RNS Number : 4636D
Turkiye Garanti Bankasi
26 April 2017
 

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http://www.rns-pdf.londonstockexchange.com/rns/4636D_1-2017-4-26.pdf

 

Türkiye Garanti Bankas? Anonim ?irketi
Unconsolidated Financial Statements

As of and For the Three-Month Period Ended

31 March 2017

( Convenience Translation of Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish)

With Independent Accountants'

Limited Review Report Thereon

 

 

Akis Ba??ms?z Denetim ve Serbest Muhasebeci Mali Mü?avirlik A?

26 April 2017

This report contains "Independent Accountant's Limited Review Report" comprising 2 pages and;"Unconsolidated Financial Statements and Related Disclosures and Footnotes"comprising 108 pages.

 

 


 

 

 

 

 

 

 

Convenience Translation of the Review Report Originally Prepared and Issued in Turkish to English (See Note I in Section Three)

 

 

Independent Auditors' Report on Review of Unconsolidated Interim Financial Information

 

To the Board of Directors of Türkiye Garanti Bankas? Anonim ?irketi;

 

Introduction

 

We have reviewed the accompanying unconsolidated statement of financial position of Türkiye Garanti Bankas? A.?. ("the Bank") as at 31 March 2017 and the related unconsolidated statement of income, unconsolidated statement of income and expense items under shareholders' equity, unconsolidated statement of changes in shareholders' equity, unconsolidated statement of cash flows for the three month period then ended and notes, comprising a summary of significant accounting policies and other explanatory information The Bank Management is responsible for the preparation and fair presentation of unconsolidated interim financial information in accordance with the "Banking Regulation and Supervision Agency ("BRSA") Accounting and Reporting Legislation" which includes the "Regulation on Accounting Applications for Banks and Safeguarding of Documents" published in the Official Gazette No.26333 dated 1 November 2006, and other regulations on accounting records of Banks published by Banking Regulation and Supervision Board and circulars and interpretations published by BRSA and the requirements of Turkish Accounting Standard 34 "Interim Financial Reporting" principles for those matters not regulated by the aforementioned legislations. Our responsibility is to express a conclusion on these unconsolidated interim financial information based on our review.

Scope of Review

We conducted our review in accordance with the Standard on Review Engagements (SRE) 2410, "Limited Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial reporting process, and applying analytical and other review procedures. A review of interim financial information is substantially less in scope than an independent audit performed in accordance with the Independent Auditing Standards and consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Basis for Qualified Conclusion

 

The accompanying unconsolidated interim financial information as at 31 March 2017 include a general provision of total TL 500,000 thousands, of which TL 200,000 thousands had been recognized as expense in the current period, and TL 300,000 thousands had been recognized as expense in prior periods, which is provided by the Bank management for the possible effects of the negative circumstances which may arise in economy or market conditions.

 

 

 

 

 

 

Qualified  Conclusion

Based on our review, except for the effects of the matter described in the Basis for Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe that the accompanying unconsolidated interim financial information do not present fairly, in all material respects, the unconsolidated financial position of Türkiye Garanti Bankas? A? as at 31 March 2017, and its unconsolidated financial performance and its unconsolidated cash flows for the three month period then ended in accordance with the BRSA Accounting and Reporting Legislation.

Other Matter

The unconsolidated financial statements of the Bank as at and for the year ended 31 December 2016 and as at and for the three-month period ended 31 March 2016 were audited and reviewed by another auditor who expressed a qualified opinion and a qualified conclusion due to the general reserve provisions provided by the Bank on 30 January 2017 and 27 April 2016, respectively.

 

Report on Other Legal and Regulatory Requirements

 

Based on our review, nothing has come to our attention that causes us to believe that the interim financial information provided in the Management's interim report included in section seven of the accompanying unconsolidated interim financial information is not consistent, in all material respects, with the reviewed unconsolidated interim financial statements and explanatory notes.

 

Additional paragraph for convenience translation to English:

 

The accounting principles summarized in Note I Section Three, differ from the accounting principles generally accepted in countries in which the accompanying unconsolidated interim financial statements are to be distributed and International Financial Reporting Standards ("IFRS"). Accordingly, the accompanying unconsolidated interim financial statements are not intended to present the financial position and results of operations in accordance with accounting principles generally accepted in such countries of users of the unconsolidated interim financial statements and IFRS.

 

Akis Ba??ms?z Denetim ve Serbest Muhasebeci Mali Mü?avirlik Anonim ?irketi

A member firm of KPMG International Cooperative

 

 

 

Murat Alsan

Partner, SMMM

 

26 April 2017

Istanbul, Turkey

 

 

 



(Convenience Translation of Financial Statements and Related Disclosures and Footnotes
Originally Issued in Turkish)

 

 

 

TÜRK?YE GARANT? BANKASI ANON?M ??RKET?

UNCONSOLIDATED INTERIM FINANCIAL REPORT

AS OF AND FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2017

 

                                                                                                               Levent Nispetiye Mah.Aytar Cad.

                                                                                                                      No:2 Be?ikta? 34340 Istanbul

                                                                                                                           Telephone: 212 318 18 18

                                                                                                                                     Fax: 212 216 64 22

www.garanti.com.tr

                                                                                                                 investorrelations@garanti.com.tr

 

The unconsolidated interim financial report for the three-month period prepared in accordance with the communiqué of Financial Statements and Related Disclosures and Footnotes to be Announced to Public by Banks as regulated by Banking Regulation and Supervision Agency, is comprised of the following sections:

 

1.  General Information about the Bank

2.  Unconsolidated Financial Statements of the Bank

3.  Accounting Policies

4.  Financial Position and Results of Operations, and Risk Management Applications of the Bank

5.  Disclosures and Footnotes on Unconsolidated Financial Statements

6.  Limited Review Report

7.  Interim Report

 

 

 

The unconsolidated financial statements for the three-month period and related disclosures and footnotes that were subject to independent review, are prepared in accordance with the Regulation on Accounting Applications for Banks and Safeguarding of Documents, Turkish Accounting Standards, Turkish Financial Reporting Standards and the related statements and guidances, and in compliance with the financial records of our Bank and, unless stated otherwise, presented in thousands of Turkish Lira (TL).

 

 

 

 

Ferit F. ?ahenk

Ali Fuat Erbil

Ayd?n Güler

Hakan Özdemir

Board of Directors Chairman

General Manager

Financial Reporting Executive Vice President

General Accounting

Senior Vice President

 

 


Javier Bernal Dionis

Jorge Saenz - Azcunaga

Carranza



Audit Committee Member

Audit Committee Member


 

The authorized contact person for questions on this financial report:

Name-Surname/Title: Handan SAYGIN/Senior Vice President of Investor Relations

Phone no: 90 212 318 23 50

Fax no:     90 212 216 59 02                                                                    


 

                                                                            SECTION ONE                                                                                             Page No:

                                                                         General Information                                                                                                  

I.          History of the bank including its incorporation date, initial legal status, amendments to legal status                                                                    1

II.         Bank's shareholder structure, management and internal audit, direct and indirect shareholders, change

             in shareholder structure during the year and information on bank's risk group                                                                                                     1

III.        Information on the bank's board of directors chairman and members, audit committee members, chief executive officer,

             executive vice presidents and their responsibilities and shareholdings in the bank                                                                                                2

IV.        Information on the bank's qualified shareholders                                                                                                                                                 3

V.         Summary information on the bank's activities and services                                                                                                                                  3

VI.        Current or likely actual or legal barriers to immediate transfer of equity or repayment of debts between the  bank and its affiliates                     4

                                                                           SECTION TWO

                                                            Unconsolidated Financial Statements

I.          Balance sheet - Assets                                                                                                                                                                                         5

II.         Balance sheet - Liabilities                                                                                                                                                                                    6

III.        Off-balance sheet items                                                                                                                                                                                       7

IV.        Income statement                                                                                                                                                                                               8

V.         Statement of income/expense items accounted under shareholders' equity                                                                                                           9

VI.        Statement of changes in shareholders' equity                                                                                                                                                     10

VII.       Statement of cash flows                                                                                                                                                                                    11

                                                                          SECTION THREE

                                                                         Accounting Policies

I.          Basis of presentation                                                                                                                                                                                         12

II.         Strategy for use of financial instruments and foreign currency transactions                                                                                                        12

III.        Investments in associates and affiliates                                                                                                                                                              13

IV.        Forwards, options and other derivative transactions                                                                                                                                           13

V.         Interest income and expenses                                                                                                                                                                            14

VI.        Fees and commissions                                                                                                                                                                                       14

VII.       Financial assets                                                                                                                                                                                                 14

VIII.     Impairment of financial assets                                                                                                                                                                           15

IX.        Netting and derecognition of financial instruments                                                                                                                                            16      

X.         Repurchase and resale agreements and securities lending                                                                                                                                    16

XI.        Assets held for sale, discontinued operations and related liabilities                                                                                                                     17

XII.      Goodwill and other intangible assets                                                                                                                                                                   17

XIII.     Tangible assets                                                                                                                                                                                                  17

XIV.     Leasing activities                                                                                                                                                                                               18

XV.       Provisions and contingent liabilities                                                                                                                                                                  18

XVI.     Contingent assets                                                                                                                                                                                                19

XVII.    Liabilities for employee benefits                                                                                                                                                                       19

XVIII.   Taxation                                                                                                                                                                                                           21

XIX.     Funds borrowed                                                                                                                                                                                                 22

XX.      Share issuances                                                                                                                                                                                                  22

XXI.     Confirmed bills of exchange and acceptances                                                                                                                                                    23

XXII.    Government incentives                                                                                                                                                                                     23

XXIII.  Segment reporting                                                                                                                                                                                             23

XXIV.   Other disclosures                                                                                                                                                                                               24

                                                                           SECTION FOUR

                                     Financial Position and Results of Operations and Risk Management

I.          Capital                                                                                                                                                                                                              25

II.         Credit risk                                                                                                                                                                                                         32

III.        Currency risk                                                                                                                                                                                                    33

IV.        Interest rate risk                                                                                                                                                                                               35

V.         Position risk of equity securities                                                                                                                                                                        38

VI.        Liquidity risk                                                                                                                                                                                                     40

VII.       Leverage ratio                                                                                                                                                                                                   45      

VIII.     Fair values of financial assets and liabilities                                                                                                                                                        45

IX.        Transactions carried out on behalf of customers and items held in trust                                                                                                              45

X.         Risk management objectives and policies                                                                                                                                                           45

                                                                            SECTION FIVE

                                     Disclosures and Footnotes on Unconsolidated Financial Statements

I.          Assets                                                                                                                                                                                                                49

II.         Liabilities                                                                                                                                                                                                          72

III.        Off-balance sheet items                                                                                                                                                                                     81

IV.        Income statement                                                                                                                                                                                              83

V.         Statement of changes in shareholders' equity                                                                                                                                                     89

VI.        Statement of cash flows                                                                                                                                                                                    90 

VII.       Related party risks                                                                                                                                                                                             91

VIII.     Domestic, foreign and off-shore branches or equity investments, and foreign representative offices                                                                   93

IX.        Matters arising subsequent to balance sheet date                                                                                                                                                94

X.         Other disclosures on activities of the bank                                                                                                                                                         95

                                                                             SECTION SIX

                                                                       Limited Review Report

I.          Disclosures on limited review report                                                                                                                                                                  97

II.         Disclosures and footnotes prepared by independent accountants                                                                                                                        97

                                                                          SECTION SEVEN

                                                                             Interim Report

I.          Introduction                                                                                                                                                                                                        98

II.         Information regarding management and corporate governance practices                                                                                                             103

III.         Assessment of financial information and risk management                                                                                                                                             104

IV.         Announcements regarding important developments during 01.01.2017-31.03.2017 period                                                                               104

V.          Announcements regarding important developments for debt instruments issuance and redemptions during

01.01.2017-31.03.2017 period                                                                                                                                                                         106

 


 

 

 

 

 

 

 

 

1         General Information

1.1         History of the bank including its incorporation date, initial legal status, amendments to legal status

Türkiye Garanti Bankas? Anonim ?irketi (the Bank) was established by the decree of Council of Ministers numbered 3/4010 dated 11 April 1946 as a "private bank" and its "Articles of Association" was issued in the Official Gazette dated 25 April 1946.

