Annual Report 2019 Contents Introduction Corporate Profile 2 İşbank in Figures 4 İşbank’s Vision, Objectives, Values and Strategy 6 İşbank Since 1924 8 10 Firsts and Innovations 12 Message from the Chairperson 16 Message from the CEO Activities 20 21 22 24 26 56 64 68 72 74 The Global Economy The Turkish Economy 2019 Developments in the Banking Sector İşbank Banking İşbank and its Activities in 2019 Digital Banking Subsidiaries Corporate Social Responsibility Activities Sustainability at İşbank Annual Report Compliance Opinion İşbank’s Dividend Distribution Policy Summary Report of the Board of Directors Agenda of the Annual Meeting Dividend Distribution Proposal Board of Directors Executive Committee Organization Chart Changes in the Organizational Structure Corporate Governance 76 77 78 79 80 82 84 86 86 Managers of Internal Systems 86 87 91 92 93 Annual General Meeting Documents Information about the Meetings of the Board of Directors İşbank Committees Human Resources Practices at İşbank Information on the Transactions Carried out with İşbank’s Risk Group Activities for which Support Services are Received in Accordance with the Regulation on Procurement of Support Services for Banks Corporate Governance Principles Compliance Statement Corporate Governance Compliance Report Corporate Governance Information Form 94 94 98 Financial Information and Risk Management 104 Audit Committee’s Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period 106 Explanations on Financial Condition, Profitability and Solvency 107 111 112 Unconsolidated Financial Statements as at and For the Year Ended December 31, 2019 with Independent Information on Risk Management Policies Applied per Risk Types İşbank Credit Ratings Audit Report Thereon 214 Consolidated Financial Statements as at and For the Year Ended December 31, 2019 with Independent Audit Report Thereon 332 Financial Highlights and Key Ratios for the Five-Year Period 334 Direct and Indirect Subsidiaries 337 Changes in Share Percentages in Subsidiaries 339 Additional Information Regarding the Related Legislation 340 Information to Shareholders Having celebrated its 95th year in 2019, İşbank is an agile organization with a focus on the future, which is backed by its superiority in technology and innovation combined with its innovative vision. İşbank touches the lives of its millions of customers with its extensive service network and digital channels, constantly works to contribute to their welfare, and produces permanent value for its stakeholders. 1 Introductionİşbank Annual Report 2019 Corporate Profile According to year-end 2019 data, İşbank is the leader among private banks in terms of total assets, total loans, total deposits and shareholders’ equity. The Largest Private Bank Turkey’s leading and the largest private bank, İşbank’s total assets reached TL 468.1 billion as at year-end 2019. İşbank is the leader among private banks also in terms of loans, deposits and shareholders’ equity, as well as asset size. Carrying out its activities with a smooth and sustainable growth strategy based on its commitment to be “the bank closest to its customers”, İşbank boasts an extensive physical and digital service network. As of the end of 2019, İşbank effectively fulfills its customers’ needs with high value-added products, services and solutions via its 24,053 employees, 1,249 domestic and 22 overseas branches, 6,506 domestic Bankamatik The Bank of “Firsts” since 1924 Having reached its 95th year in 2019, İşbank has undertaken a pioneering and guiding role in the Turkish banking industry since the day it was founded. With a firm focus on the future and innovation, İşbank works in line with its vision of developing innovative products, services and applications that are aligned with the global banking trends. Among the many firsts İşbank introduced to Turkey are the first ATM, the first internet branch and the first mobile banking application. Carrying on with its investments in technology, İşbank makes a difference also in new generation digital banking applications. Sustainable and Solid Financial Structure İşbank possesses a solid, healthy and sustainable financial structure. In its history that nearly spans a century, the Bank has always stood by companies, investors, entrepreneurs and individuals, and contributed to the sustainable development of the Turkish economy with its banking products and services. ATMs and mobile channels, which increase their As of year-end 2019, İşbank’s shareholders’ share in total transactions by the day. equity amounted to TL 58.9 billion and its capital adequacy ratio was 17.9%, well above the regulatory limit. The Bank is determined to capitalize on the capability granted to it by its sustainable and solid financial structure and to consolidate its support to its customers. 95th year In 2019, İşbank celebrated its 95th anniversary. 2 İşbank Annual Report 2019 Representing a deep-rooted banking tradition An Organization that Internalized Sustainability Traditionally observing a transparent İşbank implements a holistic perspective in and respectful dialogue based on ethical the management of impacts in environmental, principles with all of its stakeholders, social and governance aspects that make İşbank owns a brand that stands for trust, the primary components of its sustainability respectability and prestige in the eyes of its concept, assessment of environmental stakeholders in national and international and social impacts arising from its lending markets. activities, and constant enhancement of the potential of its human resource through Having undertaken pioneering roles and major training. duties through every stage of the Turkish economy, İşbank produces permanent value for its The Bank’s Sustainability Policy and other policies stakeholders in medium- and long-term, as it does complementary to it form the foundation of the in short-term, with its deep-rooted and powerful operation of this system. business model. The Bank calls its working concept as “İşbank Banking”, which is a solid and productive business model structured with a focus on “Shared and Sustainable Value Generation”. 160,000 Broad-based Shareholding Structure İşbank has nearly 160,000 shareholders. A key characteristic of İşbank is its broad shareholder base made up of approximately 160,000 shareholders and institutional investors. İşbank Members’ Supplementary Pension Fund, an institution that has the membership of nearly 50,000 current and retired bank employees, holds 39.10% of the Bank’s capital. 3 Introductionİşbank Annual Report 2019 İşbank in Figures Being one of the cornerstones of economic development in Turkey and supporting every sector in country since its incorporation, İşbank continues to contribute to the growth of Turkey. Shareholding Structure(*) 32.81% Free Float İşbank Members’ Supplementary Pension Fund 39.10% 28.09% Atatürk Shares (Republican People’s Party) (*) The shareholding structure is provided as of on 31 December 2019. (31 December 2018: Pension Fund 40.47%, Atatürk Shares 28.09%, Free Float 31.44%). 4 İşbank Annual Report 2019 TL 58.9 billion Leader among private banks in terms of shareholders’ equity TL 270.4 billion Leader among private banks in terms of total loans TL 295.9 billion Leader among private banks in terms of total deposits Key Financial Highlights (TL Million) 31.12.2019 31.12.2018 Change (%) Total Assets Loans Deposits 468,059 416,388 270,360 260,316 295,922 245,269 Shareholders' Equity 58,873 49,721 12.4 4.7 (*) 20.7 18.4 (*) To ensure the comparability between periods, in calculation of loan growth, the loan granted to the special purpose entity and classified under “Other Financial Assets at Fair Value Through Profit and Loss” as of 31.12.2019 is excluded from 31.12.2018 loan balance as well. Key Financial Ratios (%) Interest Earning Assets (*) / Total Assets Loans / Total Assets Loans / Deposits NPL Ratio NPL Coverage Ratio Demand Deposits / Total Deposits Shareholders’ Equity / Total Liabilities Capital Adequacy Ratio Return on Average Equity (RoAE) (**) (*) Interest earning assets include TL and FC required reserves at Central Bank. (**) Average figures are calculated based on quarterly balances. 31.12.2019 31.12.2018 89.0 57.8 91.4 6.5 54.7 28.4 12.6 17.9 11.4 89.3 62.5 106.1 4.1 58.7 24.4 11.9 16.5 14.8 5 Introductionİşbank Annual Report 2019 İşbank’s Vision, Objectives, Values and Strategy Our Vision To be the most preferred bank in Turkey by customers, shareholders and employees by maintaining our leading, pioneering and trusted position. Our Objectives To consistently increase the value it creates for shareholders, as a bank that responds to customer needs quickly, effectively and with high-quality solutions and that encourages its employees to achieve a high level of performance in their jobs. For our customers; • to be the bank that is the most preferred service provider in all the sectors and customer groups that we target • to provide our customers comprehensive, reliable and high quality service with our competent employees, extensive branch network and non-branch banking channels • to abide by our high business ethics and principles without compromise For our shareholders; • to consistently increase the value of our shares • to operate with an effective risk management approach For our employees; • to be a preferred employer and to offer our employees programs and training opportunities that will foster their personal and professional development • to propagate of our customer focused approach among all our personnel • to support and encourage loyalty, assuming responsibility and creativity • to deploy an employee hiring, evaluation, appointment and advancement system that is based on competencies and performance and that is fair and trustworthy 6 İşbank Annual Report 2019 In summary, Our Values İşbank’s goal is “to consistently increase the value it creates for shareholders, as a bank that responds to customer needs quickly, effectively and with high-quality solutions and that encourages its employees to achieve a high level of performance in their jobs.” Our values that represent our corporate identity, guide us to reach our vision and objectives, and that are internalized by our employees as their way of work and life are “Leadership, that is powered by a Shared Mindset generated in Solidarity, and that is Trusted under all conditions with a strong Service orientation.” Our Strategy Our strategy is achieving sustainable and profitable growth based on “the bank closest to customers” philosophy in an effort to fulfill our vision and objectives. 7 Introductionİşbank Annual Report 2019 İşbank Since 1924 İşbank, continued to support the real sector and Turkey’s economy steadily also in 2019. In keeping with its founding mission, İşbank has aimed to accept even the smallest amount of savings and to put it toward economic development. Beginning to expand into a country-wide branch network upon its foundation, İşbank was also the first Turkish bank to establish branches abroad, with the first international branches opening in 1932 in Hamburg, Germany and Alexandria, Egypt. In 1950s, İşbank focused on developing its equity participations portfolio. As İşbank’s equity participations became drivers of Turkish industry, the Bank supplied resources in the form of capital and financing to a number of industries with a focus on manufacturing. In 1960s and 1970s, İşbank accelerated the pace of the branch network expansion at the national level. In 1980s, the Bank focused on increasing the number of its overseas branches. At İşbank, the 1980s were characterized by the growing importance of multichannel banking and the Bank started offering an even broader range of products and services to customers. In 1982, İşbank introduced the first ATMs to the Turkish market. Its ATM, named “Bankamatik”, became the generic name for automatic teller machines in Turkey. İşbank further solidified its position as the sector’s pioneer in alternative distribution channels when it launched the country’s first telephone banking service, “Mavi Hat (Blueline)” in 1991, and Turkey’s first online branch in 1997. In subsequent years, İşbank continued to move forward by improving service quality and by developing products tailored to customer expectations. In parallel with these innovations, the Bank also focused on R&D efforts and made maximum use of new technology. Maintaining strong and stable growth, İşbank relocated the Bank’s headquarters from Ankara to İstanbul in 2000. 8 İşbank Annual Report 2019 In 2006, İşbank initiated the Customer- Centric Transformation (MOD) program, aimed at restructuring the Bank with a customer-focused approach. Under this program, many projects and initiatives that resulted in truly revolutionary changes were successfully completed. In line with rapid advances in technology, İşbank continued to improve the innovative multi-channel banking network, allowing customers to utilize the most suitable channel to perform any banking transaction conveniently, quickly and reliably, 24 hours a day, 7 days a week. Initiating the customer-centered Digital Transformation Program with the vision of becoming “Turkey’s Best Digital Bank”, İşbank founded MaxiTech in Silicon Valley in 2016 which will provide support to digital transformation. “Workup by İşbank” entrepreneurship program was initiated under Kolektif House in order to support high potential and technology focused startups. Besides, Innovation Committee was established at İşbank in order to provide extending innovation culture and carrying on with innovation process continually. In 2018, İşbank kept consolidating its leadership in digital banking. While the personal assistant application Maxi that quickly achieved a record number of customer contacts was integrated to the service platform, humanoid robot Pepper began offering service at İstanbul branch, representing the first concrete step of the target of enriching customer service experience delivered at branches with robotic technology. Cooperation activities are intensified with ventures contacted in the entrepreneurship ecosystem. İşbank moved one step further in the innovation universe with the opening of the Shanghai Innovation Center. İşbank, continued to support the real sector and Turkey’s economy steadily also in 2019. In the same period the Bank continued its efforts to improve its value proposition to its customers with its product and service range. With TekCep service, Turkey’s first open banking app which allows to track account movements at different banks via İşCep was put into use for legal entity customers. Apart from this, the Bank offered many innovative products to its customers from all segments, took the digitalization journey to new levels and materialized further its support for entrepreneurship. 9 Introductionİşbank Annual Report 2019 Firsts and Innovations İşbank; • Developed and introduced the “Money Box” account to Turkey to foster a culture of savings. • Introduced the first use of cheques as a convenient means of carrying out regular payments. • Launched electronic banking in Turkey, with the introduction of the country’s first ATMs: Bankamatik. • Became the first Turkish bank to open branches in Europe and TRNC • Rolled out the first investment account service in the Turkish financial services industry. • Launched Turkey’s first mutual fund. • Became Turkey’s first bank to introduce trading services of investment securities. • Initiated the first interactive telephone banking service. • Opened the first online branch. • Developed and rolled out the first application-based native mobile banking service (İşCep) for customers. • Offered the first term deposit product for customers in Turkey, “Floating Account” whose yields are indexed to the TRLIBOR market. • Turkey’s first social responsibility- focused mutual fund, “TEMA Environmental Variable Fund,” investing in environmentally friendly companies. • Launched the “Environmentally Friendly Housing Loan” product to support the development of environmentally friendly technologies in the housing sector. • Introduced Mobile Signature, enabling customers to pay off loans without having to visit a branch and to withdraw cash, without using a debit or credit card. • The integrated “Mobil Borsa” feature within İşCep gives access to real-time stock exchange data and allows stock exchange transactions in that without a dedicated application. • Developed and introduced “Mobile Key (Cep Anahtar),” a mobile phone application that strengthens the transaction security of the online branch and mobile banking channels, and also enables cash withdrawals from Bankamatik (ATMs) without the need for a card. • Developed “Üstü Kalsın (Keep the Change)” an innovative application that helps customers to grow their savings by rounding up outstanding credit card debt balances to a specified limit, and uses the difference to purchase mutual fund shares. • Developed the “Kur Korumalı (Opsiyonlu) Döviz Kredisi (Exchange Rate Protected Foreign Currency Loan with Option),” a foreign currency loan with a guaranteed exchange rate option that protects the borrower against excessive increases in the exchange rate; “Sabit Faizli Rotatif (BCH) Kredi (Fixed Rate Revolving Loan),” a fixed-interest-rate revolving line of credit for those who do not want to be affected by fluctuating interest rates; and Chinese Yuan credit and loans for customers who conduct business with China. 10 İşbank Annual Report 2019 • Introduced the “Temassız Kartla Para • Launched “Sosyal Hesap” (Social Çekme (Money Withdrawal by Contactless Card),” a contactless card application that enables users to withdraw cash with a single key press. • Designed and opened a specialized branch with a completely different and unique structure to deliver services exclusively to companies backed by foreign capital, which is an unprecedented service offering in Turkey. • Became the first privately-owned bank in Turkey to introduce the 2B Loan. • Launched the “Şipşak” product that allows customers to carry out instant shopping by scanning a QR code in print media, such as newspapers, magazines, banners or catalogues. • Launched the “Anında Alışveriş Kredisi (Instant Shopping Loan)” product that allows customers to use consumer loan instantly during the payment process without leaving the web site in which they shop by the use of API (Application Programming Interface) technology. • Introduced the “İşCepMatik”, which is a new generation ATM device designed for its customers, allowing them to withdraw cash through Bluetooth or QR code technologies without having to carry an ATM card or entering a passcode. • Became the first bank working online in Turkey that has been integrated into the invoice registry center with the “Supplier Financing” application that allows customers to use invoice amounts before their terms by discounting. • Launched “Exporter Card” product which is specifically designed for SMEs who make their export transactions via the Bank. Account) whereby İşCep users can ask for a money transfer for meals, presents, entertainment, school fees and similar purposes into a designated account from their families and friends, or whereby they can quickly respond to such requests. • Became the first bank in Turkish capital markets that issued a domestic subordinated bond denominated in TL. • Allowed to make stock exchange transactions and futures transactions in Europe’s, America’s and Asia’s leading 26 stock markets such as NASDAQ, NYSE, XETRA, LSE, ICE, SEHK with İşCep International Markets service. • Introduced Digital Moneybox to its customers which is a first in Turkey in the way of transformation of the Internet of Things (IoT) and a FinTech initiative into a banking product. • Introduced Pepper, the humanoid robot that understands and speaks Turkish, at its İstanbul branch. • Set up the Agile Atelier, one of the few implementations in the global banking sector. • Launched Maxi, the personal assistant application based on AI, on its mobile banking service (İşCep). • “TekCep” service, Turkey’s first open banking app which allows to track their account movements at different banks via İşCep was put into use for legal entity customers. • Daily Deposit Account, which can be used on non-branch channels and earns interest for one-day terms was added the product range. 11 Introductionİşbank Annual Report 2019 Message from the Chairperson Its collective capital structure is one of the key factors that enable İşbank to preserve and build on its values and principles and to carry them into the future. 60 thousand The İşbank Group employs nearly 60,000 people. Esteemed shareholders, Standing for trust and stability in the eyes of all segments of the society, İşbank proudly celebrated its 95th year in 2019. Its collective capital structure made up of approximately 160,000 shareholders is one of the key factors that enable İşbank to preserve its values and principles, and even more importantly, to build on them and carry them into the future. This robust structure also played a major part in the internalization of corporate governance, transparency, fairness and disciplined work for generations in this organization. Füsun Tümsavaş Chairperson 12 İşbank Annual Report 2019 İşbank keeps working to fulfill its responsibilities towards the society, our employees, shareholders and other stakeholders, to help build the future, and to contribute to economic welfare. İşbank Banking İşbank’s value creation model We are one of the biggest economic actors of our country. In terms of the financial strength it possesses, İşbank is one of the biggest economic actors of our country. This identity is a reflection of the added value produced by banking operations, and the extensive and great economic power the Bank represents together with its subsidiaries. Consisting of 112 companies, İşbank Group today has approximately 60 thousand employees. Besides the employment it creates, İşbank Group produces solid added value for our country with its trade volume, total exports, R&D and innovation projects, sustainability initiatives, and social benefits it provides. We are focused on innovation and on the future. Acquiring a tangible dimension through our value creation model that we call “İşbank Banking”, our Bank keeps working to fulfill its responsibilities towards the society, our employees, shareholders and other stakeholders, to help build the future, and to contribute to economic welfare. İşbank embraces it as a fundamental principle to be a socially responsible economic actor and an attentive employer, which are also integral and complementary components of its business philosophy. Focusing on the future by correctly using all capital elements at its disposal and realizing initiatives that will mold the future competition, İşbank has undertaken a pioneering role in redefining the mode of doing business in the banking sector as it leapfrogged in digitalization. Our Bank’s activities in the startup ecosystem serve as another reflection of İşbank’s focus on the future. The rapid developments in the startup ecosystem that run concurrently with digitalization are reshaping a substantial portion of economic life, as well as of the banking business. Our Bank decidedly remains a telling, dynamic and proactive actor in these areas on the back of the collaborations it develops. We are introducing a new perspective to our sustainability efforts. İşbank set its approach to sustainability on the basis of its long-standing systematic efforts, introduced the necessary standards and made significant progress in this area. A signatory of the UN Global Compact, our Bank also supports the Sustainable Development Goals adopted in 2015 to guide investments and efforts targeted at sustainable development, and directly or indirectly contributes to many of these goals. 13 Introductionİşbank Annual Report 2019 Message from the Chairperson While rapidly building on its activities associated with sustainable banking, our Bank also creates positive impact with loans extended in a number of fields ranging from the financing of renewable energy to energy efficiency and increasing women employment. Museum In 2019 the Economic Independence Museum of İşbank was opened. While rapidly building on its activities associated with sustainable banking, our Bank also creates positive impact with loans extended in a number of fields ranging from the financing of renewable energy to energy efficiency and increasing women employment. At our Bank, which strongly supports initiatives aimed at increased participation of women in business life, the ratio of women employees was 51% and the ratio of women managers was 45% as at year-end 2019. Another important step related to sustainability has been the first Integrated Report published by our Bank in 2019. Prepared in accordance with the reporting criteria of the International Integrated Reporting Council, this report has presented İşbank’s activities and performance with an integrated perspective. We are charging ahead with our social responsibility projects. Ever since its incorporation, our Bank has played a pioneering role in driving social progress. İşbank is an organization targeting to bring the added value it creates while putting into life far-reaching, long- lived and sustainable social responsibility projects to the broadest segment of the society possible. The highlights of our social responsibility initiatives include “One Million Students, One Million Books” under which 14 million books were given to primary school children over the course of 12 years, main sponsorship of the Turkish Chess Federation whereby chess classes have been opened all over Turkey, “”81 Students from 81 Cities” project carried on in collaboration with Darüşşafaka, and a wide variety of culture and arts activities ranging from performance arts to museums and archeology carried out under the İş Sanat roof. In addition, our subsidiary Kültür 14 İşbank Annual Report 2019 İşbank is an organization targeting to bring the added value it creates while putting into life far-reaching, longlived and sustainable social responsibility projects to the broadest segment of the society possible. Yayınları publishing house brings a large number of quality books to the readers. The inauguration of the Economic Independence Museum of İşbank, our second museum after the İşbank Museum opened in 2007, was another highlight of 2019. Set in our historic building located in Ulus, Ankara, which also served as the Head Office building of İşbank, the museum showcases our Bank’s deep-rooted corporate history and Turkey’s economic development for the visitors. In 2019, our Bank signed its name also under a project that will lead the development of scientific and academic research programs and their sponsorship by organizations. The first Turkish Arctic Scientific Expedition sponsored by our Bank and led by İstanbul Technical University’s Polar Research Center has been a source of pride for us all. Being Turkey’s largest private sector bank, İşbank will keep standing by its customers with its products and services and producing value by putting its resources to use for the country’s sustainable development. On behalf of the Board of Directors and myself, I would like to take this opportunity to express my gratitude to all our stakeholders and especially to our employees, who have played a part in bringing İşbank to its current position. Yours sincerely, Füsun Tümsavaş Chairperson 15 Introductionİşbank Annual Report 2019 Message from the CEO Following the contraction period that began in the last quarter of 2018 in Turkey, economic activity adopted a recovery trend from the second half of 2019. 95th year İşbank celebrated its 95th anniversary. Esteemed shareholders, customers, employees and business partners of İşbank, In 2019, loss of pace in global economy became pronounced with the effect of trade wars, Brexit- related developments, and aggravated geopolitical risks. Low inflation in connection with weak demand conditions and moderate commodity prices accompanying decelerated global economy led the central banks of developed countries to return to monetary policies supporting economic activity. This paved the way for a global conjuncture that is more positive than was expected at the onset of 2019 in terms of access to international liquidity for emerging countries where Turkey belongs. Adnan Bali Chief Executive Officer 16 İşbank Annual Report 2019 363.4 billion TL total funding we have supplied to the economy in the form of loans amounted to TL 363.4 billion in 2019. Delivery of innovative products to the customers, our collaboration with technology service providers, employment of artificial intelligence, and our investments in innovation at our Bank come to the forefront as the determinants of our digitalization journey. In Turkey, on the other hand, following the contraction period that began in the last quarter of 2018, economic activity adopted a recovery trend from the second half of 2019, with the added effect of the CBRT’s 1,200 bps reduction in the policy rate. Turkey’s Bank is stronger than ever in its 95th year… Having celebrated its 95th anniversary in 2019, İşbank retained its title as Turkey’s leading private bank in terms of total assets, shareholders’ equity, total loans and total deposits, and fittingly sustained its uninterrupted support to the Turkish economy. Continuing to stand by the real sector in line with its healthy and sustainable growth strategy, our Bank actively fulfilled households’ financing needs, and their demands for banking products and services. While our total assets grew by 12.4% year- over-year to TL 468.1 billion in 2019, our total lending went up by 4.7% to reach TL 270.4 billion. Including the non-cash loans worth TL 93.0 billion extended to our customers, total funding we have supplied to the economy in the form of loans amounted to TL 363.4 billion in the reporting period. In 2019, all necessary support continued to be provided to the SMEs. Total lending to the SMEs added up to TL 58.7 billion as at year-end 2019. The array of products and services we are delivering digitally also expanded in 2019, and our personal loan disbursements reached TL 63.8 billion, up by 9.6%. Despite the challenging conditions of 2019, our Bank’s NPL ratio remained below the average NPL ratio among private banks and stood at 6.5%. With the contribution lent by our total deposits, extensive branch network and digital banking channels as well, our total deposits expanded by 20.7% and amounted to TL 295.9 billion at the end of 2019. Having achieved its targets to a large extent at the end of 2019, our Bank posted TL 6.1 billion in net profit for the period. In the same timeframe, İşbank’s shareholders’ equity reached TL 58.9 billion, while its capital adequacy ratio, which was registered as 17.9%, continued to provide the capacity that will back progress without compromising from the growth strategy. İşbank authored significant achievements in digital banking also in 2019. In 2019, as İşbank, we have not only exhibited a solid financial performance but also continued to improve and diversify the services we offer to our customers in all respects on the back of our fast- moving efforts in digitalization. We have realized solid investments for the future such as bringing the speed and convenience granted by technology to our customers at the maximum extent possible, and redesigning our modes of doing business as required by technological transformation. İşbank’s service concept espouses an approach that seeks to constantly enhance customer experience by developing high added-value products and services. Increased delivery of innovative products to the customers, our close collaboration with technology service providers, 17 Introductionİşbank Annual Report 2019 Message from the CEO Workup Entrepreneurship Program’s graduates reached 49 in number in 2019. 8.1 million Number of total digital customers employment of artificial intelligence, and our investments in innovation at our Bank come to the forefront as the determinants of our digitalization journey. While the number of our Bank’s active mobile banking customers reached 7.8 million in 2019, the number of total digital customers exceeded 8.1 million, and the share of non-branch channels in total transactions reached 92%. Maxi, the personal assistant that is one of the most important outputs of the Artificial Intelligence projects at our Bank, carried out more than 22 million dialogues with 4.8 million customers as at year-end 2019, and the total number of its capabilities went up to 164. Turkey’s first mobile banking app, İşCep was enriched with 44 new functions in 2019 and the total number of its functions rose to 316. One other important step in 2019 has been the TekCep service, which allows legal entity customers to track their account movements at different banks via İşCep. Work is ongoing to offer TekCep, which is one of the most remarkable examples of open banking in Turkey, to our retail customers as well. While the share of branches within total transactions relatively decreased with all these efforts in the field of digitalization, our branches preserved their importance being our main service points where we contact our customers face- to-face. In the period ahead, we will continue to manage and build on our branch network with a focus on productivity. Supporting entrepreneurship is embedded in İşbank’s genes. Founded by Mustafa Kemal Atatürk for undertaking a pioneering role in the establishment of a national economy, İşbank has supported numerous entrepreneurs since the early years of the Turkish Republic. Also today, our Bank continues to stand by the entrepreneurial community based on a holistic perspective as evidenced in the Workup Entrepreneurship Program, Arya Women Investment Platform initiated to support women entrepreneurs, the collaboration with the Turkish Entrepreneurship Foundation (GİRVAK) seeking to encourage entrepreneurship at early ages, and supporting the entrepreneurs in agribusiness. Initiated in 2017 to develop the business ideas and grow the businesses of technology-focused startups, which have become significant players of today’s economy and which are also important for the Turkish economy, Workup Entrepreneurship Program’s graduates reached 49 in number in 2019. On the other hand, Maxis Innovative Venture Capital Fund, to which our Bank has committed to allocate funds up to TL 100 million and which contributes to the implementation of new business ideas, began supporting ventures during 2019. Our Bank’s efforts in this field are not confined to Turkey’s national borders. The startup ecosystem and technological innovations are being followed- 18 İşbank Annual Report 2019 İşbank is ready for the future with its competent human resources, which inherited a century-old experience and knowledge. USD 50 million Turkey’s first green bond with a nominal amount of USD 50 million, took place in 2019. up via our innovation centers set up in the Silicon Valley, in Shanghai/China and in the Turkish Republic of Northern Cyprus. İşbank will focus on working for Turkey and growing with Turkey, as it has been doing for 95 years. Being a bank enjoying high global esteem… Through the deals signed in May and November during the reporting period, İşbank secured syndicated loans with a total amount of USD 1.9 billion to be used for foreign trade finance. In 2019, our Bank also carried on with Tier II capital subordinated debts. With two issues with a final maturity of 10 years and in the amounts of TL 800 million and TL 350 million offered to qualified investors, the Bank’s Tier-II subordinated debt volume in Turkish lira terms reached TL 2.3 billion. In 2019, the Bank issued a 5-year covered bond with a nominal amount of TL 400 million within its Global Covered Bond Program, and also Turkey’s first green bond with a nominal amount of USD 50 million. Inheriting a century-old experience and knowledge that will support our focus mentioned above, our human resource is strong, competent, and more importantly, innovative. I wish that 2020 will be a successful and productive year for our country, our Bank and stakeholders. On behalf of our Bank, I thank our shareholders, customers, all our business partners, and our employees who played the biggest part in the results achieved. Yours sincerely, We are ready for the future with our powerful, competent and innovative human resource. Adnan Bali Chief Executive Officer The developments in global economy hint that the year ahead will also be filled with risks and opportunities. The Turkish economy presents a strong and stellar future in the medium and long term, and embodies a significant potential. 19 Introductionİşbank Annual Report 2019 The Fed and the ECB Central banks pursued expansionary policies in 2019. Central banks pursued expansionary policies in 2019. Protectionist trade policies and the low levels of inflation due to weak demand conditions and moderate course of commodity prices, led the major central banks to loosen their monetary policies. While the Fed implemented three rate cuts in 2019, the ECB not only decreased the policy rate, but also restarted asset purchases. In the reporting period, central banks of many emerging countries also made decisions to reduce rates. In line with the news flow regarding trade wars, changes in monetary policies and increased geopolitical risks, global capital flows followed a fluctuating course. Outlook In 2020, global economy is anticipated to gain some momentum in conjunction with the recovery in developing countries. Developments in global trade relations and geopolitical risks will continue to drive global risk perception also in 2020, as they were in 2019. Nonetheless, improved global liquidity conditions with the support of expansionary monetary policies will possibly strengthen capital flows to emerging countries. The Global Economy In 2019, the news flow regarding trade wars, changes in monetary policies, and geopolitical risks drove global capital flows. Global economy slowed down in 2019. Loss of pace in global economic activity that gave its first signals in 2018 spread across countries, while deepening particularly through the manufacturing industry channel. Protectionist trade policies and high geopolitical tensions caused globally weak investment expenditures by diminishing investor confidence, and increased the pressure on global growth. Although the US economy lost some pace in 2019, it has exhibited an outlook more positive than what was projected at the onset of the year. The inflation rate in the country floated below the target rate of 2%. The improvement in the labor market continued. The scene to the Brexit-related developments, Europe had weak economic activity throughout the year. As a result of the pressure that trade measures created on exports coupled with weakened domestic demand, the growth rate of the Chinese economy kept declining in 2019. In other emerging markets, however, country-specific conditions led decoupled growth performances. 20 İşbank Annual Report 2019 The Turkish Economy The CBRT began implementing rate cuts in the second half of 2019. Macroeconomic developments in 2019 Budget deficit continued to widen. Rebalancing in economic activity became more evident. Having contracted annually for three quarters starting from the last quarter of 2018, the Turkish economy resumed growth trend in the second half of 2019. While net exports acted as the greatest contributor to economic activity in the first half of the year, investment expenditures put significant downward pressure on growth. Economic activity somewhat recovered with the support of consumption expenditures in the third quarter of the year although the contribution of net exports turned negative. The gradual recovery in economic activity gained momentum in the last quarter of the year with the low base effect, in addition to the rate cuts implemented by the CBRT. Against this backdrop, after contracting by 1.9% in the first half of 2019, the Turkish economy achieved 0.9% growth for the whole year. The slowdown in economic activity was also reflected on external balance data. While imports volume dwindled by 9.1% in 2019, exports volume showed a limited expansion of 2.1%, which positively affected the current account balance. As a result of weakened domestic demand, coupled with the lower oil prices, 12-month cumulative current account began posting a surplus from June 2019 onwards, which reached a historic high of USD 5.4 billion as of September 2019. In the months that followed, the upward trend in domestic demand caused imports to widen and therefore started to drag down the current account surplus. During 2019 when budget deficit expanded, one-off revenues limited the deterioration of the budget outlook. Inflation was on a downward trend in the second half of the year. In 2019, inflation displayed a downward trend due to weak domestic demand conditions, a relatively stable Turkish lira, high base effect, and moderate course of commodity prices. Having fallen down to its lowest level since December 2016 with 8.55% in October, annual consumer inflation was realized as 11.84% in December, while the annual rise in domestic PPI that reflects cost inflation was 7.36%. The CBRT quickly decreased its policy rate by taking strong steps. In parallel with the improvement in inflation and easier global liquidity conditions, the CBRT initiated rate cuts in the second half of 2019. Standing at 24% at the onset of 2019, the policy rate was brought down to 12% with cuts adding up to 1,200 bps in total, which were carried out in July, September, October and December. In addition, the CBRT also implemented policies pursuing financial stability through the changes made to required reserve ratios and practices throughout the year. GDP - Sectoral Growth Rates (%)(*) CPI and FC Basket (**) (Monthly Annual Changes, %) Agriculture Industry Services Construction GDP PPI CPI FC Basket (right axis) 12 8 4 0 -4 -8 -12 2018 2019 8 1 - J 8 1 - F 8 1 - M 8 1 - A 8 1 - M 8 1 - J 8 1 - J 8 1 - A 8 1 - S 8 1 - O 8 1 - N 8 1 - D 9 1 - J 9 1 - F 9 1 - M 9 1 - A 9 1 - M 9 1 - J 9 1 - J 9 1 - A 9 1 - S 9 1 - O 9 1 - N 9 1 - D (*) Based on chain linked volume index (**) As of January-September. 21 Activitiesİşbank Annual Report 2019 2019 Developments in the Banking Sector Following the CBRT’s rate cuts in 2019, a marked increase began to be observed in TL loans in the overall banking sector. Limited rise in credit volume FX deposit volume expanded rapidly. With the effect of ongoing uncertainties, the share of FX deposits to total deposit volume, which makes up the main funding source of the banking sector, increased in 2019. FX deposit volume grew by 28.9% as compared to year-end 2018, while the rise in TL deposit volume was 19% in the same period. Thus, the increase in total deposit volume was registered as 23.8% for the whole year. Credit expansion in the banking sector was weak in the first half of 2019 due to high interest rates, continued tendency of companies to reduce their debts, and low household demand. Following the CBRT’s rate cuts in the second half of the year, a marked increase began to be observed in TL loans across the sector. In the twelve months to year- end 2019, TL loans expanded by 14.7% across the banking sector. FX loans, on the other hand, continued to decline throughout 2019 due to the pronounced weakness in investment appetite as well as the tendency to deleverage. Against this backdrop, the rise in total credit volume was registered as 10.4% as compared with year-end 2018. 14.7% TL loans grew by 14.7% in the overall banking sector. 22 İşbank Annual Report 2019 In 2020, gradual recovery in domestic economic activity is projected to continue particularly as the delayed consumption expenditures step in. The capital adequacy ratio of the banking sector went up to 18.4% in 2019. The Turkish banking sector preserves its solid outlook. Future outlook Capital adequacy ratio of the banking sector, which was 17.4% at the end of 2018, went up to 18.4% at the end of 2019. With the effect of restructurings and the increase in NPL ratio, the overall sector’s net profit shrank by 10.4% as compared to 2018 and went down to TL 46.6 billion. In 2020, gradual recovery in domestic economic activity is projected to continue particularly as the delayed consumption expenditures step in. In this period, it is considered that net exports will not provide a positive contribution to growth because of the downward pressure that the weak outlook of European economies creates on Turkey’s exports, higher imports that will result from recovered domestic demand, and the high base effect from 2019. Deposits and Loans in 2019 (*) (Change Compared to Year-end, %) 30 20 10 0 -10 J F M A M J J A S O N D TL Deposits FC Deposits Loans (*) Source: BRSA Monthly Bulletin (excluding participation banks) 23 Activitiesİşbank Annual Report 2019 İşbank Banking Financial Capital Human Capital Natural Capital Intellectual Capital Social and Relationship Capital Manufactured Capital İşbank’s Vision and Strategy Effective risk management Digital transformation Responsible finance Permanent undertaking to Turkey s e i t i r o i r P r e d o h e k a t S l Ethical and transparent banking İşbank Banking Producing shared and sustainable value Customer focus E x t e r n a l i t i e s Solid financial performance Happy and qualified employees Long-lasting and inclusive social investment programs Value Created Average return on equity 11.4% Total loans (cash & non-cash) TL 363.4 billion Women ratio in management 45%(*) Turnover ratio 1.9% Share of renewable energy projects in total energy generation projects portfolio 68% Number of digital banking clients 8.1 million Share of non- branch channels 92.2% Customers 19.5 million Total number of branches 1,271 Customer satisfaction ratio 81.2% Number of Bankamatik ATMs 6,506 (*) Except for the Senior Management, employees with the title of 2nd Manager and above are taken into consideration. 24 İşbank Annual Report 2019 • its intellectual capital nurtured by its digital transformation capabilities as well as its know- how generated by its deep-rooted history and facilitating innovative product and service development by the Bank, • its manufactured capital made up of its physical infrastructure that enriches its service quality, • its social and relationship capital creating added value for its stakeholders. İşbank secures optimum scales in the way it brings together the opportunities emanating from its robust financial structure, its human resource and their competencies, its strong relationships with stakeholders, its know-how, its brand equity associated with prestige and trust, its extensive physical and digital service network, its environment-friendly products and services, and creates all-round value. Directing a part of its produced value to the development and improvement efforts, the Bank consolidates capital elements and its value creation capacity within the frame of this cycle. Publishing sustainability reports since 2012, İşbank released its first integrated report in 2019. Produced in view of the non-financial capital elements, as well as financial capital in line with the capital classification suggested by the International Integrated Reporting Council (IIRC), the report presents a holistic viewpoint with respect to the Bank’s activities and performance in these matters. 2018 Integrated Report that also covers İşbank’s value creation model based on integrated thinking is available on the website. Having assumed pioneering roles and major duties in every phase of the Turkish economy, İşbank produced permanent value for its stakeholders with a deep-rooted and powerful business model that lets the Bank to tackle its activities with a long-term perspective. İŞBANK BANKING – A POWERFUL BUSINESS MODEL PRODUCING SHARED AND SUSTAINABLE VALUE Ever since its incorporation, İşbank has been delivering need-oriented and pioneering services designed to drive the development of the national economy and the society, and has adopted a long- term perspective for its activities. İşbank Banking notion is built around the axis of producing shared and sustainable value and incorporates the elements of digital transformation, permanent commitment to Turkey, responsible finance, customer focus, effective risk management, solid financial performance, ethical and transparent banking, happy and qualified employees, long-lasting and inclusive social investment programs. İşbank is focused on managing the following with an integrated approach and on producing value: • its financial capital based on its robust financial structure, • its human capital molded by its competent and experienced employees, • its natural capital covering its resource management concept, environment-friendly products and services, 25 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 İşbank maintained its leadership among private banks in terms of total assets, total loans, total deposits and shareholders’ equity. İşbank maintained its leadership among private banks in terms of total assets, total loans, total deposits and shareholders’ equity. İşbank’s total assets grew by 12.4% compared to the end of the previous year and reached TL 468.1 billion. Total loans, which grew by 4.7% compared to the end of the previous year, reached TL 270.4 billion as at year-end 2019 and the share of loans in total assets stood at 57.8%. Non-performing loan ratio remained below the average of private banks, and stood at 6.5% at year-end 2019. TL 468.1 billion İşbank’s total assets reached TL 468.1 billion. Total Assets (TL Million) 468,059 416,388 Total Loans (TL Million) 260,316 270,360 12.4% Increase 4.7%(*) Increase 2018 2019 2018 2019 Total Deposits (TL Million) 295,922 245,269 Shareholders’ Equity (TL Million) 58,873 49,721 20.7% Increase 18.4% Increase 2018 2019 2018 2019 (*) To ensure the comparability between periods, in calculation of loan growth, the loan granted to the special purpose entity and classified under “Other Financial Assets at Fair Value Through Profit and Loss” as of 31.12.2019 is excluded from 31.12.2018 loan balance as well. 26 İşbank Annual Report 2019 Total deposits of the Bank grew by 20.7% compared to year-end 2018 and reached TL 295.9 billion. Ranking first among private banks in terms of total deposits, TL and FC deposits, İşbank continued to be the leader among private banks also in demand deposits and TL savings deposits. Share of deposits in total liabilities stood at 63.2% as at 2019 year-end. In 2019, İşbank also continued to utilize non-deposit funding opportunities both in domestic and international markets, aiming to diversify its funding base with a cost sensitive approach as at year-end 2019, non-deposit funds, which comprised of repo transactions, funds borrowed, securities issued in domestic and international markets and subordinated debts, accounted for 18.4% of total liabilities. İşbank’s shareholders’ equity grew by 18.4% in 2019 and rose to TL 58.9 billion. The capital adequacy ratio of the Bank was 17.9% at the end of the year, above the regulatory limit. Having the most extensive distribution network among private banks with its 1,271 branches and 6,506 Bankamatik ATMs as at year-end 2019, İşbank continued to position its branches and non- branch channels so as to complement one another. The number of customers using İşCep, Turkey’s first mobile banking application, topped 7.8 million at the end of 2019. 17.9% İşbank had a capital adequacy ratio of 17.9%. Asset Composition (%) 2019 2018 Cash and Banks Securities Loans Subsidiaries and Participations Other Total Liability Composition (%) Deposits Funds Borrowed and Money Market Funds (*) Other Liabilities Shareholders’ Equity Total (*) Includes securities issued and subordinated debts in TL and FC. 14.1 18.0 57.8 4.5 5.6 100 2019 63.2 18.4 5.8 12.6 100 11.6 16.4 62.5 4.2 5.3 100 2018 58.9 22.7 6.5 11.9 100 27 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 CORPORATE BANKING İşbank is one of the pioneers in corporate banking. Remaining as the customers’ preferred choice in corporate banking in Turkey, İşbank delivers custom-tailored services and financing solutions, designed to cater to the given sector’s needs, to local corporate companies and large multinational companies. In 2019, İşbank continued to act as the main solution partner of its corporate banking customers drawing on its financial strength, know-how and deep-rooted experience. İşbank offers service to its corporate banking customers at 10 dedicated corporate branches, four of which are located in İstanbul, and at its Multinationals Branch, which carries out its activities in İstanbul and is designed to serve exclusively foreign capital companies. Allocating its resources to its customers’ operations and needs, İşbank reinforced its pioneering position in corporate banking business line amid the volatile market conditions of 2019 on the back of its functional product range and financing solutions custom-developed for the customers and sectors. İşbank has defined its key priorities in corporate banking business line in 2019 as follows: • improving asset quality by pursuing effective credit risk management policies, • maximizing the value to be created through efficient capital utilization, consolidating the capital through increased profitability and productivity in every aspect, • achieving enhanced customer satisfaction, increased sales performance and higher profitability making use of the improvements attained in business processes thanks to digitalization. A key component of İşbank’s corporate banking strategy is to be involved in the entire ecosystem of businesses so as to stand by the customers in every field based on a holistic approach to service, 28 and providing solution partnership along the end-to-end business relationship chain. The Bank targeted to increase the integration of payment and collection transactions, and worked towards getting higher share from its customers’ cash flows. Expertise and experience İşbank has adopted a service approach based on expertise and experience in corporate banking. Being the primary solution partner of corporate customers, the Bank has assumed the role of principal bank in fulfilling their strategic and financial needs, and continued to offer digital solutions catering to customers’ needs in all banking transactions. İşbank aspires to effectively fulfill customer needs and expectations by making use of the innovations in technology. Digitalization is a high priority topic for the corporate banking business line. The initiatives carried out in this department will maintain their importance in 2020. Through technology- driven process improvements and digitalization initiatives, İşbank will steer its corporate banking teams to carry out a greater number of proactive customer visits and to increase cross-selling opportunities with companies in which the Bank targets to achieve higher penetration. Project Finance In 2019, investment appetite plummeted amid economic volatilities in domestic and international markets, shrank domestic demand, and in the absence of economic growth. In such a market environment, balance sheets of real sector actors with high FC indebtedness showed results that might negatively impact corporate banking operations in a number of ways. With the effect of the economic environment described above, businesses preferred to postpone their investments in 2019, resulting in a small number of project finance transactions. In the reporting period, the Bank carried on with its refinancing/restructuring deals addressing mainly hydroelectric and natural gas-fired power plants in the electricity generation industry, while continuing to evaluate its customers’ new financing needs for renewable energy investments, and to provide funding to projects with adequate feasibility, aligned with its lending principles, and compliant with environmental and social standards. İşbank Annual Report 2019 Financing in the amount of USD 90 million to a geothermal plants project A number of projects financed by a consortium of banks including İşbank have been awarded in various categories by eminent international financial publications. Çanakkale Bridge and Highway Project: - “Turkish Deal of the Year” - “Europe Road Deal of the Year” - “Infrastructure Finance Deal of the Year (First Place)” - “Project Finance Deal of the Year (First Place)” - “Best Belt&Road Project Finance” (ICBC) - “Best Project Finance Deal in Central and Eastern Europe (CEE)” The highlight of the deals in this area was the USD 350 million-facility supplied by a consortium of national and international creditors including İşbank, which is extended for financing Efeler 6, 7 and 8 geothermal plants with a total installed capacity of 97.5 MW to Gürmat Elektrik Üretim A.Ş. company affiliated to the Güriş Group. İşbank joined this loan consortium with USD 90 million. - “Best Project Finance Deal in Europe, Middle East and Africa (EMEA)” - “Best Public-Private Partnership Deal in Central and Eastern Europe (CEE)” - “Best Road Deal in Europe, Middle East and Africa (EMEA)” A performance crowned with international awards - “Best Syndicated Loan in Europe, Middle East and Africa (EMEA)”, Some projects financed by a consortium of banks including İşbank have been awarded in various categories by eminent international financial publications including EMEA Finance, Bonds and Loans, and IJ Global Project Finance and Infrastructure Journal. Privatization deal of the Menzelet and Kılavuzlu HPPs: Akfen Renewable Energy – WPP Projects; - “ECA/Export Finance Project the Year” - “Best WPP Project Finance Award” - “Best Natural Resources Finance Deal” - “Best Renewable Energy Project Finance Deal in Europe, Middle East and Africa”, - “Best Privatization Deal in Europe, Middle East and Africa (EMEA)” Ankara-Niğde Highway Project; - “Best Hydropower Deal in Central and Eastern - “Transport Finance Deal of the Year (First Place)” Europe (CEE)” - “Infrastructure Finance Deal of the Year (Second - “Best Finance Deal in Europe (First Place)” Place)” - “Natural Resources Finance Deal of the Year Syndicated Loan Extended to Ciner Group: (Third Place)” - “M&A/Acquisition Finance Deal of the Year” - “Project Finance Deal of the Year (Second Place)” - “Corporate Finance Deal of the Year” 29 Activitiesİşbank Annual Report 2019 Tekcep TekCep, an innovative product in open banking area, has been introduced for use by customers. İşbank and its Activities in 2019 İşbank extends support to sustainable energy projects that contribute to energy supply in Turkey and that meet specific environmental and social criteria. Project finance in 2020 İşbank’s projections for project finance in 2020 are as follows: - Reviewing financing demands for renewable energy investments and particularly wind power plants (WPPs) within the scope of Renewable Energy Resources Support Mechanism (YEKDEM), - Following up the tender process for mini YEKA Solar Power Plant (SPP) with a total installed capacity of 1,000 MW which will be organized under the Renewable Energy Resources Area (YEKA) model, - lending for acquisitions and greenfield investments, - assessing certain refinancing deals, and - continuing to work on restructuring various project loans. Also, the Bank plans to charge ahead with customer contacts regarding the marketing of “Solar Loan by İşbank” which was created to finance unlicensed SPPs with a maximum installed capacity of 5 MW to be set up for self-consumption on the roofs of industrial facilities and which was introduced in 2019 in keeping with İşbank’s mission of being the pioneering and leading bank in the renewable energy sector. It is anticipated that the tourism industry that has embarked upon a recovery period in recent years will continue to decouple positively in 2020. The Bank is expecting financing demands for tourism investments that were suspended during the crisis years to become a current topic once again. Strong and deep-rooted cooperation with international institutions in the financing of investments Under the securitization deals in 2016, İşbank obtained new funds in the amount of USD 111.2 million from the European Investment Bank (EIB) and USD 55 million from the European Bank for Reconstruction and Development (EBRD). The Bank kept channeling these new funds for the financing of its customers’ investments. From the MidSEFF fund secured from EIB and EBRD, the Bank allocated USD 51.5 million loans in 2018 and USD 30 million in 2019 for a total of USD 81.5 million. The Bank on-lends the fund secured under the MidSEFF Program to its customers for financing mid-sized investments in renewable energy and industrial energy efficiency. Hence, İşbank extends support to sustainable energy projects that contribute to energy supply in Turkey and that meet specific environmental and social criteria. Risk management solutions consolidating the value offered to corporate banking customers İşbank offers custom-designed risk management tools in line with the needs of its corporate banking customers seeking hedging against market risks. In 2019, the Bank broadened its derivative products array, and ensured management of its 30 İşbank Annual Report 2019 In 2019, developments targeting digitalization of foreign trade processes were realized, and focus was placed on decreasing operational costs. İşbank reinforces its presence in foreign trade with its long- standing experience, the technology at its disposal, high level of recognition, and extensive correspondent network. customers’ specific risk exposures by developing customer-focused risk management solutions by bundling derivatives with other banking products, as well as compiling different derivative instruments. In 2020, İşbank will increase its support to its customers with derivative products and specific risk management solutions that are configured according to needs and expectations. İşbank further consolidated its credibility in cash management products with technological advancements. 2019 has been a year in which İşbank underlined its pioneering and innovative character in the area of cash management products. TekCep, an innovative product in open banking area, has been introduced for use by customers. TekCep lets customers view their accounts that are in different banks via İşCep and Commercial Internet Banking branch. Developments were also made to bulk payment systems that will make them easier to be used by customers and increase the product’s security. Through initiatives in cash management and particularly in collections, payment systems and digital services, İşbank aims to deliver high value- added services to customers in a simple, efficient and easily-accessible format at low-cost, to enhance customer satisfaction, and to contribute to business processes of customers. İşbank quickly adjusted to the modifications in the foreign exchange legislation, and remained as the solution partner of its exporter and importer customers. In 2019, important modifications were made to the Decree no. 32, export legislation and the CBRT’s Capital Movements Circular. These modifications directly impacted banking practices. Accordingly, adjustment to the new foreign exchange legislation occupied an important place within İşbank’s activities, and infrastructure and process tasks have been successfully carried out giving the utmost consideration to customer satisfaction. In addition, developments targeting digitalization of foreign trade processes were realized, and focus was placed on decreasing operational costs. İşbank reinforces its presence in foreign trade with its long- standing experience, the technology at its disposal, high level of recognition, and extensive correspondent network. The Bank adheres to its customer- and solution-oriented service concept in foreign trade drawing on its specialized teams, as well as its extensive branch and customer network. İşbank intermediates a substantial portion of Turkey’s foreign trade volume, and delivers the best end-to-end service to its customers. Targeting to make the most of technology and digitalization in foreign trade operations in 2020, İşbank will adhere to its vision of being its customers’ “business partner” also in this area. 31 Activitiesİşbank Annual Report 2019 46.5 billion TL İşbank’s installment commercial loans portfolio volume İşbank and its Activities in 2019 In 2019, İşbank continued to support its customers with its multdimensional solutions in commercial banking. COMMERCIAL BANKING Uninterrupted support to commercial banking customers In keeping with its founding mission, İşbank has always stood by the industrialists, merchants, SMEs and artisans ever since 1924. In 2019, the Bank serviced its customers with commercial banking solutions, and resolutely increased its support to the sustainable development of the Turkish economy. Intense customer contact all over Turkey. Active in almost every point that constitutes the commercial cycle, İşbank offers products and services with high value propositions to its customers all over Turkey with its far-reaching branch network. İşbank delivers its commercial banking activities out of its 47 dedicated commercial branches in 21 cities with an intense industrial and commercial life and two free zone branches, in addition to its mixed branches. This specific organization of the Bank plays a central role in satisfying commercial customers’ needs in a more efficient and productive manner. In 2019, Head Office and field teams heavily carried on with customer visits. Field teams and Non-Branch Sales teams realized nearly 344,000 and 159,000 customer visits, respectively. İşbank remained the most preferred bank in installment commercial loans also in 2019. İşbank assumes a pioneering role in financing not only large-scale commercial companies but also tradesmen and SMEs. Preserving its ongoing leadership among private banks in 2019 with a market share of 11.9%(*) (**) in installment commercial loans, which is the loan type mainly preferred by above mentioned segments for their financing, İşbank’s installment commercial loans portfolio reached a volume of TL 46.5 billion as at year-end 2019. Customers were given access to financing with a credit line of up to TL 5 million per facility, up to 36-months maturity and advantageous rates by way of Bayram Loan for SMEs and Commercial Support Loan Campaigns began to be organized from July, in addition to the ongoing Score-Based Commercial Loan Campaign and Tradesmen Support Loan Campaigns with a total disbursement amount of TL 2 billion. Within the scope of Bayram Loan for SMEs and Commercial Support Loan Campaign, loans in a total amount of TL 10 billion have been allocated in the form of 55,263 loan facilities as of year-end 2019. İşbank also keeps expanding the portfolio of commercial credit cards, which secure sustainability in the commercial relationship established and make up an important part of commercial life. Efforts were carried out via branches and commercial Direct Sales channels aimed at increasing the number of the Bank’s commercial card holder customers particularly in the second half of the year. In 2019, the Bank introduced İşim Card developed for its real person tradesmen customers. By the end of the year, the number of My Business Card customers reached 15,951. (*) Calculated using monthly sector data published by the Banking Regulation and Supervision Agency, disregarding interest accruals and rediscounts. Participation banks are excluded from sector numbers. (**) Includes overdraft accounts. 32 İşbank Annual Report 2019 In 2019, İşbank preserved its ongoing leadership among private banks in installment commercial loans. İşbank and the Central Bank of the Republic of Turkey (CBRT) signed a protocol for fulfilling the financing needs of exporters and businesses engaged in FC-earning services and activities. The Bank also continued to develop regional business partnerships to create the payment solutions that optimally fit the needs of diverse customer groups. The commercial credit cards bearing the Düzce Chamber of Commerce, Turkish Cypriot Chamber of Commerce and Antakya Chamber of Commerce logos introduced in this framework are intended to support the purchases by and between chamber members. As part of the investments made into contactless payment technology that adds speed to card- based payments, commercial credit cards offered also entail contactless features. Steps were taken for making TROY credit cards, which were introduced with the slogan “Turkey’s Payment Method”, an internationally accepted credit card within the frame of the partnership between the Interbank Card Center and Discover Financial Services. Along this line, İşbank successfully completed the infrastructural work for TROY branded Discover and co-badge credit and debit cards, and has been the first bank in Turkey offering services in this field. Extensive support to commercial customers through collaborations İşbank further expands the scope of its support to actors in commercial life through collaborations with various institutions and organizations in line with economic and conjunctural developments. Taking place among the concrete examples of this support are the Treasury-Backed Portfolio Guarantee System (PGS) and Portfolio Limit System (PLS) realized with the Credit Guarantee Fund (CGF) in 2017, 2018 and 2019. Within the scope of this collaboration that lent major contribution to the efficiency of CGF backed by the Turkish Treasury, İşbank extended loans worth approximately TL 35.5 billion. İşbank and the Central Bank of the Republic of Turkey (CBRT) signed a protocol for fulfilling the financing needs of exporters and businesses engaged in FC-earning services and activities. The fund secured from the CBRT in this framework continued to be extended to firms as discounted FC loans in 2019. As part of the activities targeted at specific professional groups, İşbank continued to collaborate with the Turkish Pharmacists Union (TEB) in 2019. In September 2019, 11 banks including İşbank, CGF and KOSGEB (Small and Medium Enterprise Development Organization) signed the “Düzce and İstanbul Urgent Support Loan Protocol”, while KOSGEB and 10 banks including İşbank and CGF signed a 3-year SME Finance Support Program Protocol, and 9 banks including İşbank, CGF and KOSGEB signed “Samsun Province Terme and Salıpazarı Districts Urgent Support Loan Protocol” in November. The financing made available by İşbank under these protocols amounted to TL 40.7 million as at 31 December 2019. Loan allocations within the frame of these collaborations are going on. 33 Activitiesİşbank Annual Report 2019 USD 40 million IBRD-Inclusive Access to Finance Project İşbank and its Activities in 2019 İşbank kept on evaluating foreign funding facilities and channeling special purpose facilities to its customers in 2019. Under the Sales Finance Program carried out worldwide within the frame of the partnership established with Oracle in 2019, the loan needs for the purchases of distributors, dealers or end-user companies that will buy software and/ or hardware from the said company began to be fulfilled via İşbank at advantageous rates. Access to foreign funding facilities In order to support businesses, İşbank continued to evaluate foreign funding facilities for various fields including energy, agriculture and women entrepreneurship, and kept channeling these special purpose facilities to customers in 2019. İşbank continued to on-lend to sub-users the USD 55 million-fund secured under TurSEFF III. from the European Bank for Reconstruction and Development (EBRD) for financing the renewable energy and energy efficiency investments of SMEs. During 2019, loans in the amount of approximately USD 22.7 million has been allocated out of this fund. The Bank continued on-lending to eligible customers the USD 47.6 million-fund secured from the European Investment Bank (EIB) in 2016 within the Bank’s securitization deal for financing the SMEs and enterprises with 250 to 3,000 employees. The entirety of the fund has been on- lent by İşbank during 2019. In June 2019, the Bank signed “Women Entrepreneurs Export Support Loan” and “Young Entrepreneur Export Support Loan” protocols addressing women and young entrepreneurs with Turk Eximbank in an effort to help women and young entrepreneurs gain increased prominence in exports. İşbank has been the first bank to sign “Young Entrepreneurs Export Support Loan”. 25 bps interest rate discount is applied to FC loans. Under each protocol, TL 100 million and USD 200 million have been allocated in total funds. Within the scope of the program, a total of TL 15 million has been lent to 36 women entrepreneurs, and TL 7.1 million to 24 young entrepreneurs as of year-end 2019. On the other hand, a loan agreement for “Inclusive Access to Finance Project” was executed by and between the International Bank for Reconstruction and Development (IBRD) and Türkiye Sınai Kalkınma Bankası A.Ş. (TSKB) under the guarantee of the Republic of Turkey Ministry of Treasury and Finance to finance companies’ investments and operating capital requirements in Turkey. Channeled to development banks, a USD 40 million-fund has been allocated to İşbank from out of the said IBRD fund under the “Intermediary Institution Loan Agreement” signed between TSKB and İşbank. The first tranche of the fund in the amount of USD 20 million has been received in İşbank’s accounts in December 2018. Work is in progress for on-lending the fund for longer-term financing of resident: • Women-inclusive Small and Medium Enterprises (SMEs), and • SMEs in less developed sub-regions influxed by the Syrians under temporary protection. Accordingly, the first tranche in the amount of USD 20 million has been allocated almost in its entirety in 2019 and work is ongoing for further disbursements. İşbank and Foreign Trade Comprised of multilingual Bank executives who have good command of the exchange regulations and are experienced in foreign trade, Foreign Trade Specialists pay visits to customers at their workplaces in 44 cities and instantly respond to all kinds of queries about foreign trade transactions. 34 İşbank Annual Report 2019 İşbank carried on with the sales of the “Women Entrepreneur Tariff Package. Product development efforts to support the financing of renewable energy and energy efficiency projects have continued. Credits were extended in the form of Overdraft Accounts and spot loans in USD and Euro terms at affordable rates and repayable in installments within the scope of the Export FC Loan Campaign announced by İşbank in February 2019 for financing exporter customers. During 2019, a total of nearly USD 695 million in financing has been allocated to 1,209 customers in total. Issuance of letters of credit bearing secure electronic signature by banks is now legally valid; following this development, the Electronic Letter of Guarantee Platform that enables electronic handling of associated procedures before the Credit Registry Agency (KKB) has been set up. İşbank finalized its integration with the said platform in September 2019, and acquired the capability to perform letter of guarantee procedures electronically. İşbank is able to issue electronic letters of guarantee and letters of intent addressed to the Directorate General of Customs and Turk Eximbank. In 2019, İşbank, acting as its customers’ business partner in foreign trade as well, continued to cooperate with the leading e-commerce companies approved by the Ministry of Trade, and enabled its customers to register with e-commerce websites at discounted prices. The Bank introduced new Foreign Trade Packages under the names Exporter’s Package and Maxi Package in February 2019. Wherever there is renewable energy, İşbank is there. A new -loan has been added to the set of loans created to support the financing of renewable energy and energy efficiency projects. In April 2019, İşbank introduced “Solar Loan at İş” for rooftop solar power plant (SPP) for self- consumption investments, which have grace periods up to 1 year, maturities up to 10 years, available in TL, USD or Euro terms, and can be repaid in a flexible schedule or in equal monthly installments. Being one of the pioneering banks in the financing of SPP projects, İşbank offers Unlicensed Electricity Generation Loan, Solar Loan at İş and Energy Efficiency Loan products designed to support these environment-friendly investments. New deposit products During 2019, İşbank’s product range was expanded with the flexible term account, the new term deposit account allowing money withdrawal during the term in response to customers’ need to withdraw money from their deposit accounts within the term, and the Daily Deposit Account, which can be used on non-branch channels and earns interest for one-day terms. Sustainable and committed support to participation of women labor in economy İşbank has spelled out its vision for women entrepreneurs, the rising asset of the economy, as “being not just their financial solution partner for their businesses, but being their companion in every part of their lives”. Along this line, İşbank supports women entrepreneurs grow and further thrive their businesses through education projects and seminars that will broaden their visions, in addition to offering the financial solutions that they need. Throughout the year, the Bank carried on with the sales of the “Women Entrepreneur Tariff Package” created to give women entrepreneurs access to basic banking services at discounted rates, and at the same time, with the loan campaigns organized to give them access to financing at favorable terms and conditions. 35 Activitiesİşbank Annual Report 2019 72% increase The number of İşCep Commercial users increased by 72%. İşbank and its Activities in 2019 “Arya Business Workshops” events, were organized twice in 2019, in Spring and Fall semesters. The cooperation initiated in 2018 for financially supporting women entrepreneurs and for contributing to their development through various seminars and training programs between İşbank and Arya, Turkey’s first female oriented investment platform, continued in 2019. “Arya Business Workshops” events, offering free-of- charge attendance to women entrepreneurs and covering various topics such as financial literacy, balance sheet management, sales, brand management and digital marketing, data management and human resources, were organized twice in 2019, in Spring and Fall semesters. 2019 organizations included the Arya Retreat Pitching Challenge (ARPC), a 6-week event sponsored by İşbank during which women entrepreneurs underwent training programs, received feedbacks and mentorship followed by a challenge by the investors to promote their ventures, and the “Arya Retreat” event attended by successful people in business, experienced and novel investors, where ARPC finalist women entrepreneurs presented their projects and found investors for their ventures. During the 3-day Arya Retreat 2019, women entrepreneurs listened to the inspiring challenge stories of valuable speakers, and captured the chance to explore investor identity, learn about angel investing, develop investment strategies, and learn in-depth about introduction to startup ecosystem and developments in the world of technology in the workshops held. 36 Contribution to the startup ecosystem İşbank continues to establish cooperations and organize campaigns that are designed to support companies in their transformation and transition to new systems which operating on traditional methods but have the potential to increase their productivity through digitalization. Within the frame of these activities, the Bank brings businesses together with solution provider startups in particular, and contributes to the startup ecosystem, as well as to digital transformation of companies. In 2019, İşbank carried on with its efforts to propagate the Technology Startup Package addressing startups, which the Bank regards as the customer portfolio of the future and a constituent of the most fundamental dynamics of the new economy. In addition to training programs organized to transfer the Startup Banking culture to the Bank’s branches, “Startup Banking – Financial Literacy”, a first in its field, was organized addressing branch employees so that they can convey the information that entrepreneurs might need during their incorporation phase to read and manage their financials correctly, as part of the Bank’s approach to be entrepreneurs’ companion. Visits were paid to universities and technoparks, which act as significant locations within the startup ecosystem, and potential partnerships were evaluated. Digital banking products with strong added-value Improvements and developments continued at full speed at branches and in digital service channels in order to let commercial customers perform their banking transactions quickly and practically through digital transformation. In 2019, the number of Commercial Business Unit digital customers increased by 13% and that of İşCep Commercial users by 72%. 48% of commercial customers and 63% of active customers use the Internet Branch or İşCep. As of year-end 2019, İşbank’s Commercial Mobile Banking market share was registered as 13.2%. The number of customers who used İşCep Commercial at least once within the last 12 months exceeded 367 thousand. İşbank Annual Report 2019 Maximum İşyerim application reached over 86 thousand downloads as of year-end 2019. “TekCep” application, Turkey’s first open banking app that made one of the highlights of development projects in 2019, was put into life in partnership with Softtech Yazılım Teknolojileri Araştırma Geliştirme ve Pazarlama Ticaret A.Ş., a subsidiary of İşbank. TekCep lets legal entity customers track their commercial account movements before other banks from İşCep Commercial or Commercial Internet Branch. TekCep app has been developed to enable commercial customers to follow up all of their accounts using a single app and a single screen with the aim of alleviating the burden of separately logging into the app of each bank to gather and combine data and to save them time and labor in the pace of commercial life. Through these improvements that give the forefront to customer experience, İşbank targets to ensure that customers are able to receive the services they require in the easiest way from wherever they may be, and to reduce the time they allocate to banking transactions so as to concentrate on their own business. Developments were made to the Instant Commercial Loan product, which has been enabling end-to-end finalization of the commercial loan process through digital channels since 2018 and remaining as the only one of its kind in the banking business in this sense, which are designed to provide easy access and to increase the credit options offered, giving the foreground to customer experience. The upper limit of the product was increased to TL 100 thousand in 2019. During 2019, İşbank disbursed TL 144 million in commercial loans via digital channels by this way. Maximum İşyerim Launched in September 2018 with the aim of gathering commercial customers’ needs for payment systems under a unified roof, Maximum İşyerim application reached over 86 thousand downloads as of year-end 2019. Through Maximum İşyerim platform, İşbank offered service to more than 113 thousand member merchants and more than 57 thousand commercial cards. Maximum İşyerim app was enriched with additional functions, one of them being the analysis reports giving the member merchants the opportunity to analyze their sales and performances in -depth, and the QR-POS capability enabling to use the mobile phone like a POS device. Commercial card users can now use the function to divide a purchase into installments and postpone a payment, whereas member merchants are provided with the “POS Early Payment” function, which allows payment of POS receivables before they fall due. Initiatives related to new generation payment collection methods designed to support business places in their potential sales made another area of focus in 2019. Within this context, the Bank introduced “Linkle Tahsilat” (Pay by Link) application, which will render collection processes of business places engaged in e-commerce practical, and began accepting QR payments by Alipay wallet that has more than one billion users in total. As a result of this initiative, İşbank has been the first Turkish bank that began accepting Alipay payment method in physical stores that it has been accepting in electronic commerce transactions since 2017. Maximum İşyerim transactions set has been expanded with the capability to instantly track countless offers from Maximum and İmece worlds to commercial customers, to view the usage data of our advantageous POS packages, to get instant list of POS transactions, and numerous similar capabilities in 2019. 37 During 2019, İşbank disbursed TL 144 million in commercial loans via digital channels. Activitiesİşbank Annual Report 2019 In 2019, Agribusiness Entrepreneurship Competition was organized. İşbank and its Activities in 2019 Having carried on with its agricultural banking activities in 2019, İşbank supported these activities with its mobile teams in the field. Collaborations focused on delivering value- added solutions in agricultural banking İşbank examines the regional and seasonal needs and demands of its customers engaged in agribusiness through analytical studies performed in the field and at the Head Office. For the purpose of delivering the products and services customized accordingly with added value, the Bank develops collaborations with various institutions and organizations in the sector. Having carried on with its agricultural banking activities in 2019, İşbank supported these activities with its mobile teams in the field. 63 Agricultural Executives working in the Non- Branch Sales Unit carry out activities in 61 cities to directly fulfill farmers’ needs to support the national agribusiness. In order to facilitate access to banking services, Agricultural Executives visit villages and offer on-site service to producers and farmers. The loan applications of customers engaged in the agricultural industry are processed using standardized allocation processes entailing effective risk management components. The Bank employs Credit Bureau of Turkey (KKB) Agricultural Loans Assessment System (TARDES) in its agricultural loan risk assessment processes. The Bank also continued to make use of the Agricultural Loan Evaluation System of KKB during 2019. Under the protocol signed between İşbank and the Agricultural and Rural Development Support Institution (TKDK) in relation to the European Union’s “Instrument for Pre-Accession Assistance - Rural Development” (IPARD) program, efforts were carried on in line with the summons for applications by TKDK in 2019. When the country’s total capacity and storable agricultural production quantities are taken into consideration, there is a capacity shortage in cold storage rooms, which are critical in ensuring a balance between supply and price of agricultural produce in particular. Within this framework, İşbank has developed the Cold Storage Room Investment Loan product for fulfilling the financing needed to build facilities for storing vegetal and animal products and seafood until they are delivered from the producers to consumers and to modernize the existing facilities. Digital Transformation in Agriculture İşbank attaches importance to technological transformation in agriculture and takes steps in this direction. In 2019, the Bank partnered with Vodafone Business and initiated the Digital Agriculture Project that uses agricultural forecasting and early warning systems that rely on advanced technology in agricultural activities and operations. On the other hand, İmeceMobile, an application that runs on smart phones for use in agricultural production activities, has been made available free-of-charge for all producers. With this app, producers are able to access a wide variety of valuable information that are important for their productions ranging from weather warnings to market hall/exchange prices, as well as to İmece Card campaigns and information. In addition, Agribusiness Entrepreneurship Competition was organized for uncovering and supporting ventures having innovative projects in the agricultural sector, and the winning team qualified to take part in İşbank Workup program. 38 İşbank Annual Report 2019 Initiated in 2018 as a collaborative initiative of İşbank and TÜRKONFED with the aim of supporting the digitalization process of the SMEs, which are the backbone of the Turkish economy, Digital Anatolia meetings continued in 2019. Meetings were held in Denizli, Elazığ, Diyarbakır and Eskişehir in order to propagate the change stemming from digitalization across Anatolia. İŞ’TE KOBİ Closely monitored by businesses of various scales but most of all by tradesmen and SMEs, İşbank’s “İŞ’TE KOBİ” SME website (www.istekobi. com. tr) that serves as a guide reached 86 thousand registered members as at year-end 2019. The number of SMEs posting ads about the services and products they offer on the SME Market section, where firms can create their profile pages for promoting their businesses, approached 12 thousand. Having collected 34 awards in various national and international organizations to date, İŞ’TE KOBİ website features a wide variety of rich content including thousands of current news, articles, industrial reports, video interviews and expert comments for use by members and other users. Farmer Meetings & Agricultural Trade Shows Farmer meetings were held in 32 localities to introduce İşbank’s products and services addressing the agricultural sector and TARSİM agricultural insurance, and to develop close relations with the producers, which served to bring the Bank together with approximately 5,000 producers annually. İşbank also participated in more than 20 various agricultural trade shows around the country. İşbank uninterruptedly carries on with its collaborative organizations. İşbank closely monitors the changes and transformations the companies are undergoing in line with the developments in the global economy. The Bank uninterruptedly carries on with its information services along this line. İşbank is the sponsor of the “Digital Transformation Center” Project, which is designed to contribute to the digitalization process of the SMEs, backed by İstanbul Development Agency and conducted by TÜRKONFED (Turkish Enterprise and Business Federation). Under the Project, SME and techno-SME selections have been completed, and the digitalization roadmap for SMEs began to be implemented. Out of more than 500 SMEs that applied for the project, 150 were admitted. Open to the general public and featuring professionals, digital transformation talks, which were organized at more than 10 Digital Transformation Centers in 2019, will be carried on also in 2020. In 2019, İşbank came together with approximately 5,000 producers in 32 localities. 