and other legal entities, excluding SME and micro businesses; (2) services such as fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits; (3) finance lease facilities through the Bank's leasing operations arm, the Georgian Leasing Company; (4) brokerage services through Galt & Taggart and (5) Wealth Management private banking services to high-net-worth individuals and offers investment management products internationally through representative offices in London, Budapest, Istanbul and Tel Aviv.

 

GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y

INCOME STATEMENT HIGHLIGHTS










Net banking interest income 

37,133

35,233

5.4%

37,949

-2.2%


75,082

73,483

2.2%

Net fee and commission income 

5,301

6,129

-13.5%

5,666

-6.4%


10,967

13,150

-16.6%

Net banking foreign currency gain

10,409

8,921

16.7%

11,429

-8.9%


21,839

20,289

7.6%

Net other banking income

1,929

1,822

5.9%

2,259

-14.6%


4,187

4,408

-5.0%

Revenue 

54,772

52,105

5.1%

57,303

-4.4%


112,075

111,330

0.7%

Salaries and other employee benefits

(12,974)

(11,357)

14.2%

(12,346)

5.1%


(25,319)

(22,512)

12.5%

Administrative expenses

(3,516)

(3,692)

-4.8%

(3,535)

-0.5%


(7,051)

(7,047)

0.1%

Banking depreciation and amortisation

(1,263)

(1,304)

-3.1%

(1,217)

3.8%


(2,480)

(2,576)

-3.7%

Other operating expenses 

(188)

(226)

-16.8%

(157)

19.7%


(346)

(457)

-24.3%

Operating expenses 

(17,941)

(16,579)

8.2%

(17,255)

4.0%


(35,196)

(32,592)

8.0%

Operating income before cost of credit risk

36,831

35,526

3.7%

40,048

-8.0%


76,879

78,738

-2.4%

Cost of credit risk 

(5,030)

(9,348)

-46.2%

(8,699)

-42.2%


(13,729)

(23,486)

-41.5%

Profit before non-recurring items and income tax 

31,801

26,178

21.5%

31,349

1.4%


63,150

55,252

14.3%

Net non-recurring items 

(259)

(14,537)

-98.2%

(1,155)

-77.6%


(1,414)

(15,393)

-90.8%

Profit before income tax 

31,542

11,641

171.0%

30,194

4.5%


61,736

39,859

54.9%

Income tax (expense) benefit

(1,053)

12,808

NMF

(1,912)

-44.9%


(2,965)

10,121

NMF

Profit

30,489

24,449

24.7%

28,282

7.8%


58,771

49,980

17.6%











BALANCE SHEET HIGHLIGHTS










Letters of credit and guarantees, standalone*

514,079

560,029

-8.2%

506,433

1.5%


514,079

560,029

-8.2%

Net loans and finance lease receivables, Currency Blended

2,037,831

2,065,566

-1.3%

2,226,884

-8.5%


2,037,831

2,065,566

-1.3%

Net loans and finance lease receivables, GEL

390,779

219,465

78.1%

398,105

-1.8%


390,779

219,465

78.1%

Net loans and finance lease receivables, FC

1,647,052

1,846,101

-10.8%

1,828,779

-9.9%


1,647,052

1,846,101

-10.8%

Client deposits, Currency Blended

2,723,674

2,602,018

4.7%

2,929,377

-7.0%


2,723,674

2,602,018

4.7%

Client deposits, GEL

740,408

754,096

-1.8%

897,239

-17.5%


740,408

754,096

-1.8%

Client deposits, FC

1,983,266

1,847,922

7.3%

2,032,138

-2.4%


1,983,266

1,847,922

7.3%

Time deposits, Currency Blended

979,001

1,041,041

-6.0%

1,136,852

-13.9%


979,001

1,041,041

-6.0%

Time deposits, GEL

139,747

161,612

-13.5%

138,404

1.0%


139,747

161,612

-13.5%

Time deposits, FC

839,254

879,429

-4.6%

998,448

-15.9%


839,254

879,429

-4.6%

Current accounts and demand deposits, Currency Blended

1,744,673

1,560,977

11.8%

1,792,525

-2.7%


1,744,673

1,560,977

11.8%

Current accounts and demand deposits, GEL

600,661

592,484

1.4%

758,835

-20.8%


600,661

592,484

1.4%

Current accounts and demand deposits, FC

1,144,012

968,493

18.1%

1,033,690

10.7%


1,144,012

968,493

18.1%

Assets under management

1,682,914

1,301,353

29.3%

1,568,550

7.3%


1,682,914

1,301,353

29.3%











 

 

 

 

 










RATIOS










ROAE, Corporate Investment Banking

20.0%

17.2%


18.3%



19.1%

17.4%


Net interest margin, currency blended

3.3%

3.7%


3.4%



3.3%

3.7%


Cost of risk

0.5%

1.5%


0.3%



0.4%

1.8%


Cost of funds, currency blended

4.8%

4.6%


5.0%



4.9%

4.5%


Loan yield, currency blended

10.6%

10.0%


10.7%



10.6%

10.2%


Loan yield, GEL

12.3%

14.3%


12.5%



12.4%

13.7%


Loan yield, FC

10.2%

9.6%


10.3%



10.3%

9.9%


Cost of deposits, currency blended

4.2%

4.2%


3.9%



4.0%

4.4%


Cost of deposits, GEL

7.4%

7.1%


6.6%



7.1%

7.5%


Cost of deposits, FC

2.9%

3.0%


2.9%



2.9%

3.1%


Cost of time deposits, currency blended

5.8%

5.9%


5.6%



5.7%

6.0%


Cost of time deposits, GEL

9.6%

9.8%


9.6%



9.6%

9.7%


Cost of time deposits, FC

5.2%

5.2%


5.1%



5.1%

5.3%


Current accounts and demand deposits, currency blended

3.3%

3.1%


2.8%



3.0%

3.2%


Current accounts and demand deposits, GEL

7.0%

6.4%


6.0%



6.6%

6.9%


Current accounts and demand deposits, FC

0.9%

0.8%


0.9%



0.9%

0.8%


Cost / income ratio

32.8%

31.8%


30.1%



31.4%

29.3%


Concentration of top ten clients

11.1%

11.3%


11.3%



11.1%

11.3%


 

*Off-balance sheet item

 

 

 

 

 



 

Performance highlights

 

§ Continued progress on strategic de-concentration initiative. During 2Q17 CIB continued to deliver on its de-concentration and loan portfolio repositioning targets, which resulted in increased quarterly ROAE and decreased quarterly credit losses on both q-o-q and y-o-y basis.

-       The concentration of top 10 CIB clients decreased from 11.3% at 31 March 2017 to 11.1% at 30 June 2017, the lowest level since the de-concentration initiative was announced in 4Q15. Net loan book amounted to GEL 2,037.8mln at 30 June 2017, down 1.3% y-o-y, and down 8.5% q-o-q, largely driven by winding down lending relationships with two large borrowers. As a result, CIB cost of credit risk significantly improved to GEL 5.0mln in 2Q17 (down 46.2% y-o-y and down 42.2% q-o-q) and decreased to GEL 13.7mln in 1H17 (down 41.5% y-o-y)

-       CIB's 2Q17 net banking interest income increased by 5.4% y-o-y, supporting the 2.2% y-o-y growth in 1H17. The y-o-y growth in both 2Q17 and 1H17 reflect increases in the currency blended loan yields over the same periods. CIB's 2Q17 net banking interest income was down by 2.2% q-o-q as a result of the decrease in CIB's loan portfolio size coupled with slight decrease in currency blended loan yields, which was marginally offset by decrease in cost of funds

-       CIB's net fee and commission income was GEL 5.3mln or 9.7% of total CIB revenue in 2Q17, compared to GEL 6.1mln or 11.8% in 2Q16 and GEL 5.7mln or 9.9% in 1Q17. On a half yearly basis, CIB net fee and commission income was GEL 11.0mln or 9.8% of total CIB revenue in 1H17, compared to GEL 13.2mln or 11.8% in 1H16. The declines in all periods were driven by decrease in net fee and commission income from guarantees and letters of credit (down by GEL 0.6mln or 17.0% y-o-y and down by GEL 0.4mln or 12.9% q-o-q in 2Q17; down by GEL 2.2mln or 27.0% y-o-y in 1H17), reflecting our ongoing risk de-concentration efforts and decreased yields on guarantees and letters of credit as we reposition our portfolio towards high credit profile corporate clients

§ CIB's loan book de-dollarisation maintained its pace in 2Q17 as the share of foreign currency denominated loans declined to 80.8% at 30 June 2017, compared to 89.4% a year ago and 82.1% at 31 March 2017. This trend reflects the corporate clients' increased appetite for borrowings in local currency due to GEL's volatility over the last two years, which was also supported by decreasing loan yields for GEL denominated loans (12.3% in 2Q17, down 200bps y-o-y and down 20bps q-o-q ; 12.4% in 1H17, down 130bps y-o-y)

