Sharing TBC Bank experience on Credit Risk under ICAAP

1. Sharing TBC Bank experience on Credit Risk under ICAAP

2. Agenda 1

3. TBC Financial Highlights and Ratios (30 September 2013) Key Facts About TBC Bank • No 1 in Retail Deposits – 34% of market share as at 30 September 2013; • A leading bank in the country with 27% and 25% market share of total customer loans and total assets respectively as at 30 September 2013; • Number of customers: over 900k; Number of employees: c. 4,000; • Entered microfinance segment in May 2011 through acquiring Bank Constanta • Presence in Azerbaijan-subsidiary TBC Kredit - non-banking credit organization Loan Portfolio Composition by Business Segments – 30 Sep 2013 Shareholder Structure • TBC Bank at a Glance Branches TBC / TBC&Constanta 59 / 109 > ATMs TBC / TBC&Constanta 251 / 297 > POS Terminals 3,295 > Note: Exchange Rate Used: USD/GEL 1. 6644 as at 30 September 2013 BB-/Stable (FC Long Term IDR) B1/Stable (Bank Deposits – Fgn Curr) B (FC Short Term IDR) Ba3 (Bank Deposits – Dom Curr) Affirmed on 14 June 2013 Affirmed on 1 November 2012 Source: Market Shares are based on National Bank of Georgia and include Bank Constanta. Note: Number of accounts and number of employees include Bank Constanta

4. Basel II/III Overview > Regulatory Capital requirements of the bank will be defined in Accordance with Basel 2/3 requirements • What is ICAAP Components of Basel 2/3 Pillar 1 Capital charge is calculated based on NBG regulation. Pillar 2 Banks Estimate its capital requirements. Use stress tests to double check its solvency. NBG approval is needed. Pillar 3 Banks need to disclose its capital calculations to interested parties. • Basel II and III are recommendations on banking regulations published by the  Basel Committee on Banking Supervision • National regulators decide to adhere to Basel committee regulations and set the requirements and timeline to the banks. • The banks were required to be compliant with Pillar 1 requirements by June 2014 and submit first ICAAP by September 2014

5. Summary Main Challenges Main Benefits Timeline > > > > Feb 2012 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2013 Feb • TBC Experience in Implementation External consultant selection High Level Gap analysis. Credit review Detailed Gap Analysis Implementation and Capital Calculation ICAAP • ICAAP implementation included: • Major improvements in risk management including credit, operational, market and other risk management • Significant changes in corporate governance both on the Supervisory and Management board level • In total: • 25+ people from the banks side and two outsourcing companies including Ernst & Young were involved in the project • Capital assessment and planning in accordance with the risk profile • Better capital management through better capital allocation practice • Better understanding and management of the risk that banks face • Enhanced corporate governance • Enhanced transparency in capital calculation and risk management resulting in enhanced trust from regulators and investors • Availability of high quality data • Development of adequate framework • Integration of the processes into day to day management

6. In million GEL Data as of Dec 2013 • Credit Risk Breakdown 92% • Compared to Pillar 1 Pillar 2 contains number of additional risks • Credit risk remains significant part of both Pillar 1 and Pillar 2 Risk Weighted Assets

7. Agenda 2

8. Identification of the full range of business level risks TBC faces TBC considers its risk management function to be fundamental to its business Principles of Risk Management Risk Management Process > > • Introduction to the Risk Management Function Sustainability • TBC conducts its business with a view towards long-term sustainability • TBC pursues a strategy that excludes any involvement in transactions that could pose an unacceptable risk for TBC’s activities, development and reputation Riskidentification Assessment of all identified risks based on the likelihood of occurrence and significance of their impact and creation of risk maps Materiality • The materiality of each risk to which TBC is exposed across the corresponding asset classes is mainly determined based on size of exposure, the current nature of processes and related controls Riskassessment Establishment of key control processes andpractices, including limit structures and reporting requirements, and a formalised risk monitoring process to control adherence to predefined targets and risk limits Proportionality • The more material a risk exposure is, the more efforts and resources are devoted to its analysis and more sophisticated approaches and complex methods are applied to its measurement Control Establishment of effective management information system in order to ensure a timely flow of information to the corresponding risk units Risk acceptance/ risk hedging • TBC either accepts exposure to a risk or hedges against it, depending on the type of risk • TBC’s accepts risk exposure according to the predefined risk appetite limits set by the Supervisory Board and Management Board Reporting