39 Activitiesİşbank Annual Report 2019 62% Today, more than 62% of total transactions at İşbank are being performed via İşCep and Maximum Mobile. İşbank and its Activities in 2019 RETAIL BANKING İşbank’s customers make the focal point of its retail banking activities. Customers’ most preferred financial solution partner İşbank shapes its retail banking activities around the goal of “being the financial solution partner that customers prefer the most in every phase of their lives” and carried them out in line with its digital transformation strategy, which is defined as “being customers’ companion”. During 2019, İşbank carried on with its initiatives in retail banking, which make customer expectations their focal points, are targeted to offer the products and services that are aligned with the needs and behaviors of customers along their life stages, and are in conformity with the Bank’s sustainable and profitable growth strategy. The Bank carries out its retail banking activities with the promise of “being the bank closest to customers” both geographically and in terms of relationship. This promise makes the building block of all communication activities carried out by İşbank. Personalized communication parallel to the customer journey In its retail banking activities, İşbank identifies all touchpoints used in the customer journey that lead to product and service purchase and that serve as a platform for post-experience sharing, and provides guidance to its customers on all physical and digital channels. During 2019, İşbank handled customer relations through content and campaign management on accounts pertaining to its brands on various social network platforms. In this process, İşbank was active with 37 social network accounts on Facebook, Twitter, Instagram, YouTube, LinkedIn, Pinterest, and Medium Blog of its İşCep, Maximum, Maximiles, İş’te Üniversiteli, Maximum Gaming and Workup brands. İşbank kept investing in digital marketing technologies that allow personalized communication, and as a result of the investments in artificial intelligence technology, the Bank further built on its capability to communicate location and time-based personalized offers via other channels and mainly by İşCep and Maximum Mobile. İşbank combines technology with its own field of business, and acts with the awareness of being an organization that creates value and makes life easier for its customers. Innovative products and services developed within the scope of digital transformation, and technology infrastructure investments and initiatives targeted at innovation and startup ecosystem make an important part of the Bank’s forward-looking activities. During 2019, in addition to advertisements on digital media as well as on conventional media, content marketing continued to be carried out based on annual collaborations with Turkey’s respected conferences, digital platforms, broadcasting corporations and university clubs. Mobile channels as the main touch point Today, more than 62% of total transactions at İşbank are being performed via İşCep and Maximum Mobile. Great majority of retail banking services carried out for new customer acquisition or existing customer activation feature İşCep and Maximum Mobile applications and their integrated features that make everyday life easier. Service through all stages of life İşbank targets to cater to customers’ varying needs and expectations at different life stages including childhood, youth, working life and retirement via high value-added banking service packages it develops. Various activation efforts are carried out to deepen relationships with new customers at the growing number of touch points, and recovery campaigns are organized for customers with lifetime high value, who have reduced their relations with the Bank. The retail banking operations actively satisfy the financial needs of all real person customers using the Bank’s physical and digital touch points. These customers are organizationally managed under the Mass, Upper Mass, Mass Affluent and Affluent segments under the “Yüz Yüze Bankacılık” (Face- to-Face Banking) brand. 40 İşbank Annual Report 2019 At the end of 2019, retail credit cards balance of İşbank reached TL 14.8 billion, up 11.8%. İşbank’s consumer loans book expanded by 31.2% to TL 29.8 billion. Expansion in retail loans and savings deposits İşbank’s consumer loans book expanded by 31.2% to TL 29.8 billion, and the Bank rose to leadership position among private banks in consumer loans. The Bank’s retail loans book, which is comprised of credit cards and consumer loans, enlarged by 9.6% year-over-year and reached TL 63.8 billion(*) in 2019. At the end of 2019, İşbank’s housing loans amounted to TL 17.5 billion. Under the funding deals made with the European Bank for Reconstruction and Development (EBRD) for USD 60 million, and with Clean Technology Fund (CTF) for USD 15 million, İşbank carries on with its efforts to finance the loans to be allocated for residential energy efficiency under the Turkish Residential Energy Efficiency Financing Facility (TuREEFF) program. The Bank was granted an award in the ceremony held by TuREEFF for its contributions to the construction of energy- efficient and environmentally-sensitive buildings. While İşbank’s total deposits increased by 20.7% year-over-year at the end of 2019 to TL 295.9 billion, savings deposits also went up by 24.2% in the same timeframe and reached TL 195.8 billion. Also the Bank is the leader among private banks in total deposits, TL savings deposits, TL commercial deposits and FX deposit accounts. In 2019, İşbank secured successful results in new customer acquisition and in increasing its existing customers’ savings held in the Bank as a result of its efforts spent towards being the most preferred bank by savers. Along this line, 75.3% of the expansion in total deposits as at the end of the year stemmed from the increase in savings deposits. Digital channels played a big part in increasing total deposits in 2019. The balance in deposit (*) Includes overdraft accounts. accounts opened via Digital Channels rose from TL 16.7 billion at year-end 2018 to TL 27.5 billion at the end of 2019, representing a surge by 64.6%. Hence, 21.3% of the rise in İşbank’s total deposits was achieved from the rise in term deposits on Digital Channels. As at year-end 2019, the share of İşbank’s savings deposits to total deposits excluding banking deposits was 67.2%, 1.6 points higher than what it was at the end of 2018. İşbank kept widening its deposit products range in the reporting period. The new additions to the product portfolio included Flexible Term Account, Inflation Hedge Term Account and Inflation- Indexed Term Account, bringing the number of deposit products up to 43. 11.8% rise in retail credit cards balance At the end of 2019, retail credit cards balance of İşbank reached TL 14.8 billion, up 11.8%. The Maximum program satisfied the needs of retail credit card customers by offering innovative solutions that make life easier in the digital world. New products and services at İşbank’s digital touch points New features in “I Want to Become a Customer” module With the “I Want to Become a Customer” service available on İşCep and isbank.com.tr, anyone wishing to become a customer of İşbank can complete his or her application process within minutes, and become our Bank’s customer easily and quickly. As at year-end 2019, 33 thousand new retail customers have been acquired through the “I Want to Become a Customer” service. Constant improvements to this service reflecting the current advancements in technology take new customer acquisition further by the day. Artificial Intelligence applications at the service of our customers AI-based New Generation Sales Leads Practice was spread across Turkey in 2019. In this practice, all sales offers made to customers via branch, İşCep, Internet Branch and Call Center 41 Activitiesİşbank Annual Report 2019 127.1% Increase in the Maximum Mobil contactless payment transactions volume İşbank and its Activities in 2019 AI-based pricing and sales models were introduced on many İşbank service channels during 2019. channels are created using the AI model. Sales offers determined according to customer needs contribute to customer experience and satisfaction, and sales efficiency and productivity are thereby increased. Digital retail loan implementations Initiatives related to AI-based retail loan pricing model launched in 2019 and addressing retail customers were introduced on İşCep and Internet Branch channels in September 2019 and on Bankamatik ATMs in November 2019. This way, an interest rate specific to each customer can be offered on digital channels, through which nearly three fourth of all consumer loan applications are being received. The share loans extended within the scope of Instant Loan, Credit Ready, API Loans and Instant Shopping Loan on digital applications for consumer loans got in total new consumer loans allocated reached 77% in terms of quantity and 63% in terms of amount in 2019. In addition, Instant Loan product was made available also on the Bankamatik ATM channel in 2019 and 7,011 disbursements amounted to TL 36.2 million in the reporting period. Maximum Mobile Ecosystem Campaigns and announcements were carried on in line with customer demands and needs in keeping with the primary goal of maintaining Maximum Mobile’s pledge to “deliver an ecosystem offering end-to-end shopping experience” since the introduction of the application. 24/7 shopping campaigns were executed covering a variety of sectors including culture/arts, e-commerce, clothing/food, fuel, airlines, education and restaurants, in view of periodic needs. Having reached 5.1 million downloads by the end of 2019, the volume of revenue-earning monetary transactions performed via Maximum Mobile app augmented by 116.7% on a year-over-year basis. The volume of mobile contactless payment transactions using the app, on the other hand, grew by 127.1% annually. The turnover generated on 432 thousand transactions under İstanbul Card integration amounted to TL 9.2 million and that on 32 thousand transactions under airplane ticket integration amounted to TL 17.1 million. “Digital MaxiPara Card” and “Maximum Gaming Card”, which are prepaid card products, are made available to customer and non-customer users via Maximum Mobile, allowing users to apply instantly for digital prepaid cards, to transfer money to these cards, and to use these cards within Maximum Mobile or in e-commerce transactions. Also, Motor Vehicle Tax can now be paid throughout the year via Maximum Mobile using credit cards, and departure tax payments can be made using credit cards, without having to produce a bank slip or stamp at border exits. Through Digital Code Market and Yemeksepeti integrations within Maximum Mobile, users are now able use their accumulated İşbank card loyalty points (MaxiPuan) for their purchases. In addition, users are also able to view member merchant location information in transaction details for transactions performed with İşbank cards using İşbank POS devices, and to get directions to the address. Customers are provided with the opportunity to create spending control via Maximum Mobile for selected credit card, sector or all card purchases and to receive a notification when 80% or 100% of the set control amount is reached. Maxi capabilities launched on İşCep have been upgraded and incorporated in Maximum Mobile in January 2019. 42 İşbank Annual Report 2019 In the field of e-commerce, İşbank attained a market share of 28.7% at year-end 2019. Rising performance in payment systems İşbank, a leading player in the payment systems market, reached the following numbers as at year- end 2019: • 8.1 million credit cards, 10.8 million debit cards, • TL 124.6 billion credit card retail volume corresponding to 14.8% market share, • TL 169.7 billion acquiring volume corresponding to 16.4% market share. Novelties introduced to the payment systems market In 2019, İşbank kept offering numerous novelties to the payment systems market. All credit card customers, including commercial credit card customers, were provided with the chance to postpone the payment of their account statement debts by one or two terms after the due date, which was immediately followed by the option to add extra installments to their instalment purchases. In the same framework, customers were offered a function allowing them to pay the portion of the credit card account statement balance apart from the required minimum payment amount in 2 or 3 installments in the last period of the year. In addition, a new transaction was launched which allows cash advance transactions performed previously to be made payable in installments until the due date. This practice gave customers the opportunity to obtain installment cash advance from other banks’ ATM networks in Turkey, in addition to the Bank’s own channels. Instant Card implementation, launched in 2018 to respond to our customers’ applications for a debit card at our branches on site, was expanded to incorporate retail and commercial credit cards; so our customers are also delivered their credit cards at the time of application. İşCep and Internet Branch were included among the channels for Card-to-Card Money Transfer service offered via Maximum Mobile and BKM (Interbank Card Center) Express apps to all credit and debit card holder customers. “İşim Kart”, a new commercial credit card product possessing more advantages for real person tradesmen customers has been developed. Both İşim Kart, and Maximum and Maximiles Business cards are issued with contactless feature by default. The scope of Limit Increase at the Time of Transaction implementation, launched in 2018 for shopping with the aim of offering instant service to customers, was expanded with the addition of cash advance and installment cash advance transactions in 2019. With this step, customers whose purchase is declined due to insufficient credit card limit are instantly called on the phone for receiving their limit increase requests. Pioneering and leading bank in e-commerce and online shopping Attaching special importance to e-commerce, İşbank attained a market share of 28.7% at year- end 2019 and thus sustained its leadership in this area. Being the first bank to provide alternative payment methods to member merchants in e-commerce, İşbank added 19 new payment methods to its portfolio in 2019, and continued to support the country’s businesses with e-exports with 38 alternative payment methods accepted in over 50 countries. The Bank began intermediating the Business Settlement Plan (BSP) implementation designed for agency sales in airlines, as a result of which business volumes of these companies receiving service from foreign countries due to unavailability of the service in Turkey were won for the national economy and for the Bank. A new application was introduced whereby our customers, to whom their newly embossed cards have not yet been delivered, are able to perform cash advance and installment cash advance transactions up to TL 2,000 daily via Maximum Mobile app, without waiting for the delivery of the physical card. İşbank has been the first in Europe to make a transition to EMV 3DS (3D Secure 2.0), the updated version of 3D Secure infrastructure that allows verification of the cardholder in card-based online purchases. The Bank aims to deliver an even better customer experience in a much more secure manner with this new technology. 43 Activitiesİşbank Annual Report 2019 Accepting the highest number of card brands İşbank has become the Bank accepting the highest number of card brands in Turkey. İşbank and its Activities in 2019 Turkish enterprises making sales to foreign countries were provided with the opportunity to get installment and deferred payment from consumers abroad using İşbank’s virtual POS infrastructure using the options of “Bank Transfer”, “Pay Later” and “Slice It”, bank transfer, payment deferment and installment payment methods offered by Klarna widely used in European countries and in the US, and “Yandex Installment” commonly used in Russia. Installment payment option, which is highly important especially for the tourism industry and establishments exporting goods to foreign countries, has been introduced first by İşbank in Turkey. Russian national cards issued by the Russian National Payment System and bearing the MIR logo, and cards bearing Discover and Diners Club logos that take place among the worldwide prestigious card systems began to be accepted at İşbank’s POS, virtual POS and ATM networks. Offering secure and diversified solutions to member merchants and entrepreneurs in different areas, İşbank added cards bearing MIR, Discover and Diners Club logos to the set of accepted cards that previously included Visa, Mastercard, American Express, UnionPay and JCB, and has become the Bank accepting the highest number of card brands in Turkey. Thanks to the cooperation established between İşbank and Alipay, operated by Ant Financial Services Group affiliated to China’s giant electronic commerce enterprise Alibaba and having more than one billion wallet users in total, payments by Alipay wallet began to be accepted on İşbank’s physical POS devices and via Maximum İşyerim app by the end of 2019. Thus, İşbank has been the first to accept Alipay payment method in physical stores, which was accepted in e-commerce transactions since 2017. During 2019, payment by bank transfer method was launched within the “Pay with İşbank” application. Under the agreements made with Hepsiburada and N11 e-commerce sites, our customers are offered the chance to pay for their shopping cart total by making a bank transfer from their İşbank accounts without leaving the related e-commerce sites. The preferred bank in salary payments In 2019, İşbank carried out developments to realize the cash flows of actively working and retired personal customers via the Bank by intermediating their salary payments, and at the same time, to diversify the financial services offered to private sector companies. While important steps were taken towards the goal of acquiring new salary customers, contribution was lent to ensuring customer loyalty without making a differentiation between personal or commercial customers, and to deepening existing relationships. Digital channel improvements putting retired customers in the center allowed this customer group to transfer their salaries faster and in a problem-free manner to İşbank. Solid position in retail cash management As part of its phase two efforts for developing Personal Finances Management application, İşbank introduced several functions designed to give our customers greater control over their financial transactions, as well as to improve customer experiences. Using these functions, customers can track the total amount spent within a given month and the details of expenses; create spending controls divided according to categories, cards or total spending criteria, identify offers and suggestions aligned with the spending history so as to steer the customer to make smart choices. As at year-end 2019, İşbank facilitated bill payments through İşCep application, its Internet Branch, Bankamatik ATMs, branches, Maximum Mobile, and automated payment order. In addition to existing collection channels, the Bank also grants its customers the ability to make one-off bill payments using İşbank credit cards via Internet Branch, İşCep and Maximum Mobile channels. With its Unlimited Automatic Service (SOS) and Maximum Account features, İşbank affords its customers the chance to automatically buy mutual funds using amounts above a specified threshold kept available in their accounts for daily transactions and to fulfill their automated payment orders on the due date using the funds available in the account and mutual funds. 44 İşbank Annual Report 2019 İşbank offers a broad range of products in non-life insurance, life insurance and private pension. The leading bank in OGS and HGS İşbank preserved its leadership in the transaction volume of OGS (Automatic Pass-Through) devices and HGS (Rapid Pass-Through) labels that facilitate bridge and highway crossings as at end- 2019. During 2019, İşbank began collecting pass- through fees of the Menemen-Aliağa-Çandarlı Highway via HGS and OGS systems. API integration in HGS In 2019, two HGS APIs were developed within the scope of open banking applications with the aim of fulfilling reporting requirements regarding HGS customers’ pass-throughs using their HGS labels and balance top-ups to HGS labels at a higher quality, and to allow customers to make changes to their HGS information. Private Pension and Insurance Within the frame of the ongoing solid collaboration with Anadolu Sigorta and Anadolu Hayat Emeklilik, İşbank offers a broad range of products in non-life insurance, life insurance and private pension on the back of an efficient service understanding. In this context, motor own-damage insurance renewal step was made available on Personal Internet Branch and İşCep in May, new sales and renewal steps for Compulsory Earthquake Policy on İşCep Personal in October, and on Commercial Internet Branch and İşCep Commercial in December. In non-life insurance products… Under the collaboration between İşbank and Anadolu Sigorta, Anadolu Sigorta premium production via the bank channel went up by 11.2% year-over-year to TL 869.5 million by the end of 2019, and Anadolu Sigorta bank channel got 9.9% share in the sector. In life insurance segment… As at year-end 2019, the bank channel of Anadolu Hayat Emeklilik wrote premiums in the amount of TL 899.2 million on Term Life Insurance. In the same timeframe, the bank channel had 10.2% market share in Term Life Insurance production. Prepaid Maximum Gaming Card product was launched with its special design in November 2019. Developments in PPS... As at 2019 year-end, the number of private pension accounts opened via the Bank that serves as agency of Anadolu Hayat Emeklilik through branches and outbound calls was 170.2 thousand. A subsidiary of the Bank, Anadolu Hayat Emeklilik commanded 15.9% market share with 1,092,911 participants as at year-end 2019. İşbank and e-sports İşbank invests in e-sports, which is the most effective medium for increasing its contact with the young generation undergoing the greatest degree of change in their attitudes and behaviors due to the digitalizing world, and for communicating with the youth. As part of the e-sports communication activities carried out under the Maximum Gaming brand, the Bank sponsors the e-sports teams of Turkey’s deep-rooted national sports clubs, undertakes content and campaign management on social network platforms, and establishes one-on-one contact in e-sports events. Prepaid Maximum Gaming Card product was launched with its special design in November 2019. Offered as a prepaid card that can be held especially by e-sports fans and that will render their gaming experiences privileged, GamingPoints can be earned in purchases made using Maximum Gaming Card. The GamingPoints earned can be redeemed in the Digital Code Market and Yemeksepeti orders within Maximum Mobile. İşbank’s initiatives in retail banking are crowned with awards... In 2019, İşbank was recognized with a total of 29 national and international awards in the retail banking segment. 45 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 In 2019, İşbank Private Banking kept offering personalized and value-driven product and service delivery that fulfills all financial needs of customers arising amid fluctuating market conditions in a way to generate optimal returns. 24% increase Total customer assets under the management of İşbank Private Banking reached TL 27 billion with an increase of 24%. PRIVATE BANKING Proactive wealth management approach with an organization meeting all kinds of financial expectations of customers In 2019, İşbank Private Banking kept offering personalized and value-driven product and service delivery that fulfills all financial needs of customers arising amid fluctuating market conditions in a way to generate optimal returns. As of year-end 2019, total assets worth TL 27 billion of 10 thousand customers were being managed in cooperation with financial subsidiaries through a diverse portfolio of investment products so as to respond to return expectations of each customer with differing risk profiles. İşbank Private Banking carried out its activities in 17 branches in total, including 14 dedicated private banking branches in İstanbul, Ankara, İzmir, Adana and Antalya, and 3 “corner” branches in Bursa, Mersin and Cyprus. Within the scope of the Digital Transformation Program carried out in 2019, applications and hardware that will enhance customer experience were put into service in branches, utilizing the opportunities afforded by advancing technology. Strong and effective asset management service as a result of strategic collaborations with subsidiaries The product, service and channel diversity offered by İş Portföy Yönetimi A.Ş. (İş Asset Management) has been improved throughout 2019. Thus, customers kept taking advantage of the most favorable return opportunities amid changing market dynamics. Total assets under management, including family funds designed to satisfy the expectations of clients requiring professional service for passing their assets to future generations, increased by 58% as compared with the previous year and reached TL 1.4 billion. Service at the highest standards continued to be offered to customers wishing to invest in equity or to access various securities offered in overseas markets at the optimum terms, with the expertise and competencies of İş Yatırım Menkul Değerler A.Ş. (İş Investment). 46 İşbank Annual Report 2019 Privia branded products and services Credit card, retail loan and mutual fund products, with processes customized according to the needs of private banking customers and which entail exclusive advantages, continued to create value for customers in 2019. İşbank Private Banking events Throughout 2019, in addition to being offered privileged financial services, İşbank Private Banking customers were hosted in prestigious art and sports events in line with their preferences and likes. In 2020… In 2020, İşbank Private Banking product and service processes which are aligned with its clients’ personal expectations will be supported with digital technologies and also will continue to be enhanced with new value propositions. In line with the goal of being its customers’ primary choice in banking amid volatile market conditions, İşbank will continue to collaborate with its subsidiaries and offer its clients new products that will ensure competitive returns. Total customer assets managed in cooperation with İş Portföy Yönetimi A.Ş. increased by 58% and reached TL 1.4 billion. Increased volume of alternative investment products and services Throughout 2019, İşbank continued to provide alternative investment products that best suit the risk profiles of private banking customers. In this context, the customers were offered structured derivatives, as well as classic derivative products such as dual currency deposits (DCD), options and forwards. In 2019, the volume of derivatives transactions carried out by İşbank increased by approximately 114% on a year-over-year basis. The total demand amount of private banking customers in corporate bond issuances mediated by İş Investment increased by 79% over the previous year. Investment advisory continued to be provided to customers with a pension savings above a certain level. Private pension service delivered in partnership with Anadolu Hayat Emeklilik A.Ş. was thus positioned as a long-term investment instrument managed professionally. In 2020, İşbank Private Banking product and service processes will be supported with digital technologies and also will continue to be enhanced with new value propositions. 47 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 İşbank customers’ holdings in gold deposit and investment accounts reached 37.1 tons at the end of 2019. 1.4 trillion TL İşbank’s trading volume at Borsa İstanbul and OTC debt securities market CAPITAL MARKETS • offsetting short term interest rate risk, Sustainable efficiency and pioneership in money and capital market transactions • strengthening the capital structure with Tier-2 issuances. İşbank retained its active position in the sector with a trading volume of above TL 1.4 trillion in Borsa İstanbul and OTC debt securities market as of year-end 2019. Increase in corporate bond issuances Having carried out domestic bills/bonds issuances amounting to TL 14.1 billion as of the end of 2019, including TL 1.2 billion Tier-2, İşbank preserved its leading position among deposit banks with over 11% market share in outstanding domestic TL securities. In 2019, corporate bond issuances increased as a result of the pursuit to diversify the balance sheet funding structure in the banking sector. Also in 2019, İşbank carried out bond issuances of various types and maturities with the objectives of: • securing long-term funds, • diversifying the existing funding structure, • eliminating the maturity mismatches between asset and liability items on the balance sheet, and High market share in gold transactions İşbank customers’ holdings in gold deposit and investment accounts reached 37.1 tons at the end of 2019, and the Bank’s market share in gold deposit accounts regarding deposit banks was registered as 16.3%. The Bank continued to hold “Gold Days” at branches in 2019, thereby recovering the so- called “under-the-mattress” physical gold for the registered economy. 48 İşbank Annual Report 2019 İşbank plays an active role in custody with 30.7% market share under custody for services provided to discretionary and collective portfolios. One of the pioneering institutions in the equity market As of end-2019, İşbank, together with its subsidiary İş Investment, generated 8.4% of the trading volume on Borsa İstanbul Equity Market, and continued its activities as one of the leading institutions in the market. İşCep International Markets service which enables customers to carry out share and futures transactions on more than 20 exchanges across three continents, continued to provide access to international organized markets via the bank distribution channel. Fund consultancy service via Robofon Advisor to those wishing to save up İşbank sustained its position as the leading fund distributor by intermediating 13.5% of the mutual funds distribution in the sector as of year end 2019. In 2019, the Bank started offering fund advisory service via Robofon Advisor, accessible through İşCep and Internet Branch, to those who wish to grow their investments by providing fund suggestions among İş Asset Management Robofon Family, therefore making it much easier to make investment decisions. Carried out in collaboration with a domestic fin-tech startup, the service constitutes one of the recent examples of the versatile support İşbank extends to the startup ecosystem in Turkey. High market share in custody İşbank plays an active role in custody with 30.7% market share and TL 48.3 billion assets under custody for services provided to discretionary and collective portfolios. With 20 real estate investment funds and 8 venture capital investment funds covered among the mutual funds provided with asset custody service, the Bank has assumed a pioneering role in the sector with respect to custody of alternative mutual funds. In 2020, İşbank… In 2020, İşbank will keep improving its market shares in money and capital market products and gold transactions on the back of: • new products and services designed within the frame of customer preferences and market conditions, • competitive pricing policy, and The Money Box Hybrid Fund, the first mutual fund designed for children, continues to be the leader across its category in terms of number of investors • its service channels aligned with customer needs ensuring uninterrupted and high-quality service delivery. İşbank intermediated 13.5% of the mutual funds distribution in the sector as of year end 2019. 49 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 Global economic activity had a performance below the forecasts made at the beginning of 2019, and the Turkish economy underwent through a rebalancing process. Risk premium Turkey’s risk premium has been volatile in 2019. TREASURY MANAGEMENT Quantitative easing tendency picked up, with the US and the Eurozone leading the trend. Global economic activity started to slow down in 2019. Central banks in the US and Eurozone were anticipated to take tightening steps in their monetary policies in 2019, however, expansionary policies had to be pursued due to the slowdown in global economy and forward- looking risks. Quantitative easing tendency picked up in the second half of the year, with the US and the Eurozone leading the trend. Within this framework, although global financial conditions improved to a certain extent, higher geopolitical tensions during the reporting period along with the uncertainties regarding trade wars and course of monetary policies caused portfolio inflows into emerging markets to remain weak. The ambiguities of the UK’s withdrawal from the European Union continued in 2019. With the Conservative Party winning the commanding majority in the general elections held on 12 December 2019, the possibility of a no-deal Brexit got stronger. Having contracted in the last two quarters of 2018, the Turkish economy started to rebalance in 2019. In this period, Turkey’s risk premium has been volatile. The fluctuations in financial markets and geopolitical factors resulted in a higher risk perception in the first half of the year. With the elimination of uncertainties and the alleviated tensions in the neighboring countries in the second half of the year, coupled with lower inflation and improved global risk appetite, country risk premium declined once again in the second half of the year. 50 İşbank Annual Report 2019 Turkish banking sector’s total assets reached TL 4,206 billion as of 2019 year-end. Central Bank of the Republic of Turkey (CBRT) cut the policy rate sharply. Shaping the monetary policy in view of inflation expectations, pricing behavior and the course of other factors affecting inflation, the CBRT preserved its tight monetary policy stance in line with the high inflation and the risks threatening price stability in the first half of the year, therefore kept its policy rate, which is the one-week repo rate, at 24.00% for the first seven months of the year. In addition, during the increased volatility in financial markets periods from March 25th to April 7th and from May 10th to May 20th, the CBRT suspended its weekly repo auctions and increased the overnight lending rate up to 25.50%. In the second half of the year, the exchange rate volatility eased off, inflation declined owing to the previous year’s base effect, thus CBRT started cutting weekly repo rate in 25 July 2019 and cut rates in three consecutive Monetary Policy Committee meetings by a total of 1,200 bps to 12%. Throughout 2019, the CBRT actively used other liquidity management instruments including various regulations on required reserves as part of macroprudential policies to encourage de-dollarization and credit expansion. Credit demand was weak and asset growth remained subdued in the sector. In 2019 when economic activity remained weak due to the economic rebalancing process, the Turkish banking sector’s total assets reached TL 4,206 billion as of 2019 year-end. Asset growth was 3.2 percentage points lower compared to the level in 2018 and has hit the lowest level since 2012 with 14.9%. The weak course of economic activity in 2019 resulted in limited loan demand. The growth rate in total loans as of year-end 2019 was 10.4%, the lowest level since the 2009 crisis, and FC loans (in USD terms) contracted by 7.5%. The ratio of performing loans to total assets was 59.9%, 2.4 percentage points lower compared to the level in 2018. Throughout 2019, FC deposits volume remained on high levels due to customer preferences. On the other hand, the weak course of domestic economic activity and the increased saving tendency encouraged by the high interest rates particularly in the first 7 months of the year resulted in an increase in total deposits (excluding banking deposits) in the banking sector by 23.8% as of 2019 year-end. During the reporting period, the ratio of total deposits to total liabilities was 55.9%, 4.0 percentage points higher compared to 2018 year-end. Since level of FC deposits remained high in the Turkish banking sector FC liquidity of banks was strong, while the weakened loan demand required less foreign funding. The total outstanding amount of syndicated loans, securitizations and Eurobond issuances of the Turkish banking sector declined to USD 50.2 billion as of 2019 year-end compared to USD 57.9 billion as of 2018 year-end Interests declined in the second half of the year. 51 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 In 2019, İşbank embraced a dynamic balance sheet management strategy focused on prioritizing solid liquidity and sustainable growth. 57.8% the share of performing loans to total assets A dynamic and proactive strategy prioritizing the cost management In 2019, a year of weak economic activity, İşbank embraced a dynamic balance sheet management strategy focused on prioritizing solid liquidity and sustainable growth. previous years; maturity gap management, liquidity, capital adequacy and preserving net interest margin policies were handled in line with the current needs, taking into consideration scenarios addressing the various effects of the differentiation in the market conjuncture upon balance sheet. The Bank’s TL and FC liquidity was shaped with a holistic approach as its primary goal to achieve a sustainable funding composition by focusing on cost management, maturity structure and funding diversification. Short- and long-term liquidity needs were evaluated using different assumptions and stress conditions, and the utmost attention was paid to back the ultimate funding capability, while considering the Bank’s profitability. The specific strategies pursued during the reporting period have been constantly reviewed in line with the asset and liability management risk policies. Since global liquidity conditions changed, external funding facilities as an alternative to deposits were more limited and costly as compared to İşbank maintained its position as the largest bank among private commercial banks with total assets worth TL 468.1 billion, performing loans portfolio of TL 270.4 billion and total deposits worth TL 295.9 billion as of 2019 year-end. In 2019, the share of performing loans to total assets was 57.8%, and the share of securities portfolio was 18.0%. Deposits(*) continued to be the primary funding source with a share of 62.2% within total liabilities, while funds borrowed and securities issued (including subordinated bond issuances) had 8.6% and 9.5% share, respectively. (*) Excluding banking deposits 52 İşbank Annual Report 2019 Having high credibility in international markets, İşbank continued to obtain low-cost, long-term funds throughout the year through various money and capital market instruments. Within the scope of treasury operations, liquidity, interest rate and exchange rate risk elements were managed in line with the Asset/Liability Management Risk Policy principles, without compromising from sustainable profitability principle in parallel to the Bank’s risk appetite. Potential risks that may arise from the maturity and interest rate structure and FC position of the balance sheet are monitored ad-hoc and on scenario basis, employing efficient models, and derivative products are also utilized along with money and capital markets products depending on the market conditions. İşbank’s balance sheet was managed by ensuring its rapid adjustment to changing conditions. Having high credibility in international markets, İşbank continued to obtain low-cost, long-term funds throughout the year through various money and capital market instruments amid varying market dynamics. The high level of FC liquidity, coupled with the expected positive course of global liquidity conditions and risk premiums, allowed flexible management of medium-long term non-deposit funding alternatives in a manner of considering maturity-cost elements entirety. Effective risk management and solid balance sheet structure Throughout 2019, the year characterized by tougher economic conditions, İşbank concentrated on asset quality, cost control, products and services that will support capital through risk- adjusted return and profitability, and was able to achieve its sustainable profitable growth target without any problems. During this period in the presence of many legislative changes and regulations targeting the banking sector, İşbank’s balance sheet was managed by ensuring its rapid adjustment to changing conditions. 53 Activitiesİşbank Annual Report 2019 More than 200 countries In 2019, İşbank, intermediated foreign trade transactions performed between Turkey and more than 200 different countries. İşbank and its Activities in 2019 İşbank uses the funds raised through syndicated loans to support the financing of foreign trade transactions of real sector companies. INTERNATIONAL BANKING İşbank’s distinction in foreign trade services In 2019, through a broad correspondent network of banks based in 121 countries, İşbank; • offered a rich selection of foreign trade products and services to its customers, and • intermediated foreign trade transactions performed between Turkey and more than 200 different countries. Financing facilities for imports and investments İşbank continued to obtain medium and long-term financing either from Export Insurance and Credit Agencies (ECAs) or from correspondent banks under ECA coverage to satisfy its customers’ financing needs for their imports of investment goods and for their energy projects. Global Bank Loan and Renewable Energy Bank Loan agreements executed between Japanese Export Credit Agency, Japan Bank for International Cooperation (JBIC) and İşbank, enabling financing of investment goods and energy projects from Japan, were each extended for another year. Loan Agreement to finance İşbank with the amount of EUR 46 million for 6 years under the coverage of SACE, Export Credit Insurance Agency of Italy was signed between İşbank and HSBC Bank Middle East Limited with the aim of funding Italy-related import transactions realized through İşbank. 54 Awards in Transfer Transactions In 2019, İşbank was rewarded by its German correspondent Commerzbank AG and its Belgium correspondent KBC Bank NV with Straight Through Processing (STP) and High Quality awards based on its performance in payment transactions in 2018. SIBOS: a platform providing active communication with global stakeholders Organized by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and providing opportunities for business development with a large number of banks based in different countries within a short period of time, the SWIFT International Banking Operations Seminar (SIBOS) was held in London in 2019, achieving its highest- ever participation. İşbank took part with a stand in the event where there were more than 11 thousand participants from 152 countries. The representatives of İşbank’s related departments held talks with numerous banks and institutions for business development motives. Within the scope of the event, more than 300 panels and sessions were organized on various topics including the financial services sector, technology, payments, international banking operations standards, customer experience, compliance, cyber security and digitalization. İşbank renewed its syndicated loans, thus re- confirming the confidence held in the Bank. Enjoying a successful track record and a solid experience in the international syndicated loans market, İşbank successfully rolled over its matured syndicated loans and obtained an approximate total funding of USD 1.9 billion from global financial markets despite the challenging market conditions of 2019. 50 financial institutions from the US, Canada, Latin America, Europe, Middle East and Asia participated in the syndications completed in May and November. The high number of participating banks and the high amount of the facilities once again confirmed the confidence held both in our country’s banking sector and in İşbank. İşbank Annual Report 2019 As of the end of 2019, the total asset size of İşbank’s overseas organization amounted to USD 7.3 billion. İşbank issued its first Green Bond in the amount of USD 50 million with a maturity of 10 years on 21 August 2019. İşbank uses the funds raised through syndicated loans to support the financing of foreign trade transactions of real sector companies and reinforces its contribution to the development of the national economy. First-ever Green Bond Issuance from İşbank İşbank issued its first Green Bond in the amount of USD 50 million with a maturity of 10 years on 21 August 2019. The said issue is the first 100% Green Eurobond issue ever undertaken by a Turkish bank. Funds generated with the issue will be allocated for the financing of renewable energy, energy efficiency, resource efficiency, clean transportation, green buildings and the like. This issuance is important in the sense that it reflects the holistic character of İşbank’s approach to sustainability, allowed the Bank to reach out to different investor groups, and it is a long-term funding. Covered Bond Issuance İşbank issued a covered bond with a 5-year maturity and a nominal amount of TL 400 million on 15 March 2019 within its Global Covered Bond Program. The Second Asset Finance Fund set up by the Development Investment Bank of Turkey invested in the covered bonds issued by İşbank and another two Turkish banks, and issued Asset- Backed Securities (ABS) backed by these covered bonds. Cross-Border Banking Operations İşbank pursues its banking operations via İşbank Germany in Germany, İşbank Russia in Russia and İşbank Georgia in Georgia. A group with presence in 11 countries İşbank has presence in 11 different foreign countries. 11 of the total of 38 branches belong to Frankfurt-based İşbank AG whereas Moscow- based JSC İşbank and Tbilisi-based JSC İşbank Georgia have 3 and 2 branches respectively. In addition to aforementioned branches of its subsidiaries, İşbank has 2 branches in Iraq, 2 in Kosovo, 2 in the UK, 1 in Bahrain and 15 in the Turkish Republic of Northern Cyprus (TRNC). The Bank has two representative offices, one in Shanghai (China) and the other one in Cairo (Egypt). As of the end of 2019, the total asset size of İşbank’s overseas organization amounted to USD 7.3 billion. The share of overseas subsidiaries in this total is 33%, while that of overseas branches is 67%. 2019 highlights… İşbank comes to the forefront in Iraq with its international banking services offered particularly via its Erbil branch. Besides intermediating a substantial portion of the trade between the two countries, the Bank also contributes to the business that adds value to the region. Uncertainties in the region lessened in 2019, which reflected on results. In Kosovo, İşbank focused especially on expanding its customer deposit base and increasing the number of customers in 2019. As a result of these efforts, the Bank achieved significant rise in the number of customers and a growth of over 20% in deposit volume. The positive relationships developed with the Gulf countries via Bahrain Branch contributed to İşbank’s effort to increase the diversity of funds. Edmonton Branch, which is İşbank’s second branch in the UK, was relocated in 2019 and renamed “North London Branch”. İşbank continued to deliver all banking services with its two branches in the UK and also increased the share of service delivered via non-branch channels. The branches also kept offering the Overseas Mortgage product, which is designed for real estate purchases in Turkey of retail customers residing in the UK. 55 Activitiesİşbank Annual Report 2019 Digital Banking İşbank carries out initiatives that build on its digital competencies in keeping with its identity as the solution partner that accompanies its customers through all stages of their life journeys and that makes life easier for them with the experience it offers. 92.2% 45.9% The share of İşbank’s transactions performed on non- branch channels to total transactions exceeded 92%. Bankamatik ATMs have 45.9% share of total monetary transactions. 8.1 million At year-end 2019, the number of the Bank’s total digital customers reached 8.1 million. 7.8 million At year-end 2019, the number of active mobile banking customers exceeded 7.8 million. 56 İşbank Annual Report 2019 2.5 million The number of customers using the Internet Branch reached 2.5 million. İşbank uses digital technologies and analytics with an innovative approach to create a perfect and secure customer experience at all touch points. 9.8 million The number of customers using Bankamatik ATMs reached 9.8 million. 8.3 million Beside İşbank customers, Bankamatik ATMs were also used by 8.3 million other bank customers. 57 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 İşCep, is Turkey’s first mobile banking app and mobile banking platform offering the widest set of transactions. DIGITAL BANKING Digitalization and advancements in technology have reshaped customer expectations and the way they interact with institutions to a significant extent. The ability of companies to deliver an easy and fast personal experience regardless of time and place has become one of the necessities of the digital age. İşbank carries out initiatives that build on its digital competencies in keeping with its identity as the solution partner that accompanies its customers through all stages of their life journeys and that makes life easier for them with the experience it offers. The key components of İşbank’s digital banking operations are: - increasing contextual interaction with customers, and - delivering personalized and innovative services. Carrying on with its activities within this framework, the Bank focused on: • using digital technologies and analytics with an innovative approach to create a perfect and secure customer experience at all touch points, • co-developing services with non-Bank stakeholders to ensure an end-to-end seamless experience within the frame of its vision to offer banking service anywhere, • supporting the entrepreneurship ecosystem through Workup Entrepreneurship Program and collaborating with startups that will create value to the Bank, group companies and customers. 58 • developing solutions and value propositions that will support the consumers and organizations in making healthy financial decisions, 44 44 new capabilities were added to İşCep in 2019. • becoming companies’ integrated business partner in commercial banking and the gateway for all retail customers to the digital world in retail banking, • achieving a broad-based customer portfolio with the inclusion of unbanked customers and commercial establishments with limited access to financial services, while also expanding the customer portfolio. In order to make the most of the opportunities brought by digitalization, transformation initiatives were carried out as a multi-dimensional program covering all areas of activity and business models were constantly renewed by adapting digital technologies to the Bank processes. In this context, the benefits of digitalization were captured for the customers in user-oriented, personalized, effective, innovative and reliable services on both digital and physical channels. Leading position in digital banking The number of İşbank’s active mobile banking customers went up from 6.7 million to more than 7.8 million in the twelve months to year-end 2019. In the same timeframe, the number of the Bank’s total digital customers reached 8.1 million, whereas number of customers using Bankamatik ATMs and Internet Branch reached 9.8 million and 2.5 million, respectively. Beside İşbank customers, Bankamatik ATMs were also used by a total of 8.3 million other bank customers, 2.4 million of them non-residents and 5.9 million residents,. As a result, the share of İşbank’s transactions performed on non-branch channels to total transactions exceeded 92%. The mobile banking app with Turkey’s most comprehensive transaction set - İşCep 44 new capabilities were added to İşCep in 2019, Turkey’s first mobile banking app and the mobile banking platform offering the widest set of transactions. Customer experience improvements were made in the app, and the number of functions available increased from 272 to 316. İşbank Annual Report 2019 Bankamatik ATMs, offer service 24/7 in 12 different languages. İşbank preserves its position as the private bank with the broadest ATM network in Turkey with 6,506 domestic Bankamatik ATMs, 4,410 of which are accessible for customers with disability. The highlights of the capabilities added to İşCep in 2019 are as follows: - TekCep application was introduced, as a first in the sector, which lets commercial customers instantly track account balances and transactions at their accounts in other banks from İşCep and Internet Branch. - Card-to-Card Money Transfer transaction was added to İşCep, which allows money transfer 24/7 within Turkey. - Robofon Advisor application enables customers to view fund suggestions aligned with their risk profiles and invest using İşCep. - No-Wait Term Deposit Account, which allows money withdrawal from the term deposit account without waiting for the maturity date and without losing accumulated interest, was made available via İşCep. - Retired customers can transfer their pensions via İşCep without a need of visiting the branch. - Customers were offered the option to make their passport, departure tax and ID charge payments using İşCep. This allows customers who pay their departure taxes via İşCep to pass from customs checkpoints without a separate document being necessary. - Customers can now access the agreements they have signed with the Bank and the forms via İşCep and also approve the agreements pending for digital approval via the app. - Real person tradesmen customers can now get an Instant Commercial Loan from İşCep. - The capabilities to access letters of guarantee, approve salaries, open daily-earning account, and view invoices in the Direct Debit System were made available via İşCep to commercial customers. Servicing 18 million Bankamatik ATM users As at 2019 year-end, İşbank preserves its position as the private bank with the broadest ATM network in Turkey with 6,506 domestic Bankamatik ATMs, 4,410 of which are accessible for customers with disability. Bankamatik ATMs, which offer service 24/7 in 12 different languages to 18.1 million users (9.8 million of them Bank customers and 8.3 million customers of other domestic and foreign banks), have 45.9% share of total monetary transactions. With the acceptance of cards bearing Discover, Diners Club and MIR logos, the entire set of international card brands are now acceptable at Bankamatik ATMs, and İşbank has become the bank with the widest acceptance set in Turkey in terms of brand diversity. New Generation Technologies İşbank has positioned Maxi, its personal banking assistant that runs on artificial intelligence and natural language processing technology and also delivers one-on-one dialogue experience, as a multi-faceted, accessible personality that constantly learns and focuses on making life easier. Enabling customers to execute their transactions by talking or texting, and launched in November 2018, Maxi had over 22 million dialogues with 4.9 million customers as at 2019 year-end. Natural language processing capabilities and transaction diversity of Maxi were further improved, and the total number of capabilities was increased to 164. First introduced for service on İşCep, Maxi began to be used also on Maximum Mobile and telephone banking. After its integration with Facebook Messenger was completed in 2018, Maxi has become the first application of a Turkish bank that was integrated with Google Assistant in February 2019, and its WhatsApp integration was brought to completion in September. 59 Activitiesİşbank Annual Report 2019 İşbank and its Activities in 2019 Within the scope of its vision to offer banking service anywhere, investments in Application Programming Interface (API), which enable customers to reach İşbank products and services anytime, anywhere they need them, continued during the year. Within the scope of its vision to offer banking service anywhere, investments in Application Programming Interface (API), which enable customers to reach İşbank products and services anytime, anywhere they need them, continued and further increased during the year. In this framework, APIs were enriched in line with users’ needs, and the total number of APIs reached 32. Numerous functions including loan processes, money transfers, opening a session with İşbank credentials, FX data, Bankamatik ATM/Branch locating, account movements and balance viewing were made available for the usage of companies and startups. TekCep app which was introduced In line with the same strategy, allows commercial customers follow their account balance information and transaction movements at different banks holistically via İşCep. Under the “single digital identity” vision, a user can log in to Anadolu Sigorta internet branch after authentication is performed by İşbank as part of the efforts to log into third party applications with İşbank credentials. The first step has been taken for the platform model that will enable increasing the rich transaction set of İşCep at low-cost and at a faster pace. Accordingly, transition without login to Anadolu Hayat Emeklilik app via İşCep has been introduced, and all of the functions Anadolu Hayat Emeklilik offers on its mobile app have become accessible from İşCep. in İşbank Museum and brought together with the visitors in November. Pepper has attracted great interest from children and has been instrumental in introducing the future generations to robotic technology. Robot Pepper The efforts for deploying the humanoid robot Pepper at 14 İşbank branches were completed. Innovation and Entrepreneurship at İşbank In order to correctly predict the strategic moves capable of changing competition in the digital world where technology is progressing rapidly and take action, İşbank carries on its initiatives for developing the technology and business models aligned with the new competitive conditions. For the effective use of game-changing technologies such as AI, Blockchain, and API, collaborations continued taking the form of using the products and services of startups either included in the Workup Entrepreneurship Program or contacted within the ecosystem, co-developing products with them, and extending support to startups. Workup Entrepreneurship Program had its 4th and 5th cohort graduates in June and December, and the total number of graduates reached 49. In order to increase the contribution to the national economy by scaling the startups included in the Workup Entrepreneurship Program globally, a program was launched with the contributions of Maxitech, the innovation center in San Francisco. In this program, 11 startups participated in the expedited training program in Turkey and three were selected to be brought together with potential customers, accelerator programs and investors in San Francisco in October. In addition to the Workup Entrepreneurship Program, various activities were organized to inspire young entrepreneurs within the scope of the cooperation with the Turkish Entrepreneurship Foundation (GİRVAK) established to support the entrepreneurial activities of young people in Turkey. Collaborative initiatives for product and service development targeting youth banking were also carried out with the Foundation. The efforts for deploying the humanoid robot Pepper at 14 İşbank branches were completed, and Pepper had a monthly average of 24 thousand interactions with customers. Pepper was placed Workup Entrepreneurship Program received the Gold Sardis prize in the innovative acceleration and incubation programs category at the Sardis Awards organized to recognize the achievements 60 İşbank Annual Report 2019 The Bank achieved 3% improvement in branch customer satisfaction over the previous year, and achieved a score of 74% in 2019. In 2019, the Bank acquired the capability to digitally measure customer experience across all of its branch and digital channels. of companies engaged in the finance sector. In addition, İşbank was awarded the first place for two consecutive years in the “Startup Friendly Companies” competition organized by Endeavor Turkey, TOBB (The Union of Chambers and Commodity Exchanges of Turkey) Young Entrepreneurs Board, Özyeğin University and Bizz Consulting. Maxis Innovative Startup Capital Investment Fund, to which the Bank committed TL 100 million, invested a total of USD 1.35 million in two startups in 2019. New Technologies are being monitored via the Bank’s innovation centers in the US, China and Turkey, and proof of concept initiatives were carried on for using digital technologies and analytical methods with an innovative approach and for creating new products. As part of the efforts to deploy innovation culture, 8 workshops were held with the Bank’s employees. In addition, 6 workshops were completed under the collaborations with universities, and processes aimed at creating innovative value propositions were carried out within the scope of “İş’te Yeni Bir Lider” Program. Customer Experience The customer experience vision of İşbank is to create a world in which customer journeys are simplified, all transactions are rendered user- friendly, and personalized experiences are offered, and always guide its customers and lend them a helping hand whenever they need it in this world. Based on this vision, the Bank continued to work towards enriching all touch points with user-oriented, personalized, effective, innovative, reliable and visual/intuitional designs, and delivering a perfect customer experience. With 50%, service quality has the biggest impact on Net Promoter Score, a metric used worldwide for customer experience management. In order to measure service quality, instant and continual customer experience measurement performed at İşbank branches were carried on in 2019, rendering sales targets and customer experience indicators of branches traceable. The reporting platform of the application was employed mostly by the Bank’s field sales teams for offering better service to customers. As a cumulative result of these efforts, the Bank achieved 3% improvement in branch customer satisfaction over the previous year, and achieved a score of 74% in 2019. In the reporting period, the Bank also acquired the capability to digitally measure customer experience across all of its branch and digital channels. The feedbacks from these measurements were used extensively by the entire organization with the purpose of delivering better service to customers. During the reporting period, İşbank kept reviewing critical customer journeys and analyzing prioritized processes with respect to customer experience. The Bank completed the assessment of 23 functions offered on the channels from the standpoint of customer experience. All these efforts and initiatives made İşbank the private bank with the highest net promoter score as compared with other closest peers in terms of size according to 2019 results of Futurebright, an independent research company. Digital Assets İşbank continued to track users’ digital footprints on its websites and to enrich its sales tunnels. Accordingly, visitors’ browsers and devices were detected and application forms were personalized. In addition, tests were performed with multiple variables aimed at measuring which of the different page versions on websites had higher turnover. Pages were personalized according to questionnaires and flow within the websites. Contextual marketing activities were carried out based on 140 active scenarios on websites as of 2019 year-end. 61 Activitiesİşbank Annual Report 2019 27 During 2019, the number of robots increased to 27 with 22 additional robots purchased. İşbank and its Activities in 2019 İşbank automates its operational processes using the Robotic Process Automation (RPA) technology. INNOVATIVE IMPLEMENTATIONS AND PRODUCT DEVELOPMENT Initiatives aligned with the target of constant process improvement During 2019, technological transformation of İşbank was brought to completion and payment applications were revamped, and a uniform and integrated technology platform was created which is in line with the future needs. In addition, multi-channel architectural design resulted in leanness, and an integrated and consistent channel experience was secured through faster introduction of products and services to the market. Agile Atelier In 2019, Agile Organization initiatives continued, which were launched as a pilot run at the Head Office upon establishment of the Agile Atelier in 2018. In this working model, employees from the Bank’s various disciplines work in teams, putting customer needs in the center to create value on the basis of swift decisions with small trials and errors, without getting caught up in obstacles. The model covers 240 employees with competencies in different areas of business. As at end-2019, 4 “Agile Areas” made up of 25 agile teams were working, focusing on tradesmen and small enterprises, retail customers, AI applications and robotic process automation. In the reporting period, the Bank achieved successful results with the “agile working model”, and significantly enhanced employee satisfaction. The speed of getting work done and employee satisfaction improved by up to 75% and 18% respectively in select topics within Agile Areas. In the AI agile area, deposit pricing was made with artificial intelligence, resulting in significant gains, whereas commercial agile area increased credit disbursements by more than 10 times with the rate of delays remaining flat through improvements 62 made to small business loans allocated automatically. While campaign realization speed doubled in the retail agile area, the number of transactions covered under robotic automation reached 5 million per year in the automation agile area. Being one of the first institutions to implement this globally spreading mode of working in Turkey, İşbank, with this initiative, claimed the first prize at Sardis 2019 Awards, Enterprise Innovation Category, and third prize in the IDC’s Turkey Finance Technology Awards 2019 Best Enterprise Transformation Project category. One of the few number of implementations in the world banking sector, the Agile Atelier was visited by nearly 100 external and internal institutions/organization, presented as a case study in conferences, and featured many times in printed and visual media. Automated Classification of Customer Orders In 2019, orders sent to Banking Operations and Payment Operations Division from different channels began to be classified automatically according to transaction content (EFT order, FX transfer etc.) using the OCR technology. Dynamic Task Management Application (ODİN) A pilot run was commenced for ODİN (optimized and dynamic) application, which dynamically distributes the processes in the BPM application (business process management) used in the common service center (OSM) to different services/ divisions with the optimization model created in view of their service levels, cut-off hours, employee competencies and similar indicators. The application secured increase in the back office service quality and productivity, and will be generalized to cover all OSM processes in 2020. Robotic Process Automation Technology İşbank automates its operational processes using the Robotic Process Automation (RPA) technology. RPA is a software that imitates human actions and is used in the performance of repetitive, high- volume tasks. Transactions are standardized and error-free results are obtained at points using RPA technology that generates increased productivity and enhanced quality in all processes. During 2019, the number of robots increased to 27 with 22 additional robots purchased. In total, 62 robotic processes were designed, and robots began working on them. Process development for İşbank Annual Report 2019 62 robotic processes were designed, and robots began working on them. full-time utilization of robot capacities are going on rapidly. Tasks are being assigned to robots in areas with standard and high-volume tasks such as operations, lending, HR, sales, compliance, capital markets and support services, thereby freeing up employees to carry out tasks with higher added value. Gathered in a centralized team, robotic process development capability was deployed across business units through classroom training programs carried out in 2019. Robotic process development training was given to 97 people from 29 different divisions in five different sessions. Thanks to this project, employees also benefited from automation opportunities in their daily tasks as well. In 2020, İşbank will keep increasing its customer service quality and speed through RPA, which it regards as an opportunity for the digital transformation of the Head Office. Innovative implementations for credit products İşbank launched innovative implementations associated with credit products in 2019. Kripton Allocation In the Kripton Allocation process, information received at the time of application is transferred to the allocation application, thus preventing repetitive data entry in different applications, while fields that need to be manually filled by users during proposal steps were decreased and data began to be automatically extracted from other applications and external systems as much as possible. On the Commercial Loan Application screen, if applications are created for customers and products identified within HTK (Fast Commercial Loan application) scope, the decision engine is run by the system, and applications for which a credit line is proposed are directly referred to the HTK application, thereby minimizing the allocation operation. Real Estate Information “Information on Mortgaged Real Estate” application was introduced for the mortgages that were/ will be created in favor of the Bank for loan collateralization. In the application, related real estates can be queried on the Directorate General of Title Deed and Cadaster database using the basic title deed data. As a result of the queries, current title deed and encumbrance information for a given real estate can be reached. As a result of the integrations, surveyor and insurance information about the real estate can now be obtained from external systems, and thus operational errors were precluded. Kripton Disbursement Kripton Disbursement has been put into wide use for TL Installment Commercial Loans. The process is designed to include several steps, which are entry of repayment schedule for commercial loans payable in installments, listing of agreements associated with the loan, viewing collaterals, approval, file opening and disbursement. With the disbursement process, the system automatically includes loan expenses and fees in the process, makes collection a step of the process, collectively lists agreements and documents necessary to be obtained for the loan, and creates agreements using the customer data and process information. Commercial Loans Tracking In an effort to introduce a more effective tracking system for commercial loans, Commercial Loans Tracking screens were introduced. Work is ongoing to set up AI-based “Early Warning and Collection Models”. Novelties in payment systems As part of the initiatives for revamping the salary payment process of commercial customers to their employees, infrastructure development has been completed for customers making salary payments based on file transfers to approve their salary payments via İşCep and Commercial Internet Banking channel, if they choose to do so, and to use their overdraft commercial deposit account in case of insufficient account balance. Furthermore, pilot work is underway for the new salary process that will enable all salary payment transactions to be realized in a shorter period of time and in a more digital environment. This new application is targeted to be generalized in the near future. Donations, which the Bank intermediates with the aim of supporting the activities of various institutions and non-governmental organizations all over Turkey, can now be made via İşCep as well. HGS label information change API is put into digital software programmers’ use in order to respond to information change demands of customers that have a large number of HGS labels, such as fleet companies. 63 Activitiesİşbank Annual Report 2019 TL 21.5 billion As at year-end 2019, İşbank’s participations portfolio had a total worth of TL 21.5 billion. Subsidiaries Over the course of its history of almost a century, İşbank has contributed to the Turkish economy by participating in nearly 300 companies. Over the course of its history of almost a century, İşbank has contributed to the Turkish economy by participating in nearly 300 companies. Since its foundation in 1924 to date, İşbank has participated in nearly 300 companies. Having simplified its equity stake portfolio in time, the Bank had direct participations in 24 companies in the reporting period. In the same period, İşbank had direct or indirect control over 111 companies. As at year-end 2019, İşbank’s participations portfolio had a total worth of TL 21.5 billion, with 74.1% of it being traded on Borsa İstanbul. Constituting 74.1% of İşbank’s participations portfolio, Türkiye Sınai Kalkınma Bankası A.Ş., Anadolu Hayat Emeklilik A.Ş., İş Finansal Kiralama A.Ş., İş Gayrimenkul Yatırım Ortaklığı A.Ş., İş Yatırım Menkul Değerler A.Ş. and Türkiye Şişe ve Cam Fabrikaları A.Ş. are publicly listed companies and their shares are traded on Borsa İstanbul. The ratio of the participations portfolio in İşbank’s total assets stood at 4.5% as at year-end 2019. Efficiency and profitability are the building blocks of İşbank’s equity stake strategy. In line with its investment strategy, İşbank’s priority is to make sure that its subsidiaries rank among the pioneering and leading enterprises of their respective sectors and that they create value. FINANCE İşbank has financial services subsidiaries that are active in business lines such as banking, insurance, private pension, capital market brokerage, portfolio management, venture capital, factoring, reinsurance, financial leasing, asset management, 64 securities investment trust, investment banking and real estate investment trust. Financial services subsidiaries enrich the range of products and services offered by İşbank to retail and corporate customers in different business lines while also creating complementary and cross product delivery and sales opportunities. TSKB Türkiye Sınai Kalkınma Bankası A.Ş. (TSKB) is Turkey’s first privately-owned development and investment bank. TSKB, as a leader among the privately-owned development and investment banks, has undertaken a significant role in Turkey’s economic development since its foundation in 1950. The Bank continues to contribute sustainable value for stakeholders and the national economy with its strong performance in economic, environmental and social aspects. Offering its customers a wide range of innovative services with its in-depth knowledge in the areas of corporate banking, investment banking and advisory services, TSKB has adopted it as its mission to contribute continued and increasing support to the inclusive and sustainable development of the country with a broad range of services. In the frame of the loan agreements executed with development finance institutions, TSKB provides social loans such as women employment, supporting employment in underdeveloped areas, occupational safety and health, as well as renewable energy, environment, energy and resource efficiency themes, and allocates funds to investments in diverse sectors in the form of SME loans and facilities. Also taking into consideration the environmental and social impacts of the loans it extends, TSKB remains as one of the leading institutions in the field of sustainability in Turkey. TSKB has been the first entity to release an Integrated Report in 2017. Recognized with the “Green Bond Deal of the Year in Central and Eastern Europe” title at the EMEA Finance Awards 2017 for the Green/Sustainable Bond issue it has carried out in 2016, the bank issued the world’s first subordinated sustainable bond in March 2017. Having joined UNEP-FI İşbank Annual Report 2019 The share of the participations portfolio in İşbank’s total assets stood at 4.5% as at year-end 2019. Principles for Responsible Banking as a founding signatory in 2019, TSKB joined the Steering Committee as its tenth member of IDFC, of which it has been a member since 2011 with the leading international development banks, the same year. With the USD 200 million-funding secured in 2019 from the Chinese Development Bank (CBD), the Bank plans to finance industrial, SME, energy, infrastructure, health and education projects across Turkey. The Bank will utilize the loan amounting to EUR 85 million that it has obtained from the French Development Agency (AFD) in the reporting period to support the investments of Turkish companies which address gender equality in the working environment, and promote the participation of women in the workforce. In addition, under the co-financing agreement it has signed with the International Bank for Reconstruction and Development (IBRD), the Bank and the EBRD will also allocate funds of EUR 100 million to the private sector. In the reporting period, the Bank also rolled over its syndicated loan approximately at a ratio of 80% with the participation of international financial institutions and raised funds in the amount of USD 177 million. In October 2019, TSKB’s corporate governance rating was raised to 95.58 on a scale of 100. On a consolidated basis, TSKB had TL 5.2 billion in shareholders’ equity and TL 42.3 billion in total assets as of year-end 2019. In its review, Fitch Ratings revised TSKB’s long-term local currency IDR rating as “BB-”, and foreign currency IDR as “B+”, with a “stable” outlook for both. Finally, TSKB was assigned a national long term rating of AA (tur), Viability Rating of (b+) and a “stable” outlook. On 18 June 2019, Moody’s determined TSKB’s long-term issuer rating as “B3”, its baseline credit assessment as ‘caa1’, with a ‘negative’ outlook assigned. www.tskb.com.tr İşbank Germany A leading financial institution backed by Turkish capital in Europe Founded in 1992, İşbank Germany developed and thrived within the financial system in Europe during 27 years, and helped customers in Turkey to access the financial system in Europe. Having successfully adapted to the changing dynamics throughout its operations more than a quarter of a century, İşbank Germany operates in Germany with 10 branches and in the Netherlands with 1 branch. As of year-end 2019, the bank had EUR 1.8 billion in total assets, EUR 211 million in total shareholders’ equity. While its activities are mostly concentrated in corporate banking, İşbank Germany, with its 165 employees, offers the full range of banking products to its customers. www.isbank.de İşbank Russia Serving customers at 3 locations in Russia Since 2011 İşbank has been cultivating its presence and efficiency in Russia, one of Turkey’s important trade partners.. Having 122 employees on its payroll, the bank has three branches in total, located in Moscow, Kazan and Saint-Petersburg. Concentrated mostly on corporate banking services, İşbank Russia’s total assets were worth USD 279 million and its shareholders’ equity was registered as USD 71 million as of year-end 2019. www.isbank.com.ru İşbank Georgia İşbank’s organization in Georgia The presence of İşbank in Georgia, Turkey’s border neighbor which is the gateway to Caucasus, started with the branch opened in Batumi in 2012. Tbilisi branch became operational in 2014 and the two branches were transformed into a subsidiary bank in 2015. Offering mostly corporate banking services and having 68 employees, İşbank Georgia had total assets worth USD 94 million and its shareholders’ equity amounted to USD 28 million as at year-end 2019. www.isbank.ge 65 Activitiesİşbank Annual Report 2019 TL 6.6 billion Anadolu Sigorta generated a premium production of TL 6.6 billion as at year-end 2019. Subsidiaries Anadolu Hayat Emeklilik The first listed private pension and life insurance company Turkey’s first life insurer, Anadolu Hayat Emeklilik A.Ş. (Anadolu Hayat Emeklilik) is also the first listed company operating in the country’s private pension and life insurance sector. As of year-end 2019, the company had total assets worth TL 27.1 billion and shareholders’ equity of TL 1.3 billion on a consolidated basis. As of the same date, Anadolu Hayat Emeklilik, which is the highest fund generator in private pension and life insurance combined, is the sector’s leader in total assets. www.anadoluhayat.com.tr Anadolu Sigorta The pioneer of the Turkish insurance sector Operating in non-life insurance branches and being one of Turkey’s leading insurance companies, Anadolu Anonim Türk Sigorta Şirketi (Anadolu Sigorta) generated a premium production of TL 6.6 billion as at year-end 2019. As of year-end 2019, the company had TL 9.4 billion in total assets and TL 1.8 billion in shareholders’ equity on a consolidated basis. The company was assigned a score of 9.55 in the Corporate Governance Rating Report issued in November 2019. As of year-end 2019, premiums written abroad accounted for 36% of the Company’s total written premiums. On a consolidated basis, the Company’s total assets were worth TL 12.9 billion and shareholders’ equity reached TL 2.9 billion as of the same date. Millî Reasürans holds 57.3% interest in the capital of Anadolu Sigorta. www.millire.com İş Leasing Turkey’s pioneering financial leasing company Having been one of the pioneers of the leasing sector in Turkey since its foundation in 1988, İş Finansal Kiralama A.Ş. (İş Leasing) pursues operations with the mission of prioritizing the SMEs in its funding activities, developing and maintaining a broad-based and high-quality portfolio, and satisfying customer demands with effective, fast and high-quality solutions. As at year-end 2019, İş Leasing had TL 9.1 billion in total assets and TL 1.3 billion in shareholders’ equity on a consolidated basis, while its leasing receivables amounted to TL 5.1 billion. The international credit rating agency Fitch Ratings assigned İş Leasing a long-term foreign currency rating of ’B+’, a long-term local currency rating of ‘B+‘ and a long-term national credit rating of ‘A+ (tur)’. Millî Reasürans holds 57.3% interest in the capital of Anadolu Sigorta. www.isleasing.com.tr İş Faktoring www.anadolusigorta.com.tr Millî Reasürans Uninterrupted reinsurance services since 1929 The financial strength rating of Millî Reasürans T.A.Ş. (Millî Reasürans), the deep-rooted company in the Turkish reinsurance sector, was affirmed as ‘B+’ in July 2019 by A.M. Best, the world’s most prestigious rating institution in the insurance sector. The company’s national credit rating was revised as ‘tr A+’ in August 2019 by Standard & Poor’s. Millî Reasürans has a branch operating in Singapore in line with the company’s strategy to export its know-how and reinsurance experience acquired in the national market to global markets. An innovative approach to the accounts receivable funding sector Being one of the pioneering companies in the sector since its incorporation in 1993 with its robust financial structure and customer-oriented approach to business, İş Faktoring A.Ş. (İş Faktoring) has been offering rapid and competitive services in the areas of finance, guarantee and collection. As at year-end 2019, İş Faktoring has TL 3.3 billion in total assets and TL 300 million in shareholders’ equity. İş Leasing holds 78.23% share in the capital of İş Faktoring. www.isfaktoring.com.tr 66 İşbank Annual Report 2019 4 of Şişecam Group companies were listed in the 2018 edition of “Turkey’s Top 500 Industrial Enterprises” compiled by the İstanbul Chamber of Industry. İş GYO One of Turkey’s largest real estate investment trusts Being one of the sector’s leading actors with its solid portfolio and financial structure, İş Gayrimenkul Yatırım Ortaklığı A.Ş. (İş GYO) pursues its activities with a focus on maintaining and developing a diversified and well-balanced portfolio. As of year-end 2019, the Company’s total assets amounted to TL 5.7 billion and its shareholders’ equity totaled TL 3.9 billion. Based on the review conducted by Saha Kurumsal Yönetim ve Kredi Derecelendirme Hizmetleri A.Ş. in August 2019, the Company was assessed within the investment category and the Company’s Long- Term National (TR) and Short-Term National (TR) ratings were affirmed as AA and A1+, respectively, with a stable outlook assigned to both. www.isgyo.com.tr İş Yatırım A leading and pioneering investment house in the capital markets Offering brokerage services in domestic and international capital markets, investment advisory, private asset management and corporate finance services, İş Yatırım Menkul Değerler A.Ş. (İş Yatırım) is the only brokerage house in Turkey traded on Borsa İstanbul Stars Market. Assigned long-term and short-term national credit ratings of ‘AA+’ and ‘A1+’ respectively by SAHA Kurumsal Yönetim ve Kredi Derecelendirme A.Ş. with a stable outlook, İş Yatırım had TL 6.7 billion in total assets and TL 1.4 billion in shareholders’ equity on a consolidated basis as of 2019 year- end. www.isyatirim.com.tr GLASS Şişecam glass, glassware, glass packaging and chemicals, mainly soda ash and chromium chemicals. Besides Şişecam -the Group’s parent company-, shares of Trakya Cam, Anadolu Cam, Soda Sanayii and Denizli Cam are traded on Borsa İstanbul as well. The Şişecam Group carries out production in facilities and plants located in Turkey as well as in Egypt, Russia, Georgia, Bulgaria, Bosnia- Herzegovina, Italy, Ukraine, Romania, Germany, Hungary, Slovakia and India. In addition, work is ongoing for a natural soda investment in the US. Having produced 43% of total glass output outside Turkey (as measured on a tonnage basis) and generated 62% of total sales revenues from facilities based abroad and exports from Turkey, Şişecam Group’s exports to 147 countries amounted to USD 785 million as of year-end 2019. Positioned as one of the world’s and Europe’s leading companies in the industry, the Şişecam Group ranked third to fifth in the world and first to fifth in Europe, in terms of its production capacity in glass manufacturing as at the end of 2019. Ranking third in Europe in terms of soda production capacity, the Group is the world leader in the production of basic chromium sulphate and sodium bichromate. As at year-end 2019, Şişecam had TL 38.8 billion in total consolidated assets and TL 19.1 billion in shareholders’ equity. In November 2019, Fitch confirmed Şişecam’s long-term foreign currency credit rating as ‘BB-’, revising its outlook as ‘stable’. Moody’s, on the other hand, revised the Company’s long-term foreign currency rating as ‘B1’ and its outlook as ‘negative’ in September 2019. The Company’s Corporate Governance Rating was determined as 9.53 in December 2019. 4 of Şişecam Group companies were listed in the 2018 edition of “Turkey’s Top 500 Industrial Enterprises” compiled by the İstanbul Chamber of Industry. The founder and the unchanging leader of the Turkish glass industry www.sisecam.com.tr Founded in 1935, Türkiye Şişe ve Cam Fabrikaları A.Ş. (Şişecam) is the holding company of Şişecam Group comprising of companies operating in flat 67 Activitiesİşbank Annual Report 2019 Corporate Social Responsibility Activities İşbank contributes to social progress through the countrywide social responsibility initiatives that it conducts or supports. • 68 European championships, 67 second place and 58 third place titles in Europe-wide organizations. 