§ In 2Q17, dollarisation of our CIB deposits increased to 72.8% as at 30 June 2017 from 71.0% a year ago and 69.4% as at 31 March 2017, as a result of significant y-o-y decrease in local currency deposit rates in 1H17. The cost of deposits in foreign currency also decreased and remained within the 2.9%-3.1% range. On the other hand, cost of deposits in local currency in 2Q17 stood at 7.4%, up q-o-q after having significantly decreased to 6.6% in 1Q17. As a result, on a half year basis, the cost of deposits in local currency was 7.1%, down 40 bps y-o-y. Consequently, total deposits amounted to GEL 2,723.7, up 4.7% y-o-y and down 7.0% q-o-q. On a constant currency basis, total deposits were up 2.6% y-o-y and down 6.0% q-o-q

§ CIB recorded a NIM of 3.3% in 2Q17 and 1H17, down 40bps y-o-y and down 10bps q-o-q. While loan yield was down by 10bps q-o-q and cost of funds was down by 20bps q-o-q, the 10bps decrease in CIB NIM on q-o-q basis was driven by an increased share of liquid assets in total interest earning assets

§ Net banking foreign currency gain. In line with lower volatility of the GEL exchange rate, CIB net banking foreign currency gain was GEL 10.4mln in 2Q17 (up 16.7% y-o-y and down 8.9% q-o-q) and amounted to GEL 21.8mln in 1H17 (up 7.6% y-o-y). 1H17 y-o-y increase was attributable to the elevated volatility of the GEL exchange rate during 1Q17

§ CIB's cost to income ratio increased to 32.8% in 2Q17 from 31.8% in 2Q16 and from 30.1% in 1Q17. On a half year basis, cost to income ratio stood at 31.4% in 1H17, up from 29.3% in 1H16. The increase resulted from the intensified de-concentration efforts, which led to a higher reduction in revenues with less impact on operating costs. CIB's operating expenses were up 8.2% on y-o-y in 2Q17 and up 8.0% y-o-y in 1H17, driven by 14.2% and 12.5% increase in salaries and other employee benefits in 2Q17 and 1H17, respectively, as a result of CIB's investments in attracting the talent to accelerate the de-concentration efforts and restructuring of its corporate recovery team. However, the benefits of these undertakings are positively reflected in CIB's lower cost of risk ratio, which stood at 0.5% in 2Q17 (down from 1.5% in 2Q16 and slightly up from 0.3% in 1Q17) and at 0.4% in 1H17 (down from 1.8% in 1H16)     

§ As a result, Corporate Investment Banking profit reached GEL 30.5mln in 2Q17 (up 24.7% y-o-y and 7.8% q-o-q) and GEL 58.8mln in 1H17 (up 17.6% y-o-y) and CIB ROAE reached 20.0% in 2Q17, compared to 17.2% a year ago and 18.3% in 1Q17. On a half yearly basis, CIB ROAE increased to 19.1%, compared to 17.4% in 1H16

 

Performance highlights of wealth management operations

 

§ The AUM of the Investment Management segment increased to GEL 1,682.9mln 2Q17, up 29.3% y-o-y and up 7.3% q-o-q. This includes a) deposits of Wealth Management franchise clients, b) assets held at Bank of Georgia Custody, c) Galt & Taggart brokerage client assets, d) Global certificates of deposit held by Wealth Management clients, and e) Aldagi pension scheme assets

§ Wealth Management deposits were GEL 1,054.6mln, up 9.3% y-o-y and flat q-o-q, growing at a compound annual growth rate (CAGR) of 14.8% over the last five-year period. The cost of deposits stood at 4.0% in 2Q17, down 40bps y-o-y and down 10bps q-o-q. On a half year basis, the cost of deposits was 4.0% in 1H17, down 60bps y-o-y. The decline in cost of deposits and the impact of Wealth Management clients switching from deposits to local bonds and Global certificates of deposit, as Galt & Taggart has offered a number of local bond issuances - yielding higher rates than deposits - to Wealth Management clients, were reflected in the Wealth Management deposit balances

§ We served 1,414 wealth management clients from 69 countries as of 30 June 2017 as compared to 1,385 clients from 68 countries as of 31 March 2017 and 1,377 clients from 68 countries as of 30 June 2016

§ On 31 May 2017, the Bank hosted the first Wealth Conference in Georgia. 50 delegates from 25 companies and 10 countries attended the event

§ Galt & Taggart, which brings under one brand corporate advisory, private equity and brokerage services, continues to develop local capital markets in Georgia.

-       Quarterly update on recent developments in Georgian economy. In August 2017, Galt & Taggart launched new research report covering the quarterly macro-economic developments in Georgian economy. The report was followed by a conference call hosted by Galt & Taggart for interested stakeholders to discuss the developments. The report is available on Galt and Taggart website at www.galtandtaggart.com 

-       Regional Fixed Income Market Watch. The report, which is released monthly and covers the debt markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, and Ukraine, provides market data for both locally and internationally listed debt issuances from the countries subject to coverage. Amongst various country-level macro-economic development indicators, the report includes information about sovereign ratings, monetary policy rates, economic growth, fiscal and current account balances

-       During 2Q17 Galt & Taggart was mandated through a competitive tender process to actively manage private pension fund of a corporate client. This is the first private pension fund ever established in Georgia by a non-financial institution. The fund is expected to accumulate approximately GEL 3mln contributions annually

-       During 2Q17 and July 2017, Galt & Taggart acted as:

-       a co-manager of the Bank's inaugural GEL 500mln Lari denominated international bond issuance in June 2017

-       a placement agent of GEL 108mln local bonds due 2020 of International Finance Corporation in June 2017

-       a placement agent for Evex Medical Corporation, a subsidiary of Georgia Healthcare Group, facilitating private placement of GEL 90mln local bonds due 2022, in July 2017

 

 

 

 

 

 

 

 

 

 

 



 

Investment Business Segment Result Discussion

 

Utility & Energy Business (Georgia Global Utilities - GGU)6

 

About GGU

Natural monopoly in the water business, with upside in electricity generation. Our utility and energy business is operated through the Group's wholly-owned subsidiary Georgia Global Utilities (GGU). GGU has two main business lines - a water utility and electric power generation. In its water utility business, GGU is a natural monopoly that supplies water and provides a wastewater service to 1.4mln people (more than one-third of Georgia's population) in three cities: Tbilisi, Mtskheta and Rustavi.

GGU is self-sufficient in power for water transportation and it benefits from additional revenue from third-party electricity sales. GGU owns and operates three hydropower generation facilities (and manages an additional facility) with a total capacity of 149.3MW. GGU is also investing in additional capacity for electricity generation through the development of hydro power plants (HPP), as well as solar and wind power sources. During 2Q17, GGU commenced construction of a 50MW HPP in western part of Georgia with a target to have the HPP operational in December 2018. Average annual production varies between 380GWh and 560GWh, depending on the level of rainfall during the year. GGU's average annual electricity consumption for its own account varies between 270GWh and 300GWh, meaning that GGU has self-sufficient power for water transportation and it benefits from additional revenue from third-party electricity sales. Over the course of the last two years GGU has managed to achieve efficiencies in its own energy consumption, thus freeing up electricity for third-party sales. The involvement in hydro power production also provides revenue diversification.

Room for efficiencies in water business from improving the worn-out infrastructure. The poor condition of pipeline infrastructure is the main reason for leaks and accidents, causing on average 70% water loss annually, out of which 50% is attributable to technical losses and 20% to commercial losses. The current high level of water losses is significantly worse than the peer average and represents a strong efficiency upside for the business. GGU owns and operates a water supply network of around 2,700km and about 1,700km of wastewater pipelines. It also has 45 pumping stations, 84 service reservoirs with a total capacity of 320,000 m3 and one water treatment plant. Around 520,000,000 m3 of potable water is supplied from water production/treatment facilities annually. By improving the pipeline infrastructure and as a result of reducing the water supplied to its utility customers, GGU expects to free-up own electricity consumption, which in turn can be sold to third parties.

Water tariff & regulation. The current water and wastewater tariff for residential customers stands at GEL 3.15 (per month, per capita) for non-metered customers and at GEL 0.27 per m3 for metered customers. All of GGU's commercial customers are metered and the tariff stands at GEL 4.42 per m3. The tariff is set per cubic meter of water consumed by customers. GNERC (Georgian National Energy and Water Supply Regulatory Commission) regulates GGU's water tariffs. GNERC is an independent regulatory body, not subject to direct supervision from any other state authority, but accountable to parliament. It is funded predominantly from the fees paid by market participants (0.2% of total revenues).

Strong cash flow generation is expected to enable GGU to sponsor stable dividend payouts to shareholders starting from 2019. GWP, a wholly owned subsidiary of GGU, which operates the water business, has a credit rating of BB- with stable outlook from Fitch.

 

 

 

 

6 Prior to 2Q17, GGU's standalone results excluded the Group's renewable energy business results due to its absence from GGU's legal structure and insignificant size. Effective from 2Q17, we are reporting GGU results on a pro-forma basis together with renewable energy business and have retrospectively revised the comparable information accordingly

 

 

 

 

 

 

 

 

 

 

 

 



 

Standalone results

We acquired the 75% of GGU's equity interests that we did not previously own on 21 July 2016 and have consolidated its results since then. Prior to this, the net income from the Group's 25% stake in GGU was reported under "profit from associates". The results below refer to GGU's standalone numbers. GGU's stand-alone results, including the related comparative information, reflect the energy & utility business performance. 