Following the acquisition on 27 July 2015, Banco Bilbao Vizcaya Argentaria SA (BBVA)'s stake in the Bank reached to 39.90% and BBVA become the main shareholder. Accordingly, the Bank was moved to the "Foreign Deposit Banks" category from the "Private Deposit Bank" category by the Banking Regulation and Supervision Agency (the BRSA).

The Bank provides banking services through 956 domestic branches, nine foreign branches and three representative offices abroad (31 December 2016: 959 domestic branches, nine foreign branches and three representative offices abroad). The Bank's head office is located in Istanbul.

1.2         Bank's shareholder structure, management and internal audit, direct and indirect shareholders, change in shareholder structure during the period and information on bank's risk group

As of 31 March 2017 , group of companies under BBVA that currently owns 49.85% shares of the Bank, is defined as the BBVA Group (the Group) and it is the main shareholder.

On 22 March 2011, BBVA had acquired; 78.120.000.000 shares of the Bank owned by GE Capital Corporation at a total nominal value of TL 781,200 thousands representing 18.60% ownership, and 26.418.840.000 shares of the Bank owned by Do?u? Holding A? at a total nominal value of TL 264,188 thousands representing 6.29% ownership.  BBVA, purchasing 24.89% shares of the Bank, had joint control on the Bank's management together with group of companies under Do?u? Holding A? (the Do?u? Group).

Subsequently, on 7 April 2011, BBVA had acquired 503.160.000 shares at  a nominal value of TL 5,032 thousands and increased its ownership in the Bank's share capital to 25.01%.  Accordingly, BBVA and the Do?u? Group continued to have mutual control on the Bank's management.

In accordance with the terms of the agreement between BBVA and the Do?u? Group which was previously disclosed on 19 November 2014, the sale of shares representing 14.89% of the share capital of the Bank with a face value of TL 625,380 thousands and 62.538.000.000 shares by the Do?u? Group to BBVA, was completed on 27 July 2015. Following the acquisition, BBVA's stake in the Bank reached to 39.90% and BBVA became the main shareholder. The Bank was moved to "Foreign Deposit Banks" category from "Private Deposit Bank" category by the BRSA.

On 21 February 2017, BBVA agreed with Do?u? Group to acquire 41.790.000.000 shares at a nominal value of TL 417,900 thousands representing 9.95% ownership and on 22 March 2017 in accordance with the terms of the agreements share transfer had been finalized. After the share transfer BBVA's interest in the share capital of the Bank is at 49.85%.

As of balance sheet date, the Do?u? Group's interest in the share capital of the Bank is at 0.05%.

BBVA Group

BBVA is operating for more than 150 years, providing variety of wide spread financial and non-financial services to 70 million retail and commercial customers.

 

The Group's headquarter is in Spain, where the Group has concrete leadership in retail and commercial markets. BBVA adopting innovative, and customer and community oriented management style, besides banking, operates in insurance sector in Europe and portfolio management, private banking and investment banking in global markets.

 

BBVA that owns a bank being the largest financial institution in Mexico and the market leader in South America, operates in more than 35 countries with more than 130 thousand employees.

 

Do?u? Group

The Do?u? Group that was established in 1951 initially for investments in construction sector, under the umbrella of Do?u? Holding established in 1975, operates in eight sectors namely financial services, automotive, construction, real estate, tourism, media, energy ve food-beverage-entertainment with 339 companies and more than 45  thousand employees.  

The Do?u? Group has agreements with well-known international brands for distrubition, management and voting right (privilege) such as; Banco Bilbao Vizcaya Argentaria S.A. ("BBVA"), Volkswagen AG, Volkswagen Financial Services AG, Audi AG, Dr.Ing.h.c. F.Porsche Aktiengesellshaft, Bentley Motors Limited, Seat SA, Scania CV AB, Automobili Lamborghini S.p.A., Thermo King, Hyatt International Ltd., Soho House, Eden Rock St. Barths, Raleigh, Hilton, Chenot, Bodyism, Crate and Barrel, Messika Group S.A, Emporio Armani, Gucci, Loro Piana, Orlebar Brown, Capritouch, Armani Jeans, Giorgio Armani, Armani Junior, Kiko, Under Armour, Hublot, Arnold&Son S.A., Bell and Ross, Breitling, Vacheron Constantin, M Missoni, HYT, Döttling, Condé Nast ("Vogue-GQ-Traveller"), National Geographic Society ("NG-NG Kids"), Curtco Robb Media LLC ("Robb Report"), Tom's Deli, Tom's Kitchen, Kitchenette, Zuma, Roka, Mezzaluna, Mezzaluna Express, Coya, Oblix, La Petite Maison and L'Atelier.

1.3         Information on the bank's board of directors chairman and members, audit committee members, chief executive officer, executive vice presidents and their responsibilities and shareholdings in the bank

Board of Directors Chairman and Members:        

Name and Surname

Responsibility

Appointment Date

Education

Experience in Banking and Business Administration

Ferit Faik ?ahenk

Chairman

18.04.2001

University

27 years

Sait Ergun Özen

Member

14.05.2003

University

30 years

Süleyman Sözen

Vice Chairman

08.07.2003

University

35 years

Dr. Muammer Cüneyt Sezgin

Member

30.06.2004

PhD

29 years

Belk?s Sema Yurdum

Independent Member

30.04.2013

University

37 years

Jaime Saenz de Tejada Pulido

Member

02.10.2014

University

24 years

Maria Isabel Goiri Lartitegui

Member

27.07.2015

Master

27 years

Javier Bernal Dionis

Independent Member of BOD and Audit Committee

27.07.2015

Master

27 years

Ali Fuat Erbil

Member and CEO

02.09.2015

PhD

25 years

Jorge Saenz Azcunaga Carranza

Independent Member of BOD and Audit Committee

31.03.2016

University

23 years

In?go Echebarria Garate

Member

31.03.2016

Master

34 years

 



 

CEO and Executive Vice Presidents:

Name and Surname

Responsibility

Appointment Date

Education

Experience in Banking and Business Administration

Ali Fuat Erbil

CEO

02.09.2015

PhD

25 years

Gökhan Erün

EVP-Corporate Banking and Treasury

Deputy CEO

01.09.2005

Master

23 years

Halil Hüsnü Erel

EVP-Technology, Operation Center, Marketing and Business Development

16.06.1997

University

42 years

Avni Ayd?n Düren

EVP-Legal Services

01.02.2009

Master

23 years

Betül Ebru Edin

EVP-Project Finance

25.11.2009

University

23 years

Didem Ba?er

EVP-Digital Banking

20.03.2012

Master

22 years

Recep Ba?tu?

EVP-Commercial Banking

01.01.2013

University

27 years

Osman Nuri Tüzün

EVP- Human Resources and Support Services

19.08.2015

Master

25 years

Ayd?n Güler

EVP-Finance and Accounting

03.02.2016

University

27 years

Ali Temel

Head of Credit Risk Management

03.02.2016

University

27 years

Mahmut Akten

EVP-Retail Banking

17.01.2017

Master

17 years

Cemal Onaran

EVP-SME Banking

17.01.2017

University

26 years

The top management listed above does not hold any material unquoted shares of the Bank.

1.4         Information on the bank's qualified shareholders

Name / Company

Shares

Ownership

Paid-in Capital

Unpaid Portion

 Banco Bilbao Vizcaya Argentaria SA

2,093,700

49.85%

2,093,700

-

 Do?u? Holding A?

2,107

0.05%

2,107

-

According to the decision made at the "General Assembly of Founder Shares Owners" and the "Extraordinary General Shareholders" meetings held on 13 June 2008, the Bank repurchased all the 370 founder share-certificates issued in order to redeem and exterminate them, subsequent to the permissions obtained from the related legal authorities, at a value of TL 3,876 thousands each in accordance with the report prepared by the court expert and approved by the Istanbul 5th Commercial Court of First Instance. A total payment of TL 1,434,233 thousands has been made to the owners of 368 founder share-certificates from "extraordinary reserves", and the value of remaining 2 founder share-certificates has been blocked in the bank accounts.

Subsequent to these purchases, the clauses 15, 16 and 45 of the Articles of Association of the Bank have been revised accordingly.

1.5         Summary information on the bank's activities and services

Activities of the Bank as stated at the third clause of its Articles of Association are as follows:

·   All banking operations,

·   Participating in, establishing, and trading the shares of enterprises at various sectors within the limits setforth by the Banking Law;

·   Providing attorneyship, insurance agency, brokerage and freight services in relation with banking activities,

·   Purchasing/selling debt securities, treasury bills, government bonds and other share certificates issued by Turkish government and other official and private institutions,



 

·   Developing economical and financial relations with foreign organizations,

·   Dealing with all economic operations in compliance with the Banking Law.

The Bank's activities are not limited to those disclosed in that third clause, but whenever the Board of Directors deems any operations other than those stated above to be of benefit to the Bank, it is recommended in the general meeting, and the launching of the related project depends on the decision taken during the General Assembly which results in a change in the Articles of Association and on the approval of this decision by the Ministry of Industry and Commerce. Accordingly, the approved decision is added to the Articles of Association .

The Bank is not a specialized bank but deals with all kinds of banking activities. Deposits are the main sources of the lendings to the customers. The Bank grants loans to companies operating in various sectors while aiming to maintain the required level of efficiency.

The Bank also grants non-cash loans to its customers; especially letters of guarantee, letters of credit and acceptance credits.

1.6         Current or likely actual or legal barriers to immediate transfer of equity or repayment of debts between the bank and its affiliates

None.


 

 

 

 

 

 

 

 

3         Accounting policies

3.1         Basis of presentation

The Bank  prepares its financial statements in accordance with the BRSA Accounting and Reporting Regulation" which includes the regulation on "The Procedures and Principles Regarding Banks' Accounting Practices and Maintaining Documents" published in the Official Gazette dated 1 November 2006 with No. 26333, and other regulations on accounting records of banks published by the Banking Regulation and Supervision Board and circulars and pronouncements published by the BRSA and Turkish Accounting Standards published by the Public Oversight Accounting and Auditing Standards Authority for the matters not regulated by the aforementioned legislations.

The accompanying unconsolidated financial statements are prepared in accordance with the historical cost basis except for financial instruments at fair value through profit or loss, financial assets available for sale, real estates and investments in affiliates valued at equity basis of accounting.