9. TBC conducts its risk management activities within the framework of its unified risk management system Supervisory Board • Risk Management Structure: Overview Risk ethics andcompliance committee Corporate Governance committee Management Board Audit committee Remuneration Committee Credit committee Operational risk committee ALCO CEO Problems Loans Committee Internal audit Loan approval committee Deputy CEO,CFO Deputy CEO,CRO Compliance department Financial risks Underwriting Risk management AML Problem loans Treasury Corporate Credit risk Business Compliance SME Retail Strategic risk Retail Repossessed assets Legal department Operational risk Information securityInternal controlReputational risk

10. 1 1 • Supervisory board • Supervisory board Objective • Risk Management Structure: Principal Bodies 2 2 • Risk, ethics and compliance committee • Risk, ethics and compliance committee 3 3 • Management Board • Management Board • Principal Bodies • Principal Bodies 4 4 • Credit committee • Credit committee Responsibilities 5 5 • Problem loans committee • Problem loans committee 6 6 Underwriting Underwriting 7 7 Risk Management Risk Management • Functions • Functions 8 8 • Data Quality Management • Data Quality Management

11. Agenda 3

12. As a result of risk identification and assessment process, the following types of credit risks are identified: • Credit Risk Management Risk resulting from the use of credit risk mitigation techniques Risk of negative consequences associated with defaults or non-fulfillment of concluded contracts in credit risk bearing operations due to a deterioration in the counterparty’s credit quality A Counterparty Default Risk Residual Risk Credit Risk Types D B Currency Induced Credit Risk Concentration Risk Risks due to presence of foreign currency denominated loans in the portfolio Risk of deterioration of portfolio quality due to large exposures to small number of borrowers, or individual industries C

13. Key principles • Establishing an appropriate credit risk environment • Operating under a sound credit-granting process • Maintaining efficient processes for credit risk measurement, control and monitoring • Credit Risk Management Framework • Policies, process and procedures • The Supervisory Board approves and annually reviews TBC’s Risk Management Strategy and key risk polices • the Risk Management Strategy outlines key principles for credit risk management, sets risk tolerance levels and a detailed plan • The Management Board oversees: • the development of the relevant policies and procedures to identify, measure, monitor and control key risks • the implementation of an effective organisational structure to execute and implement these policies Credit approval • Comprehensive assessment of a borrower's risk profile • Credit approval and covenant Setting • Automated processing based on scoring models A1 Supervision • Monitoring timeliness of debt repayments • Review of business borrowers financial conditions • Reassessment of collaterals value • Behavioural ratings update A2 Credit collection • Identification and monitoring of doubtful loans on watch • Formulation of collection strategies • Cooperation with the external collection agencies A3 Portfolio management • Review/analysis of the overall portfolio dynamics • Management of loan exposure / concentration levels • Performance of portfolio stress tests (currency induced credit risk assessment, enterprise wide stress test) • Development of scoring and rating models A4 Provisioning • NBG provisioning • IFRS provisioning A5

14. A1 Retail SME Corporate Micro • A. Corporate and SME Loans - Credit Approval Process Project analysis and review Decision Origination • Corporate loans • Applications originate at TBC’s head office • Credit analyst together with corporate banker analyses loans and company’s financials, structures credit facility and assigns a rating • Collateral is appraised by an independent internal or external appraisers’ group • Corporate credit risk manager (loans> GEL 2mn) ensures complete analysis from credit analyst, identification of all risks and proper structure of loans • Loan submitted to the centralized Corporate loan approval committee • In the event that all members of the relevant Loan approval Committee agree unanimously, the loan is approved • A corporate loan to a "large borrower" (a borrower with exposure to more than 5% of TBC Bank's Basel capital) would require the review and approval of the Risk, Ethics and Compliance Committee • SME loans • Applications originate at TBC’s branches • Loan officer analyses loan purpose and the company’s financials and assigns a rating. Collateral is appraised by internal appraisers’ group • Loan is reviewed by the branch’s internal committee to ensure completeness of the loan application documents and the loan officer's analysis • The loan is submitted to the  centralized SME loan approval committee • In the event that all members of the relevant Loan approval Committee agree unanimously, the loan is approved