INCOME STATEMENT










 GEL thousands; unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Revenue from water supply to legal entities

20,592

19,353

6.4%

18,336

12.3%


38,928

36,339

7.1%

Revenue from water supply to individuals

8,142

7,295

11.6%

7,911

2.9%


16,053

14,892

7.8%

Revenue from electric power sales

1,903

895

112.6%

1,191

59.8%


3,094

4,162

-25.7%

Revenue from technical support

739

454

62.8%

673

9.8%


1,412

1,196

18.1%

Other income

604

230

162.6%

491

23.0%


1,095

201

NMF

Revenue

31,980

28,227

13.3%

28,602

11.8%


60,582

56,790

6.7%

Provisions for doubtful trade receivables

(1,399)

(727)

92.4%

274

NMF


(1,125)

(1,473)

-23.6%

Salaries and benefits

(5,601)

(4,496)

24.6%

(4,257)

31.6%


(9,858)

(8,355)

18.0%

Electricity and transmission costs

(3,913)

(4,702)

-16.8%

(4,972)

-21.3%


(8,885)

(9,423)

-5.7%

Raw materials, fuel and other consumables 

(436)

(1,090)

-60.0%

(791)

-44.9%


(1,227)

(1,983)

-38.1%

Infrastructure assets maintenance expenditure 

(357)

(546)

-34.6%

(301)

18.6%


(658)

(1,212)

-45.7%

General and administrative expenses

(893)

(933)

-4.3%

(861)

3.7%


(1,754)

(1,712)

2.5%

Operating taxes

(776)

(734)

5.7%

(1,062)

-26.9%


(1,838)

(1,338)

37.4%

Professional fees

(592)

(400)

48.0%

(467)

26.8%


(1,059)

(1,012)

4.6%

Insurance expense

(244)

(199)

22.6%

(285)

-14.4%


(529)

(266)

98.9%

Other operating expenses

(2,109)

(2,155)

-2.1%

(1,445)

46.0%


(3,554)

(3,391)

4.8%

Operating expenses

(16,320)

(15,982)

2.1%

(14,167)

15.2%


(30,487)

(30,165)

1.1%

EBITDA

15,660

12,245

27.9%

14,435

8.5%


30,095

26,625

13.0%

EBITDA Margin

49%

43%


50%



50%

47%


Depreciation and amortisation

(5,071)

(4,256)

19.1%

(4,821)

5.2%


(9,892)

(9,662)

2.4%

EBIT

10,589

7,989

32.5%

9,614

10.1%


20,203

16,963

19.1%

EBIT Margin

33%

28%


34%



33%

30%


Net interest expense

(3,070)

(2,533)

21.2%

(2,266)

35.5%


(5,336)

(4,908)

8.7%

Net non-recurring expenses

(251)

-

NMF

-

NMF


(251)

-

NMF

Foreign exchange (loss) gain

(141)

(342)

-58.8%

(328)

-57.0%


(469)

(406)

15.5%

EBT

7,127

5,114

39.4%

7,020

1.5%


14,147

11,649

21.4%

Income tax (expense) benefit

(390)

232

NMF

-

NMF


(390)

(939)

-58.5%

Profit

6,737

5,346

26.0%

7,020

-4.0%


13,757

10,710

28.5%

Attributable to:










- Shareholders of the Group

6,946

5,386

29.0%

7,177

-3.2%


14,123

10,779

31.0%

- Non-controlling interests

(208)

(39)

NMF

(158)

31.6%


(366)

(69)

NMF

Performance highlights

§ GGU recorded total revenue of GEL 32.0mln in 2Q17(up 13.3% y-o-y and up 11.8% q-o-q) and GEL 60.6mln in 1H17 (up 6.7% y-o-y) 

-       Revenue from the water supply to legal entities and individuals reached GEL 28.7mln in 2Q17 (up 7.8% y-o-y and up 9.5% q-o-q) and GEL 55.0mln in 1H17 (up 7.3% y-o-y). Water supply revenue represented 89.8% of the total revenue in 2Q17 (94.4% in 2Q16 and 91.8% in 1Q17) and 90.8% of the total revenue in 1H17 (90.2% in 1H16). Water consumption is characterised by seasonality, whereby sales in the second quarter normally exceed sales during the first quarter. Revenue from legal entities is generally the largest element of GGU's total revenue and their water consumption pattern is reflected in GGU's quarterly revenues. The y-o-y increase in revenue from water supply to both legal entities and individuals reflects the increased consumption in 1H17 as compared to 1H16

-       Unregistered customers are one of the major reasons for unrecovered revenue. GGU regularly under-recovers its water revenue from residential consumers due to discrepancies between customers formally registered with the provider and actual customers. Currently approximately 1.4mln people live in Tbilisi, Rustavi and Mtskheta regions, while only 1.2mln residents are registered with GGU. In certain instances water is supplied, but consumption is not billed for, resulting in challenges associated with accurate accounting for water consumption. GGU is dealing with these issues by aligning its own customer database with that of the state registry to identify the unregistered customers and improve metering. The company also created a monitoring group that identifies unregistered customers per household. The exercise has positively impacted revenues from individuals

-       Revenue from electricity power sales reached GEL 1.9 million in 2Q17 (up 112.6% y-o-y and up 59.8% q-o-q). The positive trend was a result of increased internal power generation from GGU's hydro power plants supported by favorable weather conditions and the completion of rehabilitation works on Zhinvali HPP. This enabled the company to generate sufficient power to meet not only its own internal consumption needs, but also sell electricity to third parties. Additionally, GGU achieved a significant milestone during 2Q, whereby it signed an agreement that allowed GGU to export electricity to Turkey from June 2017. The 25.7% y-o-y decline in electricity power sales during 1H17 was driven by low electricity generation due to unfavourable weather conditions during 1Q17

-       The significant increase in the technical support revenue in 2Q17 and 1H17 was due to the growing number of new connections executed on behalf of the clients during these periods, and the registration of previously unregistered customers as discussed above

§ GGU's operating expenses continued to be well-contained and were almost flat in 1H17. Operating expenses amounted GEL 16.3mln in 2Q17 (up 2.1% y-o-y and up 15.2% q-o-q) and GEL 30.5mln in 1H17 (up 1.1% y-o-y):

-       The infrastructure asset maintenance expenditure, management's key focus area, was down 34.6% y-o-y in 2Q17 and down 45.7% y-o-y in 1H17 as a result of the continued prudent rehabilitation works. The quarterly number of accidents on the infrastructure also declined by 76 cases y-o-y and increased by 86 cases q-o-q during 2Q17 and declined by 374 cases y-o-y on a half year basis during 1H17. GGU actively invests in the rehabilitation of its infrastructure with a focus on improving efficiency in the medium to long-term. As a result, GGU's all-in cost of 1 meter rehabilitation was GEL 131 in 1H17, down 10.9% from GEL 147 in 1H16

-       As a result of increased management focus on improving efficiency of asset maintenance expenditures, GGU more than doubled number of employees in its technical support department in 2Q17, resulting in increased salaries and employee benefits expenses in 2Q17 and 1H17. However, GGU's all-in cost of 1 meter new connection decreased by 21.2% to GEL 41 in 1H17 from GEL 52 in 1H16

-       Starting from 1Q17, as part of an ongoing process of reviewing receivable provisioning methodology, GGU revisited certain estimates to enhance the method of provision estimation. Under the enhanced method GGU was able to identify the customers who were able to pay all their monthly bills on time, i.e. have no overdue bill balance. This change in accounting estimate had a positive impact on the provision of doubtful receivables in the amount of GEL 2.9 million in 1Q17, resulting in lower receivables provision expenses in 1Q17 and 1H17, while 2Q provision amount represents the expected run rate based on the enhanced methodology

-       Due to increased power generation during 2Q17 discussed above, GGU did not acquire electricity from the open market for its own consumption unlike 1Q17. As a result, the electricity and transmission costs were down 16.8% y-o-y and down 21.3% q-o-q in 2Q17 and down 5.7% y-o-y in 1H17

-       Operating taxes were up 5.7% y-o-y and down 26.9% q-o-q in 2Q17 and up 37.4% y-o-y in 1H17, reflecting an increase in GGU's property tax base due to the company's investments in its supply network

-       Professional fees increased in all reporting periods in 2017 primarily due to the fees received from independent subject matter experts in relation to the assessment of certain operational parameters

-       The y-o-y decline in income taxes in 1H17 reflect the impact of changes in corporate taxation model

§ Consequently, GGU reported a) EBITDA of GEL 15.7mln in 2Q17 (up 27.9% y-o-y and up 8.5% q-o-q) and GEL 30.1mln in 1H17 (up 13.0% y-o-y) and b) a profit of GEL 6.7mln in 2Q17 (up 26.0% y-o-y and down 4.0% q-o-q) and GEL 13.8mln in 1H17 (up 28.5% y-o-y)

STATEMENT OF CASH FLOW










GEL thousands; unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Cash receipt from customers

35,638

32,938

8.2%

30,582

16.5%


66,219

62,191

6.5%

Cash paid to suppliers

(10,450)

(14,543)

-28.1%

(11,330)

-7.8%


(21,781)

(24,684)

-11.8%

Cash paid to employees

(5,047)

(4,929)

2.4%

(3,859)

30.8%


(8,906)

(7,786)

14.4%

Interest received

151

61

147.5%

419

-64.0%


570

167

NMF

Interest paid

(2,910)

(2,449)

18.8%

(2,356)