Accounting policies and accounting estimates on which the accompanying financial statements based are in compliance with "The Banking Regulation and Supervision Agency ("BRSA") Accounting and Reporting Regulation" and other regulations, circulars and pronouncements published by the BRSA and with Turkish Accounting Standards issued by Public Oversight Agency for the matters not regulated by the aforementioned legislations and have been applied consistently by the Bank as in the financial statements prepared for the year ended 31 December 2016.

New and revised Turkish Accounting Standards effective for annual periods beginning on or after 1 January 2017 have no material effect on the financial statements, financial performance and on Bank's accounting policies and accounting estimates. New and revised Turkish Accounting Standards issued but not yet effective have no material effect on the financial statements, financial performance and on Bank's accounting policies and accounting estimates, except for IFRS9 which will be effective from periods beginning on or after 1 January 2018. The Bank has started projects to comply with IFRS9.

The accounting policies and the valuation principles applied in the preparation of the accompanying financial statements are explained in Notes 3.2 to 3.24.

3.2         Strategy for use of financial instruments and foreign currency transactions

3.2.1      Strategy for use of financial instruments

The liability side of the Bank's balance sheet is intensively composed of short-term deposits in line with the general trend in the banking sector. In addition to deposits, the Bank has access to longer-term borrowings via the borrowings from abroad.

In order to manage the interest rate risk arising from short-term deposits, the Bank is keen on maintaining floating rate instruments such as government bonds with quarterly coupon payments and instruments like credit cards and consumer loans providing regular cash inflows.

A portion of the fixed-rate securities and loans, and the bonds of the Bank are hedged under fair value hedges. The fair value risks of such fixed-rate assets and financial liabilities are hedged with interest rate swaps and cross currency swaps. The fair value changes of the hedged fixed-rate financial assets and financial liabilities together with the changes in the fair value of the hedging instruments, namely interest rate swaps and cross currency swaps, are accounted under net trading income/losses in the income statement. At the inception of the hedge and during the subsequent periods, the hedge is expected to achieve the offsetting of changes in fair value attributable to the hedged risk for which the hedge is designated, and accordingly, the hedge effectiveness tests are performed.

The Bank may classify its financial assets and liabilities as at fair value through profit or loss, at the initial recognition in order to eliminate any accounting inconsistency.

The fundamental strategy to manage the liquidity risk that may incur due to short-term structure of funding, is to expand the deposit base through customer-oriented banking philosophy, and to increase customer transactions and retention rates. The Bank's widespread and effective branch network, advantage of primary dealership and strong market share in the treasury and capital markets, are the most effective tools in the realisation of this strategy. For this purpose, serving customers by introducing new products and services continuously and reaching the customers satisfaction are very important.

Another influential factor in management of interest and liquidity risks on balance sheet is product diversification both on asset and liability sides.

Exchange rate risk, interest rate risk and liquidity risk are controlled and measured by various risk management systems, and the balance sheet is managed under the limits set by these systems and the limits legally required. Asset-liability management and value at risk models, stress tests and scenario analysis are used for this purpose.

Purchase and sale of short and long-term financial instruments are allowed within the pre-determined limits to generate risk-free return on capital.

The foreign currency position is controlled by the equilibrium of a currency basket to eliminate the foreign exchange risk.

3.2.2      Foreign currency transactions

Foreign exchange gains and losses arising from foreign currency transactions are recorded at transaction dates. At the end of the periods, foreign currency assets and liabilities evaluated with the Bank's spot purchase rates and the differences are recorded as foreign exchange gain or loss in the income statement. 

In the unconsolidated financial statements, the financial affiliates are accounted for using the equity method in accordance with the Communique published on the Official Gazette dated 9 April 2015 no. 29321 related to the amendments to the Turkish Accounting Standard 27 (TAS 27) "Separate Financial Statements". In this context, foreign affiliates' asset and liability items in the balance sheet are translated into Turkish Lira by using foreign exchange rates as of the balance sheet date whereas income and expense items are translated into Turkish Lira by using average foreign exchange rates for the related period. Foreign exchange differences arising from translation of income and expense items and other equity items are accounted under capital reserves under equity.

From 1 September 2015, it has been started to apply investment hedge amounting to EUR 342,104,617 in total among net investments in Garanti Bank International NV and Garanti Holding BV having capitals denominated in foreign currencies and long term foreign currency borrowings. Foreign exchange losses in the amount of TL 208,304 thousands, arising from conversion of both foreign currency net investments and long term foreign currency borrowings are accounted under capital reserves and hedging reserves, respectively under equity as of 31 March 2017. There is no ineffective portion arising from net investment hedge accounting.

3.3         Investments in associates and affiliates

In the unconsolidated financial statements, the financial affiliates are accounted for using the equity method in accordance with the Communique published on the Official Gazette dated 9 April 2015 no. 29321 related to the amendments to the Turkish Accounting Standard 27 (TAS 27) "Separate Financial Statements".

In accordance with the Turkish Accounting Standard 28 (TAS 28) for "Investments in Associates and Joint Ventures" through the equity method, the carrying value of financial affiliates are accounted in the financial statements with respect to the Bank's share in these investments' net asset value. While the Bank's share on profits or losses of financial affiliates are accounted in the Bank's income statement, the Bank's share in other comprehensive income of financial affiliates are accounted in the Bank's other comprehensive income statement.

Non-financial affiliates are accounted at cost in the financial statements after provisions for inpairment losses deducted, if any, in accordance with TAS 27.

3.4         Forwards, options and other derivative transactions

As per the Turkish Accounting Standard 39 (TAS 39) "Financial Instruments: Recognition and Measurement"; forward foreign currency purchases/sales, swaps, options and futures are classified as either "hedging purposes" or "trading purposes".

3.4.1      Derivative financial instruments held for trading

              The derivative transactions mainly consist of foreign currency and interest rate swaps, foreign currency options and forward foreign currency purchase/sale contacts. There are no embedded derivatives.

Derivatives are initially recorded in off-balance sheet accounts at their purchase costs including the transaction costs. Subsequently, derivative transactions are valued at their fair values and the changes in their fair values are recorded on balance sheet under "derivative financial assets held for trading" or "derivative financial liabilities held for trading", respectively depending on the fair values being positive or negative. Fair value changes for trading derivatives are recorded under income statement.

The spot legs of currency swap transactions are recorded on the balance sheet and the forward legs in the off-balance sheet accounts as commitment.

3.4.2      Derivative financial instruments held for risk management

The Bank enters into interest rate and cross currency swap transactions in order to hedge the change in fair values of fixed-rate financial instruments. While applying fair value hedge accounting, the changes in fair values of hedging instrument and hedged item are recognised in  income statement. If the hedging is effective, the changes in fair value of the hedged item is presented in statement of financial position together with the fixed-rate loan, and in case of fixed-rate financial assets available for sale, such changes are reclassified from shareholders' equity to income statement.

The Bank enters into interest rate and cross currency swap transactions in order to hedge the changes in cash flows of the floating-rate financial instruments While applying cash flow hedge accounting, the effective portion of the changes in the fair value of the hedging instrument is accounted for under hedging reserves in shareholders' equity, and the ineffective portion is recognised in income statement. The changes recognised in shareholders' equity is removed and included in income statement in the same period when the hedged cash flows effect the income or loss.

The Bank performs effectiveness test at the beginning of the hedge accounting period and at each reporting period. The effectiveness tests are carried out using the "Dollar off-set model" and the hedge accounting is applied as long as the test results are between the range of 80%-125% of effectiveness.

The hedge accounting is discontinued when the hedging instrument expires, is exercised, sold or no longer effective. When discontinuing fair value hedge accounting, the cumulative fair value changes in carrying value of the hedged item arising from the hedged risk are amortised to income statement under trading account income/loss caption over the maturity of the hedged item from that date of the hedge accounting is discontinued. While expiring, sale, discontinuing cash flow hedge accounting or when no longer effective the cumulative gains/losses recognised in shareholders' equity and presented under hedging reserves are continued to be kept in this account. When the cash flows of hedged item incur, the gain/losses accounted for under shareholders' equity, are recognised in income statement considering the original maturity.

3.5         Interest income and expenses

Interests are recorded according to the effective interest rate method (rate equal to the rate in calculation of present value of future cash flows of financial assets or liabilities) defined in the Turkish Accounting Standard 39 (TAS 39) "Financial Instruments: Recognition and Measurement".

In case an interest was accrued on a security before its acquisition, the collected interest is divided into two parts as interest before and after the acquisition and only the interest of the period after the acquisition is recorded as interest income in the financial statements.

The accrued interest income on non-performing loans are reversed and subsequently recognised as interest income only when collected.

3.6         Fees and commissions

Except for certain fees related with certain banking transactions and recognized when received, fees and commissions received or paid, and other fees and commissions paid to financial institutions are accounted under accrual basis of accounting. The income derived from agreements or asset purchases from real-person or corporate third parties are recognized as income when realized.

3.7         Financial assets

3.7.1      Financial assets at fair value through profit or loss

Financial assets valued at fair value through profit or loss, such assets are valued at their fair values and gain/loss arising on those assets is recorded in the income statement. Interest income earned on trading securities and the difference between their acquisition costs and amortized costs  are recorded as interest income in the income statement. The differences between the amortized costs and the fair values of such securities are recorded under trading account income/losses in the income statement. In cases where such securities are sold before their maturities, the gains/losses on such sales are recorded under trading account income/losses.

 

The Bank classifies certain loans and securities issued at their origination dates, as financial assets/liabilities at fair value through profit or loss in compliance with TAS 39. The interest income/expense earned and the difference between the acquisition costs and the amortized costs of financial insturuments are recorded under interest income/expense in income statement, the difference between the amortized costs and the fair values of financial instruments are recorded under trading account income/losses in income statement.

3.7.2      Investments held-to-maturity, financial assets available-for-sale and loans and receivables

Financial assets are initially recorded at their purchase costs including the transaction costs.

Investments held-to-maturity are financial assets with fixed maturities and pre-determined payment schedules that the Bank has the intent and ability to hold until maturity, excluding originated loans and receivables.

There are no financial assets that are not allowed to be classified as investments held-to-maturity for two years due to the tainting rules applied for the breach of classification rules.

Investments held-to-maturity are measured at amortized costs using internal rate of return after deducting impairments, if any.

Financial assets available-for-sale , are financial assets other than assets held for trading purposes, investments held-to-maturity and originated loans and receivables.

Financial assets available-for-sale are measured at their fair values subsequently. However, assets for which fair values can not be determined reliably, are valued at amortized costs by using discounting method with internal rate of return for floating-rate securities; and by using valuation models or discounted cash flow techniques for fixed-rate securities. Unrecognised gain/losses derived from the difference between their fair values and the discounted values are recorded in "securities value increase fund" under the shareholders' equity. In case of sales, the gain/losses arising from fair value measurement under shareholders' equity are recognized in income statement.

The Bank owns consumer price indexed government bonds (CPI) portfolio. CPI's are valued and accounted according to the effective interest rate method which is calculated according to the real coupon rate and the reference inflation index on the issue date. As it is mentioned in the Undersecretariat of Treasury's Investor Guide of CPI, the reference index used during the calculation of the actual coupon payment amount is the previous two months CPI's. The bank determines its expected inflation rates in compliance with this guide. The estimated inflation rate according to the Central Bank of Turkey and the Bank's expectations, is updated during the year when it is considered necessary.

Purchase and sale transactions of securities are accounted at delivery dates.

Loans and receivables are financial assets raised by the Bank providing money, commodity and services to debtors.

Loans are financial assets with fixed or determinable payments and not quoted in an active market.