487 Total medals earned under İşbank’s main sponsorship of the Turkish Chess Federation numbered 487. The driving force behind Turkey’s development, İşbank takes its activities beyond its core business of banking and extensions. The Bank has assumed a pioneering and guiding role in social development as in many other areas. The Bank invests not just in the present but also in the future and produces permanent value through its initiatives in the areas of education, environment, culture and the arts that it launches or substantially supports, in a bid to help achieve that which is the best for the society and the environment. EDUCATION Chess Main sponsor of the Turkish Chess Federation With the goal of making chess a widely played and easily accessible mass sports in the country, İşbank entered into cooperation with the Turkish Chess Federation in December 2005. İşbank is the countrywide sponsor of this discipline. The main motives behind the sponsorship decision included propagating chess particularly among children, making it an easily accessible sport, compensating the lacking aspects of chess education, turning it into a popular and sought after sport across the country, and reaching a higher number of gifted children in this respect so as to increase the level and frequency of international achievements. Since the beginning of İşbank’s sponsorship of the Turkish Chess Federation: • licensed players increased from 30,000 to 931,742 • chess trainers increased from 2,000 to 86,858 • chess tournaments increased from 400 to 9,600 • chess clubs increased from 600 to 2,136 • title-holder chess players increased from 6 to 187. Medals claimed in tournaments reached 487. The titles won to date are presented below: • 25 world championships, 30 second place and 39 third place titles in worldwide organizations, Main sponsor of the Northern Cyprus Chess Federation In parallel with its sponsorship of the Turkish Chess Federation, İşbank became the sponsor of the Northern Cyprus Chess Federation in 2013 with the same objectives. Upon initiation of the sponsorship, chess has become a club activity once a week at primary schools in the Turkish Republic of Northern Cyprus. Chess classes were opened in all of the schools in the country. İşbank chess classes in primary and secondary schools Chess classes are being opened at schools in order to make chess an easily accessible sport at primary and secondary schools, to encourage children to play chess, to attract the attention of teachers and parents to this area and to supply lacking materials at schools with limited means. During 2019, more than 2,000 chess classes were opened, bringing the total number of chess classes opened at schools to 25,000. Turkey Junior, Youth and Veterans Chess Championships At the Turkey Junior (aged 7-12) and Youth (aged 13-18) Chess Championships held concurrently in Antalya in 2019, 2,636 players from 81 cities in Turkey and from the Turkish Republic of Northern Cyprus competed. School Sports Chess Turkey Championships Sponsored by İşbank and co-organized by the Turkish Chess Federation and Directorate General of Sports School Sports Branch, 2019 School Sports Chess Turkey Championships was held at Lütfi Elvan Congress Center in Karaman between 9 and 13 June 2019. 100 school teams and 511 chess players from a large number of cities in our country participated in the competition. Türkiye İş Bankası Chess Super League Competitions continued to be organized within the frame of Türkiye İş Bankası Chess Super League. Tatvan Chess Education Club has claimed championship of the 2019 Türkiye İş Bankası Chess Super League. 68 İşbank Annual Report 2019 Türkiye İş Bankası Chess Super League which is the strongest league in its field is also recognized as one of the strongest ones in Europe. Türkiye İş Bankası Chess Super League is the strongest league in its field in Turkey, and is also recognized as one of the strongest ones in Europe. 81 Students from 81 Cities Having espoused the mission of “equal opportunities in education”, Darüşşafaka provides education to students who have lost one or both parents and are in financial need. Darüşşafaka offers high quality education and boarding in contemporary conditions with full scholarship from fifth grade through to the end of high school. Launched by İşbank in collaboration with Darüşşafaka in 2008-2009 academic year, “81 Students from 81 Cities” initiative is one of the most comprehensive and longest-lived projects in the area of education in Turkey. Under the project, each year İşbank covers all educational expenses for 81 children from 81 cities who successfully pass the Darüşşafaka Educational Institutions admission exam from the fifth grade through to the end of high school. Within the scope of the project, İşbank keeps extending support to students who are admitted to a higher education program. Furthermore, every year İşbank covers the educational costs of a certain number of Darüşşafaka graduates who attend the Koç University under the university’s “Anadolu Scholarship Holders” program. Including this year’s graduates, the number of students supported reached approximately to 750. Aiming to support the students’ social development as well through the project, social and cultural activities are used as a platform to get together with the students. One Million Books, One Million Children At the end of the 2007-2008 academic year, İşbank launched the “One Million Books, One Million Children” campaign, one of the biggest book campaigns ever undertaken in Turkey. With this campaign, the Bank aims to: With the book titled Black Beauty distributed for the 12th year of the campaign carried out at the end of 2018-2019 academic year, 14 million books in total were distributed to primary and secondary school students. Under the campaign, books were sent to Bahrain, Georgia, Iraq, the UK and Kosovo branches, and to İşbank AG and İşbank Russia, as well as to İşbank branches in Turkey and TRNC As in previous years, a certain number of books were printed in the Braille alphabet and delivered to the libraries of schools providing education to visually impaired children in 2019. In addition, books were sent to students of Regional Boarding Secondary Schools and to children boarding in the housing of the General Directorate of Children’s Services. Kumbara Magazine (Kumbara Dergisi) Kumbara and Mini Kumbara Magazines prepared with two different contents for age groups 3-6 and 7-14 are being published digitally since 2016. “Coding Education with Scratch 3.0” and “Chess Training Video” were developed for the Kumbara Magazine portal that was launched with the objective of presenting high quality, educational and entertaining contents to children. During 2019, our Kumbara Magazines were visited by more than 65 thousand unique users and reached approximately 500 thousand hits. Book donations to schools and libraries As an extension of the Bank’s social responsibility initiatives seeking to contribute to education, books published by İş Bankası Kültür Yayınları publishing house are being sent to schools and public libraries all over the country. In 2019, books delivered to more than 3 thousand schools and libraries numbered nearly 58,000. Golden Youth Award Since 1971, students who excel in the university admission exams are awarded every year under the “Golden Youth” award program. The number of the award recipients topped 3,500. • help build on children’s cognitive and cultural intellectual skills, Sponsorship of the First Turkish Arctic Scientific Expedition • support the formation of a generation that reads and questions, • contribute to establishing a cordial communication between the Bank and children at an early age. The first Turkish Arctic Scientific Expedition carried out by İstanbul Technical University’s Polar Research Center (PolReC) was carried out with the sponsorship of İşbank between 11 and 26 July 2019 with the aim of contributing to the global climate change and sea ice physics studies. 69 Activitiesİşbank Annual Report 2019 10 million Kültür Yayınları has brought more than 10 million books to the readers in 2019. Corporate Social Responsibility Activities The expedition covered the following phases: observation and analysis of arctic sea ice type, sea ice topography measurements verification by remote sensing, arctic meteorology, sky quality research, persistent organic pollutant sampling, microplastics research, bioproduct studies, and arrival at 80 North point. During this expedition that was organized for the first time for scientific purposes, data have been gathered for 41 researches of different universities and academic disciplines. The findings are anticipated to lend contribution to the scientific community for many years to come. ENVIRONMENT 81 Forests in 81 Cities The “81 Forests in 81 Cities” project was initiated in 2008 in collaboration with the TEMA Foundation and the Ministry of Agriculture and Forestry. Aiming to protect the environment and to increase environmental awareness of the society, particularly of children, the project has been instrumental in planting 2,205,000 saplings over a total area of 1,500 hectares in all cities in Turkey and 35,200 saplings were planted to 22 hectares in the TRNC The project covers the care of the saplings for a five-year period following the planting. Related work continued in 2019. As part of the upkeeping efforts, about 1,000,000 complementary plantings were made to date. Including the complementary plantings, the total number of saplings planted exceeded 3 million. The success rate in forested areas was 83% as at year-end 2019. CULTURE AND ART Kültür Yayınları Established in 1956 by Hasan Âli Yücel, the former Minister of Education, Kültür Yayınları has since been one of the indispensable publishing houses for all the readers with its publications that are both rich in content and superior in print quality. Carrying on with its publication activities with the principles of high quality publishing, contribution to the advancement of the Turkish language, and instilling the habit of reading from young ages, Kültür Yayınları has brought more than 10 million books to the readers in 2019. 70 Art and Museum Activities İşbank has been carrying out its culture and art operations under the umbrella of İş Sanat since 2017. İş Sanat is one of the country’s most important art platforms with the performance and music events it organizes, its activities in plastic arts, and its contribution to the protection of Turkey’s cultural heritage. Music Events Having celebrated its 19th year last season, İş Sanat hosted 22 concerts and dance performances, 5 children’s events, and 9 poetry readings. In addition, 12 young artists took to the stage at Millî Reasürans within the scope of the “Rising Stars” series. In the 19th season, events were followed by nearly 27 thousand spectators. İş Sanat Concert Hall opened its 20th season with Borusan İstanbul Philharmonic Orchestra featuring Demirhan Gökbudak as the soloist, the Rising Star of the previous year, as has become a tradition by now. Galleries Kibele Art Gallery and Ankara Art Gallery showcase exhibitions by masterful artists in plastic arts. In 2018-2019 season, Kibele Art Gallery hosted retrospective exhibitions of Mustafa Ayaz, Erol Kınalı, Maria Kılıçlıoğlu and Gürol Sözen, as well as a thematic exhibition titled “A Journey to Nâzım”. The 2019 – 2020 season started with “Kibele’s Memory” exhibition organized for the 20th year of Kibele Gallery and looking back on the past exhibitions and artists. Having brought Mevlüt Akyıldız Exhibition to art lovers in May 2019, Ankara Art Gallery opened the 2019 – 2020 season with the exhibition “A Journey to Nâzım”. Mimar Sinan Fine Arts University Artworks Conservation and Restoration Laboratory Artworks Conservation and Restoration Laboratory was co-established with Mimar Sinan Fine Arts University with the aim of supporting academic research on the restoration and conservation of artworks and contributing to training qualified workforce in this area. Conservation and restoration of artworks included in İşbank Art Collection are carried out at this laboratory. In addition, education is ongoing at the University’s Artworks Conservation and Restoration BA program, which was established in the 2013-2014 academic year as part of this cooperation. İşbank Annual Report 2019 İşbank Museum opened its doors to visitors in November 2007. Contributions to Archeology İşbank extends support to archeological excavations with the purpose of unearthing and conserving Turkey’s rich archeological assets and making them a part of the world heritage. In this context, contribution to excavations of the “House of Muses”, one of the excavation sites in the ancient city of Zeugma each of which is carried out as an individual project, commenced in 2012, and the work was completed in October 2019. In addition, support began to be lent for the excavations in the ancient city of Patara in Kaş, Antalya together with Şişecam and TSKB in 2016, ancient city of Teos in Seferihisar İzmir in 2018, and ancient city of Nysa in Sultanhisar, Aydın in 2019. The book titled Patara compiled by Prof. Havva İşkan Işık, Head of Patara Excavations, was published in Turkish and English languages. It is considered that the archeological assets that were and will be uncovered with the 5-year sponsorships of Patara, Teos and Nysa ancient city excavations will shed light not only on the history of civilization in Anatolia, but will also contribute greatly to the world cultural heritage. Furthermore, the Bank also provided support in 2019 for repairing the storage room where ceramic pieces found in Kaman-Kalehöyük excavations that are being run by the Japanese Institute of Anatolian Archeology are conserved. Activities in Museology and History İşbank Museum (Yenicami, İstanbul) Having opened its doors in November 2007, Museum offers a narrative of the Bank’s deep- rooted institutional history and Turkey’s economic development with banking equipment, documents, communication devices, photographs, pictures, advertisements, promotional materials and films. The Museum’s collection mainly consists of three- dimensional objects that depict the transformation phases of banking in Turkey during the Republic Era and objects that have become an indispensable part of people’s daily lives. The pieces in the collection have been gathered from İşbank’s branches. In order to secure longevity of the pieces, international museum protection standards are applied to preserve the collection for posterity. Various workshops targeted at children are conducted at the Museum, including Budgeting and Saving, Money of the World, Museum Memory, and My Pocket Money in my Pocket. Additionally, Financial Literacy Training courses are provided for adults. Over 21,000 students attended the workshops held at the Museum in 2019. In March 2019, İşbank Museum inaugurated an exhibition titled “Independence” in tribute to the centennial of the inception of the War of Independence. The exhibition showcases approximately 1,000 documents, photographs, films and objects. İşbank Museum welcomed more than 580,000 visitors in 2019 and the total number of visitors since the initial opening of the museum reached 1.7 million. Economic Independence Museum of İşbank (Ulus, Ankara) Museum was opened on 2 May 2019 in the historic building located in Ulus, Ankara, which also served as the 3rd Head Office building of İşbank, to showcase the Bank’s deep-rooted corporate history and Turkey’s economic development for the visitors in Ankara. The Museum hosts a permanent exhibition on the 1st and 2nd floors, houses İş Sanat Ankara Gallery on the 3rd floor, a temporary exhibition hall on the 4th floor, and activity hall on the 5th floor. In addition to offering special guided exhibition tours organized for student groups, the Museum welcomed more than 1,800 students in workshops and was visited by 62 thousand people in total during 2019. One leg of the “Independence” Exhibition was put on display in the Economic Independence Museum in Ankara, and the exhibition attracted over 500,000 visitors in total in two museums. History of Technology Book Giving an account of İşbank’s history of technology, the book entitled Eskişehir Yolu 8. Km / Dünden Bugüne İş Bankası’nın Bilgi Teknolojileri Tarihi (History of İşbank’s Information Technology from the Past into the Present) was prepared. İstanbul Foundation for Culture and Arts International İstanbul Music Festival İşbank sponsored the “Moscow Soloists & Yuri Bashmet” concert within the scope of the 47th İstanbul Music Festival organized by the İstanbul Foundation for Culture and Arts. 71 Activitiesİşbank Annual Report 2019 In line with its founding philosophy and sustainability notion, İşbank shapes all of its activities with an integrated and long- term perspective. The Corporate Governance Committee, operating under the Board of Directors, is the highest management body that is responsible for sustainability-related activities at İşbank. The Head of Investor Relations Division acts as the Sustainability Coordinator, and is responsible for coordinating the related activities among the executive bodies. The Sustainability Working Group covering various departments ensures the execution of sustainability activities and information flow. Responsible Banking İşbank’s responsible banking approach envisages management of banking activities with a well- rounded perspective. This comprehensive approach incorporates development of products, services and solutions in many different areas ranging from the financing of renewable energy projects that support a low carbon economy to the empowering of SMEs and women entrepreneurs that are the backbone of the economy, and to analyzing, taking under control, and eliminating -at the maximum extent possible- the environmental and social impacts resulting from the investments that it finances. These efforts also contribute to the solution of issues that global goals designate as critical. In loan assessment processes, analyzing and managing environmental and social impacts are as crucial as economic feasibility, and represent an important aspect of responsible banking approach. At İşbank, potential environmental and social risks of all greenfield investment projects worth more than USD 10 million and the investors requesting loans are assessed by the Environmental and Social Risk Evaluation Tool (ERET), which requires an examination on the basis of 26 different criteria. As a prerequisite of its responsible banking notion, İşbank refuses loan demands for activities covered in İşbank Exclusion List appended to its Environmental and Social Impacts Policy, without giving them any consideration. İşbank Exclusion List can be found in attachment to the Environmental Social Impacts Policy available on the website. Sustainability at İşbank İşbank simultaneously manages economic, environmental and social components, and creates permanent value for the Turkish economy and all of its stakeholders. In line with its founding philosophy and sustainability notion, İşbank shapes all of its activities with an integrated and long-term perspective. Sustainability represents an important leverage within İşbank’s operations cycle and supports the Bank in improving its value creation capabilities in a versatile manner. Within the scope of its sustainability approach, İşbank contributes to community welfare, to protection and upkeeping of the environment, and development of Turkey as well, besides producing value on the economic axis. Sustainability Management at İşbank Sustainability Management System of İşbank provides the framework for addressing several aspects in a holistic manner, e.g. managing environmental, social and governance areas with an integrated perspective, assessing environmental and social impacts resulting from lending operations, and enhancing the HR potential through training. Underpinnings of the operation of this system are İşbank’s Sustainability Policy and other policies complementary to it. The following policies that define İşbank’s sustainability approach can be accessed on the website. • Sustainability • Environmental and social impacts • Human rights and human resources • Anti-bribery and anti-corruption • Gifts and hospitality. 72 İşbank Annual Report 2019 İşbank contributes to mitigation of risks stemming from climate change with the financing it extends to renewable energy projects. Financing renewable energy Reducing carbon emissions and encouraging alternative energy resources are pivotal for the transition to a low-carbon economy. Undertaking an important role in this transition, İşbank finances renewable energy projects, thus contributing to mitigation of risks stemming from climate change. İşbank also utilizes long-term funds obtained from international financial institutions for financing renewable energy and energy efficiency. Management of direct environmental impact İşbank monitors the environmental impact stemming from its operations and carries out projects directed towards improving its performance in this respect. In this context, environmental indicators in primary impact areas such as waste generation, water and energy consumption and carbon emissions at the Bank’s Head Office buildings and branches are systematically followed up. İşbank’s Head Office locations hold environmental certifications at international standards. İşbank Head Office building located in Levent, İstanbul possesses BREEAM In-use Excellent certificate, and Tuzla Technology and Operations Center (TUTOM) has LEED Gold certification. Certified with LEED v4 Gold for Data Centers, the Bank’s Tuzla Data Center (Atlas) is the one and only data center satisfying these standards in Turkey. Qualified and happy employees In keeping with its vision of “being an employer of choice”, İşbank provides a dignified, fair, egalitarian and safe working environment that is conducive to personal and professional development. Attracting young talents to the Bank is a priority topic with respect to Human Resources activities, as well as ensuring employee satisfaction while constantly observing employee rights. With the purpose of bringing the positive impact it creates to the broadest segment of the society possible, İşbank focuses on education, environment, culture and the arts. Information about the Bank’s corporate social responsibility projects can be found on page 68 of this Report. National and international collaborations İşbank consolidates the impact and contribution it achieves in the area of sustainability with collaborations with national and international organizations and institutions. İşbank is an active supporter of the UN Global Compact since 2012. The Bank is among the first signatories of the Declaration of Sustainable Finance, an initiative of the Global Compact Turkey released in 2017. Believing in the importance of adopting the Sustainable Development Goals as a guide in making use of the transformative power banks have over the economy, İşbank supports the UN Sustainable Development Goals (SDGs). İşbank is included in Borsa İstanbul (BIST) Sustainability Index consisting of the companies traded on Borsa İstanbul and is also a constituent of the FTSE4Good Emerging Markets Index of the Financial Times Stock Exchange Group (FTSE), jointly owned by the London Stock Exchange and Financial Times, which measures the performances of companies that are strong performers in environmental, social and governance areas. Integrated reporting Releasing sustainability reports on an annual basis since 2012, İşbank published its first integrated report in 2019. Tackling non-financial capitals, as well as financial capital in line with the framework suggested by the International Integrated Reporting Council (IIRC), the report presents a holistic perspective of the Bank’s activities and performance in these aspects. Long-lasting and inclusive social investment programs İşbank’s 2018 Integrated Report is available on the website. İşbank has a pioneering and guiding role in social progress and development. In keeping with its founding mission, the Bank implements sustainable, comprehensive and long-lasting social investment programs. 73 Activitiesİşbank Annual Report 2019 Annual Report Compliance Opinion Güney Bağımsız Denetim ve SMMM A.Ş. Eski Büyükdere Cad. Orjin Maslak No: 27 Maslak, Sarıyer 34398 İstanbul - Turkey Tel: +90 212 315 3000 Fax: +90 212 230 8291 ey.com Ticaret Sicil No: 479920 Mersis No: 0-4350-3032-6000017 INDEPENDENT AUDITOR’S REPORT ON THE ANNUAL REPORT OF THE BOARD OF DIRECTORS To the Shareholders of Türkiye İş Bankası Anonim Şirketi 1) Qualified Opinion We have audited the annual report of Türkiye İş Bankası A.Ş. (“the Bank”) and its subsidiaries (“the Group”) for the period of January 1, 2019 – December 31, 2019. In our opinion, except for the matter described in the Basis for Qualified Opinion section of our report, the consolidated and unconsolidated financial information provided in the annual report of the Board of Directors and the discussions made by the Board of Directors on the situation of the Group are presented fairly and consistent, in all material respects, with the audited full set consolidated and unconsolidated financial statements and the information we obtained during the audit. 2) Basis for Qualified Opinion As described in the Basis For Qualified Opinion section of Independent Auditor’s Report on the complete set of audited unconsolidated and consolidated financial statements of the Bank and the Group for the period between 1 January 2019 and 31 December 2019 dated February 7, 2020, the unconsolidated and consolidated financial statements as at December 31, 2019 include a free provision at an amount of TL 1,125,000 thousands of which TL 1,200,000 thousands was provided in prior years and TL 75,000 thousands reversed in the current period by the Bank and the Group management for the possible effects of the negative circumstances which may arise from the possible changes in the economy and market conditions which does not meet the recognition criteria of “Turkish Accounting Standard” (TAS) 37 “Provisions, Contingent Liabilities and Contingent Assets”. We conducted our audit in accordance with “Regulation on independent audit of the Banks” published in the Official Gazette no.29314 dated 2 April 2015 published by Banking Regulation and Supervision Agency (BRSA Independent Audit Regulation) and Independent Auditing Standards (InAS) which are part of the Turkish Auditing Standards as issued by the Public Oversight Accounting and Auditing Standards Authority of Turkey (POA). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Annual Report section of our report. We are independent of the Group in accordance with the Code of Ethics for Independent Auditors (Code of Ethics) as issued by the POA, and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.. 3) Our Auditor’s Opinion on the Full Set Consolidated and Unconsolidated Financial Statements We have expressed qualified opinions in our auditor’s reports dated February 7, 2020 on the full set consolidated and unconsolidated financial statements of the Group for the period of 1/1/2019-31/12/2019. 74 İşbank Annual Report 2019 4) The Responsibility of the Board of Directors on the Annual Report In accordance with Articles 514 and 516 of the Turkish Commercial Code 6102 (“TCC”) and communique on ‘Principles and procedures set out by the regulations on preparation and issuance of annual reports of Banks’, the management of the Group is responsible for the following items: a) Preparation of the annual report within the first three months following the balance sheet date and submission of the annual report to the general assembly. b) Preparation and fair presentation of the annual report; reflecting the operations of the Group for the year, along with its financial position in a correct, complete, straightforward, true and honest manner. In this report, the financial position is assessed according to the consolidated and unconsolidated financial statements. The development of the Group and the potential risks to be encountered are also noted in the report. The evaluation of the board of directors is also included in this report. c) The annual report also includes the matters below: - Subsequent events occurred after the end of the fiscal year which have significance, - The research and development activities of the Group, - Financial benefits such as salaries and bonuses paid to the board members and to those charged governance, allowances, travel, accommodation and representation expenses, financial aids and aids in kind, insurances and similar deposits. - Other matters prescribed in the communique on ‘Principles and procedures set out by the regulations on preparation and issuance of annual reports of Banks’ published in official gazette no.26333 dated November 1, 2006. When preparing the annual report, the board of directors takes into account the secondary legislative arrangements published by the Ministry of Trade and related institutions. 5) Auditor’s Responsibilities for the Audit of the Annual Report Our aim is to express an opinion, based on the independent audit we have performed on the annual report in accordance with provisions of the Turkish Commercial Code and the Communique on ‘Principles and procedures set out by the regulations on preparation and issuance of annual reports of Banks’ published in official gazette no.26333 dated November 1, 2006, “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 Agency (BRSA), circulars, interpretations published by BRSA and “BRSA Accounting and Financial Reporting Legislation” which includes the provisions of Turkish Financial Reporting Standards (TFRS) for the matters which are not regulated by these regulations, on whether the consolidated and unconsolidated financial information provided in this annual report and the discussions of the Board of Directors are presented fairly and consistent with the Group’s audited consolidated and unconsolidated financial statements and to prepare a report including our opinion. The independent audit we have performed is conducted in accordance with InAS and BRSA Independent Audit Regulation. These standards require compliance with ethical provisions and the independent audit to be planned and performed to obtain reasonable assurance on whether the consolidated and unconsolidated financial information provided in the annual report and the discussions of the Board of Directors are free from material misstatement and consistent with the consolidated and unconsolidated financial statements. The name of the engagement partner who supervised and concluded this audit is Fatma Ebru Yücel. 75 İşbank Annual Report 2019 İşbank’s Dividend Distribution Policy İşbank’s principles of dividend distribution are set by article 58 of the Articles of Incorporation. According to this article, after deducting all general expenses from the income arising from the operations of the Bank within a year, including premiums and bonuses and similar payments to the personnel of the Bank, and funds for all kinds of depreciations, as well as necessary provisions, the net profit obtained shall partly be set aside as contingency reserves and partly distributed in the order, manner and at the rates indicated below: a) 1- 5% to statutory reserve fund, 2- 5% as provision for probable future losses, 3- 10% as first contingency reserve If the cause for setting aside of a provision and fund for a probable future loss and/or risk doesn’t exist anymore, the remaining fund will be added to first contingency reserve (a/3) after distribution of net profit referred to in paragraph (a). b) From the balance of the net profit after the reserve fund referred to in paragraph (a) above have been set aside, an amount equal to 6% of the paid up capital represented by Group A, B and C share certificates, shall be distributed to shareholders as the “first dividend”. Should the profit realized in any year be insufficient to provide for the first dividend of 6% referred to above, the balance shall be made up and distributed out of the contingency reserve fund. Provided, however, that any amount thus taken out of the reserve fund shall constitute a charge to be made up out of the profits to be realized in the subsequent years. c) After the reserved fund and the first dividend referred to in paragraphs (a) and (b) above have been provided for, the balance of the net profit shall be set aside and distributed as follows: • 10% for founder shares (limited to the portion of TL 250 thousand – two hundred and fifty thousand –of paid capital) • 20% to the employees of the Bank, and • 10% as second contingency reserve. d) After the amounts set forth in paragraphs (a), (b) and (c) have been set aside and distributed, the balance shall be distributed to the shareholders as “second dividend” in the manner stated below and taking into consideration paragraph (e). 1-The net total of the dividends to be distributed to the holders of Group (A) shares as first and second dividends under paragraphs (b) and (d) may be not exceed 60% of the capital paid up by them, the net total of the dividends to be distributed to holders of Group (B) shares may not exceed 30% of the capital paid up by them, and the net total of the dividends to be distributed to holders of Group (C) shares may not exceed 25% of the capital paid up by them. 2-After the amounts set forth in paragraphs (a), (b) and (c) have been set aside and distributed, should the balance be insufficient to distribute the second dividend in the manner specified by the paragraph (1) above, twice the amount of the paid up capital represented by Group (A) shares the actual amount of the capital represented by Group (B) shares, and the 5/6 (five sixth) amount of the capital represented by Group (C) shares shall be taken as the basis, and, total dividends to be paid to the three Groups of shares shall be calculated separately in the distribution of the second dividend. e) The amount that needs to be added to the statutory reserve under paragraph 2/c of Article 519 of the Turkish Commercial Code, shall be set aside. f) The General Assembly shall, upon proposal of the Board of Directors, decide whether the balance remaining after the distribution and allocation of the net profit as specified above shall be transferred to the extraordinary reserve funds, or carried over to the following year, or up to 80% of such amount be distributed to the shareholders by dividing of the same by the number of shares and the remaining balance be transferred to the extraordinary reserve funds or carried over to the following year. In the calculation of the dividends to be paid to all three Groups of shares; group A shares will be considered as 40 times the share quantity, due to the reason that 20 Group (A) shares each with a nominal value of TL 500 (this amount is related to the period prior to the Law regarding the Monetary Unit of the Turkish Republic (No:5083) on which the rate of change has not been applied) have been changed with 1 Group (A) share with a nominal value of 1 Kurus, Group B shares will be considered as 1.5 times of the share quantity, and Group C shares will be considered as the same quantity. The dividends are distributed within the scope of the related legislation in a manner and at a time determined by General Assembly. 76 İşbank Annual Report 2019 Summary Report of the Board of Directors Esteemed Shareholders, Welcome to our Bank’s 96th Ordinary General Meeting. As we present the Board of Directors’ Report, the Balance Sheet and the Income Statement covering the results of our activities in 2019 fiscal year for your review and approval, we respectfully greet all of you here today. During 2019, global capital flows followed a fluctuating course in parallel with the trade wars, changes in monetary policies, and aggravated geopolitical risks. Having started to contract on an annual basis from the last quarter of 2018, the Turkish economy shrank by 1.9% in the first half of the year. Economic activity resumed growth trend in the third quarter of the year with the positive contribution of consumption expenditures although the contribution of net exports was reversed to the negative. Economic recovery gained momentum in the last quarter of the year with the low base effect coupled with the rate cuts implemented by the CBRT. While the credit expansion in the banking sector was weak in the first half of 2019, there was a marked increase in TL loans in the overall sector following the CBRT’s rate cuts in the second half of the year. While TL loans expanded by 14.7% across the banking sector as at year-end 2019, the rise in total credit volume was registered as 10.4% as compared with year-end 2018 due to the decline in FX loans and the pronounced weakening in investment appetite. While FX deposit volume grew by 28.9% as compared to year-end 2018, the rise in TL deposit volume was 19% in the same period. Thus, the increase in total deposit volume was registered as 23.8% for the whole year. When compared to the end of the previous year, as of 31 December 2019, • Our loans grew by 4.7% to TL 270.4 billion, • Our deposits expanded by 20.7% to TL 295.9 billion, • Our total assets increased by 12.4% to TL 468.1 billion, • Our shareholders’ equity went up by 18.4% to TL 58.9 billion, • and our net profit amounted to TL 6.1 billion. During 2019, the Bank’s balance sheet was dynamically managed with a focus on asset quality and profitability. Standing at 6.5% at year-end, our non- performing loans ratio was below the private banks’ average in 2019. While total deposits continued to be increased, the Bank also continued to utilize non-deposit funding sources, with a cost sensitive approach, in domestic and international markets in order to diversify funding base. Standing at 17.9% as of 2019 year-end, our capital adequacy ratio continued to stay well-above the regulatory requirement. At the end of 2019, our Bank posted a return on assets of 1.4% and a return on equity of 11.4%. Esteemed Shareholders, We hereby submit our Annual Report, Balance Sheet and Income Statement pertaining to our 2019 activities for your review and approval. We would like to take this opportunity to express our gratitude to the Turkish public for their steadfast trust in our Bank, to the institutions of the Turkish State for their continuous support, to our employees for their dedicated efforts, and we extend our respects to you, our valued shareholders, for having honored this General Meeting with your presence. TÜRKİYE İŞ BANKASI A.Ş. BOARD OF DIRECTORS 77 Corporate Governanceİşbank Annual Report 2019 Agenda of the Annual Meeting 1 - Opening Ceremony, establishment of the Council of Chairmanship 2 - Discussion of 2019 Annual Report of the Board of Directors, Financial Statements, the Independent Auditors’ Reports and ratification of the Annual Report of the Board of Directors and Financial Statements 3 - Discharge of the Board of Directors from their responsibilities for the transactions and accounts of the year 2019 4 - Approval, approval with amendments or disapproval of the proposal of the Board of Directors regarding the utilization of 2019 profit 5 - Election of the Board of Directors 6 - Determination of the allowance for the members of the Board of Directors 7 - Selection of the Independent Audit Company 8 - Permitting the members of the Board of Directors as per articles 395 and 396 of the Turkish Commercial Code 9 - Amendment of the article 5 of the Articles of Incorporation regarding the extension of the permission period of the Maximum Level of Registered Capital 10 - Presenting information to the shareholders on the subjects held in Capital Markets Board Corporate Governance Communique principle no. 1.3.6 11 - Presenting information to the shareholders about the donations 78 İşbank Annual Report 2019 Dividend Distribution Proposal As a result of our activities in 2019, our Bank’s net profit for the period was TL 6,067,586,899.23. On the other hand, within the framework of the Turkish Accounting Standard (TAS) n.16 “Tangible Assets”, which has started to be applied in the past accounting period of time, as a result of selling some of our fixed assets, which are being tracked with using revaluation model, in accordance with; TFRS 9 Recognition and Derecognition in the financial statements, regulates the accounting principles of our associates and subsidiaries and the equity method presented on the TAS 27 – Separate Financial Statements, our Bank had TL 5,907,908,356.09 as prior years’ profit (retained earnings). For the year of 2019, Banking Regulation and Supervision Agency stated to The Bank Association of Turkey; emphasizing that the general prudent policy of the Agency needs to be maintained for the whole of the banking system, profits and legal reserves should not distributed in such a way to cause the cash outflow. Within this framework, as per the resolution of the Board of Directors dated 02.03.2020, the amount of TL 6,071,460,806.58 profit that contains TL 6,067,586,899.23 net profit at the year of 2019 and TL 3,873,907.35 previous years’ profit which is subjected to tax exemption and consisted due to the Turkish Accounting Standard (TAS) n.16 “Tangible Assets”, is proposed to be distributed based on the following chart: • TL 26,394,081.00 of the balance sheet profit is composed of return on real estate sales that is to be kept in a special fund account in order to be used in capital increase if required to be transferred to related reserves, and the amount of TL 20,000,000.00 to be set aside as risk venture capital fund in order to make use of risk venture investment trust and funds, • It is proposed that TL 301,253,336.28 (the remaining part of 2019 net profit TL 6,025,066,725.58) in accordance with Article 58 (a) of our Articles of Incorporation be set aside as legal reserves, • It is proposed that TL 5,723,813,389.30 (the remaining part of the profit) be set aside as extraordinary reserves. NET CURRENT PERIOD PROFIT PREVIOUS YEARS’ PROFIT NON-DISTRIBUTABLE PROFIT DISTRIBUTABLE PROFIT - For Statutory Reserve Fund - Contingency Reserve TL 6,067,586,899.23 3,873,907.35 - 46,394,081.00 6,025,066,725.58 301,253,336.28 5,723,813,389.30 79 Corporate Governanceİşbank Annual Report 2019 Board of Directors 1 2 3 4 5 1- Füsun Tümsavaş Chairperson 3- Adnan Bali Member of the Board and Chief Executive Officer Füsun Tümsavaş was born in Ankara in 1957 and graduated from Ankara University, Faculty of Political Science, Department of Economics and Finance. She started her professional career at the Ankara Branch of the Central Bank of the Republic of Turkey in 1979. In 1981, she started to work at İşbank’s I. Loans Department as an Officer and subsequently became Assistant Section Head and Assistant Credit Specialist in the same department. Ms. Tümsavaş was appointed as Assistant Manager in 1994 and Unit Manager in 1999 in the aforementioned department. She became the Head of Commercial Loans Department in 2004. In addition to her duties at the Bank, Ms. Tümsavaş also serves as the Vice Chairperson of the Board of İşbank Members’ Supplementary Pension Fund. Ms. Tümsavaş was elected to İşbank’s Board of Directors on 28 March 2008, 31 March 2011, 28 March 2014 and 31 March 2017; and was appointed as the Chairperson of the Board of Directors on 1 April 2019. Ms. Tümsavaş also serves as the Chairperson of the Risk Committee, Audit Committee, TRNC Internal Systems Committee, Remuneration Committee and Corporate Governance Committee; and as an alternate member of the Credit Committee. 2- Ertuğrul Bozgedik Vice Chairperson Mr. Ertuğrul Bozgedik was born in Kayseri in 1964 and graduated from Ankara University, Faculty of Political Science, Department of Economics. He began his career as an Assistant Inspector on the Board of Inspectors at İşbank in 1986. He was appointed as Assistant Manager in II. Loans Department in 1995, Regional Manager at I. Loans Department in 1999, Regional Manager in Non- Performing Loans Department in 2002 and Head of Corporate Loans Department in 2004. Mr. Bozgedik was promoted to Chairperson of the Board of Inspectors in 2008 and to the post of Deputy Chief Executive in 2011. Mr. Bozgedik, who was elected as a member of İşbank’s Board of Directors on 31 March 2017, and as the Vice Chairperson of the Board on 1 April 2019, also serves as a member of the Credit Committee, Audit Committee, TRNC Internal Systems Committee and Risk Committee. Adnan Bali was born in İslahiye in 1962 and graduated from Middle East Technical University, Faculty of Economics and Administrative Sciences, Department of Economics. He joined İşbank as Assistant Inspector on the Board of Inspectors in 1986. He became Assistant Manager in the Treasury Department in 1994 and served as a Unit Manager in the same department in 1997. He was appointed Head of the Treasury Department in 1998. Mr. Bali served as the Manager of the Şişli Branch in 2002 and the Manager of Galata Branch in 2004; he was appointed Deputy Chief Executive on 30 May 2006. He was appointed as the 16th Chief Executive Officer of İşbank on 1 April 2011. He has also been serving as the Chairman of the Credit Committee and member of the Risk Committee. Mr. Adnan Bali is the Chairman of Şişecam Group. He is member of the Board of Directors of Vehbi Koç Foundation and The Banks Association of Turkey; member of Institute of International Finance (IIF) and Institut International d’Etudes Bancaires (IIEB). Mr. Bali is also member of the High Advisory Board of Darüşşafaka Society. 4- Prof. Dr. Turgay Berksoy Member of the Board Prof. Dr. Turgay Berksoy was born in 1951 in Elazığ and graduated from Istanbul Academy of Economic and Commercial Sciences. Subsequently, he completed his master’s degree at Boğaziçi University and obtained his doctorate from Marmara University. Prof. Dr. Berksoy worked as faculty member and assumed administrative posts at various universities in Turkey, and worked as visiting lecturer at University of East Anglia School of Development Studies. Prof. Dr. Berksoy, who is a chartered accountant, served as Chairman of the Board at the Finance Research Center at Marmara University, Faculty of Economics and Administrative Science. In addition to his post at the university, he served as adviser in some banks; Auditor on the Board of İşbank; member of the Board of the Tax Reform Commission, The Union of Chambers and Commodity Exchanges of Turkey Private Specialization Commission, Güneş Hayat Sigorta A.Ş., Petkim A.Ş., Ataköy Otelcilik A.Ş., Türkiye Maritime Facilities Inc. and Paşabahçe Cam Sanayi ve Ticaret A.Ş.; member of the Ministry of Finance Tax Council; and independent member of the Board at Anadolu Anonim Türk Sigorta Şirketi, Trakya Cam Sanayii A.Ş. and Türkiye Şişe ve Cam Fabrikaları A.Ş. He was retired from his faculty member position in Marmara University Public Finance Department, Faculty of Economics as of April 2018. Prof. Dr. Berksoy was elected to İşbank’s Board of Directors on 28 March 2014. He was elected as an Independent Member of the Board of Directors on 31 March 2015 and on 31 March 2017. Prof. Dr. Berksoy also serves as member of the Audit Committee and TRNC Internal Systems Committee and alternate member of the Credit Committee. 5- Feray Demir Member of the Board Ms. Feray Demir was born in Ağrı in 1968 and graduated from Anadolu University, Faculty of Economics and Administrative Sciences, Business Administration Department. She started her professional career as an Officer at Sefaköy/Istanbul Branch in 1988. She was appointed as Assistant Section Head in 1990, Section Head in 1995, Sub- Manager in 1996 and as Assistant Manager in 1999 at the same branch. She then served at the same position in Commercial Loans Department and Corporate Marketing Department. She was appointed as Branch Manager to Çarşı-Güneşli/Istanbul Branch in 2005, and then served as Head of Commercial Banking Sales Department from 2007 to 2011. She served as Branch Manager of Istanbul Corporate Branch from 2011 to 2016. In addition to her duties at the Bank, Ms. Demir also serves as member of the Board of İşbank Members’ Supplementary Pension Fund. Ms. Demir, who was elected to İşbank’s Board of Directors on 25 March 2016 and 31 March 2017, also serves as a member of the Corporate Social Responsibility Committee, Credit Committee and Remuneration Committee. 80 İşbank Annual Report 2019 6 7 8 9 10 6- Ersin Önder Çiftçioğlu Member of the Board Mr. Ersin Önder Çiftçioğlu was born in Ankara in 1960 and graduated from Hacettepe University, Faculty of Social and Administrative Sciences, Department of English Linguistics. Mr. Çiftçioğlu began his career at İşbank as an Officer in Yenişehir/Ankara Branch in 1985, and was appointed as an Assistant Section Head, Section Head, Sub- Manager and Assistant Manager in the same branch. In 2007, he was appointed as Assistant Manager at the Başkent/Ankara Corporate Branch and Regional Manager of SME Loans Underwriting Division of Adana Region in the same year and subsequently served as Ankara Center I. Region Manager in 2008. He was appointed as Ege/Izmir Corporate Branch Manager in 2011 and Başkent/Ankara Corporate Branch in 2016. He served as Istanbul Provincial Head of CHP from 2014 to 2015, as a member of the Party Council from 1999 to 2001 and 2012 to 2014 and served as the Chairman of Council at the 35th Ordinary Meeting held in January 2016. Mr. Karayalçın received United Nation World Habitat Year Award in 1986 in England, at the same year he was chosen as a businessman of the year by Nokta Magazine. He received TÜTAV award due to his contributions to international publicity of Turkey 1987 and 1991. Furthermore, he received Légion d’honneur in 1993 from French government. Mr. Türeli held positions as Intern National Estate Controller at the Ministry of Finance from 1990 to 1993 and as Assistant Planning Specialist and Planning Specialist at the Prime Ministry State Planning Organization from 1993 to 2011. Türeli also worked as a part time lecturer on Economics at the Middle East Technical University from 2002 to 2010. Mr. Türeli was elected as a member of parliament from Izmir for CHP (Republican People’s Party) in 2011 and served at the Turkish Grand National Assembly Planning and Budgeting Commission as a member and as CHP group speaker until 2015. Mr. Türeli has published articles and academic work on the Turkish economy. Mr. Karayalçın also continues his academic career as a faculty member at Girne American University and T.C. Istanbul Kültür University. Mr. Türeli, who was elected to İşbank’s Board of Directors on 31 March 2017, also serves as a member of the Corporate Social Responsibility Committee. Mr. Karayalçın was elected to İşbank’s Board of Directors on 31 March 2017. 10-Fazlı Bulut Member of the Board Mr. Çiftçioğlu, who was elected to İşbank’s Board of Directors on 31 March 2017, also serves as a member of the Corporate Governance Committee. 8- Özcal Korkmaz Member of the Board 7- Murat Karayalçın Member of the Board Murat Karayalçın was born in Samsun in 1943 and graduated from Middle East Technical University English Preparatory School and Ankara University, Faculty of Political Science, Department of Economics- Finance and he received his master’s degree in Development Economics from University of East Anglia in the United Kingdom. Mr. Karayalçın served as a Specialist at State Planning Organization from 1969 to 1978, Deputy Undersecretary at the Ministry of Rural Affairs from 1978 to 1979, General President at Kent Koop. from 1981 to 1991 and Central Association of Türkiye Kent Kooperatifleri from 1988 to 1993 and Board member at International Settlement Council from 1986 to 1987 and he served as an Executive Board Member at The International Co-operative Alliance from 1988 to 1995. Mr. Karayalçın served as Mayor of Ankara Metropolitan Municipality from 1989 to 1993, Chairman of Social Democratic People’s Party from 1993 to 1995, Deputy Prime Minister and Minister of State from 1993 to 1994 and Deputy Prime Minister and Minister of Foreign Affairs from 1994 to 1995. Mr. Karayalçın was elected as a member of parliament from Samsun for CHP (Republican People’s Party) in 1995 and served as the Chairman of the Turkish Grand National Assembly Committee of Foreign Affairs from 1997 to 1999. Mr. Özcal Korkmaz was born in Aydın in 1945 and graduated from Istanbul University, Department of Economics. Mr. Korkmaz started his career at National Productivity Center in 1970, served as Assistant Account Expert at the Ministry of Finance from 1972 to 1975, as Account Expert from 1975 to 1980 and as Senior Account Expert from 1980 to 1985. Afterwards, Mr. Korkmaz served as Deputy Assistant Treasurer of Ankara from 1985 to 1987 and as Treasurer of Ankara from 1987 to 1989. From 1989 to 1994, Mr. Korkmaz served as General Manager and Chairman of the Board of Directors of T.C. Government Retirement Fund and retired in 1994. He served as the Chairman of the Board of Directors of Bağımsız Denetim ve Danışmanlık A.Ş. from 2009 to 2015. He serves as the Chairman of Korkmaz Yeminli Mali Müşavirlik A.Ş. from 2016 and continues his work as a Certified Public Accountant since 1994. Mr. Korkmaz, who was elected to İşbank’s Board of Directors on 31 March 2017, also serves as a member of the Corporate Governance Committee. 9- Rahmi Aşkın Türeli Member of the Board Mr. Rahmi Aşkın Türeli was born in Merzifon in 1963 and graduated from Ankara University, Faculty of Political Science, Department of Finance and received his master’s degree in Economics from University of Southern California. Mr. Fazlı Bulut was born in Pertek in 1964 and graduated from Ankara University, Faculty of Political Science, Department of Economics. He completed his master’s degree in Economic Development in New Hampshire College in the USA. Mr. Bulut served as Account Expert and Senior Account Expert at the Ministry of Finance in the Board of Account Experts from 1985 to 1997. He taught General Accounting at College of Tourism and College of Computer Technology, at Bilkent University, from 1996 to 1998. Mr. Bulut served as Vice General Manager and Member of the Board in Social Insurance Institution from 1997 to 1999. He served as Vice General Manager, General Manager and Member of the Board of Directors in Tepe Home Mobilya ve Dekorasyon Ürünleri San. Tic. A.Ş., a subsidiary of Bilkent Holding, from 1999 to 2011. He subsequently served as a consultant for Bilkent Holding on tax and retailing from 2011 to 2012 and as the General Manager of B. Braun Kalyon Medikal ve Dış Ticaret A.Ş. from 2013 to 2015 and as the Coordinator of Financial Affairs in Terra İnşaat Grubu from 2016 to 2017. Mr. Bulut also has books published on various subjects. Mr. Bulut, who was elected to İşbank Board of Directors on 29 March 2019, also serves as a member of the Corporate Governance Committee and the Corporate Social Responsibility Committee. 81 Corporate Governanceİşbank Annual Report 2019 Executive Committee 1 2 3 4 5 1- Adnan Bali Member of the Board and Chief Executive Officer 2- Hakan Aran Deputy Chief Executive 4- Senar Akkuş Deputy Chief Executive Adnan Bali was born in İslahiye in 1962 and graduated from Middle East Technical University, Faculty of Economics and Administrative Sciences, Department of Economics. He joined İşbank as Assistant Inspector on the Board of Inspectors in 1986. He became Assistant Manager in the Treasury Department in 1994 and served as a Unit Manager in the same department in 1997. He was appointed Head of the Treasury Department in 1998. Mr. Bali served as the Manager of the Şişli Branch in 2002 and the Manager of Galata Branch in 2004; he was appointed Deputy Chief Executive on 30 May 2006. He was appointed as the 16th Chief Executive Officer of İşbank on 1 April 2011. He has also been serving as the Chairman of the Credit Committee and member of the Risk Committee. Mr. Adnan Bali is the Chairman of Şişecam Group. He is member of the Board of Directors of Vehbi Koç Foundation and The Banks Association of Turkey; member of Institute of International Finance (IIF) and Institut International d’Etudes Bancaires (IIEB). Mr. Bali is also member of the High Advisory Board of Darüşşafaka Society. Born in Antakya in 1968. Mr. Hakan Aran graduated from the Computer Engineering Department of the Middle East Technical University and completed his master’s degree in Management at Başkent University, the Faculty of Social Sciences. He began his career at İşbank’s IT System Operations Department in 1990 as an Software Specialist. He served various positions at Data Process and Software Development Directorate. Mr. Aran was appointed Deputy Chief Executive on 17 July 2008. 3- Yalçın Sezen Deputy Chief Executive Born in İzmir in 1965. Mr. Yalçın Sezen graduated from the Political Sciences and Public Administration Department of the Middle East Technical University, Faculty of Economics and Administrative Sciences. In 1987, Mr. Sezen joined İşbank as an Assistant Inspector on the Board of Inspectors. He served at different units of İşbank and was appointed as Deputy Chief Executive on 13 April 2011. Born in Diyarbakır in 1969. Ms. Senar Akkuş graduated from the Economics Department of the Middle East Technical University, Faculty of Economic and Administrative Sciences. In 1991, Ms. Akkuş joined İşbank as an Assistant Specialist at the Treasury Department. She served at different units of İşbank and was appointed as Deputy Chief Executive on 13 April 2011. 5- Murat Bilgiç Deputy Chief Executive Born in Ankara in 1968. Mr. Murat Bilgiç graduated from the International Relations Department of the Middle East Technical University, Faculty of Economic and Administrative Sciences. He also holds a Master’s degree in Money-Banking-Finance from the University of Birmingham. He attended the Advanced Management Program in Harvard Business School. He joined İşbank in 1990 as an Assistant Inspector on the Board of Inspectors. He served at different units of İşbank and was appointed as Deputy Chief Executive on 25 March 2016. 82 İşbank Annual Report 2019 6 7 8 9 10 6- N. Burak Seyrek Deputy Chief Executive 8- Ebru Özşuca Deputy Chief Executive 10- Cahit Çınar Deputy Chief Executive Born in Ankara in 1967. Mr. Cahit Çınar graduated from International Relations Department of Ankara University, Faculty of Political Science. He attended Munich Ludwig-Maximillians University between 1989-1990. He began his career at İşbank as an Assistant Specialist at Economic Research Division in 1991 and joined the Board of Inspectors as an Assistant Inspector in 1992. He served at different units of İşbank and Güneşli Corporate Branch and served as a Chief Executive Officer at İşbank AG. which is a subsidiary of İşbank located in Germany. Mr. Çınar was appointed as Deputy Chief Executive of İşbank on 5 October 2018. Born in Ankara in 1970. Mr. N. Burak Seyrek graduated from the International Relations Department of Ankara University, Faculty of Political Sciences. He joined İşbank in 1990 as Assistant Specialist at Training Department. He served at different units and branches of İşbank and also served Chief Executive Officer at İşbank AG, which is a subsidiary of İşbank located in Germany. Mr. Seyrek was appointed as Deputy Chief Executive of İşbank on 25 March 2016. 7- Şahismail Şimşek Deputy Chief Executive Born in Erzurum in 1968. Mr. Şahismail Şimşek graduated from Ankara University, Faculty of Political Science, Department of Finance. He joined İşbank as an Officer at Yenişehir/Ankara in 1992, and served at different units and branches of İşbank. Mr. Şimşek was appointed as Deputy Chief Executive on 28 November 2017. Born in Ankara in 1971. Ms. Ebru Özşuca graduated from the Economics Department of the Middle East Technical University, Faculty of Economic and Administrative Sciences in 1992. She also holds a master’s degree from Economics Department of Graduate School of Social Sciences at Middle East Technical University and in International Banking and Finance from the University of Southampton in the UK. She attended Advanced Management Program in Harvard Business School in 2015. She joined İşbank as an Assistant Specialist at the Treasury Department in 1993. Ms. Özşuca served at different units of İşbank and was appointed as Deputy Chief Executive on 28 November 2017. 9- Gamze Yalçın Deputy Chief Executive Born in Ankara in 1971. Ms. Gamze Yalçın graduated from the Economics Department of the Middle East Technical University, Faculty of Economic and Administrative Sciences. She also holds a master’s degree in International Banking and Finance from the University of Birmingham in UK. She attended Advanced Management Program in Harvard Business School in 2017. She joined Organization Directorate at İşbank as an Assistant Specialist in 1993 and she served at different units of İşbank. Ms. Yalçın was appointed as Deputy Chief Executive on 28 November 2017. 83 Corporate Governanceİşbank Annual Report 2019 Organization Chart(*) BOARD OF DIRECTORS CHIEF EXECUTIVE DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO BOARD OF INSPECTORS HEAD OFFICE COUNSELLORSHIP DATA MANAGEMENT DIVISION CARD PAYMENT SYSTEMS DIVISION FINANCIAL MANAGEMENT DIVISION CAPITAL MARKETS DIVISION COMMERCIAL LOANS UNDERWRITING DIVISION ENTERPRISE ARCHITECTURE DIVISION PRIVATE BANKING MARKETING AND SALES DIVISION CONSUMER LOANS UNDERWRITING DIVISION HR MANAGEMENT DIVISION CORPORATE LOANS UNDERWRITING DIVISION TALENT MANAGEMENT DIVISION FINANCIAL ANALYSIS AND CREDIT INFORMATION DIVISION SME LOANS UNDERWRITING DIVISION DIGITAL BANKING OPERATIONS DIVISION CONSUMER LOANS DIVISION INFORMATION TECHNOLOGIES DIVISION DIGITAL BANKING DIVISION MANAGERIAL REPORTING & INTERNAL ACCOUNTING DIVISION STRATEGY & CORPORATE PERFORMANCE MANAGEMENT DIVISION RETAIL BANKING MARKETING DIVISION SUBSIDIARIES DIVISION RETAIL BANKING PRODUCT DIVISION RETAIL BANKING SALES DIVISION RETAIL LOAN & CARD OPERATIONS DIVISION CORPORATE COMPLIANCE DIVISION INTERNAL CONTROL DIVISION RISK MANAGEMENT DIVISION SECRETARIAT TO THE BOARD OF DIRECTORS (*) As of 31 December 2019. 84 İşbank Annual Report 2019 AUDIT COMMITTEE DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO DEPUTY CEO BRANCHES ABROAD AND FOREIGN REPRESENTATIVES (OFFICES) BANKING OPERATIONS & PAYMENT OPERATIONS DIVISION COMMERCIAL BANKING MARKETING DIVISION ECONOMIC RESEARCH DIVISION INTERNATIONAL FINANCIAL INSTITUTIONS DIVISION COMMERCIAL & CORPORATE LOANS MONITORING & RECOVERY DIVISION COMMERCIAL BANKING SALES DIVISION BRANCH NETWORK DEVELOPMENT DIVISION COMMERCIAL BANKING PRODUCT DIVISION TREASURY DIVISION INVESTOR RELATIONS DIVISION CORPORATE BANKING MARKETING AND SALES DIVISION CONSTRUCTION &REAL ESTATE MANAGEMENT DIVISION SME BANKING SALES DIVISION FREE ZONE BRANCHES FOREIGN TRADE & COMMERCIAL LOAN OPERATIONS DIVISION INTERNAL OPERATIONS DIVISION PROCUREMENT DIVISION SUPPORT SERVICES DIVISION CREDITS PORTFOLIO MANAGEMENT DIVISION LEGAL AFFAIRS AND FOLLOW-UP DIVISION LEGAL COUNSELLORSHIP RETAIL LOANS MONITORING AND RECOVERY DIVISION CORPORATE COMMUNICATIONS COORDINATION AND GENERAL SECRETARY CORPORATE COMMUNICATIONS DIVISION 85 Corporate Governanceİşbank Annual Report 2019 Changes in the Organizational Structure During the reporting period, “Legal Affairs and Follow-up Division” was set up to ensure higher efficacy in the management of non-performing loans portfolio in line with the changing conjuncture, and legal follow-up functions were transferred to this division. In addition, Retail Banking and General Deliberation Legal Counsellorship and Commercial Banking Legal Counsellorship were unified under the roof “Legal Counsellorship”. Managers of Internal Systems Names and surnames, terms of office, areas of responsibility, academic backgrounds and professional experiences of managers of Internal Systems, which consists of Board of Inspectors, Risk Management Division, Corporate Compliance Division and Internal Control Division, are presented below. Chairman of the Board of Inspectors: Muzaffer Okay Term of Office 2 year 8 months Professional Experience 28 years Head of Risk Management: Hürdoğan Irmak Term of Office 2 year 18 days Professional Experience 19 years Head of Corporate Compliance Division (Compliance Officer): Ertuğrul Senem Term of Office 2 year 8 months Professional Experience 29 years Head of Internal Control: Hamit Umut Togay Term of Office 5 year 10 months Professional Experience 22 years Departments Worked Previously Academic Background Board of Inspectors, Nonperforming Loans Division, Commercial and Corporate Loans Monitoring & Recovery Division, Corporate Compliance Division B.A. Degree from a Domestic University Departments Worked Previously Academic Background Corporate Loans Underwriting Division, Board of Inspectors, Risk Management Division B.S. Degree from a Domestic University Departments Worked Previously Academic Background Board of Inspectors, Deposits and Banking Services Division, Accounting Division, Budgeting and Planning Division, Change Management Board, Rıhtım- Kadıköy Branch, Enterprise Architecture Division B.A. Degree from a Domestic University Departments Worked Previously Academic Background Board of Inspectors, Retail Banking Product Division, Galata Branch B.A. Degree from a Domestic University Information about the Meetings of the Board of Directors In İşbank, the Board meetings are generally held at least once a month, yet interim meetings might be held in case of need. Meeting agendas are prepared in accordance with the proposals of Head Office departments. Moreover, various reports requested by the Board of Directors from the Bank management and off the agenda topics put forward by the Board members are discussed during the meetings. Meeting agenda and related documents are distributed to the Board members in a particular time before the meetings. By the end of 2019, 14 Board meetings were held and 13 of them were held by full participation. 571 pages of minutes were recorded for the said meetings, which lasted 45 hours in total. As of 2019 year-end a total of 231 files were reviewed, which split as 172 files for loan underwriting and 59 files on other issues regarding loans; based on the work carried out by convening meetings or by individual review and signing of the file by each Board Member, which resulted in 160 loan decisions. A total of 328 files were reviewed on non-credit matters and 328 resolutions were taken. Consequently, 691 Board resolutions were made in 2019, including 203 those that were passed during the meetings. 86 İşbank Annual Report 2019 İşbank Committees Assessments on İşbank Committees İşbank committees presented their decisions and reports to Board of Directors in 2019, and the necessary decisions have been taken as a result of the assessment of Board of Directors. The Audit Committee The Audit Committee which was constituted by the resolution of the Board of Directors dated 01.04.2019 and Nr. 43047 is chaired by Ms. Füsun Tümsavaş, Chairperson of the Board of Directors. The other members of the Committee are Mr. Ertuğrul Bozgedik, Vice Chairperson of Board of Directors and Prof. Dr. Turgay Berksoy, Independent Member of Board of Directors. Pursuant to its working principles, Audit Committee is responsible for holding meetings at least twice a year provided that six- month periods are not exceeded, and it is obligated to inform the Board of Directors about the results of the activities it carried out and measures to be taken based on these results and about necessary practices to be implemented. Moreover the Audit Committee is obligated to provide its recommendations regarding other issues that are deemed significant for the Bank in order to carry out its activities safely. Audit Committee works in collaboration with the Remuneration Committee and the Risk Committee. The Audit Committee is in charge of: • ensuring that the internal systems of the Bank function efficiently and sufficiently, that these systems and the accounting and reporting systems operate within the framework of the related regulations and the Bank’s policies and that the information produced has integrity, • making preliminary assessment necessary to select independent audit firms, rating, valuation and support service institutions; regularly monitoring the activities of these institutions selected by the Board of Directors; evaluating them periodically within the context of the provisions of the legislation; providing information to the Board of Directors, • reviewing the assessments of the independent audit firms, evaluating independent audit results, and making discussions with the independent auditors, • informing the Board of Directors about findings of the independent auditors and internal systems departments, and about measures taken by the top management and by the units reporting to the top management, • ensuring that the internal audit functions of subsidiaries that are subject to consolidation are coordinated in line with the related regulations, • receiving information and reports about internal systems and functioning of departments within the scope of internal systems, their operations including consolidated risks, and about related policies and regulations, • ensuring that the financial reports of the Bank are issued in conformity with relevant legislations, regulations and standards, • making assessments in order to ensure whether or not required procedures and principles have been implemented for detecting, measuring, monitoring and controlling potential and existing risks incurred by the Bank; ensuring that risk framework and risk culture, in line with the Bank’s structure and operations, are established within the Bank, • ensuring that internal capital adequacy evaluation process (ICAAP) includes all risks in a consolidated manner, auditing and control processes are established to provide required assurance about its adequacy and accuracy, • evaluating professional education levels and competency of managers and personnel assuming duties in departments within the scope of internal systems; making suggestions to the Board of Directors for the selection of managers, as well as presenting opinion to the Board of Directors during their dismissal, • establishing communication channels to make sure that information will be provided directly to the Audit Committee or to the internal audit unit or to the Bank inspectors in case of Bank fraud. • if required, gathering information, documents or reports from all Bank units, support service contractors and independent auditors and being subject to Board approval, receiving consultancy from those who are specialists in their respective fields, 87 Corporate Governanceİşbank Annual Report 2019 İşbank Committees • reporting to and informing the Board about the results of its own operations, the measures needed to be taken in order for the Bank’s operations to be within the framework of the related legislation and Bank policies in a continuous and secure way and its evaluation, opinion and recommendation on any other issues that are deemed to be important, • fulfilling other responsibilities determined by the related legislations and the duties given by the Board within this framework. As of the end of 2019, Audit Committee held 47 meetings with full participation and adopted 63 resolutions. Turkish Republic of Northern Cyprus (TRNC) Internal Systems Committee TRNC Internal Systems Committee is established within the framework of TRNC Banking Law and related regulations. The Committee has three members and as per the resolution of the Board of Directors, dated 01.04.2019, Nr. 43048 the Committee is chaired by Ms. Füsun Tümsavaş, the Vice Chairperson of the Board of Directors. The other members of the committee are Mr. Ertuğrul Bozgedik, the Vice Chairperson of the Board and Prof. Dr. Turgay Berksoy who is an independent member of the Board. The Committee holds meetings at least twice a year provided that a six month period is not exceeded and informs the Board of Directors on the results of its own activities, its opinion on the measures needed to be taken and the necessary practices to be implemented by the branches, that operate under TRNC office, and other important issues in order for these branches to operate in a secure way. TRNC Internal Systems Committee is responsible for ensuring the efficiency and sufficiency of the internal systems provided by the Bank in relation to the operation of the branches, that operate under TRNC office; ensuring the operation of the internal systems, accounting and reporting systems in line with the law and related regulations and ensuring the integrity of the produced information; carrying out the preliminary assessment of independent audit firms and other companies providing services directly related to other banking operations to be selected by the Board; and monitoring regularly and coordinating these companies that are selected and contracted by the Board. As of 2019 year-end, TRNC Internal Systems Committee held meetings 6 times with full participation of the members and took 8 resolutions. Credit Committee Credit Committee in the Bank makes resolutions on credit allocation within its authorization limit, makes decisions on demands to change the credit allocation conditions within its authorization limit and carries out other assignments regarding credits given by the Board. Credit Committee consists of three members; one of them is the Chief Executive Officer or Deputy Chief Executive, who is also the chairperson of the Committee and two members from the Board of Directors. Two alternate Committee Members are also designated who will stand if need arises. As the loan proposal files are presented, the Committee makes decision on the credit allocation with consensus, after each Committee Member examines and signs the files. Resolutions of the Credit Committee which have unanimous backing are executed directly while resolutions made on a majority basis are executed following the approval of the Board of Directors. By the end of 2019, by the evaluation of 51 files under the authority of the Credit Committee, 42 resolutions were adopted with full participation of the members. As per the resolution of the Board of Directors, dated 30.12.2019, Nr. 43505, Chief Executive Officer, Mr. Adnan Bali is the Chairperson of the Committee and regular member, Vice Chairperson Mr. Ertuğrul Bozgedik and member of the Board of Directors Ms. Feray Demir are the Credit Committee members. Ms. Füsun Tümsavaş, Chairperson of the Board of Directors and Mr. Turgay Berksoy, independent member of the Board of Directors are alternate members of the Credit Committee. Committee Members Duty Primary Duty Adnan Bali Feray Demir Ertuğrul Bozgedik Chairperson of the Committee Member of the Board and Chief Executive Officer Member Member Board Member Board Member Alternate Members: Füsun Tümsavaş-Prof. Dr. Turgay Berksoy 88 İşbank Annual Report 2019 Credit Revision Committee Being one of the committees of the Board of Directors, the Credit Revision Committee is constituted every year as per the article of the context of Bank’s Credit Risk Policy put in effect. The Committee holds meetings at least once a year within the framework of the principle of reviewing the loan portfolio, evaluating the relations with credit customers at the end of the year and revising, when necessary, the credit limits allocated to the said persons and corporations for the following year. Credit Revision Committee, composed of Ms. Füsun Tümsavaş, the Chairperson of the Board of Directors, and Ms. Feray Demir, Mr. Ertuğrul Bozgedik and Mr. Ersin Önder Çiftçioğlu who are members of the Board of Directors as per the Board of Directors’ resolution dated 20.11.2018, Nr. 42738 for the year 2019; has completed its analyses and evaluations regarding certain firms and groups under the authorization of Board of Directors and Credit Committee on 16.04.2019. For the year 2020, the Credit Revision Committee is reconstituted with its members being Füsun Tümsavaş, Chairperson of the Board of Directors and Vice Chairperson Ertuğrul Bozgedik as well as Feray Demir and Ersin Önder Çiftçioğlu, Board of Directors members; as per the Board of Directors’ resolution dated 23.12.2019, Nr. 43455. Corporate Social Responsibility Committee The Corporate Social Responsibility Committee held 8 meetings in 2019 and was established as per the Regulation on Social Responsibility Practice, which was adopted with the resolution of the Board and its members are Board Members Ms. Feray Demir, Mr. Rahmi Aşkın Türeli, Mr. Fazlı Bulut (as of 01.04.2019), Mr. Yalçın Sezen, Ms. Senar Akkuş, Mr. Suat Sözen and Mr. Bülent Yumuşaker. The committee assessed the project suggestions and demands, as well as terms of cooperation and developments about ongoing activities and accounted for the results. Corporate Governance Committee Corporate Governance Committee was established in order to monitor the Bank’s compliance with the corporate governance principles, perform studies for improvement in corporate governance practices and make suggestions to the Board and fulfill the projected tasks of Corporate Governance Committee and Nomination Committee to be in accordance with the related legislation. The Corporate Governance Committee is the highest authority in matters regarding sustainability management. The Corporate Governance Committee is composed of one chairperson and four members. With the decision n.43081, dated 30.04.2019; Board of Directors’ Chairperson Ms. Füsun Tümsavaş was elected as the Chairperson of the Committee, Board Members Mr. Ersin Önder Çiftçioğlu, Mr. Özcal Korkmaz, Mr. Fazlı Bulut and the Investor Relations Department Manager Mr. Süleyman H. Özcan were elected as Committee Members. As of 2019 year-end, the Corporate Governance Committee convened 6 times with full participation of the members and took 10 decisions. Risk Committee Risk Committee is responsible for articulating the risk management strategies and policies İşbank will adhere to both on a consolidated and unconsolidated basis, presenting them to the İşbank Board of Directors for approval and monitoring compliance with them. Committee is the common communication platform for the Bank’s executive divisions in terms of assessing the risk the Bank is exposed to, making suggestions about the actions to be taken and approaches to be followed. The Committee’s principal duties are the following: • Preparing the risk strategies and policies and presenting to the Board for approval. • Monitoring the effective usage of the outcomes of the internal capital adequacy assessment process in the planning and decision making processes of the Bank. • Negotiating and adjudicating the issues addressed by Risk Management Division. • Recommending the level of risk limits for exposures/possible exposures to the Board, monitoring the breaches of these limits and making recommendations regarding the elimination of those breaches to the Board. • Recommending the amendments in the risk policies to the Board. • Monitoring the risk management processes, i.e. risk identification, definition, measurement, assessment, control and reporting processes, carried out by Risk Management Division. • Monitoring the accuracy and reliability of the risk measurement methodologies and their results. 89 Corporate Governanceİşbank Annual Report 2019 İşbank Committees Committee Members: • Füsun Tümsavaş: Chairperson of Board of Directors and Head of Risk Committee • Ertuğrul Bozgedik: Vice Chairperson of Board of Directors • Adnan Bali: CEO, Head of Credit Committee • Senar Akkuş: Deputy Chief Executive • Murat Bilgiç: Deputy Chief Executive • Ebru Özşuca: Deputy Chief Executive, Head of Asset & Liability Management Committee • Ertuğrul Senem: Head of Corporate Compliance Division • Hürdoğan Irmak: Head of Risk Management Division Risk Committee contributes to the configuration of Group risk policies also through consolidated group meetings. In the activities that the Risk Committee carries out on a consolidated basis, • Hansu Uçar, Head of Equity Participations Division also attend the meetings. In 2018, Risk Committee held 12 meetings with majority participation and In these meetings risk management practices of İşbank and its subsidiaries under consolidated risk policies have been evaluated, risk reports has been presented to the Committee, the results have been analyzed and 15 decisions regarding the risk management systems and processes were taken. Remuneration Committee Bank’s Remuneration Committee has been established for the purpose of executing functions and activities related to monitoring and controlling remuneration policies of the Bank on behalf of Board of Directors. The Committee has two members; Ms. Füsun Tümsavaş, the Chairperson of the Board, was elected as the Chairperson of the Committee and Ms. Feray Demir, Member of the Board of Directors was elected as the member of the Committee dated as per the resolution of the Board dated 01.04.2019 and Nr. 43051. Provided that it doesn’t exceed three-month periods, the Remuneration Committee convenes at least four times a year and submits to the Board of Directors the results of the activities that it carries out and its opinions regarding other issues that it deems important. Within the framework of compliance to Corporate Governance Principles, Remuneration Committee is responsible for monitoring and controlling policies related to remuneration management on behalf of Board of Directors within the context of compliance to Corporate Governance Principles; providing that remuneration policies are in compliance with the Bank’s ethical values, internal balances and strategic goals. The Committee is also responsible for evaluating remuneration policy and practices within the framework of risk management; submitting the proposals regarding the necessities determined after the evaluations to Board of Directors, as well as fulfilling other responsibilities in accordance with relevant legislations and tasks assigned by the Board of Directors within this framework. In 2019, Remuneration Committee held 7 meetings with full participation of the members and adopted 13 resolutions. 90 İşbank Annual Report 2019 Human Resources Practices at İşbank Within the frame of its vision to pioneer digitalization, İşbank successfully implemented its sustainable and problem-free growth strategy also in 2019, acting as an organization that shape the future competition and banking business standards with its identity as a dynamic and agile organization. Within the scope of the strategic and profitable growth strategy of İşbank that targets healthy and sustainable growth in every field, individuals possessing the competencies and qualifications required by the relevant positions were employed using the appropriate assessment methods and tools in the reporting period. In 2019, 267 new employees were hired in Turkey and 33 abroad in various title groups. The Bank had 24,053 people in total on its payroll as at year-end 2019, 23,736 of them employed domestically and 317 in foreign countries. The upgrading efforts continued, which were initiated for executing the onboarding processes on the digital platform in a faster and more user-oriented manner. Work was started to expand the scope of hiring examination processes that are being executed online on the digital platform. The MasterClass Internship Program, which was launched with the intention to better inform potential co-workers about İşbank, was carried on, and 75 students completed their 20 work day-internships in Information Technologies, Legal Counsellorship and various Headquarters departments. Additionally, in cooperation with Yenibirlider Association, “İş’te YBL Development Program” had its first graduates, and the second edition that will last 8 months was initiated with 12 new students. Various career events and workshops designed to enhance İşbank’s position as the “Employer of Choice” among candidates continued, and a talent perception exploration was initiated that will set the course of future efforts. In 2019, besides fulfillment of regulatory obligations in Human Resources Management processes, manual processes were systematized, thus increasing their efficacy and efficiency. Also, operational processes were rendered faster with the use of robots. Managers and candidates for managerial positions working in branches and Head Office departments receive an annual bonus. Attention is paid to ensure that premium payments are aligned with the Bank’s long-term strategy and the risk undertaken, as well as respective employees’ performances. Variable remuneration is not applied to identified employees at the Bank. As part of the employee-oriented approach, a mobile HR communication platform application was developed. Intended to support internal communication, the mobile app provides contents related to private, work and social life. In an effort to enhance employee engagement, a photography competition, cultural excursions and various sports activities were organized under the name Employee Communication Program and Platform (ECPP). In addition to that, as one of the most effective ways to increase interaction with young employees whose expectations differ in line with the digitalizing world, an e-sports tournament was performed online/offline for the first time in in-house communication. At İşbank, employee compensation and benefits are determined with the Collective Agreement within the frame of applicable legislation and in accordance with the Remuneration Policy. Related information is presented in the appropriate sections of the Annual Report. The conformity of salary levels paid by the Bank to the ones in the sector is reviewed by participating in independent and anonymous salary surveys administered twice a year. There were 23 identified employees working at İşbank by year-end 2019. Within the framework of the new business model launched under the Digital Transformation Program, aiming to upskill and reskill employees to enable them quickly adapt to their changing roles and responsibilities, the Bank presented new generation learning initiatives, which are designed specifically for roles, enriched with digital learning tools. During 2019, nearly 8,000 employees from all branches attended the training programs and received more than 100 thousand hours of training, in line with the transformation journey. Employees have experienced over 120 thousand hours of learning experience with tools such as videos, e-learning and games on a wide range of topics that support the digitalization process offered through “Öğrenme Dünyası (Learning World)” platform, easily accessible anytime anywhere. The digital learning solutions offered by İşbank were named among internationally best practices and recognized with awards. İşbank’s second learning game “İşGame” won gold in “Best Use of Games for Learning” category at the Brandon Hall HCM Excellence Awards 2019, and bronze in “Best Learning Game” category at the Learning Technologies Awards 2019. In addition, with “İş’te Gerçeklik (IsReality)” application launched to convey the changes that take place in the physical structures of digitalized branches and in the roles of employees within the scope of the new business model, the Bank was awarded gold in the “Best Use of Virtual Worlds for Learning” category at the Brandon Hall HCM Excellence Awards, and silver in “Corporate Learning/ Workforce Development Solution” category at the Stevie - International Business Awards. A special academy in Artificial Intelligence field was launched to support the ongoing programs within the scope of the digital transformation process. With the academy, it is aimed to increase the knowledge and skills of the teams working in the field of artificial intelligence and to enable them to design artificial learning-supported solutions and decision support systems based on big data. In a bid to help maintain İşbank’s competitive strength, sustain its leadership position and support the realization of Bank’s vision to become the best digital bank, management and leadership development programs were carried on for managers at different levels with leading national and international business schools. 91 Corporate Governanceİşbank Annual Report 2019 Human Resources Practices at İşbank 2020 goals The digitalization and optimization effort, initiated in recruitment practices will be continued in 2020, and the prevalence of such practices will be increased with the addition of new topics. Efficient use of decision support systems, evaluation of mobile solutions, diversification of activities for university students are planned, in order to reduce operational risks and costs, strengthen the interaction with the target group and increase candidate satisfaction. Within the frame of İşbank’s structure and priorities, advancements in technology will be monitored, and efforts will be ongoing to move processes to mobile platforms, and improving operational processes by migrating them to the system by utilizing robots. As part of the digitalization of HR practices and processes, development work began on a mobile HR communication platform in 2019, and is targeted to be spread in 2020. The platform is intended to keep the communication with employees alive on a 24/7 basis, to publish announcements, to send personal messages specific to each employee, and to increase the synergy between employees through campaigns and games that will be run on the app. In 2020, onboarding and basic OHS refresher trainings will be implemented online to ensure satisfaction of İşbank’s legal obligations and to enhance Occupational Health and Safety culture within the frame of OHS practices, while support programs on occupational health and safety issues addressing all employees will be carried on. In addition, emergency drills will be continued in all buildings of the Bank in 2020, as is done every year. On another hand, while the Bank’s employees will keep receiving periodic health examinations, weight will be given to preventive healthcare practices to help them lead a physically and mentally healthy life, to prevent the illnesses they might contract in the future, and to protect them from illnesses and injuries through prophylaxis and early diagnosis. In addition, initiatives will be carried out to integrate İşbank’s healthcare practices with OHS practices, and thus to more effectively follow up healthcare processes. With the introduction of İşbank Healthcare Provision system, it is targeted to mechanize the periodic verification of healthcare assistance and provision system, to ensure efficient and instant communication related to the health process, and to reduce paper costs by way of electronic forwarding of all data by healthcare institutions. İşbank will continue to offer talent management solutions in 2020, focusing on the sustainability of digital transformation activities and delivering the future skills. Accordingly, various learning opportunities will be offered, including personalized learning journeys enriched with digital learning solutions to support the employees’ upskilling and reskilling. Information on the Transactions Carried out with İşbank’s Risk Group All financial services provided to companies within İşbank’s Risk Group are provided on an arm’s length basis, subject to the same procedures and policies applicable for third parties. Credit lines and other lending transactions allocated to companies within İşbank’s Risk Group are analyzed and monitored to ensure compliance with legal requirements. In 2019, the loans extended to the Group companies had all been significantly below the regulatory risk limits. 