23.5%


(5,266)

(4,959)

6.2%

Taxes paid

(3,826)

(3,545)

7.9%

(1,757)

117.8%


(5,584)

(6,443)

-13.3%

Restricted cash in Bank

417

763

-45.3%

945

-55.9%


1,362

140

NMF

Cash flow from operating activities

13,973

8,296

68.4%

12,644

10.5%


26,614

18,626

42.9%











Maintenance capex

(5,370)

(5,205)

3.2%

(8,835)

-39.2%


(14,202)

(9,079)

56.4%

Operating cash flow after maintenance capex

8,603

3,091

178.3%

3,809

NMF


12,412

9,547

30.0%











Purchase of PPE and intangible assets

(31,114)

(8,950)

NMF

(15,334)

102.9%


(46,448)

(15,028)

NMF

Restricted cash in Bank

-

-

NMF

(12,249)

-100.0%


(12,249)

-

NMF

Total cash used in investing activities

(31,114)

(8,950)

NMF

(27,583)

12.8%


(58,697)

(15,028)

NMF











Proceeds from borrowings

55,838

2,583

NMF

12,412

NMF


68,250

2,963

NMF

Repayment of borrowings

(4,666)

(2,791)

67.2%

(4,328)

7.8%


(8,994)

(5,292)

70.0%

Dividends paid out

-

(50)

NMF

-

-


-

(104)

NMF

Capital increase

9,054

1,727

NMF

780

NMF


9,834

1,901

NMF

Total cash flow from (used in) financing activities

60,226

1,469

NMF

8,864

NMF


69,090

(532)

NMF











Exchange loss on cash equivalents

(283)

(879)

-67.8%

(693)

-59.2%


(976)

(945)

3.3%

Total cash inflow/(outflow)

37,432

(5,269)

NMF

(15,603)

NMF


21,829

(6,958)

NMF











Cash balance










Cash, beginning balance

16,776

11,668

43.8%

32,379

-48.2%


32,379

13,357

142.4%

Cash, ending balance

54,208

6,399

NMF

16,776

NMF


54,208

6,399

NMF

§ GGU has an outstanding receivables collection rate within the 95-98% range from water supply. During the first half 2017, the collection rate for legal entities and households was 98% and 94%, respectively. As a result, GGU had GEL 4.9mln overdue receivables outstanding at 30 June 2017. While Georgian water utility sector historically had low receivables collection rates, as a result of GGU's arrangement with electricity suppliers since 2011, which allows disconnection of non-paying water customers from the electricity network, GGU's collection rates remained very strong at around the 96% level. In return, electricity suppliers receive flat monetary compensation from GGU (c.GEL 1.3mln p.a. since 2015)

§ The decrease in costs of raw materials and asset maintenance discussed above were triggers for the 28.1% y-o-y and 7.8% q-o-q decrease in the cash paid to suppliers

§ The significant increase in maintenance capex y-o-y in both 2Q17 and 1H17 (up 3.2% and 56.4%) reflects the acceleration of the infrastructure maintenance program starting from 3Q16 to improve the operational efficiencies. This program has already resulted in the decline of the number of accidents on the infrastructure and respective reduction of the level of necessary maintenance capex to support the day-to-day operations of the company in 2Q17. As a result, maintenance capex spent in 2Q17 is significantly lower than it was in 1Q17 (down 39.2% q-o-q). The increased operating cash flow after deducting maintenance capex of GEL 8.6mln in 2Q17 reflects this dynamic 

BALANCE SHEET

GEL thousands; unless otherwise noted

Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q







Cash and cash equivalents

54,208

6,399

NMF

16,776

NMF

Trade and other receivables

28,271

25,551

10.6%

30,944

-8.6%

Inventories

3,299

4,429

-25.5%

3,108

6.1%

Current income tax prepayments

1,406

1,013

38.8%

998

40.9%

Total current assets

87,184

37,392

133.2%

51,826

68.2%

Property, plant and equipment

370,646

305,738

21.2%

349,967

5.9%

Investment Property

18,371

19,417

-5.4%

18,922

-2.9%

Intangible assets

1,324

1,216

8.9%

1,359

-2.6%

Restructured trade receivables

160

23

NMF

178

-10.1%

Restricted Cash

15,041

2,922

NMF

16,234

-7.3%

Other non-current assets

10,671

1,556

NMF

2,830

NMF

Total non-current assets

416,213

330,872

25.8%

389,490

6.9%

Total assets

503,397

368,264

36.7%

441,316

14.1%







Current borrowings

54,300

25,186

115.6%

22,566

140.6%

Trade and other payables

22,261

20,089

10.8%

28,391

-21.6%

Provisions for liabilities and charges

781

2,133

-63.4%

743

5.1%

Other taxes payable

2,396

2,045

17.2%

2,736

-12.4%

Total current liabilities

79,738

49,453

61.2%

54,436

46.5%

Long term borrowings

111,291

46,445

139.6%

91,534

21.6%

Deferred income tax liability

-

390

NMF

-

-

Deferred income

17,833

-

NMF

17,817

0.1%

Total non-current liabilities

129,124

46,835

175.7%

109,351

18.1%

Total liabilities

208,862

96,288

116.9%

163,787

27.5%







Share capital

13,062

3,900

NMF

8,262

58.1%

Additional paid-in-capital

846

-

NMF

-

NMF

Retained earnings

93,870

86,846

8.1%

85,384

9.9%

Revaluation reserve

180,924

180,040

0.5%

181,461

-0.3%

Total equity attributable to shareholders of the Group

288,702

270,786

6.6%

275,107

4.9%

Non-controlling interest

5,833

1,190

NMF

2,422

140.8%

Total equity

294,535

271,976

8.3%

277,529

6.1%

Total liabilities and equity

503,397

368,264

36.7%

441,316

14.1%

§ The increase in property, plant and equipment is primarily due to additional investments into the company's infrastructure carried out during 2016 and 1H17 in order to upgrade the network and further reduce water losses and achieve cost efficiencies

§ The increase in borrowings and cash and cash equivalents during 2Q17 are primarily due to additional financing obtained from local financial institutions and shareholders of GGU, which supported the additional investment in PPE

§ During 2016, GGU made significant progress towards reducing its foreign-exchange exposure. In particular, the company refinanced a large part of its US dollar-denominated debt with Lari-denominated debt. Currently 87.9% of GGU's borrowings are denominated in local currency

 

 



 

Healthcare business (Georgia Healthcare Group or GHG)

Standalone results

GHG is the largest integrated player in the fast-growing predominantly privately-owned Georgia Healthcare ecosystem with an aggregated value of GEL 3.4 billion. GHG is comprised of three different business lines: healthcare services business (consisting of a hospital business and Polyclinics (outpatient clinics)), pharmacy business and medical insurance business. BGEO Group owns 57.0% of GHG at 30 June 2017, with the balance of the shares being held by the public (largely institutional investors). GHG's results are fully consolidated in BGEO Group's results. GHG's shares are listed on the London Stock Exchange. The results below refer to GHG standalone numbers and are based on GHG's reported results, which are published independently and available on GHG's web-site: ghg.com.ge

INCOME STATEMENT










GEL thousands; unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Revenue, gross

184,601

101,673

81.6%

186,447

-1.0%


371,048

174,249

112.9%

Corrections & rebates

(660)

(724)

-8.8%

(623)

5.9%


(1,283)

(1,134)

13.1%

Revenue, net

183,941

100,949

82.2%

185,824

-1.0%


369,765

173,115

113.6%

Revenue from healthcare services

65,940

58,055

13.6%

65,725

0.3%


131,665

118,096

11.5%

Revenue from pharmacy

110,942

30,691

NMF

111,399

-0.4%


222,341

30,691

NMF

Net insurance premiums earned

13,410

15,298

-12.3%

13,965

-4.0%


27,375

29,128

-6.0%

Eliminations

(6,351)

(3,095)

105.2%

(5,265)

20.6%


(11,616)

(4,800)

142.0%

Costs of services

(130,247)

(67,395)

93.3%

(129,746)

0.4%


(259,993)

(111,546)

133.1%

Cost of healthcare services

(37,652)

(31,399)

19.9%

(37,777)

-0.3%


(75,429)

(64,397)

17.1%

Cost of pharmacy

(84,822)

(25,059)

NMF

(84,408)

0.5%


(169,230)

(25,059)

NMF

Cost of insurance services

(12,718)

(13,989)

-9.1%

(12,734)

-0.1%


(25,452)

(26,836)

-5.2%

Eliminations

4,945

3,052

62.0%

5,173

-4.4%


10,118

4,746

113.2%

Gross profit

53,694

33,554

60.0%

56,078

-4.3%


109,772

61,569

78.3%

Salaries and other employee benefits

(18,424)

(9,229)

99.6%

(17,728)

3.9%


(36,152)

(16,152)

123.8%

General and administrative expenses

(11,400)

(6,705)

70.0%

(13,352)

-14.6%


(24,752)

(9,268)

167.1%

Impairment of receivables

(1,003)

(1,236)

-18.9%

(1,121)

-10.5%


(2,124)

(2,216)

-4.2%

Other operating income

3,229

497

549.7%

1,182

173.2%


4,411

78

NMF

EBITDA

26,096

16,882

54.6%

25,059

4.1%


51,155

34,011

50.4%

Depreciation and amortisation

(6,481)