Loans and receivables are recognized at cost and measured at amortized cost using the effective interest method. Duties paid, transaction costs and other similar expenses on assets received against such risks are considered as a part of transaction cost and charged to customers.

3.8         Impairment of financial assets

Financial asset or group of financial assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such indication exists, the Bank estimates the amount of impairment.

Impairment loss incurs if, and only if, there is an objective evidence that the expected future cash flows of financial asset or group of financial assets are adversely effected by an event(s) ("loss event(s)") incurred subsequent to recognition. The losses expected to incur due to future events are not recognized even if the probability of loss is high.

 

If there is an objective evidence that certain loans will not be collected, for such loans; the Bank provides specific and general allowances for loan and other receivables classified in accordance with the Regulation on Identification of and Provision against Non-Performing Loans and Other Receivables (the Provisioning Regulation) published on the Official Gazette no.2633 dated 1 November 2006. The allowances are recorded in income statement of the related period.

Provisions made during the period are recorded under "provision for losses on loans and other receivables". Provisions booked in the prior periods and released in the current year are recorded under "other operating income".

3.9         Netting and derecognition of financial instruments

3.9.1      Netting of financial instruments

In cases where the fair values of trading securities, securities available-for-sale, securities quoted at the stock exchanges, associates and affiliates are less then their carrying values, a provision for impairment is allocated, and the net value is shown on the balance sheet.

The Bank provides specific allowances for non-performing loan and other receivables in accordance with the Regulation on Identification of and Provision against Non-Performing Loans and Other Receivables. Such allowances are recorded under "loans" as negative balances on the asset side.

Otherwise, the financial assets and liabilities are netted off only when there is a legal right to do so.

3.9.2      Derecognition of financial assets

The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, it continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in income statement.

In case an existing financial asset is replaced with another financial asset from the same counterparty where the terms on the initial financial asset are substantially modified, the existing financial asset is derecognized and a new financial asset is recognized.  The difference between the carrying values of the respective financial assets is recognized in income statement.

3.10       Repurchase and resale agreements and securities lending

Securities sold under repurchase agreements are recorded on the balance sheet in compliance with the Uniform Chart of Accounts. Accordingly, government bonds and treasury bills sold to customers under repurchase agreements are classified as "Investments Subject to Repurchase Agreements" and valued based on the Bank management's future intentions, either at market prices or using discounting method with internal rate of return. The funds received through repurchase agreements are classified separately under liability accounts and the related interest expenses are accounted for on an accrual basis.

Securities purchased under resale agreements are classified under "interbank money markets" separately. An income accrual is accounted for the positive difference between the purchase and resale prices earned during the period.

3.11       Assets held for sale, discontinued operations and related liabilities

A tangible asset (or a disposal group) classified as "asset held for sale" is measured at lower of carrying value or fair value less costs to sell. An asset (or a disposal group) is regarded as "asset held for sale" only when the sale is highly probable and the asset (disposal group) is available for immediate sale in its present condition. For a highly probable sale, there must be a valid plan prepared by the management for the sale of asset including identification of possible buyers and completion of sale process. Furthermore, the asset should be actively marketed at a price consistent with its fair value.

A discontinued operation is a part of the Bank's business classified as sold or held-for-sale. The operating results of the discontinued operations are disclosed separately in income statement. The Bank has no discontinued operations.

3.12       Goodwill and other intangible assets

The Bank's intangible assets consist of softwares, intangible rights and other intangible assets.

Goodwill and other intangible assets are recorded at cost in compliance with the Turkish Accounting Standard 38 (TAS 38) "Intangible Assets".

The costs of other intangible assets purchased before 31 December 2004 are restated from the purchasing dates to 31 December 2004, the date the hyperinflationary period is considered to be ended. The intangible assets purchased after this date are recorded at their initial purchase costs.

As per TAS 38, internally-generated softwares should be recognised as intangible assets if they meet the below listed criterias:

- The technical feasibility of completing the intangible asset so that it will be available for use,

- Availability of the Bank's intention to complete and use the intangible asset,

- The ability to use the intangible asset,

- Clarity in probable future economic benefits to be generated from the intangible asset,

- The availability of adequate technical, financial and other resources to complete the development phase and to start using the intangible asset,

- The availability to measure reliably the expenditure attributable to the intangible asset during the development phase.

The directly attributable development costs of intangible asset are included in the the cost of such assets, however the research costs are recognised as expense as incurred.

The intangible assets are amortised by the Bank over their estimated useful lives based on their inflation adjusted costs on a straight-line basis. Estimated useful lives of the Bank's intangible assets are 3-15 years, and amortisation rates are 6.67-33.3%.

If there is objective evidence of impairment, the asset's recoverable amount is estimated in accordance with the Turkish Accounting Standard 36 (TAS 36) " Impairment of Assets" and if the recoverable amount is less then the carrying value of the related asset, a provision for impairment loss is provided.

3.13       Tangible assets

The cost of the tangible assets purchased before 31 December 2004 are restated from the purchasing dates to 31 December 2004, the date the hyperinflationary period is considered to be ended. The tangible assets purchased after this date are recorded at their historical costs.

As of 1 November 2015, changing the existing accounting policy, it has been decided to apply revaluation model for properties recorded under tangible assets instead of cost model in accordance with the Turkish Accounting Standard 16 (TAS 16) "Property, Plant and Equipment". Accordingly, for all real estates registered in the ledger, a valuation study was performed by independent expertise firms.



 

If there is objective evidence of impairment, the asset's recoverable amount is estimated in accordance with the Turkish Accounting Standard 36 (TAS 36) " Impairment of Assets" and if the recoverable amount is less than the carrying value of the related asset, a provision for impairment loss is provided.

Gains/losses arising from the disposal of the tangible assets are calculated as the difference between the net book value and the net sale price.

Maintenance and repair costs incurred for tangible assets, are recorded as expense.

There are no restrictions such as pledges, mortgages or any other restriction on tangible assets. The depreciation rates and the estimated useful lives of tangible assets are presented below. Depreciation method in use was not changed in the current period.

 

 

Tangible assets

Estimated Useful Lives (Years)

 

Depreciation Rates %

Buildings

50

2

Vaults

50

2

Motor Vehicles

5-7

15-20

Other Tangible Assets

4-20

5-25

The depreciation of an asset held for a period less than a full financial year is calculated as a proportion of the full year depreciation charge from the date of acquisition to the financial year end.

Useful lives of buildings are reviewed at least once a year and if current estimates are different than previous estimates, then the revised estimates are considered as accounting policy change in accordance with Turkish Accounting Standard 8 (TAS 8) "Accounting Policies, Changes in Accounting Estimates and Errors".

Investment properties

Land and buildings that are held to earn rentals or for capital appreciation or both rather than for use in production, supply of goods or services, administrative purposes or sale in the ordinary course of business are clasified as investment property. As of 1 November 2015, changing the existing accounting policy, it has been decided to apply fair value model for investment properties instead of cost model in accordance with the Turkish Accounting Standard 40 (TAS 40) "Investment Property" Accordingly, for all the investment properties registered in the ledger, a valuation study was performed by independent expertise firms. Fair value changes in investment properties were accounted in the income statement for the period they occurred.

Investment properties accounted at fair value are not depreciated.

3.14       Leasing activities

Leased assets are recognized by recording an asset or a liability. In the determination of the related asset and liability amounts, the lower of the fair value of the leased asset and the present value of leasing payments is considered. Financial costs on leasing agreements are expanded in lease periods at a fixed interest rate.

In cases where leased assets are impaired or the expected future benefits of the assets are less than their book values, the book values of such leased assets are reduced to their net realizable values. Depreciation for assets acquired through financial leases is calculated consistently with the same principle as for the tangible assets.

In operating leases, the rent payments are charged to the statement of operations in equal installments.

3.15       Provisions and contingent liabilities

In the financial statements, a provision is made for an existing commitment resulted from past events if it is probable that the commitment will be settled and a reliable estimate can be made of the amount of the obligation. Provisions are calculated based on the best estimates of management on the expenses to incur as of the balance sheet date and, if material, such expenses are discounted for their present values. If the amount is not reliably estimated and there is no probability of cash outflow from the Bank to settle the liability, the related liability is considered as "contingent" and disclosed in the notes to the financial statements.

3.16       Contingent assets

The contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the Bank. If an inflow of economic benefits to the Bank has become probable, then the contingent asset is disclosed in the footnotes to the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the financial statements of the period in which the change occurs.

3.17       Liabilities for employee benefits

Severance indemnities and short-term employee benefits

As per the existing labour law in Turkey, the Bank is required to pay certain amounts to the employees retired or fired except for resignations or misbehaviours specified in the Turkish Labour Law.

Accordingly, the Bank reserved for employee severance indemnities in the accompanying financial statements using actuarial method in compliance with the Turkish Accounting Standard 19 (TAS 19) "Employee Benefits" for all its employees who retired or whose employment is terminated, called up for military service or died. The major actuarial assumptions used in the calculation of the total liability are as follows:


31 March 2017

31 December 2016


%

%

Net Effective Discount Rate

3.43

3.43

Discount Rate

11.50

11.50

Expected Rate of Salary Increase

9.30

9.30

Inflation Rate

7.80

7.80

The above rates are effective rates, whereas the rates applied for the calculation differ according to the employees' years-in-service.

The Bank provided for undiscounted short-term employee benefits earned during the financial periods as per services rendered in compliance with TAS 19.

The actuarial gains/losses are recognised under shareholders' equity as per the revised TAS 19.

Retirement benefit obligations

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee (and his/her dependents) will receive on retirement.

The Bank's defined benefit plan (the "Plan") is managed by "Türkiye Garanti Bankas? Anonim ?irketi Memur ve Müstahdemleri Emekli ve Yard?m Sand??? Vakf?" (the Fund) established as per the provisional article 20 of the Social Security Law no.506 and the Bank's employees are the members of this Fund.

The Plan is funded through contributions of both by the employees and the employer as required by Social Security Law numbered 506. These contributions are as follows:


31 March 2017


Employer

Employee

Pension contributions

15.5%

10.0%

Medical benefit contributions

6.0%

5.0%

The Plan is composed of a) the contractual benefits of the employees, which are subject to transfer to Social Security Foundation ("SSF") as per the Social Security Law no.5754 ("the Law"), and b) other social rights and medical benefits provided by the Bank but not transferable to SSF.



 

a) Benefits transferable to SSF

The first paragraph of the provisional article 23 of Banking Law no.5411, published in the Official Gazette on 1 November 2005, no.25983, which requires the transfer of the members of the funds subject to the provisional article 20 of the Social Security Law no.506, and the persons who are paid under insurance coverage for disablement, old-age and mortality and their right-holders to the SSF within three years following the effective date of the related article was cancelled with the decision of the Constitutional Court dated 22 March 2007, no.2007/33. The reasoned ruling regarding the cancellation of the Constitutional Court was published in the Official Gazette no.26731, dated 15 December 2007. The Constitutional Court stated that the reason behind this cancellation was the possible loss of antecedent rights of the fund members.

Following the publication of the verdict, the Turkish Grand National Assembly ("Turkish Parliament") started to work on the new legal arrangements by taking the cancellation reasoning into account and the articles of the Law no.5754 regulating the principles related with such transfers were accepted and approved by Turkish Parliament on 17 April 2008, and enacted on 8 May 2008 after being published in the Official Gazette no.26870.