15. Measures operating leverage, used to determine debt capacity of the company; Views company’s debt in relation to its capital; A1 Ratios are analyzed in comparison with peer and industry data. Both historical and projected ratios are considered for analysis: Measures ability to repay interest expenses related to the loans; • Ratio • Definition • Benchmark • A. Corporate Customers Desired Ratios Measures liquidity position of the company; < 3 • Debt/EBITDA Shows company’s ability to repay loans from its operating revenues. < 2 - 3 • Debt/Equity > 2 • EBIT/Interest > 1 • Current Ratio > 1.2 - 1.3 • Debt Service Cover Ratio From 1H 2014 this will change and TBC Bank will introduce industry specific ratios Current estimate examples are: Trading Operations: Debt/Equity < 4, Telecommunications: Debt/EBITDA < 4; Project Finance (Power Generation): Debt Service Cover Ratio (DSCR) > 1.50 In addition, TBC Bank may utilize other ratios – mostly industry-specific ones, that are used for the analysis of specific company or industry. Please also note that these ratios are not mandatory, they rather shape desired limits of respective financial measurements. Out of these ratios, Debt/EBITDA, DSCR and Debt/Equity are more important

16. A1 Rating models > • Expert model was developed together with Ernst &Young during Basel II/III implementation project • At present the model is applied for portfolio quality monitoring. • Given the expert origin, the model is carefully monitored for validity • Once the model is validated, it will be used as a supporting tool in credit approval process, for limit setting and pricing purposes, for provisioning purposes • A. Corporate and SME Loans – Rating model • Final grade consists of : • Industry score (20%) • Qualitative Borrower score (15%) • Quantitative Borrower score (65%) • Industry assessment • Financial Stability • Economic Volatility • Demand Trend • Barriers to Entry • Sector Competition • Access to Inputs • Operational Gearing and Capital Intensive • Quantitative criteria • Evaluation of solvency • Cover debt service through gross profit • Effectiveness of operations • Assessment of profitability • Earnings volatility • Dividends / Net income • Coefficient of autonomy • Valuating of client’s liquidity • Rates of turnover • Qualitative criteria • Company's position in the industry • Organizational and managerial activity • Company’s governance • Finance, accounting and control • Business reputation • Relationship with the Bank

17. A2 Retail SME Corporate Micro • A. Retail Loans - Credit Approval Process Origination Project analysis and review Decision • Mortgage Loans, Consumer Loans, Car Loans • Applications originate in branches • Loan officer gathers and reviews preliminary information and determines the type of credit facility that best meets the applicant's needs • Checks are made in internal and external databases (Credit Bureau, Public Registry, Civil Registry) • Thorough analysis of credit application is conducted • Collateral is appraised by internal appraiser’s group • Loan submitted to the centralized Retail loan approval committee • POS loans and Credit Cards • POS loan are originated by merchants acting as TBC's agents or TBC staff located at the merchant • Credit Cards originate in branches • POS loans and Credit Cards applications are assessed using application scoring model and credit bureau ratings • Scoring is applied once the borrower meets the minimum requirements for the product, such as age, minimum income, and similar criteria • Automated Approval and Rejection zones are defined individually for products, based on performance of loans within these segments

18. A2 Decision based on scorecards • TBC Bank has started assessing POS loans and Credit Cards applications using Scoring Model from 2008 and 2012 respectively • Automated Approval and Rejection zones are defined individually for products, based on performance of loans within these segments • Applications that fall in manual zone are assessed by Centralized operations management department. Phone calls are undertaken to the work place and family members of the borrower in order to cross check the data provided by the borrower in the application • A. Retail Loans - Credit Approval Process

19. A2 • PTI • Maximum portion of revenue, which can be applied to cover the loan • A. Retail Loans - Ratios • LTV Loan Amount / Collateral Market Value (LTV) differs according to Collateral Types: • Debt Service Ratio • (Borrower’s Family Total Revenue – Total Costs) / Monthly Installment >= 1.3

20. A2 Rating models > • Behavioural rating model for retail loans was developed by Experian in 2012 based on the Bank’s five years statistical data • In compliance with Basel regulation three models were developed for: (1) loans secured by real estate, (2) credit limits, and (3) other retail loans • For each segment the model is further differentiated according to the number of months on books of the loan: less than 6 months on books and more than 6 months on • Following variables are included in the model (with approximate weights) books • A. Retail Loans – Rating Model • Payment behaviour • Information about payment overdues: current overdue days, maximum length of overdues in the last 12 months, etc • Length of credit history • Length of credit history • Macroeconomic variables • Refinance rate, GDP, etc • Utilisation of facilities • Frequency of credit limit usage, deposits, current balance of the loan amount, etc • Data from application • Gender, work experience, type of the client, etc