(4,581)

41.5%

(5,872)

10.4%


(12,353)

(9,046)

36.6%

Net interest expense

(7,828)

(3,469)

125.7%

(7,119)

10.0%


(14,947)

(5,125)

191.6%

Net gain/(loss) from foreign currencies

986

(1,964)

-150.2%

2,778

-64.5%


3,764

(2,224)

NMF

Net non-recurring income/(expense)

(1,478)

(586)

152.2%

(1,792)

NMF


(3,270)

(816)

NMF

Profit before income tax expense

11,295

6,282

79.8%

13,054

-13.5%


24,349

16,800

44.9%

Income tax (expense)/benefit

(88)

26,920

-100.3%

(19)

NMF


(107)

28,425

NMF

   of which: Deferred tax adjustments

-

27,113


-



-

29,311


Profit for the period

11,207

33,202

-66.2%

13,035

-14.0%


24,242

45,225

-46.4%











Attributable to:










  - shareholders of the Company

6,172

27,755

-77.8%

8,832

-30.1%


15,004

37,676

-60.2%

  - non-controlling interests

5,035

5,447

-7.6%

4,203

19.8%


9,238

7,549

22.4%

       of which: Deferred tax adjustments

-

4,705


-



-

5,057


Performance highlights

§ GHG delivered strong revenue of GEL 184.6mln in 2Q17 (up 81.6% y-o-y and flat q-o-q) and GEL 371.0mln in 1H17 (up 112.9% y-o-y). The y-o-y revenue growth in 2Q17 and 1H17 was mainly attributable to the pharmacy business (GPC and Pharmadepot acquired in and consolidated from May 2016 and January 2017, respectively). The healthcare services business was the second largest contributor to y-o-y revenue growth, with strong organic growth of 13.3% in 2Q17 and 11.5% in 1H17. The increase in healthcare and pharmacy business revenue was partially offset by y-o-y decline in net insurance premiums earned both in 2Q17 and 1H17, mainly attributable to the expiration of the loss-making contract with the Ministry of Defence of Georgia in January 2017

§ In 2Q17 and 1H17, GHG achieved a well-diversified revenue mix, spread across all three segments of the Georgian healthcare ecosystem. In the first half of 2017, 34% of the GHG's revenue came from the healthcare services business, 59% from pharmacy business and the remaining 7% from medical insurance business. The high level of diversification was achieved through GHG's entrance and further expansion into the pharmacy business, which is funded almost entirely out-of-pocket and therefore helped GHG to further diversify its revenue by payment sources. This translated into c.55% of total revenue from out of pocket payments, c.23% from Georgia's Universal Health Program and c.22% from corporates in 1H17

§ In 2Q17, GHG continued to focus on extracting operating efficiencies and synergies across the business lines. As anticipated, healthcare services business margins are temporarily reduced due to the launches of new healthcare facilities and services, which are currently in their rapid build-out phase. Starting from 2Q17, the gross margin for the healthcare services business started to rebound gradually (up by 40bps q-o-q), as a result of GHG's efforts towards increasing the utilisation of healthcare facilities through elective care services and realising further cost synergies - a trend that we expect to continue. The gross margin in the pharmacy business was temporarily reduced in April as a result of an increased cost of goods sold driven by the impact of previously purchased inventory at a higher foreign currency exchange rate. During May and June, such impact was realized and the gross margin returned to its normal level

§ GHG reported record EBITDA of GEL 26.1mln in 2Q17 (up 54.6% y-o-y and up 4.1% q-o-q) and GEL 51.2mln in 1H17 (up 50.4% y-o-y). The EBITDA margin for healthcare services business was 27.5% in 2Q17 (29.2% in 2Q16 and 25.3% in 1Q17) and 26.4% in 1H17 (29.3% in 1H16). Temporary y-o-y reduction in EBITDA margin in 2Q17 and 1H17 was due to the roll-outs explained above. The healthcare services EBITDA margin started to rebound gradually in 2Q17, with positive operating leverage at 11.4ppts q-o-q and GHG expects further margin increases going forward. The healthcare services business was the main contributor to GHG's EBITDA, contributing 70% and 69% in total EBITDA in 2Q17 and 1H17, respectively, followed by pharmacy business, contributing 34% in total EBITDA during both 2Q17 and 1H17. Pharmacy business EBITDA margin was 8.0% and 7.9% in 2Q17 and 1H17, respectively, up from 7.8% in 1Q17 and on track to deliver its goal of more than 8% EBITDA margin

§ GHG's profit totaled GEL 11.2mln in 2Q17 (up 39.2% y-o-y on a normalised7 basis and down 14.0% q-o-q) and GEL 24.2mln in 1H17 (up 33.7% y-o-y on a normalised basis7). The healthcare services business was the main driver of the 2Q17 profit, contributing GEL 7.9mln, followed by the pharmacy business, which contributed GEL 4.7mln. This profit was partially offset by the loss of GEL 1.5mln reported by the medical insurance business

§ Depreciation and amortisation. GHG continued its sizeable development projects by actively investing in healthcare facilities as well as consolidating the pharmacy business entities, which was reflected in the 41.5% y-o-y and 36.6% y-o-y growth of depreciation and amortization in 2Q17 and 1H17, respectively. The 10.4% q-o-q increase in depreciation and amortization expense in 2Q17 is fully attributable to the launch of the Sunstone hospital in April 2017

§ Financing costs. Increases in interest expense on y-o-y basis both in 2Q17 and 1H17 are due to three main factors: 1) Lower base in 2016. At the end of 2015 and the beginning of 2016, GHG prepaid local banks debt to utilise the available cash post-IPO, subsequently realising significant savings in interest expense throughout 2016. From the second quarter of 2016 and in the first quarter of 2017, GHG sourced longer-term and less expensive funding from both local commercial banks and Development Financial Institutions ("DFIs") and used the proceeds for the development of healthcare facilities; 2) At the beginning of 2017, GHG raised GEL 33.0mln from a local commercial bank to pay the first tranche of consideration payable for the Pharmadepot acquisition. The increased debt balance in 2Q17 and 1H17, has resulted in increased interest expense; and 3) Recognised interest expense of GEL 0.9mln, due to unwinding of a discount resulting from the remaining consideration payable (in the amount of US$13.0mln) to Pharmadepot's former selling shareholders as part of total purchase price, payment of which will be carried out over the next five years. Discounted present value accounting is an IFRS requirement and does not result in actual cash outflow on interest, although it is considered an inherent part of the final remaining consideration to be paid

§ GHG's balance sheet increased substantially over the last twelve months, reaching GEL 1,065.5mln as at 30 June 2017 (up 30.9% y-o-y and flat q-o-q). The 30.9% y-o-y growth in total assets was largely driven by the increase in property and equipment, reflecting investments in the renovation of hospitals, roll-out of polyclinics and the consolidation of the pharmacy business, as a result of the two acquisitions completed in May 2016 and in January 2017. The pharmacy businesses consolidation primarily affected inventories and goodwill. Out of the GEL 107.2mln inventory balance at 30 June 2017, GEL 92.2mln was attributable to the pharmacy business, while balance of Goodwill from the acquisitions of the pharmacy businesses amounted to GEL 77.8mln at 30 June 2017. Borrowed funds increased y-o-y in 2Q17 and 1H17 as a result of the drivers noted above. The q-o-q reduction in borrowed funds in 2Q17 was due to maturity of local currency bonds. The y-o-y increase in accounts payable is also attributable to the pharmacy business. Out of the GEL 87.7mln accounts payable balance, GEL 58.0mln relates to the pharmacy business

§ During 2Q17, GHG continued to invest in the development of the healthcare facilities. Healthcare services business spent a total of GEL 13.6mln on capital expenditures, primarily on the extensive renovations of Deka and Sunstone hospitals, as well as enhancing service mix and introducing new services to cater to previously unmet patient needs. Of this, maintenance capex was GEL 2.6mln

§ In July 2017, healthcare service business acquired two community hospitals in the Khashuri and Qareli regions (together the "Hospitals"). The acquisition is in line with the healthcare services business strategy to expand its presence across the country, especially in underrepresented regions of Georgia. Following the acquisition of the Hospitals, the number of community hospitals increased to 22, with 555 beds in total. The Hospitals are located in the Khashuri and Qareli regions, with a combined population of c.100,000 people, and operate with 65 and 25 beds, respectively. These acquisitions further enable GHG to direct patients to its referral hospitals, primarily in Kutaisi and Tbilisi, thus providing potential for revenue synergies

§ GHG's healthcare services market share by number of beds was 24.6% at 30 June 2017

7 Comparison on a normalised basis – 2Q16 and 1H16 net profit was normalised and adjusted for one-off non-recurring gain due to deferred tax adjustments (in the amount of GEL 29.3mln, which fully resulted from the healthcare services business) and adjusted for one-off currency translation loss in June (in the amount of GEL 2.1mln), which resulted from settlement of the US dollar denominated payable for the acquisition of GPC 


 

Real estate business (m2 Real Estate or m2)

Standalone results8

Our Real Estate business is operated through the Group's wholly-owned subsidiary m2 Real Estate, which develops residential property in Georgia. m2 Real Estate has historically outsourced the construction and architecture works, whilst itself focusing on project management and sales. In May 2017, m2 Real Estate acquired BK Construction LLC, a local real estate construction company, with the aim to bring the construction works in house to achieve cost and project development efficiencies. The Group's Real Estate business serves to meet the unsatisfied demand in Tbilisi for housing through its well-established branch network and sales force, while stimulating the Bank's mortgage lending business. The business has also recently begun hotel development in the under-developed mid-price sector.