As per the Law, the present value of post-employment benefits as at the transfer date for the fund members to be transferred, are to be calculated by a commission composing from the representatives of the SSF, the Ministry of Finance, the Undersecretariat of Treasury, the Undersecretariat of State Planning Organisation, the BRSA, the Savings Deposit Insurance Fund, the banks and the funds, by using a technical discount rate of 9.80% taking into account the funds' income and expenses as per insurance classes and the transferable contributions and payments of the funds including any salary and income differences paid by the funds above the limits of SSF for such payments.The transfers are to take place within the three-year period starting from 1 January 2008 . Subsequently, the transfer of the contributors and the persons receiving monthly or regular income and their right-holders from such funds established for employees of the banks, insurance and reinsurance companies, trade chambers, stock markets and unions that are part of these organizations subject to the provisional article 20 of the Social Security Law no.506 to the SSF, has been postponed for two years. The decision was made by the Council of Ministers on 14 March 2011 and published in the Official Gazette no. 27900 dated 9 April 2011 as per the decision of the Council of Ministers, no.2011/1559, and as per the letter no. 150 of the Ministry of Labor and Social Security dated 24 February 2011 and according to the provisional article 20 of the Social Security and Public Health Insurance Law no.5510.

On 19 June 2008, Cumhuriyet Halk Partisi ("CHP") applied to the Constitutional Court for the cancellation of various articles of the Law including the first paragraph of the provisional Article 20. At the meeting of the Constitutional Court on 30 March 2011, it was decided that the first paragraph of the provisional Article 20 of the Law is not contradictory to the Constitutional Law, and accordingly the dismissal of the cancellation request has been denied with the majority of votes.

Before the completion of two-years period set by the Council of Ministers on 14 March 2011, as per the Article no. 51 of the law no. 6645, published in the Official Gazette no. 29335 dated 23 April 2015, the Article no. 20 of the law no. 5510 was amended giving the Council of Ministers the authority to determine the date of transfer without defining any timeline.

b) Other benefits not transferable to SSF

Other social rights and payments provided in the existing trust indenture but not covered through the transfer of the funds' members and their right-holders to the SSF, are to be covered by the funds and the institutions that employ the funds' members.

The actuarial gains/losses are recognised under shareholders' equity as per the revised TAS 19.

3.18       Taxation

3.18.1    Corporate tax

Effective from 1 January 2006, statutory income is subject to corporate tax at 20% in Turkey. This rate is applied to accounting income modified for certain exemptions (like dividend income) and deductions (like investment incentives), and additions for certain non-tax deductable expenses and allowances for tax purposes. If there is no dividend distribution planned, no further tax charges are made.

Dividends paid to the resident institutions and the institutions working through local offices or representatives are not subject to withholding tax. As per the decisions no.2009/14593 and no.2009/14594 of the Council of Ministers published in the Official Gazette no.27130 dated 3 February 2009, certain duty rates included in the articles no.15 and 30 of the new Corporate Tax Law no.5520 are revised. Accordingly, the withholding tax rate on the dividend payments other than the ones paid to the nonresident institutions generating income in Turkey through their operations or permanent representatives and the resident institutions is 15%. In applying the withholding tax rates on dividend payments to the nonresident institutions and the individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of the retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax.

The prepaid taxes are calculated and paid at the rates valid for the earnings of the related years. The prepayments can be deducted from the annual corporate tax calculated for the whole year earnings.

In accordance with the tax legislation, tax losses can be carried forward to offset against future taxable income for up to five years. Tax losses cannot be carried back to offset profits from previous periods.

In Turkey, there is no procedure for a final and definite agreement on tax assessments. Companies file their tax returns with their tax offices by the end of 25th of the fourth month following the close of the accounting period to which they relate. Tax returns are open for five years from the beginning of the year that follows the date of filing during which time the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue re-assessments based on their findings.

The tax applications for foreign branches;

NORTHERN CYPRUS

According to the Corporate Tax Law of the Turkish Republic of Northern Cyprus no.41/1976 as amended, the corporate earnings (including foreign corporations) are subject to a 10% corporate tax and 15% income tax. This tax is calculated based on the income that the taxpayers earn in an accounting period. Tax base is determined by modifying accounting income for certain exclusions and allowances for tax purposes. The corporations cannot benefit from the rights of offsetting losses, investment incentives and amortisation unless they prepare and have certified their balance sheets, income statements and accounting records used for tax calculations by an auditor authorized by the Ministry of Finance. In cases where it is revealed that the earnings of a corporation were not subject to taxation in prior years or the tax paid on such earnings are understated, additional taxes can be charged in the next twelwe years following that the related taxation period. The corporate tax returns are filed in the tax administration office in April after following the end of the accounting year to which they relate. The corporate taxes are paid in two equal installments in May and October.

MALTA

The corporate earnings are subject to a 35% corporate tax. This rate is determined by modifying accounting income for certain exclusions and allowances for tax purposes. The earnings of the foreign corporations' branches in Malta are also subject to the same tax rate that the resident corporations in Malta are subject to. The earnings of such branches that are transferred to their head offices are not subject to an additional tax. The taxes payable is calculated by the obligating firm and the calculation is shown at the tax declaration form that is due till the following year's September and the payment is done till this date.



 

LUXEMBOURG

The corporate earnings are subject to a 21% corporate tax. This rate is determined by modifying accounting income for certain exclusions and allowances for tax purposes. An additional 7% of the calculated corporate income tax is paid as a contribution to unemployment insurance fund. 3% of the taxable income is paid as municipality tax in addition to corporate tax. The municipalities have the right to increase this rate up to 200%-350%. The municipality commerce tax, which the Bank's Luxembourg branch subject to currently is applied as 7.50% of the taxable income. The tax returns do not include any tax amounts to be paid.

The tax calculation is done by the tax office and the amount to be paid is declared to corporate through an official letter called Note. The amounts and the payment dates of prepaid taxes are determined and declared by the tax office at the beginning of the taxation period. The corporations whose head offices are outside Luxembourg, are allowed to transfer the rest of their net income after tax following the allocation of 5% of it for legal reserves, to their head offices .

3.18.2    Deferred taxes

According to the Turkish Accounting Standard 12 (TAS 12) "Income Taxes"; deferred tax assets and liabilities are recognized, using the balance sheet method, on all taxable temporary differences arising between the carrying values of assets and liabilities in the financial statements and their corresponding balances considered in the calculation of the tax base, except for the differences not deductible for tax purposes and initial recognition of assets and liabilities which affect neither accounting nor taxable profit.

If transactions and events are recorded in the income statement, then the related tax effects are also recognized in the income statement. However, if transactions and events are recorded directly in the shareholders' equity, the related tax effects are also recognized directly in the shareholders' equity.

The deferred tax assets and liabilities are reported as net in the financial statements.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

3.18.3    Transfer pricing

The article no.13 of the Corporate Tax Law describes the issue of transfer pricing under the title of "Disguised Profit Distribution by Way of Transfer Pricing". "The General Communiqué on Disguised Profit Distribution by Way of Transfer Pricing" published at 18 November 2007, explains the application related issues on this topic. 

According to this communiqué, if the taxpayers conduct transactions like purchase and sale of goods or services with the related parties where the prices are not determined according to the arm's length principle, then it will be concluded that there is a disguised profit distribution by way of transfer pricing. Such disguised profit distributions will not be deducted from the corporate tax base for tax purposes.

As stated in the "7.1 Annual Documentation" section of this communiqué, the taxpayers are required to fill out the "Transfer Pricing, Controlled Foreign Entities and Thin Capitalization" form for the purchase and sale of goods or services conducted with their related parties in a taxation period, attach these forms to their corporate tax returns and submit to the tax offices.

3.19       Funds borrowed

The Bank, whenever required, generates funds from domestic and foreign sources in the form of borrowings, syndications, securitizations, and bill and bond issuances in the local and international markets.The funds borrowed are recorded at their purchase costs and valued at amortised costs using the effective interest method.

In cases where such funds are valued at their amortised costs and such application results in measurement or accounting inconsistencies due to having the relevant financial instruments valued using different methods or the related gains or losses are recorded differently, such fundings are valued and recorded at their fair values as per TAS 39 in order to minimise or prevent such inconsistencies.

3.20       Share issuances

None.

                 

3.21       Confirmed bills of exchange and acceptances

Confirmed bills of exchange and acceptances are realized simultaneously with the customer payments and recorded in off-balance sheet accounts as possible debt and commitment, if any.

3.22       Government incentives

As of 31 March 2017, the Bank does not have any government incentives or grants.

3.23       Segment reporting

The Bank operates in corporate, commercial, retail and investment banking. Accordingly, the banking products served to customers are; custody services, time and demand deposits, accumulating deposit accounts, repos, overdraft facilities, spot loans, foreign currency indexed loans, consumer loans, automobile and housing loans, working capital loans, discounted bills, gold loans, foreign currency loans, Eximbank loans, pre-export loans, ECA covered financing, letters of guarantee, letters of credit, export factoring, acceptance credits, draft facilities, forfaiting, leasing, insurance, forward, futures, salary payments, investment account (ELMA), cheques, safety boxes, bill payments, tax collections, payment orders. GarantiCard, BonusCard, Miles&Smiles Card, FlexiCard, MoneyCard, BusinessCard under the brand names of Visa and Mastercard, virtual cards and also American Express credit cards and "Paracard" debit cards with Maestro, Electron, Visa and Mastercard brand names, are available.

The Bank provides service packages to its corporate, commercial and retail customers including deposit, loans, foreign trade transactions, investment products, cash management, leasing, factoring, insurance, credit cards, and other banking products. A customer-oriented branch network has been built in order to serve customers' needs effectively and efficiently. The Bank also utilizes alternative delivery channels intensively.

The Bank provides corporate banking products to international and national holdings in Turkey by coordinating regional offices, suppliers and intermediaries, utilizing cross-selling techniques. Mainly, it provides services through its commercial and mixed type of branches to export-revenue earning sectors like tourism and textile and exporters of Turkey's traditional agricultural products.

Additionally, the Bank provides banking services to enterprises and their employees working in retail and service sectors through product packages including overdraft accounts, POS machines, credit cards, cheque books, Turkish Lira and foreign currency deposits, investment accounts, internet banking and call-center, debit cards and bill payment modules.

Retail banking customers form a wide-spread and sustainable deposit base for the Bank. Individual customers' needs are met by diversified consumer banking products through branches and alternative delivery channels.