92 İşbank Annual Report 2019 Activities for which Support Services are Received in Accordance with the Regulation on Procurement of Support Services for Banks • Support services received from Accenture Danışmanlık Ltd. Şti. for credit management application; • Support services received from Aktif İleti ve Kurye Hizmetleri A.Ş. for delivery of credit card products to customer addresses; • Support services received from Aras Kurye Servisi A.Ş. for delivery of card products to our customers addresses; • Support services received from Aras Kurye Servisi A.Ş. for sending Banking Services Agreement to the addresses of applicants apply for “Anında Müşteri” and sending the signed contract to the Bank; • Services purchased from Arçelik A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Secure e-payment infrastructure service received from Asseco See Teknoloji A.Ş. for electronic commerce; • Support services received from Atos Müşteri Hizmetleri A.Ş. for sales-oriented external calls; • The service purchased from ATP Ticari Bilgisayar Ağı ve Elektrik Güç Kaynakları Üretim ve Pazarlama Ticaret A.Ş regarding the transfer of right to use software and document; • The service received from Austriacard Turkey Kart Operasyonları A.Ş. for production and customization of İşbank’s credit cards equipped by chip technology; • Support services received from Bilişim Bilgisayar Hizmetleri Ltd. Şti. for using of payment application on new generation cash register; • The support services purchased from CMC İletişim ve Çağrı Merkezi Hizmetleri A.Ş. aimed at calling customers and reminding them the deferrals regarding retail loans and the credit cards payments; • The support services purchased from Comdata Teknoloji ve Müşteri Hizmetleri A.Ş. (previous name Win Bilgi İletişim Hizmetleri A.Ş.) aimed at calling customers and reminding them the deferrals regarding retail loans and the credit cards payments; • Support services received from D-Market Elektronik Hizmetler ve Tic. A.Ş. for marketing of consumer loans; • Services purchased from Edata Elektronik San ve Tic A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Support service received from E-Kart Elektronik Kart Sistemleri San. ve Tic. A.Ş. for production and customization of İşbank’s credit cards equipped by chip technology; • Support service received from Enuygun Com İnternet Bilgi Hizmetleri Teknoloji ve Ticaret A.Ş. for marketing of consumer loans. • Support service received from Erişim Müşteri Hizmetleri A.Ş. for meeting the demands of the customers using Telephone Branch; • Support services received from Genpa Telekomünikasyon ve İletişim Hizmetleri San. ve Tic. A.Ş. for marketing of consumer loans; • Support services received from Hangisi İnternet ve Bilgi Hizmetleri A.Ş. for marketing of consumer loans; • Services purchased from Hobim Digital Elektronik Hizmetler A.Ş. for printing and/or enveloping bank statements of the credit cards and contracted merchants, and other documents like letters and notices; • Services purchased from Hugin Yazılım Teknolojileri San. ve Tic A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Support service received from IBM Global Services İş ve Teknoloji Hizmetleri ve Ticaret Ltd. Şti. for Emergency Center located in İzmir for back up of the system; • Services purchased from Ingenico Ödeme Sistem Çözümleri for maintenance of and running the Bank’s application on new generation cash registers; • The service purchased from Innova Bilişim Çözümleri A.Ş regarding the use of virtual POS; • Services purchased from Infina Yazılım A.Ş., for purchasing software, installation, and maintenance, and support services to be received throughout the term of the contract; • Support service received from İş Net Elektronik Bilgi Üretim Dağıtım Ticaret ve İletişim Hizmetleri A.Ş. for operation, management and maintenance of communication networks and for providing sources relating to operation and management of data processing application servers and server operating systems; • Services purchased from Karbil Yazılım ve Bilişim Teknolojileri Tic. A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Support services received from Konut Kredisi Com Tr Danışmanlık A.Ş. for marketing of consumer loans; • Support services received from Kurye Net Motorlu Kuryecilik ve Dağıtım Hizmetleri A.Ş. for delivery of credit card products to customer addresses; • Support services received from Kurye Net Motorlu Kuryecilik ve Dağıtım Hizmetleri A.Ş. for delivery of OGS devices to our customers addresses; • Support service received from Loomis Güvenlik Hizmetleri A.Ş. for carrying of cheques, promissory notes, other commercial papers and documents between Group Centers and Banking Operations and Payment Operations Division; • Support service received from Loomis Güvenlik Hizmetleri A.Ş. for carrying of foreign currency cash between Group Centers and İstanbul Cash Management Center; • The service purchased from Obase Bilgisayar Danışmanlık Hizmetleri Ticaret San. A.Ş. for outsourcing in data analytics studies; • The service received from Plastik Kart Akıllı Kart İletişim Sistemleri San. ve Tic. A.Ş. for production and customization of İşbank’s credit cards equipped by chip technology; • The service purchased from Provus Basım ve Posta İletişim Hizmetleri A.Ş. regarding the transfer of balance from POS devices to the prepaid cards; • The service received from Mikrosaray Mikrobilgisayar Paz. ve Tic. A.Ş. on directing customers to the Bank’s branches for installing the Bank’s application to new generation cash registers; • Services purchased from MT Bilgi Teknoloji Dış Ticaret A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Services purchased from Panaroma Bilişim Teknolojileri San. ve Tic. A.Ş. for maintenance of and running the Bank’s application on new generation cash registers; • Support service received from Posta ve Telgraf Teşkilatı A.Ş. for marketing of consumer loans. • Services purchased from R2 Servis Elektrik, Elektronik ve Bilgisayar Teknolojileri San. ve Tic. A.Ş. for maintenance and running the Bank’s application on new generation cash registers; • Support services received from Softtech Yazılım Teknolojileri Araştırma Geliştirme ve Pazarlama Tic. A.Ş. for information systems management, information systems infrastructure support, software development, project development, business analysis, systems analysis, project and product consulting, technical support issues; • Support services received from 57 retail stores for marketing of retail loans. 93 Corporate Governanceİşbank Annual Report 2019 Corporate Governance Principles Compliance Statement İşbank is subject to the provisions stipulated for banks in the Banking legislation and Capital Markets legislation regarding Corporate Governance Principles. The Bank carries out its activities in accordance with the compulsory principles of the Communiqué on Corporate Governance (Communiqué) published by the Capital Markets Board. Bank’s practices regarding the non-compulsory provisions of the principles stipulated in the Communiqué and additional information within in the framework of Corporate Governance are given in the Corporate Governance Compliance Report and Corporate Governance Information Form, which are the parts of Annual Report. There are not any changes foreseen to be performed in the Bank’s managerial practices within the framework of the principles stipulated in the Communiqué. Within the year, procedures were carried out to develop the structure of the Corporate Governance Principles that the Bank is subject to. Corporate Governance Compliance Report Corporate Governance Compliance Report Yes Company Compliance Status No Partial Exempted Not Applicable Explanation X X X X X X X 1.1. FACILITATING THE EXERCISE OF SHAREHOLDER RIGHTS 1.1.2- Up-to-date information and disclosures which may affect the exercise of shareholder rights are available to investors at the corporate website. 1.2. RIGHT TO OBTAIN AND REVIEW INFORMATION 1.2.1 - Management did not enter into any transaction that would complicate the conduct of special audit. 1.3. GENERAL ASSEMBLY 1.3.2 - The company ensures the clarity of the General Assembly agenda, and that an item on the agenda does not cover multiple topics. 1.3.7- Insiders with privileged information have informed the board of directors about transactions conducted on their behalf within the scope of the company's activities in order for these transactions to be presented at the General Shareholders' Meeting. 1.3.8 - Members of the board of directors who are concerned with specific agenda items, auditors, and other related persons, as well as the officers who are responsible for the preparation of the financial statements were present at the General Shareholders' Meeting. 1.3.10 - The agenda of the General Shareholders' Meeting included a separate item detailing the amounts and beneficiaries of all donations and contributions. 1.3.11 - The General Shareholders' Meeting was held open to the public, including the stakeholders, without having the right to speak. 1.4. VOTING RIGHTS 1.4.1 - There is no restriction preventing shareholders from exercising their shareholder rights. 1.4.2 - The company does not have shares that carry privileged voting rights. 1.4.3-The company withholds from exercising its voting rights at the General Shareholders' Meeting of any company with which it has cross-ownership, in case such cross-ownership provides management control. 1.5. MINORITY RIGHTS 1.5.1 - The company pays maximum diligence to the exercise of minority rights. 1.5.2 - The Articles of Association extend the use of minority rights to those who own less than one twenthieth of the outstanding shares, and expand the scope of the minority rights. 94 X X X X In addition to the shareholders of İşbank, the persons mentioned in "İşbank Internal Directive on Working Principles and Procedures of General Assembly" may attend the General Assembly. X In our Bank, minority rights are exercised in line with the related legislation. İşbank Annual Report 2019 Corporate Governance Compliance Report Yes Company Compliance Status No Partial Exempted Not Applicable Explanation 1.6. DIVIDEND RIGHT 1.6.1 - The dividend policy approved by the General Shareholders' Meeting is posted on the company website. 1.6.2 - The dividend distribution policy comprises the minimum information to ensure that the shareholders can have an opinion on the procedure and principles of dividend distributions in the future. 1.6.3 - The reasons for retaining earnings, and their allocations, are stated in the relevant agenda item. 1.6.4 - The board reviewed whether the dividend policy balances the benefits of the shareholders and those of the company. 1.7. TRANSFER OF SHARES 1.7.1 - There are no restrictions preventing shares from being transferred. 2.1. CORPORATE WEBSITE 2.1.1. - The company website includes all elements listed in Corporate Governance Principle 2.1.1. 2.1.2 - The shareholding structure (names, privileges, number and ratio of shares, and beneficial owners of more than 5% of the issued share capital) is updated on the website at least every 6 months. 2.1.4 - The company website is prepared in other selected foreign languages, in a way to present exactly the same information with the Turkish content. 2.2. ANNUAL REPORT 2.2.1 - The board of directors ensures that the annual report represents a true and complete view of the company's activities. 2.2.2 - The annual report includes all elements listed in Corporate Governance Principle 2.2.2. 3.1. CORPORATION'S POLICY ON STAKEHOLDERS 3.1.1- The rights of the stakeholders are protected pursuant to the relevant regulations, contracts and within the framework of bona fides principles. 3.1.3 - Policies or procedures addressing stakeholders' rights are published on the company's website. 3.1.4 - A whistleblowing programme is in place for reporting legal and ethical issues. 3.1.5 - The company addresses conflicts of interest among stakeholders in a balanced manner. 3.2. SUPPORTING THE PARTICIPATION OF THE STAKEHOLDERS IN THE CORPORATION'S MANAGEMENT 3.2.1 - The Articles of Association, or the internal regulations (terms of reference/manuals), regulate the participation of employees in management. 3.2.2 - Surveys/other research techniques, consultation, interviews, observation method etc. were conducted to obtain opinions from stakeholders on decisions that significantly affect them. 3.3. HUMAN RESOURCES POLICY 3.3.1 - The company has adopted an employment policy ensuring equal opportunities, and a succession plan for all key managerial positions. 3.3.2 - Recruitment criteria are documented. 3.3.3 - The company has a policy on human resources development, and organises trainings for employees. 3.3.4 - Meetings have been organised to inform employees on the financial status of the company, remuneration, career planning, education and health. 3.3.5 - Employees, or their representatives, were notified of decisions impacting them. The opinion of the related trade unions was also taken. X X X X X X X X X X X X X X X X X X X X X Information considered necessary for international investors is available on the Bank's website, in the Investor Relations section also in English. İşbank employees participate in the management of the Bank via their beneficiary status in İşbank Members' Supplementary Pension Fund, which holds 39.10% of İşbank shares. 95 Corporate Governanceİşbank Annual Report 2019 Corporate Governance Compliance Report Corporate Governance Compliance Report Yes 3.3.6 - Job descriptions and performance criteria have been prepared for all employees, announced to them and taken into account to determine employee remuneration. 3.3.7 - Measures (procedures, trainings, raising awareness, goals, monitoring, complaint mechanisms) have been taken to prevent discrimination, and to protect employees against any physical, mental, and emotional mistreatment. 3.3.8 - The company ensures freedom of association and supports the right for collective bargaining. 3.3.9 - A safe working environment for employees is maintained. 3.4. RELATIONS WITH CUSTOMERS AND SUPPLIERS 3.4.1-The company measured its customer satisfaction, and operated to ensure full customer satisfaction. 3.4.2 - Customers are notified of any delays in handling their requests. 3.4.3 - The company complied with the quality standards with respect to its products and services. 3.4.4 - The company has in place adequate controls to protect the confidentiality of sensitive information and business secrets of its customers and suppliers. 3.5. ETHICAL RULES AND SOCIAL RESPONSIBILITY 3.5.1 - The board of the corporation has adopted a code of ethics, disclosed on the corporate website. 3.5.2-The company has been mindful of its social responsibility and has adopted measures to prevent corruption and bribery. 4.1. ROLE OF THE BOARD OF DIRECTORS 4.1.1 - The board of directors has ensured strategy and risks do not threaten the long-term interests of the company, and that effective risk management is in place. 4.1.2 - The agenda and minutes of board meetings indicate that the board of directors discussed and approved strategy, ensured resources were adequately allocated, and monitored company and management performance. 4.2. ACTIVITIES OF THE BOARD OF DIRECTORS 4.2.1-The board of directors documented its meetings and reported its activities to the shareholders. 4.2.2 - Duties and authorities of the members of the board of directors are disclosed in the annual report. 4.2.3-The board has ensured the company has an internal control framework adequate for its activities, size and complexity. 4.2.4 - Information on the functioning and effectiveness of the internal control system is provided in the annual report. 4.2.5 - The roles of the Chairman and Chief Executive Officer are separated and defined. 4.2.7-The board of directors ensures that the Investor Relations department and the corporate governance committee work effectively. The board works closely with them when communicating and settling disputes with shareholders. 4.2.8 - The company has subscribed to a Directors and Officers liability insurance covering more than 25% of the capital. X X X X X X X X X X X X X X X X X 96 Company Compliance Status No Partial Exempted X Not Applicable Explanation Performance related compensation is used in certain positions. X Our Bank’s Board of Directors and Executives are insured with a coverage for a limit up to USD 25 million against the risk of loss they may cause due to their faults while performing their duties within the scope of a liability insurance policy that names our Bank and our participations as the insured. İşbank Annual Report 2019 Corporate Governance Compliance Report Yes Company Compliance Status No Partial Exempted Not Applicable Explanation 4.3. STRUCTURE OF THE BOARD OF DIRECTORS 4.3.9 - The board of directors has approved the policy on its own composition, setting a minimal target of 25% for female directors. The board annually evaluates its composition and nominates directors so as to be compliant with the policy. 4.3.10 - At least one member of the audit committee has 5 years of experience in audit/accounting and finance. 4.4. BOARD MEETING PROCEDURES 4.4.1-Each board member attended the majority of the board meetings in person. 4.4.2 - The board has formally approved a minimum time by which information and documents relevant to the agenda items should be supplied to all board members. 4.4.3 - The opinions of board members that could not attend the meeting, but did submit their opinion in written format, were presented to other members. 4.4.4 - Each member of the board has one vote. 4.4.5 - The board has a charter/written internal rules defining the meeting procedures of the board. 4.4.6 - Board minutes document that all items on the agenda are discussed, and board resolutions include director's dissenting opinions if any. 4.4.7-There are limits to external commitments of board members. Shareholders are informed of board members' external commitments at the General Shareholders' Meeting. 4.5. BOARD COMMITTEES 4.5.5 - Board members serve in only one of the Board's committees. 4.5.6 - Committees have invited persons to the meetings as deemed necessary to obtain their views. 4.5.7 - If external consultancy services are used, the independence of the provider is stated in the annual report. 4.5.8 - Minutes of all committee meetings are kept and reported to board members. 4.6. FINANCIAL RIGHTS 4.6.1-The board of directors has conducted a board performance evaluation to review whether it has discharged all its responsibilities effectively. 4.6.4-The company did not extend any loans to its board directors or executives, nor extended their lending period or enhanced the amount of those loans, or improve conditions thereon, and did not extend loans under a personal credit title by third parties or provided guarantees such as surety in favour of them. 4.6.5 - The individual remuneration of board members and executives is disclosed in the annual report. X X X X X X X X X X X X X X No target ratio is set for the number of female members in the Board of Directors. As of the end of 2019, there are two female members in the Board. Based on the last three terms of İşbank Board of Directors, percentage of the female members in the Board was realized as 21%. X X The duties that İşbank Board members have outside the Bank are provided in the Annual Report which is presented in the General Assembly. Members of İşbank Board of Directors may take part in more than one committee within the context of the related legislation. The committees present information regarding their activities and meeting results to the Board of Directors, whenever needed. Restrictions related with the loans to be extended by İşbank to the Board members and employees are defined in article 50 of the Banking Law. In this context, İşbank does not extend loans to its Board members and employees other than those allowed by the law. Total compensation of the Board members and managers with administrative responsibilities is disclosed. 97 Corporate Governanceİşbank Annual Report 2019 Corporate Governance Information Form SHAREHOLDERS 1.1. Facilitating the Exercise of Shareholders Rights The number of investor meetings (conference, seminar/etc.) organised by the company during the year In 2019, İşbank participated in a total of 15 conferences in Turkey and abroad. In these events, a total of 128 investor meetings were conducted. 5 investor events took place in the Bank's Headquarters, besides, 252 meetings and teleconferences were conducted. 1.2. Right to Obtain and Examine Information The number of special audit request(s) The number of special audit requests that were accepted at the General Shareholders' Meeting 1.3. General Assembly - - Link to the PDP announcement that demonstrates the information requested by Principle 1.3.1. (a-d) https://www.kap.org.tr/tr/Bildirim/743437 Whether the company provides materials for the General Shareholders' Meeting in English and Turkish at the same time General Assembly documents except the list of participants and the minutes of the meeting (invitation to the General Assembly, agenda, proxy statement, information document, dividend distribution proposal, etc.) are presented in Turkish and English simultaneously. The links to the PDP announcements associated with the transactions that are not approved by the majority of independent directors or by unanimous votes of present board members in the context of Principle 1.3.9 The links to the PDP announcements associated with related party transactions in the context of Article 9 of the Communique on Corporate Governance (II-17.1) The links to the PDP announcements associated with common and continuous transactions in the context of Article 10 of the Communique on Corporate Governance (II-17.1) - - - The name of the section on the corporate website that demonstrates the donation policy of the company The limit set for donations was approved in the General Assembly of 2013 and the minutes of said meeting can be found in İşbank website, Home Page > About Us > Investor Relations > Disclosures to BIST. The Bank's policy regarding donations does not take place in the Bank's website. The relevant link to the PDP with minute of the General Shareholders' Meeting where the donation policy has been approved The number of the provisions of the articles of association that discuss the participation of stakeholders to the General Shareholders' Meeting None Article 47 Identified stakeholder groups that participated in the General Shareholders' Meeting, if any Shareholders and shareholder representatives as well as Board members, independent auditor representatives and İşbank employees (within the context of the legislation) participated in the General Assembly held in 2019. 1.4. Voting Rights Whether the shares of the company have differential voting rights No In case that there are voting privileges, indicate the owner and percentage of the voting majority of shares. - The percentage of ownership of the largest shareholder 39.10% 1.5. Minority Rights Whether the scope of minority rights enlarged (in terms of content or the ratio) in the articles of the association No If yes, specify the relevant provision of the articles of association. - 1.6. Dividend Right The name of the section on the corporate website that describes the dividend distribution policy Home Page >About Us > Investor Relations > Corporate Governance > Dividend Distribution Policy Minutes of the relevant agenda item in case the board of directors proposed to the general assembly not to distribute dividends, the reason for such proposal and information as to use of the dividend. In accordance with the Banking Legislation, our Bank has applied to the Banking Regulation and Supervision Agency (BRSA) for the permission for profit distribution in line with our Articles of Incorporation. The BRSA has not approved the application for the cash distribution of the net profit of our Bank emphasizing that the profits should be retained in the entity in line with the general prudent policy of the Agency for the whole of the banking system, to keep the equity structure of the sector as strong as possible. The amount of TL 6,769,085,006.47 net profit at the year of 2018 is decided that TL 8,629,009.00 of the balance sheet profit is composed of return on real estate sales that is to be kept in a special fund account in order to be used in capital increase if required to be transferred to related reserves, and the amount of TL 15,000,000.00 to be set aside as risk venture capital fund in order to make use of risk venture investment trust and funds, TL 337,272,779.87 (the remaining part of 2018 net profit TL 6,745,455,997.47) in accordance with Article 58 (a) of our Articles of Incorporation be set aside as legal reserves, TL 6,408,183,197.60 (the remaining part of the profit) be set aside as extraordinary reserves. PDP link to the related general shareholder meeting minutes in case the board of directors proposed to the general assembly not to distribute dividends https://www.kap.org.tr/tr/Bildirim/751148 98 İşbank Annual Report 2019 General Assembly Meetings General Meeting Date The number of information requests received by the company regarding the clarification of the agenda of the General Shareholders' Meeting Shareholder participation rate to the General Shareholders' Meeting Percentage of shares directly present at the GSM Percentage of shares represented by proxy 29.03.2019 0 88.67% 0.01% 88.66% DISCLOSURE AND TRANSPARENCY 2.1. Corporate Website Specify the name of the page of the corporate website that contains the General Shareholders' Meeting minutes, and also indicates for each resolution the voting levels for or against Specify the name of the page of the corporate website that contains all questions asked in the general assembly meeting and all responses to them The number of the relevant item or paragraph of General Shareholders' Meeting minutes in relation to related party transactions The number of declarations by insiders received by the board of directors The link to the related PDP general shareholder meeting notification Home Page > About Us > Investor Relations > Disclosures to BIST - - 427 https://www. kap.org.tr/tr/ Bildirim/751148 Specify the name of the sections of the website providing the information requested by the Principle 2.1.1. Home Page>About Us>Investor Relations If applicable, specify the name of the sections of the website providing the list of shareholders (ultimate beneficiaries) who directly or indirectly own more than 5% of the shares. List of languages for which the website is available 2.2. Annual Report The page numbers and/or name of the sections in the Annual Report that demonstrate the information requested by principle 2.2.2. Home > About Us > Investor Relations > Corporate Overview > Corporate Information > Ownership Structure Turkish and English a) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on the duties of the members of the board of directors and executives conducted out of the company and declarations on independence of board members Additional Information Regarding the Related Legislation b) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on committees formed within the board structure İşbank Committees c) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on the number of board meetings in a year and the attendance of the members to these meetings Information about the Meetings of the Board of Directors ç) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on amendments in the legislation which may significantly affect the activities of the corporation No legislation change that would significantly impact İşbank activities has occurred d) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on significant lawsuits filed against the corporation and the possible results thereof Unconsolidated Financial Statements as at and for the Year Ended 31 December 2019 with Independent Audit's Report Thereon - Information on Other Provisions e) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on the conflicts of interest of the corporation among the institutions that it purchases services on matters such as investment consulting and rating and the measures taken by the corporation in order to avoid from these conflicts of interest None f) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on the cross ownership subsidiaries that the direct contribution to the capital exceeds 5% İşbank has no cross ownership subsidiaries. g) The page numbers and/or name of the sections in the Annual Report that demonstrate the information on social rights and professional training of the employees and activities of corporate social responsibility in respect of the corporate activities that arises social and environmental results Human Resources Practices at İşbank / Corporate Social Responsibility Activities 99 Corporate Governanceİşbank Annual Report 2019 Corporate Governance Information Form STAKEHOLDERS 3.1. Corporation’s Policy on Stakeholders The name of the section on the corporate website that demonstrates the employee remedy or severance policy Compensation principles for Bank employees are determined by the Collective Bargaining Agreement which is shared with the employees through İşbank's Corporate Intranet Portal. The number of definitive convictions the company was subject to in relation to breach of employee rights None The position of the person responsible for the alert mechanism (i.e. whistleblowing mechanism) The contact detail of the company alert mechanism 3.2. Supporting the Participation of the Stakeholders in the Corporation’s Management Name of the section on the corporate website that demonstrates the internal regulation addressing the participation of employees on management bodies Corporate bodies where employees are actually represented 3.3. Human Resources Policy The role of the board on developing and ensuring that the company has a succession plan for the key management positions The name of the section on the corporate website that demonstrates the human resource policy covering equal opportunities and hiring principles. Also provide a summary of relevant parts of the human resource policy. Whether the company provides an employee stock ownership programme The name of the section on the corporate website that demonstrates the human resource policy covering discrimination and mistreatments and the measures to prevent them. Also provide a summary of relevant parts of the human resource policy. İşbank has an online communication platform through which employees may submit their requests and complaints to the Senior Management directly. Only a limited number of managers have access to the said platform. Other stakeholders may deliver their suggestions or complaints to the Senior Management through İşbank Corporate Website. Every person can use the contact form in İşbank website (Home Page > Contact Form) to deliver any demand or complaint to the Bank. No information on this matter is available on our website. İşbank employees participate in the management of the Bank via their beneficiary status in İşbank Members' Supplementary Pension Fund, which holds 39.10% of İşbank shares. Board of Directors creates succession plans. Home Page>About Us>Sustainability>Our Policies There isn't an employee stock ownership program Home Page>About Us>Sustainability>Our Policies The number of definitive convictions the company is subject to in relation to health and safety measures None 3.5. Ethical Rules and Social Responsibility The name of the section on the corporate website that demonstrates the code of ethics The name of the section on the company website that demonstrates the corporate social responsibility report. If such a report does not exist, provide the information about any measures taken on environmental, social and corporate governance issues. Any measures combating any kind of corruption including embezzlement and bribery Home Page > About Us > Investor Relations > Corporate Governance > Ethical Principles Home Page>About Us>Sustainability>Our Reports Home Page>About Us>Sustainability>Our Policies 100 İşbank Annual Report 2019 BOARD OF DIRECTORS-I 4.2. Activity of the Board of Directors Date of the last board evaluation conducted 25-26.12.2019 Whether the board evaluation was externally facilitated No Whether all board members released from their duties at the GSM Yes Name(s) of the board member(s) with specific delegated duties and authorities, and descriptions of such duties No delegation of authority in İşbank Number of reports presented by internal auditors to the audit committee or any relevant committee to the board 255 Specify the name of the section or page number of the annual report that provides the summary of the review of the effectiveness of internal controls Audit Committee's Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period Name of the Chairman Name of the CEO Füsun Tümsavaş Adnan Bali If the CEO and Chair functions are combined: provide the link to the relevant PDP annoucement providing the rationale for such combined roles Chairman and General Manager seats are held by different persons Link to the PDP notification stating that any damage that may be caused by the members of the board of directors during the discharge of their duties is insured for an amount exceeding 25% of the company's capital Our Bank's Board of Directors and Executives are insured with a coverage for a limit up to USD 25 million against the risk of loss they may cause due to their faults while performing their duties within the scope of a liability insurance policy that names our Bank and our participations as the insured. This insurance policy was not made subject to a disclosure. The name of the section on the corporate website that demonstrates current diversity policy targeting women directors None The number and ratio of female directors within the Board of Directors 2 / 20% BOARD OF DIRECTORS-II 4.4. Meeting Procedures of the Board of Directors Number of physical board meetings in the reporting period (meetings in person) Director average attendance rate at board meetings 14 98.30% Whether the board uses an electronic portal to support its work or not Yes Number of minimum days ahead of the board meeting to provide information to directors, as per the board charter 3 work days The name of the section on the corporate website that demonstrates information about the board charter Articles of Association Number of maximum external commitments for board members as per the policy covering the number of external duties held by directors None 4.5. Board Committees Page numbers or section names of the annual report where information about the board committees are presented İşbank Committees Link(s) to the PDP announcement(s) with the board committee charters https://www.kap.org.tr/tr/Bildirim/262622 101 Corporate Governanceİşbank Annual Report 2019 Corporate Governance Information Form Composition of Board Committees-I Names Of The Board Committees Name Of Committees Defined As "Other" In The First Column Name-Surname of Committee Members Whether Committee Chair Or Not Whether Board Member Or Not Corporate Governance Committee Corporate Governance Committee Corporate Governance Committee Corporate Governance Committee Corporate Governance Committee Audit Committee Audit Committee Audit Committee Remuneration Committee Remuneration Committee Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Other Füsun Tümsavaş Ersin Önder Çiftçioğlu Özcal Korkmaz Fazlı Bulut Süleyman H. Özcan Füsun Tümsavaş Ertuğrul Bozgedik Turgay Berksoy Füsun Tümsavaş Feray Demir Adnan Bali Feray Demir Ertuğrul Bozgedik Füsun Tümsavaş (Alternate Member) Turgay Berksoy (Alternate Member) Füsun Tümsavaş Ertuğrul Bozgedik Turgay Berksoy Füsun Tümsavaş Feray Demir Ertuğrul Bozgedik Ersin Önder Çiftçioğlu Credit Committee Credit Committee Credit Committee Credit Committee Credit Committee Turkish Republic of Northern Cyprus Internal Systems Committee Turkish Republic of Northern Cyprus Internal Systems Committee Turkish Republic of Northern Cyprus Internal Systems Committee Credit Revision Committee Credit Revision Committee Credit Revision Committee Credit Revision Committee Corporate Social Responsibility Committee Feray Demir Corporate Social Responsibility Committee Rahmi Aşkin Türeli Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Fazlı Bulut Yalçin Sezen Senar Akkuş Suat E. Sözen Corporate Social Responsibility Committee Bülent Yumuşaker Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Füsun Tümsavaş Ertuğrul Bozgedik Adnan Bali Senar Akkuş Murat Bilgiç Ebru Özşuca Ertuğrul Senem Hürdoğan Irmak Yes No No No No Yes No No Yes No Yes No No No No Yes No No No No No No No No No No No No No Yes No No No No No No No Board member Board member Board member Board member Not board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Board member Not board member Not board member Not board member Not board member Board member Board member Board member Not board member Not board member Not board member Not board member Not board member 102 İşbank Annual Report 2019 BOARD OF DIRECTORS-III 4.5. Board Committees-II Specify where the activities of the audit committee are presented in your annual report or website (Page number or section name in the annual report/website) Specify where the activities of the corporate governance committee are presented in your annual report or website (Page number or section name in the annual report/website) Specify where the activities of the nomination committee are presented in your annual report or website (Page number or section name in the annual report/website) Specify where the activities of the early detection of risk committee are presented in your annual report or website (Page number or section name in the annual report/website) Specify where the activities of the remuneration committee are presented in your annual report or website (Page number or section name in the annual report/website) 4.6. Financial Rights Information about the activities of Audit Committee which was established within the context of the related legislation is presented in "İşbank Committees" section of the Annual Report. İşbank Committees At İşbank, functions of Nomination Committee are fulfilled by Corporate Governance Committee. Information about the activities of Risk Committee is presented in "İşbank Committees" section of the Annual Report. Information about the activities of Remuneration Committee which was established within the context of the related legislation is presented in "İşbank Committees" section of the Annual Report. Specify where the operational and financial targets and their achievement are presented in your annual report (Page number or section name in the annual report) CEO's Message Specify the section of website where remuneration policy for executive and non-executive directors are presented. Specify where the individual remuneration for board members and senior executives are presented in your annual report (Page number or section name in the annual report) Composition of Board Committees-II Home Page > About Us > Investor Relations > Corporate Governance > Remuneration Policy Additional Information Regarding the Related Legislation Names Of The Board Committees Name of committees defined as "Other" in the first column The Percentage Of Non-executive Directors The Percentage Of Independent Directors In The Committee The Number Of Meetings Held In Person The Number Of Reports On Its Activities Submitted To The Board Corporate Governance Committee Audit Committee Remuneration Committee Other Other Other Other Other Credit Committee Turkish Republic of Northern Cyprus Internal Systems Committee Credit Revision Committee Corporate Social Responsibility Committee Risk Committee 80% 100% 100% 80% 100% 100% 43% 50% 20% 100% 50% 60% 100% 50% 0% 25% 6 47 7 - 6 1 8 11 - 12 - - 2 1 10 13 103 Corporate Governanceİşbank Annual Report 2019 Audit Committee’s Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period Internal Audit İşbank Board of Inspectors (the Board), operates under the Board of Directors’ control. By adopting ethical principles stated by banking and internal audit regulations and taking IIA Internal Audit Standards into consideration, İşbank Board of Inspectors audits the activities of the Bank’s Head Office divisions (including internal control, risk management and compliance divisions), banking and IT processes, domestic and foreign branches and subsidiaries; in accordance with the Bank’s mission, strategies and policies, as well as relevant laws and regulations. Furthermore, the Board of Inspectors performs the Bank’s processes and information systems audits. The Board of Inspectors conducts ad-hoc audits and investigations. İşbank Board of Inspectors, which is certified to be in conformance with the international quality standards, performs its duties by combining its long- established audit experience with advanced technology in a modern, risk-focused way. The Board, which is constituted by 169 auditors, carries out on-site audits as well as remote audits with the help of its IT capabilities. Audit reports are submitted to the Board of Directors, Audit Committee, senior management and related Head Office divisions regarding on reports’ importance and priority. In the meantime, corrective measures taken by the relevant Head Office divisions are monitored by the Board of Inspectors. The Board of Directors monitors activities of the Board of Inspectors through periodic business reports presented via the Audit Committee. During 2019, The Board undertook audits of branches and as well as 3 Head Office divisions, 5 subsidiaries, 4 Regional Directorates subject to SME Loans Underwriting Division, top 200 companies and top 50 risk groups with the highest risk in the Bank, construction-contracting sector, project loans and personal loans. Moreover, • Model, • Sustainability Management System, • Central Counterparty Practice, • Valuation Process are audited and 3 subsidiaries are subjected to on-site follow-up activities. In addition audits of 29 domestic branches, 2 overseas branches, 3 Regional Directorates subject to SME Loans Underwriting Division, 1 Head Office division, Asset Custody Service, Sustainability Management System, Policy for Combating Financial Crimes and Sanctions and 3 subsidiaries which are started in financial year haven’t been finalized. Banking processes and IT audits are conducted annually by the members of The Board of Inspectors in accordance with the “Regulation over External Audit Institutions’ Information Systems and Banking Processes Audits” which is published by Turkish Banking Regulation and Supervision Agency. Both consolidated and solo financial statements are tested during the financial reporting process audits. According to the results of the banking processes and IT audits conducted in 2019, there has been; • no material weakness in the internal controls over the main banking processes ensuring the Bank to perform efficiently, reliably and smoothly, • no material finding about the integrity, availability, consistency and reliability of the data reported in consolidated and solo financial statements. With the help of risk focused audit plan, The Board audited a significant portion of İşbank’s entire credit portfolio in 2019. During 2019, the development and maintenance activities of the risk evaluations, which is the basis of personnel related risks determination, as well as other applications that provide data for internal fraud detection and investigation activities are pursued. Furthermore early detection of fraudulent transactions and increase of the effectiveness and efficiency of the audits are aimed by Internal Fraud Detection Audit Team via monitoring suspicious transaction chains and analyzing those alerts centrally. Internal Control The main objective of the internal control system is to provide the maximum contribution to achieve İşbank’s corporate targets set in accordance with the Bank’s vision, mission and strategies and stakeholder expectations. To this end, the performance required to ensure that all components of the internal control system operate together in an integrated and effective manner, under the supervision of İşbank’s Board of Directors, with the contribution and support of all İşbank’s employees, is being rigorously carried out with professional care and attention. The design and operational effectiveness of the internal control activities carried out by the relevant units in the process are regularly examined by the Internal Control Division which is an independent function. For this purpose, “onsite” and/or “remote” controls have been carried out by the Internal Control Division with a risk-oriented approach, on the activities of the Bank’s domestic and foreign branches and Head Office units, financial reporting and information systems and internal control structures of the subsidiaries subject to consolidation. 104 İşbank Annual Report 2019 Activities for central and continuous monitoring of the effectiveness of controls by using advanced data analytics applications were conducted. The results of the reviews were analyzed by the Internal Control Division and developing proposals, monitoring and follow up activities intended for eliminating the existing deficiencies and preventing the recurrence of the defects were continued. In order to contribute to their professional development, İşbank’s internal control personnel were provided with various trainings during the year. Internal Control Division also supported the Bank’s employees’ trainings in order to increase the awareness of internal control activities across the organization. İşbank’s internal control system and internal control activities are structured and operated to make sure that: i) The Bank’s assets are protected, ii) The Bank’s activities are carried out in compliance with the Law and other relevant legislations, the Bank’s internal policies and guidelines, and banking practices, iii) accounting and financial reporting systems function securely and in integrity, and iv) information is provided promptly. Compliance Compliance is the foremost duty and responsibility of all managers and employees of the Bank and financial subsidiaries which are subject to consolidation at any level. The functions and activities regarding compliance executed in the Head Office Divisions, Branches of the Bank local and abroad, financial subsidiaries which are subject to consolidation are monitored through the corporate compliance activities conducted within the Corporate Compliance Division, which reports to the Board of Directors. Corporate Compliance Division operates with the purpose to provide maximum contribution in order to manage the compliance risk and control this risk in an appropriate and efficient manner within the scope of materiality and risk based approach and in this regard to execute and manage the activities of the Bank and financial subsidiaries which are subject to consolidation continuously in compliance with the relevant laws, regulations and standards. The necessary researching, analyzing, monitoring, assessing, informing, conducting, coordinating and reporting activities regarding compliance issues are conducted within the Corporate Compliance Division, which consists of four sub-units, namely, Subsidiaries and Foreign Branches Compliance, Banking Activities Compliance, Fiscal Offences and Sanctions and International Obligations. The duties and responsibilities of the Compliance Officer as stated in the Prevention of Laundering Proceeds of Crime Law and other related regulations in effect are fulfilled by the Head of Corporate Compliance Division, who is the legal “Compliance Officer” of the Bank as well. The activities regarding the prevention of laundering proceeds of crime and finance of terror in our Bank are executed in an express and efficient manner within the context of related legislations and the Bank’s Policy and the Compliance Program, which have been prepared in accordance with these legislations. Bank’s Compliance Risk Management Policy and Policy for Combating Financial Crimes and Sanctions are stated in “Investor Relations / Corporate Governance” link at our Bank’s website www.isbank.com.tr in English and Turkish. The results of the activities regarding compliance are also regularly monitored and evaluated by the senior management and the Board of the Bank. Risk Management Besides banking activities, both financial and non-financial risks encompassing the whole group required to be analyzed, monitored and reported from the standpoint of group risk management in addition to that of banking-specific risk management principles. Beyond regulatory requirements this aspect of risk management has become an industry standard for corporate governance. The risk management process, organized within the framework of advanced risk management methodologies and favors a common risk management culture throughout the establishment, is structured to emphasize good corporate governance, assuring segregation of units responsible for monitoring and controlling risk from executive functions. In that respect, risk definition, measurement, analysis, monitoring, reporting and control functions are carried out within the same framework. The process of risk management and the functions involved in that process are among the highest priority responsibilities of the İşbank Board of Directors. The Risk Management Division, which acts through the Risk Committee and forms a functional constituent of the risk management function in collaboration with the Bank Credit Committee and the Asset & Liability Management Committee, carries out the works towards the regulatory and internal capital adequacy in accordance with the Basel framework and consistent with international best practices, in addition to working towards developing and validating risk measurement methodologies and optimizing the capital adequacy management process. Prof. Dr. Turgay Berksoy Member of the Board and the Audit Committee Ertuğrul Bozgedik Füsun Tümsavaş Deputy Chairperson of the Board of Directors and Member of the Audit Committee Chairperson of the Board of Directors and the Audit Committee 105 İşbank Annual Report 2019Financial Informationand Risk Management Explanations on Financial Condition, Profitability and Solvency İşbank increased its total assets by 12.4% to TL 468.1 billion by the end of 2019 compared to the end of the previous year, and retained its position as “Turkey’s largest private bank”. In the same period, İşbank also maintained its leadership position among private banks in terms of total loans, total deposits and shareholders’ equity. The Bank’s total cash loans reached TL 270.4 billion as of the end of 2019. Compared to the previous year-end, TL loans increased by 9.4% and FC loans decreased by 12.1% when adjusted for the exchange rates. By the end of 2019, loans and securities portfolio accounted for 57.8% and 18.0% of total assets, respectively. In line with the economic developments, İşbank’s ratio of non-performing loans to total loans went up during 2019. As at year-end, the Bank’s non- performing loan ratio was realized at 6.5%, which is lower than the average of private banks. In line with its strategy of being the closest bank to the customer, sustaining its omni-channel banking services with its widespread branch network and diversified digital service platforms, İşbank continued to be the priority choice of savers. İşbank maintained its leadership among private banks in total deposits, TL deposits and FC deposits. İşbank’s total deposits grew by 20.7% in 2019 and reached TL 295.9 billion by the end of 2019. While TL deposits increased by 16.1% compared to the end of the previous year, the expansion in FC deposits was 10.8% when adjusted for exchange rate. As of the end of 2019, the share of demand deposits in total deposits was 28.4%. Accounting for 63.2% of liabilities by the end of 2019, deposits continued to be the main funding source of İşbank. With a cost sensitive approach, İşbank also continued to utilize non-deposit funding sources in domestic and international markets in order to diversify its funding base and to strengthen the maturity profile of its funding. The share of İşbank’s non-deposit funding sources in total liabilities was 18.4% as of the end of 2019. The Bank’s shareholders’ equity reached TL 58.9 billion at the end of 2019, up by 18.4% compared to the previous year-end. Maintaining its solid capitalization, İşbank’s capital adequacy ratio stood at 17.9% at the end of the year. In 2019, İşbank booked a net profit of TL 6.1 billion and achieved an average return on equity of 11.4% and an average return on assets of 1.4%. 106 İşbank Annual Report 2019 Information on Risk Management Policies Applied per Risk Types Risk policies and procedures constitute the internal rules and principles which are approved and enforced by the Board considering Risk Management Division suggestions and executed by the senior management. These policies that have been put into effect in accordance with international standards, stipulate general standards regarding the organization and scope of risk management function, risk measurement methods, roles and responsibilities of the risk management group, risk limit setting methodology, rules governing the breach of limits and confirmations that have to be given in various situations. In 2020, the slowdown in global economic activity, high indebtedness, global trade tensions and geopolitical developments are expected to create risks on global financial stability. In addition, the monetary policies to be implemented by the central banks of developed countries, especially FED are of great importance. It is expected that FED will continue its expansionary monetary policy and the increase in the trend of global indebtedness will continue. Considering the fact that favorable conditions recently occurred for emerging countries may vanish rapidly, credit and liquidity risks are anticipated to maintain their importance. Apart from the financial risks mentioned above, the most important non-financial risk element of the Bank is considered to arise from information technologies risk. In parallel with the global examples, the risk of financial and reputational losses as a result of cyber events in our country is at the forefront. In addition, associated with digitalization, risk factors arising due to enhancements and changes in banking products, services and applications, considered to remain important. To ensure the conformity of the Bank’s risk appetite with business plan and prevailing market environment, risk limits which are set by the Board of Directors and defined in the Bank’s risk appetite framework are monitored. In this context, breaches in market, liquidity, structural interest rate, credit and operational risk limits are analyzed by Risk Management Division and reported to the Audit Committee. Capital Adequacy Policy Capital Adequacy Policy defines the level of capital, on consolidated and unconsolidated basis, that the Bank must hold against potential losses arising from financial risks associated with on and off-balance sheet items in addition to non-financial risks caused by the Bank’s operations; and establishes the principles for maintaining and monitoring the minimum capital levels determined in accordance with the regulations and the Internal Capital Adequacy Assessment Process. Capital Adequacy Policy is an integral part of the Risk Policies. 107 İşbank Annual Report 2019Financial Informationand Risk Management Information on Risk Management Policies Applied per Risk Types Credit Risk Policy Credit risk is defined as any situation where the counterparty obligation will not or cannot be fulfilled partially or fully on maturity as affirmed in the agreement. Credit Risk Policy sets the framework for credit risk management, control and monitoring, roles and responsibilities and credit risk limits. İşbank maintains identification, measurement and management of credit risk across all products and activities. The Board reviews credit risk policies and strategies annually at minimum. Senior management is responsible for the execution of credit risk policies. The findings of independent review of loans and credit risk are reported to the Board and the senior management regularly. Monitoring credit risk includes parameters such as maturity, industry, collateral, geography, currency, loan type, and credit risk ratings as a whole, in addition to the assessments on the obligor and the facility. In managing credit risk, İşbank implements internal risk limits specified by the Board of Directors that restrict the maximum credit risk based on parameters such as risk groups and sectors in addition to the credit risk limits that are mandated by legal regulations. These internal limits are determined in a way that does not lead to risk concentrations. Breaching risk limits until the regulatory limits are treated as “exceptional procedure”. The authorization for exceptional procedure resides with the Board of Directors. The results of controls and assessments related to risk limit breaches are presented to senior management and the Board of Directors by Internal Audit and Risk Management Functions. İşbank employs internal credit risk rating systems that are developed to service the needs for credit risk management, credit granting decisions, credit process audits and credit provision calculations. Internal audit and risk management functions regularly assess the internal credit risk rating systems according to their compatibility with the structure, size and complexity of the Bank’s operations. If diverse circumstances required, necessary adjustments and/or modifications are made to the system. Internal credit risk rating systems are assessed by the Risk Committee and approved by the Board of Directors. Asset and Liability Management Risk Policy Asset and liability management risk is defined as; the risk of loss caused by Bank’s failure to effectively manage all financial risks arising from the bank’s assets, liabilities and off-balance sheet transactions. Market risk of trading book, structural interest rate risk of banking book and liquidity risk are all within the scope of asset and liability management risk. All principles and procedures related to constitution and management of Bank’s asset-liability structure and Bank’s risk appetite is established by the Board of Directors. Ensuring asset and liability management risk being within the levels imposed by legislation and internal risk limits is the first priority. Within the Bank’s risk appetite framework risk tolerance levels which aim to put a cap on the amount of risk undertaken by the Bank are determined by Board of Directors for each risk type on both bank-only and consolidated basis. In this process, liquidity, target income level and general expectations about the risk factors are taken into consideration. Board of Directors and Audit Committee are obliged to track that Bank’s capital is used optimally. For this purpose they have to keep risks under control and ensure necessary actions being taken. Asset-Liability Management Committee is responsible for governance of asset and liability management risk in accordance with the risk appetite framework and risk limits determined by Board of Directors and within the principles and procedures expressed in ALM risk policy. Measuring asset and liability management risk, reporting the results and monitoring the compliance with the risk limits are the responsibilities of Risk Management Division. The level of the risk taken is reviewed under different scenarios. Measurement results are tested in terms of reliability and integrity. Asset and liability management risk is reported to Risk Committee and reported to the Board of Directors through Audit Committee. Compliance with risk limits is closely and continuously monitored by Risk Management Division, Asset-Liability Management Committee and related business units. In the event of a breach in the risk limits, the breach and its reasons are instantly reported to Board of Directors through Audit Committee. Course of action needed to be taken in order to eliminate the breach is determined by the Board. Asset and liability management processes and compliance with the policy rules are audited by internal audit system. The principles regarding the audit process, audit reports and fulfillment of action plans to eliminate the errors and gaps determined by internal audit are established by the Board of Directors. 108 İşbank Annual Report 2019 Stress Testing Policy The purpose of the Stress Testing Policy is to measure the significant risks and vulnerabilities that may arise from both bank specific adverse developments or from stress conditions on general economic and financial environment. Stress testing program is defined as the collection of studies and analyses to assess the risks generated by Bank’s activities and the program covers the methodologies, assumptions and scenarios related with those analyses. In order to ensure the validity and appropriateness of the results; stress testing program is regularly monitored and updated taking into consideration the current economical conjuncture and market conditions, Bank’s products, strategies and technological capabilities and Bank’s risk appetite framework. Bank implements a stress testing program oriented to assess the risks both from an holistic view (i.e. bank-wide stress tests) and on the basis of the important risk types (i.e. individual stress tests) in accordance with the regulations and internal procedures and the results are reported to the senior management, Board of Directors and other related legal authorities. The Board of Directors is responsible for conducting the stress testing program as a whole. The Board of Directors ensures that the outputs of the stress testing program are evaluated and used as an input for decision making on the relevant fields. Executing the analyses included in stress testing program, reporting the outputs of the stress tests and monitoring the compliance with respect to the risk limits are the responsibility of Risk Management Division. The scope of the stress testing program, the set of risk factors to be used in the analyses and the level of the stress parameters are determined by Risk Committee. The processes related to stress testing and compliance with the policy rules are audited by internal audit system. The principles regarding the audit process, audit reports and fulfillment of action plans to eliminate the errors and gaps determined by internal audit are established by the Board of Directors. Operational Risk Policy Operational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. Risk Management Division is responsible for the risk management activity on this particular risk. Operational risk management activities comprise defining, measuring, analyzing, monitoring and reporting, controlling of operational risks, following up the new techniques on management of operational risks besides regulatory and internal reporting. The fundamental principles and procedures of risk management are determined in Operational Risk Policy. Categorization of inherited operational risks within the activities and processes is made possible by the Risk Catalogue. It serves as the basic document to define and classify the risks and is subject to alteration as conditions change. Risk Catalogue is modified in line with the improving risk management practices and changing regulations Operational risk management process combines both qualitative and quantitative approaches in measurement and assessment. Apart from the calculations executed within the scope of legislation, “advanced measurement methods” “impact - likelihood analysis”, “loss event analysis”, “scenario analysis” ”, “stress testing” and “key risk indicators” are utilized. All operational risks inherited in the banking processes and information systems, risk levels of new products and processes and outsourcing risk, operational losses incurred by the Bank are monitored continuously, risk assessments are updated regularly and reported to the Risk Committee and the Board in a timely manner. Employees have the understanding of the Bank’s objective to attain a working environment aiming to reduce the probability of loss, considering that the entire internal rules and procedures, led by operational risk policy, and act sensitively to the inherited operational risks and controls. 109 İşbank Annual Report 2019Financial Informationand Risk Management Information on Risk Management Policies Applied per Risk Types Reputational Risk Policy Reputational risk is defined as loss of trust to the Bank or reputation impairment as a result of non-compliance with existing legal regulations or negative view of parties such as current or potential customers, partners, opponents and supervisory authorities and related studies are conducted by Risk Management Division. Reputational Risk Policy determines principles and procedures for definition, evaluation, control, monitoring, reporting and management activities of reputational risk sources. Reputational risk sources are evaluated both individually and as a whole, appropriate systems and controls are established to manage risky elements efficiently. Risk Management Division is responsible for reporting reputational risk evaluations periodically to Risk Committee, Audit Committee and the Board of Directors. All the employees execute their functions with the responsibility of preserving the reputation of the Bank. Consolidated Risk Policies Compliance with risk management principles related to the Bank’s subsidiaries is monitored according to Bank’s Consolidated Risk Policies. Through Consolidated Risk Policies, subsidiaries identify their specific risk management policies which are approved by their boards that form the framework of their risk management systems and processes. Information Systems Management Policy The purpose of Information Systems Management Policy is to determine the principles which will constitute a basis for the management of information systems that the Bank uses to fulfill its activities and the procedures in order to define, measure, control, monitor, report and manage the risks derived from using information technologies. With the Policy, the information technologies which is an important element for sustaining Bank activities is intended to be managed effectively as information systems management, being handled as a part of corporate governance practices. On the management of Bank’s information systems and all the elements relating to those systems articles of this Policy are applied. Risks derived from information technologies are basically assessed within the scope of Bank’s operational risk management. It is essential that those risks which could be seen as multipliers of the other risks derived from activities of the Bank are measured, closely monitored and controlled within the framework of Bank’s integrated risk management. 110 İşbank Annual Report 2019 İşbank Credit Ratings MOODY’S Rating Outlook(*) Long-term Foreign Currency Deposit Rating Long-term Local Currency Deposit Rating Long-term Foreign Currency Senior Debt Rating Short-term Foreign Currency Deposit Rating Short-term Local Currency Deposit Rating FITCH RATINGS Long-term Foreign Currency Issuer Default Rating Long-term Local Currency Issuer Default Rating Short-term Foreign Currency Issuer Default Rating Short-term Local Currency Issuer Default Rating National Long-term Rating Viability Rating Support Rating STANDARD & POOR'S Long-term Counterparty Credit Rating Short-term Counterparty Credit Rating Long-term National Scale Rating Short-term National Scale Rating B3 B3 B3 NP NP B+ B+ B B Negative Negative Negative - - Negative Stable - - A+ (tur) Stable b+ 4 B+ B trA+ trA-1 - - Negative - - - The dates on which the Bank’s credit ratings/outlook was last updated are given below: Moody’s 18.06.2019, Fitch Ratings: 12.11.2019, Standard & Poor’s: 17.08.2018 (*) Outlook: “Stable” indicates that the current rating will not be changed in the short term; “positive” indicates that the current rating is very likely to be upgraded and “negative” indicates that the current rating is very likely to be downgraded. 111 İşbank Annual Report 2019Financial Informationand Risk Management Unconsolidated Financial Statements as at and For the Year Ended December 31, 2019 with Independent Audit Report Thereon (Convenience Translation of Unconsolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish) 112 İşbank Annual Report 2019Türkiye İş Bankası A.Ş. Independent Auditor’s Report Güney Bağımsız Denetim ve SMMM A.Ş. Eski Büyükdere Cad. Orjin Maslak No: 27 Maslak, Sarıyer 34398 İstanbul - Turkey Tel: +90 212 315 3000 Fax: +90 212 230 8291 ey.com Ticaret Sicil No: 479920 Mersis No: 0-4350-3032-6000017 To the Shareholders of Türkiye İş Bankası Anonim Şirketi: Audit of Unconsolidated Financial Statements Qualified Opinion We have audited the accompanying unconsolidated financial statements of Türkiye İş Bankası A.Ş (the Bank), which comprise the statement of balance sheet as at December 31, 2019, and the unconsolidated statement of income, unconsolidated statement of profit or loss and other comprehensive income, unconsolidated statement of changes in shareholders’ equity and unconsolidated statement of cash flows for the year then ended and notes to the unconsolidated financial statements, and a summary of significant accounting policies and other explanatory information. In our opinion, except for the effects of the matter on the unconsolidated financial statements described in the Basis for Qualified Opinion paragraph, the accompanying unconsolidated financial statements present fairly, in all material respects, the unconsolidated financial position of Türkiye İş Bankası A.Ş. as at December 31, 2019 and financial performance and unconsolidated its cash flows for the year then ended in accordance with the prevailing accounting principles and standards set out as in accordance with “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette no.26333 dated November 1, 2006 and other regulations on accounting records of Banks published by Banking Regulation and Supervision Agency (BRSA), circulars, interpretations published by BRSA and “BRSA Accounting and Financial Reporting Legislation” which includes the provisions of “Turkish Financial Reporting Standards” (TFRS) for the matters which are not regulated by these regulations. Basis for Qualified Opinion As explained in Section Five Part II-i.4.5, the accompanying unconsolidated financial statements as at December 31, 2019 include a free provision at an amount of TL 1,125,000 thousands of which TL 1,200,000 thousands was provided in prior years and TL 75,000 thousands reversed in the current period by the Bank management for the possible effects of the negative circumstances which may arise from the possible changes in the economy and market conditions which does not meet the recognition criteria of “Turkish Accounting Standard” (TAS) 37 “Provisions, Contingent Liabilities and Contingent Assets”. Our audit was conducted in accordance with “Regulation on independent audit of the Banks” published in the Official Gazette no.29314 dated April 2, 2015 by BRSA (BRSA Independent Audit Regulation) and Independent Auditing Standards (“ISA”) which are the part of Turkish Auditing Standards issued by the Public Oversight Accounting and Auditing Standards Authority (“POA”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with of Code of Ethics for Independent Auditors (Code of Ethics) published by POA and have fulfilled our other responsibilities in accordance with the code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. 113 Financial Informationand Risk Managementİşbank Annual Report 2019 Independent Auditor’s Report Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the unconsolidated financial statements of the current period. Key audit matters were addressed in the context of our audit of the unconsolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for Qualified Opinion section we have determined the matters described below to be the key audit matters to be communicated in our report. Key Audit Matter How the Key Audit Matter is addressed in our audit TFRS 9 “Financial Instruments” Standard and recognition of impairment on financial assets and related significant disclosures As presented in Section III disclosure VIII, the Bank recognizes expected credit losses of financial assets in accordance with TFRS 9 Financial Instruments standard. We considered impairment of financial assets as a key audit matter since: Our audit procedures included among others include: - Evaluating the appropriateness of accounting policies as to the requirements of TFRS 9, Bank’s past experience, local and global practices. - Amount of on and off balance sheet items that are subject to expected credit loss - Reviewing and testing of processes which are used to calculate expected credit losses calculation is material to the financial statements. - There are complex and comprehensive requirements of TFRS 9. - The classification of the financial assets is based on the Bank’s business model and characteristics of the contractual cash flows in accordance with TFRS 9 and the Bank uses significant judgment on the assessment of the business model and identification of the complex contractual cash flow characteristics of financial instruments. - The Bank’s determines fair value of its financial assets, reflected at fair value in accordance with the relevant business model category, according to Level 3 if there are financial inputs that are not observable in the fair value measurement and that contain significant estimates and assumptions. - Policies implemented by the Bank management include compliance risk to the regulations and other practices. - Processes of TFRS 9 are advanced and complex. - Judgements and estimates used in expected credit loss, complex and comprehensive. - Disclosure requirements of TFRS 9 are comprehensive and complex. by involving our Information technology and process audit specialists. - Evaluating the reasonableness of management’s key judgements, estimates and data sources used in expected credit loss calculations considering the standard requirements, sectorial and global practices. - Reviewing the appropriateness of criteria in order to identify the financial assets having solely payments of principal and interest and checking the compliance to the Bank’s Business model. - Reviewing the Bank’s classification and measurement models of the financial instruments (financial instruments determined as Level 3 according to fair value hierarchy) and comparing with TFRS 9 requirements - Evaulating the alignment of the significant increase in credit risk determined during the calculation of expected credit losses, default definition, restructuring definition, probability of default, loss given default, exposure at default and macro-economic variables that are determined by the financial risk management experts with the Bank’s past performance, regulations, and other processes that has forward looking estimations. - Assessing the completeness and the accuracy of the data used for expected credit loss calculation. - Testing the mathematical accuracy of expected credit loss calculation on sample basis. - Evaluating the judgments and estimates used for the individually assessed financial assets. - Evaluating the accuracy and the necessity of post-model adjustments. - Auditing of TFRS 9 disclosures. 114 İşbank Annual Report 2019 It has been addressed whether there have been any significant changes in regulations governing pension liabilities, employee benefits plans during the period, that could lead to adjust the valuation of employee benefits. Support from actuarial auditor of our firm, has been taken to assess the appropriateness of the actuarial assumptions and calculations performed by the external actuary. We further focused on the accuracy and adequacy of the Bank’s provision provided for the deficit and also disclosures on key assumptions related to pension fund deficit. Pension Fund Obligations Employees of the Bank are members of “Türkiye İş Bankası A.Ş. Mensupları Emekli Sandığı Vakfı”, (“the Fund”), which is established in accordance with the temporary Article 20 of the Social Security Act No. 506 and related regulations. The Fund is a separate legal entity and foundation recognized by an official decree, providing all qualified employees with pension and post-retirement benefits. As disclosed in the “Section Three Note XVII” to the financial statements, Banks will transfer their pension fund to the Social Security Institution and the authority of the “Council of Ministers” on the determination of the mentioned transfer date is changed as “President” in the Decree Law No. 703 published in the Official Gazette numbered 30473 and dated July 9, 2018. According to the technical balance sheet report as at 31 December 2019 prepared considering the related articles of the Law regarding the transferrable benefit obligations for the non- transferrable social benefits and payments which are included in the articles of association, the Fund has an actuarial and technical deficit which is fully provisioned for. The valuation of the Pension Fund liabilities requires judgment in determining appropriate assumptions such as defining the transferrable social benefits, discount rates, salary increases, demographic assumptions, inflation rate estimates and the impact of any changes in individual pension plans. The Bank Management uses Fund actuaries to assist in assessing these assumptions. Considering the subjectivity of key assumptions and estimate used in the calculations of transferrable liabilities and the effects of the potential changes in the estimates used together with the uncertainity around the transfer date and given the fact that technical interest rate is prescribed under the law, we considered this to be a key audit matter. Derivative Financial Instruments Derivative financial instruments including foreign exchange contracts, currency and interest rate swaps, currency and interest rate options, futures and other derivative financial instruments which are held for trading are initially recognized on the statement of financial position at fair value and subsequently are re-measured at their fair value. Details of related amounts are explained in “Section Five Note I.c.” and “Section Five Note II.b”. Our audit procedures included among others involve reviewing policies regarding fair value measurement accepted by the bank management fair value calculations of the selected derivative financial instruments which is carried out by valuation experts of another entity who are in the same audit network within our firm and the assessment of used estimations and the judgements and testing the assement of operating effectiveness of the key controls in the process of fair value determination. Fair value of the derivative financial instruments is determined by selecting most convenient market data and applying valuation techniques to those particular derivative products. Derivative Financial Instruments are considered by us as a key audit matter because of the subjectivity in the estimates, assumptions and judgements used. Responsibilities of Management and Directors for the Unconsolidated Financial Statements Bank management is responsible for the preparation and fair presentation of the unconsolidated financial statements in accordance with the BRSA Accounting and Reporting Legislation and for such internal control as management determines is necessary to enable the preparation of the financial statement that is free from material misstatement, whether due to fraud or error. In preparing the unconsolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank’s financial reporting process. 115 Financial Informationand Risk Managementİşbank Annual Report 2019 Independent Auditor’s Report Auditor’s Responsibilities for the Audit of the Unconsolidated Financial Statements In an independent audit, the responsibilities of us as independent auditors are: Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with BRSA Independent Audit Regulation and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with BRSA Independent Audit Regulation and ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the unconsolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. (The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the unconsolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the unconsolidated financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with government with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the unconsolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements 1) In accordance with Article 402 paragraph 4 of the Turkish Commercial Code (“TCC”) no 6102; no significant matter has come to our attention that causes us to believe that the Bank’s bookkeeping activities and financial statements for the period January 1 - December 31, 2019 are not in compliance with the TCC and provisions of the Bank’s articles of association in relation to financial reporting. 2) In accordance with Article 402 paragraph 4 of the TCC; the Board of Directors submitted to us the necessary explanations and provided required documents within the context of audit. The engagement partner who supervised and concluded this independent auditor’s report is Fatma Ebru Yücel. Additional paragraph for convenience translation to English As explained in detail in Note I of Section Three, the effects of differences between accounting principles and standards set out by regulations in conformity with BRSA Accounting and Financial Reporting Legislation, accounting principles generally accepted in countries in which the accompanying unconsolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”) have not been quantified in the accompanying unconsolidated financial statements. Accordingly, the accompanying unconsolidated financial statements are not intended to present the financial position, results of operations and changes in financial position and cash flows in accordance with the accounting principles generally accepted in such countries and IFRS. February 7, 2020 Istanbul, Turkey 116 İşbank Annual Report 2019 The Unconsolidated Financial Report As at and for the Year Ended December 31, 2019 Headquarters Address: İş Kuleleri, 34330, Levent/İstanbul Telephone: 0212 316 00 00 Fax: 0212 316 09 00 Web site: www.isbank.com.tr E-mail: musteri.iliskileri@isbank.com.tr The unconsolidated financial report as at and for the year ended 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, comprises the following sections: - GENERAL INFORMATION ABOUT THE BANK - UNCONSOLIDATED FINANCIAL STATEMENTS - EXPLANATIONS ON THE ACCOUNTING POLICIES - INFORMATION ON FINANCIAL STRUCTURE AND RISK MANAGEMENT - DISCLOSURES AND FOOTNOTES ON THE UNCONSOLIDATED FINANCIAL STATEMENTS - OTHER EXPLANATIONS - INDEPENDENT AUDITORS’ REPORT The unconsolidated financial statements for the year ended and related disclosures and footnotes in this report are prepared in accordance with the Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks, “Banking Regulation and Supervision Agency” (BRSA) regulations, “Turkish Accounting Standards”, “Turkish Financial Reporting Standards” and the related statements and guidance and in compliance with the financial records of our Bank. Unless otherwise stated, the accompanying unconsolidated financial report is presented in thousands of Turkish Lira (TL), and has been subjected to independent audit and presented as the attached. Prof. Dr. Turgay Berksoy Member of the Board and the Audit Committee Ertuğrul Bozgedik Füsun Tümsavaş Deputy Chairperson of the Board of Directors and Member of the Audit Committee Chairperson of the Board of Directors and the Audit Committee Ali Tolga Ünal Head of Financial Management Division Senar Akkuş Deputy Chief Executive In Charge of Financial Reporting Adnan Bali Chief Executive Officer The authorized contact person for questions on this financial report: Name - Surname/Title : Süleyman H. Özcan/Head of Investor Relations Division Phone No Fax No E-mail : +90 212 3161602 : +90 212 3160840 : Suleyman.Ozcan@isbank.com.tr : investorrelations@isbank.com.tr Website : www.isbank.com.tr 117 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş. Contents SECTION I General Information about the Bank Explanations on the Establishment Date and Initial Status of the Bank, History Including the Changes in the Former Status Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Bank, any Changes in the Period, and Information on the Bank’s Risk Group Page Number 120 120 Explanations on the Chairperson’s, Directors’, Auditors’, Chief Executive Officer’s and Deputy Chief Executives’ Shares, if any, and the Areas of their Responsibility at the Bank 120 Information on the Bank’s Qualified Shareholders Summary Information on the Bank’s Functions and Business Lines Existing or Potential, Actual or Legal Obstacles on the Transfer of Shareholders’ Equity between the Bank and its Subsidiaries or the Reimbursement of Liabilities Written Policies on Assessment of Ensuring Compliance on Market Discipline, Disclosure Obligations, Frequency and Accuracy of the Related Disclosures SECTION II Unconsolidated Audit Financial Statements Balance Sheet (Statement of Financial Position) - Assets Balance Sheet (Statement of Financial Position) - Assets (Prior Period) Balance Sheet (Statement of Financial Position) - Liabilities Balance Sheet (Statement of Financial Position) - Liabilities (Prior Period) Statement of Off-Balance Sheet Items Statement of Off-Balance Sheet Items (Prior Period) Statement of Income I. II. III. IV. V. VI. VII. I. II. III. IV. V. VI. VII. VIII. Statement of Income (Prior Period) IX. X. XI. Statement of Profit or Loss and Other Comprehensive Income Statement of Profit or Loss and Other Comprehensive Income (Prior Period) Statement of Cash Flows XII. Statement of Cash Flows (Prior Period) XIII. Statement of Changes in the Shareholders’ Equity XIV. Statement of Changes in the Shareholders’ Equity (Prior Period) XV. Statement of Profit Distribution XVI. Statement of Profit Distribution (Prior Period) SECTION III Explanations on Accounting Policies Basis of Presentation Strategy for Use of Financial Instruments and Foreign Currency Transactions Associates and Subsidiaries Forward and Option Contracts and Derivatives Instruments Interest Income and Expenses Fees and Commission Income and Expenses Financial Assets I. II. III. IV. V. VI. VII. VIII. Impairment of Financial Assets IX. X. XI. Offsetting Financial Instruments Sale and Repurchase Agreements and Securities Lending Transactions Non-current Assets Held for Sale and Discontinued Operations and Related Liabilities XII. Goodwill and Other Intangible Assets XIII. Tangible Assets XIV. Leasing Transactions XV. Provisions and Contingent Liabilities XVI. Contingent Assets 118 121 121 121 121 122 122 123 123 124 124 125 125 126 126 127 127 128 128 130 130 131 131 131 132 132 132 132 133 134 134 134 134 134 135 135 135 İşbank Annual Report 2019 XVII. Liabilities Regarding Employee Benefits XVIII. Taxation XIX. Borrowings XX. Equity Shares and Their Issuance XXI. Bank Acceptances and Bills of Guarantee XXII. Government Incentives XXIII. Segment Reporting XXIV. Other Disclosures SECTION IV Information on the Financial Position and Risk Management of the Bank I. II. III. IV. V. VI. VII. Explanations on Shareholders’ Equity Explanations on Credit Risk Explanations on Currency Risk Explanations on Interest Rate Risk Explanations on Equity Shares Risk Arising from Banking Book Explanations on Liquidity Risk Management and Liquidity Coverage Ratio Explanations on Leverage Ratio VIII. Explanations on Other Price Risks IX. X. XI. Explanations on Presentation of Assets and Liabilities at Fair Value Explanations on Transactions Carried Out on Behalf of Third Parties and Fiduciary Transactions Explanations on Risk Management Objectives and Policies XII. Explanations on Segment Reporting SECTION V Disclosures and Footnotes on the Unconsolidated Financial Statements I. II. III. IV. V. VI. VII. Disclosures and footnotes on assets Disclosures and footnotes on liabilities Disclosures and footnotes on off balance sheet items Disclosures and footnotes on statement of income Disclosures and footnotes on statement of changes in shareholders’ equity Disclosures and footnotes on statement of cash flows Disclosures and footnotes on the bank’s risk group VIII. Disclosures on the bank’s domestic, foreign, off-shore branches or associates and foreign representative offices IX. Subsequent events SECTION VI Other Explanations I. Explanations on the bank’s credit ratings SECTION VII Explanations on the Audit Report Explanations on the independent auditors’ report Explanations and footnotes of the independent auditors report I. II. Page Number 135 136 137 137 137 137 138 138 139 149 158 160 163 164 169 170 170 171 171 185 186 199 205 207 210 210 211 212 213 213 213 213 119 Financial Informationand Risk Managementİşbank Annual Report 2019 SECTION ONE: GENERAL INFORMATION ABOUT THE BANK I. Explanations on the Establishment Date and Initial Status of the Bank, History Including the Changes in the Former Status TÜRKİYE İŞ BANKASI A.