INCOME STATEMENT9










GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











 Revenue from sale of apartments

15,926

5,335

NMF

18,399

-13.4%


34,325

33,327

NMF

 Cost of sale of apartments

(15,076)

(4,667)

NMF

(17,109)

-11.9%


(32,185)

(26,766)

20.2%

 Net revenue from sale of apartments

850

668

NMF

1,290

-34.1%


2,140

6,561

NMF

 Revenue from operating leases

881

597

47.6%

899

-2.0%


1,780

1,186

50.1%

 Cost of operating leases

(197)

(50)

NMF

(83)

137.3%


(280)

(97)

188.7%

 Net revenue from operating leases

684

547

25.0%

816

-16.2%


1,500

1,089

37.7%

 Revaluation of commercial property

21,306

-

NMF

479

NMF


21,785

-

NMF

 Gross real estate profit 

22,840

1,215

NMF

2,585

NMF


25,425

7,650

NMF

 Gross other investment profit 

47

(76)

-161.8%

11

NMF


58

12

NMF

 Revenue 

22,887

1,139

NMF

2,596

NMF


25,483

7,662

NMF

 Salaries and other employee benefits

(504)

(336)

50.0%

(407)

23.8%


(911)

(633)

43.9%

 Administrative expenses

(1,050)

(1,354)

-22.5%

(1,427)

-26.4%


(2,477)

(2,381)

4.0%

 Operating expenses 

(1,554)

(1,690)

-8.0%

(1,834)

-15.3%


(3,388)

(3,014)

12.4%

 EBITDA

21,333

(551)

NMF

762

NMF


22,095

4,648

NMF

 Depreciation and amortisation

(63)

(60)

5.0%

(66)

-4.5%


(129)

(113)

14.2%

 Net foreign currency (loss) gain

(90)

636

-114.2%

(194)

-53.6%


(284)

1,022

-127.8%

 Interest income

290

-

NMF

189

53.4%


479

-

NMF

 Interest expense

(47)

(60)

-21.7%

(48)

-2.1%


(95)

(134)

-29.1%

 Net operating income (loss) before non-recurring items 

21,423

(35)

NMF

643

NMF


22,066

5,423

NMF

 Net non-recurring items 

193

228

-15.4%

(76)

NMF


117

205

-42.9%

 Profit before income tax 

21,616

193

NMF

567

NMF


22,183

5,628

NMF

 Income tax (expense)

-

(29)

NMF

-

-


-

(844)

NMF

 Profit 

21,616

164

NMF

567

NMF


22,183

4,784

NMF

Performance highlights

§ During 2Q17 and 1H17 m2 continued to unlock values through real estate development and recorded a strong gain from investment property revaluation of GEL 21.3mln. As a result, its portfolio of yielding assets, including the revaluation gain, increased by 70.0% and 61.7% to GEL 68.0mln at 30 June 2017 as compared to GEL 40.0mln at 30 June 2016 and GEL 42.0mln at 31 March 2017, respectively

§ Revaluation of commercial property increased materially in 2Q17 due to the revaluation of three under construction investment properties. m2 previously measured investment property under construction at cost, as allowed by IFRS, on the basis that fair value determination was difficult due to lack of comparable data and reliability of alternative fair value measurements. During 2Q 2017, management reassessed the approach and concluded that given a) the recent transactions of under construction properties on the local market, b) management's track record in building and renting out commercial properties and c) availability of increased statistical information; that reliable measurement of fair value was warranted. Accordingly, management hired an independent, internationally recognised, valuation company to determine the fair values and recorded a GEL 21.3mln revaluation gain in 2Q17 and 1H17

§ Net revenue from the sale of apartments is by its nature choppy and depends on the number of projects underway at a given time. We also adopted a new accounting treatment in 2017 which applies a completely different basis for recognizing revenue. Accordingly, y-o-y comparisons are not meaningful and will not be commented upon. Net revenue from the sale of apartments in 2Q17 was down 34.1% q-o-q as a result of the decrease in inventory base

§ Net revenue from operating leases increased by 37.7% in 1H17 y-o-y, supported by the growth in the commercial real estate portfolio. Consequently, the portfolio of yielding assets represented 20.6% of m2 Real Estate's total assets at 30 June 2017, compared to 12.9% a year ago and 14.2% at 31 March 2017

§ As a result, m2 recognised a total revenue of GEL 22.9mln in 2Q17 (GEL 2.6mln in 1Q17) and net profit of GEL 21.6mln (GEL 0.6mln in 1Q17). Total revenue reached GEL 25.5mln in 1H17 and profit amounted to GEL 22.2mln during the same period

§ In 1H17, m2 sold a total of 233 apartments with a total sales value of US$ 17.7mln, compared to 157 apartments sold with a total sales value of US$ 14.3mln during 1H16.  During 2Q17, m2 sold a total of 90 apartments with a total sales value of US$ 7.6mln, compared to 104 apartments sold with the total sales value of US$ 8.8mln during 2Q16 and 143 apartments with a total sales value of US$ 10.1mln in 1Q17

 

8 Prior to 1Q17, m2 Real Estate results presented were segment results, i.e. including Group elimination and consolidation adjustments. Effective 1Q17, and similar to other investment business entities, we are reporting stand-alone results for m2 Real Estate

9 The net revenue trend between the second quarter and first half of 2017 and 2016 is not comparable given the early adoption of IFRS 15 from 1 January 2017. Prior to 1 January 2017, m2 recognised revenues from sales of residential units upon completion and handover of the units to customers in line with IAS 18, while under IFRS 15 revenue is recognized according to the percentage of completion method. Accordingly, we will not comment on y-o-y comparisons

 

BALANCE SHEET

GEL thousands, unless otherwise noted

Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q







Cash and cash equivalents

52,817

42,488

24.3%

48,636

8.6%

Amounts due from credit institutions

386

-

NMF

179

115.6%

Investment securities

2,979

2,359

26.3%

1,515

96.6%

Accounts receivable

6,517

530

NMF

6,130

6.3%

Prepayments

26,312

17,835

47.5%

17,842

47.5%

Inventories

68,822

119,821

-42.6%

83,922

-18.0%

Investment property, of which:

136,594

104,161

31.1%

110,831

23.2%

       Land bank

68,622

64,188

6.9%

68,789

-0.2%

       Commercial real estate

67,972

39,973

70.0%

42,042

61.7%

Property and equipment

14,486

1,594

NMF

9,110

59.0%

Other assets

20,604

22,008

-6.4%

17,557

17.4%

Total assets

329,517

310,796

6.0%

295,722

11.4%







Amounts due to credit institutions

56,723

36,052

57.3%

38,912

91.6%

Debt securities issued

60,268

47,484

26.9%

62,278

-6.4%

Accruals and deferred income

58,654

99,380

-41.0%

53,670

18.6%

Other liabilities

6,915

16,489

-58.1%

7,657

-19.4%

Total liabilities

182,560

199,405

-8.4%

162,517

24.6%







Share Capital

4,180

4,180

0.0%

4,180

0.0%

Additional paid-in capital

86,987

84,833

2.5%

86,227

1.8%

Other reserves

4,087

-

NMF

13,469

-139.4%

Retained earnings

51,703

22,378

131.0%

29,329

152.6%

Total equity

146,957

111,391

21.1%

133,205

-0.8%

Total liabilities and equity

329,517

310,796

-1.5%

295,722

-41.2%

 

§ m2 continued to have a strong, diversified and well managed balance sheet. At 30 June 2017, total assets were GEL 329.5mln (up 6.0% y-o-y and up 11.4% q-o-q), made up by 16.0% cash, 8.0% prepayments, 20.9% inventories (apartments in development), 41.5% investment property (land bank and commercial real estate),  and 13.6% all other assets. Borrowings, which consist of debt raised from Development Financial Institutions ("DFIs") and debt securities issued in the local market, represent 35.5% of the total balance sheet. During 2Q17, m2 drew down US$ 8mln (approximately GEL 20mln) from a DFI credit facility for its ongoing real estate project financing

§ m2 currently has a land bank with a total value of GEL 68.6mln on its balance sheet. We do not expect the land bank to grow, as the company's strategy is to utilise its existing land plots within three to four years and, in parallel, start development of third party land

 

Operating highlights

The first half of 2017 was record breaking for m2 with regards to the number of apartments and square meters sold. m2 also took an important strategic step by acquiring BK Construction LLC. m2 expects that the vertical integration brought by its new captive construction company will enable it to bring construction costs down and further improve the profitability. Moreover, m2 continued to build up its portfolio of yielding assets, including hotels, to match the growing demand for accommodation generated by the robust growth of the tourism sector. The company is pleased that its existing income-generating properties are successfully leased at a 90% occupancy rate. m2 continued its strong performance in construction with more than 180,000 square meters currently under construction across four ongoing projects,  which are on schedule.