Information on the business segments is as follows:

Current Period

Retail Banking

Corporate / Commercial Banking

Invesment Banking

Other

Total Operations

Total Operating Profit

1,845,532

1,541,026

52,076

695,938

4,134,572

Other

-

-

-

-

-

Total Operating Profit

1,845,532

1,541,026

52,076

695,938

4,134,572

Net Operating Profit

706,794

756,548

3,580

470,223

1,937,145

Income from Associates and Affiliates

-

-

-

108

108

Net Operating Profit

706,794

756,548

3,580

470,331

1,937,253

Provision for Taxes

-

-

-

411,704

411,704

Net Profit

706,794

756,548

3,580

58,627

1,525,549







 Segment Assets

60,305,937

135,607,324

87,951,716

10,974,556

294,839,533

 Investments in Associates and Affiliates

-

-

-

5,580,601

5,580,601

Total Assets

60,305,937

135,607,324

87,951,716

16,555,157

300,420,134

 Segment Liabilities

111,241,350

63,083,623

81,941,041

7,785,403

264,051,417

 Shareholders' Equity

-

-

-

36,368,717

36,368,717

Total Liabilities and Shareholders' Equity

111,241,350

63,083,623

81,941,041

44,154,120

300,420,134

 

Prior Period

Retail Banking

Corporate / Commercial Banking

Invesment Banking

Other

Total Operations

Total Operating Profit

1,408,705

1,148,870

65,894

747,718

3,371,187

Other

-

-

-

-

-

Total Operating Profit

1,408,705

1,148,870

65,894

747,718

3,371,187

Net Operating Profit

219,923

290,502

4,574

766,846

1,281,845

Income from Associates and Affiliates

-

-

-

--

-

-

Net Operating Profit

219,923

290,502

4,574

766,846

1,281,845

Provision for Taxes

-

-

-

241,307

241,307

Net Profit

219,923

290,502

4,574

525,539

1,040,538







 Segment Assets

59,084,680

126,963,548

81,188,982

11,707,628

278,944,838

 Investments in Associates and Affiliates

-

-

-

5,210,562

5,210,562

Total Assets

59,084,680

126,963,548

81,188,982

16,918,190

284,155,400

 Segment Liabilities

106,985,273

61,415,792

74,568,141

5,647,114

248,616,320

 Shareholders' Equity

-

-

-

35,539,080

35,539,080

Total Liabilities and Shareholders' Equity

106,985,273

61,415,792

74,568,141

41,186,194

284,155,400

 

 3.24         Other disclosures

None.

 

4         Financial Position and Results of Operations and Risk Management

4.1         Total capital

The capital items calculated as per the "Regulation on Equities of Banks" published on 5 September 2013, are presented below:

4.1.1      Components of total capital

Current Period

Amount

Amount as per the regulation before

1/1/2014 (*)

COMMON EQUITY TIER I CAPITAL



Paid-in Capital to be Entitled for Compensation after All Creditors

4,972,554


Share Premium

11,880


Reserves

27,166,294


Other Comprehensive Income according to TAS

2,998,060


Profit

1,525,549


      Current Period Profit

1,525,549


      Prior Period Profit

-


Bonus Shares from Associates, Affiliates and Joint-Ventures not Accounted in Current Period's Profit

1,891


Common Equity Tier I Capital Before Deductions

36,676,228


Deductions From Common Equity Tier I Capital



Valuation adjustments calculated as per the article 9. (i) of the Regulation on Bank Capital

-

-

Current and Prior Periods' Losses not Covered by Reserves, and Losses Accounted under Equity according to TAS (-)

387,872

-

Leasehold Improvements on Operational Leases (-)

98,405

-

Goodwill Netted with Deferred Tax Liabilities

-

-

Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights

175,917

219,896

Net Deferred Tax Asset/Liability (-)

-

-

Differences arise when assets and liabilities not held at fair value, are subjected to cash flow hedge accounting

-

-

Total credit losses that  exceed total expected loss calculated according to the Regulation on Calculation of Credit Risk by Internal Ratings Based Approach

-

-

Securitization gains

-

-

Unrealized gains and losses from changes in bank's liabilities' fair values due to changes in creditworthiness

-

-

Net amount of defined benefit plans

-

-

Direct and Indirect Investments of the Bank on its own Tier I Capital (-)

1,923

-

Shares Obtained against Article 56, Paragraph 4 of the Banking Law (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Mortgage Servicing Rights Exceeding the 10% Threshold of Tier I Capital (-)

-

-

Net Deferred Tax Assets arising from Temporary Differences Exceeding the10% Threshold of Tier I Capital (-)

-

-

Amount Exceeding the 15% Threshold of Tier I Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

-

-

The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital not deducted from Tier I Capital (-)

-

-

Mortgage Servicing Rights not deducted (-)

-

-

Excess Amount arising from Deferred Tax Assets from Temporary Differences (-)

-

-

Other items to be Defined by the BRSA (-)

-

-

Deductions from Tier I Capital in cases where there are no adequate Additional Tier I or Tier II Capitals (-)

-



Amount

Amount as per the regulation before

1/1/2014 (*)

Total Deductions from Common Equity Tier I Capital

664,117


Total Common Equity Tier I Capital

36,012,111


ADDITIONAL TIER I CAPITAL



Preferred Stock not Included in Common Equity Tier I Capital and the Related Share Premiums

-


Debt Instruments and the Related Issuance Premiums Defined by the BRSA

-


Debt Instruments and the Related Issuance Premiums Defined by the BRSA (Covered by Temporary Article 4)

-


Additional Tier I Capital before Deductions

-


Deductions from Additional Tier I Capital



Direct and Indirect Investments of the Bank on its own Additional Tier I Capital (-)

-

-

Investments in Equity Instruments Issued by Banks or Financial Institutions Invested in Bank's Additional Tier I Capital and Having Conditions Stated in the Article 7 of the Regulation

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital (-)

-

-

Other items to be defined by the BRSA (-)

-


Items to be Deducted from Tier I Capital during the Transition Period

-


Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

43,979

-

Net Deferred Tax Asset/Liability not deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

-

-

Deduction from Additional Tier I Capital when there is not enough Tier II Capital (-)

-

-

Total Deductions from Additional Tier I Capital

-


Total Additional Tier I Capital

-


Total Tier I Capital (Tier I Capital= Common Equity Tier I Capital + Additional Tier I Capital)

35,968,132


TIER II CAPITAL



Debt Instruments and the Related Issuance Premiums Defined by the BRSA

-


Debt Instruments and the Related Issuance Premiums Defined by the BRSA (Covered by Temporary Article 4)

-


Provisions (Amounts explained in the first paragraph of the article 8 of the Regulation on Bank Capital)

2,678,423


Total Deductions from Tier II Capital

2,678,423


Deductions from Tier II Capital



Direct and Indirect Investments of the Bank on its own Tier II Capital (-)

-

-

Investments in Equity Instruments Issued by Banks and Financial Institutions Invested in Bank's Tier II Capital and Having Conditions Stated in the Article 8 of the Regulation

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-


The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital and Tier II Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of Tier I Capital (-)

-

-

Other items to be defined by the BRSA (-)

-

-

Total Deductions from Tier II Capital

-


Total Tier II Capital

2,678,423


Total Equity (Total Tier I and Tier II Capital)

38,646,555


Total Tier I Capital and Tier II Capital ( Total Equity)





Amount as per the regulation before

1/1/2014 (*)

Loans Granted against the Articles 50 and 51 of the Banking Law (-)

96


Net Book Values of Movables and Immovables Exceeding the Limit Defined in the Article 57, Clause 1 of the Banking Law and the Assets Acquired against Overdue Receivables and Held for Sale but Retained more than Five Years (-)

68,359


Other items to be Defined by the BRSA (-)

42,479


Items to be Deducted from the Sum of Tier I and Tier II Capital (Capital) During the Transition Period



The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not deducted from Tier I Capital, Additional Tier I Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-)

-

-

The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not deducted from Additional Tier I Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-)

-

-

The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital, of the Net Deferred Tax Assets arising from Temporary Differences and of the Mortgage Servicing Rights not deducted from Tier I Capital as per the Temporary Article 2, Clause 2, Paragraph (1) and (2) and Temporary Article 2, Clause 1 of the Regulation (-)

-

-

CAPITAL



Total Capital ( Total of Tier I Capital and Tier II Capital )

38,535,621

-

Total Risk Weighted Assets

242,047,310

-

CAPITAL ADEQUACY RATIOS



CET1 Capital Ratio (%)

14.88

-

Tier I Capital Ratio (%)

14.86

-

Capital Adequacy Ratio (%)

15.92

-

BUFFERS



Bank-specific total CET1 Capital Ratio

6.767

-

Capital Conservation Buffer Ratio (%)

1.250

-

Bank-specific Counter-Cyclical Capital Buffer Ratio (%)

0.017

-

Additional CET1 Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation

7.81

-

Amounts Lower Than Excesses as per Deduction Rules



Remaining Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital

-

-

Remaining Total of Net Long Positions of the Investments in Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% or less of the Issued Share Capital

-

-

Remaining Mortgage Servicing Rights

-

-

Net Deferred Tax Assets arising from Temporary Differences

217,806

-

Limits for Provisions Used in Tier II Capital Calculation



General Loan Provisions for Exposures in Standard Approach (before limit of one hundred and twenty five per ten thousand)

3,289,114

-

General Loan Provisions for Exposures in Standard Approach Limited by 1.25% of  Risk Weighted Assets

2,678,423

-

Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqu  on Calculation of Credit Risk by Internal Ratings Based Approach

-

-

Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqu  on Calculation of Credit Risk by Internal Ratings Based Approach, Limited by 0.6% Risk Weighted Assets

-

-

Debt Instruments Covered by Temporary Article 4 (effective between 1.1.2018-1.1.2022)



Upper Limit for Additional Tier I Capital Items subject to Temporary Article 4

-

-

Amount of Additional Tier I Capital Items Subject to Temporary Article 4 that Exceeds Upper Limit

-

-

Upper Limit for Additional Tier II Capital Items subject to Temporary Article 4

-

-

Amount of Additional Tier II Capital Items Subject to Temporary Article 4 that Exceeds Upper Limit

-

-

(*)    Under this item fully loaded amounts were reported for items that are subject to phasing in according to "Bank Capital Regulation" dated 1 January 2014.

 

Prior Period

Amount

Amount as per the regulation before

1/1/2014 (*)

COMMON EQUITY TIER I CAPITAL



Paid-in Capital to be Entitled for Compensation after All Creditors

4,972,554


Share Premium

11,880


Reserves

23,385,730


Other Comprehensive Income according to TAS

2,759,735


Profit

5,070,549


      Current Period Profit

5,070,549


      Prior Period Profit

-


Bonus Shares from Associates, Affiliates and Joint-Ventures not Accounted in Current Period's Profit

1,891


Common Equity Tier I Capital Before Deductions

36,202,339


Deductions From Common Equity Tier I Capital



Valuation adjustments calculated as per the article 9. (i) of the Regulation on Bank Capital

-

-

Current and Prior Periods' Losses not Covered by Reserves, and Losses Accounted under Equity according to TAS (-)

732,893

-

Leasehold Improvements on Operational Leases (-)

103,037

-

Goodwill Netted with Deferred Tax Liabilities

-

-

Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights

128,006

213,344

Net Deferred Tax Asset/Liability (-)

-

-

Differences arise when assets and liabilities not held at fair value, are subjected to cash flow hedge accounting

-

-

Total credit losses that  exceed total expected loss calculated according to the Regulation on Calculation of Credit Risk by Internal Ratings Based Approach

-

-

Securitization gains

-

-

Unrealized gains and losses from changes in bank's liabilities' fair values due to changes in creditworthiness

-

-

Net amount of defined benefit plans

-

-

Direct and Indirect Investments of the Bank on its own Tier I Capital (-)

1,730

-

Shares Obtained against Article 56, Paragraph 4 of the Banking Law (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Mortgage Servicing Rights Exceeding the 10% Threshold of Tier I Capital (-)

-

-

Net Deferred Tax Assets arising from Temporary Differences Exceeding the10% Threshold of Tier I Capital (-)

-

-

Amount Exceeding the 15% Threshold of Tier I Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

-

-

The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital not deducted from Tier I Capital (-)

-

-

Mortgage Servicing Rights not deducted (-)