Ş. (“the Bank”) was established on August 26, 1924 to operate in all kinds of banking activities and to initiate and/or participate in all kinds of financial and industrial sector undertakings when necessary. There is no change in the Bank’s status since its establishment. II. Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Bank, any Changes in the Period, and Information on the Bank’s Risk Group As at December 31, 2019, 39.10% of the Bank’s shares are owned by T. İş Bankası A.Ş. Supplementary Pension Fund (Fund), 28.09% are owned by the Republican People’s Party- CHP (Atatürk’s shares) and 32.81% are on free float (December 31 2018: Fund 40.47%, CHP 28.09%, Free float 31.44%). III. Explanations on the Chairperson’s, Directors’, Auditors’, Chief Executive Officer’s and Deputy Chief Executives’ Shares, if any, and the Areas of their Responsibility at the Bank Chairperson and Members of the Board of Directors: Name and Surname Areas of Responsibility Füsun Tümsavaş Ertuğrul Bozgedik Adnan Bali Chairperson of the Board of Directors and the Audit Committee, Remuneration Committee, TRNC Internal Systems Committee, Risk Committee and Chairperson of the Corporate Governance Committee, Substitute Member of the Credit Committee Deputy Chairperson of the Board of Directors and Member of the Audit Committee, Credit Committee and Member of the TRNC Internal Systems Committee and the Risk Committee Chief Executive Officer and Director, Chairperson of the Credit Committee Member of the Risk Committee, Chairperson of the Executive Committee and Chairperson of the Human Resources Committee Prof. Dr. Turgay Berksoy Director, Audit Committee, Member of the TRNC Internal Systems Committee, Credit Committee Deputy Member Feray Demir Director, Credit Committee, Member of the Remuneration Committee and Corporate Social Responsibility Committee Ersin Önder Çiftçioğlu Director, Member of Corporate Governance Committee Murat Karayalçın Özcal Korkmaz Director Director, Member of Corporate Governance Committee Rahmi Aşkın Türeli Director, Member of Corporate Social Responsibility Committee Fazlı Bulut Director, Member of Corporate Governance and Corporate Social Responsibility Committee Mr. Sezgin Yılmaz has resigned from the Membership position of the Board of Directors in the current period. Chief Executive Officer and Deputy Chief Executives: Name and Surname Areas of Responsibility Adnan Bali Hakan Aran Yalçın Sezen Senar Akkuş Yılmaz Ertürk (*) Murat Bilgiç Chief Executive Officer and Director, Chairperson of the Credit Committee, Natural Member of the Risk Committee, Chairperson of the Executive Committee, Chairperson of the Human Resources Committee Information Technologies, Digital Banking Operations, Data Management Retail Banking Marketing-Sales and Products, Retail Loan and Card Operations, Retail Loans, Digital Banking, Card Payment Systems, Member of the Corporate Social Responsibility Committee Financial Management, Strategy and Corporate Performance Management, Managerial Reporting and Internal Accounting, Subsidiaries, Member of the Corporate Social Responsibility Committee and the Risk Committee Private Banking Marketing and Sales, Capital Markets Corporate, SME, Commercial, Retail Banking Allocation, Credit Portfolio Management, Financial Analysis and Credit Information, and Member of the Risk Committee Nevzat Burak Seyrek Enterprise Architecture, Human Resources and Talent Management, Consumer Relations Coordination Officer Mehmet Şencan (*) Ömer Karakuş (*) Commercial Banking Marketing, Sales and Product, Banking Sales, Corporate Banking Sales, Free Zone Branches, Foreign Branches and Representations Banking Basic Operations, Support Services and Purchasing, Foreign and Commercial Credit Operations, Internal Operations, Construction and Property Management, Branch Network Development Şahismail Şimşek SME and Enterprise Banking Sales, Commercial Banking Marketing and Product Ebru Özşuca Gamze Yalçın H. Cahit Çınar Treasury, Economic Enquiries, Member of the Risk Committee International Financial Institutions, Investor Relations Commercial Banking, Retail Banking and General Deliberation Legal Counsellorship, Commercial and Corporate Loans and Retail Loans Monitoring and Recovery, Credits Portfolio Management (*) As a result of the Board Meeting dated August 26, 2019, Deputy Chief Executives Yılmaz Ertürk, Mehmet Şencan and Ömer Karakuş have resigned from their position at the Bank. The Bank’s shares attributable to members of the Board of Directors and the Audit Committee, to the CEO and the Deputy Chief Executives are of minor importance. 120 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Information on the Bank’s Qualified Shareholders Name Surname/Company Shares Ownership Paid-in Capital Unpaid Capital T. İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı (İşbank Members’ Supplementary Pension Fund) Cumhuriyet Halk Partisi - Republican People’s Party -(Atatürk’s Shares) 1,759,503 1,264,142 39.10% 28.09% 1,759,503 1,264,142 V. Summary Information on the Bank’s Functions and Business Lines In line with the relevant legislation and principles stated in the Articles of Incorporation of the Bank, the Bank’s activities include operating in retail, commercial, corporate and private banking, foreign currency and money market operations, marketable securities operations, international banking services and other banking operations, as well as initiating or participating in all kinds of financial and industrial sector corporations as may be required. VI. Existing or Potential, Actual or Legal Obstacles on the Transfer of Shareholders’ Equity between the Bank and its Subsidiaries or the Reimbursement of Liabilities None. VII. Written Policies on Assessment of Ensuring Compliance on Market Discipline, Disclosure Obligations, Frequency and Accuracy of the Related Disclosures The Bank has written policies on assessment of ensuring compliance on market discipline, disclosure obligations, frequency and accuracy of related disclosures. The mentioned policies which are agreed by Board of Directors’ can be obtained from the Bank’s website. 121 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Unconsolidated Balance Sheet As of December 31, 2019 THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2018) ASSETS Footnotes TL FC Total TL FC Total I. 1.1 1.1.1 1.1.2 FINANCIAL ASSETS (NET) Cash and Cash Equivalents Cash and Balances with Central Bank Banks 1.1.3 Money Market Placements 1.1.4 Expected Credit Loss (-) 43,873,366 81,575,604 125,448,970 36,272,160 60,855,328 97,127,488 V-I-a V-I-d 5,941,992 60,217,752 66,159,744 6,811,741 41,689,629 48,501,370 5,262,530 47,970,711 53,233,241 6,420,987 33,714,894 40,135,881 683,360 12,270,949 12,954,309 393,655 7,989,485 8,383,140 - - - 3,898 23,908 27,806 - 2,901 - 14,750 - 17,651 1.2 1.2.1 1.2.2 1.2.3 1.3 1.3.1 1.3.2 1.3.3 1.4 Financial Assets at Fair Value Through Profit or Loss V-I-b 1,475,121 1,897,655 3,372,776 574,413 2,144,087 2,718,500 Government Debt Securities Equity Securities Other Financial Assets Financial Assets at Fair Value Through Other Comprehensive Income Government Debt Securities Equity Securities Other Financial Assets Derivative Financial Assets 258,360 137,669 10,939 - 269,299 137,669 428,905 144,203 15,465 - 444,370 144,203 1,079,092 1,886,716 2,965,808 1,305 2,128,622 2,129,927 V-I-e 36,236,812 15,635,533 51,872,345 28,443,983 12,370,140 40,814,123 35,822,081 14,488,127 50,310,208 28,289,459 12,060,157 40,349,616 63,903 350,828 369,921 777,485 433,824 1,128,313 53,409 101,115 229,248 80,735 282,657 181,850 V-I-c-l 219,441 3,824,664 4,044,105 442,023 4,651,472 5,093,495 1.4.1 Derivative Financial Assets at Fair Value Through Profit or Loss 219,441 3,824,664 4,044,105 442,023 4,651,472 5,093,495 1.4.2 Derivative Financial Assets at Fair Value Through Other Comprehensive Income - - - - - - II. 2.1 2.2 2.3 2.4 Financial Assets Measured at Amortised Cost (Net) 190,990,350 113,653,733 304,644,083 170,438,350 114,351,238 284,789,588 Loans Lease Receivables Factoring Receivables V-I-f V-I-k 175,565,322 113,678,236 289,243,558 154,439,244 114,941,809 269,381,053 - - - - - - - - - - - - Other Financial Assets Measured at Amortised Cost (Net) V-I-g 28,041,103 2,847,252 30,888,355 24,754,084 1,973,879 26,727,963 2.4.1 Government Debt Securities 2.4.2 Other Financial Assets 27,752,402 2,361,186 30,113,588 24,433,190 1,605,742 26,038,932 288,701 486,066 774,767 320,894 368,137 689,031 Expected Credit Loss (-) 12,616,075 2,871,755 15,487,830 8,754,978 2,564,450 11,319,428 ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) V-I-q Held for Sale Discontinued Operations EQUITY INVESTMENTS 1,100,815 1,100,815 - 1,366 1,366 - 1,102,181 1,102,181 - 243,350 243,350 - - - - 243,350 243,350 - 19,109,551 1,961,003 21,070,554 16,018,971 1,619,749 17,638,720 Investments in Associates (Net) V-I-h 250,459 4.1.1 Associates Accounted by using Equity Method 4.1.2 Unconsolidated Associates 4.2 Subsidiaries (Net) - 250,459 - - - 250,459 206,775 - - 250,459 206,775 - - - 206,775 - 206,775 V-I-i 18,859,092 1,961,003 20,820,095 15,812,196 1,619,749 17,431,945 2.5 III. 3.1 3.2 IV. 4.1 4.2.1 Unconsolidated Financial Subsidiaries 7,954,699 1,961,003 9,915,702 6,635,993 1,619,749 4.2.2 Unconsolidated Non-Financial Subsidiaries 10,904,393 4.3 Joint Ventures (Net) 4.3.1 Joint Ventures Accounted by using Equity Method 4.3.2 Unconsolidated Joint Ventures V. VI. 6.1 6.2 VII. VIII. IX. X. TANGIBLE ASSETS (Net) INTANGIBLE ASSETS (Net) Goodwill Other INVESTMENT PROPERTY (Net) CURRENT TAX ASSET DEFERRED TAX ASSET OTHER ASSETS V-I-j V-I-m V-I-n V-I-o V-I-p V-I-r - - - - - - - 10,904,393 9,176,203 - - - - - - - - - - 8,255,742 9,176,203 - - - 6,430,266 32,301 6,462,567 5,121,510 8,804 5,130,314 912,885 - 912,885 - - 624 - 624 - - 913,509 622,662 - - 913,509 622,662 - - - - 632 - 632 - - 623,294 - 623,294 - - 1,038,789 792,319 1,831,108 1,201,504 291,402 1,492,906 2,468,498 4,118,001 6,586,499 4,964,920 4,377,024 9,341,944 TOTAL ASSETS 265,924,520 202,134,951 468,059,471 234,883,427 181,504,177 416,387,604 122 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Balance Sheet As of December 31, 2019 I. II. III. IV. 4.1 4.2 4.3 V. 5.1 5.2 VI. VII. 7.1 7.2 THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2018) LIABILITIES Footnotes TL FC Total TL FC Total DEPOSITS FUNDS BORROWED MONEY MARKETS SECURITIES ISSUED (Net) Bills Asset Backed Securities Bonds FUNDS Borrower Funds Other FİNANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS V-II-a V-II-c 131,290,175 164,631,827 295,922,002 113,054,647 132,214,199 245,268,846 1,856,265 38,394,368 40,250,633 2,198,903 42,593,665 44,792,568 739,089 448,671 1,187,760 5,207,327 3,864,566 9,071,893 V-II-f 6,423,545 24,693,665 31,117,210 5,087,889 24,357,192 29,445,081 5,231,941 0 0 0 5,231,941 4,386,277 0 - - - 4,386,277 - 1,191,604 24,693,665 25,885,269 701,612 24,357,192 25,058,804 0 0 0 0 0 0 0 0 0 0 0 0 - - - - - - - - - - - - DERIVATIVE FINANCIAL LIABILITIES V-II-b-j 349,231 1,785,132 2,134,363 1,248,291 2,457,199 3,705,490 Derivative Financial Liabilities at Fair Value Through Profit or Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income VIII. FACTORING PAYABLES IX. X. 10.1 10.2 10.3 10.4 XI. XII. XIII. 13.1 13.2 XIV. 14.1 14.2 XV. XVI. 16.1 16.2 LEASE PAYABLES (Net) PROVISIONS Restructuring Provisions Reserve for Employee Benefits Insurance Technical Provisions (Net) Other Provisions CURRENT TAX LIABILITY DEFERRED TAX LIABILITY LIABILITIES RELATED TO ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Held for Sale Discontinued Operations SUBORDINATED DEBT Loans Other Debt Instruments OTHER LIABILITIES SHAREHOLDERS’ EQUITY Paid-in capital Capital Reserves 16.2.1 Share Premium 16.2.2 Share Cancellation Profits 16.2.3 Other Capital Reserves 16.3 16.4 Accumulated Other Comprehensive Income or Loss Not Reclassified Through Profit or Loss Accumulated Other Comprehensive Income or Loss Reclassified Through Profit or Loss 16.5 Profit Reserves 16.5.1 Legal Reserves 16.5.2 Status Reserves 16.5.3 Extraordinary Reserves 16.5.4 Other Profit Reserves 16.6 Profit or Loss 16.6.1 Prior Periods’ Profit or Loss 16.6.2 Current Period Profit or Loss 349,231 1,785,132 2,134,363 1,248,291 2,457,199 3,705,490 V-I-h V-I-m 0 0 0 0 0 0 1,348,114 48,149 1,396,263 - - - - - - - - - 6,772,459 269,898 7,042,357 6,129,827 126,635 6,256,462 0 1,237,995 0 0 0 0 0 - 1,237,995 1,003,364 0 - - - - - 1,003,364 - 5,534,464 269,898 5,804,362 5,126,463 126,635 5,253,098 V-II-o 1,194,439 28,346 1,222,785 1,472,739 16,218 1,488,957 0 0 0 0 0 0 0 0 0 0 0 0 - - - - - - - - - - - - 2,281,084 11,265,847 13,546,931 1,136,214 10,022,587 11,158,801 0 0 0 - - - 2,281,084 11,265,847 13,546,931 1,136,214 10,022,587 11,158,801 V-II-g V-II-p 12,844,278 2,521,424 15,365,702 12,919,797 2,559,085 15,478,882 59,249,365 -375,900 58,873,465 50,919,858 (1,199,234) 49,720,624 4,500,000 1,043,623 5,610 0 1,038,013 0 204 204 0 0 4,500,000 4,500,000 - 4,500,000 1,043,827 1,047,229 5,814 0 5,328 - 1,038,013 1,041,901 204 204 - - 1,047,433 5,532 - 1,041,901 4,370,921 -617 4,370,304 4,290,573 (506) 4,290,067 3,351,446 -375,487 2,975,959 1,081,082 (1,198,932) (117,850) 34,007,790 4,372,235 0 29,635,555 0 11,975,585 5,907,998 6,067,587 0 0 0 0 0 0 0 0 34,007,790 27,238,705 4,372,235 4,034,962 0 - 29,635,555 23,203,743 0 - 11,975,585 12,762,269 5,907,998 5,993,184 6,067,587 6,769,085 - - - - - - - - 27,238,705 4,034,962 - 23,203,743 - 12,762,269 5,993,184 6,769,085 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 224,348,044 243,711,427 468,059,471 199,375,492 217,012,112 416,387,604 123 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Statement of Off-Balance Sheet Items As of December 31, 2019 THOUSAND TL Footnotes V-III OFF-BALANCE SHEET ITEMS A. OFF-BALANCE SHEET CONTINGENCIES and COMMITMENTS (I+II+III) GUARANTEES AND SURETYSHIPS I. Letters of Guarantee 1.1 Guarantees Subject to State Tender Law 1.1.1 Guarantees Given for Foreign Trade Operations 1.1.2 Other Letters of Guarantee 1.1.3 Bank Acceptances 1.2 Import Letter of Acceptance 1.2.1 Other Bank Acceptances 1.2.2 Letters of Credit 1.3 Documentary Letters of Credit 1.3.1 Other Letters of Credit 1.3.2 Prefinancing Given as Guarantee 1.4 Endorsements 1.5 Endorsements to the Central Bank of Turkey 1.5.1 Other Endorsements 1.5.2 Purchase Guarantees for Securities Issued 1.6 Factoring Guarantees 1.7 1.8 Other Guarantees Other Suretyships 1.9 COMMITMENTS II. Irrevocable Commitments 2.1 Forward Asset Purchase Commitments 2.1.1 Forward Deposit Purchase and Sales Commitments 2.1.2 Capital Commitments to Associates and Subsidiaries 2.1.3 Loan Granting Commitments 2.1.4 Securities Underwriting Commitments 2.1.5 Commitments for Reserve Deposit Requirements 2.1.6 Commitments for Cheque Payments 2.1.7 Tax and Fund Liabilities from Export Commitments 2.1.8 Commitments for Credit Card Expenditure Limits 2.1.9 Commitments for Credit Cards and Banking Services Promotions 2.1.10 Receivables from Short Sale Commitments 2.1.11 Payables for Short Sale Commitments 2.1.12 Other Irrevocable Commitments 2.1.13 Revocable Commitments 2.2 Revocable Loan Granting Commitments 2.2.1 Other Revocable Commitments 2.2.2 DERIVATIVE FINANCIAL INSTRUMENTS III. Derivative Financial Instruments Held for Risk Management 3.1 Fair Value Hedges 3.1.1 Cash Flow Hedges 3.1.2 Net Foreign Investment Hedges 3.1.3 Derivative Financial Instruments Held for Trading 3.2 Forward Foreign Currency Buy/Sell Transactions 3.2.1 Forward Foreign Currency Buy Transactions 3.2.1.1 Forward Foreign Currency Sell Transactions 3.2.1.2 Currency and Interest Rate Swaps 3.2.2 Currency Swap Buy Transactions 3.2.2.1 Currency Swap Sell Transactions 3.2.2.2 3.2.2.3 Interest Rate Swap Buy Transactions 3.2.2.4 Interest Rate Swap Sell Transactions Currency, Interest Rate and Security Options 3.2.3 Currency Call Options 3.2.3.1 Currency Put Options 3.2.3.2 3.2.3.3 Interest Rate Call Options 3.2.3.4 Interest Rate Put Options 3.2.3.5 Securities Call Options 3.2.3.6 Securities Put Options 3.2.4 3.2.4.1 3.2.4.2 3.2.5 3.2.5.1 3.2.5.2 3.2.6 B. CUSTODY AND PLEDGES RECEIVED (IV+V+VI) IV. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 V. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 VI. ITEMS HELD IN CUSTODY Customers’ Securities Held Investment Securities Held in Custody Cheques Received for Collection Commercial Notes Received for Collection Other Assets Received for Collection Assets Received for Public Offering Other Items Under Custody Custodians PLEDGED ITEMS Marketable Securities Guarantee Notes Commodity Warranty Real Estates Other Pledged Items Pledged Items-Depository ACCEPTED BILL, GUARANTEES AND SURETIES Currency Futures Currency Buy Futures Currency Sell Futures Interest Rate Futures Interest Rate Buy Futures Interest Rate Sell Futures Other TL 31,903,241 31,795,897 576,475 1,935,615 29,283,807 - - - 107,344 95,025 12,319 - - - - - - - - 57,195,362 56,523,318 926,022 - 3,588 18,930,150 - - 2,673,042 23,261 31,090,963 113,842 - - 2,762,450 672,044 587,044 85,000 CURRENT PERIOD (31/12/2019) FC 149,796,339 290,959,998 61,085,821 38,451,496 976,230 15,107,009 22,368,257 6,504,495 111,643 6,392,852 13,482,177 9,693,110 3,789,067 - - - - - - 2,647,653 - 12,394,658 8,259,675 1,770,544 - - 691,460 - - - - - - - - 5,797,671 4,134,983 4,134,983 - 60,697,736 217,479,519 - - - - 217,479,519 16,739,104 8,195,147 8,543,957 186,651,608 61,491,754 18,992,170 53,083,842 53,083,842 11,745,692 2,565,449 2,766,699 3,206,772 3,206,772 - - - - - - - - 2,343,115 547,916,565 414,540,975 32,346,684 - 3,179,363 12,294,549 12,417,721 - - 4,455,051 - 506,716,977 382,194,291 5,890 15,525,296 19,501,597 - 270,300,149 76,861,359 - - - - - - 60,697,736 5,471,564 2,941,784 2,529,780 51,678,508 4,648,644 46,073,264 478,300 478,300 3,547,664 1,980,082 1,567,582 - - - - - - - - - - - 41,199,588 - 25,209,839 12,690,407 2,932,325 - - 367,017 - 39,135,450 2,977,525 92,058,677 - 314,369,096 58,176,229 - - TL Total 92,989,062 70,247,393 1,552,705 17,042,624 51,652,064 6,504,495 111,643 6,392,852 13,589,521 9,788,135 3,801,386 - - - - - - 2,647,653 - 69,590,020 64,782,993 2,696,566 - 3,588 19,621,610 - - 2,673,042 23,261 31,090,963 113,842 - - 8,560,121 4,807,027 4,722,027 85,000 278,177,255 - - - - 278,177,255 22,210,668 11,136,931 11,073,737 238,330,116 66,140,398 65,065,434 53,562,142 53,562,142 15,293,356 4,545,531 4,334,281 3,206,772 3,206,772 - - - - - - - - 2,343,115 PRIOR PERIOD (31/12/2018) FC 440,756,337 142,340,703 259,264,460 58,907,288 32,415,624 37,823,956 32,331,131 2,615,819 817,618 12,986,188 1,764,875 22,221,949 29,748,638 4,379,607 - 205,562 - 4,174,045 - 14,408,070 84,493 11,010,797 68,660 3,397,273 15,833 - - - - - - - - - - - - 2,295,655 - - - 15,296,152 51,793,450 9,034,855 51,091,005 2,982,764 1,684,678 - - - - 363,639 15,747,394 - - - - - 2,600,948 - 17,791 - 27,477,673 - 113,226 - - - - 5,688,452 3,449,295 6,261,297 702,445 6,261,297 602,445 - 100,000 58,131,629 185,061,020 - - - - 185,061,020 11,507,343 5,697,656 5,809,687 157,606,624 55,102,408 22,725,522 39,889,347 39,889,347 10,184,275 3,959,008 4,202,091 1,011,588 1,011,588 - - - - - - - - 5,762,778 962,457,540 491,949,787 327,020,029 28,855,646 43,264,171 - - 2,719,469 23,784,677 10,659,413 16,174,536 11,834,457 2,932,823 251 - - - 3,642,056 372,135 - - 888,911,268 448,685,616 298,164,383 - 14,537,333 9,093,066 - 221,288,415 53,245,569 - - - - - - 58,131,629 6,078,339 3,096,081 2,982,258 46,758,472 7,172,559 39,308,113 138,900 138,900 5,294,818 2,806,159 2,488,659 - - - - - - - - - - - 73,546,272 - 28,389,202 24,984,956 15,350,046 - - 4,822,068 - 24,313,343 3,093,867 84,861,294 - 294,240,086 42,177,026 - - 39,141,340 18,502,821 111,560,274 - 584,669,245 135,037,588 - - Total 401,605,163 91,322,912 70,155,087 3,433,437 14,751,063 51,970,587 4,379,607 205,562 4,174,045 14,492,563 11,079,457 3,413,106 - - - - - - 2,295,655 - 67,089,602 60,125,860 4,667,442 - - 16,111,033 - - 2,600,948 17,791 27,477,673 113,226 - - 9,137,747 6,963,742 6,863,742 100,000 243,192,649 - - - - 243,192,649 17,585,682 8,793,737 8,791,945 204,365,096 62,274,967 62,033,635 40,028,247 40,028,247 15,479,093 6,765,167 6,690,750 1,011,588 1,011,588 - - - - - - - - 5,762,778 818,969,816 72,119,817 - 26,504,146 26,833,949 14,767,280 251 - 4,014,191 - 746,849,999 24,313,343 17,631,200 93,954,360 - 515,528,501 95,422,595 - - TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 697,712,904 705,500,973 1,403,213,877 634,290,490 586,284,489 1,220,574,979 124 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Statement of Income As of December 31, 2019 INCOME STATEMENT INTEREST INCOME Interest Income on Loans Interest Income on Reserve Deposits Interest Income on Banks Interest Income on Money Market Placements Interest Income on Marketable Securities Portfolio Financial Assets At Fair Value Through Profit or Loss Financial Assets At Fair Value Through Other Comprehensive Income Financial Assets At Measured at Amortised Cost Financial Lease Income Other Interest Income INTEREST EXPENSE (-) Interest on Deposits Interest on Funds Borrowed Interest on Money Market Funds Interest on Securities Issued Financial Lease Expense Other Interest Expenses NET INTEREST INCOME (I - II) NET FEES AND COMMISSIONS INCOME Fees and Commissions Received Non-cash Loans Other Fees and Commissions Paid Non-cash Loans Other DIVIDEND INCOME TRADING INCOME/(LOSS) (Net) Gains/(Losses) on Securities Trading Derivative Financial Transactions Gains/Losses Foreign Exchange Gains/(Losses) OTHER OPERATING INCOME GROSS OPERATING INCOME (III+IV+V+VI+VII) EXPECTED CREDIT LOSS (-) OTHER PROVISION EXPENSES (-) PERSONNEL EXPENSE (-) OTHER OPERATING EXPENSES (-) NET OPERATING INCOME/(LOSS) (VIII-IX-X-XI-XII) AMOUNT IN EXCESS RECORDED AS GAIN AFTER MERGER PROFIT/LOSS FROM ASSOCIATES ACCOUNTED FOR USING THE EQUITY METHOD NET MONETARY POSITION GAIN/LOSS PROFIT/LOSS ON CONTINUING OPERATIONS BEFORE TAX (XIII+...+XVI) TAX PROVISION FOR CONTINUING OPERATIONS (±) Current Tax Provision Deferred Tax Income Effect (+) Deferred Tax Expense Effect (-) NET PERIOD PROFIT/LOSS FROM CONTUNUING OPERATIONS (XVI±XVII) INCOME ON DISCONTINUED OPERATIONS Income on Assets Held for Sale Gain on Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Other Income on Discontinued Operations EXPENSE ON DISCONTINUED OPERATIONS (-) Expense on Assets Held for Sale Loss on Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Other Expense on Discontinued Operations PROFIT/LOSS ON DISCONTINUED OPERATIONS BEFORE TAX (XX-XXI) TAX PROVISION FOR DISCONTINUED OPERATIONS (±) Current Tax Provision Deferred Tax Expense Effect (+) Deferred Tax Income Effect (-) I. 1.1 1.2 1.3 1.4 1.5 1.5.1 1.5.2 1.5.3 1.6 1.7 II. 2.1 2.2 2.3 2.4 2.5 2.6 III. IV. 4.1 4.1.1 4.1.2 4.2 4.2.1 4.2.2 V. VI 6.1 6.2 6.3 VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. 18.1 18.2 18.3 XIX. XIX. 19.1 19.2 19.3 XX. 20.1 20.2 20.3 XXI. XXII. 22.1 22.2 22.3 XXIII. NET PERIOD PROFIT/LOSS FROM DISCONTINUED OPERATIONS (XXII±XXIII) XXIV. NET PERIOD PROFIT/LOSS (XIX+XXIV) Earnings per Share (*) (*) Expressed in exact TL. Footnotes CURRENT PERIOD (01/01-31/12/2019) PRIOR PERIOD (01/01-31/12/2018) THOUSAND TL V-IV-a V-IV-b V-IV-c V-IV-f V-IV-g V-IV-g V-IV-h V-IV-j V-IV-m 43,042,350 33,059,553 384,820 267,376 1,158 9,277,804 49,775 5,393,805 3,834,224 - 51,639 23,183,222 16,704,769 1,800,967 900,764 3,466,414 238,843 71,465 19,859,128 5,569,128 6,948,594 1,061,821 5,886,773 1,379,466 998 1,378,468 9,098 (6,397,400) 149,234 (5,870,570) (676,064) 3,146,751 22,186,705 7,778,690 547,216 4,283,744 5,508,800 4,068,255 - 2,806,196 - 6,874,451 806,864 1,692,604 587,078 1,472,818 6,067,587 - - - - - - - - - - - - - - 6,067,587 0.053933028 38,840,381 30,681,126 506,694 137,604 1,118 7,488,713 38,351 4,676,798 2,773,564 - 25,126 21,788,130 13,498,140 1,715,612 3,580,712 2,955,352 - 38,314 17,052,251 4,405,201 5,385,351 864,065 4,521,286 980,150 294 979,856 6,425 (4,071,660) 93,630 (3,269,401) (895,889) 1,912,307 19,304,524 6,332,961 10,713 3,675,519 4,364,202 4,921,129 - 2,808,736 - 7,729,865 960,780 1,194,393 486,494 720,107 6,769,085 - - - - - - - - - - - - - - 6,769,085 0.060168441 125 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Statement of Changes in Profit or Loss and Other Comprehensive Income as of December 31, 2019 PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME I. II. 2.1 2.1.1 2.1.2 2.1.3 PROFIT/LOSS FOR THE PERIOD OTHER COMPREHENSIVE INCOME Other comprehensive income that will not be reclassified to profit or loss Revaluation Surplus on Tangible Assets Revaluation Surplus on Intangible Assets Gains/(Losses) on remeasurements of Defined Benefit Plans 2.1.4 Other Income/Expense Items of Other Comprehensive Income not to be Reclassified to Profit Or Loss 2.1.5 Taxes Relating To Components Of Other Comprehensive Income not to be Reclassified To Profit Or Loss 2.2 Other Income/Expense Items not be Reclassified to Profit or Loss 2.2.1 Exchange Differences on Translation 2.2.2 Valuation and/or Reclassification Profit or Loss from Financial Assets at Fair Value through Other Comprehensive Income 2.2.3 Income/(Loss) Related with Cash Flow Hedges 2.2.4 Income/(Loss) Related with Hedges of Net Investments in Foreign Operations 2.2.5 Other Income/Expense Items of Other Comprehensive Income to be Reclassified to Other Profit or Loss 2.2.6 Taxes Relating To Components Of Other Comprehensive Income to be Reclassified To Profit Or Loss THOUSAND TL CURRENT PERIOD (01/01-31/12/2019) PRIOR PERIOD (01/01-31/12/2018) 6,067,587 3,174,046 80,237 (19,137) - (73,864) 156,552 16,686 3,093,809 220,557 2,771,653 - - 665,823 (564,224) 6,769,085 203,242 902,850 663,340 - (84,621) 373,541 (49,410) (699,608) 433,535 (1,775,683) - - 271,301 371,239 XII. TOTAL COMPREHENSIVE INCOME (I+II) 9,241,633 6,972,327 126 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Statement of Cash Flow As of December 31, 2019 A. CASH FLOWS FROM BANKING OPERATIONS 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 10,690,936 16,772,613 Footnotes CURRENT PERIOD (01/01-31/12/2019) PRIOR PERIOD (01/01-31/12/2018) THOUSAND TL 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 1.1.8 1.1.9 Interest Received Interest Paid Dividend Received Fees and Commissions Received Other Income Collections from Previously Written Off Loans and Other Receivables Cash Payments to Personnel and Service Suppliers Taxes Paid Other 40,743,322 (23,866,286) 470,493 6,940,115 730,481 908,016 (7,108,597) (2,308,000) (5,818,608) 35,943,972 (20,667,838) 506,006 5,381,025 231,027 514,719 (6,003,038) (964,352) 1,831,092 1.2 Changes in Operating Assets and Liabilities 10,205,225 12,338,503 Net (Increase)/Decrease in Financial Assets at Fair Value Through Profit or Loss 1.2.1 Net (Increase)/Decrease in Due From Banks 1.2.2 1.2.3 Net (Increase)/Decrease in Loans 1.2.4 Net (Increase)/Decrease in Other Assets 1.2.5 Net Increase/(Decrease) in Bank Deposits 1.2.6 Net Increase/(Decrease) in Other Deposits 1.2.7 1.2.8 Net Increase/(Decrease) in Funds Borrowed 1.2.9 Net Increase/(Decrease) in Matured Payables 1.2.10 Net Increase/(Decrease) in Other Liabilities Net Increase/(Decrease) in Financial Liabilities at Fair Value Through Profit or Loss (271,746) (3,077,291) (10,188,922) 1,727,554 (461,278) 38,477,867 - (8,533,986) - (7,466,973) (274,456) 8,314,359 (17,755,475) (3,543,691) (547,800) 31,774,715 - 1,909,221 - (7,538,370) I. B. II. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Net Cash Provided From Banking Operations 20,896,161 29,111,116 CASH FLOWS FROM INVESTING ACTIVITIES Net Cash Provided from Investing Activities Cash Paid for the Purchase of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Cash Obtained from Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Cash Paid for the Purchase of Tangible Asset Cash Obtained from the Sale of Tangible Asset Cash Paid for Purchase of Financial Assets at Fair Value Through Other Comprehensive Income Cash Obtained from Sale of Financial Assets at Fair Value Through Other Comprehensive Income Cash Paid for Purchase of Financial Assets Measured at Amortised Cost Cash Obtained from Sale of Financial Assets Measured at Amortised Cost (*) Other (9,837,471) (5,827,445) (8,500) - (248,842) 494,844 (18,850,009) 12,196,027 (11,142,522) 8,299,543 (578,012) (157,802) - (299,593) 178,431 (13,712,263) 9,478,503 (4,675,254) 3,737,743 (377,210) C. CASH FLOWS FROM FINANCING ACTIVITIES III. Net cash provided from financing activities (528,663) (7,611,461) 3.1 3.2 3.3 3.4 3.5 3.6 Cash obtained from funds borrowed and securities issued Cash used for repayment of funds borrowed and securities issued Equity Instruments Dividends Paid Payments for Finance Leases (**) Other 13,975,887 (13,983,203) - - (521,347) - 9,768,383 (15,170,365) - (1,679,172) - (530,307) IV. Effect of change in foreign exchange rate on cash and cash equivalents 787,421 67,856 V. Net increase in cash and cash equivalents VI. Cash and cash equivalents at beginning of the period VII. Cash and cash equivalents at end of the period (*) Includes Redeemed Financial Assets measured at amortized cost. (**) As of December 31, 2019, it includes payments for finance leases as required by the ”TFRS 16-Leases“ Standard which became effective as of January 1, 2019. 11,317,448 15,740,066 30,559,853 14,819,787 41,877,301 30,559,853 127 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Unconsolidated Statement of Changes in Shareholders’ Equity as of December 31, 2019 THOUSAND TL THOUSAND TL Accumulated Other Comprehensive Income That will not be Reclassified in Profit/(Loss) Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) Paid-in Capital Share Premium Share Certificate Cancellation Profits Other Capital Reserves Tangible assets accumulated revaluation reserve Increase/ (Decrease) Accumulated gains/(losses) on remeasurements of defined benefit plans Other (1) Exchange differences on translation reserve Other (2) Profit Reserves Prior Period Profit/(Loss) Net Current Total Shareholder’s Period Profit/(Loss) Equity 4,500,000 5,450 1,563,167 2,155,082 (99,478) 1,331,613 276,751 712,508 23,252,573 4,500,000 5,450 1,563,167 2,155,082 (99,478) 1,331,613 597,006 (67,697) 373,541 276,751 433,535 712,508 271,301 23,252,573 6,769,085 Accumulated gains/ (losses) due to revaluation and/ or reclassification of financial assets measured at fair value through other comprehensive income (1,311,571) 904,070 904,070 (407,501) (1,404,444) CHANGES IN SHAREHOLDERS’ EQUITY Footnotes PRIOR Period (31/12/2018) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference I. II. 2.1 2.2 III. IV. V. VI. VII. VIII. Convertible Bonds IX. X. XI. 11.1 11.2 Subordinated Debt Increase/(Decrease) Through Other Changes 82 (521,266) Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other (*) 10,598,172 554,439 554,439 11,152,611 150,877 (5,310,304) (1,679,172) (3,631,132) 3,986,132 3,631,132 355,000 42,984,267 1,458,509 1,458,509 44,442,776 6,972,327 (370,307) (1,324,172) (1,679,172) 355,000 Ending Balance (III+IV+…...+X+XI) 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 710,286 (1,811,945) 983,809 27,238,705 5,993,184 6,769,085 49,720,624 Current Period (31/12/2019) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference I. II. 2.1 2.2 III. IV. V. VI. VII. VIII. Convertible Bonds 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 710,286 (1,811,945) 983,809 27,238,705 12,762,269 49,720,624 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 (17,224) (59,091) 156,552 710,286 220,557 (1,811,945) 2,207,429 983,809 665,823 27,238,705 12,762,269 6,067,587 49,720,624 9,241,633 IX. X. XI. 11.1 11.2 Subordinated Debt Increase/(Decrease) Through Other Changes 282 (3,888) Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other 6,769,085 (85,186) (6,769,085) 6,769,085 (6,769,085) (88,792) Ending Balance (III+IV+…...+X+XI) 4,500,000 5,814 1,038,013 2,734,864 (226,266) 1,861,706 930,843 395,484 1,649,632 34,007,790 5,907,998 6,067,587 58,873,465 (1) Other Comprehensive Income of Associates and Joint Ventures Accounted for Using Equity Method that will not be Reclassified to Profit or Loss and Other Accumulated Amounts of Other Comprehensive Income that will not be Reclassified to Profit or Loss. (2) Accumulated gains/(losses) on cash flow hedges, Other Comprehensive Income of Associates and Joint Ventures Accounted for using equity method that will be classified to Profit/(Loss), Other Accumulated Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) In the prior period, repurchase of shares has been occured amounting to TL 530.307 in accordance with the Board of Directors decision dated 17.08.2018 and has been accounted under Other Capital Reserves, regarding Article 612 of the Turkish Commercial Code. (**) According to the Articles of Incorporation of the Bank, since a portion of the net profit for the period is distributed to the employees as a dividend, the provision provided for employee dividend distribution within the scope of “TAS 19-Employee Benefits”, has been added to distributable profit. 128 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) THOUSAND TL THOUSAND TL Accumulated Other Comprehensive Income That will not be Reclassified in Profit/(Loss) Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) CHANGES IN SHAREHOLDERS’ EQUITY Footnotes Premium Profits Reserves Other (1) Exchange differences on translation reserve Share Certificate Share Cancellation Other Capital Paid-in Capital Tangible assets accumulated Accumulated revaluation gains/(losses) on reserve remeasurements Increase/ (Decrease) of defined benefit plans 4,500,000 5,450 1,563,167 2,155,082 (99,478) 1,331,613 276,751 4,500,000 5,450 1,563,167 2,155,082 (99,478) 1,331,613 597,006 (67,697) 373,541 276,751 433,535 Accumulated gains/ (losses) due to revaluation and/ or reclassification of financial assets measured at fair value through other comprehensive income (1,311,571) 904,070 904,070 (407,501) (1,404,444) Increase/(Decrease) Through Other Changes 82 (521,266) Other (2) Profit Reserves Prior Period Profit/(Loss) Net Current Period Profit/(Loss) Total Shareholder’s Equity 712,508 23,252,573 712,508 271,301 23,252,573 3,986,132 3,631,132 355,000 10,598,172 554,439 554,439 11,152,611 150,877 (5,310,304) (1,679,172) (3,631,132) 6,769,085 42,984,267 1,458,509 1,458,509 44,442,776 6,972,327 (370,307) (1,324,172) (1,679,172) 355,000 Ending Balance (III+IV+…...+X+XI) 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 710,286 (1,811,945) 983,809 27,238,705 5,993,184 6,769,085 49,720,624 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 710,286 (1,811,945) 983,809 27,238,705 12,762,269 49,720,624 4,500,000 5,532 1,041,901 2,752,088 (167,175) 1,705,154 (17,224) (59,091) 156,552 710,286 220,557 (1,811,945) 2,207,429 983,809 665,823 27,238,705 12,762,269 6,067,587 49,720,624 9,241,633 Increase/(Decrease) Through Other Changes 282 (3,888) 6,769,085 (85,186) (6,769,085) 6,769,085 (6,769,085) (88,792) Ending Balance (III+IV+…...+X+XI) 4,500,000 5,814 1,038,013 2,734,864 (226,266) 1,861,706 930,843 395,484 1,649,632 34,007,790 5,907,998 6,067,587 58,873,465 (1) Other Comprehensive Income of Associates and Joint Ventures Accounted for Using Equity Method that will not be Reclassified to Profit or Loss and Other Accumulated Amounts of Other Comprehensive Income that will not be Reclassified to Profit or Loss. (2) Accumulated gains/(losses) on cash flow hedges, Other Comprehensive Income of Associates and Joint Ventures Accounted for using equity method that will be classified to Profit/(Loss), Other Accumulated Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) In the prior period, repurchase of shares has been occured amounting to TL 530.307 in accordance with the Board of Directors decision dated 17.08.2018 and has been accounted under Other Capital Reserves, regarding Article 612 of the Turkish Commercial Code. (**) According to the Articles of Incorporation of the Bank, since a portion of the net profit for the period is distributed to the employees as a dividend, the provision provided for employee dividend distribution within the scope of “TAS 19-Employee Benefits”, has been added to distributable profit. PRIOR Period (31/12/2018) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference VIII. Convertible Bonds Subordinated Debt Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other (*) Current Period (31/12/2019) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference VIII. Convertible Bonds Subordinated Debt Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other I. II. 2.1 2.2 III. IV. V. VI. VII. IX. X. XI. 11.1 11.2 I. II. 2.1 2.2 III. IV. V. VI. VII. IX. X. XI. 11.1 11.2 129 Financial Informationand Risk Managementİşbank Annual Report 2019 Unconsolidated Statement of Profit Distribution As of December 31, 2019 I. DISTRIBUTION OF CURRENT YEAR PROFIT (1) 1.1 1.2 1.2.1 1.2.2 1.2.3 CURRENT PERIOD PROFIT TAXES AND DUES PAYABLE (-) Corporate Tax (Income Tax) Income Tax Withholding Other Taxes and Dues Payable (2) A. NET PROFIT FOR THE PERIOD (1.1-1.2) 1.3 1.4 1.5 PRIOR YEARS’ LOSSES (-) FIRST LEGAL RESERVES (-) OTHER STATUTORY RESERVES (-) THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2019) 6,874,451 806,864 1,662,347 30,257 (885,740) 7,729,865 960,780 1,175,043 19,350 (233,613) 6,067,587 6,769,085 - - - - 337,273 6,431,812 B. NET PROFIT ATTRIBUTABLE TO [(A-(1.3+1.4+1.5)] 6,067,587 1.6 1.6.1 1.6.2 1.6.3 1.6.4 1.6.5 1.7 1.8 1.9 1.9.1 1.9.2 1.9.3 1.9.4 1.9.5 1.10 1.11 1.12 1.13 FIRST DIVIDEND TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Preferred Shares To Preferred Shares (Preemptive Rights) To Profit Sharing Bonds To Holders of Profit/Loss Share Certificates DIVIDENDS TO PERSONNEL (-) DIVIDENDS TO THE BOARD OF DIRECTORS (-) SECOND DIVIDEND TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Privileged Shares To Owners of Preferred Shares To Profit Sharing Bonds To Holders of Profit/Loss Share Certificates STATUTORY RESERVES (-) EXTRAORDINARY RESERVES OTHER RESERVES SPECIAL FUNDS II. DISTRIBUTION FROM RESERVES DISTRIBUTED RESERVES DIVIDENDS TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Privileged Shares To Owners of Preferred Shares 2.1 2.2 2.2.1 2.2.2 2.2.3 2.2.4 To Profit Sharing Bonds 2.2.5 2.3 2.4 To Holders of Profit/Loss Share Certificates DIVIDENDS TO PERSONNEL (-) DIVIDENDS TO THE BOARD OF DIRECTORS (-) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - III. EARNINGS PER SHARE 3.1 3.2 3.3 3.4 TO OWNERS OF ORDINARY SHARES (3) TO OWNERS OF ORDINARY SHARES (%) TO OWNERS OF PREFERRED SHARES TO OWNERS OF PREFERRED SHARES (%) IV. DIVIDEND PER SHARE 4.1 4.2 4.3 4.4 TO OWNERS OF ORDINARY SHARES TO OWNERS OF ORDINARY SHARES (%) TO OWNERS OF PREFERRED SHARES TO OWNERS OF PREFERRED SHARES (%) (1): The decision for dividend payment is made at the Annual General Meeting. Annual General Meeting has not been held as of the reporting date. (2): Deferred Tax Income. (3): Expressed in exact TL. 130 0.0539 135 - - - - - - 0.0602 150 - - - - - - İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) SECTION II: UNCONSOLIDATED FINANCIAL STATEMENTS SECTION THREE: EXPLANATIONS ON ACCOUNTING POLICIES I. Basis of Presentation: The unconsolidated financial statements, related notes and explanations in this report are prepared in accordance with the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” and other regulations on accounting records of Banks published by Banking Regulation and Supervision Agency and circulars and interpretations published by Banking Regulation and Supervision Authority, (together referred as “BRSA Accounting and Financial Reporting Legislation”) and requirements of Turkish Accounting Standards (TAS) published the Public Oversight Accounting and Auditing Standards Authority for the matters not regulated by the aforementioned legislations. In accordance with the ‘Communique amending the Communiqué on the Financial Statements and Related Disclosures and Footnotes to be Announced to Public by Banks’ published in the Official Gazette dated 1 February 2019 with No. 30673, the accompanying previous period financial statements were made compatible with the current period financial statement formats. Accounting policies applied in the current period are consistent with previous periods financial statements except for ‘TFRS 16 Leases’. As of January 1, 2019, the Bank have started to recognize operating leases in accordance with the “TFRS 16 Leases” standard which was published in the Official Gazette dated April 16, 2018 No. 30393. In accordance with the applicable legislations of transition of the standard, the prior period financial statements and footnotes have not been restated. Explanations on the application and effects of TFRS 16 are disclosed in footnote XXIV, section three. Additional paragraph for convenience translation to English The differences between accounting principles, as described in these preceding paragraphs and accounting principles generally accepted in countries in which unconsolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”) have not been quantified in these unconsolidated financial statements. Accordingly, these unconsolidated financial statements are not intended to present the financial position, results of operations and changes in financial position and cash flows in accordance with the accounting principles generally accepted in such countries and IFRS. The accounting policies and valuation principles used in the preparation of financial statements are presented below in detail. II. Strategy for Use of Financial Instruments and Foreign Currency Transactions 1. The Bank’s Strategy on Financial Instruments The Bank’s main activities comprise private, retail, commercial and corporate banking, money market and securities market operations, as well as activities related to international banking services. In conformity with the general liability structure of the banking system, the Bank’s liabilities are mainly composed of short-term deposits and other medium and long-term liabilities. The liquidity risk that may arise from this liability structure can be easily controlled through deposit continuity, as well as widespread network of the correspondent banks, market maker status (The Bank is one of the market maker banks) and by the use of liquidity facilities of the Central Bank of Republic of Turkey (“CBRT”). As a result, the liquidity of the Bank and the banking system can be easily monitored. On the other hand, foreign currency liquidity requirements are met by the money market operations and currency swaps. Most of the funds collected bear fixed-interest, and by monitoring the sectoral developments and the yields of alternative investment instruments, fixed and floating rate placements are made. Safety principle has always been the top priority in placements and the placements are focused on high yielding and low risk assets by considering their maturity structure. Accordingly, a pricing policy aiming at high return is implemented in the long-term placements and attention is paid to the maximum use of non-interest income generation opportunities. The Bank determines its lending strategy by taking into consideration the international and national economic data and expectations, market conditions, current and potential credit customers’ expectations and tendencies, and risks such as; interest rate, liquidity, currency and credit risks. Furthermore, in conformity with this strategy, the Bank acts within the legal limits in terms of asset-liability management. The primary objectives related to balance sheet components are set by the long-term plans shaped along with budgeting; and the Bank takes the required positions against the short-term currency, interest rates and price fluctuations in accordance with these plans and the course of the market conditions. Foreign currency, interest rate and price fluctuations in the markets are monitored instantaneously. While taking positions, in addition to the legal limits, the Bank’s own transaction and control limits are also effectively monitored in order to avoid limit overrides. The Bank’s asset-liability management is executed by the Asset-Liability Management Committee, within the risk limits determined by the Board of Directors, in order to keep the liquidity risk, interest rate risk, currency risk and credit risk within certain limits depending on the equity adequacy and to maximize profitability. 2. Foreign Currency Transactions Foreign currency monetary assets and liabilities on the balance sheet are converted into Turkish Lira by using the prevailing exchange rates at the balance sheet date. Non-monetary items in foreign currencies carried at fair value are converted into Turkish Lira by the rates at the date of which the fair value is determined. Exchange rate differences arising from the conversions of monetary foreign currency items and the collections of and payments in foreign currency transactions are reflected to the income statement. The Bank started to apply equity method in 2018 for the foreign associates and subsidiaries which were followed with historical rates in accordance with the TAS 27 “Separate Financial Statements” In this context, foreign subsidiaries are accounted at current rates in the financial statement and the resulting exchange differences are accounted under equity. The financial statements of the foreign branches of the Bank are prepared in the currency of the primary economic environment in which the entity operates (functional currency). The financial statements of foreign branches are expressed in TL which is the functional currency of the Bank and the presentation currency of the financial statements. Assets and liabilities of the foreign branches of the Bank are converted into TL by using the prevailing exchange rates at the balance sheet date. Income and expenses are converted by at exchange rates at the dates of the transactions. The exchange rate differences arising from the conversion are recorded in the shareholders’ equity. III. Associates and Subsidiaries Since 2018, the Bank accounts its associates and subsidiaries in accordance with equity method which described in TAS 28. Under the equity method, Bank’s share of net assets of the associates and subsidiaries is recognized in the Bank’s financial statements. The profit or loss of the Bank includes the Bank’s share of the profit or loss of the associates and subsidiaries and Bank’s other comprehensive income or expenses include the Bank’s share of other comprehensive income or expenses of the associates and subsidiaries. Mergers/acquisitions and change in share ratios of related associates and subsidiaries during the period are shown under the item “Increase/Decrease through Other Changes” in the statement of changes in shareholders’ equity. 131 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Forward and Option Contracts and Derivatives Instruments Derivative transactions of the Bank consist of foreign currency and interest rate swaps, forwards, foreign currency options and interest rate options. The Bank has no derivative instruments decomposed from the main contract. The Bank classifies derivative transactions, which act as a hedge but does not meet qualification criteria for hedge accounting, as “Derivative Financial Assets at Fair Value through Profit or Loss” in accordance with the “TFRS 9 Financial Instruments” requirements. Derivative transactions are recorded at their fair value at the date of contract, receivables and payables arising from these transactions are recorded in off-balance sheet accounts. Derivative transactions are measured at fair value at subsequent reporting dates and if the valuation difference is positive they are classified as “Derivative Financial Assets at Fair Value through Profit or Loss”, if it is negative they are classified as “Derivative Financial Liabilities at Fair Value through Profit or Loss”. The differences arising from the valuation of derivative transactions are associated with the income statement. On off-balance sheet items table, options which generated assets for the Bank are presented under “call options” line and which generated liabilities are presented under “put options” line. V. Interest Income and Expenses Interest income is calculated by using the effective interest rate method (the rate that equal the future cash flows of a financial asset or liability to its present net book value) to gross carrying amount of financial asset in conformity with “TFRS 9 Financial Instruments” except financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired. Under the scope of TFRS 9 application, the Bank does not reverse the interest accruals and rediscounts of non- performing loans and other receivables and monitors the related amounts under interest income and calculates expected credit loss on these amounts according to the related methodology. VI. Fees and Commission Income and Expenses Wages and commissions those that are not an integral part of the effective interest rate of the financial instruments measured at amortized cost are accounted for in accordance with “TFRS 15 - Revenue from Customer Contracts”. Fees and commission income and expenses are recognized either on accrual basis or by using the effective interest method. Income earned in return for services rendered contractually or due to operations like sale or purchase of assets on behalf of a third party real person or corporate body are recognized in income accounts in the period of collection. VII. Financial Assets Beginning from January 1, 2018, the Bank within the scope of “TFRS 9 Financial Instruments”, classifies and accounts its financial assets as “Financial Assets at Fair Value Through Profit or Loss”, “Financial Assets at Fair Value Through Other Comprehensive Income” or “Financial Assets at Measured at Amortized Cost” by taking into account their business model and contractual cash flow characteristics. Financial assets are recognized or derecognized according to TFRS 9 “Recognition and Derecognition in Statement of Financial Position” requirements. The Bank recognizes a financial asset in its statement of financial position when it becomes a party to the contractual provisions of the financial instrument. Financial assets are measured at their fair value on initial recognition in the financial statements. The Bank has three different business models for classification of financial assets: - Business model aimed at holding financial assets in order to collect contractual cash flows: Financial assets held under the mentioned business model are managed to collect contractual cash flows over the life of these assets. The Bank manages its assets held under this portfolio in order to collect certain contractual cash flows - Business model aimed at collecting contracted cash flows of financial assets and selling: In this business model, the Bank intends both to collect contractual cash flows of financial assets and to sell these assets. - Other business models: A business model in which financial assets; are not held within the scope of a business model aimed at collection of contractual cash flows and within the scope of a business model aimed at collecting and selling contracted cash flows, are measured by reflecting fair value in profit or loss. The Bank is able to reclassify all affected financial assets in case it changes the business model that is used for the management of financial asset. In the event of the termination of the rights related to the cash flows from a financial asset, the transfer of all risks and rewards of the financial asset to a significant extent or has no longer control of the financial assets, the Bank derecognizes the financial asset. 1. Financial Assets at Fair Value Through Profit or Loss Financial assets other than financial assets that are measured at amortized cost or at fair value through other comprehensive income, are measured at fair value through profit or loss. Financial assets at fair value through profit or loss are financial assets held for the purpose of generating profit from short-term fluctuations in price or similar factors in the market or being part of a portfolio for profitability in the short term, regardless of the acquisition reason or financial assets that are not held in a business model that aims at collecting and/or selling contractual cash flows of financial assets. Financial assets at fair value through profit or loss are initially measured at fair value on the balance sheet and are subsequently re-measured at fair value. Gains or losses arising from the valuation are related to income statement. In some cases, restructuring, alteration or counterparty changes of contractual cash flows of loans may lead to derecognition of related loans in accordance with TFRS 9. When the change in the financial asset results from derecognizing the existing financial asset from the financial statements and the revised financial asset is recognized in the financial statements, the revised financial asset is considered as a new financial asset in accordance with TFRS 9. When the Bank determines that there are significant changes between the first conditions in the new conditions of the revised financial asset, the Bank evaluates the new financial asset according to the current business models. When it is determined that the contractual conditions do not only result in cash flows that include principal and interest payments at certain dates, the financial asset is recognized at fair value and is subject to valuation. The differences arising from the valuation are reflected in the nominal accounts. The Bank recognizes loans at fair value through profit or loss, if the contractual terms of the loan, do not result in cash flow including the principal payments and interest payments generated from principal amounts at certain dates. These loans are valued at their fair values after their recognition and the losses or gains arising from the valuation are included in the profit and loss accounts. 2. Financial Assets at Fair Value Through Other Comprehensive Income Financial assets at fair value through other comprehensive income are financial assets that are held under a business model that aims both to collect contractual cash flows and to sell financial assets, and financial assets with contractual terms that lead to cash flows that are solely payments of principal and interest on the principle amount outstanding at specific dates. 132 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Financial assets at fair value through other comprehensive income are initially recognized at their fair value including their transaction costs on the financial statements. The initial recognition and subsequent valuation of such financial assets, including the transaction costs, are carried out on a fair value basis and the difference between amortized cost and the cost of borrowing instruments is recognized in profit or loss by using the effective interest method. Dividend income arising from investments in equity instruments that are classified as at fair value through other comprehensive income is also recognized in income statements. Gains and losses, except impairment gain or loss and foreign exchange gain or loss, arising from changes in the fair value of financial assets at fair value through other comprehensive income are reflected to other comprehensive income until derecognized or reclassified. When the value of the financial asset is collected or when financial asset is disposed, the related fair value differences accumulated in the shareholders’ equity are transferred to the income statement. During the initial introduction to financial statements, amendments to the fair value of an investment in an equity instrument within the framework of TFRS 9 that are not held for trading or that are not valued in a financial statement of an entity that acquires business combinations under the “TFRS 3 Business Combinations” may be subject to an irreversible preference regarding these amendments being accounted in other comprehensive income. In such case dividends taken from mentioned investment will be accounted in financial statement as profit or loss. 3. Financial Assets Measured at Amortised Cost Financial assets measured at amortized cost are those financial assets that are held within the framework of a business model aimed at collecting contractual cash flows over the life of the asset and which result in cash flows that include principal and interest on the principal amount outstanding at specific dates. Financial assets measured at amortized cost with the initial recognition at fair value including transaction costs are subject to valuation with their discounted cost value by using the effective interest rate method, net of any provision for impairment. Interest income from financial assets measured at amortized cost are recognized in the income statement as an “interest income”. The Bank evaluates its loans within the framework of current business models and can be classified as Financial Assets measured at Amortized Cost. VIII. Impairment of Financial Assets In accordance with the “TFRS 9-Financial Instruments” and the regulation “Procedures and Principals regarding Classification of Loans and Allowances Allocated for Such Loans” issued by BRSA, the Bank recognizes expected credit loss allowance on financial assets at fair value through other comprehensive income, financial assets measured at amortized cost, impaired credit commitments and financial guarantee contracts. Within the scope of TFRS 9, the expected credit loss is calculated according to the “three-stage” impairment model based on the change in the loan quality of financial assets after initial recognition and detailed in the following headings: Stage 1: An important determinant for calculating the expected credit loss in accordance with TFRS 9 is to assess whether there is a significant increase in the credit risk of the financial asset. Financial assets that have not experienced a significant increase in credit risk since the initial recognition are monitored in the first stage. Impairment for credit risk for the Stage 1 financial assets is equal to the 12-month expected credit losses. Stage 2: Financial assets that experienced a significant increase in the credit risk since initial recognition, are transferred to Stage 2. The expected credit loss of these financial assets are measured at an amount equal to the instrument’s lifetime expected credit loss. In order to classify a financial asset in the stage 2, the following criteria is considered: - Overdue between 30-90 days - Restructuring of the loan - Significant deterioration in the probability of default In the event of a significant deterioration in the probability of default, the credit risk is considered to be increased significantly and the financial asset is classified as stage 2. The absolute and gradual thresholds used to increase the probability of default are differentiated on the basis of portfolio and product group. In this manner, for the commercial portfolio, definition of increase in the probability of default is the comparison between the probability of default on loan’s opening date, obtained from the integrated rating/score based on bank’s internal rating and probability of default of the same loan on reporting date, obtained from the integrated rating/score based on bank’s internal rating. For the individual portfolio, it is accepted that the probability of default is worsened in cases where the behavioral score falls below the thresholds determined on the basis of the product and the probability of default exceeds the thresholds determined on the basis of the product. Stage 3: Financial assets with sufficient and fair information for impairment at the reporting date, are classified in the third stage. Expected credit loss of these financial assets is measured at an amount equal to the lifetime expected credit loss. The following basic factors are considered for the classification of a financial asset in the third stage: - More than 90 days past due - Whether the credit rating is weakened, has suffered a significant weakness or cannot be collected or there is a certain opinion on this matter While estimating the expected credit loss, statistical models, methods and tools are used in accordance with the relevant legislation and accounting standards. Expected credit loss is measured using reasonable and supportable information by taking into account current and forecasts of future economic information, including macroeconomic factors. Three scenarios, base scenario, optimistic scenario and the worst scenario, are used in forecasting studies made by macroeconomic models. The variables used in these estimates include Industrial Production Index and basic financial indicators. The validity of the risk parameter estimates used in the calculation of expected credit losses is reviewed and evaluated at least annually within the framework of model validation processes. Macroeconomic forecasts and risk delinquency data used in risk parameter models are re-evaluated every quarter to reflect the changes in economic conjuncture and are updated if needed. In the expected credit loss calculations, macroeconomic information is taken into account under multiple scenarios. Except for demand or revolving loans, the maximum period for which expected credit losses are to be determined is the contractual life of the financial asset. For demand or revolving loans, maturity is determined by taking into account the future risk mitigation processes such as behavioral maturity analyses performed by the Bank and cancellation/revision of the Bank’s credit limit. While calculating the expected credit loss, aside from assessment of whether there is a significant increase in credit risk or not, basic parameters expressed as probability of default, loss given default and exposure at default are used. Probability of Default: Represents the probability of default on the loan over a specified time period. In this context, the Bank has developed models to calculate 12-month and life-time default probabilities by using internal rating based credit rating models. As for the Group Companies historical probability of default data has also been observed. 133 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Loss Given Default (LGD): Defined as the damage caused by the default of borrower to the total balance of the exposure at the time of default. The LGD estimates are determined in terms of credit risk groups that are detailed in the Bank’s data resources and system facilities. The model used for the estimation of the LGD was established by taking into account the direct cost items during the collection process, based on the historical data of the Bank’s collection, cash flows are discounted at effective interest rates. Exposure at Default: For cash loans, the cash balance at the date of report, for non-cash loans the balance calculated using the Credit Conversion Factor (CCF) is represented by Exposure at Default. Credit Conversion Factor: Calculated for non-cash loans (undrawn limit for revolving loans, commitments, non-cash loans etc.) The historical limit usage data of the Bank for revolving loans are analyzed and the limit amount that can be used until the moment of default is estimated. For non-cash loans, the cash conversion ratio of the loan amount is estimated by analyzing the product type and the past compensation amount of the bank. Credit risks, which require qualitative review due to their characteristics and differ by grouping in this manner, are considered as individual within the internal policies. Calculations are made by the method of discounted cash flows with the effective interest rate expected from the relevant financial instrument. Discounted cash flows are estimated for 3 different scenarios in which parameters are differentiated, and individual expected credit loss is calculated by taking into consideration the cash deficit amounts weighted according to probabilities. Expected credit loss is reflected in the income statement. Released provisions in the current year are accounted under “Expected Credit Losses”, released provision which is carried from the prior year are accounted under “Other Operating Income”. IX. Offsetting Financial Instruments Financial assets and financial liabilities shall be offset, and the net amount shall be presented in the balance sheet only when a party currently has a legally enforceable right to set off the recognized amounts or intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. X. Sale and Repurchase Agreements and Securities Lending Transactions Marketable securities subject to repurchase agreements are classified under “Financial Assets at Fair Value through Profit and Loss”, “Financial Assets at Fair Value through Other Comprehensive Income” or “Financial Assets Measured at Amortised Cost” in the Bank’s portfolio and they are valued according to the valuation principles of the related portfolios. Funds obtained from the repurchase agreements are recognized under “Funds from Repurchase Transactions” account in liabilities. For the difference between the sale and repurchase prices determined by the repo agreements for the period; expense accrual is calculated using the effective interest rate method. Reverse repo transactions are recognized under the “Receivables from Reverse Repo Transactions” account. For the difference between the purchase and resale prices determined by the reverse repo agreements for the period; income accrual is calculated using the effective interest rate method. XI. Non-current Assets Held for Sale and Discontinued Operations and Related Liabilities Assets that meet the criteria to be classified as held for sale are measured at the lower of its carrying amount and fair value less costs to sell. Assets held for sale are not amortized or depreciated and presented in the financial statements separately. In order to classify a tangible fixed asset as held for sale, the asset (or the disposal group) should be available for an immediate sale in its present condition subject to the terms of any regular sales of such assets (or such disposal groups) and the sale should be highly probable. For a highly probable sale, the appropriate level of management must be committed to a plan to sell the asset (or the disposal group), and an active programme to complete the plan should be initiated to locate a customer. Also, the asset (or the disposal group) should have an active market sale value, which is a reasonable value in relation to its current fair value. Events or circumstances may extend the completion of the sale more than one year. Such assets are still classified as held for sale if there is sufficient evidence that the delay in the sale process is due to the events and circumstances occurred beyond the control of the entity or the entity remains committed to its plan to sell the asset (or disposal group). A discontinued operation is a component of a bank that either has been disposed of or is classified as held for sale. Gains or losses relating to discontinued operations are presented separately in the income statement. XII. Goodwill and Other Intangible Assets As at the balance sheet date, there is no goodwill recorded in the unconsolidated balance sheet of the Bank. The Bank’s intangible assets are composed of software programs. The purchased items are presented with their acquisition costs less the accumulated amortization and impairment provisions. In case there is an indication of impairment, the recoverable amount of the related intangible asset is estimated within the framework of “TAS 36 -Impairment of Assets” and impairment provision is set aside in case the recoverable amount is below its acquisition cost. The related assets are amortized by the straight-line method considering the estimated useful life. The amortization method and period are periodically reviewed at the end of each year. XIII. Tangible Assets Tangible assets purchased before January 1, 2005, are presented in the financial statements at their inflation adjusted acquisition costs as at December 31, 2004, and the items purchased in the subsequent periods are presented at acquisition costs less accumulated amortization and impairment provisions. In 2015, the Bank, has been changed its accounting policies from historical cost method to revaluation method for the real estate properties which are held for own use in accordance with “TAS 16-Property, Plant and Equipment”. The positive difference between the net book value of real estate property values and the renewed expertise values which are determined by the licensed valuation companies in 2018 are recorded under the shareholders’ equity. In case there is an indication of impairment, the recoverable amount of the related intangible asset is estimated within the framework of “TAS 36 - Impairment of Assets” and impairment provision is set aside in case the recoverable amount is below its acquisition cost. Tangible assets other than the land and construction in progress are amortized by the straight-line method, according to their estimated useful lives. The estimated useful life, residual amount and the method of amortization are reviewed every year for the possible effects of the changes that occur in the estimates and if there is any change in the estimates, they are recognized prospectively. Assets held under finance lease are depreciated over the expected useful life of the related assets. Assets subject to leasing are depreciated according to relevant contract periods. Leasehold improvements are amortized in equal amounts considering their useful life. However, in any case the useful life cannot exceed leasing term. When the lease period is not certain or longer than 5 years, the amortization period is recognized as 5 years. 134 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The difference between the sales proceeds arising from the disposal of tangible assets or the inactivation of a tangible asset and the book value of the tangible assets are recognized in the income statement. Regular maintenance and repair costs incurred for tangible assets are recognized as expense. There are no pledges, mortgages and similar encumbrances on tangible assets. The “Regulation on Procedures and Principles for the Trading of Precious Metals by Banks and the Disposal of Commodities and Real Properties acquired by Banks due to their Receivables” has been abolished by BRSA effective from January 1, 2017. Real properties acquired by Group due to their receivables and not treated in the scope of “TFRS 5 - Non-current Assets Held for Sale and Discontinued Operations” has been started to follow under “Other Assets” in accordance with the related accounting standard from the current period. The depreciation rates used in amortization of tangible assets and their estimated useful lives are as follows: Buildings Safe Boxes Other Movables XIV. Leasing Transactions Estimated Economic Life (Year) Depreciation Rate 50 2-50 2-25 2% 2% - 50% 4% - 50% Assets acquired under financial leases are carried at the lower of their fair values or amortized value of the lease payments. Leasing payables are recognized as liabilities in the balance sheet while the interest payable portion of the payables is recognized as a deferred amount of interest. Finance lease payments are separated as financial expense and principal amount payment, which provides a decrease in finance lease liability, thus helps a fixed rate interest on the remaining principal amount of the debt to be calculated. Within the context of the Bank’s general borrowing policy, financial expenses are recognized in the income statement. Assets held under financial leases are recognized under the “Property, Plant and Equipment” account and are depreciated by using the straight-line method. The Bank does not participate in the financial leasing transactions as a “lessor”. As of January 1, 2019 the Bank have started to recognize operating leases in accordance with the TFRS 16 “leases” standard. Operating leases within the framework of the aforementioned standard are monitored in a similar manner to financial leases. For the agreements within the scope of TFRS 16, the right of use asset and the lease payments are reflected to the financial statements and they are presented under “Tangible Assets” and “Liabilities from Financial Leases”, respectively. The lease liability is calculated by discounting the future lease payments by the use of the Bank or alternative borrowing interest rates at the date of initial application or contract date. Fixed assets, which are accounted as usage right assets, are subject to depreciation considering the period of the contract. Interest expenses and foreign exchange differences related to the lease liabilities are associated with profit and loss statement. Explanations on the application and effects of TFRS 16 are disclosed in footnote XXIV, section three. XV. Provisions and Contingent Liabilities As of the end of the reporting period, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists, the entity recognizes a provision in the financial statements. As of the end of the reporting period where it is more likely that no present obligation exists at the end of the reporting period, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote. 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. In case the provision is measured by using the estimated cash flows required to fulfill the existing liability, the book value of the related liability is equal to the present value of the related cash flows. Provisions are calculated based on the best estimates of management on the expenses to incur as of the balance sheet date to fulfill the liability by considering the risks and uncertainties related to the liability. 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. XVI. 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. Since showing the contingent assets in the financial statements may result in the accounting of an income, which will never be generated, the related assets are not included in the financial statements. Nevertheless, the developments related to the contingent assets are constantly evaluated and 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. XVII. Liabilities Regarding Employee Benefits 1. Severance Indemnities and Short-Term Employee Benefits According to the related regulation and the collective bargaining agreements, the Bank is obliged to pay termination benefits for employees who retire, die, quit for their military service obligations, who have been dismissed as defined in the related regulation or (for the female employees) who have voluntarily quit within one year after the date of their marriage. Within the scope of “TAS 19-Employee Benefits”, the Bank allocates severance indemnity provisions for employee benefits by estimating the present value of the probable future liabilities. According to TAS 19, the actuarial gains and losses occurred is recognized under equity. The Bank also allocates provision for the unused paid vacation. 2. Retirement Benefit Obligations Türkiye İş Bankası A.Ş. Emekli Sandığı Vakfı (“İşbank Pension Fund”), of which each Bank employee is a member, has been established according to the provisional Article 20 of the Social Security Act No. 506. As per provisional article numbered 23 of the Banking Law numbered 5411, it is ruled that Bank pension funds, which were established within the framework of Social Security Act, will be transferred to the Social Security Institution, within 3 years after the publication of such law. Methods and principles related to transfer have been determined as per the Cabinet decision dated 30 November 2006 numbered 2006/11345. However, the related article of the act has been cancelled upon the President’s application dated November 2, 2005, by the Supreme Court’s decision dated March 22, 2007, numbered E.2005/39, K.2007/33, which was published on the Official Gazette dated March 31, 2007 and numbered 26479 and the execution decision was ceased as of the issuance date of the related decision. 135 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) After the justified decree related to cancelling the provisional Article 23 of the Banking Law was announced by the Constitutional Court on the Official Gazette dated December 15, 2007 and numbered 26731, Turkish Grand National Assembly started to work on establishing new legal regulations, and after it was approved at the General Assembly of the TGNA, the Law numbered 5754 “Emendating Social Security and General Health Insurance Act and Certain Laws and Decree Laws”, which was published on the Official Gazette dated 8 May 2008 and numbered 26870, came into effect. The new law decrees that the contributors of the Bank pension funds, the ones who receive salaries or income from these funds and their rightful beneficiaries will be transferred to the Social Security Institution and will be subject to this Law within 3 years after the release date of the related article, without any need for further operation. The three-year transfer period can be prolonged for maximum 2 years by the Cabinet decision. However related transfer period has been prolonged for 2 years by the Cabinet decision dated March 14, 2011, which was published on the Official Gazette dated April 9, 2011 and numbered 27900. In addition, by the Law “Emendating Social Security and General Health Insurance Act”, which was published on the Official Gazette dated March 8, 2012 and numbered 28227, this period of 2 years has been raised to 4 years after that related transfer period has been prolonged for one more year by the Cabinet decision dated April 8, 2013, which was published on the Official Gazette dated 3 May 2013 and numbered 28636 also this period has revalidated one more year by the Cabinet decision dated February 24, 2014, which was published on the Official Gazette dated April 30, 2014 and numbered 28987. The Council of Ministers has been lastly authorized to determine the transfer date in accordance with the last amendment in the first paragraph of the 20th provisional article of Law No.5510 implemented by the Law No. 6645 on Amendment of the “Occupational Health and Safety Law and Other Laws and Decree Laws” published in the Official Gazette dated April 23, 2015 and numbered 29335. This authority was transferred to the President with the delegated legislation No.703 which was published in the repetitive Official Gazette No. 30473 dated July 9, 2018. On the other hand, the application made on 19 June 2008 by the Republican People’s Party to the Constitutional Court for the annulment and motion for stay of some articles, including the first paragraph of the provisional article 20 of the Law, which covers provisions on transfers, was rejected in accordance with the decision taken at the meeting of the afore-mentioned court on 30 March 2011. The above mentioned Law also states that; - Through a commission constituted by the attendance of one representative separately from the Social Security Institution, Ministry of Finance, Turkish Treasury, State Planning Organization, Banking Regulation and Supervision Agency, Savings Deposit Insurance Fund, one from each pension fund, and one representative from the organization employing pension fund contributors, related to the transferred persons, the cash value of the liabilities of the pension fund as of the transfer date will be calculated by considering their income and expenses in terms of the lines of insurance within the context of the related Law, and technical interest rate of 9.8% will be used in the actuarial calculation of the value in cash, - And that after the transfer of the pension fund contributors, the ones who receive salaries or income from these funds and their rightful beneficiaries to the Social Security Institution, these persons’ uncovered social rights and payments, despite being included in the trust indenture that they are subject to, will be continued to be covered by the pension funds and the employers of pension fund contributors. In line with the new law, the Bank obtained a technical actuarial valuation report from the licensed actuary for the year ended December 31, 2019. And provided full provision for the total amount of technical and actual deficit in the actuarial report in the financial statements. The actuarial assumptions used in the related actuarial report are given in Section Five Note II-i-5-1. Türkiye İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı (İşbank Members’Supplementary Pension Fund) was founded due to provide additional social security and solidarity rights in addition to compulsory social security contribution, which has been founded by the Bank as per the provisions of the Turkish Commercial Code and Turkish Civil Code. XVIII. Taxation 1. Corporate Tax: With the change in Law no: 7061, in accordance with the Article 32 of the Corporate Tax Law No: 5520, the corporate tax rate is calculated at the rate of 22% for 2018, 2019 and 2020 taxation period’s income. As per the Corporate Tax law, temporary tax is calculated and paid quarterly in line with the principles of the Income Tax Law and at the corporate tax rate. The temporary tax payments are deducted from the current period’s corporate tax. The 4th temporary provisional tax for the year 2019 has paid in February 2020 and has offset with the current period’s corporate tax. Tax expense consists of current tax and deferred tax. The current tax liability is calculated over the portion of the period subject to taxation. The taxable profit differs from the profit stated in the income statement, as the income and expense items that can be taxable or deductible at other periods, and items that are not taxable or deductible are excluded. The current tax amounts payable are netted off with prepaid tax amounts and presented on the financial statements. Within the framework of the Corporate Tax Law numbered 5520, 75% of the gains on the sale of the participation shares, which were held in the assets for a minimum of 2 whole years and 75% of the gains on the sale of immovable are exempt from tax provided that they are added to the capital as set forth by the Law or that they are kept in a special fund under liabilities for a period of 5 years. However, in accordance with Article 89/a of the Law No. 7061 and Article 5.1.e and Article 5.1.f of the Corporate Tax Law, which were published in the Official Gazette dated December 5, 2017 and numbered 30261, the 75% applied in terms of immovable sales mentioned above has been reduced to 50% which is effective from the date of publication of the Law. 2. Deferred Tax: Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Free provisions that are allocated for possible future risks are included in the tax base and they are not subject to deferred tax calculation. No tax assets or liabilities are recognized for the temporary timing difference that affects neither the taxable profit nor the accounting profit and that arises from the initial recognition in the balance sheet, of assets and liabilities, other than the goodwill and mergers. The carrying values of deferred tax assets are 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. Deferred tax is measured at enacted tax rates prevailing in the period or about to be enacted when the assets are realized, or liabilities are settled, and the tax is recognized as income or expense in the income statement. Nonetheless, if the deferred tax is related to assets directly associated with the equity in the same or different period, it is directly recognized in the equity accounts. According to a change in Corporate Tax Law, which were published in the Official Gazette dated December 5, 2017 and numbered 30261, Article 91 of the Law numbered 7061, Corporate Tax has been increased to 22% from 20% in order to be applied to the profits of the institutions for the taxation periods of 2018, 2019 and 2020. Within this context deferred tax is calculated using the related rates considering the periods when deferred tax assets and liabilities are realized. Even though, according to BRSA Article numbered BDDK.DZM 2/13/1-1a-3, dated December 8, 2004, there is no deferred tax allocated for general and free provision, the Bank has started to calculate deferred tax for the expected credit loss for Stage 1 and Stage 2 loans since January 2018. However, deferred tax is not calculated for free provisions. Deferred tax assets and liabilities are shown in financial tables by way of offsetting. 136 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 3. Tax Practices in the Countries that Foreign Branches Operate: Turkish Republic of Northern Cyprus (TRNC) In accordance with TRNC tax legislation, 15% income tax is accrued on the remaining tax base after 10% corporate tax is deducted from corporate income. The tax bases for companies are determined by adding the expenses that cannot be deducted according to TRNC regulations, to commercial gains and by subtracting exemptions and deductions from commercial gains. Income tax is paid in September, and corporate tax payment is made in two equal installments, in May and in October. On the other hand, withholding tax is paid in TRNC over interest income and similar gains of the companies. The related withholding tax payments are deducted from corporate tax payable and the difference between withholding amount and corporate tax payable is discounted from income tax provided that the withholding tax amount is higher than corporate tax amount. England Corporate earnings are subject to 19% corporate tax in England. The relevant rate is applied to the tax base that is determined by adding the expenses that cannot be deducted due to the regulations, to commercial gains and by subtracting exemptions and deductions from commercial gains. On the other hand, if the specific balance within the scope of the regulations’ tax base of the relevant year, is higher than the amount found the corporate tax payments are made as temporary tax payments in four installments in July and October of the relevant year and in January and April of the following year. Relevant temporary tax payments are deducted from the corporate tax that is finalized until the end of January of the second year following the relevant year. On the other hand, if the tax base is under the determined balance, corporate tax is paid by the end of September following the year that the profit is made. Bahrain Banks in Bahrain are not subject to tax according to the regulations of the country. The Republic of Iraq (Iraq) The corporate tax is 15% in Iraq. In central government-dependent cities tax is paid in the following year to the related tax administration by the end of May at the latest and in the cities under the administration of Northern Iraq tax is paid in the following year to the related tax administration by the end of September, at latest and the financial statements must be presented, and accrued taxes must be paid. In accordance with the agreement reached between the Central Administration of Iraq and the Northern Iraq Regional Government at the end of 2018, the corporate tax of the Bank’s Iraq Branches will be paid in Erbil in a consolidated manner starting from the 2017 financial period. Kosovo Corporate earnings are subject to income tax rate of 10% according to the Kosovo legislation. This ratio is applied to the tax base that will be calculated as a result of the implementation of exemptions, deductions, addition of disallowable expenses, to the corporate income and that are calculated in accordance with the tax laws. Tax has to be paid in advance until April, July, October and the 15th day of January of the following year by four installments. If those prepaid taxes are lower than the final corporate tax, the difference is paid until the end of March of the following year, in case of a claim made by the company, if it is higher, then the difference is returned to the institution by the tax authorities after the inspection conducted by those institutions. 