Construction work on the second m2 hotel project in Tbilisi, to be operated under the Ramada brand, commenced in May 2017. As part of its expansion into the hospitality sector, during 2Q17 m2 secured a prime location land plot in the historic city of Kutaisi, the second largest city in Georgia. Kutaisi operates an international airport, which has experienced double digit annual growth in the number of passengers since its reopening in 2012, leading to a shortage of available hotel rooms in the city. m2 plans to develop a 120-room 3-star hotel under the Ramada Encore brand, on the land and has already engaged architects and engineers in order to start the design process.

In June 2017, m2 completed the master-plan for its largest plot of land, located in the Digomi district of Tbilisi. m2 plans to develop a mixed use project in stages over the next 5 years with more than 4,000 apartments, retail, school, kindergarten and offices. m2 is currently in the process of submitting a master-plan to the city authorities for approval.

§ m2 has started ten projects since its establishment in 2010, of which, six projects have already been completed, while the construction of four projects is ongoing. m2 has completed all of its projects on or ahead of scheduled time and within budget. The four on-going projects have the following characteristics:

-       Kartozia Street project: the largest ever project carried out by m2, with a total of 819 apartments in a central location in Tbilisi, of which 418 units are sold

-       Skyline project - a luxury residential apartment building in Old Tbilisi neighbourhood with few apartments (19 in total, of which 10 are sold), with prices amounting to twice that of m2 Real Estate's average prices charged on other projects

-       Kazbegi Avenue II project - a mixed-use development with 302 residential apartments and a hotel (m2 Real Estate has the exclusive right to develop Wyndham Ramada Encore hotels in Georgia) with a capacity of 152 rooms. The construction started in June 2016, with sales of 146 apartments to date

-       50 Chavchavadze Avenue project - the project is located in the central part of Tbilisi with a total of 82 apartments, of which 53 are sold

§ m2 has a very good track record of selling apartments. Out of the 1,672 apartments completed to date since inception, only 19 or 1.1% remain in stock as available for sale. The four ongoing projects, described above, have a total capacity of 1,222 apartments, of which 627 apartments or 51.3% are sold. Currently, a total of 614 units are available for sale, out of the total of 2,894 apartments either already developed or under development phase

OPERATING DATA

for completed and on-going projects, as of 30 June 2017

#

Project name

Number of apartments

Number of apartments sold

Number of apartments sold as % of total

Number of apartments available for sale

Start date (construction)

Actual / Planned Completion date (construction)

Construction completed %

 

Completed projects

1,672

1,653

98.9%

19



100%

 

1

Chubinashvili Street

123

123

100.0%

-

Sep-10

Aug-12

100%

 

2

Tamarashvili Street

525

523

100.0%

2

May-12

Jun-14

100%

 

3

Kazbegi Street

295

295

100.0%

-

Dec-13

Feb-16

100%

 

4

Nutsubidze Street

221

221

100.0%

-

Dec-13

Sep-15

100%

 

5

Tamarashvili Street II

270

266

98.5%

4

Jul-14

Jun-16

100%

 

6

Moscow Avenue

238

225

94.5%

13

Sep-14

Jun-16

100%

 

On-going projects

1,222

627

51.3%

595




 

7

Kartozia Street

819

418

51.0%

401

Nov-15

Oct-18

58%

 

8

Skyline

19

10

52.6%

9

Dec-15

Aug-17

95%

 

9

Kazbegi Street II

302

146

48.3%

156

Jun-16

Nov-18

25%

 

10

50 Chavchavadze Ave.

82

53

64.6%

29

Oct-16

Oct-18

30%

 


Total

2,894

2,280

78.8%

614




 

§ Since its inception, m2 Real Estate unlocked US$ 16.4mln in total land value from the six completed projects, while an additional US$ 16.5mln in land value is expected to be unlocked from the four ongoing projects

FINANCIAL DATA

for completed and on-going projects, as of 30 June 2017

#

Project name

Total Sales

 (US$ mln)

Recognised as revenue (US$ mln)

Deferred revenue (US$ mln)

Deferred revenue  expected to be recognised as revenue in 2017

Land value unlocked

(US$)

Realised & Expected IRR

Completed projects

138.8

138.8

-

-

16.4


1

Chubinashvili street

9.9

9.9

-

-

0.9

47%

2

Tamarashvili street

48.6

48.6

-

-

5.4

46%

3

Kazbegi Street

27.2

27.2

-

-

3.6

165%

4

Nutsubidze Street

17.4

17.4

-

-

2.2

58%

5

Tamarashvili Street II

24.3

24.3

-

-

2.7

71%

6

Moscow avenue

11.5

11.5

-

-

1.6

31%

On-going projects

52.0

28.1

23.9

19.4

16.5


7

Kartozia Street

29.5

15.3

14.2

12.0

5.8

60%

8

Skyline

4.6

4.4

0.2

0.2

3.1

329%

9

Kazbegi Street II

12.3

5.2

7.0

4.9

4.3

51%

10

50 Chavchavadze ave.

5.7

3.2

2.5

2.3

3.3

75%


Total

190.9

167.0

23.9

19.4

32.9


The number of apartments financed with BOG mortgages in all m2 projects reached 1,035 or GEL 123.6mln at 30 June 2017

 

 

 



 

Property and Casualty Business (Aldagi or P&C)

Standalone results

Our Property and Casualty (P&C) insurance business is operated through the Group's wholly-owned subsidiary Aldagi, which is a leading player in the local P&C insurance market with a market share of 37.3% based on gross premium written at 31 March 2017. The company offers a wide range of insurance products in Georgia to corporate and retail clients, covering more than 600,000 customers through five business lines: motor, property, credit life, liability and other insurance services. Aldagi's insurance products are offered through its offices in Tbilisi and large cities across Georgia, network of insurance agents, partner local banks and non-financial institutions (such as major car dealerships), insurance brokers and online portals.

Aldagi's P&C products principally include the following: a) motor insurance covering vehicle damage and third-party liability insurance services with 22,114 active clients and 37% market share, b) property insurance covering commercial property insurance, contractor's performance and damage risks with 14,129 active clients and 37% market share, c) credit life insurance covering loan-linked life insurance services with 557,144 active clients and 28% market share, d) liability insurance covering financial risks, employer's liability, professional indemnity, general third party liability, etc. with  1,813 active clients and 38% market share. Aldagi's other products include agro insurance, cargo insurance, livestock insurance, bankers blanket bond insurance, directors' and officers' liability insurance services with 13,541 active clients and 29% market share.

INCOME STATEMENT










GEL thousands, unless otherwise noted

2Q17

2Q16

Change

y-o-y

1Q17

Change

q-o-q


1H17

1H16

Change

y-o-y











Earned premiums, gross

20,900

16,859

24.0%

18,520

12.9%


39,420

32,393

21.7%

Earned premiums, net

15,048

11,905

26.4%

14,436

4.2%


29,485

23,160

27.3%

Insurance claims expenses, gross

(8,413)

(8,142)

3.3%

(10,700)

-21.4%


(19,112)

(14,278)

33.9%

Insurance claims expenses, net

(5,906)

(3,740)

57.9%

(5,637)

4.8%


(11,543)

(7,946)

45.3%

Acquisition costs, net

(1,917)

(1,354)

41.6%

(1,677)

14.3%


(3,594)

(2,739)

31.2%

Net underwriting profit

7,225

6,811

6.1%

7,122

1.4%


14,348

12,475

15.0%

Salaries and other employee benefits

(2,161)

(1,875)

15.3%

(1,978)

9.3%


(4,138)

(3,644)

13.6%

Selling, general administrative expenses

(664)

(684)

-2.9%

(893)

-25.6%


(1,557)

(1,408)

10.6%

Other operating income

21

127

-83.5%

212

-90.1%


233

251

-7.2%

Net Fee and commission income

113

104

8.7%

99

14.1%


212

203

4.4%

Impairment charges

(190)

(185)

2.7%

(242)

-21.5%


(432)

(358)

20.7%

Other operating expenses

(54)

(20)

170.0%

(52)

3.8%


(106)

(89)

19.1%

EBITDA

4,290

4,278

0.3%

4,268

0.5%


8,560

7,430

15.2%

Foreign exchange (loss)

(146)

(986)

-85.2%

(425)

-65.6%


(571)

(1,033)

-44.7%

Depreciation and amortization expenses

(241)

(175)

37.7%

(234)

3.0%


(475)

(383)

24.0%

Net interest income

598

770

-22.3%

767

-22.0%


1,365

1,495

-8.7%

Non-recurring income

51

77

-33.8%

11

NMF


62

88

-29.5%

Pre-tax profit

4,552

3,964

14.8%

4,387

3.8%


8,941

7,597

17.7%

Income tax expense

(713)

(1,009)

-29.3%

(638)

11.8%


(1,350)

(1,553)

-13.1%

Net profit

3,839

2,955

29.9%

3,749

2.4%


7,591

6,044

25.6%

Performance highlights

§ Aldagi recorded strong net underwriting profit in 2Q17(up 6.1% y-o-y and up 1.4% q-o-q) and in 1H17 (up 15.0% y-o-y) as a result of the following: 