-

-

Excess Amount arising from Deferred Tax Assets from Temporary Differences (-)

-

-

Other items to be Defined by the BRSA (-)

-

-

Deductions from Tier I Capital in cases where there are no adequate Additional Tier I or Tier II Capitals (-)

-


Total Deductions from Common Equity Tier I Capital

965,666


Total Common Equity Tier I Capital

35,236,673


ADDITIONAL TIER I CAPITAL



Preferred Stock not Included in Common Equity Tier I Capital and the Related Share Premiums

-


Debt Instruments and the Related Issuance Premiums Defined by the BRSA

-



Amount

Amount as per the regulation before

1/1/2014 (*)

Debt Instruments and the Related Issuance Premiums Defined by the BRSA (Covered by Temporary Article 4)

-


Additional Tier I Capital before Deductions

-


Deductions from Additional Tier I Capital



Direct and Indirect Investments of the Bank on its own Additional Tier I Capital (-)

-

-

Investments in Equity Instruments Issued by Banks or Financial Institutions Invested in Bank's Additional Tier I Capital and Having Conditions Stated in the Article 7 of the Regulation

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital (-)

-

-

Other items to be defined by the BRSA (-)

-


Items to be Deducted from Tier I Capital during the Transition Period

-


Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

85,338

-

Net Deferred Tax Asset/Liability not deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-)

-

-

Deduction from Additional Tier I Capital when there is not enough Tier II Capital (-)

-

-

Total Deductions from Additional Tier I Capital

-


Total Additional Tier I Capital

-


Total Tier I Capital (Tier I Capital= Common Equity Tier I Capital + Additional Tier I Capital)

35,151,335


TIER II CAPITAL



Debt Instruments and the Related Issuance Premiums Defined by the BRSA

-


Debt Instruments and the Related Issuance Premiums Defined by the BRSA (Covered by Temporary Article 4)

-


Provisions (Amounts explained in the first paragraph of the article 8 of the Regulation on Bank Capital)

2,596,082


Total Deductions from Tier II Capital

2,596,082


Deductions from Tier II Capital



Direct and Indirect Investments of the Bank on its own Tier II Capital (-)

-

-

Investments in Equity Instruments Issued by Banks and Financial Institutions Invested in Bank's Tier II Capital and Having Conditions Stated in the Article 8 of the Regulation

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-

-

Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-)

-


The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital and Tier II Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of Tier I Capital (-)

-

-

Other items to be defined by the BRSA (-)

-

-

Total Deductions from Tier II Capital

-


Total Tier II Capital

2,596,082


Total Equity (Total Tier I and Tier II Capital)

37,747,417


Total Tier I Capital and Tier II Capital ( Total Equity)



Loans Granted against the Articles 50 and 51 of the Banking Law (-)

31


Net Book Values of Movables and Immovables Exceeding the Limit Defined in the Article 57, Clause 1 of the Banking Law and the Assets Acquired against Overdue Receivables and Held for Sale but Retained more than Five Years (-)

55,860


Other items to be Defined by the BRSA (-)

36,994



Amount

Amount as per the regulation before

1/1/2014 (*)

Items to be Deducted from the Sum of Tier I and Tier II Capital (Capital) During the Transition Period



The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not deducted from Tier I Capital, Additional Tier I Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-)

-

-

The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not deducted from Additional Tier I Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-)

-

-

The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital, of the Net Deferred Tax Assets arising from Temporary Differences and of the Mortgage Servicing Rights not deducted from Tier I Capital as per the Temporary Article 2, Clause 2, Paragraph (1) and (2) and Temporary Article 2, Clause 1 of the Regulation (-)

-

-

CAPITAL



Total Capital ( Total of Tier I Capital and Tier II Capital )

37,654,532

-

Total Risk Weighted Assets

232,322,344

-

CAPITAL ADEQUACY RATIOS



CET1 Capital Ratio (%)

15.17

-

Tier I Capital Ratio (%)

15.13

-

Capital Adequacy Ratio (%)

16.21

-

BUFFERS



Bank-specific total CET1 Capital Ratio

5.635

-

Capital Conservation Buffer Ratio (%)

0.625

-

Bank-specific Counter-Cyclical Capital Buffer Ratio (%)

0.51

-

Additional CET1 Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation

8.21

-

Amounts Lower Than Excesses as per Deduction Rules



Remaining Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital

-

-

Remaining Total of Net Long Positions of the Investments in Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% or less of the Issued Share Capital

-

-

Remaining Mortgage Servicing Rights

-

-

Net Deferred Tax Assets arising from Temporary Differences

153,379

-

Limits for Provisions Used in Tier II Capital Calculation



General Loan Provisions for Exposures in Standard Approach (before limit of one hundred and twenty five per ten thousand)

3,171,163

-

General Loan Provisions for Exposures in Standard Approach Limited by 1.25% of  Risk Weighted Assets

2,596,082

-

Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqu  on Calculation of Credit Risk by Internal Ratings Based Approach

-

-

Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqu  on Calculation of Credit Risk by Internal Ratings Based Approach, Limited by 0.6% Risk Weighted Assets

-

-

Debt Instruments Covered by Temporary Article 4 (effective between 1.1.2018-1.1.2022)



Upper Limit for Additional Tier I Capital Items subject to Temporary Article 4

-

-

Amount of Additional Tier I Capital Items Subject to Temporary Article 4 that Exceeds Upper Limit

-

-

Upper Limit for Additional Tier II Capital Items subject to Temporary Article 4

-

-

Amount of Additional Tier II Capital Items Subject to Temporary Article 4 that Exceeds Upper Limit

-

-

(*)    Under this item fully loaded amounts were reported for items that are subject to phasing in according to "Bank Capital Regulation" dated 1 January 2014.

The Bank plans its Common Equity Tier 1 (CET1) Capital by considering 10% as the minimum target while considering its additional CET 1 requirements during the phase-in period due to aforementioned regulations.



 

4.1.2      Items included in capital calculation

              None.

4.1.3      Reconciliation of capital items to balance sheet

Current Period

Carrying value

Amount of correction

Value of the capital report

Explanation of differences

Paid-in Capital

4,200,000

772,554

4,972,554

Inflation adjustments included in Paid-in Capital according to  Regulation's Temporary Article 1

Capital Reserves

3,476,874

(852,915)

2,623,959


Other Comprehensive Income According to TAS

3,463,103

(852,915)

2,610,188


  Securities Value Increase Fund

1,202,434

-

1,202,434


  Revaluation Surplus on Tangible

  Assets

1,678,016

-

1,678,016


  Revaluation Surplus on Intangible

  Assets

-

-

-


  Revaluation Surplus on Investment

  Property

-

-

-


  Hedging Reserves (Effective

  Portion)

(86,283)

(80,361)

(166,644)

Items not included in the calculation as per Regulation's Article 9-1-f

  Revaluation Surplus on Assets Held

  for Sale and Assets of Discontinued

  Operations

-

-

-


  Other Capital Reserves

668,936

(772,554)

(103,618)

Inflation adjustments included in Paid-in Capital according to  Regulation's Temporary Article 1

Bonus Shares of Associates, Affiliates and Joint-Ventures

1,891

-

1,891


Share Premium

11,880

-

11,880


Profit Reserves

27,166,294

-

27,166,294


Profit or Loss

1,525,549

-

1,525,549


  Prior Periods Profit/Loss

-

-

-


  Current Period Net Profit/Loss

1,525,549

-

1,525,549


Deductions from Common Equity Tier I Capital (-)

-


276,245

Deductions from Common Equity Tier 1 Capital as per the Regulation

Common Equity Tier I Capital

36,368,717


36,012,111


Subordinated Debts



-


Deductions from Tier I Capital (-)



43,979

Deductions from Tier 1 Capital as per the Regulation

Tier I Capital



35,968,132


Subordinated Debts



-


General Provisions



2,678,423

General Loan Provision added to Tier II Capital as per the Regulation's Article 8

Deductions from Tier II Capital (-)



-

Deductions from Tier II Capital as per the Regulation

Tier II Capital



2,678,423


Deductions from Total Capital (-)



110,934

Deductions from Capital as per the Regulation

Total



38,535,621


 



 

Prior Period

Carrying value

Amount of correction

Value of the capital report

Explanation of differences

Paid-in Capital

4,200,000

772,554

4,972,554

Inflation adjustments included in Paid-in Capital according to  Regulation's Temporary Article 1

Capital Reserves

2,882,801

(842,188)

2,040,613


Other Comprehensive Income According to TAS

2,869,030

(842,188)

2,026,842


  Securities Value Increase Fund

622,143

-

622,143


  Revaluation Surplus on Tangible

  Assets

1,626,437

-

1,626,437


  Revaluation Surplus on Intangible

  Assets

-

-

-


  Revaluation Surplus on Investment

  Property

-

-

-


  Hedging Reserves (Effective

  Portion)

(48,486)

(69,634)

(118,120)

Items not included in the calculation as per Regulation's Article 9-1-f

  Revaluation Surplus on Assets Held

  for Sale and Assets of Discontinued

  Operations

-

-

-


  Other Capital Reserves

668,936

(772,554)

(103,618)

Inflation adjustments included in Paid-in Capital according to  Regulation's Temporary Article 1

Bonus Shares of Associates, Affiliates and Joint-Ventures

1,891

-

1,891


Share Premium

11,880

-

11,880


Profit Reserves

23,385,730

-

23,385,730


Profit or Loss

5,070,549

-

5,070,549


  Prior Periods Profit/Loss

-

-

-


  Current Period Net Profit/Loss

5,070,549

-

5,070,549


Deductions from Common Equity Tier I Capital (-)

-


232,773

Deductions from Common Equity Tier 1 Capital as per the Regulation

Common Equity Tier I Capital

35,539,080


35,236,673


Subordinated Debts



-


Deductions from Tier I Capital (-)



85,338

Deductions from Tier 1 Capital as per the Regulation

Tier I Capital



35,151,335


Subordinated Debts



-


General Provisions



2,596,082

General Loan Provision added to Tier II Capital as per the Regulation's Article 8

Deductions from Tier II Capital (-)



-

Deductions from Tier II Capital as per the Regulation

Tier II Capital



2,596,082


Deductions from Total Capital (-)



92,885

Deductions from Capital as per the Regulation

Total



37,654,532


4.2         Credit risk

Not prepared in compliance with the Article 25 of the communique "Financial Statements and Related Disclosures and Footnotes to be Announced to Public by Banks".



 

4.3         Currency risk

Foreign currency position limit is set in compliance with the legal standard ratio of net foreign currency position. As of 31 March 2017, the Bank's net 'on balance sheet' foreign currency short position amounts to TL 17,877,169 thousands (31 December 2016: TL 17,200,230 thousands), net 'off-balance sheet' foreign currency long position amounts to TL 20,888,357 thousands (31 December 2016: TL 18,461,666 thousands), while net foreign currency long open position amounts to TL 3,011,188 thousands (31 December 2016: TL 1,261,436 thousands).

The foreign currency position risk of the Bank is measured by "standard method" and "value-at-risk (VaR) model". Measurements by standard method are carried out monthly, whereas measurements by "VaR" are done daily. The foreign currency exchange risk is managed through transaction, dealer, desk and stop-loss limits approved by the board of directors for the trading portfolio beside the foreign currency net position standard ratio and the VaR limit.