4. Transfer Pricing: Transfer pricing is regulated through Article 13 of Corporate Tax Law titled “Transfer Pricing through Camouflage of Earnings”. Detailed information for the practice regarding the subject is found in the “General Communiqué Regarding Camouflage of Earnings through Transfer Pricing”. According to the aforementioned regulations, in the case of making purchase or sales of goods or services with relevant persons/corporations at a price that is determined against “arm’s length principle”, the gain is considered to be distributed implicitly through transfer pricing and such distribution of gains is not subject to deductions according to article 11 of Corporate Tax Law in means of corporate tax. XIX. Borrowings The Bank, whenever required, generates funds from individuals and institutions residing domestically and abroad by approaching the borrowing instruments in the form of syndication, securitization, collateralized borrowing and issue of bonds/bills. Such transactions are at first carried at acquisition cost, and in the following periods they are valued at amortized cost measured by using the effective interest rate method. XX. Equity Shares and Their Issuance Share issuance related to costs is recognized as expenses. Dividend income related with the equity shares are determined by the General Assembly of the Shareholders. Weighted average number of shares outstanding is taken into account in the calculation of earnings per share. In case the number of shares increases by way of bonus issues as a result of the capital increases made by using the internal sources, the calculation of earnings per share is made by adjusting the weighted average number of shares, which were previously calculated as at the comparable periods. The adjustment means that the number of shares used in calculation is taken into consideration as if the bonus issue occurred at the beginning of the comparable period. In case such changes in the number of shares occur after the balance sheet date, but before the ratification of the financial statements to be published, the calculation of earnings per share are based on the number of new shares. The Bank’s earnings per share calculations taking place in the income statement are as follows: Profit distributable to shareholders Weighted average number of share certificates (Thousand figure) Earnings per share - (in full TL) XXI. Bank Acceptances and Bills of Guarantee Current Period 6,067,587 112,502,250 0.053933028 Prior Period 6,769,085 112,502,250 0.060168441 Bill guarantees and acceptances are realized simultaneously with the customer payments and they are presented as possible liabilities and commitments in the off-balance sheet accounts. XXII. Government Incentives There are no government incentives utilized by the Bank, during the current or prior accounting periods. 137 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) XXIII. Segment Reporting Business segment is the part of an enterprise, - which conducts business operations where it can gain revenues and make expenditures (including the revenues and expenses related to the transactions made with the other parts of the enterprise), - whose operating results are regularly monitored by the authorities with the power to make decisions related to the operations of the enterprise in order to make decisions related to the funds to be allocated to the segment and to evaluate the performance of the segment, and - which has its separate financial information. Information on the Bank’s business segmentation and related information is explained in Section IV, Note XII. XXIV. Other Disclosures As of January 1, 2019, operating leases within the framework of the “TFRS 16-Leases” standard are recognized in a similar manner to financial leases. During transition by the Bank, simplified application was preferred, and, in this context, comparative information has not been restated in the financial statements. According to the standard, the lease agreements are examined; their components, the lease periods and the amounts are evaluated by categories, by taking the exceptions and similar items into account. For the contracts considered within the scope of TFRS 16, at the initial application date and/or at the time of signing the contract, the leasing liability and the right to use asset are reflected in the financial statements. The direct costs incurred by the lessee in the beginning were evaluated, it is concluded that amounts are insignificant, initial costs are not included in the right of use asset. In accordance with TFRS 16, the right of use asset can be measured with its cost or fair value, and the Bank measures the right of use assets with its cost. The net lease liability is calculated by discounting the future lease payments by the use of the Bank or alternative borrowing interest rates at the date of initial application or contract date. Fixed assets which are recognized as right of use asset are subject to straight-line depreciation considering the lease period. Interest expenses related to the lease liabilities and foreign exchange differences are associated with statement of income. The effect of TFRS 16 on financial statements, in accordance with the selected transition method and related accounting policies, is given below. Tangible Assets (Net) Liabilities for Leasing Transactions (Net-Discounted with borrowing rate) 01.01.2019 6,652,094 1,492,531 31.12.2019 6,462,567 1,396,263 138 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) SECTION FOUR: INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE BANK I. Explanations on Shareholders’ Equity The capital adequacy standard ratio of the bank is 17.87%. (December 31, 2018: 16.49%) COMMON EQUITY TIER I CAPITAL Paid-in Capital to be Entitled for Compensation after All Creditors Share Premium Legal Reserves Other Comprehensive Income according to TAS Profit Net Current Period Profit Prior Period Profit Bonus Shares from Associates, Subsidiaries and Joint-Ventures not Accounted in Current Period’s Profit Common Equity Tier I Capital Before Deductions 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 Leasehold improvements on operational leases Goodwill Netted with Deferred Tax Liabilities Current Period Amount as per the regulation before 1/1/2014 (*) 6,115,938 5,814 33,424,238 8,556,156 11,975,585 6,067,587 5,907,998 60,077,731 673,959 60,218 Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights 842,016 842,016 Remaining after deducting from the related deferred tax liability with the deferred tax asset based on future taxable income, except for deferred tax assets based on temporary differences 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 1 Capital 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 (amount above 10% threshold) Net Deferred Tax Assets arising from Temporary Differences Exceeding the Threshold of Tier I Capital Amount Exceeding the 15% Threshold of Tier 1 Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks The Portion of Net Long Position of the Investments in Equity Items of Consolidated Banks and Financial Institutions where the Bank owns 10% or more of the Issued Share Capital not deducted from Tier 1 Capital Excess Amount arising from Mortgage servicing rights Excess Amount arising from Deferred Tax Assets from Temporary Differences Other items to be defined by the regulator 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 Total Common Equity Tier I Capital 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 530,307 2,106,500 57,971,231 139 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Current Period Amount as per the regulation before 1/1/2014 (*) Total of Net Long Positions of the Investments in Equity Items of Consolidated Banks and Financial Institutions where the Bank does not own 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 Consolidated Banks and Financial Institutions where the Bank owns more than 10% of the Issued Share Capital Other items to be Defined by the regulator 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 Evaluation of Capital Adequacy of Banks (-) Net Deferred Tax Asset/Liability not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy 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) 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) Tier II Capital Before Total Deductions 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 The Total of Net Long Position 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 Tier I Capital (-) The Total 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 Exceeding the 10% Threshold of Tier I Capital (-) Other items to be Defined by the regulator (-) Total Deductions from Tier II Capital Total Tier II Capital Total Equity (Total Tier I and Tier II Capital) Deductions from Total Equity (Tier I Capital and Tier II Capital) Loans Granted against the Articles 50 and 51 of the Banking Law Net Book Values of Movables and Immovable’s 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 Other items to be Defined by the regulator 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 Consolidated Banks and Financial Institutions where the Bank does not own 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not deducted from Tier I Capital, Additional Core 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 Consolidated 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 Total of Net Long Positions of the Investments in Equity Items of Consolidated 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 Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank owns 10% of the Issued Share Capital, Deferred tax assets based on temporary differences and the right to offer mortgage as per the Temporary Article 2, Clause 1, Sub Clause 1 and 2 of the Regulation CAPITAL Total Capital (Total of Tier I Capital and Tier II Capital) Total Risk Weighted Assets 57,971,231 5,195,000 1,627,800 4,405,791 11,228,591 11,228,591 69,199,822 973 135 838 69,198,849 387,338,812 140 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Current Period Amount as per the regulation before 1/1/2014 (*) CAPITAL ADEQUACY RATIOS Common Equity Tier I Capital Ratio (%) Tier I Capital Ratio (%) Capital Adequacy Ratio (%) BUFFERS Total Additional Common Equity Requirement Ratio (a+b+c) a) Capital Conservation Buffer Ratio (%) b) Bank-specific Counter-Cyclical Capital Buffer Ratio (%) c) Systematic Important Bank Buffer Ratio (%) Additional Common Equity Tier I Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation (%) 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 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) General Loan Provisions for Exposures in Standard Approach Limited by 1,25% of Risk Weighted Assets Total Loan Provision that Exceeds Total Expected Loss Calculated According to the Communiqué on Calculation of Credit Risk by Internal Ratings Based Approach Total Loan Provision that Exceeds Total Expected Loss Calculated According to the Communiqué 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 January 2018-1 January 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 (*) Represents the amounts taken into consideration according to transition clauses. 14.97 14.97 17.87 2.551 2.500 0.051 0.000 8.97 220,768 1,831,108 5,476,404 4,405,791 1,627,800 6,618,200 141 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) COMMON EQUITY TIER I CAPITAL Paid-in Capital to be Entitled for Compensation after All Creditors Share Premium Legal Reserves Other Comprehensive Income according to TAS Profit Net Current Period Profit Prior Period Profit Bonus Shares from Associates, Subsidiaries and Joint-Ventures not Accounted in Current Period’s Profit Common Equity Tier I Capital Before Deductions 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 Leasehold improvements on operational leases Goodwill Netted with Deferred Tax Liabilities Amount as per the regulation before 1/1/2014 (*) Prior Period 6,115,938 5,532 26,663,782 6,796,903 12,762,269 6,769,085 5,993,184 52,344,424 2,623,800 69,413 Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights 598,577 598,577 Deferred Tax Assets that Rely on Future Profitability Excluding Those Arising from Temporary Differences (net of related tax 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 1 Capital 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 more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital Mortgage servicing rights (amount above 10% threshold) Deferred Tax Assets arising from Temporary Differences Exceeding the 10% Threshold of Tier I Capital Amount Exceeding the 15% Threshold of Tier 1 Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Evaluation of Capital Adequacy 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 1 Capital Mortgage servicing rights (amount above 10% threshold) Excess Amount arising from Deferred Tax Assets from Temporary Differences Other items to be defined by the regulator 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 Total Common Equity Tier I Capital 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 1 Capital Direct and Indirect Investments of the Bank on its own Additional Core 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 1 Capital The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier 1 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 regulator Items to be Deducted from Tier 1 Capital during the Transition Period Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) 142 3,291,790 49,052,634 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Amount as per the regulation before 1/1/2014 (*) Prior Period Net Deferred Tax Asset/Liability not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) Deduction from Additional Tier 1 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) 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) Tier II Capital before Regulatory Deductions 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 (-) The Total of Net Long Position of the Direct or Indirect Investments in Additional Core 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 regulator Total Deductions from Tier II Capital Total Tier II Capital Total Equity (Total Tier I and Tier II Capital) Deductions from Total Equity Loans Granted against the Articles 50 and 51 of the Banking Law Net Book Values of Movables and Immovable’s 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 Other items to be Defined by the regulator Items to be Deducted from the Sum of Tier I and Tier II Capital (Capital) During the Transition Period Portion of the total of net long positions of investments made in Common Equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or less of the issued common share capital exceeding 10% of Common Equity of the Bank not to be deducted from the Common Equity, Additional Tier I Capital, Tier II Capital as per the 1st clause of the Provisional Article 2 of the Regulation on the Equity of Banks, Portion of the total of net long positions of direct or indirect investments made in Additional Tier I and Tier II Capital items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital exceeding 10% of Common Equity of the Bank not to be deducted from the Additional Tier I Capital and Tier II Capital as per the 1st clause of the Provisional Article 2 of the Regulation on the Equity of Banks Portion of the total of net long positions of investments made in Common Equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital, deferred tax assets based on temporary differences and mortgage servicing rights not deducted from Common Equity as per the 1st and 2nd Paragraph of the 2nd clause of the Provisional Article 2 of the Regulation on the Equity of Banks CAPITAL Total Capital (Total of Tier I Capital and Tier II Capital) Total Risk Weighted Assets CAPITAL ADEQUACY RATIOS Common Equity Tier I Capital Ratio (%) Tier I Capital Ratio (%) Capital Adequacy Ratio (%) BUFFERS Total Additional Common Equity Requirement Ratio (a+b+c) d) Capital Conservation Buffer Ratio (%) e) Bank-specific Counter-Cyclical Capital Buffer Ratio (%) f) Systematic Important Bank Buffer Ratio (%) Additional Common Equity Tier I Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation 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 49,052,634 3,720,000 2,105,200 4,077,654 9,902,854 9,902,854 58,955,488 4,958 2,824 2,134 58,950,530 357,502,189 13.72 13.72 16.49 1.915 1.875 0.040 0.000 7.721 143 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Amount as per the regulation before 1/1/2014 (*) Prior Period 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 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) General Loan Provisions for Exposures in Standard Approach Limited by 1,25% of Risk Weighted Assets Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué on Calculation of Credit Risk by Internal Ratings Based Approach Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué 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 January 1,2018-January 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 (*) Represents the amounts taken into consideration according to transition clauses. 181,741 1,492,906 5,052,022 4,077,654 2,105,200 5,230,800 144 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Details on Subordinated Liabilities: Issuer Türkiye İş Bankası A.Ş. Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) US900151AB70 - XS0847042024 US900151AF84 - XS1003016018 Türkiye İş Bankası A.Ş. US90016BAF58 - XS1623796072 Governing law(s) of the instrument With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. Taking into account in equity calculation Subject to 10% deduction as of 1/1/2015 Yes No No Eligible at unconsolidated/consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Instrument type Amount recognized in regulatory capital (Currency in million TL, as of most recent reporting date) Par value of instrument Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory (BRSA) approval Optional call date, contingent call dates and redemption amount Bond 214 5,890 Bond 1,414 2,356 Bond 2,945 2,945 Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities 24.10.2012 Dated 10 Years Yes 10.12.2013 Dated 10 Years Yes 29.06.2017 Dated 11 Years Yes The Bank; (1) provided that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date a) can purchase b) can redeem all bonds if any taxes imposed or levied (2) can redeem all bonds in case of the deduction from equity. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) in case of the tax situation arises (b) can redeem all bonds in case of the deduction from equity. The Bank has the option to repay all of the related bonds on June 29, 2023 provided that subject to having obtained the prior approval of the BRSA. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) in case of the tax situation arises (b) can redeem all bonds in case of the deduction from equity. Subsequent call dates, if applicable None. Coupons/dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem Fixed 6% None. None. None. None. Fixed 7.85% None. None. None. None. Fixed 7% None. None. None. Noncumulative or cumulative Noncumulative Convertible or non-convertible None. Noncumulative None. Noncumulative None. If convertible, conversion trigger (s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into 145 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Write-down feature None If write-down, write-down trigger(s) In accordance with Regulations on Equities of Banks, Article 8(2) (h), bonds have deleted option from records. In accordance with Regulations on Equities of Banks, Article 8(2) (h), bonds have deleted option from records. Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). Partially or completely Partially or completely Permanent Permanent If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. In compliance with article number 7 and 8 of Regulation on Bank Capital Yes Yes Yes Details of incompliances with article number 7 and 8 of Regulation on Bank Capital Don’t vest with the conditions stated in clause of the Article 7 and the clause of 8.2. (h) To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. 146 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Issuer Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) TRSTISB72712 Türkiye İş Bankası A.Ş. TRSTISB62911 Türkiye İş Bankası A.Ş. TRSTISB92918 Governing law(s) of the instrument Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Taking into account in equity calculation Subject to 10% deduction as of 1/1/2015 No No No Eligible at unconsolidated/consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Instrument type Amount recognized in regulatory capital (Currency in million TL, as of most recent reporting date) Bond 1,100 Par value of instrument(million TL) 1,100 Bond 800 800 Bond 350 350 Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory (BRSA) approval Optional call date, contingent call dates and redemption amount Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities 08.08.2017 Dated 10 Years Yes 19.06.2019 Dated 10 Years Yes 26.09.2019 Dated 10 Years Yes The Bank; (1) provided that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date a) can purchase b) can redeem all bonds if any taxes imposed or levied (2) can redeem all bonds in case of the deduction from equity. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) in case of the tax situation arises (b) can redeem all bonds in case of the deduction from equity. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) in case of the tax situation arises (b) can redeem all bonds in case of the deduction from equity. Subsequent call dates, if applicable None. Interest/Dividend Payment Fixed or floating coupon/dividend payments Floating None. Floating None. Floating Coupon rate and any related index Government Debt Security for 5 years+350 base points TRLIBOR with 3 month maturity + 100 base points Government Debt Security for 5 years+350 base points None. None. None. Noncumulative None. None. None. None. Noncumulative None. Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem None. None. None. Noncumulative or cumulative Noncumulative Convertible into equity shares None. If convertible, conversion trigger (s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into 147 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Write-down feature If write-down, write-down trigger(s) In accordance with Regulations on Equities of Banks, Article 8(2) (h), bonds have deleted option from records. In accordance with Regulations on Equities of Banks, Article 8(2) (h), bonds have deleted option from records. In accordance with Regulations on Equities of Banks, Article 8(2) (h), bonds have deleted option from records. Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). If write-down, full or partial Partially or completely Partially or completely Partially or completely If write-down, permanent or temporary Permanent Permanent Permanent If temporary write-down, description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. In compliance with article number 7 and 8 of Regulation on Bank Capital Yes Yes Yes Details of incompliances with article number 7 and 8 of Regulation on Bank Capital To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. Explanations on the reconciliation of amounts on the equity items statement and amounts on the balance sheet: Current Period Shareholders’ equity Leasehold improvements on operational leases Goodwill and intangible assets Provision Subordinated debt Deductions from shareholders’ equity Capital Carrying Amount 58,873,465 60,218 913,509 5,476,404 13,546,931 973 Amounts in Equity Calculation (*) 58,873,465 (60,218) (842,016) 4,405,791 6,822,800 (973) 69,198,849 (*) The related amounts are calculated in accordance with “Regulation on Equities of Banks”. In this context, part of the expected credit loss of stage 1 and stage 2 up to 1.25% of amount subject to credit risk, part; subordinated loans according to the fourth article of the regulation, have been taken into consideration in equity calculation. 148 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) II. Explanations on Credit Risk 1. Credit risk is defined as the possibility of incurring loss where the counterparty in a transaction, partially or completely fails to meet its contractual obligations in due time in an agreement with the Bank. The Bank’s position against the credit risk limits defined by the current legislation is monitored by the Board. Within this framework, loans extended to Risk Groups and the Bank’s Risk Group, including the Bank; loans in high amounts and limitations regarding the shares in participations are monitored according to the limits determined in connection with the size of the shareholders’ equity. Credit risk limits of customers are determined depending on the financial situation and loan requirements of the borrowers, in strict compliance with the relevant banking legislation, within the framework of loan authorization limits of Branches, Regional Offices, Loan Divisions, the Deputy Chief Executives responsible for loans, the CEO, the Credit Committee and Board of Directors. These limits may be changed as may be deemed necessary by the Bank. Moreover, all commercial credit limits are revised periodically, provided that each period does not exceed a year. Furthermore, the borrowers and borrower groups forming a large proportion of the overall placement are subject to risk limits in order to provide further minimization of potential risk. The geographical distribution of borrowers is consistent with the concentration of industrial and commercial activities in Turkey. The distribution of borrowers by sector is monitored closely for each period and sectoral risk limits have been determined to prevent concentration of risk in sectoral sense. The credit-worthiness of customers is monitored on a consistent basis by using company rating and scoring models specially developed for this purpose, and the audit of statements of account received is assured to have been made in accordance with the provisions as stipulated by the relevant legislation. Utmost importance is given to ensure that loans are furnished with collaterals. Allocation decision, by the definition of credit risk, is not based on the assumption of colletarals can be liquidized. Most of the loans extended are collateralized by taking real estate, movable or commercial enterprise under pledge, promissory notes and other liquid assets as collateral, or by acceptance of bank letters of guarantee and individual or corporate guarantees. Jurisdictional applicability of collaterals in default, time required to convert to money and ability to maintain expected values are taken into consideration from the beginning of the credit allocation process. Most of the loans are collateralized by the receipt of real estate and securities pledge, commercial enterprise pledge, exchange notes and other liquid securities receivables, bank letters of guarantees and surety of other persons and institutions. It is an important element of the credit policy that disinclude concentration on collateral. Non-performing and impaired loans has been classified in accordance with the “TFRS 9-Financial Instruments” and BRSA’s “Regulation on Procedures and Principles for Classification of Loans and Provisions to be set aside”. The detailed descriptions of these methods correspond with accounting practices, are included in Section Three Note VIII. Amount subject to credit risk (*) Risk Classifications Current Period Risk Amount Average Risk Amount (**) Conditional and unconditional exposures to central governments or central banks 143,667,258 131,958,197 Conditional and unconditional exposures to regional governments or local authorities Conditional and unconditional exposures to administrative bodies and non-commercial undertakings Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Conditional and unconditional exposures to banks and brokerage houses Conditional and unconditional exposures to corporates Conditional and unconditional retail exposures Exposures secured by residential real estate property Exposures secured by commercial real estate property Past due items Items in regulatory high-risk categories Exposures in the form of bonds secured by mortgages Securitization positions Short term exposures to banks, brokerage houses and corporates Exposures in the form of collective investment undertakings Other items Share Certificate Investment (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) Average risk amounts are the arithmetical average of the amounts in quarterly reports prepared. 144,922 428,064 331 26,069,632 204,233,221 77,240,762 14,259,232 21,176,664 8,557,443 503,903 1,273,213 15,576,032 21,504,378 92,182 448,584 318 26,377,037 199,943,841 64,373,859 16,126,271 23,173,756 7,480,179 562,539 1,325,284 15,175,975 19,879,885 149 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Credit risk is the risk reduction effects without taking into consideration the total amount of exposures after offsetting transactions with different risk classes according to the types and amounts of disaggregated risks are listed below the average for the period. 2. There are certain control limits on forward transactions in terms of counter parties, and the risks taken for derivative instruments are evaluated along with other potential risks resulting from the market fluctuations. 3. As a result of the current level of customers’ needs and the progress in the domestic market in this particular area, the Bank uses derivative transactions either for hedging or for commercial purposes. Derivative instruments with a remarkable volume are monitored with consideration that they can always be liquidated in case of need. 4. Indemnified non-cash loans are considered as having the same risk weights as unpaid cash loans. The rating and scoring systems applied by the Bank, includes detailed company analysis and enables rating of all companies and loans without any restrictions regarding credibility. Loans and companies, which have been renewed, restructured or rescheduled, are rated within the scope of this system. Specialized loans are evaluated by a special rating system, which is based on the credibility of the counterparty as well as the feasibility and risk analysis of the cash flows created mainly by the projects undertaken or the asset financed. 5. Lending transactions abroad are conducted by determining the country risks of related countries within the context of the current rating system and by taking the market conditions, country risks, and the relevant legal limitations into account. Furthermore, the credibility of banks and other financial institutions established abroad is examined within the framework of the ratings that are determined by rating agencies and backed with CDS-IR (based on credit default swap) ratings and credit limits are assigned to the related banks and financial institutions accordingly. 6. (i) The share of the Bank’s receivables from the top 100 and 200 cash loan customers in the overall cash loan portfolio stands at 28%, 36%, respectively (December 31, 2018: 28%, 36%). (ii) The share of the Bank’s receivables from the top 100 and 200 non-cash loan customers in the overall non-cash portfolio stands at 45%, 57% respectively (December 31, 2018: 46%, 58%). (iii) The share of the Bank’s cash and non-cash receivables from the top 100 and 200 loan customers in the overall cash and non-cash loans stands at 17%, 23%, respectively (December 31, 2018: 18%, 24%). Companies that are among the top loan customers ranked according to cash, non-cash and total risks are leaders in their own sectors, the loans advanced to them are in line with their volume of industrial and commercial activity. A significant part of such loans is extended on a project basis, with their repayment sources being analyzed in accordance with the banking principles to be considered as satisfactory and associated risks are determined and duly covered by obtaining appropriate guarantees when deemed necessary. 7. The total value of the stage 1 and stage 2 expected credit loss allocated for credit risk stands at TL 5,154,031. 8. The Bank measures the quality of its loan portfolio by applying different rating/scoring models on cash commercial/corporate loans, retail loans and credit cards. The breakdown of the rating/scoring results, which are classified as “Strong”, “Standard” and “Below Standard” by considering their default features, is shown below. The loans whose borrowers’ capacity to fulfill their obligations is very good, are defined as “Strong”, whose borrowers’ capacity to fulfill its obligations in due time is reasonable, are defined as “Standard” and whose borrowers’ capacity to fulfill their obligations is poor, are defined as “Below Standard”. Strong Standard Below Standard Current Period Prior Period 43.92% 47.42% 8.66% 40.93% 52.77% 6.30% The table data comprises behavior rating/scoring results. 9. The net values of the collaterals of the closely monitored loans are given below in terms of collateral types and risk matches. Type of Collateral Real Estate Mortgage (*) Cash Collateral (Cash, securities pledge, etc.) Pledge on Wages and Vehicles Cheques & Notes Personal 978,177 28,982 1,199,790 Current Period Commercial and Corporate 6,911,845 172,846 382,587 460 Credit Cards Personal 1,155,631 12,096 767,868 Prior Period Commercial and Corporate 6,749,581 204,022 289,508 2,521 Credit Cards Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Non-collateralized Total 243,349 1,194,740 22,182,474 2,140,828 1,138,507 198,675 843,252 19,057,673 2,081,807 1,096,016 3,645,038 31,791,040 1,138,507 2,977,522 28,385,112 1,096,016 (*) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair values of collaterals in expertise reports; and after comparing the results to the mortgage/pledge amounts and loan balances, the smallest figures are considered to be the net value of collaterals. 150 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 10. The net values of the collaterals of non-performing loans are given below in terms of collateral types and risk matches. Type of Collateral Real Estate Mortgage (*) Cash Collateral Vehicle Pledge Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Current Period Prior Period Net Value of the Collateral 5,423,511 437 348,010 6,516,987 Loan Balance 5,423,511 437 348,010 6,516,987 Net Value of the Collateral 3,680,124 921 461,856 765,546 Loan Balance 3,680,124 921 461,856 765,546 (*) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair values of collaterals in expertise reports, and after comparing the results to the mortgage/pledge amounts and loan balances the smallest figures are considered to be the net value of collaterals. 11. The aging analysis of the recievables past due but not impaired in terms of financial asset classes, is as follows: Current Period (*) Loans Corporate/Commercial Loans Consumer Loans Credit Cards Total 31-60 Days (**) 61-90 Days (**) Total 371,078 95,921 189,052 656,051 636,254 53,600 81,662 771,516 1,007,332 149,521 270,714 1,427,567 (*) The loans classified as closely monitored that are not past due or past due for less than 31 days is TL 31,945,921. (**) Related figures show only overdue amounts of installment based commercial loans and installment-based consumer loans; the principal amounts of the loans which are not due as of the balance sheet date are equal to TL 2,363,979 and TL 837,118 respectively. Prior Period (*) Loans Corporate/Commercial Loans Consumer Loans Credit Cards Total 31-60 Days (**) 61-90 Days (**) Total 300,587 93,586 240,207 634,380 700,730 47,161 90,383 838,274 1,001,317 140,747 330,590 1,472,654 (*) The loans classified as closely monitored that are not past due or past due for less than 31 days is TL 27,894,848. (**) Related figures show only overdue amounts of installment based commercial loans and installment-based consumer loans; the principal amounts of the loans which are not due as of the balance sheet date are equal to TL 2,152,368 and TL 938,780 respectively. 151 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 12. Profile of significant exposures in major regions Domestic European Union OECD Countries (**) Off-Shore Banking Regions USA, Canada Other Countries Investments in Associates, Subsidiaries and Jointly Controlled Entities Undistributed Assets/ Liabilities (***) Total 140,965,666 724 667,385 2,033,483 143,667,258 Current Period Risk Groups (*) Contingent and Non-Contingent Receivables from Central Governments or Central Banks (****) Contingent and Non-Contingent Receivables from Regional Government or Domestic Government Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises Contingent and Non-Contingent Receivables from Multilateral Development Banks Contingent and Non-Contingent Receivables from International Organizations Contingent and Non-Contingent Receivables from Banks and Intermediaries Contingent and Non-Contingent Corporate Receivables Contingent and Non-Contingent Retail Receivables Contingent and Non-Contingent Receivables Secured by Residential Property 144,915 427,971 331 7 93 4,996,816 13,657,672 1,743,227 10,361 4,709,354 952,202 198,071,661 1,369,703 9,263 806,724 785,441 3,190,429 75,806,832 363,781 31,764 1,175 28,893 1,008,317 Non-Performing Receivables 8,545,147 4,371 35,168,937 166,019 27,218 213 253 13,114 2,856 Receivables are identified as high risk by the Board Secured Marketable Securities Securitization Positions Short-term Receivables and Short- term Corporate Receivables from Banks and Intermediaries 503,896 2 4 60,355 4,856 1 Investments as Collective Investment Institutions 1,273,213 Other Receivables 15,557,343 13,018 5,671 Share Certificate Investments 21,504,378 Total 481,462,397 15,575,621 1,817,360 818,513 6,207,043 7,249,743 21,504,378 534,635,055 (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) OECD countries other than EU countries, USA and Canada (***) Assets and liabilities that are not consistently allocated. (****) Credits guaranteed by the Undersecretariat of Treasury are included in the class of receivables from central government. 152 144,922 428,064 331 26,069,632 204,233,221 77,240,762 35,435,896 8,557,443 503,903 1,273,213 15,576,032 21,504,378 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Risk Groups (*) Contingent and Non-Contingent Receivables from Central Governments or Central Banks (****) Contingent and Non-Contingent Receivables from Regional Government or Domestic Government Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises Contingent and Non-Contingent Receivables from Multilateral Development Banks Contingent and Non-Contingent Receivables from International Organizations Contingent and Non-Contingent Receivables from Banks and Intermediaries Contingent and Non-Contingent Corporate Receivables Contingent and Non-Contingent Retail Receivables Contingent and Non-Contingent Receivables Secured by Residential Property Receivables are identified as high risk by the Board Secured Marketable Securities Securitization Positions Short-term Receivables and Short- term Corporate Receivables from Banks and Intermediaries Investments as Collective Investment Institutions Other Receivables Equity Investments Total Domestic European Union OECD Countries (**) Off-Shore Banking Regions USA, Canada Other Countries Investments in Associates, Subsidiaries and Jointly Controlled Entities Undistributed Assets/ Liabilities (***) Total 116,732,376 999 1,510,139 118,243,514 75,464 325,004 300 2 71 5,130,184 13,989,531 1,702,276 131,544 3,755,795 1,311,916 195,230,429 1,294,315 2,939 585,155 72,334 3,550,648 59,147,523 279,597 28,772 1,307 23,869 734,386 Non-Performing Receivables 4,608,220 7,974 91 40,779,295 221,627 36,634 441 158,550 3 201,115 14,151,398 19,235 452 56,582 9,354 764 17,921,378 436,539,558 15,794,346 1,770,712 718,447 3,871,685 7,173,862 17,921,378 483,789,988 (*) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. (**) OECD countries other than EU countries, USA and Canada (***) Assets and liabilities that are not consistently allocated (****) Credit Guarantee Fund guaranteed by the Undersecreteriat of Treasury are included in the receivables from central governments. 153 75,466 325,075 300 26,021,246 200,735,820 60,215,454 41,113,814 4,626,091 159,317 201,115 14,151,398 17,921,378 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 13. Risk profile by sectors or counterparties: (1) (**) (2) Sectors/Counterparty (*) Agricultural Farming and Raising Livestock Forestry Fishing Industry Mining Production Electricity, gas, and water Construction Services Wholesale and Retail Trade Hotel, Food and Beverage Services Transportation and Telecommunication Financial Institutions Real Estate and Renting Services Self-Employment Services Education Services Health and Social Services 188,628 179,340 3,877 5,411 3,528,886 102,088 3,371,969 54,829 1,410,614 56,197,927 4,497,551 290,229 634,217 50,192,126 156,839 90,982 151,608 184,375 Current Period Bank (4) (5) (6) (7) (8) (9) (10) (11) (12) (14) TL FC Total Current Period Bank (13) 1,475,880 1,983,848 871,594 1,956,328 7,308 596,978 8,987 18,533 422,272 302,666 1,219 118,387 91,537,080 5,239,668 6,726,674 4,224,788 125,928 64,597 53,115,648 4,955,250 5,476,577 34,196,644 158,490 1,185,500 27,374,248 3,048,831 3,203,966 331 26,014,301 67,196,748 21,212,509 13,658,913 1,246,769 24,468,088 12,641,853 7,298,968 4,734,965 1,385,057 1,817,290 17,836,736 4,580,076 1,659,050 (3) 542 542 157,275 15 157,260 4,797 224,951 1,159 77 703 160,951 331 26,014,301 8,747,894 320,343 452,677 1,246,769 8,724 45,783 7,296 258 6,426,919 836,644 681,023 3,464,479 868,913 582,752 302,876 530,639 1,533,123 258,673 280,849 358,283 Other Total 82,341,203 143,667,258 144,922 144,922 40,499 428,064 331 26,069,632 204,233,221 77,240,762 35,435,896 55,331 16,649,265 45,755,906 11,424,071 233,965 503,903 26,444 1,273,213 15,576,032 15,576,032 453,227 139,772,752 33,443,013 173,215,765 21,504,378 281,735,438 252,899,617 534,635,055 75,181 66,073 756 8,352 2,719,968 18,327 1,241,458 1,460,183 1,209,031 4,038,363 1,162,476 216,881 150,211 2,306 2,429,427 47,155 14,789 15,118 514,900 8,557,443 6,185 4,469 7 1,709 67,457 298 62,125 5,034 73,416 122,880 77,165 3,518 24,878 202 1,902 14,123 378 714 9,876,039 42,475,683 77,377,364 119,853,047 3,254,394 3,193,721 22,153 38,520 708,379 34,852,339 6,914,965 14,680,271 81,552,338 35,325,899 898,142 187,291 1 710,850 3,827,647 43,246,742 30,302,975 21,644,632 4,152,536 3,381,012 22,154 749,370 4,536,026 78,099,081 37,217,940 36,324,903 119,536,466 201,088,804 14,874,179 50,200,078 3,437,268 5,010,749 8,448,017 9,610,586 21,867,072 15,345,922 74,506,403 24,956,508 96,373,475 7,169,297 1,486,916 1,128,051 1,527,249 6,072,632 13,241,929 389,196 310,768 3,026,617 1,876,112 1,438,819 4,553,866 9,876,039 11,175,112 52,818 70,637 9,235,575 1,816,082 (1) Contingent and non-contingent exposures to central governments or central banks (2) Contingent and non-contingent exposures to regional governments or local authorities (3) Contingent and non-contingent exposures to administrative bodies and non-commercial undertakings (4) Contingent and non-contingent exposures to multilateral development banks (5) Contingent and non-contingent exposures to international organizations (6) Contingent and non-contingent exposures to banks and brokerage houses (7) Contingent and non-contingent corporate receivables (8) Contingent and non-contingent retail receivables (9) Contingent and non-contingent exposures secured by real estate property (10) Past due receivables (11) Receivables in regulatory high-risk categories (12) Other receivables (13) Share Certificate Investments (14) Stock Investments (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) Credit Guarantee Fund guaranteed by the undersecreteriat of treasury are included in the receivables from central governments. 154 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 13. Risk profile by sectors or counterparties: Sectors/Counterparty (*) Agricultural Farming and Raising Livestock Forestry Fishing Industry Mining Production Construction Services Electricity, gas, and water Wholesale and Retail Trade Hotel, Food and Beverage Services Transportation and Telecommunication Financial Institutions Real Estate and Renting Services Self-Employment Services Education Services Health and Social Services 188,628 179,340 3,877 5,411 3,528,886 102,088 3,371,969 54,829 1,410,614 56,197,927 4,497,551 290,229 634,217 50,192,126 156,839 90,982 151,608 184,375 (3) 542 542 157,275 15 157,260 4,797 224,951 1,159 77 703 8,724 45,783 7,296 258 331 26,014,301 67,196,748 21,212,509 13,658,913 160,951 331 26,014,301 8,747,894 320,343 452,677 1,475,880 1,983,848 871,594 1,956,328 7,308 596,978 8,987 18,533 422,272 302,666 1,219 118,387 91,537,080 5,239,668 6,726,674 4,224,788 125,928 64,597 53,115,648 4,955,250 5,476,577 34,196,644 158,490 1,185,500 27,374,248 3,048,831 3,203,966 24,468,088 12,641,853 7,298,968 4,734,965 1,385,057 1,817,290 17,836,736 4,580,076 1,659,050 6,426,919 836,644 681,023 3,464,479 868,913 582,752 302,876 530,639 1,533,123 258,673 280,849 358,283 Other Total 82,341,203 143,667,258 144,922 144,922 40,499 428,064 331 26,069,632 204,233,221 77,240,762 35,435,896 55,331 16,649,265 45,755,906 11,424,071 (1) Contingent and non-contingent exposures to central governments or central banks (2) Contingent and non-contingent exposures to regional governments or local authorities (3) Contingent and non-contingent exposures to administrative bodies and non-commercial undertakings (4) Contingent and non-contingent exposures to multilateral development banks (5) Contingent and non-contingent exposures to international organizations (6) Contingent and non-contingent exposures to banks and brokerage houses (7) Contingent and non-contingent corporate receivables (8) Contingent and non-contingent retail receivables (9) Contingent and non-contingent exposures secured by real estate property (10) Past due receivables (11) Receivables in regulatory high-risk categories (12) Other receivables (13) Share Certificate Investments (14) Stock Investments governments. (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) Credit Guarantee Fund guaranteed by the undersecreteriat of treasury are included in the receivables from central (1) (**) (2) (4) (5) (6) (7) (8) (9) (10) (11) (12) Current Period Bank Current Period Bank (13) 75,181 66,073 756 8,352 2,719,968 18,327 1,241,458 1,460,183 1,209,031 4,038,363 1,162,476 216,881 150,211 2,306 2,429,427 47,155 14,789 15,118 514,900 8,557,443 6,185 4,469 7 1,709 67,457 298 62,125 5,034 73,416 122,880 77,165 3,518 24,878 202 1,902 14,123 378 714 1,246,769 1,246,769 (14) TL FC Total 3,254,394 3,193,721 22,153 38,520 898,142 187,291 1 710,850 4,152,536 3,381,012 22,154 749,370 9,876,039 42,475,683 77,377,364 119,853,047 9,876,039 11,175,112 52,818 70,637 9,235,575 1,816,082 708,379 34,852,339 6,914,965 14,680,271 81,552,338 35,325,899 3,827,647 43,246,742 30,302,975 21,644,632 4,536,026 78,099,081 37,217,940 36,324,903 119,536,466 201,088,804 14,874,179 50,200,078 3,437,268 5,010,749 8,448,017 9,610,586 21,867,072 15,345,922 74,506,403 24,956,508 96,373,475 7,169,297 1,486,916 1,128,051 1,527,249 6,072,632 13,241,929 389,196 310,768 3,026,617 1,876,112 1,438,819 4,553,866 233,965 503,903 26,444 1,273,213 15,576,032 15,576,032 453,227 139,772,752 33,443,013 173,215,765 21,504,378 281,735,438 252,899,617 534,635,055 155 Financial Informationand Risk Managementİşbank Annual Report 2019 14. Analysis of maturity-bearing exposures according to remaining maturities: Time to Maturity Risk Groups (*) 1 Month 1-3 Months 3-6 Months 6-12 Months Over 1 Year Total Contingent and Non-Contingent Receivables from Central Governments or Central Banks Contingent and Non-Contingent Receivables from Regional Governments or Domestic Governments Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises The multilateral development banks and non-contingent receivables 1,455,969 2,729,897 2,333,754 2,984,504 83,508,506 93,012,630 101 123 3,395 10,250 131,036 144,905 6,388 2,594 331 27,869 172,832 203,545 413,228 331 Contingent and Non-Contingent Receivables from Banks and Intermediaries 11,201,447 1,333,885 674,603 4,491,216 3,967,417 21,668,568 Contingent and Non-Contingent Corporate Receivables 11,401,716 14,650,387 17,241,942 25,917,832 134,825,473 204,037,350 Contingent and Non-Contingent Retail Receivables 17,549,884 1,310,289 2,113,687 6,269,270 45,730,249 72,973,379 Contingent and Non-Contingent Collateralized Receivables with Real Estate Mortgages 1,218,847 830,274 1,352,414 2,270,663 27,755,841 33,428,039 Receivables are identified as High Risk by the Board 6,858 6,616 34,198 26,199 421,833 495,704 Total 42,841,210 20,864,396 23,781,862 42,142,766 296,543,900 426,174,134 (*) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. 15. Information on Risk Classes In the calculation of the amount subject to credit risk, determining the risk weights related to risk classes stated on the sixth article of “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, is based on the Fitch Ratings’ international rating. While receivables from resident banks in abroad which is assessed in the risk class of “Contingent and Non-Contingent Receivables from Banks and Brokerage Agencies” and receivables from central governments which is assessed in the risk class of “Contingent and Non-Contingent Receivables from Central Governments or Central Banks” will be subjected to risk weights with the scope of ratings; therefore domestic resident banks accepted as unrated, the risk weight is applied according to receivables from relevant banks, type of exchange and original maturity. If a receivable-specific rating is performed, risk weights to be applied on the receivable are determined by the relevant credit rating. The table related to mapping the ratings used in the calculations and credit quality grades, which is stated in the Annex of Regulation on Measurement and Evaluation of Capital Adequacy of Banks, is given below: Credit Quality Grades Risk Rating Risk Amounts according to Risk Weights 1 2 3 4 5 6 AAA via AA- A+ via A- BBB+ via BBB- BB+ via BB- B+ via B- CCC+ and lower Risk Weight Amount Before Credit Risk Mitigation (*) Amount After Credit Risk Mitigation 0% 20% 35% 50% 75% 100% 150% 250% Mitigation in Shareholders’ Equity 118,106,551 16,129,096 14,284,426 27,371,738 83,045,612 281,160,980 711,027 220,768 129,630,924 16,129,096 14,259,232 27,369,096 77,240,762 269,074,150 711,027 220,768 902,234 902,234 (*) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. 156 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 16. Miscellaneous Information According to Type of Counterparty or Major Sectors Significant Sectors/Counterparty Current Period Agricultural Farming and Raising Livestock Forestry Fishing Industry Mining Production Electricity, gas, and water Construction Services 1 1.1 1.2 1.3 2 2.1 2.2 2.3 3 4 4.1 Wholesale and Retail Trade Hotel, Food and Beverage Services Transportation and Telecommunication Financial Institutions Real Estate and Renting Services Self-Employment Services Education Services Health and Social Services Other Total 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5 6 Loans Depreciated (TFRS 9) Provisions Significant Increase in Credit Risk (Stage 2) Non-Performing (Stage 3) Expected Credit Loss (TFRS 9) 312,817 304,935 4,538 3,344 16,731,253 98,395 6,446,848 10,186,010 5,056,552 9,648,163 2,727,204 1,871,016 2,705,016 16,494 1,060,369 395,750 96,106 776,208 4,825,800 36,574,585 213,342 196,133 2,662 14,547 5,548,333 75,238 3,164,590 2,308,505 3,121,795 7,888,070 3,191,335 155,344 146,430 2,228 6,686 4,726,274 67,356 2,429,977 2,228,941 2,419,354 4,946,593 2,382,678 388,443 280,613 451,688 11,264 3,655,536 92,143 51,256 46,405 2,111,934 18,883,474 735,518 10,191 1,286,000 69,595 46,264 135,734 1,774,640 14,022,205 17. Information on Value Adjustments and Change in Credit Provisions: Beginning Balance Additional Provisions Reversal of Provisions Other Value Adjustment Ending Balance Stage 3 provisions Stage 1 and Stage 2 Provisions 6,565,598 5,588,117 (1,827,684) 4,747,362 3,302,822 (2,896,153) 18. Exposures Subject to Counter-cyclical Capital Buffer Country Turkey TRNC ABD Cayman Island England Malta Kosova Marshall Island Iraq Germany Other RWA Calculations for Private Sector Loans in Banking Book 280,629,348 2,379,190 RWA calculations for Trading Book 208,810 805,851 797,356 729,688 622,316 494,932 402,840 236,989 193,178 680,596 10,326,031 5,154,031 Total 280,838,158 2,379,190 805,851 797,356 729,688 622,316 494,932 402,840 236,989 193,178 680,596 157 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) III. Explanations on Currency Risk Foreign currency position risk for the Bank is a result of the difference between the Bank’s assets denominated in foreign currencies and indexed to foreign currencies and liabilities denominated in foreign currencies. Furthermore, parity fluctuations of different foreign currencies are another element of the currency risk. The currency risk is managed by the internal currency risk limits which are established as a part of the Bank’s risk policies. The Assets and Liabilities Committee and the Assets and Liabilities Management Unit meet regularly to take the necessary decisions for hedging exchange rate and parity risks within the framework of the limits determined by the “Net Foreign Currency Overall Position/Shareholders’ Equity” ratio which is a part of the legal requirement and limits specified by the Board of Directors. Foreign exchange risk management decisions are strictly applied. In measuring currency risk, both the Standard Method and the Value at Risk Model (VAR) are used as applied in the statutory reporting. Measurements made within the scope of the Standard Method are carried out on a monthly basis and form the basis of determining the capital requirement for hedging currency risk. Risk measurements made within the context of the VAR are practiced on a daily basis using the historical and Monte Carlo simulation methods. Scenario analyses are conducted to support the calculations made within the VAR context. The results of the measurements made on currency risk are reported to the Top Management and the risks are closely monitored by taking into account the market and the economic conditions. The Bank’s foreign currency purchase 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: Date December 31, 2019 December 30, 2019 December 27, 2019 December 26, 2019 December 25, 2019 December 24, 2019 USD 5.8900 5.8800 5.8879 5.8675 5.8637 5.8899 EURO 6.6100 6.5908 6.5721 6.5129 6.5029 6.5319 The Bank’s last 30-days arithmetical average foreign currency purchase rates: USD: 5.7882 TL EUR: 6.4339 TL Sensitivity to currency risk: The Bank’s sensitivity to any potential change in foreign currency rates has been analyzed. In the analysis presented below 10% change, which is also the amount used for the internal reporting purposes, is anticipated in USD, EUR, GEL and CHF. % Change in Foreign Currency Effects on Profit/Loss (*) Current Period USD EURO GEL CHF 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease (*) Indicates the values before tax. (138.012) 138.012 244.576 (244.576) 17.783 (17.783) 23.368 (23.368) Prior Period (160.019) 160.019 (99.584) 99.584 15.791 (15.791) 6.656 (6.656) 158 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Information on currency risk: Current Period Assets EUR USD Other FC Total Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey(1) Banks Financial Assets at Fair Value through Profit/Loss (2) Money Market Placements 19,907,933 19,405,074 1,607,546 558,234 8,092,819 4,048,443 8,657,704 2,570,584 47,970,711 12,270,949 4,606,677 Financial Assets at Fair Value Through Other Comprehensive Income 2,632,514 12,999,087 3,932 15,635,533 Loans (3) Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Financial Assets Measured at Amortised Cost Derivative Financial Assets Held for Risk Management Tangible Assets (2) Intangible Assets (2) Other Assets (2) Total Assets Liabilities Banks Deposits Foreign Currency Deposits (4) Money Market Funds Funds Provided from Other Financial Institutions Debt Securities Issued (5) Miscellaneous Payables Derivative Financial Liabilities Held for Risk Management Other Liabilities (2) Total Liabilities Net Balance Sheet Position Net Off Balance Sheet Position Derivative Financial Assets (6) Derivative Financial Liabilities (6) Non-Cash Loans Prior Period Total Assets Total Liabilities Net Balance Sheet Position Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities Non-Cash Loans 53,249,390 60,208,549 1,574,526 115,032,465 1,379,843 1,377,164 1,291,592 581,160 178,496 1,961,003 2,847,252 14,402 212 12,960 27,574 979,540 2,933,453 110,353 4,023,346 81,706,566 108,979,229 13,689,715 204,375,510 1,240,022 296,575 840,402 2,376,999 59,907,490 85,401,343 16,945,995 162,254,828 448,671 13,490,785 24,900,706 401,376 35,896,414 649,067 2,877 63,098 81,878 448,671 38,394,368 35,959,512 1,132,321 1,125,993 1,727,563 93,468 2,947,024 76,165,666 149,320,339 18,027,718 243,513,723 5,540,900 (40,341,110) (4,338,003) (39,138,213) (3,393,004) 40,826,778 4,911,925 42,345,699 12,347,552 15,740,556 55,005,759 14,178,981 28,080,966 29,667,289 5,993,884 1,081,959 3,337,566 73,347,195 31,001,496 61,085,821 65,522,826 110,947,613 10,011,605 186,482,044 61,997,818 142,428,984 11,720,651 216,147,453 3,525,008 (31,481,371) (1,709,046) (29,665,409) (4,844,836) 32,238,534 2,821,793 30,215,491 11,736,010 49,905,124 4,036,882 16,580,846 17,666,590 25,702,989 30,041,036 1,215,089 3,163,263 65,678,016 35,462,525 58,907,288 (1) Precious metals accounts amounting TL 8,271,399 are included. (2) In accordance with the Communiqué regarding the principles of the “Regulation on Measurement and Practices of Banks’ Net Overall FC Position/Shareholders’ Equity Ratio on a Consolidated and Unconsolidated Basis”, Foreign Currency Income Accruals of Derivative Financial Instruments (TL 1,115,642), Operating Lease Development Costs (TL 4,727), Intangible assets (TL 624), Deferred Tax Asset (TL 792,319), Prepaid Expenses (TL 102,981), Stage 1 and Stage 2 expected credit loss (TL (2,729,001)), Assets Held for Sale and Related to Discontinued Operations (1,366), in liabilities; Foreign Currency Expense Accruals of Derivative Financial Instruments (TL 505,494) and Shareholders’ Equity (TL (375,900)) in Stage 1 and Stage 2 expected credit loss for non-cash loans (TL 68,110) in liabilities are not included in currency risk calculations. (3) Foreign currency indexed loans amounting TL 1,529,217 presented in TL loans in the balance sheet are included in the table above. TL 593,495 is USD indexed, TL 929,312 is EUR indexed, TL 1,177 is CHF indexed, TL 5,132 is GBP indexed, TL 101 is JPY indexed. (4) Precious metals deposit accounts amounting TL 10,432,383 are included. (5) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. (6) The derivative transactions within the context of forward foreign currency options and foreign currency forwards definitions included in the Communiqué above are taken into consideration. 159 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Explanations on Interest Rate Risk Interest rate risk is defined as the impairment in the value of the Bank’s interest sensitive Asset, liabilities and off-balance sheet items due to interest rate fluctuations. The method of average maturity gap according to the repricing dates is used for measuring the interest rate risk arising from the banking accounts, whereas the interest rate risk related to interest sensitive financial instruments followed under trading accounts is assessed within the scope of market risk. Potential effects of interest rate risk on the Bank’s assets and liabilities, market developments, the general economic environment and expectations are regularly followed in meetings of the Asset-Liability Committee, where further measures to reduce risk are taken when necessary. The Bank’s on and off-balance sheet interest sensitive accounts other than the assets and liabilities exposed to market risk are monitored and controlled by the limits on the ratio of structural interest rate risk to equity and tier 1 capital determined by the Board within the scope of asset-liability management risk policy. Moreover, scenario analyses formed in line with the average maturity gaps and the historical data and expectations are also used in the management of the related risk. In addition, the impact of changes in interest rates on the Bank’s net interest income is regularly analyzed. Within this framework, the limit on the ratio of change in net interest income to the capital is expected to occur under various scenarios are monitored and regularly reported to senior management. Interest rate sensitivity In this part, the sensitivity of the Bank’s assets and liabilities to the interest rates has been analyzed assuming that the year end balance figures were the same throughout the year. Mentioned analysis shows how the FC and TL changes in interest rates by one point during the one-year period affect the Bank’s income accounts and shareholders’ equity under the assumption maturity structure and balances are remain the same all year round at the end of the year. During the measurement of the Bank’s interest rate sensitivity, the profit/loss on the asset and liability items that are evaluated with market value are determined by adding to/deducting from the difference between the expectancy value of the portfolio after one year in case there is no change in interest rates and the value of the portfolio one year later, which is measured after the interest shock, the interest income to be additionally earned/to be deprived of during the one year period due to the renewal or repricing of the related portfolio at the interest rates formed after the interest shock. On the other hand, in the profit/loss calculation of assets and liabilities that are not evaluated by the current market prices, it is assumed that assets and liabilities with fixed interest rates will be renewed at maturity date and the assets and liabilities having variable interest rates will be renewed at the end of repricing period with the market interest rates generated after the interest shock. Within this context, ceteris paribus, the possible changes that may occur in the Bank’s profit and shareholders’ equity in case of 100 basis point increase/decrease in TL and FC interest rates on the reporting day are given below: % Change in the Interest Rate (*) Effect On Profit/Loss Effect on Equity (**) TL 100 bp increase 100 bp decrease FC (***) 100 bp increase 100 bp decrease Current Period Prior Period Current Period 136,010 (401,444) 48,410 (53,433) (789,613) 871,744 Prior Period (676,245) 752,570 (*) Changes in interest rates is calculated assuming that the expectations reflected in inflation. The effects on the profit/loss and shareholders’ equity are stated with their before tax values. (**) The effect on the profit/loss is mainly arising from the fact that the average maturity of the Bank’s fixed rate liabilities is shorter than the average maturity of its fixed rate assets. (***) The effect on the shareholders’ equity is arising from the change of the fair value of securities followed under Financial Assets Available for Sale. 160 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a. Interest rate sensitivity of assets, liabilities and off balance sheet items (Based on time remaining to repricing date): Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss (*) Money Market Placements Financial Assets at Fair Value Through Other Comprehensive Income Loans Financial Assets Measured at Amortised Cost Other Assets (**) Total Assets Liabilities Banks Deposits Other Deposits Money Market Funds Miscellaneous Payables Marketable Securities Issued (***) Funds Provided from Other Financial Institutions Other Liabilities (****) Total Liabilities Balance Sheet Long Position Balance Sheet Short Position 1,094 7,621,787 139,292 53,232,147 53,233,241 5,193,230 12,954,309 1,081,006 931,943 3,724,410 448,867 7,189 1,223,466 7,416,881 13,024,342 55,681,293 5,929,309 2,202,682 6,677,495 8,531,979 11,102,996 12,025,501 510,032 51,872,345 23,095,570 83,061,216 104,904,123 22,410,738 90,618 289,243,558 5,571,939 8,914,079 9,069,431 1,403,597 30,888,355 20,248,100 22,450,782 85,541,513 36,416,239 104,231,684 125,525,417 35,847,025 80,497,593 468,059,471 3,361,138 512,680 339,195 501,725 4,714,738 165,490,809 29,716,872 11,170,506 1,285,997 4,627 83,538,453 291,207,264 1,187,760 682,025 1,691,889 4,450,505 6,611,475 28,670,433 3,239,839 11,418,430 1,187,760 12,100,455 44,664,141 40,250,633 4,481,401 21,746,804 10,914,492 477,960 455,147 859,624 2,671,878 660,713 436,058 1,056,965 70,424,071 73,934,480 177,372,982 56,882,008 29,895,292 33,289,021 4,737,489 165,882,679 468,059,471 (91,831,469) (20,465,769) (85,385,086) (197,682,324) 74,336,392 92,236,396 31,109,536 197,682,324 Off Balance Sheet Long Position 3,533,443 10,295,150 Off Balance Sheet Short Position (1,270,459) (4,204,967) (6,954,496) 13,828,593 (12,429,922) Total Position (88,298,026) (10,170,619) 73,065,933 88,031,429 24,155,040 (85,385,086) 1,398,671 (*) Includes Derivative financial assets. (**) Stage 1 and Stage 2 Performing Loans’ expected credit loss is included in “non-interest bearing” column. (***) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (****) Shareholders’ equity is included in “non-interest bearing” column. 161 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss (*) Money Market Placements Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 20,000,796 5,726,636 20,962 609,618 20,135,085 40,135,881 2,025,924 8,383,140 1,566,947 932,605 4,615,622 539,716 8,540 148,565 7,811,995 Financial Assets Available for Sale 10,003,206 6,307,266 6,858,435 6,652,152 Loans 58,264,882 25,778,453 75,707,736 88,685,440 10,652,815 20,914,373 340,249 40,814,123 30,169 269,381,053 Held to Maturity Investments 3,329,936 3,869,735 9,648,054 6,623,106 3,257,132 26,727,963 Other Assets (**) Total Assets Liabilities Banks Deposits Other Deposits 2,668,012 20,465,437 23,133,449 101,560,415 36,909,021 97,439,465 102,500,414 34,832,860 43,145,429 416,387,604 2,861,700 941,738 518,884 597,042 4,919,364 131,321,799 35,729,366 12,801,267 1,132,515 59,364,535 240,349,482 Money Market Funds Miscellaneous Payables 6,877,502 747,027 671,599 1,522,792 Marketable Securities Issued (***) 1,256,366 3,719,454 3,915,295 22,472,074 9,240,693 Funds Provided from Other Financial Institutions Other Liabilities (****) Total Liabilities 7,375,500 21,325,384 13,017,543 1,989,388 1,084,753 1,236,049 888,618 1,122,914 475,340 61,884,753 65,607,674 151,675,943 63,276,159 32,898,695 26,069,317 10,325,446 132,142,044 416,387,604 9,071,893 10,295,714 11,042,741 40,603,882 44,792,568 Balance Sheet Long Position 64,540,770 76,431,097 24,507,414 165,479,281 Balance Sheet Short Position (50,115,528) (26,367,138) Off Balance Sheet Long Position 4,008,452 5,728,715 Off Balance Sheet Short Position (333,400) (3,424,415) (4,189,210) (88,996,615) (165,479,281) 9,737,167 (7,947,025) Total Position (46,107,076) (20,638,423) 64,207,370 73,006,682 20,318,204 (88,996,615) 1,790,142 (*) Includes Derivative financial assets. (**) Stage 1 and Stage 2 Performing Loans’ expected credit loss is included in “non-interest bearing” column. (***) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (****) Shareholders’ equity is included in “non-interest bearing” column. b. Average interest rates applied to monetary financial instruments: Current Period Assets Cash (Cash in Vault. Foreign Currency Cash. Money in Transit. Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss Money Market Placements Financial Assets at Fair Value Through Other Comprehensive Income Loans Financial Assets Measured at Amortised Cost Liabilities Banks Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (*) Funds Provided from Other Financial Institutions (*) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. 162 EUR % 0.06 1.56 2.35 4.97 1.92 0.37 0.14 1.74 USD % 0.95 6.36 4.96 7.13 4.10 1.52 1.15 2.72 5.90 4.09 JPY % 0.04 TL % 9.83 9.70 13.97 16.33 14.42 11.21 7.99 9.62 15.11 11.76 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Assets Cash (Cash in Vault. Foreign Currency Cash. Money in Transit. Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss Money Market Placements Financial Assets Available for Sale Loans Held to Maturity Investments Liabilities Banks Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (*) Funds Provided from Other Financial Institutions (*) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. V. Explanations on Equity Shares Risk Arising from Banking Book EUR % 1.73 3.93 3.11 5.13 0.44 0.53 0.88 1.44 USD % 2.00 1.65 6.46 4.79 7.60 3.47 2.44 2.44 4.06 5.86 4.51 JPY % 4.50 0.01 TL % 13.00 18.03 13.57 18.03 19.94 15.59 23.71 17.17 23.80 21.03 13.53 a. Related to the equity investments account practices about the associates and subsidiaries can be seen in the Third Section and the footnote numbered III. b. Balance Sheet Value of Equity Investment, fair value, and for publicly traded, if the market value is different from the fair value comparison to the market price: Share Certificate Investments Quoted Stock Investment Group A Subsidiaries Financial Subsidiaries Non-Financial Subsidiaries Non-Quoted Subsidiaries Financial Subsidiaries Non-Financial Subsidiaries Associates Financial Associates Non-Financial Associates Comparison Book Value Fair Value Market Value 12,326,491 11,999,250 6,065,370 9,876,039 220,768 29,691 3,850,332 1,028,354 c. Unrealized gains and losses on investment in stocks, Revaluation increases with the amounts of additives included in the main and capital Portfolio 1 Private Equity Investments 2 Shares Traded on a Stock Exchange 3 Other Stocks 4 Total Realized Gains/ losses During the period Revaluation Increases Unrealized Gains and Losses Including into Tier I Capital (*) Total Total Including into Common Equity Including into Tier II Capital 11,976,873 2,751,109 11,976,873 2,751,109 14,727,982 14,727,982 (*) Includes the capital amount according to the equity method. d. Capital requirement as per equity shares: Portfolio Private Equity Investments Share Traded on a Stock Exchange Other Stocks Total Carrying Value Total RWA Minimum Capital Requirement 15,941,409 5,129,145 15,941,409 5,460,297 21,070,554 21,401,706 1,275,313 436,824 1,712,137 163 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) VI. Explanations on Liquidity Risk Management and Liquidity Coverage Ratio Liquidity risk may occur as a result of funding long-term assets with short-term liabilities; The Bank’s liquidity is managed by the Asset-Liability Management Committee in accordance with the business strategies, legal requirements, current market conditions and expectations regarding the economic and financial conjuncture. The Bank’s principal source of funding is deposits. Although the average maturity of deposits is shorter than that assets as a result of the market conditions, the Bank’s wide network of branches and stable core deposit base are its most important safeguards of funding. Additionally, the Bank borrows medium and long-term funds from institutions abroad. Concentration limits are generally used in deposit and non-deposit borrowings in order to prevent adverse effects of concentrations in the liquidity risk profile of the Bank. In order to meet the liquidity requirements that may arise from market fluctuations, considerable attention is paid to the need to preserve liquid liquidity and efforts in this respect are supported by projections of Turkish Lira and Foreign Currency (FC) cash flows. The term structure of TL and FC deposits, their costs and amounts are monitored on a daily basis. During these studies historical events and future expectations are taken into account as well. Based upon cash flow projections, prices are differentiated for different maturities and measures are taken accordingly to meet liquidity requirements. Moreover, potential alternative sources of liquidity are determined to be used in case of extraordinary circumstances. The liquidity risk exposure of the Bank has to be within the risk capacity limits which are prescribed by the legislation and the Bank’s risk appetite defined in its business strategy. It is essential for the Bank to have an adequate level of unencumbered liquid asset stock which can be sold or pledged, in case a large amount of reduction in liquidity sources occurs. The level of liquid asset buffer is determined in accordance with the liquidity risk tolerance which is set by the Board of Directors. Asset-Liability Management Committee is responsible for monitoring the liquidity position, determining appropriate sources of funds and deciding the maturity structure in accordance with the limits which are set by the Board of Directors. The Treasury Division is responsible for monitoring the liquidity risk, in accordance with the Asset and Liability Risk Policy limits, objectives set out in the business plan and the decisions taken at the meetings of Asset-Liability Management Committee. The Treasury Division is also responsible for making liquidity projections and taking necessary precautions to reduce liquidity risk, by using the results of stress testing and scenario analysis. Within this scope, Treasury Division is monitoring the Turkish Lira (TL) and foreign currency (FC) liquidity position instantly and prospectively based on the information provided from the branches, business units and IT infrastructure of the Bank. The assessment of long-term borrowing opportunities is carried out regularly in order to balance the cash inflows and outflows and to mitigate the liquidity risk. The Bank creates liquidity through repurchase agreements and secured borrowings based on the high quality liquid asset portfolio, through securitization and other structured finance products which are created from the asset pools like credit card receivables and retail loans. The Bank applies liquidity stress tests to measure liquidity risk. In this approach, in liquidity stress scenarios in which parameters are determined by the Board of Directors, the ability of the Bank’s liquid assets’ in covering cash outflows within a one-month horizon has been described. Liquidity adequacy limits for TL and FC are determined by Board of Directors, based on the liquidity requirements and risk tolerance of the Bank. The liquidity risk is measured by the Risk Management Division and results are reported to the related executive functions, senior management and Board of Directors. It is essential for the Bank to monitor the liquidity position and funding strategy continuously. In case of a liquidity crisis that may arise from unfavorable market conditions, extraordinary macroeconomic situations and other reasons which are beyond the control of the Bank, “Emergency Action and Funding Plan” is expected to be commissioned. In that case, aforementioned committees have to report the precautions taken and their results to the Board of Directors through Audit Committee. The Bank’s Foreign Currency (FC) and total (TL+FC) liquidity coverage ratio averages for the last three months, the highest value and the lowest value occurred in this period are given below. Current Period TL+FC 176.54 FC 307.29 Prior Period TL+FC 101.63 FC 166.36 18.10.2019 25.10.2019 05.10.2018 23.11.2018 209.00 412.66 156.81 274.11 29.11.2019 03.01.2020 04.01.2019 04.01.2019 Current Period The lowest value Applicable week The highest value Applicable week 164 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Liquidity Coverage Ratio: Current Period HIGH QUALITY LIQUID ASSETS High Quality Liquid Assets Cash Outflows Total Unweighted Value (*) Total Weighted Value (*) TL+FC FC TL+FC FC 117,412,446 54,916,614 Retail and Small Business Customers, of which; 201,855,265 114,216,455 18,082,670 11,421,646 Stable deposits Less stable deposits Unsecured wholesale funding, of which; Operational deposits Non-operational deposits Other unsecured funding Secured funding Other cash outflows, of which; Derivatives cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions Obligations related to structured financial products 42,057,131 159,798,134 114,216,455 78,465,947 38,624,455 580,222 7,461 2,102,857 15,979,813 42,055,130 145,055 11,421,646 20,163,163 1,865 63,272,420 36,483,263 32,858,221 18,095,008 14,613,305 2,133,731 9,051,854 2,066,290 44,678,641 19,922,908 44,678,641 19,922,908 41,418,723 16,662,990 41,418,723 16,662,990 Commitments related to debts to financial markets and other off-balance sheet obligations Other revocable off-balance sheet commitments and contractual obligations 3,259,918 5,509,752 3,259,918 4,730,020 3,259,918 275,488 Other irrevocable or conditionally revocable off-balance sheet obligations 153,049,122 66,605,870 15,905,483 3,259,918 236,501 8,111,253 TOTAL CASH OUTFLOWS CASH INFLOWS Secured lending Unsecured lending Other cash inflows TOTAL CASH INFLOWS TOTAL HQLA STOCK TOTAL NET CASH OUTFLOWS LIQUIDITY COVERAGE RATIO (%) (*) The simple arithmetic average calculated for the last three months of the weekly simple arithmetic average. 120,997,412 59,855,471 9,835 26,890,371 16,339,545 20,193,796 40,235,432 35,879,375 40,235,432 67,135,638 52,218,920 60,429,228 14,457,952 35,879,375 50,337,327 Upper Limit Applied Value 117,412,446 54,916,614 60,568,184 15,313,743 194.49 361.35 165 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period HIGH QUALITY LIQUID ASSETS High Quality Liquid Assets CASH OUTFLOWS Total Unweighted Value (*) Total Weighted Value (*) TL+FC FC TL+FC FC 69,202,831 33,761,698 Retail and Small Business Customers, of which; 168,322,999 92,331,294 15,244,068 9,233,129 Stable deposits Less stable deposits Unsecured funding, of which; Operational deposits Non-operational deposits Other unsecured funding Secured funding Other cash outflows, of which; 31,764,640 1,588,232 136,558,359 92,331,294 13,655,836 9,233,129 62,226,648 32,204,931 34,188,498 17,395,740 562,884 6,670 140,721 1,668 48,685,832 30,036,351 26,045,557 15,244,331 12,977,932 2,161,910 8,002,220 2,149,741 40,348,928 20,316,660 40,348,928 20,316,660 Derivatives cash outflow and liquidity needs related to market valuation changes on derivative or other transactions 40,348,928 20,316,660 40,348,928 20,316,660 Obligations related to structured financial products Commitments related to debts to financial markets and other off-balance sheet obligations Other revocable off-balance sheet commitments and contractual obligations Other irrevocable or conditionally revocable off-balance sheet obligations TOTAL CASH OUTFLOWS CASH INFLOWS Secured lending Unsecured lending Other cash inflows TOTAL CASH INFLOWS TOTAL HQLA STOCK TOTAL NET CASH OUTFLOWS LIQUIDITY COVERAGE RATIO (%) 8,092,354 7,348,894 404,618 135,876,383 73,362,528 15,302,485 367,445 8,458,119 105,488,597 55,771,093 386 22,228,538 11,280,653 14,445,268 8,749,323 35,567,976 30,897,529 35,567,976 30,897,529 57,796,900 42,178,182 50,013,244 39,646,852 Upper Limit Applied Value 69,202,831 33,761,698 55,475,353 16,669,154 127.95 210.33 (*) The simple arithmetic average calculated for the last three months of the weekly simple arithmetic average. With respect to prior period’s averages, an increase in foreign currency and total liquidity coverage ratio have been observed for the fourth quarter of 2019. The foreign currency liquidity coverage ratio has increased due to the increase in the stock of high quality liquid assets. Total and foreign currency liquidity coverage ratios are currently far above the minimum level (respectively for 100% and 80% in 2019) pursuant to legal legislations. The Liquidity Coverage Ratio which has been introduced to ensure banks to preserve sufficient stock of high quality assets to meet their net cash outflows that may occur in the short term is calculated as per the Communiqué on “Measurement and Assessment of the Liquidity Coverage Ratio of Banks’ published by BRSA. The ratio is directly affected by the level of unencumbered high quality assets which can be liquidated at any time and net cash inflows and outflows arising from the Bank’s assets, liabilities and off-balance sheet transactions. The Bank’s high quality liquid asset stock primarily consists of cash, the accounts held at CBRT and unencumbered government bonds which are issued by Turkish Treasury. The Bank’s principal source of funding is deposits. In terms of non-deposit borrowing, funds received from repurchase agreements, marketable securities issued, and funds borrowed from financial institutions are among the most significant funding sources of the Bank. In order to manage liquidity effectively, concentration of liquidity sources and usages should be avoided. Due to the strong and stable core deposit base of the Bank, deposits are received from a diversified customer portfolio. In addition, in order to provide diversification in liquidity sources and usages, liquidity concentration limits are used effectively. Total amount of funds borrowed from a single counterparty or a risk group is closely and instantaneously monitored, taking liquidity concentration limits into account. In addition to these, the cumulative liquidity deficits that the Bank is exposed to in various maturity tranches are periodically monitored and reported to the senior management. Cash flows of derivatives that will take place within 30 days are taken into account in calculation of liquidity coverage ratio. Cash outflows of derivatives that arise from margin obligations, are reflected to the results in accordance with the methodology articulated in the related legislation. Liquidity risk of the Bank, its foreign branches and subsidiaries that are to be consolidated are managed within the regulatory limits and in accordance with the group strategies. For the purposes of effectiveness and sustainability of liquidity management, funding sources of group companies and funding diversification opportunities in terms of markets, instruments and tenor are evaluated and liquidity position of the group companies are monitored continuously by the Bank. 166 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Presentation of assets and liabilities according to their remaining maturities: Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Unallocated (*) Total Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey 29,616,634 23,616,607 Banks 5,721,225 7,093,793 139,291 53,233,241 12,954,309 Financial Assets at Fair Value through Profit/Loss (**) Money Market Placements Financial Assets at Fair Value Through Other Comprehensive Income Loans (***) Financial Assets Measured at Amortised Cost Other Assets Total Assets Liabilities Bank Deposits Other Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (****) Miscellaneous Payables 1,212,342 1,080,100 930,838 3,731,004 455,335 7,262 7,416,881 510,032 50,941 1,426,381 2,616,107 25,910,836 21,358,048 51,872,345 14,561,594 28,154,978 20,852,154 68,083,664 110,541,992 28,165,702 18,883,474 289,243,558 963,739 1,298,501 1,821,888 21,360,329 5,443,898 30,888,355 3,997,776 46,229 127,158 18,279,619 22,450,782 51,621,827 64,957,934 24,693,394 76,252,663 158,395,650 54,974,910 37,163,093 468,059,471 501,725 3,361,138 512,680 339,195 83,538,453 165,489,717 29,716,597 11,164,860 1,293,010 4,627 1,714,181 1,187,760 3,286,912 22,186,421 11,391,785 1,671,334 1,691,889 1,668,813 7,112,082 28,670,433 5,520,924 11,844,003 163,137 93,315 4,714,738 291,207,264 40,250,633 1,187,760 44,664,141 12,100,455 Other Liabilities Total Liabilities Liquidity Gap 3,322,794 1,225,923 1,096,266 1,081,833 344,027 66,863,637 73,934,480 84,040,178 188,611,482 36,574,062 41,898,824 42,530,376 7,540,912 66,863,637 468,059,471 (32,418,351) (123,653,548) (11,880,668) 34,353,839 115,865,274 47,433,998 (29,700,544) Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities Non-cash Loans Prior Period Total Assets Total Liabilities Liquidity Gap 19,748 (116,394) 1,175,005 271,048 35,899,277 19,227,240 20,613,990 24,526,750 39,496,074 35,879,529 19,343,634 19,438,985 24,255,702 39,496,074 54,224,332 1,976,792 5,908,305 17,491,717 9,635,096 3,752,820 1,349,407 139,763,331 138,413,924 92,989,062 44,644,799 56,835,860 22,087,344 73,763,570 134,020,805 56,718,721 28,316,505 416,387,604 59,961,577 159,820,924 45,657,294 41,206,827 38,119,384 14,561,509 57,060,089 416,387,604 (15,316,778) (102,985,064) (23,569,950) 32,556,743 95,901,421 42,157,212 (28,743,584) Net Off Balance Sheet Position (1,369,703) (2,276,275) 475,366 1,010,001 133,790 Derivative Financial Assets Derivative Financial Liabilities 37,506,162 18,535,732 16,933,148 22,184,356 25,423,516 38,875,865 20,812,007 16,457,782 21,174,355 25,289,726 Non-cash Loans 51,283,445 2,817,912 5,903,894 18,333,363 8,834,698 4,149,600 (2,026,821) 120,582,914 122,609,735 91,322,912 (*) Asset items, such as Tangible Assets, Subsidiaries and Associates, Office Supply Inventory, Prepaid Expenses and Non-Performing Loans, which are required for banking operations and which cannot be converted into cash in short-term, other liabilities such as Provisions which are not considered as payables and Shareholders’ Equity, are shown in the “Unallocated” column. (**) Includes Derivative financial assets. (***) The non-performing loans are shown in the “Undeliverable” column. (****) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. 167 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) In compliance with the “TFRS 7”, the following table indicates the maturities of the Bank’s major financial assets and liabilities which are not qualified as derivatives. The following tables have been prepared by referencing the earliest dates of collections and payments without discounting the liabilities. The interest to be collected from and paid to the related liabilities is included in the following table. Adjustments column shows the items that may cause possible cash flows in the following periods. The values of the related liabilities registered in balance sheet do not include these amounts. Current Period Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (**) Leasing Liabilities 84,040,178 169,185,882 30,476,901 11,696,599 1,361,972 4,860 296,766,392 844,390 295,922,002 1,728,264 1,188,548 3,429,351 22,999,936 13,057,322 1,795,094 43,009,967 2,759,334 40,250,633 1,188,548 788 1,187,760 1,697,122 1,811,361 9,525,828 34,351,426 7,535,365 54,921,102 10,256,961 44,664,141 37,291 73,800 288,079 1,067,845 1,899,835 3,366,850 1,970,587 1,396,263 (*) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (**) Includes payments for finance leases as required by the ”TFRS 16-Leases“ Standard which became effective as of January 1, 2019 Prior Period Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued(*) Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total 59,961,577 134,739,842 37,552,513 13,758,840 1,195,312 247,208,084 1,939,238 245,268,846 1,603,993 3,908,438 22,237,257 16,124,552 4,521,474 48,395,714 3,603,146 44,792,568 6,894,179 675,767 1,568,139 9,138,085 66,192 9,071,893 1,268,494 2,725,755 6,133,916 28,490,837 12,204,318 50,823,320 10,219,438 40,603,882 (*) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. The following table shows the remaining maturities of non-cash loans of the Bank. Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 743,785 2,771,346 68,708 5 Years and Over Total 13,589,521 9,463,411 43,974,122 340,206 446,593 542,271 896,145 528,896 9,480 2,906,186 11,646,044 8,753,452 2,071,444 70,247,393 2,258,334 3,059,368 14,959 317,691 495,245 6,504,495 1,681,376 2,647,653 54,224,332 1,976,792 5,908,305 17,491,717 9,635,096 3,752,820 92,989,062 Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5,125,787 1,241,213 2,355,725 5,650,082 119,756 5 Years and Over Total 14,492,563 45,491,815 1,260,981 2,697,922 9,963,090 7,973,140 2,768,139 70,155,087 424,259 241,584 315,718 684,106 166,141 2,719,473 718 236,051 505,751 1,381,461 4,379,607 2,295,655 51,283,445 2,817,912 5,903,894 18,333,363 8,834,698 4,149,600 91,322,912 Current Period Letters of Credit Letters of Guarantee Acceptances Other Total Prior Period Letters of Credit Letters of Guarantee Acceptances Other Total 168 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The following table shows the remaining maturities of derivative financial assets and liabilities of the Bank. Current Period Forwards Contracts-Buy Forwards Contracts-Sell Swaps Contracts-Buy Swaps Contracts-Sell Futures Transactions-Buy Futures Transactions-Sell Options-Call Options-Put Other Total Prior Period Forwards Contracts- Buy Forwards Contracts- Sell Swaps Contracts-Buy Swaps Contracts-Sell Futures Transactions-Buy Futures Transactions-Sell Options-Call Options-Put Other Total Up to 1 Month 1-3 Months 3-12 Months 1,256,189 1,253,231 1,937,177 1,934,854 5,780,168 5,691,025 1-5 Years 2,163,397 2,194,627 5 Years and Over Total 11,136,931 11,073,737 32,434,720 16,279,125 12,383,204 20,456,930 38,148,561 119,702,540 32,506,930 16,415,096 11,402,337 20,154,652 38,148,561 118,627,576 2,088,676 1,999,675 239,385 760,419 743,165 501,038 1,728,495 1,623,500 1,444,246 1,827,200 1,827,200 158,446 1,347,513 1,347,513 7,752,303 7,541,053 2,343,115 71,778,806 38,570,874 40,052,975 48,782,452 78,992,148 278,177,255 Up to 1 Month 1-3 Months 3-12 Months 1,087,668 1,086,605 1,105,743 1,104,272 3,879,925 3,889,309 1-5 Years 2,720,401 2,711,759 5 Years and Over Total 8,793,737 8,791,945 33,408,248 16,439,710 8,885,071 18,146,669 25,423,516 102,303,214 33,819,076 17,407,452 8,400,318 17,145,310 25,289,726 102,061,882 2,759,345 2,684,921 803,997 804,001 2,983,708 2,983,711 1,536,164 1,682,564 2,368,888 1,229,705 1,229,705 175,162 7,776,755 7,702,338 5,762,778 76,382,027 39,347,739 33,390,930 43,358,711 50,713,242 243,192,649 VII. Explanations on Leverage Ratio a. Explanations on differences between current and prior periods’ leverage ratios The Bank’s unconsolidated leverage ratio is 9.07% and calculated in accordance with the principles of the “Regulation on Measurement and Evaluation of Banks’ Leverage Level. (December 31, 2018: 8.20%). According to the Regulation, the minimum leverage ratio is 3%. The changes in the leverage ratio are mostly due to the increase in Tier I Capital. b. Explanations on leverage ratio: On-Balance sheet items On-balance sheet items (excluding derivatives and SFTs, but including collateral) Assets amounts deducted from Tier 1 capital Total on balance sheet exposures Derivative exposures and credit derivatives Replacement cost associated with derivative financial instruments and credit derivatives The potential amount of credit risk with derivative financial instruments and credit derivatives The total amount of risk on derivative financial instruments and credit derivatives Investment securities or commodity collateral financing transactions The amount of risk investment securities or commodity collateral financing transactions (Excluding on balance sheet items) Risk amount of exchange brokerage operations Total risks related with securities or commodity financing transactions Off -Balance Sheet Items Gross notional amount of off-balance sheet items Adjustments for conversion to credit equivalent amounts The total risk of off-balance sheet items Capital and Total Exposures Tier 1 Capital Total Exposures Leverage Ratio Leverage Ratio (*) Three-month average of the amounts in Leverage Ratio table. Current Period (*) Prior Period (*) 451,942,052 (876,726) 451,065,326 3,694,184 1,942,906 5,637,090 2,463,078 2,463,078 165,807,287 (4,557,870) 161,249,417 56,276,404 620,414,911 417,093,905 (636,552) 416,457,353 5,644,566 1,774,601 7,419,167 4,810,328 4,810,328 163,642,658 (6,781,814) 156,860,844 48,024,232 585,547,692 9.07 8.20 169 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) VIII. Explanations on Other Price Risks The Bank is exposed to stock price risk due to its investments in companies being traded on the Borsa İstanbul A.