21. Agenda 3

22. B Concentration management is a significant function of credit risk management Already Implemented • A. Concentration Risk • The system is already established to identify, measure, monitor, and control credit risk concentrations • TBC limits the level of credit risk it undertakes by placing limits on concentrations of: • single borrowers and groups of related borrowers; • (ii) single industry and groups of "higher-risk" industries Under Development Process • New methodology is under development for concentration risk management • Credit concentration risk measurement process will be improved based on the Central Bank of Spain’s guidelines • Reasons for selecting Spanish regulation: • Spain was strongly effected by the global financial crisis 2007-2012, the following global recession 2008-2012, and by the European sovereign debt crisis • The Spanish credit market is heavily dependent on mortgages in particular and on real estate in general • The Spanish simplified option is considered good regulatory practice and implemented in a similar form by several Eastern European regulators (i.e. the Slovenian and the Serbian regulator) • The Spanish simplified option is consistent with the Basel 2 standardized approach to credit risk measurement and results into concentration risk numbers that are easily comparable across the banking industry • Two Types of Concentrations are managed: Single name and Sectoral concentration • Concentration indexes will be calculated using Herfindahl-Hirshman Index (HHI)

23. B Single Name Concentration Sectoral Concentration > > Number of Borrowers assessed: 1,000 Grouping method: Largest Borrowers or Group of Borrowers Individual Concentration Index x is the total direct exposure to the groups under the top 1,000 y is the direct exposure to the groups under the entire portfolio • A. Concentration Risk The surcharge should be applied to the capital requirements for credit risk relating to the borrowers included in the calculation of the individual concentration index (Σy). Number of industries assessed: All industries The sectoral concentration index (HHIS) of the credit portfolio is calculated as following: Σxi2/ (Σxi)2* 100 xis the value of risk exposure to each economic sector The surcharge should be applied only to the capital requirements for credit risk relating to the exposures included in the calculation of the sectoral concentration index

24. B Limits Stress Tests > > • A. Concentration Risk In addition to HHI suggested by Central Bank of Spain TBC Bank will limit single name concentration risk, using top 1, 5, 10 and 20 borrowers exposures ratios Actual limits vs maximum limits will be communicated to the Management Board on a monthly basis and to RECC on a quarterly basis In addition the Bank will undertake concentration risk stress tests on a quarterly basis Under stress testing the Bank will assess what would be the loss of regulatory capital if the top 1, 3 and 5 borrowers default in the same time Results of stress test will be applied for credit risks monitoring purposes and will be communicated to the Management Board on a quarterly basis

25. Agenda 3

26. C • A. Foreign Currency Induced Credit Risk

27. Agenda 4

28. Enterprise Wide Stress Testing > Stress-testing is performed to estimate potential losses in case of highly improbable but severe macroeconomic conditions and ensure sufficient capital is in place to withstand the stress • Stress Tests Key actions • Stress-testing is performed quarterly or more frequently in case of a significant change in the market conditions • Following macroeconomic parameters are stressed: • GDP Growth -15% • CPI Change -10% • Unemployment 17% • Exchange Rate 18% • Real Estate Change 39% • Stress scenarios are defined based on (i) most severe GDP decline in Georgia and its peer countries during the last 8 years and (ii) stress scenario provided by NBG • Yearly bases dependences and correlations are assessed between these macroeconomic variables and Bank’s losses. • Based on identified dependencies, potential credit losses are estimated for individual products and industries in case of stress scenario • The results of EWST are expressed as the amount of capital needed in order to withstand the full potential losses resulting from the specified stress events.

29. Agenda 5

30. I Phase-Accomplished II Phase Results • Way Forward (Credit Risk Focus Under ICAAP) • Developed Risk Strategy that is in line with Bank’s business strategy • Corporate customer rating model was introduced. Existing rating model was updated in accordance with Basel 2 requirements • Retail client rating model was introduced • Currency Induced Credit Risk (CICR) assessment was performed and respective model was developed • Improved Concentration risk management • Enterprise Wide stress test has been developed and performed • Enhanced corporate governance and credit risk management bodies • Introduced risk based audit planning compliant with Basel requirements • Introduced Economic capital framework that is the first step to risk adjusted performance appraisal • Further improving application scorecard for retail loans • Enhance overdue loans management process for retail loans • Implement Internal Rating Based approach for retail loans • Further improve business loans assessment model • More mature Credit Risk management • Better assessment of capital • Direct link from borrowers’ risk profile to capital charge