The Bank's effective exchange rates at the date of balance sheet and for the last five working days of the period announced by the Bank in TL are as follows:


USD

EUR

Foreign currency purchase rates at balance sheet date

3.6350

3.8849

Exchange rates for the days before balance sheet date;



Day 1

3.6250

3.8902

Day 2

3.6430

3.9188

Day 3

3.6150

3.9288

Day 4

3.6100

3.9288

Day 5

3.6100

3.8979

Last 30-days arithmetical average rates

3.6632

3.9147



 

The Bank's currency risk:

Current Period

EUR

USD

Other FCs

Total

Assets





Cash (Cash on Hand, Money in Transit, Purchased

Cheques) and Balances with the Central Bank of Turkey

9,004,826

15,010,932

3,635,107

27,650,865

Banks

3,013,658

6,590,776

553,368

10,157,802

Financial Assets at Fair Value through Profit/Loss

123,245

348,774

-

472,019

Interbank Money Market Placements

174,044

-

-

174,044

Financial Assets Available-for-Sale

77,810

1,330,312

-

1,408,122

Loans (*)

28,773,589

44,768,798

727,053

74,269,440

Investments in Associates, Affiliates and Joint-

  Ventures

3,000,726

-

-

3,000,726

Investments Held-to-Maturity

136,199

11,659,481

-

11,795,680

Derivative Financial Assets Held for Risk Management

630

82,751

-

83,381

Tangible Assets

15

263

-

278

Intangible Assets

-

-

-

-

Other Assets

161,116

470,202

7,296

638,614

Total Assets

44,465,858

80,262,289

4,922,824

129,650,971






Liabilities





Bank Deposits

795,264

2,387,198

170,487

3,352,949

Foreign Currency Deposits

24,774,511

59,530,867

1,898,753

86,204,131

Interbank Money Market Takings

-

-

-

-

Other Fundings

10,833,687

29,076,650

2,049

39,912,386

Securities Issued

2,229,669

10,951,309

807,302

13,988,280

Miscellaneous Payables

44,679

729,370

11,992

786,041

Derivative Financial Liabilities Held for Risk

   Management

18,577

66,222

-

84,799

Other Liabilities (**)

263,309

845,609

2,090,636

3,199,554

Total Liabilities

38,959,696

103,587,225

4,981,219

147,528,140






Net 'On Balance Sheet' Position

5,506,162

(23,324,936)

(58,395)

(17,877,169)

Net 'Off-Balance Sheet' Position

(3,383,166)

24,118,211

153,312

20,888,357

  Derivative Assets

12,442,567

57,828,570

4,040,546

74,311,683

  Derivative Liabilities

15,825,733

33,710,359

3,887,234

53,423,326

  Non-Cash Loans

-

-

-

-

 





Prior Period





Total Assets

42,167,078

75,254,202

2,640,045

120,061,325

Total Liabilities

36,222,880

96,223,885

4,814,790

137,261,555

Net 'On Balance Sheet' Position

5,944,198

(20,969,683)

(2,174,745)

(17,200,230)

Net 'Off-Balance Sheet' Position

(4,526,285)

20,945,530

2,042,421

18,461,666

  Derivative Assets

14,374,090

58,983,474

4,395,536

77,753,100

  Derivative Liabilities

18,900,375

38,037,944

2,353,115

59,291,434

  Non-Cash Loans

-

-

-

-

(*)      The foreign currency-indexed loans amounting TL 6,173,568 thousands included under TL loans in the accompanying balance sheet are presented above under the related foreign currency codes.

(**)   Other liabilities include gold deposits of TL 2,074,209 thousands.



4.4         Interest rate risk

The interest rate risk resulting from balance sheet maturity mismatch presents the possible losses that may arise due to the changes in interest rates of interest sensitive assets and liabilities in the on- and off-balance sheet. Interest sensitivity of assets, liabilities and off-balance sheet items is evaluated during the Weekly Assesment Commitee and Assets-Liabilities Committee meetings taking into consideration the developments in market conditions .

The Bank's interest rate risk is measured by using economic value, economic capital, net interest income, income at risk, market price sensitivity of marketable securities portfolio, duration-gap and sensitivity analysis.

The results are supported by the sensitivity and scenario analysis performed periodically due to the possible instabilities in the markets. Furthermore, the interest rate risk is monitored according to the limits approved by the board of directors.

4.4.1      Interest rate sensitivity of assets, liabilities and off balance sheet items (based on repricing dates)

Current Period

Up to 1 Month

1-3

Months

3-12

Months

1-5 Years

5 Years and Over

Non-Interest Bearing (*)

Total

Assets








Cash (Cash on Hand, Money in Transit,

   Purchased Cheques) and Balances

   with the Central Bank of Turkey

19,458,904

-

-

-

-

11,610,904

31,069,808

Banks

4,147,522

2,030,442

1,014,598

-

-

3,130,036

10,322,598

Financial Assets at Fair Value through

   Profit/Loss

7,644

11,664

13,125

82,112

216,770

2,683,778

3,015,093

Interbank Money Market Placements

174,044

-

-

-

-

-

174,044

Financial Assets Available-for-Sale

2,248,537

3,415,652

9,524,789

2,827,365

1,196,374

2,002,766

21,215,483

Loans

39,555,000

32,228,437

53,442,566

53,736,099

12,746,392

4,204,767

195,913,261

Investments Held-to-Maturity

3,192,624

3,046,382

3,008,183

4,535,503

7,298,676

2,576,213

23,657,581

Other Assets

4,513

160

-

17,333

2,307

15,027,953

15,052,266

Total Assets

68,788,788

40,732,737

67,003,261

61,198,412

21,460,519

41,236,417

300,420,134









Liabilities








Bank Deposits

695,777

118,710

66,000

-

-

3,397,458

4,277,945

Other Deposits

88,581,188

23,902,815

10,971,362

8,701

-

39,701,767

163,165,833

Interbank Money Market Takings

13,954,914

607

-

-

-

4,411

13,959,932

Miscellaneous Payables 

-

-

-

-

-

10,377,942

10,377,942

Securities Issued 

851,574

1,540,144

4,891,326

7,171,339

4,038,684

365,896

18,858,963

Other Fundings

14,246,468

15,514,555

6,837,542

4,280,944

457,150

248,574

41,585,233

Other Liabilities

8,134

14,193

10,512

1,146

-

48,160,301

48,194,286

Total Liabilities

118,338,055

41,091,024

22,776,742

11,462,130

4,495,834

102,256,349

300,420,134









On Balance Sheet Long Position

-

-

44,226,519

49,736,282

16,964,685

-

110,927,486

On Balance Sheet Short Position

(49,549,267)

(358,287)

-

-

-

(61,019,932)

(110,927,486)

Off-Balance Sheet Long Position

13,042,316

17,952,295

5,246,583

5,275,797

4,723,062

-

46,240,053

Off-Balance Sheet Short Position

(2,347,316)

(9,956,222)

(4,715,236)

(17,731,619)

(11,522,926)

-

(46,273,319)

Total Position

(38,854,267)

7,637,786

44,757,866

37,280,460

10,164,821

(61,019,932)

(33,266)

(*)     Interest accruals are also included in non-interest bearing column.



 

Prior Period

Up to 1 Month

1-3

Months

3-12

Months

1-5 Years

5 Years and Over

Non-Interest Bearing (*)

Total

Assets








Cash (Cash on Hand, Money in Transit,

   Purchased Cheques) and Balances

   with the Central Bank of Turkey

17,892,432

-

-

-

-

5,892,702

23,785,134

Banks

3,926,271

1,934,196

1,989,280

-

-

4,469,179

12,318,926

Financial Assets at Fair Value through

   Profit/Loss

7,624

22,679

15,205

26,655

42,663

3,391,602

3,506,428

Interbank Money Market Placements

351,690

-

-

-

-

1

351,691

Financial Assets Available-for-Sale

2,613,361

5,750,771

5,630,419

2,729,802

1,684,778

1,503,438

19,912,569

Loans

43,310,831

22,078,517

55,780,392

48,273,126

12,730,401

3,874,961

186,048,228

Investments Held-to-Maturity

1,025,906

2,002,859

5,554,835

5,329,013

7,297,741

2,429,830

23,640,184

Other Assets

3,886

176

-

16,494

2,306

14,569,378

14,592,240

Total Assets

69,132,001

31,789,198

68,970,131

56,375,090

21,757,889

36,131,091

284,155,400









Liabilities








Bank Deposits

645,554

9,261

207,533

-

-

2,856,198

3,718,546

Other Deposits

88,684,664

20,652,616

11,479,265

180,101

-

36,516,405

157,513,051

Interbank Money Market Takings

9,763,295

-

-

-

-

6,092

9,769,387

Miscellaneous Payables 

-

-

-

-

-

9,088,139

9,088,139

Securities Issued 

506,828

1,335,786

4,599,655

7,523,662

2,143,691

327,257

16,436,879

Other Fundings

13,807,571

14,873,592

6,853,254

4,343,480

164,288

244,183

40,286,368

Other Liabilities

6,058

9,469

20,681

1,686

-

47,305,136

47,343,030

Total Liabilities

113,413,970

36,880,724

23,160,388

12,048,929

2,307,979

96,343,410

284,155,400









On Balance Sheet Long Position

-

-

45,809,743

44,326,161

19,449,910

-

109,585,814

On Balance Sheet Short Position

(44,281,969)

(5,091,526)

-

-

-

(60,212,319)

(109,585,814)

Off-Balance Sheet Long Position

8,000,925

10,184,917

12,492,698

4,640,715

4,244,593

-

39,563,848

Off-Balance Sheet Short Position

(1,313,961)

(4,549,173)

(9,696,072)

(12,903,699)

(11,205,806)

-

(39,668,711)

Total Position

(37,595,005)

544,218

48,606,369

36,063,177

12,488,697

(60,212,319)

(104,863)

(*)     Interest accruals are also included in non-interest bearing column.



 

4.4.2      Average interest rates on monetary financial instruments

Current Period

EUR

USD

JPY

TL


%

%

%

%

Assets





  Cash (Cash on Hand, Money in Transit,

      Purchased Cheques) and Balances with

      the Central Bank of Turkey

-

0.82

-

2.81

  Banks

0.07

0.60

-

9.15

  Financial Assets at Fair Value through

      Profit/Loss

2.17

5.03

-

10.98

  Interbank Money Market Placements

0.01

-

-

-

  Financial Assets Available-for-Sale

-

5.34

-

12.02

  Loans

3.95

5.75

-

15.38

  Investments Held-to-Maturity

0.19

5.54

-

13.19

Liabilities





  Bank Deposits

-

1.50

-

11.09

  Other Deposits

0.85

1.96

0.94

7.80

  Interbank Money Market Takings

-

-

-

11.40

  Miscellaneous Payables 

-

-

-

-

  Securities Issued 

3.58

5.25

0.64

10.69

  Other Fundings

0.97

2.73

-

10.02

 

Prior Period

EUR

USD

JPY

TL


%

%

%

%

Assets





  Cash (Cash on Hand, Money in Transit,

     Purchased Cheques) and Balances with the

     Central Bank of Turkey

-

0.52

-

4.22

  Banks

0.05

0.90

-

9.09

  Financial Assets at Fair Value through

     Profit/Loss

2.18

5.77

-

10.16

  Interbank Money Market Placements

0.05

-

-

-

  Financial Assets Available-for-Sale

-

5.64

-

10.08

  Loans

3.92

5.61

3.41

15.26

  Investments Held-to-Maturity

0.19