Ş. (BIST). The Bank’s sensitivity to stock price risk at the reporting date was measured with an analysis. In the analysis, with the assumption of all other variables were held constant and the data (stock prices) used in the valuation method are 10% higher or lower. According to this assumption in shares traded in Borsa Istanbul and followed under Financial Assets at Fair Value through Profit or Loss account, expected to have an effect amounting to TL 13,767 increase/decrease. IX. Explanations on Presentation of Assets and Liabilities at Fair Value 1. Information on fair values of financial assets and liabilities Financial Assets Money Market Placements Banks Financial Assets at Fair Value through Other Comprehensive Income Investments Financial Assets Measured Amortized Cost Loans Financial Liabilities Banks Deposits Other Deposits Funds Provided from Other Financial Institutions Marketable Securities Issued (*) Miscellaneous Payables Book Value Fair value Current Period Prior Period Current Period Prior Period 12,954,309 8,383,140 12,951,453 8,394,558 51,872,345 30,888,355 270,360,084 4,714,738 291,207,264 40,250,633 44,664,141 12,100,455 40,814,123 26,727,963 258,189,364 4,919,364 240,349,482 44,792,568 40,603,882 11,042,741 51,872,345 31,039,054 271,214,596 4,695,910 290,548,279 39,661,083 44,957,049 12,100,455 40,814,123 24,755,322 241,892,499 4,902,686 240,425,832 44,112,554 37,607,581 11,042,741 (*) Includes subordinated bonds which are classified on the balance sheet as subordinated loans. Strike prices, quotations, market prices determined by the CBRT and published in the Official Gazette and the values calculated by using alternative models, are taken as the basis in the fair value determination of Financial Assets at fair value through other comprehensive income. When the prices of the financial assets measured at amortized cost cannot be measured in an active market, fair values are not deemed to be reliably determined and amortized cost, calculated by the internal rate of return method, are taken into account as the fair values. Fair values of banks, loans granted, deposits and funds borrowed from other financial institutions and marketable securities are calculated by discounting the amounts in each maturity bracket formed according to repricing periods, using the rate corresponding to relevant maturity bracket in the discount curves based on current m arket conditions. 2. Information on fair value measurements recognized in the financial statements “TFRS 13 - Fair Value Measurement” standard requires the items, which are recognized in the balance sheet at their fair values to be shown in the notes by being classified within a range. According to this, the related financial instruments are classified into three levels in such a way that they will express the significance of the data used in fair value measurements. At the first level, there are financial instruments, whose fair values are determined according to quoted prices in active markets for identical assets or liabilities, at the second level, there are financial instruments, whose fair values are determined by directly or indirectly observable market data, and at the third level, there are financial instruments, whose fair values are determined by the data, which are not based on observable market data. The financial assets, which are recognized in the balance sheet at their values, are shown below as classified according to the aforementioned principles of ranking. Current Period Financial Assets at Fair Value Through Profit and Loss Debt Securities Equity Securities Derivative Financial Assets at Fair Value through Profit and Loss Other Financial Assets at Fair Value Thtough Profit or Loss (*) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 258,360 137,669 35,822,080 Level 2 3,844 4,044,105 1,074,673 15,189,405 421,665 76,207 2,134,363 Level 3 11,514 1,886,716 350,829 (*) Since they are not traded in an active market, the equity securities TL 12,159 under the financial assets at fair value through other comprehensive income are shown in the financial statements at acquisition cost and the related securities are not shown in this table. 170 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Financial Assets at Fair Value Through Profit and Loss Debt Securities Equity Securities Derivative Financial Assets Held for Trading Other Financial Assets Available-for-Sale (*) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 428,905 144,203 28,289,459 Level 2 17,100 5,093,495 12,083,302 274,631 57,590 3,705,490 Level 3 1,365 2,126,927 101,115 (*) Since they are not traded in an active market, the equity securities TL 8,026 under the financial assets available-for-sale are shown in the financial statements at acquisition cost and the related securities are not shown in this table. The movement table of financial assets at level 3 is given below: Balance at the Beginning of the Period Purchases Redemption or Sales Valuation Difference Transfers (*) Balance at the end of the Period Current Period 2,229,407 261,733 (1,365) 221,111 (461,827) 2,249,059 Prior Period 102,480 2,126,927 2,229,407 (*) The current period balance, Part Five of the details I-b.3 and I-n no.lu the amount classified under “TFRS 5 - Assets Held For Sale and Discontinued Operations” is included in the footnotes. Real estates which are presented in the financial statements at fair value are classified at level 3. The loans measured at fair value through profit and loss under Level 3 consists of loan granted to the special purpose entity which is disclosed in the Section V footnote I-f.2 and footnote I.r. The mentioned loan’s fair value is determined by the various valuation methods. The potential changes in the fundamental estimations and assumptions in the valuation work may affect the carrying fair value of the loan. X. Explanations on Transactions Carried Out on Behalf of Third Parties and Fiduciary Transactions The Bank gives trading and custody services in the name and on the account of its customers. The Bank has no fiduciary transactions. XI. Explanations on Risk Management Objectives and Policies Explanations according to “Communiqué on Public Disclosures about Risk Management” published on the Official Gazette No.29511 dated October 23, 2015 are included below. The Bank uses the standardised approach for calculation of capital charge for credit risk, therefore explanations about internal ratings-based approach are not included. a. General Information on Risk Management and Risk Weighted Amounts a.1. The Bank’s risk management approach Bank is exposed to financial and non-financial risks which are required to be analyzed, monitored and reported within specific risk management principles of the Bank and with the perspective of risk management. The risk management process is organized within the framework of risk management and serves the creation of a common risk culture in corporate level; which brings “corporate governance” to forefront, the independence of the internal audit and monitoring units from the business units that undertake risks is established risk is defined in accordance with international regulations and in this context measurement, analysis, monitoring, reporting and control functions are carried. Risk management process and the functions involved in the process is one of the primary responsibilities of the Board of Directors. The Risk Committee operates to prepare the Bank’s risk management strategies and policies, submit them to the Board of Directors for approval and monitor the implementations. Evaluating the capital adequacy and observing the active use of results in Bank’s planning and decision making processes, establishing and monitoring limits related to main risks, monitoring the activities of risk management (determining, defining, measuring, evaluating and managing risk) and monitoring results and methods in measuring risk are also under their authority and responsibility of the Committee. Committee reports activity results to the Board of Directors through Audit Committee. The Risk Management Department, which operates under the Bank’s Board of Directors, has been organized as Asset-Liability Management Risk Unit, Credit Risk and Economic Capital Unit, Operational Risk and Subsidiary Risk Unit and Validation Unit. The Bank’s risk management process is carried out within the framework of risk policies which are issued by the Board of the Directors by taking the recommendations of the Risk Management Department into account and which include the written standards that are implemented by the business units. These policies which are entered into force in line with the international practices are general standards which contain organization and scope of the risk management function, risk measurement policies, duties and responsibilities of the risk management group, procedures for determining risk limits, ways to eliminate limit violations, compulsory approvals and confirmations to be given in a variety of events and situations. In the aforementioned risk policies, the Bank’s risk appetite framework is defined as a set of approaches that determine the risk capacity, the risk appetite, the risk tolerance and that include the policies, procedures, controls and systems for reporting and monitoring of the limits set for the Bank’s risk profile and the indicators in the framework. The Bank’s risk appetite framework, which is formed in accordance with the above-mentioned factors and entered into force with the Board of Directors approval, includes indicators that are aligned with the business plan, the strategic programme, capital and remuneration planningand comparable on a business unit level to the extent possible. The compliance to the limits within the framework is periodically monitored and the realization of the risk appetite indicators are reported to the Risk Committee and the Boards on a monthly basis. 171 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) In order to build a strong corporate culture that has a risk management perspective, the Bank has policies, processes, systems and a control system that is integrated with the Bank’s risk management system to effectively control the bank’s risk management system is available. All employees of the Bank essentially perform their duties in a responsible manner that aims to develop controls to reduce or eliminate the probability of the Bank to incur losses related to the operational risks. In the process risk analysis studies, risks and the related controls are evaluated together with employees performing the relevant process in a holistic approach. Procedures to be followed in case of a risk threshold breach and risk definitions are given in the risk politics. Code of conducts, operation manuals, the sharing of duties between business units and risk units are announced to the Bank’s staff. The risk reports that analyse the results reached by the Bank and the comprehensive risk assessment and comparison of these results with a risk management perspective are periodically submitted to the Risk Committee and to the Board through the Audit Committee. The content of the above mentioned reports could be summarised as follows: - Capital adequacy ratio, the progression of the components of this ratio and the issues that affect the aforementioned ratio, - Monitoring the compliance status of the limits set by the Board of Directors as a part of therisk appetite framework and based on the components of the main risk types, - In addition to the assesment of the loan portfolio on the basis of counterparties and loan types, monitoring of the portfolio as a whole according to parameters such as maturity, sector, geography, risk ratings, arrears, defaults, - Measuring the assets and liabilities management risk, and reporting of measurement results, - Monitoring of all risks assessed in the context of operational risk, loss events that occurred in the Bank and risk indicators, - Testing the measurement results in terms of completeness and realiability, - Analysing the level of risk indicators under various stress scenarios, - Examining various concentration indicators and the course followed by these indicators, As per the communique on “Bank’s Internal Systems and Internal Capital Adequacy and Assessment Process” and “Guidelines for Stress Testing of Banks to Use in Capital and Liquidity Planning”, stress tests are conducted for the entire risks that the Bank is exposed to and on the basis of significant risk categories. As a part of the holistic stress tests, risk appetite, capital planning, strategic plan and budget, action plans for emergencies and unexpected situations related to miscellaneous risks and other issues considered as significant are taken into consideration. In the above-mentioned stress tests, the methods that form the basis of regulatory reporting (standard method for credit and market risk, basic indicator method for operational risk) are used. On the other hand, in the stres tests for individual risk types the most advanced approaches used for risk measurement in the Bank are leveraged. In the stress tests, both the first pillar risks (credit risk, market risk, operational risk) in scope of the regulatory framework and all the other risks that the Bank is exposed to independent of the regulatory framework are taken into account in a holistic perspective. In determining the course of capital adequacy under various scenarios during the planning horizon, the actions that the Bank will take in case of stress conditions and the impact of the diversified growth strategies of business units on the capital adequacy and the balance sheet are considered. The scope and content of the Bank’s risk management system in terms of the main risk types are listed below. Bank’s risk mitigation strategies and processes for the assessment of their effectiveness are given in Fourth Section II No. “Explanations on Credit Risk” under the Section IV, XI-f.1 notes. No. “The Public Disclosure of Qualitative Information Related to the Market Risk” mentioned in the section. Credit risk Credit risk is defined as the risk of the failure to comply with the requirements or failing to fulfill its obligations partially or totally of the counter side of the transaction contract with the Bank. The methodology and responsibilities of the credit risk management, controlling and monitoring and the framework of credit risk limitations specified with the credit risk policy. The Bank defines measures and manages credit risk of the all products and activities. Board of Directors review the Bank’s credit risk policies and credit risk strategy on an annual basis as a minimum. Key Management is responsible for the implementation of credit risk policies which are approved by Board of Directors. As a result of loans and credit risks analysis all findings are reported to Board of Directors and Key Management on a regular basis. In addition to transaction and company based credit risk assessment process, monitoring of credit risk also refers to an approach with monitoring and managing the credit as a whole maturity, sector, security, geography, currency, credit type and credit rating. In the Bank’s credit risk management, along the limits as required by legal regulations, the Bank utilizes the risk limits to undertake the maximum credit risk within risk groups or sectors that the Board of Directors determines. These limits are determined such a way that prevents risk concentration on particular sectors. Excess risk limits up to legal requirements and boundaries limits are considered as an exception. The Board of Directors has the authority in exception process. The results of the control of risk limits and the evaluations of these limits are presented by Internal Audit and Risk Management Group to Key Management and Board of Directors. The Bank uses credit decision support systems which are created for the purpose of credit risk management, lending decisions, controlling the credit process and credit provisioning. The consistency of the credit decision support systems with the structure of the Bank’s activities, size and complexity is examined continuously by internal systems. Credit decision support systems contain the Risk Committee assessment and approval of Board of Directors. Asset and Liability Management Risk Asset-liability management risk defined as the risk of Bank’s incurring loss due to managing all financial risks that are inflicted from the Bank’s assets, liabilities and off-balance sheet transactions, ineffectively. Trading book portfolio’s market risk, structural interest rate risk and liquidity risk of the banking portfolio; are considered within the scope of the asset liability management. Complying the established risk limits and being at the limits that stipulated by the legislation are the primary priority of Asset-liability management risk. Risk limits are determined by the Board of Directors by taking into consideration of the Group’s liquidity, target income level and general expectations about changes in risk factors. Board of Directors and the Audit Committee are responsible for following the Bank’s capital is used optimally; for this purpose, checking the status against risk limits and providing the necessary actions are taken. Asset and Liability Management Committee is responsible for managing the Asset and Liability risk within the framework of operating principles that are involved in the risk appetite and risk limits are set by the Board of Directors in accordance with the policy statement. Asset and liability management processes and compliance with the provisions of the policy are controlled and audited by the internal audit system. The execution of the audit, reporting the audit results, action plans for the elimination of errors and gaps identified as a result of inspections regarding the fulfillment of the principles, are determined by the Board of Directors. 172 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Operational Risk Operational risk is defined as “the probability of loss due to the inadequate or failed internal processes, people, systems, external factors or legal risks”. All risks except financial risks are considered within the scope of operational risk. Studies consisted and are formed of occur by execution of identification, definition, measurement, analysis, monitoring of operational risk, providing and reporting the necessary control related to monitoring the progress of our country and the world, the development of techniques and methods, necessary legal reporting, notification and conduct of follow-up transactions. Studies on the subject are conducted by the Department of Risk Management. Operational risks that arise due to the activities are defined in “Bank Risk Catalogue” and classified in respect of species. Bank Risk Catalogue is kind of the fundamental document that used for identification and classification of all at the risk that may be encountered. It is updated in line with the changes in the nature of the processes and activities. Qualitative and quantitative methods are used in a combination for measurement and evaluation of the operational risks. In this process, information uses that obtained from “Impact- Probability Analysis”, “Missing Event Data Analysis”, “Risk Indicators” methods. Methods prescribed by legal regulations are applied as minimum in determining the capital requirement level for the operating risk. All risks are assessed in the context of operational risk, loss events and the risk indicators same as operational risks that occurred in the Bank, are monitored on a regular basis by the Department of Risk Management and reported periodically to the Risk Committee and the Board of Directors. Validation Operations Risk measurement models are validated at least once a year under international standards. The performance and soundness of the models are evaluated by the validation unit by statistical methods, the compliance of the processes applied within the scope of the model with the related laws, communiqués and regulations are analyzed, and the appropriateness of the data quality and IT applications used in the models is monitored. The results of the validation activities are reported to the Risk Committee and the Board of Directors. a.2 Overview of risk weighted amounts: Credit risk (excluding counterparty credit risk) (CCR) Of which standardised approach (SA) Of which internal rating-based (IRB) approach Counterparty credit risk Of which standardised approach for counterparty credit risk (CCR) Of which internal model method (IMM) Equity positions in banking book under basic risk weighting or internal rating-based approach Equity investments in funds - look-through approach Equity investments in funds - mandate-based approach Equity investments in funds - 1250% weighted risk approach Settlement risk Securitization positions in banking accounts Of which IRB ratings-based approach (RBA) Of which IRB Supervisory formula approach (SFA) SA/simplified supervisory formula approach (SSFA) Market risk Of which standardised approach (SA) Of which internal model approaches (IMM) Operational Risk Of which Basic Indicator Approach Of which Standardised approach (SA) Of which Advanced measurement approach Risk Weighted Amounts Minimum Capital Requirements Current Period 343,738,969 343,738,969 6,949,485 6,949,485 Prior Period 316,592,051 316,592,051 9,014,270 9,014,270 Current Period 27,499,118 27,499,118 555,959 555,959 1,222,908 150,558 97,833 1,125 6,365,563 6,365,563 24,924,269 24,924,269 5,765,938 5,765,938 29,109,592 29,109,592 461,275 461,275 2,328,767 2,328,767 The amounts below the thresholds for deduction from capital (subject to a 250% risk weight) 551,920 454,353 44,154 Floor adjustment Total 387,338,812 357,502,189 30,987,106 173 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Linkages between Financial Statements and Risk Amounts b.1. Differences and matching between asset and liabilities’ carrying values in financial statements and risk amounts in capital adequacy calculation Carrying values of items in accordance with Turkish Accounting Standards Carrying values in financial statements prepared as per TAS Subject to credit risk Subject to counterparty credit risk Securitization Positions Subject to market risk Not subject to capital requirements or subject to deduction from capital 53,233,241 12,954,309 53,233,241 12,954,309 3,372,776 1,074,673 51,872,345 51,872,345 4,044,105 4,044,105 4,044,105 2,298,103 484,050 2,088,024 Current Period Assets Cash and CBRT Banks and Money Market Placements Financial Assets at Fair Value Through Profit/Loss Financial Assets at Fair Value Through Other Comprehensive Income Derivative Financial Assets at Fair Value Through Profit/Loss Derivative Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets at Amortised Cost-Credit 289,243,558 289,243,558 30,888,355 30,888,355 15,487,830 15,487,830 1,102,181 1,102,181 21,070,554 6,462,567 913,509 21,070,554 6,402,349 913,509 1,831,108 6,558,693 1,831,108 6,558,693 60,218 842,016 468,059,471 465,701,150 4,044,105 4,870,177 902,234 295,922,002 40,250,633 1,187,760 31,117,210 2,134,363 1,396,263 7,042,357 1,222,785 13,546,931 15,365,702 58,873,465 468,059,471 6,573,938 1,187,760 2,134,363 7,761,698 2,134,363 Financial Assets at Amortised Cost-Other Financial Assets Financial Assets at Amortised Cost- Expected Loss Provisions (-) Assets Held for Sale and Discontinued Operations Investment in Associates, Subsidiaries and Joint-Ventures Tangible Assets Intangible Assets Investment Properties Current Tax Asset Deferred Tax Asset Other Assets Total Assets Liabilities Deposits Funds Borrowed Money Market Funds Marketable Securities Issued Derivative Financial Liabilities at Fair Value Through Profit/Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income Leasing Transaction Liabilities Provisions Current Tax Liability Deferred Tax Liability Subortinated Debts Other Liabilities Shareholders’ Equity Total Liabilities 174 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Carrying values of items in accordance with Turkish Accounting Standards Subject to counterparty credit risk Securitization Positions Subject to market risk Not subject to capital requirements or subject to deduction from capital 591,573 874,188 2,418,232 69,413 602,315 5,093,495 5,093,495 5,093,495 Financial Assets at Amortised Cost-Credit 269,381,053 269,381,053 Carrying values in financial statements prepared as per TAS 40,135,881 8,383,140 Subject to credit risk 40,135,881 8,383,140 2,718,500 2,126,927 40,814,123 40,814,123 26,727,963 26,727,963 11,319,428 11,319,428 243,350 243,350 17,638,720 5,130,314 623,294 17,638,720 5,060,901 623,294 1,492,906 9,324,293 1,492,906 9,324,293 Prior Period Assets Cash and CBRT Banks and Money Market Placements Financial Assets at Fair Value Through Profit/Loss Financial Assets at Fair Value Through Other Comprehensive Income Derivative Financial Assets at Fair Value Through Profit/Loss Derivative Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets at Amortised Cost-Other Financial Assets Financial Assets at Amortised Cost- Expected Loss Provisions(-) Assets Held for Sale and Discontinued Operations Investment in Associates, Subsidiaries and Joint-Ventures Tangible Assets Intangible Assets Investment Properties Current Tax Asset Deferred Tax Asset Other Assets Total Assets Liabilities Deposits Funds Borrowed Money Market Funds Marketable Securities Issued Derivative Financial Liabilities at Fair Value Through Profit/Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income Leasing Transaction Liabilities Provisions Current Tax Liability Deferred Tax Liability Subortinated Debts Other Liabilities Shareholders’ Equity Total Liabilities 416,387,604 415,726,618 5,093,495 3,883,993 671,728 245,268,846 44,792,568 9,071,893 29,445,081 3,705,490 6,256,462 1,488,957 11,158,801 15,478,882 49,720,624 416,387,604 5,965,580 9,071,893 3,705,490 15,037,473 3,705,490 175 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b.2 The main sources of the differences between the risk amounts and the amounts assessed in accordance with TAS in the financial statements Current Period 1 Asset carrying value amount under scope of TAS 2 Liabilities carrying value amount under scope of TAS 3 Total net amount scope of financial statement 4 Off-balance sheet amounts 5 Repo style transactions (*) 6 Differences in valuations 7 Differences due to different netting rules 8 Differences due to consideration of provisions 9 Differences due to prudential filters 10 Differences due to risk mitigation (**) 11 Risk Amounts Total Credit Risk 468,059,471 465,701,150 468,059,471 465,701,150 303,513,971 65,421,762 Securitization Positions Counterparty credit risk 4,044,105 (7,761,698) 11,805,803 6,016,352 2,324,809 Market risk 4,870,177 2,134,363 2,735,814 (4,627,305) 526,495,608 8,341,161 2,735,814 (*) According to the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, it is the counterparty credit risk amount calculated for repo style transactions. (**) The source of the difference is collaterals of exposures to which credit risk mitigation is applied in the calculation of capital adequacy. Prior Period 1 Asset carrying value amount under scope of TAS 2 Liabilities carrying value amount under scope of TAS 3 Total net amount scope of financial statement 4 Off-balance sheet amounts 5 Repo style transactions (*) 6 Differences in valuations 7 Differences due to different netting rules 8 Differences due to consideration of provisions 9 Differences due to prudential filters 10 Differences due to risk mitigation (**) 11 Risk Amounts Total Credit Risk 416,387,604 415,726,618 416,387,604 415,726,618 283,048,998 63,669,618 Securitization Positions Counterparty credit risk 5,093,495 (15,037,473) 20,130,968 6,828,094 4,374,612 Market risk 3,883,993 3,705,490 178,503 (6,602,646) 472,793,591 11,202,706 178,503 (*) According to the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, it is the counterparty credit risk amount calculated for repo style transactions. (**) The source of the difference is collaterals of exposures to which credit risk mitigation is applied in the calculation of capital adequacy. The Bank intends to use fair value measurement methods in accordance with TFRS 13 using valuation methodologies based primarily on observable data. In this context, market prices, quoted prices, prices set by CBRT and published in official gazette and internal pricing models are also utilized in the fair value measurement of the financial assets in the form of securities. Valuation models that use market data such as ineterest rates, efficiency curves, currency, and volatility curves are used as the basis for derivative transactions while third party valuation services are also available. The accuracy of the market prices, data and/or model inputs used in valuation under the independent price validation process is regularly checked and the suitability of the results provided by the third-party pricing service is tested at regular intervals. c. Explanation on Credit Risk c.1. General Information on Credit Risk c.1.1. General qualitative information on credit risk This information is included in footnotes under Section Four, Part II, “Explanations on Credit Risk,” and Section Four, Note XI-a.1. 176 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.1.2. Credit quality of assets: Current Period Loans (*) Debt Securities Off-balance sheet exposures Total Gross Carrying Calue in Financial Statements Prepared in Accordance with Turkish Accounting Standards (TAS) Defaulted 18,883,474 1,022,354 19,905,828 Non-defaulted 270,360,084 82,803,376 156,749,701 509,913,161 Allowances/amortization and impairments 10,326,031 537,247 10,863,278 (*) The credit balance, which is measured at fair value through profit and loss, as detailed in section five 1-B-3, is not included in the above tables. Prior Period Loans (*) Debt Securities Off-balance sheet exposures Total Gross Carrying Calue in Financial Statements Prepared in Accordance with Turkish Accounting Standards (TAS) Defaulted 11,191,689 545,107 11,736,796 Non-defaulted 258,189,364 66,385,242 150,903,665 475,478,271 Allowances/amortization and impairments 6,565,598 365,941 6,931,539 (*) The credit balance, which is measured at fair value through profit and loss, as detailed in section five 1-B-3, is not included in the above tables. c.1.3. Changes in stock of default loans and debt securities (*): Defaulted loans and debt securities at end of the previous reporting period Loans and debt securities that have defaulted since the last reporting period Receivables back to non-defaulted status Amounts written off Other changes Defaulted loans and debt securities at end of the reporting period Current Period 11,191,689 12,782,901 (109,537) (1,569,431) (3,412,148) 18,883,474 Net Values 278,917,527 82,803,376 157,234,808 518,955,711 Net Values 262,815,455 66,385,242 151,082,831 480,283,528 Prior Period 5,403,534 12,881,463 (92,081) (953,606) (6,047,621) 11,191,689 (*) Indemnified non-cash loans or non-cash loans not converted into cash, of the firms which are followed under “Non-performing Loans” accounts are not included in the table. c.1.4. Additional Explanation About the Credit Quality of Assets Bank’s methods for determining provision amounts and classification of its loans are mentioned in the Section Three Note VIII. The bank is restructuring its loans classified as first and second group as well as non-performing loans. Restructuring in performing loans are made by granting a new loan or extending the term date of credit given to customer by Bank. Restructiring of a contract is made on customer’s demand or with the purpose of enhancing the solvency of customer. Restructuring in non- performing loans are generally made by establishing a new redemption plan within the context of a protocol aiming the collection of those receivables whose redemption plan are not valid because of delinquency previously. The breakdown of receivables in terms of geographic regions, sectors and remaining maturities are represented in “Explanations on Credit Risk” in the Section Four Notes II. On the basis of sector-based provisions for receivables are presented in the footnote numbered Section Four II-16. The amounts of the receivables that are set aside for the geographical regions are as follows. The amount of non-performing loans which are written off in 2019 is TL 1,569,431. Domestic EU Countries OECD Countries (*) Off-shore Banking Regions USA, Canada Other Countries Total Current Period Prior Period Non-Performing Loans Specific Provision Non-Performing Loans Specific Provision 18,733,589 16,348 1,016 8,309 124,212 18,883,474 10,188,442 11,977 803 5,453 119,356 10,326,031 11,017,950 30,524 734 5 1,905 140,571 6,409,730 22,550 643 5 1,453 131,217 11,191,689 6,565,598 (*) OECD countries other than the EU countries, USA and Canada The aging analysis of past-due receivables is included in Section Four Note II-11 c.2. Credit risk mitigation c.2.1. Qualitative Requirements to be Disclosed to The Public Regarding Credit Risk Mitigation Techniques In the calculation of the Bank’s Credit Risk Mitigation in accordance with the “Communiqué on Credit Risk Mitigation Techniques” published in the Official Gazette numbered 29111 on 6 September 2014, the financial collaterals are taken into consideration. The Bank takes local currency and foreign currency deposit pledges into consideration as financial collaterals in calculating regulatory capital adequacy. Information on key characteristics of the policies and processes related to the assessment and management of collateral are included in footnotes under Section IV No. II, “Credit Risk Explanations”. 177 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.2.2. Credit risk mitigation techniques: Exposures unsecured Exposures secured by collateral Exposures secured by collateral, of which: secured amount Exposures secured by financial guarantees (*) Exposures Secured by Financial Guarantees, of which: Secured Amount Exposures secured by credit derivatives Exposures secured by credit derivatives, of which: secured amount 259,397,971 82,803,376 6,026,643 4,919,095 13,492,913 11,316,763 342,201,347 6,026,643 4,919,095 13,492,913 11,316,763 Current Period Loans (**) Debt securities Total Of which defaulted 8,557,443 (*) Consists loans of Credit Guarantee Fund guaranteed by the Undersecretariat of Treasury. (**) The credit balance, which is measured at fair value through profit and loss, as detailed in section five 1-B-3, is not included in the above tables. Exposures unsecured Exposures secured by collateral Exposures secured by collateral, of which: secured amount Exposures secured by financial guarantees (*) Exposures Secured by Financial Guarantees, of which: Secured Amount Exposures secured by credit derivatives Exposures secured by credit derivatives, of which: secured amount 241,714,375 66,385,242 5,138,751 2,473,689 15,962,329 13,909,953 308,099,617 5,138,751 2,473,689 15,962,329 13,909,953 Prior Period Loans (**) Debt securities Total Of which defaulted 4,626,091 (*) Consists loans of Credit Guarantee Fund guaranteed by the Undersecretariat of Treasury. (**) The credit balance, which is measured at fair value through profit and loss, as detailed in section five 1-B-3, is not included in the above tables. c.3. Credit risk if standard approach is used c.3.1. Qualitative disclosures about the ratings notes used by banks to calculate credit risk by standard approach The mentioned disclosure is presented in Section Four Note XI-a.1. c.3.2. Standard approach - Exposure credit risk and credit risk mitigation effects Current Period On-balance sheet amount Off-balance sheet amount On-balance sheet Amount Off-balance sheet amount Risk- weighted amount Risk-weighted amount density Exposures before CCF and CRM Exposures post-CCF and CRM RWA and RWA density Exposures to sovereigns and their central banks 132,118,874 144,716 385,928 15,474,134 159,701,299 79,402,662 14,121,463 19,064,587 8,557,443 258,416 1,586 463 152,470 661 11,811,605 97,508,077 44,388,441 373,541 3,629,111 1,032,838 143,435,638 144,717 385,046 15,474,133 149,738,440 73,854,373 14,098,417 18,561,384 8,557,443 258,417 231,620 205 43,018 331 10,595,499 54,494,781 3,386,389 160,815 2,615,280 245,486 19,698,215 72,465 428,064 9,544,392 202,302,519 57,930,572 4,990,731 14,385,415 7,556,123 642,875 1,188,213 15,550,991 21,504,378 85,000 2,700,153 1,188,213 15,550,991 21,504,378 85,000 25,041 1,222,908 9,914,473 21,835,530 467,473,104 161,683,946 462,751,590 71,883,465 350,524,282 13.71% 50.00% 100.00% 0.00% 36.61% 99.05% 75.00% 35.00% 67.93% 88.30% 127.58% 96.05% 63.65% 101.54% 65.56% Exposures to regional and local governments Exposures to administrative bodies and non- commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories by the Board Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Equity investments Other exposures Total 178 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non-commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories by the Board Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Equity investments Other exposures Total Exposures before CCF and CRM Exposures post-CCF and CRM RWA and RWA density On-balance sheet amount 103,948,268 75,317 Off-balance sheet amount 1,835 415 On-balance sheet Amount 117,858,220 75,317 Off-balance sheet amount 385,294 149 Risk- weighted amount 15,676,249 37,734 Risk-weighted amount density 13.26% 50.00% 281,127 13,116,664 156,692,841 62,436,889 18,742,629 21,828,076 4,626,091 72,663 165,667 600 15,783,147 102,186,659 36,144,308 406,751 2,376,906 545,107 281,048 13,116,664 146,798,730 57,235,060 18,723,901 20,601,500 4,626,091 72,664 44,027 300 12,904,582 53,937,090 2,980,394 173,349 1,615,064 86,653 325,075 10,088,539 198,729,206 45,161,591 6,614,038 15,673,953 3,834,323 176,797 101,115 14,151,398 17,921,378 413,994,456 100,000 157,711,395 101,115 14,151,398 17,921,378 411,563,086 100,000 72,226,902 150,558 9,262,771 18,193,990 323,924,824 100.00% 0.00% 38.77% 99.00% 75.00% 35.00% 70.55% 82.88% 110.97% 74.86% 65.45% 101.52% 66.96% c.3.3. Standardised Approach-Exposures by Risk Classes and Risk Weights: Current Period Risk Groups Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non-commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due loans (*) Exposures in higher-risk categories by the Board Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Equity investments Other exposures Total 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Bank 123,969,034 19 19,698,205 144,915 7 428,064 331 15,589,896 539,200 8,166,980 2,998,688 2,252,422 200,695,329 60,334 4 77,240,762 14,259,232 13,582,498 2,290,741 7,594,166 5,978,602 288,100 84,645 56,669 362,589 143,667,258 144,922 428,064 331 26,069,632 204,233,221 77,240,762 14,259,232 21,176,664 8,557,443 503,903 5,661,559 129,630,924 1,172,603 21,283,610 9,914,473 16,129,096 14,259,232 27,369,096 77,240,762 269,074,150 100,610 711,027 220,768 1,273,213 21,504,378 15,576,032 220,768 534,635,055 179 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Risk Groups Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non-commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories by the Board Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Equity investments Other exposures Total 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Bank 102,567,261 300 9 75,464 15,676,244 2 325,075 12,905,644 622,766 11,216,960 3,016,803 1,898,065 197,096,251 577 60,215,454 18,897,250 13,085,222 1,583,537 9,131,342 3,042,554 37,703 48,951 72,663 118,243,514 75,466 325,075 300 26,021,246 200,735,820 60,215,454 18,897,250 22,216,564 4,626,091 159,317 4,888,627 107,456,188 100,000 17,739,637 9,262,771 13,528,410 18,897,250 29,116,813 60,215,454 254,320,892 101,115 73,240 181,741 201,115 17,921,378 14,151,398 181,741 483,789,988 d. Explanations on Counterparty credit risk d.1. Qualitative Explanations on Counterparty credit risk The counterparty credit risk that the Bank is exposed to be managed within the framework of general limit allocation and credit risk mitigation that are outlined in the credit risk policy. In setting general credit limits, the counterparty credit risks of customers as well as their cash and noncash risks are taken into account with a holistic view. Moreover, the total position of the transactions which create counterparty credit risk is also monitored under a separate risk limit. The counterparty credit risk, which stems from derivatives and repo style transactions including transactions with qualified central counterparties that result in liabilities for both sides, is measured according to the Appendix-2 and Appendix-4 of the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks” which is published on the Official Gazette no:29511 dated November 23, 2015. Counterparty credit risk valuation method based on the calculation of fair values of the derivative transactions is implemented. In calculating the potential credit risk, the amount of the contract is multiplied by the rates given in the regulation. The replacement costs of derivative instruments are calculated based on the valuation of the related contracts according to the fair value method. Most of the credit risk related to the derivative transactions with other banks is subject to daily collateral clearing agreements mutually signed with related parties and the counterparty credit risk is hence reduced. On the other hand, the risk-reducing effect of such agreements is not considered in the calculation of the counterparty credit risk under the capital adequacy legislation. There are no guarantees received or sold by credit derivatives by the Bank in the context of trading or banking accounts. 180 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Total 4,044,105 1,771,142 2,320,084 8,135,331 930,636 5,006,363 Replacement Cost 4,044,105 Potential Future Exposure Exposure after Credit Risk Mitigation 1,771,142 5,815,247 Risk Weighted Amounts 4,075,727 Replacement Cost 5,093,495 Potential Future Exposure Exposure after Credit Risk Mitigation 1,525,632 6,619,127 Risk Weighted Amounts 4,734,978 Total 5,093,495 1,525,632 d.3. Capital obligation for credit valuation adjustment (CVA): 4,373,060 10,992,187 1,988,672 6,723,650 d.2. Counterparty credit risk (CCR) approach analysis: Current Period Standardised Approach -CCR (for derivatives) (*) Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) (*) Transactions with central counterparties are not included. Prior Period Standardised Approach -CCR (for derivatives) Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) Total portfolio value with standardized approach CVA capital charge Total subject to the CVA capital charge d.4. CCR exposures by risk class and risk weights: Current Period Risk Groups Conditional and unconditional exposures to sovereigns and their central banks Conditional and unconditional exposures to regional and local governments Conditional and unconditional exposures to administrative bodies and non-commercial entities Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Exposures in high-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Equity investments Other Exposures Other Assets Total Current Period Prior Period Risk Amounts 5,815,247 5,815,247 Risk Weighted Amounts 1,938,968 1,938,968 Risk Amounts 6,619,127 6,619,127 Risk Weighted Amounts 2,286,247 2,286,247 0% 10% 20% 50% 75% 100% 150% Total Credit Exposure Risk Weights 23,920 23,920 1,201 1,201 44,003 2,991,436 40,593 5,078,181 2,991,436 40,593 2,005,754 3,028,424 40,593 3,060,560 8,135,331 181 Conditional and unconditional exposures to banks and securities firms 2,005,754 3,028,424 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Risk Groups 0% 10% 20% 50% 75% 100% 150% Total Credit Exposure Risk Weights Conditional and unconditional exposures to sovereigns and their central banks 160,290 Conditional and unconditional exposures to regional and local governments Conditional and unconditional exposures to administrative bodies and non-commercial entities Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Conditional and unconditional exposures to banks and securities firms 1,291,179 6,140,272 Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Exposures in high-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings 2,541 15,592 3,655 163,945 599 599 18,119 3,359,940 7,449,570 3,362,481 15,592 160,290 1,291,179 6,142,813 15,592 3,382,313 10,992,187 Collateral used in derivative transactions Received Collateral Given Collateral Segregated Unsegregated Segregated Unsegregated Collateral used in derivative transactions Received Collateral Given Collateral Segregated Unsegregated Segregated Unsegregated Collateral used in other transactions Given Collateral Received Collateral 1,974,562 5,783,834 7,758,396 Collateral used in other transactions Given Collateral Received Collateral 6,911,170 7,897,390 14,808,560 Equity investments Other Exposures Other Assets Total d.5. Collateral for CCR: Current Period Cash- Domestic Currency Cash- Other Currencies Total Prior Period Cash- Domestic Currency Cash- Other Currencies Total d.6. Credit derivatives exposures: None. 182 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Post CRM risk exposure 228,686 205,830 201,105 4,725 21,854 1,002 RWA 4,150 4,117 4,022 95 33 Post CRM risk exposure 236,485 210,519 208,966 1,553 20,552 5,414 RWA 4,373 4,210 4,179 31 163 d.7. Exposures to central counterparties (CCP): Exposure to Qualified Central Counterparties (QCCPs) (total) Exposures for trades at WCCPs (excluding initial margin and default fund contributions); of which (i) OTC Derivatives (ii) Exchange-traded Derivatives (iii) Repo-reverse repo transactions, credit securities transactions and securities or commodities lending or borrowing (iv) Netting sets where cross-product has been approved Segregated initial margin Non-segregated initial margin Paid guarantee fund amount Unpaid guarantee fund commitment Exposures to non-QCCPs (total) Exposures for trades at non-QCCPs (excluding initial margin and default fund contributions); of which (i) OTC Derivatives (ii) Exchange-traded Derivatives (iii) Securities financing transactions (iv) Nettinf sets where cross-product has been approved Segregated initial margin Non-segregated initial margin Pre-funded default fund contributions Unfunded default fund contributions e. Explanations on securitizations: None. f. Market Risk Explanations f.1. Qualitative information to be disclosed to the public regarding market risk Market risk is defined as the risk that may reduce the market value of the trading portfolio due to the changes in the risk factors named interest rate, exchange rates, equities and the price of commodities and options. The procedures for the management of market risk are discussed in the Bank’s “Asset and Liability Management Risk Policy” and those procedures are in line with the risk/return expectations of the Bank and with the limits that are defined in the risk appetite framework. Limits related to market risk; are established by the Board and are revised periodically in order to reflect market conditions and best practices in the industry. Compliance to those limits is closely monitored by the Risk Management Department, Asset and Liability Management Committee and by the executive departments. Additionally, compliance with the provisions relating to the procedures and policies of market risk management is audited by the internal audit system. Trading activities of the securities that are included in the calculation of market risk is carried out by taking the Asset-Liability Committee decisions, risk policies and established limits into consideration and risks arising due to these activities are hedged using derivatives transactions where necessary. Measurement of market risk, reporting of results, and monitoring compliance with the risk limits are among the key responsibilities of the Risk Management Department. Analyses related to market risk are reported to the Risk Comittee and to the Board via the Audit Committee by the Risk Management Deparment. The trading book of the Bank included in market risk calculations consists of on balance-sheet financial assets that are held for trading intent, derivatives that provide hedge to those instruments and foreign currency positions. The market risk carried by the Bank is measured and monitored using two methods known respectively as the Standard Method and the Value at Risk Model (VAR) and Expected Shortfall in accordance with the local regulations which are established in compliance with the international legislations. In this context, the exchange rate risk emerges as the most important component of the market risk. The market risk calculations using the Standard Method are performed at the end of each month and the measurement results are included in the statutory reports as well as being reported to the Bank’s top management. The Value at Risk Model and Expected Shortfall are another alternative for the Standard Method used for measuring and monitoring market risk. This model is used to measure the market risk on a daily basis in terms of interest rate risk, currency risk and equity share risk and is a part of the Bank’s daily internal reporting. Further retrospective testing (back-testing) is carried out on a daily basis to determine the reliability of the daily risk calculation by the VAR model, which is used to estimate the maximum possible loss for the following day. Scenario analyses which support the VAR model used to measure the losses that may occur in the ordinary market conditions are practiced, and the possible impacts of scenarios that are developed based on the future predictions and the past crises, on the value of the Bank’s portfolio are determined and the results are reported to the Bank’s top management. 183 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.2. Standardised Approach: Current Period Outright Products Interest rate risk (general and specific) Equity risk (general and specific) Foreign exchange risk Commodity risk Options Simplified approach Delta-plus method Scenario approach Securitisations Total g. Explanations on Operational Risk Current Period Prior Period RWA 5,535,576 1,876,275 386,538 2,923,650 349,113 230,362 RWE 6,268,539 1,935,613 581,925 3,040,813 710,188 97,024 230,362 97,024 5,765,938 6,365,563 The operational risk capital requirement is calculated according to Regulation on Measurement and Evaluation of Capital Adequacy of Banks’ article number 24, is measured using the Basic Indicator Approach once a year in parallel with domestic regulations. As of December 31, 2019, the operational risk amount is TL 29,109,592 (December 31, 2018: TL 24,924,269) and information about the calculation is given below. Current Period Gross Income Value at operational risk (Total*12.5) Prior Period Gross Income Value at operational risk (Total*12.5) 2 PP Amount 1 PP Amount CP Amount Total/No. of Years of Positive Gross Rate (%) Total 13,527,113 15,503,039 17,545,195 3 15 2,328,767 2 PP Amount 1 PP Amount CP Amount Total/No. of Years of Positive Gross Rate (%) Total 10,848,679 13,527,113 15,503,039 3 15 1,993,942 29,109,592 24,924,269 h. The interest rate risk of the banking book items: Interest rate risk arising from the banking accounts is defined as negative effect risk on capital of the changes in market interest rates due to differences in interest settlement and re- pricing on, differences in interest-earning assets taking part in the banking book; interest-bearing liabilities; interest-bearing derivative transactions inclusive of the policies established by the Board of Directors, is managed within the framework of the strategies set by the Bank Asset-Liability Committee. Compliance with internal risk limits for banking portfolio is closely and continuously monitored by the Risk Management Department and Asset-Liability Committee and the measurement results are reported to the Board of Directors on a monthly basis. Duration and sensitivity analysis are conducted on a monthly basis by the Bank in the scope of monitoring of interest rate risk arising from the banking books about Interest Rate Risk in the Banking Accounts from the Regulation on Measurement and Assessment of Standard Shock Method which is published in the Official Gazette No. 28034 dated 23 August 2011. In the duration analysis, the maturity gap between assets and liabilities of the balance sheet are determined by the calculation of the weighted average maturities based on the asset that sensitive to interest rate and liabilities and off-balance sheet transactions re-pricing period. In the interest rate risk sensitivity analysis, the influence of the various interest rate change scenarios to the economic value of the Bank’s capital is examined. The interest rate risk of the banking book item in accordance with the legal regulations is measured and monitored on a monthly basis within the scope of the Regulation about Measurement and Assessment of Interest Rate Risk in the Banking Accounts by Standard Shock Method. In the calculations committed due to the mentioned regulations, behavioral maturity modeling method is used for the deposits with low sensitivity to interest rate changes and demand deposits which is original maturities is longer than contractual maturities. Applied Shock (+/- x basis point) Revenue/Loss Revenue/Shareholders’ Equity - Loss/Shareholders’ Equity (+) 500 (-) 400 (+) 200 (-) 200 (+) 200 (-) 200 (7,266,235) 6,862,050 (570,281) 481,972 (219,256) 522,364 7,866,386 (8,055,772) (10.50)% 9.92% (0.82)% 0.70% (0.32)% 0.75% 11.37% (11.64)% Currency TL TL EUR EUR USD USD Total (for Negative Shocks) Total (for Positive Shocks) 184 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) j. Remuneration policy The Remuneration Committee, which is established to carry out the duties and activities related to the monitoring and supervision of the Bank’s remuneration applications on behalf of the Board of Directors, consists of two members. The Remuneration Committee meets at least twice a year, not exceeding six months, and reports to the Board of Directors on the results of the activities carried out and important matters considered to have an impact on the Bank’s position. As of the end of 2019, the Remuneration Committee met 7 times and made a total of 13 decisions. Regarding compliance with the Corporate Governance Principles, the Remuneration Committee monitors and supervises the practices related to wage management on behalf of the Board of Directors; the fees are in line with the Bank’s ethical values, internal balances and strategic objectives; the evaluation of the remuneration policy and its practices in the context of risk management; it is responsible for the presentation of the proposals determined in line with the requirements of the salary policy and the other responsibilities determined by the provisions of the applicable legislation and the fulfillment of the duties given by the Board of Directors in this framework. As of the end of 2019, the number of qualified employees working at the Bank is 23. The monetary and social rights of employees are determined in accordance with the Chartering Policy in the framework of the legislation related to the Collective Labor Agreement. The Bank carries out its practices with regard to remuneration policies within the framework of relevant banking and capital market legislation. This policy includes all managers and employees. Premium payments are made once a year to managers and managers who work in branches and headquarters units. It is considered that managerial premium payments are in line with the Bank’s long-term strategy and the risks assumed, as well as the performance of its employees. There are no variable fees for qualified employees in the Bank. The compliance of the wage levels in the bank with the sector wage levels is monitored by participating in independent and anonymous wage surveys, which are held twice a year. Within the scope of the remuneration policy, the Bank’s pricing practices are planned and executed on the basis of effective risk management, prevention of excessive risk taking, compliance with relevant legislation and scope and structure of the bank’s activities, strategies, long-term objectives and risk management structures. The fees to be paid to the managers and employees of the Bank at every stage; It is essential that the Bank is in line with its ethical values, internal balances anfd strategic objectives, and that it is not only associated with its short-term performance. Payments made to employees are determined in a manner that will positively impact the Bank’s corporate values and on the basis of objective conditions. Payments to be made to the managers of the units within the internal systems and to their staff are determined by taking into account the performance of the relevant personnel in relation to their functions, as they are in the audit or oversight, or are independent of the performance of the activity unit they control. XII. Explanations on Segment Reporting The Bank’s operations are classified as corporate, commercial, retail and private banking, and treasury/investment banking. The Bank provides services to the large corporations, SMEs and other trading companies through various financial media within the course of its corporate and commercial operations. Services such as project financing, operating and investment loans, deposit and cash management, credit cards, cheques and bills, foreign trade transactions and financing, letter of guarantees, letter of credits, forfeiting, foreign currency trading, bill collections, payrolls, investment accounts, tax collections and other banking services are provided for the aforementioned customer segments. Retail banking services are comprised of individuals needs such as deposits, consumer loans, overdraft accounts, credit cards, bill collections, remittances, foreign currency trading, safe- deposit boxes, insurance, tax collections, and investment accounts and by other banking services. Private banking category are comprised of any kind of financial and cash management related services provided for individuals within the high-income segment. Treasury transactions are comprised of medium- and long-term funding tools such as securities trading, money market transactions, spot and forward TL and foreign currency trading, and derivative transactions such as forwards, swaps, futures and options, as well as syndications and securitizations. The details about the aforementioned investments are stated in Note I.h-I.i of Section Five. Statement of information related to business segmentation is given below. Below mentioned information has been prepared with the data obtained from the Bank’s management reporting system. Current Period Interest Income Interest Expense Commission Income Commission Expense Dividend Income Trading Income/Loss (Net) Other Income Expected Credit Loss Other Operating Expense Income/Loss from Investments in Subsidiaries Accounted by Equity Method Income Before Tax Tax Provision Net Period Profit Total Assets Total Liabilities Corporate/ Commercial Banking Individual/Private Banking 25,229,979 5,998,452 4,932,444 847,577 5,736,914 1,828,096 7,778,533 9,255,152 1,887,775 245,000 560,736 3,920,797 Treasury Transaction/ Investment Activities 9,931,158 6,168,145 9,098 (6,397,400) 14,316 1,485 2,806,196 Unallocated 102,680 1,761,473 128,375 1,379,466 2,039,858 2,026,771 4,043,651 Total 43,042,350 23,183,222 6,948,594 1,379,466 9,098 (6,397,400) 3,146,751 8,325,906 9,792,544 2,806,196 6,874,451 806,864 6,067,587 215,915,460 118,664,564 56,901,472 163,906,235 122,315,728 88,236,897 72,926,811 97,251,775 468,059,471 468,059,471 185 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Interest Income Interest Expense Commission İncome Commission Expense Dividend Income Trading Income/Loss (Net) Other Income Provision Expense and Other Provision Expenses Other Operating Expense Income/Loss from Investments in Subsidiaries Accounted by Equity Method Income Before Tax Tax Provision Net Period Profit Total Assets Total Liabilities Corporate/ Commercial Banking Individual/Private Banking 23,485,509 4,820,219 3,858,997 552,664 3,414,162 1,465,299 6,929,032 7,711,033 1,470,016 208,930 442,152 3,078,751 Treasury Transaction/ Investment Activities 8,134,129 8,251,676 6,425 (4,071,660) 28,741 4,805 2,808,736 Unallocated 291,711 1,005,202 56,338 980,150 1,121,972 2,482,555 3,495,671 Total 38,840,381 21,788,130 5,385,351 980,150 6,425 (4,071,660) 1,912,307 6,343,674 8,039,721 2,808,736 7,729,865 960,780 6,769,085 205,739,511 95,602,149 50,766,300 134,923,149 99,249,014 98,173,833 60,632,779 87,688,473 416,387,604 416,387,604 SECTION FIVE: DISCLOSURES AND FOOTNOTES ON THE UNCONSOLIDATED FINANCIAL STATEMENTS I. DISCLOSURES AND FOOTNOTES ON ASSETS a. Cash and Central Bank of Turkey: a.1. Cash and balances with the Central Bank of Turkey: Cash in TL/Foreign Currency Central Bank of Turkey Other Total a.2. Information on balances with the Central Bank of Turkey: Unrestricted Demand Deposit Unrestricted Time Deposit Restricted Time Deposit Other (*) Total (*) The amount of reserve deposits held at the Central Bank of Turkey. a.3. Information on reserve requirements: Current Period Prior Period TL 2,091,507 3,171,023 5,262,530 FC 3,397,846 44,400,659 172,206 47,970,711 TL 2,256,376 4,164,611 FC 2,557,892 31,082,643 74,359 6,420,987 33,714,894 Current Period TL 3,171,023 FC Prior Period TL FC 20,785,146 4,164,611 14,044,132 3,171,023 23,615,513 44,400,659 4,164,611 17,038,511 31,082,643 As per the Communiqué no. 2013/15 “Reserve Deposits” of the Central Bank of the Republic of Turkey (“CBRT”), banks keep reserve deposits at the CBRT for their TL and FC liabilities mentioned in the communiqué. The reserve deposit rates vary according to their maturity compositions; the reserve deposit rates are realized between 1% - 7% for TL deposits and other liabilities, between 15% - 19% for FC deposits and between 5% - 21% for other FC liabilities. Reserves are calculated and set aside every two weeks on Friday for 14-day periods. In accordance with the related communiqué, CBRT pays interests TL and USD reserves. b. Information on Financial Assets at Fair Value through Profit and Loss: b.1. Financial Assets at fair value through profit and loss, which are given as collateral or blocked: As of December 31, 2019, and December 31, 2018, there are no financial assets at fair value through profit and loss, which are given as collateral or blocked. b.2. Financial assets at fair value through profit and loss, which are subject to repurchase agreements: Financial assets at fair value through profit and loss, which are subject to repurchase agreements as at December 31, 2019 are amounting to TL 91,705 (December 31, 2018: TL 138,057). b.3. All creditors including the Bank reached an agreement on restructuring the loans granted to the company which was previously followed under Loans in the previous period. As previously stated, loans of the company had been planning to be restructured based on required permits and necessary approvals within a new special purpose entity which was already incorporated or will be incorporated in the Republic of Turkey and owned by the creditors either directly or indirectly through takeover of the shares, that have been pledged by the company as a guarantee for the credit risk. Above mentioned process was completed in 2018 and, in this context the Bank owns 11.5972% of the newly formed special purpose entity. 186 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) At the Ordinary Meeting of General Assembly of 2018 held in the current period, it has been decided to increase the share capital of the mentioned company by TL 3,982,230, all to be covered by common receivables. Whereas the Bank’s ownership ratio in the company has not changed, the nominal value of the shares owned increased from TL 6 to TL 461,833. Amount in question is recognized under Assets Held for Sale and Discontinued Operations account. The remaining loan amount after the capital increase amounting to TL 1,886,716 (31.12.2018: TL 2,126,927), is accounted under financial assets at fair value through profit or loss. The amount of impairment recognized for the total asset converted into loan and capital is TL 251,391 and is classified under the specified item. Assets, which are converted into loan and capital, amounted TL 2,348,549 are measured at fair value under TFRS 9 “Financial Instruments” standard and TFRS 5 “Assets Held For Sale and Discontinued Operations” Standard. The mentioned loan’s fair value is determined by an independent valuation company, considering the various valuation method such as discounted cash flows, similar market multipliers, similar transaction multipliers in the same sector, market value and analyst reports. The potential changes in the fundamental estimations and assumptions in the valuation work may affect the carrying fair value of the asset. Related asset balance is followed as Level 3 within the scope of “TFRS 13 - Fair Value Measurement” standard. If the growth rate and risk-free return rate on investment used in the discounted cash flow method in the valuation report are increased or decreased by 0.25%, provided that all other variables are constant, the total value of assets recognized in the financial statements and profit before tax will increase by about TL 55 million (full TL amount) or will decrease by TL 49 million (full TL amount). b.4. TL 1,061,158 of other financial assets consists of the mutual funds; Quasar İstanbul Konut Gayrimenkul and Quasar İstanbul Ticari Gayrimenkul which were founded by İş Portföy Yönetimi A.Ş. c. Positive differences on derivative financial assets held for trading: Derivative Financial Assets at Fair Value Through Profit or Loss Forward Transactions Swap Transactions Futures Options Other Total d. Information on Banks: d.1. Information on Banks: Banks Domestic Banks Foreign Banks Foreign Head Office and Branches Total d.2. Information on foreign banks: EU Countries USA, Canada OECD Countries (*) Off-shore Banking Regions Other Total (*) OECD countries other than the EU countries, USA and Canada. Current Period Prior Period TL 82,015 136,748 FC 284,468 3,496,361 TL 187,680 249,817 FC 371,202 4,116,188 678 43,835 4,526 164,082 219,441 3,824,664 442,023 4,651,472 Current Period TL FC Prior Period TL 462,385 220,975 1,281,044 10,989,905 109,167 284,488 FC 602,926 7,386,559 683,360 12,270,949 393,655 7,989,485 Restricted Amount Unrestricted Amount Current Period Prior Period Current Period Prior Period 5,061,814 4,125,760 53,765 1,277,301 10,518,640 4,119,978 2,079,104 38,916 1,210,156 7,448,154 692,240 692,240 222,893 222,893 187 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Expected credit loss for cash and cash equivalents: Beginning of period provisions Additional provisions within the period Transfers within the period Write-offs from Assets Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Currency Exchange Difference Current Period Ending Provisions Current Period Prior Period Stage 1 Stage 2 Stage 2 Stage 1 Stage 1 17,651 27,076 (16,999) 78 27,806 Stage 2 9,571 15,433 (9,228) 1,875 17,651 e. Information on Financial Assets at Fair Value through Other Comprehensive Income: e.1. Information on financial assets at Fair Value through Other Comprehensive Income, which are given as collateral or blocked: Derivative financial assets at fair value through other comprehensive income, which are given as collateral or blocked, amount to TL 6,258,965 as at December 31, 2019. (December 31, 2018: TL 6,276,354). e.2. Information on financial assets at Fair Value Through Other Comprehensive Income, which are subject to repurchase agreements: Derivative financial assets at fair value through other comprehensive income, which are subject to repurchase agreements amount to TL 1,228,583 as at December 31, 2019. (December 31, 2018: TL 6,415,389). e.3. Information on financial assets at Fair Value through Other Comprehensive Income: Debt Securities Quoted on a Stock Exchange Not-Quoted (*) Share Certificates Quoted on a Stock Exchange Not-Quoted Impairment Losses (-) Other Total Current Period 52,115,479 35,881,877 16,233,602 433,824 433,824 777,157 100,199 51,872,345 Prior Period 42,829,002 29,304,592 13,524,410 282,657 282,657 2,388,485 90,949 40,814,123 (*) Refers to the debt securities, which are not quoted on the Stock Exchange or which are not traded, although quoted, on the Stock Exchange at the end of the related period f. Information related to loans: f.1. Information on all types of loans and advances given to shareholders and employees of the Bank: Direct Lending to Shareholders Corporate Shareholders Individual Shareholders Indirect Lending to Shareholders Loans and Other Receivables to Employees Total Current Period Prior Period Cash Non-Cash Cash Non-Cash 264,231 264,231 203 203 235,091 235,091 38 38 188 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.2. Information about the Standard loans and loans under close monitoring and loans under close monitoring that have been restructured or rescheduled: Cash Loans Non-specialized loans Corporation Loans Export Loans Import Loans Loans Extended to Financial Sector Consumer Loans Credit Cards Other Specialized Loans Other Receivables Total 12 Month Expected Credit Losses (Stage I) Significant Increase in Credit Risk (Stage II) Loans Under Close Monitoring Restructured Loans Loans Not Subject to Restructuring Loans with Revised Contract Terms 17,949,515 12,116,924 618,152 8,110,549 5,942,797 70,236 2,600,198 664,780 1,949,461 473,727 1,623,789 Refinance 10,514,521 4,805,131 152,391 1,044,840 4,512,159 Standard Loans 233,785,499 108,396,128 20,213,157 5,946,954 45,341,874 18,772,757 35,114,629 233,785,499 17,949,515 8,110,549 10,514,521 Current Period Prior Period Standard Loans 1,457,857 Loans Under Close Monitoring Standard Loans 1,862,573 Loans Under Close Monitoring 3,696,174 2,884,789 Changes observed in the expected credit loss for the Stage 1 and Stage 2 loans according to TFRS 9, is due to the fluctuation of credit default probabilities mainly depending on the expectations. The increase in the loan balance classified in Stage 2 also affects the mentioned change. The increase in the expected loss for the Stage 3 loans is effected by the increase in the loan balance classified in this group. f.3. Information on Maturity analysis of cash loans Cash Loans Short-term Loans and Other Receivables Medium and Long-term Loans and Other Receivables Loans under close monitoring Loans Not Subject to Restructuring Restructured Loans 2,459,050 15,490,465 1,040,057 17,585,013 Standard Loans 57,601,992 176,183,507 189 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.4. Information on consumer loans, retail credit cards, personnel loans and personnel credit cards: Short-Term Medium and Long Term Interest and Income Accruals 1,379,351 11,446 27,250 1,340,655 13,861,588 5,494,744 8,366,844 22,527 22,527 18,777 18,777 104,822 41,068 63,754 477 477 1,219,416 45,827,240 17,305,368 499,549 28,022,323 4,615 4,615 775,948 775,948 124,106 2,464 146 121,496 380,418 116,101 5,137 259,180 14,768 14,768 52,224 52,224 1,047 8 1 1,038 2,798 2,798 194 194 Total 47,587,009 17,432,915 531,936 29,622,158 19,383 19,383 14,689,760 6,270,692 8,419,068 22,527 22,527 143,930 2,472 147 141,311 107,814 43,866 63,948 477 477 16,606,958 46,734,707 465,825 63,807,490 17,174 1,236,590 Consumer Loans - TL Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Consumer Loans - FC Indexed Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Consumer Loans - FC Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Retail Credit Cards - TL With Installments Without Installments Retail Credit Cards - FC With Installments Without Installments Personnel Loans-TL Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Personnel Loans- FC Indexed Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Personnel Loans - FC Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans Personnel Credit Cards - TL With Installments Without Installments Personnel Credit Cards-FC With Installments Without Installments Overdraft Accounts - TL (real persons) Overdraft Accounts - FC (real persons) Total 190 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.5. Information on commercial installments loans and corporate credit cards: Commercial Loans With Installments-TL Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Commercial Loans Commercial Loans With Installments-FC Indexed Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Commercial Loans Short-Term 2,336,598 339 97,766 2,238,493 Medium and Long Term 38,208,813 893,940 2,143,039 35,171,834 798,805 16,264 74,852 707,689 Interest and Income Accruals 733,050 7,712 22,411 702,927 541,159 12,029 42,143 486,987 Total 41,278,461 901,991 2,263,216 38,113,254 1,339,964 28,293 116,995 1,194,676 Commercial Loans With Installments-FC 28,227 3,704,651 47,720 3,780,598 Real Estate Loans Vehicle Loans General Purpose Commercial Loans 28,227 3,704,651 Other Commercial Loans Corporate Credit Cards-TL With Installments Without Installments Corporate Credit Cards-FC With Installments Without Installments Overdraft Accounts - TL (corporate) Overdraft Accounts - FC (corporate) Total f.6. Allocation of loan by borrowers: Public Private Total f.7. Domestic and foreign loans: Domestic Loans Foreign Loans Total f.8. Loans granted to subsidiaries and associates: Direct Loans Granted to Subsidiaries and Associates Indirect Loans Granted to Subsidiaries and Associates Total f.9. Information on impairment provisions of Loans (Stage 3): Loans with Limited Collectability Loans with Doubtful Collectability Uncollectible Loans Total 70,846 70,846 5,004,540 2,203,031 2,801,509 655 655 1,377,574 47,720 14,645 14,645 3,780,598 5,090,031 2,273,877 2,816,154 655 655 35,770 1,413,344 8,747,594 42,783,115 1,372,344 52,903,053 Current Period 3,801,944 266,558,140 270,360,084 Current Period 262,054,760 8,305,324 270,360,084 Prior Period 766,673 257,422,691 258,189,364 Prior Period 248,991,885 9,197,479 258,189,364 Current Period 1,735,386 Prior Period 958,569 1,735,386 958,569 Current Period 571,870 2,930,004 6,824,157 10,326,031 Prior Period 1,011,581 1,321,646 4,232,371 6,565,598 191 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.10. Information on non-performing loans (Net): f.10.1. Information on non-performing loans, which are restructured or rescheduled: Group III Loans with Limited Collectibility Group IV Loans with Doubtful Collectibility Group V Uncollectible Loans Current Period (Gross amounts before the provisions) Restructured Loans Prior Period (Gross amounts before the specific provisions) Restructured Loans and Other Receivables f.10.2. Information on the movement of total non-performing loans Prior Period Ending Balance Corporate and Commercial Loans Retail Loans Credit Cards Other Additions (+) Corporate and Commercial Loans Retail Loans Credit Cards Other Transfers from Other NPL Categories (+) Corporate and Commercial Loans Retail Loans Credit Cards Other Transfers to Other NPL Categories (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Collections (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Write-Offs (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Debt Sale (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Current Period Ending Balance Corporate and Commercial Loans Retail Loans Credit Cards Other Provisions (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Net Balance on Balance Sheet 65,922 65,922 47,359 47,359 445,066 445,066 54,189 54,189 Group III Loans with Limited Collectability 3,025,467 2,765,700 156,244 103,523 Group IV Loans with Doubtful Collectability 2,900,420 2,567,749 196,744 135,927 12,199,695 10,722,658 906,627 570,410 12,614,386 11,486,408 677,468 450,510 1,287,740 963,648 208,171 115,921 18,153 17,654 343 156 1,304,883 1,020,648 176,889 107,346 571,870 420,543 84,472 66,855 733,013 267,518 260,729 4,181 2,608 12,614,386 11,486,408 677,468 450,510 8,386,555 7,633,230 432,633 320,692 933,463 727,721 136,570 69,172 7,792 6,684 592 516 115 82 33 6,454,399 5,947,251 308,516 198,632 2,930,004 2,630,266 164,163 135,575 3,524,395 832,989 832,989 64,897 64,897 Group V Uncollectible Loans 5,265,802 3,803,854 717,716 645,159 99,073 315,688 288,857 3,321 904 22,606 8,386,555 7,633,230 432,633 320,692 1,300,482 1,013,601 200,460 84,103 2,318 28,500 26,304 1,123 1,007 66 1,514,871 985,415 230,836 293,907 4,713 11,124,192 9,700,621 721,251 587,738 114,582 6,824,157 5,618,603 583,172 522,534 99,848 4,300,035 The part of the receivables constitute non-performing loans amounting to TL 418,399 are transferred to Gelecek Varlık Yönetimi A.Ş. in May 2019 by collecting TL 30,000 amount of sales amount in cash and part of the receivables constitute non-performing loans amounting to TL 1,096,587 are transferred to Efes Varlık Yönetim A.Ş., Hayat Varlık Yönetimi A.Ş., Birikim Varlık Yönetim A.Ş. and Doğru Varlık Yönetimi A.Ş. in September 2019 by collecting TL 32,400 of sales amount in cash. 192 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.10.3. Information on foreign currency non-performing loans: Group III Group IV Loans with Limited Collectibility Loans with Doubtful Collectability Group V Uncollectible Loans Current Period Balance at the End of the Period Provisions (-) Net Balance on Balance Sheet (*) Prior Period Period Ending Balance Specific Provisions (-) Net Balance on Balance Sheet (*) (*) In addition to the loans extended in foreign currency, loans which are monitored in Turkish Lira are included. f.10.4. Information on gross and net non-performing loans as per customer categories: Current Period (Net) Loans to Individuals and Corporate (Gross) Provisions (-) Loans to Individuals and Corporate (Net) Banks (Gross) Provisions (-) Banks (Net) Other Loans (Gross) Provisions (-) Other Loans (Net) Loans to Individuals and Corporate (Gross) Specific Provisions (-) Loans to Individuals and Corporate (Net) Banks (Gross) Specific Provisions (-) Banks (Net) Other Loans and Receivables (Gross) Specific Provisions (-) Other Loans and Receivables (Net) 81,910 36,242 45,668 1,799,332 418,845 1,380,487 3,916,536 1,628,380 2,288,156 1,344,847 525,594 819,253 Group III Group IV Loans with Limited Collectibility Loans with Doubtful Collectibility 733,013 1,304,883 571,870 733,013 3,524,395 6,454,399 2,930,004 3,524,395 2,013,886 3,025,467 1,011,581 2,013,886 1,578,774 2,900,420 1,321,646 1,578,774 5,187,955 2,167,497 3,020,458 1,126,958 894,704 232,254 Group V Uncollectible Loans 4,300,035 11,009,610 6,724,309 4,285,301 114,582 99,848 14,734 1,033,431 5,166,729 4,148,105 1,018,624 99,073 84,266 14,807 f.10.5. Information on interest accruals, valuation differences and related provisions calculated for non-performing loans: Current Period (Net) Interest accruals and valuation differences Provisions (-) Prior Period (Net) Interest accruals and valuation differences Provisions (-) Group III Group IV Loans with Limited Collectibility Loans with Doubtful Collectibility Group V Uncollectible Loans 64,957 113,840 48,883 186,874 275,283 88,409 341,007 603,791 262,784 126,145 252,593 126,448 317,525 730,071 412,546 24,139 57,167 33,028 f.10.6. Outline of the liquidation policy for uncollectible loans and other receivables In order to ensure the liquidation of non-performing loans, all possibilities evaluated to ensure maximum collection according to the legislation. First of all, administrative initiatives are taken to deal with the borrower. Collection through legal proceedings used if there is no possibility of collection and configuration with the interviews for other receivables. f.10.7. Information on write-off policy The Bank’s general policy for write-offs and receivables under follow-up is to write of such loans and receivables that are proven to be uncollectible in legal follow-up process within the instructions of Tax Procedure Law. 193 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) In addition, loans that are allocated for special provisions and considered as there’s no reasonable expectations to collect back can also be write-off. In the current period, the bank does not have any loans that are write-off within the framework of this method. Expected Credit Loss Provisions beginning of the period Additional provisions within the period Transfers within the period Write-offs from Assets Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Currency Exchange Difference Provisions at the end of the period Current Period Prior Period Stage 1 1,862,573 346,840 (694,090) 119,363 (154,979) (43,168) 21,318 Stage 2 2,884,789 2,635,882 (1,110,536) (112,993) 159,542 (780,387) 19,877 Stage 3 6,565,598 4,761,655 (365,276) (1,451,475) (6,370) (4,563) 823,555 2,907 Stage 1 2,006,862 517,082 (700,256) 58,360 (250,345) (71,299) 302,169 Stage 2 1,277,345 2,641,006 (139,315) (50,218) 255,154 (1,128,882) 29,699 Stage 3 3,874,561 2,777,487 (307,408) (953,606) (8,142) (4,809) 1,200,181 (12,666) 1,457,857 3,696,174 10,326,031 1,862,573 2,884,789 6,565,598 g. Financial Assets Measured at Amortised Cost: g.1. Financial Assets Measured at Amortised Cost given as collateral or blocked: Financial assets measured at amortised cost given as collateral or blocked amount to TL 1,816,815 as at December 31, 2019 (December 31, 2018: TL 2,608,391). g.2. Financial Assets Measured at Amortised Cost subject to repurchase agreements: Financial assets measured at amortised cost, which are subject to repurchase agreements amount to TL 33,869 as at December 31, 2019 (December 31, 2018: TL 4,132,381). g.3. Information on government securities measured at amortised cost: Government Bonds Treasury Bills Other Public Debt Securities Total g.4. Information on financial assets measured at amortised cost: Debt Securities Quoted on a Stock Exchange Not Quoted (*) Impairment Losses (-) Total (*) Indicates unlisted debt securities, and debt securities that have not been traded at the end of the related periods while they are listed g.5. Movement of financial assets measured at amortised cost within the year: Beginning Balance Foreign Exchange Differences Arising on Monetary Assets Purchases During the Year Disposals through Sales and Redemption Impairment Losses (-) Valuation effect Balance at the End of the Period Expected credit loss for financial assets measured at amortised cost Current Period 30,113,588 Prior Period 26,038,932 30,113,588 26,038,932 Current Period 30,888,355 30,111,594 776,761 Prior Period 26,727,963 26,047,980 679,983 30,888,355 26,727,963 Current Period 26,727,963 305,374 11,142,522 (8,299,544) 1,012,040 30,888,355 Prior Period 7,614,815 601,821 21,206,740 (3,737,743) 1,042,330 26,727,963 Current Period Prior Period Stage 2 Stage 1 Stage 1 6,468 5,421 (4,227) 106 7,768 Stage 1 Stage 2 Stage 2 3,771 5,944 (3,518) 271 6,468 Beginning Term Provision Additional Provisions During the Period Disposal During the Period Write-off Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Exchange Rate Differences Period-end Provisions 194 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h. Information on associates (Net): h.1. General information on associates: . o N 1- 2- 3- Title Address (City/Country) Arap Türk Bankası A.Ş. Bankalararası Kart Merkezi A.Ş. Kredi Kayıt Bürosu A.Ş. İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY Bank’s Share Percentage- If Different, Voting Percentage (%) Bank’s Risk Group Share Percentage (%) 20.58 9.98 9.09 20.58 9.98 9.09 h.2. Information on financial statements of associates in the above order (*): . o N 1- 2- 3- Total Assets 5,249,643 147,868 348,965 Shareholders’ Equity Total Tangible Assets 1,072,947 93,468 224,008 154,138 65,949 234,333 Interest Income (**) 346,762 3,852 8,774 Securities Income Current Period Profit/Loss Prior Period Profit/Loss Fair Value 15 164,509 28,503 26,579 103,243 15,603 34,818 (*) Shows September, 2019 amounts for Bankalararası Kart Merkezi A.Ş and Kredi Kayıt Bürosu A.Ş,, December 31, 2019 Arap Türk Bankası A.Ş. amounts for other associates. (**) Includes interest income on securities. h.3. Movement of investments in associates: Beginning Balance Movements During the Period Purchases Bonus Shares Acquired Dividends Received from Current Year Profit Sales Revaluation Increase (*) Impairment Balance at the end of the period Capital commitments Contribution in equity at the end of the period (%) (*) The differences arising from accounting by equity method is included. h.4. Sectoral information on financial associates and the related carrying amounts: Associates Banks Insurance Companies Factoring Companies Leasing Companies Finance Companies Other Financial Participations Total h.5. Associates quoted on a stock exchange: None. h.6. Associates disposed of in the current period: None. h.7. Associates acquired in the current period: None. Current Period Prior Period 206,775 185,399 43,684 21,376 250,459 206,775 Current Period Prior Period 220,768 181,741 220,768 181,741 195 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i. Information on subsidiaries (Net): i.1. Information on equity adequacy of major subsidiaries: COMMON EQUITY TIER I CAPITAL Common Equity Tier I Capital Before Deductions Deductions from Common Equity Tier I Capital (-) Total Common Equity Tier I Capital ADDITIONAL TIER I CAPITAL Additional Tier I Capital before Deductions Deductions from Additional Tier I Capital (-) Total Tier I Capital TIER II CAPITAL Tier II Capital Before Deductions Deduction from Tier II Capital (-) Total Tier II Capital Total Tier I Capital and Tier II Capital Deductions from Total Tier I Capital and Tier II Capital (-) Türkiye Sınai Kalkınma Bankası A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. 5,736,081 441,749 5,294,332 3,860,612 1,316 3,859,296 Insurance/ Reinsurance Companies 3,455,322 112,806 3,342,516 İş Finansal Kiralama A.Ş. İş Yatırım Menkul Değerler A.Ş. 1,209,037 4,967 1,204,070 1,114,079 74,173 1,039,906 5,294,332 3,859,296 3,342,516 1,204,070 1,039,906 2,273,513 2,273,513 7,567,845 3,859,296 3,342,516 1,204,070 1,039,906 EQUITY 7,567,845 3,859,296 3,342,516 1,204,070 1,039,906 i. Information on subsidiaries (Net): i.2. General information on subsidiaries (*): o N 1- 2- 3- 4- 5- 6- 7- 8- 9- Title Anadolu Hayat Emeklilik A.Ş. JSC İsbank JSC Isbank Georgia İş Finansal Kiralama A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Merkezleri Yönetim ve İşletim A.Ş. İş Net Elektronik Bilgi Üretim Dağıtım Ticaret ve İletişim Hizmetleri A.Ş. İş Yatırım Menkul Değerler A.Ş. İşbank AG 10- Kültür Yayınları İş Türk A.Ş. 11- Milli Reasürans T.A.Ş. 12- Trakya Yatırım Holding A.Ş. 13- Türkiye Sınai Kalkınma Bankası A.Ş. 14- Türkiye Şişe ve Cam Fabrikaları A.Ş. Address (City/Country) İstanbul/TURKEY Moscow/RUSSIA Tbilisi/GEORGIA İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İstanbul TURKEY İstanbul TURKEY Frankfurt-Main/GERMANY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY (*) The purchased free float shares of listed subsidiaries in Borsa Istanbul (BIST) namely; Anadolu Hayat Emeklilik A.Ş., İş Finansal Kiralama A.Ş, and İş Yatırım Menkul Değerler A.Ş., which are booked under “Financial Assets at Fair Value Through Profit or Loss” account is not included. (Board of Directors Decision dated December 25, 2015) Bank’s Share Percentage-if Different, Voting Rights (%) Bank’s Risk Group Share Percentage (%) 62.00 100.00 100.00 27.79 47.90 86.33 94.65 65.65 100.00 99.17 77.06 100.00 41.44 67.54 83.00 100.00 100.00 58.29 63.70 100 100 70.69 100.00 100.00 77.06 100.00 50.92 75.81 196 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i.3. Financial statement information related to subsidiaries in the above order (*): Total Assets Shareholders’ Equity Total Tangible Assets Interest Income (**) Securities Income Current Period Profit/Loss Prior Period Profit/Loss 27,146,995 1,285,889 1,598,549 570,461 9,088,299 5,716,357 88,750 80,981 6,717,106 12,000,811 50,716 4,531,965 868,561 42,253,011 403,334 177,827 1,273,933 3,860,227 39,505 59,061 1,393,135 1,369,801 36,742 2,135,841 599,647 5,178,989 259,064 46,994 1,931 18,371 4,025,325 8,767 24,139 154,037 168,516 1,806 639,471 318,276 690,601 38,750,838 19,133,385 16,115,534 293,169 99,454 33,007 951,136 12,812 3,464 6,165 254,079 369,824 399 285,103 14,710 3,313,001 411,447 35,062 12,055 4,593 708 20 378,617 2,565 12 68,809 11,259 13,399 360,692 16,796 11,640 84,292 297,390 10,782 (847) 420,975 77,784 9,490 312,511 3,953 736,141 254,663 10,286 12,993 197,537 341,611 9,951 1,610 234,285 132,734 8,508 278,213 33,765 663,263 498,061 2,700,319 3,365,897 11,999,250 Additional Shareholders’ Equity Required Fair Value 2,941,630 2,667,182 1,673,019 1,623,060 3,421,600 o N 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- (*) Shows December, 2018 amounts for Trakya Yatırım Holding A.