-       Net earned premiums. The increases of 26.4% y-o-y and 4.2% q-o-q in 2Q17 and of 27.3% y-o-y in 1H17 were supported by organic growth of the motor insurance business line, approximately 36.0% of Aldagi's total insurance portfolio, which contributed an approximately 24.0% y-o-y increase in net premiums earned in 1H17. In addition, the property insurance and credit life insurance businesses, approximately 25.0% and 11.0% of total insurance portfolio, respectively, contributed approximately 10.0% and 21.0% 1H17 y-o-y increases, respectively, in net earned premiums through organic growth. New product introductions and enhancements of existing products described under Operating Highlights below resulted in a further increase to net premiums earned of 5.6% y-o-y in 1H17

-       Net insurance claims. Claims expenses were up 57.9% y-o-y and 4.8% q-o-q in 2Q17and up 45.3% y-o-y in 1H17. The y-o-y increases in net insurance claims expenses were primarily attributable to several separate property insurance claims following a major fire incident and increased loss severity in motor insurance in 1H17. The quarterly y-o-y increase in net insurance claims expenses is due to higher loss frequency experienced in motor claims due to heavy hailstorms in 2Q17. The increase in insurance claims expenses was also driven by shifting of the insurance portfolio to the retail segment, which is characterised by higher profit margin and slightly elevated loss ratio, compared to the corporate segment

-       Net acquisition costs were up 41.6% y-o-y and up 14.3% q-o-q in 2Q17 and up 31.2% y-o-y in 1H17, outpacing the increase in net earned premiums during respective periods. The primary trigger was the introduction of new insurance product lines in 2017, with higher average commission rates compared to average commission rates of insurance portfolio

-       Combined ratio was 73.1% in 2Q17 (65.5% in 2Q16 and 72.1% in 1Q17) and 72.6% in 1H17 (69.6% in 1H16). The combined ratio remains healthy despite the incidents that increased losses in the first half 2017

-       Expense ratio was 33.8% in 2Q17 (34.1% in 2Q16 and 33.0% in 1Q17) and 33.4% in 1H17 (35.3% in 1H16)

-       Loss ratio was 39.2% in 2Q17 (31.4% in 2Q16 and 39.0% in 1Q17) and 39.1% in 1H17 (34.3% in 1H16)

§ Salaries and employee benefits reached GEL 2.2mln in 2Q17 (up 15.3% y-o-y and up 9.3% q-o-q) and GEL 4.1mln in 1H17 (up 13.6% y-o-y) primarily as a result of the organic growth of the property and casualty insurance business and the related increase in headcount

§ Corporate income tax expense. The y-o-y and q-o-q movements in income taxes reflect the impact of changes in the corporate taxation model

§ As a result of the developments described above, Aldagi's EBITDA reached GEL 4.3mln in 2Q17, flat y-o-y and q-o-q, and GEL 8.6mln in 1H17, up 15.2% y-o-y. Aldagi's net profit was GEL 3.8mln in 2Q17 (up 29.9% y-o-y and up 2.4% q-o-q) and GEL 7.6mln in 1H17 (up 25.6% y-o-y)

 

BALANCE SHEET

GEL thousands, unless otherwise noted

Jun-17

Jun-16

Change

y-o-y

Mar-17

Change

q-o-q







Cash and cash equivalents

3,900

5,962

-34.6%

6,143

-36.5%

Amounts due from credit institutions

24,247

24,495

-1.0%

27,450

-11.7%

Investment securities: available-for-sale

4,551

3,128

45.5%

2,562

77.6%

Insurance premiums receivable, net

31,533

26,179

20.5%

21,812

44.6%

Ceded share of technical provisions

23,509

20,551

14.4%

14,998

56.7%

Property and equipment, net

9,177

8,572

7.1%

9,106

0.8%

Intangible assets, net

1,268

1,164

8.9%

1,331

-4.7%

Goodwill

13,051

13,051

-

13,051

-

Deferred acquisition costs

1,692

1,093

54.8%

1,658

2.1%

Pension fund assets

17,198

14,900

15.4%

16,721

2.9%

Other assets

5,467

4,534

20.6%

4,924

11.0%

Total assets

135,593

123,629

9.7%

119,756

13.2%







Gross technical provisions

55,016

51,368

7.1%

44,585

23.4%

Reinsurance premium payable

17,746

13,958

27.1%

8,224

115.8%

Salaries and other benefits payable

2,148

1,548

38.8%

4,197

-48.8%

Pension benefit obligations

17,198

14,900

15.4%

16,721

2.9%

Other Liabilities

3,025

2,629

15.1%

2,411

25.5%

Total liabilities

95,133

84,403

12.7%

76,138

24.9%







Share Capital

1,889

1,889

-

1,889

-

Additional paid-in capital

5,405

5,405

-

5,405

-

Revaluation and other reserves

422

359

17.5%

422

-

Retained earnings

25,153

25,529

-1.5%

32,153

-21.8%

Net profit

7,591

6,044

25.6%

3,749

102.5%

Total equity

40,460

39,226

3.1%

43,618

-7.2%

Total liabilities and equity

135,593

123,629

9.7%

119,756

13.2%

§ Aldagi has a very strong balance sheet. As of 30 June 2017, total assets reached GEL 135.6mln. The growth in assets was largely driven by 20.5% y-o-y and 44.6% q-o-q increase in net insurance premiums receivable and 14.4% y-o-y and 56.7% q-o-q increase in ceded share of technical provisions. The latter is in line with the growth of Aldagi's net earned premiums during the respective periods

§ Aldagi has paid dividends in the amount of GEL 14.1mln since 1H16, of which GEL 7.1mln was paid in 3Q16 and GEL 7.0mln in 2Q17

§ Insurance companies in Georgia are subject to regulatory requirements. Since 31 December 2016 Aldagi is required to maintain a solvency ratio in excess of 100%. At 30 June 2017, Aldagi's solvency ratio was 155% as compared to 193% at 31 March 2017. The decrease was driven by the reduction in retained earnings as a result of the dividends paid in 2Q17

Operating Highlights

The first half of 2017 was very strong for Aldagi, as the company has already exceeded its annual targets for new product development. Through the introduction of livestock insurance via multi-channel distributions, Aldagi stepped into the previously underpenetrated regional markets of Georgia resulting in more than 9,000 insurance policies sold across the country. Aldagi's bond performance insurance and trip cancellation insurance products were also enhanced. Aldagi has a pipeline of additional exciting and innovative new products that we expect to launch in the coming months.

During 2Q17 Aldagi created a new department of Strategic Development under the CEO that combined product development, digital management and project management under one umbrella. The goal is to improve market intelligence through more direct communication and sharing about the Georgian insurance market's emerging demands. Aldagi targets solidifying its undisputed market leader position in the digital insurance over the next 5 years. Digitalisation of Aldagi's customer facing processes is a big part of this goal - the company is looking to have all its processes and procedures, including issuance of e-policies, remote claims regulation and building web/mobile customer profiles principally executed through digital channels. Aldagi is investing in the skills and expertise of its people and technical capacity to broaden its competitive advantages. In 2Q17, the total number of Aldagi's online agents reached 10,000, who are selling and promoting our retail insurance products through our unique web-portal onjob.ge, a digital platform that helps us attract customers.

The second quarter of 2017 was successful in getting one step closer to the introduction of Border Motor Third Party Liability Insurance (MTPL insurance for vehicles visiting Georgia either on a temporary or on transit basis). Through extensive cooperation with the Insurance State Supervision Service of Georgia (ISSSG), the insurance market regulator in Georgia, Border MTPL is in its final stages of approval by Parliament of Georgia and is expected to be effective from 1 January 2018. Approximately 1.8mln vehicles crossed the Georgian borders throughout 2016. Aldagi expects that MTPL insurance will increase the size of the existing property and casualty market by approximately GEL 30-50mln (15-25% of the existing P&C market). Aldagi is working closely with ISSSG to assist it in drafting a new law requiring mandatory local MTPL for all vehicles registered in Georgia. The new law is expected to be launched in 2019 and will be a major boost to retail market penetration. The company also believes that current low level of insurance market penetration of 1.1% in Georgia (of which 0.6% relates to for property and casualty insurance market penetration and 0.5% to medical insurance market) represents highly untapped retail growth potential.

§ Based on the latest available market data as of 31 March 2017, Aldagi continues to be the most profitable insurance company in the local market with a 57.0% share of the insurance industry profit

§ Aldagi continues to lead the market with a powerful distribution network of 211 points of sale and more than 687 sales agents as of 30 June 2017, compared to 214 points of sale and 454 sales agents as of 30 June 2016 and 212 point of sale and 589 sales agents as of 31 March 2017

§ At 30 June 2017, Aldagi's portfolio included 606,403 insured customers, up 19.3% y-o-y and up 5.0% q-o-q. The increases were mainly driven by increase in motor insurance business line and introduction of new product lines in 2017. The number of new insurance policies written reached 265,984 in 2Q17 (212,836 and 200,436 new policies written in 2Q16 and 1Q17, respectively) and 466,420 in 1H17 (381,648 policies in 1H16)

§ As discussed above, in 1H17 Aldagi shifted its focus to the retail market, which positively impacted the lapse ratio, i.e. the ratio of clients that fail to renew their insurance agreements at expiration to total contracts. The lapse ratio for retail clients decreased to 36.0% in 1H17 from 45.0% in 1H16, while corporate clients' lapse ratio was slightly up at 9.0% in 1H17 from 7.0% in 1H16


SELECTED FINANCIAL INFORMATION

 

INCOME STATEMENT (QUARTERLY)

BGEO Consolidated


Banking Business


Investment Business