Ş., İş Merkezleri Yönetim ve İşletim A.Ş., İş Net Elektronik Bilgi Üretim Dağıtım Ticaret ve İletişim Hizmetleri A.Ş. and Kültür Yayınları İş Türk A.Ş., shows December 31, 2019 amounts for other associates. (**) Includes interest income on securities. i.4. Movement of investments in subsidiaries: Balance at the Beginning of the Period Movements in the Period Purchases (*) Bonus Shares Acquired Dividends Received from Current Year Profit Sales Revaluation Surplus (**) Impairment Balance at the End of the Period Capital Commitments Contribution in equity at the end of the period (%) (*) Is due to the in the cash capital increase realized by Milli Reasürans T.A.Ş. (**) The differences arising from accounting by equity method is included. i.5. Sectoral information on financial subsidiaries and the related carrying amounts: Banks Insurance Companies Factoring Companies Leasing Companies Finance Companies Other Financial Subsidiaries Total i.6. Subsidiaries quoted on stock exchange: Traded on domestic stock exchanges Traded on foreign stock exchanges Total Current Period 17,431,945 Prior Period 13,616,844 8,500 157,796 3,379,650 3,657,305 20,820,095 17,431,945 Current Period 4,183,845 2,836,609 Prior Period 3,432,976 2,294,172 331,262 300,038 2,563,986 9,915,702 2,228,556 8,255,742 Current Period 15,941,409 Prior Period 13,527,246 15,941,409 13,527,246 197 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i.7. Subsidiaries disposed of in the current period: None. i.8. Subsidiaries acquired in the current period: None. j. Information on jointly controlled entities: There are no jointly controlled entities of the Bank. k. Information regarding finance lease receivables of the Bank (Net): The Bank has no finance lease receivables. l. Explanations on derivative financial assets held for risk management: The Bank has no derivative financial assets held for risk management. m. Information on tangible assets (net): Prior Period Cost Accumulated Depreciation Net Book Value Current Period End: Net Book Value at the Beginning of the Period Change During the Period (Net) (*) Depreciation Impairment Net Currency Translation Differences (*) Cost at the Period End Accumulated Depreciation at the Period End Closing Net Book Value Real Estates Leased Tangible Assets Buildings Under Construction Vehicles Other Tangible Assets Total 4,471,297 (45,128) 4,426,169 4,426,169 53,794 (17,632) 1,679,972 (328,347) 8,901 8,901 8,901 8,127 4,490,249 (27,918) 1,934,382 (582,757) 17,028 4,462,331 1,351,625 17,028 20,087 (13,996) 6,091 6,091 3,026 (2,536) (111) 22,069 (15,599) 6,470 2,662,365 7,162,650 (1,973,212) (2,032,336) 689,153 5,130,314 689,153 170,200 (225,603) 5,130,314 1,915,119 (574,118) (8,637) (8,748) 2,558,752 9,022,480 (1,933,639) (2,559,913) 625,113 6,462,567 (*) The balance includes the movements in cost and accumulated depreciation items. n. Information on Intangible Assets: Net Book Value at the Beginning of the Period Change During the Period (Net) (*) Depreciation Impairment Net Currency Translation Differences (*) Cost at the Period End Accumulated Depreciation at Period End Closing Net Book Value (*) The balance includes the movements in cost and accumulated depreciation items. o. Explanations on investment property: The Bank has no investment property. p. Information on deferred tax asset: Current Period 623,294 578,024 (287,855) 46 2,776,848 (1,863,339) 913,509 Prior Period 557,416 377,319 (311,870) 429 2,198,614 (1,575,320) 623,294 As at December 31, 2019, the Bank has deferred tax asset amounting to TL 1,831,108. Such deferred tax asset is calculated based on the temporary differences between the book value of the Bank’s assets and liabilities and their tax basis measured as per the prevailing tax regulation. When the items comprising, the temporary differences are followed under equity, the related tax asset/liability is directly recognized under equity items. Deferred Tax (Asset)/Liability: Tangible and Intangible Assets Provisions (*) Valuation of Financial Assets Other Net Deferred Tax (Asset)/Liability: Current Period Prior Period 421,527 (2,318,125) 90,479 (24,989) (1,831,108) 370,516 (2,076,270) 223,171 (10,323) (1,492,906) (*) Comprised of employee termination benefits, actual and technical deficits of the pension fund, the provisions for credit card bonus points, expected credit loss for Stage 1 and Stage 2 loans and other provisions. 198 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) q. The deferred tax assets is as follows: Opening Balance TFRS 9 Opening Effect Recognised Under Previous Years’ Profits and Losses Deferred Tax Income/(Expense) (Net) Deferred Taxes Recognised Under Shareholders’ Equity Deferred Taxes Recognised Under Previous Years’ Profits and Losses Exchange Rate Differences Deferred Tax Asset r. Information on assets held for sale and discontinued operations: Balance at the Beginning of the Period Transfers (Net) Depreciation (Net) Impairment Losses (-) Balance at the End of the Period Current Period 1,492,906 885,740 (547,538) Prior Period 508,969 515,297 233,613 321,829 (86,877) 75 1,831,108 1,492,906 Current Period Prior Period 243,350 858,950 (119) 155,920 87,510 (80) 1,102,181 243,350 Investment in a special purpose company whose details be given in section five footnote I.b.3 is classified within the scope of “TFRS-5 Assets Held for Sale and Discontinued Operations” from prior period. As stated in the same footnote, share of the Bank in the company’s capital nominal values increase from TL 6 to TL 461,833 and this amount is disclosed under the line of Transfers (Net). On the other hands an international investment bank is authorized as a sales advisor in the current period for the sale of the relevant company or the shares owned by the company and in this context, necessary works related to the sale and negotiations with potential investors will be initiated. The other assets classified as “Assets Held for Sale” consist of real estates. Other than the capital investment mentioned above, the change balance in the current period includes TL 330,000 of real estate acquired due to a receivable classified as assets held for sale during the period while being monitored under other assets. Those real estates subject to sale are announced on the Bank’s web site. Announcements about the real estates subject to sale are also made by means of newspaper advertisements and similar media. The Bank has no discontinued operations. s. Information on Other Assets: The “other assets” item of the balance sheet does not exceed 10% of total assets. II. DISCLOSURES AND FOOTNOTES ON LIABILITIES a. Information on Deposits: a.1. The maturity structure of deposits (Current Period): Savings Deposits Foreign Currency Deposits Residents in Turkey Residents Abroad Public Sector Deposits Commercial Deposits Other Institutions Deposits Precious Metals Deposits Interbank Deposits The Central Bank of the Republic of Turkey Domestic Banks Foreign Banks Participations Banks Other Total Demand 17,391,671 44,491,065 39,390,827 5,100,238 947,893 11,813,802 459,012 8,435,010 501,725 485 4,980 496,084 176 7 Days Notice Up to 1 Month 1-3 Months 3-6 Months 6 Months to 1 Year 1 Year and Over Accumulated Deposits Total 5,038,638 54,412,656 2,914,178 918,450 876,065 10,875 81,562,533 17,789,600 74,516,605 4,948,612 1,931,954 8,143,121 1,488 151,822,445 16,709,626 64,598,841 3,758,012 1,161,085 3,600,705 1,072 129,220,168 1,079,974 9,917,764 1,190,600 770,869 4,542,416 416 22,602,277 2,499 48,966 422 1 9,339,963 16,620,754 543,561 1,589,085 572,741 4,072,570 1,096,957 160,474 184,611 1,666,281 1,782,719 37,813 42,627 1,689,738 253,115 468,271 192 72,812 48,199 85,211 858,050 808,231 42,937 244,518 1,739,782 42,627 8,597 468,271 999,973 39,979,977 6,409,953 10,432,383 4,714,738 485 1,150,485 3,563,592 176 84,040,178 34,409,722 151,638,881 9,584,170 6,542,817 9,693,871 12,363 295,922,002 199 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.2. The maturity structure of deposits (Prior Period): Savings Deposits Foreign Currency Deposits Residents in Turkey Residents Abroad Public Sector Deposits Commercial Deposits Other Institutions Deposits Precious Metals Deposits Interbank Deposits The Central Bank of the Republic of Turkey Domestic Banks Foreign Banks Participations Banks Other Total Demand 12,472,331 32,392,356 28,300,302 4,092,054 936,429 8,303,396 367,443 4,892,580 597,042 126 8,450 588,366 100 7 Days Notice Up to 1 Month 1-3 Months 3-6 Months 6 Months to 1 Year 1 Year and Over Accumulated Deposits Total 1,873,572 47,480,107 7,676,938 596,930 672,433 9,964 70,782,275 11,377,209 63,238,470 5,201,564 2,139,040 8,899,502 1,324 123,249,465 10,289,444 54,948,404 4,053,932 1,015,560 3,347,563 1,099 101,956,304 1,087,765 8,290,066 1,147,632 1,123,480 5,551,939 225 21,293,161 2,804 38,128 1,045 1 546 4,565,999 11,989,877 2,348,226 203,302 1,120,811 81,886 98,617 3,750,022 6,353,013 142,590 1,673,308 1,464,344 605,717 29,923 981,989 186,159 52,839 56,276 392,794 1,411,951 261,357 1,464,344 603,030 2,687 2,044 184,115 4,165 388,629 978,953 28,531,611 10,635,126 6,172,052 4,919,364 126 2,029,640 2,889,498 100 59,961,577 19,673,395 128,103,538 22,186,503 4,137,344 11,195,201 11,288 245,268,846 a.3. Savings deposits which are under the guarantee of Savings Deposits Insurance Fund exceeding the insurance limit: Savings Deposits Savings Deposits Foreign Currency Savings Deposits Other Deposits in the Form of Savings Deposits Foreign Branches’ Deposits Under Foreign Authorities’ Insurance Off-shore Banking Regions’ Deposits Under Foreign Authorities Insurance Under the Guarantee of Savings Deposits Insurance Fund Exceeding the Limit of Deposit Insurance Fund Current Period 44,102,037 34,185,261 5,898,896 Prior Period 31,872,642 21,865,360 3,254,664 Current Period 36,391,606 66,511,898 4,305,318 Prior Period 38,047,628 56,323,397 2,616,606 3,216,011 2,645,709 1,170,490 1,028,605 a.4. Savings deposits which are not under the guarantee of deposit insurance fund: Foreign Branches’ Saving Deposits and Other Accounts Deposits and Other Accounts held by Main Shareholders and their Relatives Deposits and Other Accounts of the Chairman and Members of Board of Directors, Chief Executive Officer, Senior Executive Officers and their Relatives Deposits and Other Accounts Covered by Assets Generated Through the Offenses Mentioned in Article 282 of the Turkish Criminal Code No,5237 and Dated 26 September 2004 Deposits in the Banks to be Engaged Exclusively in Off-shore Banking in Turkey b. Information on Derivative Financial Liabilities at Fair Value Through Profit or Loss: Derivative Financial Liabilities at Fair Value Through Profit or Loss Forward Transactions Swap Transactions Futures Options Other Total c. Information on Banks and other financial institutions: c.1. Information on banks and other financial institutions: Funds borrowed from the Central Bank of Turkey Domestic banks and Institutions Foreign banks, institutions and funds Total 200 Current Period 1,170,490 Prior Period 1,028,605 22,831 28,304 Current Period Prior Period TL 133,432 215,508 FC 180,380 1,557,988 TL 331,509 914,767 FC 228,102 2,031,301 291 46,764 2,015 194,242 3,554 349,231 1,785,132 1,248,291 2,457,199 Current Period TL FC 925,967 Prior Period TL FC 539,698 618,412 3,065,795 436,606 2,795,912 1,237,853 34,402,606 1,762,297 39,258,055 1,856,265 38,394,368 2,198,903 42,593,665 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.2. Maturity analysis of funds borrowed: Short-term Medium and Long-term Total c.3. Information on funds borrowed: Current Period Prior Period TL 618,412 1,237,853 1,856,265 FC 2,674,532 35,719,836 38,394,368 TL 635,217 1,563,686 2,198,903 FC 4,160,849 38,432,816 42,593,665 Information on funds received through syndicated loans and securitization deals, which take a significant place among funds borrowed, are given below. Syndication loans: Securitization deals: Date of Use May 2019 November 2019 Funds Borrowed 323,500,000 USD + 644,940,000 EUR 215,000,000 USD + 545,000,000 EUR Maturity 1 year 1 year The Bank obtained funds by way of putting on securitization deals all its claims and receivables based on diversified payment rights in USD, EUR and GBP through TIB Diversified Payment Rights Finance Company. Information on funds received through securitization is given below. Date June 2012 December 2013 December 2014 March 2015 October 2015 October 2016 December 2016 December 2017 December 2017 December 2017 Other: Structured Entity Amount Final Maturity TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company TIB Diversified Payment Rights Finance Company 125,000,000 EUR 50,000,000 EUR 220,000,000 USD 555,000,000 USD 221,200,000 USD 240,000,000 USD 158,800,000 USD 265,000,000 USD 125,000,000 EUR 125,000,000 USD 12 years 12 years 14 years 5-15 years 10 years 5-12 years 10-13 years 5-7 years 5 years 9 years Remaining Debt Amount as at December 31, 2019 59,375,000 EUR 30,000,000 EUR 180,000,000 USD 82,000,000 USD 158,987,500 USD 162,138,833 USD 152,850,000 USD 265,000,000 USD 125,000,000 EUR 125,000,000 USD As of August 2014, in connection with the future cash flows securitization program amounting to USD 500 million on 10 years maturity, the bank has increased the total amount of the financial instrument USD 600 million by obtaining the same structured USD 100 million in September 2017. d. Information on Debt Securities Issued (Net): Bills Bonds Total e. Concentration on the Bank’s liabilities: Current Period Prior Period TL 5,231,941 1,191,604 6,423,545 FC 24,693,665 24,693,665 TL 4,386,277 701,612 5,087,889 FC 24,357,192 24,357,192 Of the Bank’s liabilities, 63% consists of deposits, 9% of loans borrowed, 10% of securities issued and Tier II subordinated loans. Deposits have spread to a wide customer base with different characteristics. Loans are composed of funds obtained from various financial institutions through syndication, securitization, post-financing and money markets. f. Information on Other Liabilities: Other liabilities do not exceed 10% of the balance sheet total. g. Information on Lease Payables (net): Less than 1 year 1-4 years Over 4 year Total Current Period Gross 4,809 189,857 3,172,184 3,366,850 Net 4,711 167,748 1,223,804 1,396,263 201 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h. Information on Derivative Financial Liabilities Held for Risk Management: The Bank does not have any derivative financial liabilities held for risk management purposes. i. Information on Provisions: i.1. Reserves for employee benefits: According to the related regulation and the collective bargaining agreements, the Bank is obliged to pay employee termination benefits to employees who retire, die, quit for their military service obligations, who have been dismissed as defined in the related regulation or to the female employees who have voluntarily quit within one year after the date of their marriage. In accordance with the related regulations, the amount of employee termination benefits is TL 6,379.86 (exact TL amount as at December 31, 2019), which is one month salary for each service year and cannot exceed the base wage ceiling for employee termination benefits. A provision for severance pay to allocate that employees need to be paid upon retirement is calculated by estimating the present value of probable amount. The liability of the Bank arising from severance payment is determined in accordance with the actuarial report prepared by an independent valuation company. As of 31.12.2019, provision amounting to TL 1,168,051 is reflected in the financial statements (December 31, 2018: TL 945,548). The main actuarial assumptions used in the calculation of the employee termination benefits are as follows: - - In the calculation, the discount rate is taken as 11.70%, inflation rate is 7,20% and real rate of increase is 2%. In the calculation, the ceiling at the level of TL 6,379.86 (full TL amount) which is valid as of December 31, 2019 is taken as the basis. - The age of retirement is considered as the earliest age possible that an individual can retire. - CSO 1980 table is used for the mortality rate for female and male employees The movements related to provision for employee termination benefits are given below: Present value of defined benefit obligation at the beginning of the period Service Cost Interest Cost Benefits paid Loss/(Gain) due to Settlements/Reductions/Terminations Past Service Cost Actuarial loss/(gain) Defined benefit obligation at the end of the period Current Period Prior Period 945,548 71,226 147,187 (70,581) 802 5 73,864 1,168,051 758,894 56,891 84,756 (40,418) 784 19 84,622 945,548 In addition to the employee termination benefits the Bank allocates provisions for the unused vacation pay liability. As ofDecember 31, 2019 provision for unused vacation pay is amounting to TL 69,944 (December 31, 2018: TL 57,816). i.2. Provisions for exchange losses in the principal amount of foreign currency indexed loans: Since foreign currency indexed loans are followed based on the rates on the lending date, the Parent Bank incurs a loss if the exchange rates decrease and makes profit if the exchange rate increases. As at December 31, 2019 and December 31, 2018 there is no provision amount for the currency evaluation losses in the principal amount of foreign currency indexed loans. i.3. As at December 31, 2019, the Bank’s specific provisions for indemnified non-cash loans balance is TL 537,247 (December 31, 2018: TL 365,941) which is allocated for the non-cash loans of companies whose loans are followed under “Non-performing Loans” accounts. i.4. Information on other provisions: i.4.1. Liabilities arising from retirement benefits: Liabilities of pension funds founded as per the Social Security Act: Within the scope of the explanations given in Section Three Note XVII, in the actuarial report which was prepared as of December 31, 2019 for Türkiye İş Bankası A.Ş. Emekli Sandığı Vakfı (İşbank Pension Fund) By an actuary who is enregistered in the actuary registry, of which each Bank employee is a member, and which has been established according to the provisional Article 20 of the Social Security Act No. 506, the amount of actuarial and technical deficit stands at TL 3,494,026 (21.12.2018: 2,875,305 TL) There is a provision on financial statements to compensate the deficit in mentioned period, the mentioned provision is preserved on current year financial statements aswell. The above mentioned actuarial audit, which was made in accordance with the principles of the related law, measures the cash value of the liability as of December 31, 2019, in other words; it measures the amount to be paid to the Social Security Institution by the Bank. Actuarial assumptions used in the calculation are given below. - 9.8% technical deficit interest rate is used. - 34.5% total premium rate is used. - CSO 1980 woman/man mortality tables are used. 202 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Below table shows the cash values of premium and salary payments of the Bank as of December 31, 2019, taking the health expenses within the Social Security Institution limits into account. Net Present Value of Total Liabilities Other Than Health Net Present Value of Long Term Insurance Line Premiums Net Present Value of Total Liabilities Other Than Health Net Present Value of Health Liabilities Net Present Value of Health Premiums Net Present Value of Health Liabilities Pension Fund Assets Amount of Actuarial and Technical Deficit The assets of the pension fund are as follows. Cash and Cash Equivalents Securities Portfolio Other Total Current Period (11,295,446) 4,695,781 (6,599,665) (1,347,791) 3,404,441 2,056,650 1,048,989 (3,494,026) Prior Period (9,329,382) 3,952,714 (5,376,668) (1,211,775) 2,865,717 1,653,942 847,421 (2,875,305) Current Period Prior Period 301,165 696,788 51,036 1,048,989 538,880 207,462 101,079 847,421 On the other hand, after the transfer, the currently paid health benefits will be revised within the framework of the Social Security Institution legislation and related regulations. i.4.2. Provision of credit cards and promotion of banking services applications: As at December 31, 2019 The Bank has recognized provisions amounting to TL 89,062 for the amount which is recognized within the framework of credit card expenses of credit card customers or promotions for banking services. (December 31, 2018: TL 85,673). i.4.3. As mentioned public disclosures of the Bank on December 31, 2012 and December 19, 2013; an inspection has been made by the inspectors of Tax Inspection Board to “Türkiye İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı” (“İşbank Supplementary Pension Fund”), which was founded as per the provisions of the Turkish Commercial and Civil Codes, regarding the payments that fulfill İşbank’s liabilities within the framework of the Articles of Foundation of the Pension Fund and the relevant legislation. As a result of this investigation, tax audit reports were prepared for the years 2007, 2008, 2009, 2010, 2011 claiming that the aforementioned liabilities should be taxed in terms of wage base, thus, they should be subject to withholding tax and stamp duty. According to this report, the total amount of tax and penalties notified to Bank was TL 74,353 for 2007 and 2008; and TL 151,899 for 2009, 2010 and 2011 and it was stated that the Bank applied to tax courts to cancel these tax notifications and some of the court decisions were determined in favor of the Bank and some others were determined against the Bank. In this context, for the finalized decisions of Regional Administrative Courts related to the years 2007 and 2008 against the Bank, the Bank applied to the Constitutional Court. According to this decision, there is no predictability in legal conformity for taxing the Bank’s contributions to the Pension Fund in terms of wage base and for this reason it was accepted that property right of the Bank has been violated according to the 35th article of Constitution. Finally the Court decided that the amount of tax, penalties and default interest which was paid by the Bank should be paid back to the Bank as for compensation with its legal interest. According to the decision of the Constitutional Court, it is expected that the cases related to the periods 2007, 2008, 2009, 2010 and 2011 will conclude in favor of the Bank. In this context, the provisions amounting to TL 207,402 which had been allocated for the mentioned periods, reversed at 2015. In the last decision of the constitutional court numbered 2016/2400 regarding the legal proceedings initiated upon the conclusion of the lawsuits amounting to TL 61,060 for the 20 periods in 2012 and 2013 against the bank; it was accepted that the predictability criterion was realized after the 2012 tax review, and it was concluded that the Bank’s ownership rights were not violated for December 2012 and beyond periods. However, since the aforementioned periods were filed by making a reservation and paying taxes, the mentioned decision had no additional effect on the financial statements. In addition, at a case file, which was one of the lawsuits regarding the repayment of income tax stoppage and stamp tax which has been paid by reservation statement beginning from December 2013, of which its court decision was rendered in favor of the Bank, has been reversed by the majority of the votes of the Assembly after it was submitted to the General Assembly of Tax Courts. Regarding the mentioned issue, the legal process is ongoing. Within the scope of these developments, the Bank recognized provisions amounting to TL 73,665 (December 31, 2018: TL 63,008). i.4.4. In 1993, Dışbank A.Ş. shares which were owned by the Bank were sold to Lapis Holding A.Ş. In 2008, it was claimed that USD 52,6 million of the amount, which was paid upfront within the context of the sale agreement, had been provided from the funds of the insolvent TYT Bank A.Ş. by the buyer and payment of USD 52,6 million as well as the interest to be calculated to the Savings Deposit Insurance Fund (SDIF) was demanded. The administrative actions initiated by the SDIF in 2008 were revoked by Council of State Administrative Law Chambers 13th upon the application of the Bank. The decisions which were in favour of the Bank were reversed by Plenary Session of the Law Chamber upon the appeal of the SDIF. Council of State Administrative Law Chambers 13th decided to reject the applications of the Bank in January 2016 due to their obligation to obey the decisions of reversal. After the aforementioned court decisions, although the legal process was still in progress, the collection procedures were carried out within the context of Law No. 6183 and TL 298,466, including the default interest, was collected from the Bank by the SDIF previous periods.As a part of the legal process, the Bank has not received positive results from the individual application to the Constitutional Court. On the other hand, the legal process is still ongoing within the framework within the framework of the ongoing lawsuits and other available legal options. As a part of the legal process, individual application to the Constitutional Court of Republic of Turkey has been made by the Bank was not concluded positively. On the other hand the legal process is continued within the framework of the ongoing lawsuits and other available legal options. i.4.5. Except the other provisions indicated above, other provisions consist of a free provision amounting to TL 1,125,000, of which TL 1,200,000 thousands was provided in prior years and TL 75,000 thousands reversed in the current period and in accordance with the precautionary principle by taking into consideration the possible changes in the economy and market conditions, provisions allocated for expenses and provisions allocated for ongoing lawsuits and other provisions set aside for miscellaneous reasons. 203 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) j. Information on Tax Liability: j.1. Information on current tax liability: j.1.1. Information on tax provision: Explanations in relation to taxation and tax calculations were stated in section three notes XVIII. The remaining corporate tax liability after the deduction of the temporary tax amount stands at 719,916 as at 31 December 2019. j.1.2. Information on taxes payable: Corporate Tax Payable Tax on Securities Income Tax on Real Estate Income Banking Insurance Transaction Tax Foreign Exchange Transaction Tax Value Added Tax Payable Other Total j.1.3. Information on premiums: Social Security Premiums - Employees Social Security Premiums - Employer Bank Pension Fund Premiums - Employees Bank Pension Fund Premiums - Employer Pension Fund Membership Fees and Provisions-Employees Pension Fund Membership Fees and Provisions-Employer Unemployment Insurance - Employees Unemployment Insurance - Employer Others Total Current Period 719,916 228,254 4,699 181,938 7,439 7,779 66,860 Prior Period 1,002,712 193,080 4,646 225,372 122 6,359 51,611 1,216,885 1,483,902 Current Period Prior Period 189 227 1,827 3,654 3 5,900 144 176 1,577 3,154 4 5,055 j.2. Information on deferred tax liabilities: None. k. Information on Payables for Assets Held for Sale and Discontinued Operations The Bank does not have any payables for assets held for sale and discontinued operations. l. Information on subordinated loans As of October 24, 2012, issued 10 year-term bills with a nominal value of USD 1,000,000,000; as of December 10, 2013, issued 10 year-term bills with a nominal value USD 400,000,000 and as of June 29, 2017 issued 11 year-term bills with a nominal value USD 500,000,000 which all have the characteristic of subordinated loans for the purpose of making available to the individuals and legal persons who are resident abroad. Interest rates of aforementioned bonds are 6.00%, 7.85% and 7% respectively. In addition, the Banka has issued TL 1,100,000,000 (Full TL amount) as of August 8, 2017, TL 800,000,000 (Full TL amount) as of June 19, 2019 and TL 350,000,000 (Full TL amount) as of September 26, 2019 with floating interest rates for qualified investors without being offered to the public in TurkeyThe bills mentioned are amounting to TL 13,546,931 as of December 31, 2019 (December 31, 2018: TL 11,158,801). Current Period TP FC Prior Period TP FC Debt Instruments To Be Included In Additional Capital Calculation Subordinated Loans Subordinated Debt Instrument Debt Instruments To Be Included In Contribution Capital Calculation 2,281,084 11,265,847 1,136,214 10,022,587 Subordinated Loans Subordinated Debt Instrument Total 2,281,084 2,281,084 11,265,847 11,265,847 1,136,214 1,136,214 10,022,587 10,022,587 204 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) m. Information on shareholders’ equity: m.1. Presentation of paid-in capital: Common shares Preferred shares Total Current Period 4,499,970 30 4,500,000 Prior Period 4,499,970 30 4,500,000 m.2. Explanation as to whether the registered share capital system ceiling is applicable at the Bank, if so, the amount of registered share capital: Capital System Registered Capital System m.3. The capital increase made in current period: None. Paid-in Capital 4,500,000 Ceiling 10,000,000 m.4. Information on capital increase through transfer from capital reserves during the current period: None. m.5. Significant commitments of the Bank related to capital expenditures within the last year and the following quarter, the general purpose thereof, and the estimation of funds required for them: There is no capital commitment. m.6. Information regarding the shares of the company acquired: The Bank has repurchased shares amounting to TL 530,307 in accordance with the Board of Directors Decision dated August 17, 2018. m.7. Previous periods’ indicators related to income, profitability and liquidity, and the estimated effects of forecasts, which are to be made by taking into consideration the uncertainties of these indicators, on the Bank’s equity: The Bank’s balance sheet is managed in a prudent way to ensure that the effect of risks arising from interest rates, exchange rates and loans is at the lowest level. m.8. Privileges Granted to Shares: Turkish Commercial Law and related registration are kept conditionally; Group (A) shares each with a nominal value of 1 Kr have the privileges of; - Receiving 20 times the number of shares in the distribution of bonus shares issued from conversion of extraordinary and revaluation reserves generated in accordance with the relevant laws (Article 18 of the Articles of Incorporation) - Exercising the preference rights as 20 times (Article 19 of the Articles of Incorporation), and Despite having a lower nominal value, Group (B) shares, each with a nominal value of 1 Kurus, have the same rights with the Group (C) shares having a nominal value of 4 Kurus each. Furthermore, Group (A) and (B) shares, each with a nominal value of 1 Kurus, are granted privileges in distribution of profits pursuant to Article 58 of the Articles of Incorporation. m.9. Information on marketable securities value increase fund: Financial Assets At Fair Value Through Other Comprehensive Income Valuation Difference Deferred Tax Effect Foreign Exchange Differences Total III. DISCLOSURES AND FOOTNOTES ON OFF BALANCE SHEET ITEMS a. Explanations to Liabilities Related to Off-Balance Sheet Items: a.1. Types and amounts of irrevocable loan commitments: Current Period TL 793,334 1,010,653 (217,319) FC (397,850) (529,233) 131,383 Prior Period TL (656,737) (846,125) 189,388 FC (1,155,208) (1,444,108) 288,900 793,334 (397,850) (656,737) (1,155,208) Commitment for customer credit card limits amounts to TL 31,090,963 and commitment to pay for cheque leaves amounts to TL 2,673,042. The amount of commitment for the forward purchase of assets is TL 1,345,907 and for the forward sale of assets is TL 1,350,659. a.2. The structure and amount of probable losses and commitments resulting from off-balance sheet items, including those below: As at December 31, 2019, the Bank’s provisions for indemnified non-cash loans balance is 537,247 (December 31, 2018: TL 365,941) which is allocated for the non-cash loans of companies whose loans are followed under “Non-performing Loans” accounts. Commitments are shown in the table of “off-balance sheet items”. a.3. Guarantees, bank acceptances, collaterals that qualify as financial guarantees, and non-cash loans including other letters of credit: Bank Acceptances Letters of Credit Other Guarantees Total Current Period 6,504,495 13,589,521 2,647,653 22,741,669 Prior Period 4,379,607 14,492,563 2,295,655 21,167,825 205 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.4. Certain guarantees, tentative guarantees, suretyships and similar transactions: Letters of Tentative Guarantees Letters of Certain Guarantees Letters of Advance Guarantees Letters of guarantee given to customs Other Letters of Guarantee Total a.5. Total Non-cash Loans: Non-cash Loans against Cash Risks With Original Maturity of 1 Year or Less With Original Maturity More Than 1 Year Other Non-cash Loans Total a.6. Sectoral Risk Concentration of Non-cash Loans: Agriculture Farming and Stockbreeding Forestry Fishery Industry Mining and Quarrying Manufacturing Electricity, Gas, Water Construction Services Wholesale and Retail Trade Hotel and Restaurant Services Transportation and Communication Financial Institutions Real Estate and Rental Services Self-Employed Services Educational Services Health and Social Services Others Total Current Period 914,451 41,417,828 7,642,728 3,236,625 17,035,761 70,247,393 Current Period 17,035,758 4,595,363 12,440,395 75,953,304 92,989,062 TL 165,814 141,388 17,966 6,460 9,601,074 222,368 5,332,908 4,045,798 3,933,370 18,021,204 10,630,858 352,326 2,034,415 3,427,704 1,003,259 311,050 64,814 196,778 181,779 Current Period Prior Period (%) 0.52 0.44 0.06 0.02 FC 78,134 16,894 17 61,223 (%) 0.13 0.03 0.00 0.10 TL 138,435 101,744 30,549 6,142 (%) 0.43 0.31 0.10 0.02 FC 67.949 32.833 17 35.099 30.09 33,199,239 54.35 10,061,761 31.04 31.006.632 0.70 482,456 16.71 28,961,551 12.68 12.33 56.49 33.32 1.10 6.38 10.74 3.15 0.98 0.20 0.62 0.57 3,755,232 10,416,477 16,723,951 8,236,983 643,191 4,124,105 2,070,817 936,777 243,666 3,030 465,382 668,020 0.79 47.41 6.15 17.05 199,510 5,521,418 4,340,833 4,190,703 0.62 17.03 13.39 12.93 263.049 27.633.447 3.110.136 10.062.920 27.38 17,848,492 55.06 17.163.262 13.49 9,760,792 1.05 278,028 6.75 3.39 1.53 0.40 0.01 0.76 1.09 1,413,400 4,337,020 1,482,644 314,960 67,124 194,524 176,233 30.11 0.86 4.36 13.38 4.57 0.97 0.21 0.60 0.54 9.157.245 451.620 3.141.338 2.457.026 1.220.857 241.356 5.038 488.782 606.525 31,903,241 100 61,085,821 100 32,415,624 100 58.907.288 Prior Period 730,285 39,761,392 11,246,122 3,004,272 15,413,016 70,155,087 Prior Period 15,413,014 5,148,169 10,264,845 75,909,898 91,322,912 (%) 0.11 0.05 0.00 0.06 52.64 0.45 46.91 5.28 17.08 29.14 15.55 0.77 5.33 4.17 2.07 0.41 0.01 0.83 1.03 100 a.7. Non-cash Loans classified under Group I and Group II: Non-cash Loans Letters of Guarantee Bank Acceptances Letters of Credit Endorsements Underwriting Commitments of the Securities Issued Factoring Related Guarantees Other Guaranties and Warranties Group I TL 30,037,573 29,930,229 107,344 FC 59,310,971 36,884,511 6,335,122 13,443,685 2,647,653 Group II TL 1,865,668 1,865,668 FC 1,774,850 1,566,985 169,373 38,492 206 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Explanation on Derivative Financial Instruments: Majority of the Bank’s derivative transactions comprise foreign currency and interest rate swaps, forward foreign exchange trading, and currency and interest rate options. Even though some derivative transactions economically provide risk hedging, since all necessary conditions to be defined as items suitable for financial risk hedging accounting are not met, they are recognized as “fair value through profit or loss” within the framework of TFRS 9 “Financial Instruments”. c. Explanations Related to Contingencies and Commitments: Balance of the “Other Irrevocable Commitments” account, which comprised the letters of guarantees, guarantees and commitments submitted by the Bank pursuant to its own internal affairs and guarantees given to third parties by other institutions in favor of the Bank and the commitments due to housing loans extended within the scope of unfinished house projects followed amounts to TL 8,560,121. Bank regarding the cheques given to customers is presented under off balance sheet commitments, as per the related regulations is amounting to TL 2,673,042. In case the cheques presented for payment to beneficiaries are not covered, the Bank will be obliged to pay the uncovered amount up to TL 1,255 (in exact TL amount) for the cheques that are subject to the Law numbered 3167 on “the Regulation of Payments by Cheque and Protection of Cheque Holders”, and up to TL 2,030 (in exact TL amount) for the cheques that are subject to the “Cheque Law” numbered 5941. The uncollected amount will be followed under “Indemnified Non-Cash Loans”. d. Explanations related to transactions made on behalf of or on the account of others: It is explained in Note X under Section Four. IV. DISCLOSURES AND FOOTNOTES ON STATEMENT OF INCOME a. Interest Income a.1. Information on interest income on loans: Interest Income on Loans (*) Short-term Loans Medium and Long-term Loans Interest on Non-performing Loans Premiums Received from State Resource Utilization Support Fund Current Period TL 7,133,477 17,094,464 878,903 FC 924,290 6,987,982 40,437 Prior Period TL 6,924,456 15,709,579 754,018 FC 629,414 6,653,259 10,400 Total 25,106,844 7,952,709 23,388,053 7,293,073 (*) Includes fee and commission income on cash loans. a.2. Information on interest income on banks: The Central Bank of Turkey Domestic Banks Foreign Banks Foreign Head Offices and Branches Total a.3. Information on interest income from securities: Financial Assets at Fair Value Through Profit or Loss Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets Measured at Amortised Cost Total a.4. Information on interest income received from associates and subsidiaries: Interest Income from Associates and Subsidiaries Current Period TL 48,009 65,311 FC 18,594 135,462 113,320 154,056 Current Period TL 49,415 4,675,076 3,742,737 8,467,228 FC 360 718,729 91,487 810,576 Prior Period TL 41,612 43,170 84,782 Prior Period TL 38,071 4,044,139 2,719,210 6,801,420 FC 1,481 3,239 48,102 52,822 FC 280 632,659 54,354 687,293 Current Period 122,737 Prior Period 97,531 207 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Interest Expense b.1. Information on interest expense from funds borrowed: Banks Central Bank of Turkey Domestic Banks Foreign Banks Foreign Head Offices and Branches Other Institutions Total (*) (*) Includes fee and commission expenses from cash loans. b.2. Information on interest paid to associates and subsidiaries: Interest Paid to Associates and Subsidiaries b.3. Information on interest paid on marketable securities issued: Interest on Securities Issued b.4. Information on Interest Expense on Deposits According to Maturity Structure: Current Period Prior Period TL 248,471 63,067 185,404 FC 1,156,746 2,738 81,534 1,072,474 TL 226,637 27,289 199,348 FC 1,120,130 2,481 36,714 1,080,935 248,471 395,750 1,552,496 226,637 368,845 1,488,975 Current Period 453,842 Prior Period 261,638 Current Period Prior Period TL 1,352,930 FC 2,113,484 TL 901,005 FC 2,054,347 Demand Deposits Up to One Month Up to Three Months Up to Six Months Up to One Year Over One Year Accumulated Deposits Time Deposits 178,275 313,781 450 977,803 71,575 123,118 8,356,242 8,621 2,278,516 589,640 81 849,297 35 259,360 448,182 1,449 118,412 96,724 9,440 910 125,482 12 164,089 248 17 1,330 Total 303,833 9,764,544 9,118 3,776,509 1,119,085 17 1,541,884 11,356,137 1,556,955 226,025 290,741 1,330 14,973,089 83 59 159,812 3,973 1,225,275 8,485 94,416 1,243 49,605 2,375 169,101 2,893 22 1,698,314 19,028 858 164,643 1,706,527 1,865 1,235,625 12,591,762 98 95,757 1,652,712 142 159 10,728 62,708 288,733 789 172,783 463,524 14,338 1,731,680 16,704,769 22 1,352 Demand Deposits Up to One Month Up to Three Months Up to Six Months Up to One Year Over One Year Accumulated Deposits Time Deposits 1 1 7 261,810 244,865 160 614,174 38,286 78,816 7,076,423 6,707 1,855,949 329,788 8,523 513,587 113 143,799 191,843 194 44,014 35,148 2,590 165 48,605 24 73,597 229 816 Total 349,509 7,928,311 7,004 2,722,674 562,736 9 1,159,295 9,347,683 857,865 81,946 122,620 816 11,570,234 63 52 175,624 5,644 1,210,321 19,268 97,189 2,154 60,552 2,096 343,226 2,113 20 1,886,995 31,327 1278 182,546 1,341,841 1,267 1,230,856 10,578,539 115 124 40 99,383 957,248 6,510 69,158 151,104 489 345,828 468,448 9,584 1,927,906 13,498,140 20 836 Current Period TL Bank Deposits Savings Deposits Public Sector Deposits Commercial Deposits Other Institutions Deposits Deposits with 7 Days Notice Total FC Foreign Currency Deposits Bank Deposits Deposits with 7 Days Notice Precious Metals Deposits Total Grand Total Prior Period TL Bank Deposits Savings Deposits Public Sector Deposits Commercial Deposits Other Institutions Deposits Deposits with 7 Days’ Notice Total FC Foreign Currency Deposits Bank Deposits Deposits with 7 Days’ Notice Precious Metals Deposits Total Grand Total 208 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c. Information on dividend income: Financial Assets at Fair Value Through Profit and Loss Financial Assets at Fair Value Through Other Comprehensive Income Other Total d. Information on trading income/losses (Net): Income Securities Trading Gains Gains on Derivative Financial Instruments (*) Foreign Exchange Gains Losses (-) Securities Trading Losses Losses on Derivative Financial Instruments (*) Foreign Exchange Losses Trading Income/Losses (Net) Current Period Prior Period 3,882 5,216 9,098 4,953 1,472 6,425 Current Period Prior Period 172,170 21,905,319 462,227,080 22,936 27,775,889 462,903,144 (6,397,400) 125,920 12,703,076 701,017,586 32,290 15,972,477 701,913,475 (4,071,660) (*) Income arising from foreign currency changes related to derivative transactions amounts to TL 19,215,917 and the losses amount to TL 24,768,014 and the amount of net loss is TL (5,552,097) (December 31, 2018 profit: TL 11,085,540, loss: TL 14,635,295). e. Information on other operating income: Other operating income mainly consist of cancellation on expected credit losses and reversals of free provisions amounting TL 375,000 for possible risks which was provided in the previous periods or collections from stage 3 loans, income from fees received from customers in return for various banking services and sales of fixed assets. g. Information on provision for loans and other receivables: Expected Credit Loss 12 Month Expected Credit Loss (Stage I) Significant Increase in Credit Risk (Stage II) Non-performing Loans (Stage III) Marketable Securities Impairment Provision Financial Assets at Fair Value Through Profit or Loss Financial Assets at Fair Value Through Other Comprehensive Income Impairment Losses on Associates, Subsidiaries and Joint-Ventures Associates Subsidiaries Joint-ventures Other (*) Total Current Period 7,778,690 498,467 968,664 6,311,559 1,485 1,485 Prior Period 6,332,961 345,319 2,105,683 3,881,959 4,805 4,805 545,731 8,325,906 5,908 6,343,674 (*) The amount of current period, consists of provision for impairment loss for financial assets at fair value through profit or loss and the free provision expense of TL 300,000. 209 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h. Other operating expenses: Reserve for Employee Termination Benefits Bank Pension Fund Deficit Provisions Impairment Losses on Tangible Assets Depreciation Expenses of Tangible Assets Impairment Losses on Intangible Assets Impairment Losses on Goodwill Amortization Expenses of Intangible Assets Impairment Losses on Equity Accounted Investments Impairment Losses on Assets to be Disposed Depreciation Expenses of Assets to be Disposed Impairment Losses on Assets Held for Sale Other Operating Expenses Operational Lease Related Expenses Repair and Maintenance Expenses Advertisement Expenses (**) Other Expenses (**) Loss on Sale of Assets Other (***) Total Current Period Prior Period 148,639 618,721 574,237 102,032 237,090 45,791 234,162 287,855 311,870 2,520,785 85,844 198,005 191,774 2,045,162 2,321 1,356,242 5,508,800 2,557,492 467,789 148,563 179,762 1,761,378 1,277 874,488 4,364,202 (*) TFRS 16 Leases standard has been started to be applied as of 01.01.2019 and no adjustment has been made in the previous period. (**) Expense amount of the Bank’s donation, aid and social responsibility projects is TL 61,443 in the current period. (December 31, 2018: TL 51,887) (***) In the current period, TL 366,231 consists of the fees, taxes, duties and funds. i. Information on profit/loss before tax from continued operation and discontinued operations: The Bank’s income before tax consists of continued operations. Income before tax consists of net interest income amounting to TL 19,859,128, net fees and commission income amounting to TL 5,569,128 and the amount of other operating expense is TL 9,792,544. j. Information on provision for taxes from continuing and discontinued operations As of December 31, 2019, the amount of the Bank’s tax provision is TL 806,864 and the amount consists of current tax expense that is amounting to TL 1,692,604 and consists of deferred tax expense amounting TL 885,740. k. Information on Net Operating Profit/Loss after Net Profit/Loss from Continuing and Discontinued Operations: The Bank’s net profit generated from its continuing operations amounts to TL 6,067,587. l. Information on net period profit/loss: l.1. Income and expenses resulting from ordinary banking activities: There is no specific issue required to be disclosed for the Bank’s performance for the nine-month period between January 1, 2019 - December 31,2019. l.2. Effects of changes in accounting estimates on the current and future periods’ profit/loss: There is no issue to be disclosed. l.3. ‘‘The other’’ item which is located at the bottom of received fees and commissions in the income statement consist of various fees and commissions received from transactions such as credit card transactions, capital market transactions. m. Explanation on other items on the income statement: Other items do not exceed 10% of the total amount of the income statement. V. DISCLOSURES AND FOOTNOTES ON STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY The paid-in capital is TL 4,500,000 in legal records. As of balance sheet date, the balance of legal reserves is TL 4,372,235 and the balance of extraordinary reserves is TL 29,635,555. Detail of the securities increase fund is in Note Section Five-k.9 and TL (85,936) of this amount is the deffered tax effect on financial assets at fair value through other comprehensive income (31 December 2018: TL 478,288). VI. DISCLOSURES AND FOOTNOTES ON STATEMENT OF CASH FLOWS The operating profit to TL 10,690,936 before the changes in operating assets and liabilities mostly comprised of TL 40,743,322 of interest received from loans and securities, and TL 23,866,286 of interest paid on deposits and marketable securities borrowed by the Bank. The account ‘’Other’’ classified under operating profit other than fees and commissions paid, cash payments to personnel and service suppliers and taxes paid consists of other operating expenses and derivative gains/losses accounts is TL (5,818,608) (December 31, 2018: TL (1,831,092)). Net Increase (Decrease) in Other Liabilities account classified in changes of assets and liabilities resulting from the changes in Funds Provided Under Repurchase Agreements, miscellaneous payables, other liabilities and taxes, duties, charges, and premiums is TL 7,466,973 (December 31, 2018: TL 7,538,370 decrease). Net Cash Provided from Other Investing Activities account includes net cash flows from sale of intangible assets and declined by TL 578,012 (December 31, 2018: TL 377,210 decrease). 210 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The effect of changes in foreign exchange rates on cash and cash equivalents is approximately TL 787,421 as of December 31, 2019 (December 31, 2018: TL 67,856). Due to the high rate of turnover of related foreign currency assets, the difference between the last 30 days’ arithmetic average of currency exchange rates and the year end currency exchange rate is used to calculate the effect of change in foreign exchange rate. Cash, cash in foreign currency, unrestricted deposits in Central Bank of Turkey, money in transit, cheques purchased, precious metals, money market operations as well as demand and timed up to 3 months are defined as cash and cash equivalents. Cash and cash equivalents at beginning of the period: Cash Cash in TL and Foreign Currency Central Bank of Turkey and Other Cash Equivalents Banks’ Demand Deposits and Time Deposits Up to 3 Months Money Market Receivables Total Cash and Cash Equivalents Current Period December 31, 2018 Prior Period December 31, 2017 23,011,833 4,814,268 18,197,565 7,548,020 7,548,020 12,748,378 3,310,114 9,438,264 2,071,409 2,071,409 30,559,853 14,819,787 The total amount resulting from the transactions made in the previous period shows the total cash and cash equivalents as of the beginning of the current period. Cash and cash equivalents at end of the period: Cash Cash in TL and Foreign Currency Central Bank of Turkey and Other Cash Equivalents Banks’ Demand Deposits and Time Deposits Up to 3 Months Money Market Receivables Total Cash and Cash Equivalents VII. DISCLOSURES AND FOOTNOTES ON THE BANK’S RISK GROUP Current Period December 31, 2019 Prior Period December 31, 2018 29,616,634 5,489,353 24,127,281 12,260,667 12,260,667 23,011,833 4,814,268 18,197,565 7,548,020 7,548,020 41,877,301 30,559,853 a. Information on the volume of transactions relating to the Bank’s risk group, incomplete loan and deposit transactions and period’s profit and loss: a.1. Information on loans held by the Bank’s risk Group Current Period: Bank’s Risk Group Loans and other receivables Balance at the beginning of the period Balance at the end of the period Interest and commission income received Prior Period: Bank’s Risk Group Loans and other receivables Balance at the beginning of the period Balance at the end of the period Interest and commission income received Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Cash Non-Cash Cash Non-Cash Cash Non-Cash 958,569 1,735,386 119,080 5,830,957 5,971,958 2,220 859,156 3,855,442 241,149 529,797 658,330 6,010 Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Cash Non-Cash Cash Non-Cash Cash Non-Cash 871,676 958,569 91,600 3,936,058 5,830,957 1,076 621,064 859,156 46,219 464,386 529,797 4,497 211 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.2. Information on deposits held by the Bank’s risk group: Bank’s Risk Group Deposits Balance at the beginning of the period Balance at the end of the period Interest expense on deposits Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Individuals and Corporates in Risk Group Current Period Prior Period Current Period Prior Period Current Period Prior Period 5,140,191 4,354,282 321,033 2,556,663 5,140,191 243,249 178,624 8,896 10,004 148,163 178,624 38,950 3,435,929 7,768,540 241,924 3,009,110 3,435,929 210,496 a.3. Information on forward and option agreements and other similar agreements made with the Bank’s risk group: Bank’s Risk Group Current Period Prior Period Current Period Prior Period Current Period Prior Period Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Individuals and Corporates in Risk Group Transactions at Fair Value Through Profit and Loss Beginning of the period End of the period Total Profit/Loss Transactions for hedging purposes Beginning of the period End of the period Total Profit/Loss b. Disclosures for Bank’s risk group: 2,206,327 1,192,862 (224,924) 468,088 2,206,327 (174,182) 2,323,674 399,392 (239,520) 2,323,674 (113,179) In accordance with the relevant decision of the Banking Regulation and Supervision Agency, the special purpose entity and the mentioned company’s subsidiary Türk Telekom A.Ş, are not included in the Bank’s risk group, where details are disclosed in Section V, footnote I.f.2 and footnote I.r. b.1. The relations of the Bank with the entities controlled by the Bank and its related parties regardless of whether there are any transactions between the parties: All types of corporate and retail banking services are provided to these corporations in line with the articles of Banking Law. b.2. The type and amount of transaction carried out, and its ratio to the overall transaction volume, values of principal items and their ratios to overall items, pricing policy and other items in addition to the structure of the relationship: The transactions carried out are mainly loan and deposit transactions. The ratio of loans extended to the risk group to the overall cash loans is (excluding non-performing loans) 2.07%, while the ratio to the overall assets is 1,19%; the ratio of deposits of the risk group corporations to the overall deposits is 4,10%, while the ratio to overall liabilities is 2.59%, Comparable price method is used in pricing the transactions. b.3. Purchase and sale of real estates, other assets and services, agency agreements, finance lease contracts, transfer of information obtained through research and development, license agreements, funding (including loans and provision of support as cash capital or capital-in-kind), guarantees and collaterals, and management agreements: The Bank acquires its properties through its associate, İş Finansal Kiralama A.Ş., when required, The Bank’s branches act as agents for Anadolu Anonim Türk Sigorta Şirketi and Anadolu Hayat Emeklilik A.Ş. Furthermore, through its branches it performs mediation for order transmission with İş Yatırım Menkul Değerler A.Ş. and carries out agency activities for İş Portföy Yönetimi A.Ş. If requested, cash and non-cash loan requirements of corporations within the risk group are met in accordance with the limits imposed by the Banking Law and the prevailing market conditions. b.4. As of December 31, 2019, Total worth of the shares, which the Bank purchased from its subsidiaries that are traded on Istanbul Stock Exchange, and accounted under the Financial Assets at Fair Value Through Profit or Loss in accordance with the Board of Directors decisions dated December 25, 2015 and TL 137,603 (December 31, 2018: TL 144,173). c. Total salaries and similar benefits paid to the (executive members and senior executives) Total benefits to key management personnel in the current period is amount to TL 30,375. (December 31, 2018: TL 28,233) VIII. DISCLOSURES ON THE BANK’S DOMESTIC, FOREIGN, OFF-SHORE BRANCHES OR ASSOCIATES AND FOREIGN REPRESENTATIVE OFFICES Domestic Branches(*) Foreign Representative Offices Foreign Branches Number 1,249 Employees 23,736 Country of Incorporation 1 1 2 15 2 2 1 3 2 42 200 36 28 6 China Egypt England T.R.N.C. Iraq Kosovo Bahrain Total Assets 18,576,897 6,621,320 1,369,402 901,150 3,839,311 Legal Capital 777 80,000 293,236 66,100 Off-Shore Branches (*) The Branches located in Free Trade Zones in Turkey are included among domestic branches. 212 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IX. SUBSEQUENT EVENTS With the resolution of the Bank’s Board of Directors decision dated September 17, 2019 regarding issuance of securities, the Bank has issued commercial paper with total nominal value of TL 2,829,837 thousand after December 31, 2019. With the resolution of the Bank’s Board of Directors decision regarding issuance of securities abroad, Bank has issued a marketable security with 10 years maturity, recall option on 5th year, nominal value of USD 750,000,000 and 7.75% interest rate on January 22, 2020. With the resolution of the Board of Directors of Türkiye İş Bankası A.Ş. (Isbank) dated 30.01.2020, the Head Office has been authorized to carry out necessary activities regarding the merger process of Türkiye Şişe ve Cam Fabrikaları A.Ş. with Trakya Cam Sanayii A.Ş., Anadolu Cam Sanayii A.Ş., Soda Sanayii A.Ş., Paşabahçe Cam San. ve Tic. A.Ş. and Denizli Cam Sanayii ve Tic. A.Ş. through acquisition which is considered to contribute to the enhancement of financial performance, profitability and company value of Şişecam Group in line with its long term strategies and competitive targets in global markets. This authorization is subject to the continuity of Isbank’s control share in paid-up capital of Türkiye Şişe ve Cam Fabrikaları A.Ş., based on company values and exchange ratios to be determined by the Expert Institution Report, which will be drawn-up as a result of the independent valuation process that should be undertaken by the companies being a party to merger in accordance with the related legislation. SECTION SIX: OTHER EXPLANATIONS I. EXPLANATIONS ON THE BANK’S CREDIT RATINGS: MOODY’S Long-term Foreign Currency Deposit Long-term Local Currency Deposit Long-term Foreign Currency Senior Debt Short-term Foreign Currency Deposit Short-term Local Currency Deposit FITCH RATINGS Long-term Foreign Currency Issuer Default Rating Long-term Local Currency Issuer Default Rating Short-term Foreign Currency Issuer Default Rating Short-term Local Currency Issuer Default Rating National Long-term Rating Viability Rating Support Rating STANDARD & POOR’S Long-term Counterparty Credit Rating Short-term Counterparty Credit Rating Long-term National Scale Rating Short-term National Scale Rating Rating Outlook (*) B3 B3 B3 NP NP B+ B+ B B A+ (tur) b+ 4 B+ B trA+ trA-1 Negative Negative Negative - - Negative Stable - - Stable - - Negative - - - The dates below given are on which the Bank’s credit ratings/outlook was last updated: Moody’s: 18.06.2019, Fitch Ratings: 12.11.2019, Standard & Poor’s: 17.08.2018 (*) Outlook: “Stable” indicates that the current rating will not be changed in the short term; “positive” indicates that the current rating is very likely to be upgraded and “negative” indicates that the current rating is very likely to be downgraded. SECTION SEVEN: EXPLANATIONS ON THE INDEPENDENT AUDITORS’ REPORT I. EXPLANATIONS ON THE INDEPENDENT AUDITORS’ REPORT: The unconsolidated financial statements and disclosures for the year ended December 31, 2019 have been audited by Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi (A member firm of Ernst&Young Global Limited) and the independent auditors’ report dated February 7, 2020, is presented preceeding the unconsolidated financial statements. II. EXPLANATIONS AND FOOTNOTES OF THE INDEPENDENT AUDITORS REPORT There are no significant issues or necessary disclosures or notes in relation to the Bank’s operations other than those mentioned above. 213 Financial Informationand Risk Managementİşbank Annual Report 2019Notes to the Unconsolidated Financial StatementsFor the Year Ended December 31, 2019Türkiye İş Bankası A.Ş.(Convenience Translation of Unconsolidated Audit Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Consolidated Financial Statements as at and For the Year Ended December 31, 2019 with Independent Audit Report Thereon (Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish) 214 İşbank Annual Report 2019Türkiye İş Bankası A.Ş. Independent Auditor’s Report Güney Bağımsız Denetim ve SMMM A.Ş. Eski Büyükdere Cad. Orjin Maslak No: 27 Maslak, Sarıyer 34398 İstanbul - Turkey Tel: +90 212 315 3000 Fax: +90 212 230 8291 ey.com Ticaret Sicil No: 479920 Mersis No: 0-4350-3032-6000017 To the Shareholders of Türkiye İş Bankası Anonim Şirketi: Audit of Consolidated Financial Statements Qualified Opinion We have audited the accompanying consolidated financial statements of Türkiye İş Bankası A.Ş (the Bank) and its subsidiaries (collectively referred as “The Group”), which comprise the statement of balance sheet as at December 31, 2019, and the consolidated statement of income, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended and notes to the consolidated financial statements, and a summary of significant accounting policies and other explanatory information. In our opinion, except for the effects of the matter on the consolidated financial statements described in the Basis for Qualified Opinion paragraph, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2019 and consolidated financial performance and consolidated its cash flows for the year then ended in accordance with the prevailing accounting principles and standards set out as in accordance with “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette no.26333 dated November 1, 2006 and other regulations on accounting records of Banks published by Banking Regulation and Supervision Agency (BRSA), circulars, interpretations published by BRSA and “BRSA Accounting and Financial Reporting Legislation” which includes the provisions of Turkish Financial Reporting Standards (TFRS) for the matters which are not regulated by these regulations. Basis for Qualified Opinion As explained in Section Five Part II-i.4.5, the accompanying consolidated financial statements as at December 31, 2019 include a free provision at an amount of TL 1,125,000 thousands of which TL 1,200,000 thousands was provided in prior years and TL 75,000 thousands reversed in the current period by the Group management for the possible effects of the negative circumstances which may arise from the possible changes in the economy and market conditions which does not meet the recognition criteria of “Turkish Accounting Standard” (TAS) 37 “Provisions, Contingent Liabilities and Contingent Assets”. Our audit was conducted in accordance with “Regulation on independent audit of the Banks” published in the Official Gazette no.29314 dated April 2, 2015 by BRSA (BRSA Independent Audit Regulation) and Independent Auditing Standards (“ISA”) which are the part of Turkish Auditing Standards issued by the Public Oversight Accounting and Auditing Standards Authority (“POA”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with of Code of Ethics for Independent Auditors (Code of Ethics) published by POA and have fulfilled our other responsibilities in accordance with the code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. Key audit matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for Qualified Opinion section we have determined the matters described below to be the key audit matters to be communicated in our report. 215 Financial Informationand Risk Managementİşbank Annual Report 2019 Independent Auditor’s Report Key Audit Matter How the Key Audit Matter is addressed in our audit TFRS 9 “Financial Instruments” Standard and recognition of impairment on finan- cial assets and related significant disclosures As presented in Section III disclosure VIII, the Group recognizes expected credit losses of financial assets in accordance with TFRS 9 Financial Instruments standard. We considered impairment of financial assets as a key audit matter since: Our audit procedures included among others include: - Evaluating the appropriateness of accounting policies as to the requirements of TFRS 9, Group’s past experience, local and global practices. - Amount of on and off balance sheet items that are subject to expected credit loss - Reviewing and testing of processes which are used to calculate expected credit losses calculation is material to the financial statements. - There are complex and comprehensive requirements of TFRS 9. - The classification of the financial assets is based on the Group’s business model and characteristics of the contractual cash flows in accordance with TFRS 9 and the Group uses significant judgment on the assessment of the business model and identification of the complex contractual cash flow characteristics of financial instruments. - The Group’s determines fair value of its financial assets, reflected at fair value in by involving our Information technology and Process audit specialists. - Evaluating the reasonableness of management’s key judgements, estimates and data sources used in expected credit loss calculations considering the standard requirements, sectorial and global practices. - Reviewing the appropriateness of criteria in order to identify the financial assets having solely payments of principal and interest and checking the compliance to the Group’s Business model. accordance with the relevant business model category, according to Level 3 if there are financial inputs that are not observable in the fair value measurement and that contain significant estimates and assumptions. - Reviewing the Group’s classification and measurement models of the financial instruments (financial instruments determined as Level 3 according to fair value hierarchy) and comparing with TFRS 9 requirements - Policies implemented by the Group management include compliance risk to the regulations and other practices. - Processes of TFRS 9 are advanced and complex. - Judgements and estimates used in expected credit loss, complex and comprehensive. - Disclosure requirements of TFRS 9 are comprehensive and complex. - Evaulating the alignment of the significant increase in credit risk determined during the calculation of expected credit losses, default definition, restructuring definition, probability of default, loss given default, exposure at default and macro-economic variables that are determined by the financial risk management experts with the Group’s past performance, regulations, and other processes that has forward looking estimations. - Assessing the completeness and the accuracy of the data used for expected credit loss calculation. - Testing the mathematical accuracy of expected credit loss calculation on sample basis. - Evaluating the judgments and estimates used for the individually assessed financial assets. - Evaluating the accuracy and the necessity of post-model adjustments. - Auditing of TFRS 9 disclosures. 216 İşbank Annual Report 2019 It has been addressed whether there have been any significant changes in regulations governing pension liabilities, employee benefits plan during the period, that could lead to adjust the valuation of employee benefits. Support from the audit teams of our subsidiaries and the actuarial auditor of our firm, has been taken to assess the appropriateness of the actuarial assumptions and calculations performed by the external actuary. We further focused on the accuracy and adequacy of the Bank’s provision provided for the deficit and also disclosures on key assumptions related to pension fund deficit. Pension Fund Obligations Employees of the Group are members of “Türkiye İş Bankası A.Ş. Mensupları Emekli Sandığı Vakfı”, (“the Fund”), which is established in accordance with the temporary Article 20 of the Social Security Act No. 506 and related regulations. The Fund is a separate legal entity and foundation recognized by an official decree, providing all qualified employees with pension and post-retirement benefits. As disclosed in the “Section Three Note XX” to the financial statements, Banks will transfer their pension fund to the Social Security Institution and the authority of the “Council of Ministers” on the determination of the mentioned transfer date is changed as “President” in the Decree Law No. 703 published in the Official Gazette numbered 30473 and dated July 9, 2018. According to the technical balance sheet report as at December 31, 2019 prepared considering the related articles of the Law regarding the transferrable benefit obligations for the non- transferrable social benefits and payments which are included in the articles of association, the Fund has an actuarial and technical deficit which is fully provisioned for. The valuation of the Pension Fund liabilities requires judgment in determining appropriate assumptions such as defining the transferrable social benefits, discount rates, salary increases, demographic assumptions, inflation rate estimates and the impact of any changes in individual pension plans. The Group Management uses Fund actuaries to assist in assessing these assumptions. Considering the subjectivity of key assumptions and estimate used in the calculations of transferrable liabilities and the effects of the potential changes in the estimates used together with the uncertainity around the transfer date and given the fact that technical interest rate is prescribed under the law, we considered this to be a key audit matter. Derivative Financial Instruments Derivative financial instruments including foreign exchange contracts, currency and interest rate swaps, currency and interest rate options, futures and other derivative financial instruments which are held for trading are initially recognized on the statement of financial position at fair value and subsequently are re-measured at their fair value. Details of related amounts are explained in “Section Five Note I.c.” and “Section Five Note II.b”. Our audit procedures included among others involve reviewing policies regarding fair value measurement accepted by the Group management fair value calculations of the selected derivative financial instruments which is carried out by valuation experts of another entity who are in the same audit network within our firm and the assessment of used estimations and the judgements and testing the assement of operating effectiveness of the key controls in the process of fair value determination. Fair value of the derivative financial instruments is determined by selecting most convenient market data and applying valuation techniques to those particular derivative products. Derivative Financial Instruments are considered by us as a key audit matter because of the subjectivity in the estimates, assumptions and judgements used. Responsibilities of Management and Directors for the Consolidated Financial Statements Group management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the BRSA Accounting and Reporting Legislation and for such internal control as management determines is necessary to enable the preparation of the financial statement that is free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. 217 Financial Informationand Risk Managementİşbank Annual Report 2019 Independent Auditor’s Report Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements In an independent audit, the responsibilities of us as independent auditors are: Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with BRSA Independent Audit Regulation and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with BRSA Independent Audit Regulation and ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. (The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.) - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank and its subsidiaries’ internal control. - Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. - Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank and its subsidiaries’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank and its subsidiaries’ to cease to continue as a going concern. - Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. - Obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with government with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements 1) In accordance with Article 402 paragraph 4 of the Turkish Commercial Code (“TCC”) no 6102; no significant matter has come to our attention that causes us to believe that the Bank’s bookkeeping activities and financial statements for the period January 1 - December 31, 2019 are not in compliance with the TCC and provisions of the Bank’s articles of association in relation to financial reporting. 2) In accordance with Article 402 paragraph 4 of the TCC; the Board of Directors submitted to us the necessary explanations and provided required documents within the context of audit. The engagement partner who supervised and concluded this independent auditor’s report is Fatma Ebru Yücel. Additional paragraph for convenience translation to English As explained in detail in Note I of Section Three, the effects of differences between accounting principles and standards set out by regulations in conformity with BRSA Accounting and Financial Reporting Legislation, accounting principles generally accepted in countries in which the accompanying consolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”) have not been quantified in the accompanying consolidated financial statements. Accordingly, the accompanying consolidated financial statements are not intended to present the financial position, results of operations and changes in financial position and cash flows in accordance with the accounting principles generally accepted in such countries and IFRS. February 7, 2020 Istanbul, Turkey 218 İşbank Annual Report 2019 The Consolidated Financial Report As at and for the Year Ended December 31, 2019 Headquarters Address: İş Kuleleri, 34330, Levent/İstanbul Telephone: 0212 316 00 00 Fax: 0212 316 09 00 Web Site: www.isbank.com.tr E-mail: musteri.iliskileri@isbank.com.tr The consolidated financial report as at and for the year ended 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, comprises the following sections: - GENERAL INFORMATION ABOUT THE PARENT BANK - CONSOLIDATED FINANCIAL STATEMENTS OF THE PARENT BANK - EXPLANATIONS ON THE ACCOUNTING POLICIES - INFORMATION ON FINANCIAL STRUCTURE AND RISK MANAGEMENT OF THE GROUP - DISCLOSURES AND FOOTNOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS - OTHER EXPLANATIONS - INDEPENDENT AUDITOR’S REPORT Associates, subsidiaries and structured entities whose financial statements have been consolidated in the consolidated financial report are as follows: Associates ARAP-TÜRK BANKASI A.Ş. Subsidiaries ANADOLU ANONİM TÜRK SİGORTA ŞİRKETİ ANADOLU HAYAT EMEKLİLİK A.Ş. EFES VARLIK YÖNETİM A.Ş. İŞ FAKTORİNG A.Ş. İŞ FİNANSAL KİRALAMA A.Ş. İŞ GAYRİMENKUL YATIRIM ORTAKLIğI A.Ş. İŞ GİRİŞİM SERMAYESİ YATIRIM ORTAKLIğI A.Ş. İŞ PORTFÖY YÖNETİMİ A.Ş. İŞ YATIRIM MENKUL DEğERLER A.Ş. İŞ YATIRIM ORTAKLIğI A.Ş İŞBANK AG JOINT STOCK COMPANY İŞBANK (JSC İŞBANK) JOINT STOCK COMPANY İŞBANK GEORGIA (JSC İŞBANK GEORGIA) MAXİS GİRİŞİM SERMAYESİ PORTFÖY YÖNETİMİ A.Ş. MAXIS INVESTMENTS LTD. MİLLİ REASÜRANS T.A.Ş. TSKB GAYRİMENKUL YATIRIM ORTAKLIğI A.Ş. TÜRKİYE SINAİ KALKINMA BANKASI A.Ş. YATIRIM FİNANSMAN MENKUL DEğERLER A.Ş. YATIRIM VARLIK KİRALAMA A.Ş. Structured Entities TIB DIVERSIFIED PAYMENT RIGHTS FINANCE COMPANY The consolidated year ended financial financial statements and related disclosures and footnotes in this report are prepared, in accordance with the Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks. Banking Regulation and Supervision Agency (BRSA) regulations, Turkish Accounting Standards, Turkish Financial Reporting Standards and the related statements and guidance and in compliance with the financial records of our Bank. Unless otherwise stated the accompanying consolidated financial report is presented in thousands of Turkish Lira (TL), and has been subjected to independent audit and presented as the attached. Prof. Dr. Turgay Berksoy Member of the Board and the Audit Committee Ertuğrul Bozgedik Füsun Tümsavaş Deputy Chairperson of the Board of Directors and Member of the Audit Committee Chairperson of the Board of Directors and the Audit Committee Ali Tolga Ünal Senar Akkuş Adnan Bali Head of Financial Management Division Deputy Chief Executive In Charge of Financial Reporting Chief Executive Officer The authorized contact person for questions on this financial report: Name - Surname/Title : Süleyman H. Özcan/Head of Investor Relations Division Phone No Fax No E-mail : +90 212 3161602 : +90 212 3160840 : Suleyman.Ozcan@isbank.com.tr : investorrelations@isbank.com.tr Website : www.isbank.com.tr 219 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş. Contents SECTION I General Information about the Parent Bank Explanations on the Establishment Date and Initial Status of the Parent Bank, and History Including the Changes in the Former Status Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Parent Bank, any Changes in the Period, and Information on the Parent Bank’s Risk Group Page Number 222 222 Explanations on the Chairperson’s, Directors’, Auditors’, Chief Executive Officer’s and Deputy Chief Executives’ Shares, if any, and the Areas of their Responsibility at the Bank 222 Information on the Parent Bank’s Qualified Shareholders Summary Information on the Parent Bank’s Functions and Business Lines Differences between the Communiqué on Preparation of Consolidated Financial Statements of Banks and Turkish Accounting Standards and Explanation about the Institutions Subject to Full Consolidation Method or Proportional Consolidation and Institutions which are deducted from Equity or not included in these Three Methods I. II. III. IV. V. VI. VII. Existing or Potential, Actual or Legal Obstacles on the Transfer of Shareholders’ Equity between the Parent Bank and its Subsidiaries or the Reimbursement of Liabilities VIII. Written Policies on Assessment of Ensuring Compliance on Market Discipline, Disclosure Obligations, Frequency and Accuracy of the Related Disclosures SECTION II Consolidated Financial Statements Consolidated Balance Sheet -Assets(Current Period) Consolidated Balance Sheet -Assets (Prior Period) Consolidated Balance Sheet -Liabilities (Current Period) Consolidated Balance Sheet -Liabilities (Prior Period) Consolidated Off-Balance Sheet Items (Current Period) Consolidated Off-Balance Sheet Items (Prior Period) Consolidated Income Statement (Current Period) I. II. III. IV. V. VI. VII. VIII. Consolidated Income Statement (Prior Period) IX. X. XI Profit Or Loss And Other Comprehensive Income (Current Period) Profit Or Loss And Other Comprehensive Income (Prior Period) Consolidated Statement of Cash Flows (Current Period) XII. Consolidated Statement of Cash Flows(Prior Period) XIII. Consolidated Statement of Changes in the Shareholders’ Equity (Current Period) XIV. Consolidated Statement of Changes in the Shareholders’ Equity (Prior Period) XV. Consolidated Statement of Profit Distribution (Current Period) XVI. Consolidated Statement of Profit Distribution (Prior Period) SECTION III Explanations on Accounting Policies Basis of Presentation Strategy for Use of Financial Instruments and on Foreign Currency Transactions Information on the Consolidated Companies Forward, Option Contracts and Derivative Instruments Interest Income and Expenses Fees and Commission Income and Expenses Financial Assets I. II. III. IV. V. VI. VII. VIII. Impairment of Financial Assets IX. X. XI. Offsetting Financial Instruments Sale and Repurchase Agreements and Securities Lending Transactions Non-current Assets Held for Sale and Discontinued Operations and Related Liabilities XII. Goodwill and Other Intangible Assets XIII. Tangible Assets XIV. Investment Property XV. Leasing Transactions XVI. Insurance Technical Income and Expense XVII. Insurance Technical Provisions XVIII. Provisions and Contingent Liabilities XIX. Contingent Assets 220 223 223 223 225 225 226 226 227 227 228 228 229 229 230 230 231 231 232 232 234 234 235 235 236 237 237 237 237 238 239 239 239 240 240 240 240 241 241 241 241 İşbank Annual Report 2019 XX. Liabilities Regarding Employee Benefits XXI. Taxation XXII. Additional Information on Borrowings XXIII. Information on Equity Shares and Issuance of Equity Shares XXIV. Bank Acceptances and Bills of Guarantee XXV. Government Incentives XXVI. Segment Reporting XXVII. Other Disclosures SECTION IV Information on the Financial Position and Risk Management of the Group I. II. III. IV. V. VI. VII. Explanations on Shareholders’ Equity Explanations on Credit Risk Explanations on Currency Risk Explanations on Interest Rate Risk Explanations on Equity Shares Risk Arising from Banking Book Explanations on Liquidity Risk and Consolidated Liquidity Coverage Ratio Explanations on Leverage Ratio VIII. Explanations on Other Price Risk IX. X. XI. Explanations on Presentation of Assets and Liabilities at Fair Value Explanations on Transactions Carried Out on Behalf of Third Parties and Fiduciary Transactions Explanations on Risk Management Objectives and Policies XII. Explanations on Segment Reporting SECTION V Disclosures and Footnotes on the Consolidated Financial Statements Disclosures and footnotes on consolidated assets Disclosures and footnotes on consolidated liabilities Disclosures and footnotes on consolidated off-balance sheet items Disclosures and footnotes on the consolidated income statement Disclosures and footnotes on consolidated statement of changes in shareholders’ equity Disclosures and footnotes on the consolidated statemens of cash-flows Disclosures and footnotes on the group’s risk group I. II. III. IV. V. VI. VII. VIII. Disclosures on the group’s domestic, foreign, off-shore branches or participations and representative offices IX. Subsequent events SECTION VI Other Explanations I. Explanations on the group’s credit ratings SECTION VII Explanations on the Audit Report I. II. Explanations on the independent auditors’ report Explanations and footnotes of the independent auditors report Page Number 241 242 244 244 244 244 244 244 245 256 266 268 272 272 277 278 278 279 280 295 296 312 319 321 325 325 326 328 329 330 331 331 221 Financial Informationand Risk Managementİşbank Annual Report 2019 SECTION ONE: GENERAL INFORMATION ABOUT THE PARENT BANK I. Explanations on the Establishment Date and Initial Status of the Parent Bank, and History Including the Changes in the Former Status TÜRKİYE İŞ BANKASI A.Ş. (“the Bank” or “the Parent Bank”) was established on August 26, 1924 to operate in all kinds of banking activities and to initiate and/or participate in all kinds of financial and industrial sector undertakings when necessary. The Bank status has not been changed since its establishment. II. Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Parent Bank, any Changes in the Period, and Information on the Parent Bank’s Risk Group As at December 31, 2019, 39.10% of the Bank’s shares are owned by T. İş Bankası A.Ş. Supplementary Pension Fund (Fund), 28.09% are owned by the Republican People’s Party- CHP (Atatürk’s shares) and 32.81% are on free float (31 December 2018: Fund 40.47%, CHP 28.09%, Free float 31.44%). III. Explanations on the Chairperson’s, Directors’, Auditors’, Chief Executive Officer’s and Deputy Chief Executives’ Shares, if any, and the Areas of their Responsibility at the Bank Chairperson and Members of the Board of Directors: Name and Surname Areas of Responsibility Füsun Tümsavaş Ertuğrul Bozgedik Adnan Bali Chairperson of the Board, the Remuneration Committee, the Audit Committee, TRNC Internal Systems Committee, the Risk Committee, the Corporate Governance Committee and Substitute Member of the Credit Committee Deputy Chairperson of the Board of Directors and Member of the Audit Committee, the Credit Committee, Member of the TRNC Internal Systems Committee, Chairperson of the Risk Committee Chief Executive Officer and Board Member, Chairperson of the Credit Committee and Human Resources Committee, Member of the Risk Committee, Chairperson of the Executive Committee Prof. Dr. Turgay Berksoy Director, Member of the Audit Committee and TRNC Internal Systems Committee, Substitute Member of the Credit Committee Feray Demir Director, Member of the Credit Committee, Remuneration Committee and Corporate Social Responsibility Committee Ersin Önder Çiftçioğlu Director, Member of the Corporate Governance Committee Murat Karayalçın Özcal Korkmaz Director Director, Member of the Corporate Governance Committee Rahmi Aşkın Türeli Director, Member of Corporate Social Responsibility Committee Fazlı Bulut Director, Member of the Corporate Governance Committee and Corporate Social Responsibility Committee Mr. Sezgin Yılmaz has resigned from the Membership position of the Board of Directors in the current period. Chief Executive Officer and Deputy Chief Executives: Name and Surname Areas of Responsibility Adnan Bali Hakan Aran Yalçın Sezen Senar Akkuş Yılmaz Ertürk (*) Murat Bilgiç Chief Executive Officer and Board Member, Chairperson of the Credit Committee and the Human Resources Committee, Member of the Risk Committee, Chairperson of the Executive Committee Information Technologies, Digital Banking Operations, Data Management Retail Banking Marketing, Sales and Products, Retail Loan and Card Operations, Retail Loans, Digital Banking, Card Payment Systems, Member of the Corporate Social Responsibility Committee Financial Management, Strategy and Corporate Performance Management, Managerial Reporting and Internal Accounting, Subsidiaries, Member of the Corporate Social Responsibility Committee and the Risk Committee Private Banking Marketing and Sales, Capital Markets Corporate, Commercial, SME, Retail Banking Allocation, Financial Analysis and Credit Information, and Member of the Risk Committee Nevzat Burak Seyrek Enterprise Architecture, Human Resources and Talent Management, Consumer Relations Coordination Officer Mehmet Şencan (*) Ömer Karakuş (*) Corporate Banking Marketing and Sales, Commercial Banking Sales, Free Zone Branches, Foreign Branches and Representations Banking Basic Operations, Support Services, Purchasing, Foreign and Commercial Credit Operations, Internal Operations, Construction and Property Management, Branch Network Development Şahismail Şimşek SME and Enterprise Banking Sales, Commercial Banking Marketing and Product Ebru Özşuca Gamze Yalçın H. Cahit Çınar Treasury, Economic Enquiries, Member of the Risk Comittee International Financial Institutions, Investor Relations Commercial Banking, Retail Banking and General Deliberation Legal Counsellorship, Commercial and Corporate Loans and Retail Loans Monitoring and Recovery, Credits Portfolio Management (*) As a result of the Board Meeting dated August 26, 2019, Deputy Chief ExecutivesYılmaz Ertürk, Mehmet Şencan and Ömer Karakuş have resigned from their position at the Bank.. The Parent Bank’s shares attributable to the Directors and members of the Audit Committee, to the CEO and the Deputy Chief Executives are of minor importance. 222 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Information on the Parent Bank’s Qualified Shareholders Name Surname/Company Shares Ownership Paid-in Capital Unpaid Capital T, İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı (“İşbank Members’ Supplementary Pension Fund”) Cumhuriyet Halk Partisi - Republican People’s Party (Atatürk’s Shares) 1,759,503 1,264,142 39.10% 28.09% 1,759,503 1,264,142 V. Summary Information on the Parent Bank’s Functions and Business Lines In line with the relevant legislation and principles stated in the Articles of Incorporation of the Bank, the Bank’s activities include operating in retail, commercial, corporate and private banking, foreign currency and money market operations, marketable securities operations, international banking services and other banking operations, as well as initiating or participating in all kinds of financial and industrial sector corporations as may be required. VI. Differences between the Communiqué on Preparation of Consolidated Financial Statements of Banks and Turkish Accounting Standards and Explanation about the Institutions Subject to Full Consolidation Method or Proportional Consolidation and Institutions which are deducted from Equity or not included in these Three Methods Banks are obligated to prepare consolidated financial statements for credit institutions and financial subsidiaries for creating legal restrictions on a consolidated basis based on the “Communiqué on Preparation of Consolidated Financial Statements of Banks” by applying Turkish Accounting Standards. There is not any difference between the related Communiqué and the consolidation operations that is based on Turkish Accounting Standards and Turkish Financial Reporting Standards. The consolidated financial statement includes the subsidiaries of the Bank which are credit institutions or financial institutions accordance with the BRSA regulations. As of current there is no credit institution or financial institution subsidiaries which are excluded in the scope of the consolidation. The Parent Bank and its subsidiaries; - ANADOLU ANONİM TÜRK SIGORTA ŞİRKETİ - ANADOLU HAYAT EMEKLİLİK A.Ş. - EFES VARLIK YÖNETİM A.Ş. - İŞ FAKTORING A.Ş. - İŞ FINANSAL KİRALAMA A.Ş. - İŞ GAYRIMENKUL YATIRIM ORTAKLIğI A.Ş. - İŞ GİRİŞİM SERMAYESİ YATIRIM ORTAKLIğI A.Ş. - İŞ PORTFÖY YÖNETIMI A.Ş. - İŞ YATIRIM MENKUL DEğERLER A.Ş. - İŞ YATIRIM ORTAKLIğI A.Ş. - İŞBANK AG - JSC İŞBANK - JSC İŞBANK GEORGIA - MAXİS GİRİŞİM SERMAYESİ PORTFÖY YÖNETİMİ A.Ş. - MAXİS INVESTMENTS LTD. - MİLLİ REASÜRANS T.A.Ş. - TSKB GAYRİMENKUL YATIRIM ORTAKLIğI A.Ş. - TÜRKİYE SINAİ KALKINMA BANKASI A.Ş. - YATIRIM FİNANSMAN MENKUL DEğERLER A.Ş. - YATIRIM VARLIK KİRALAMA A.Ş. and Structured Entity; - TIB DIVERSIFIed Payment Rights Finance Company is included in the consolidated financial statements with “full consolidation method”. The Parent Bank’s associate acting as a credit institution; - ARAP-TÜRK BANKASI A.Ş. is accounted under equity accounting method in the consolidated financial statements. 223 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Consolidated companies are active in the areas of banking, insurance and reinsurance, private pensions, finance leasing, factoring, real estate investment, venture capital investment, brokerage, investment consulting, portfolio and asset management. Those companies are explained below. Anadolu Anonim Türk Sigorta Şirketi The Company was established in 1925 and operates in almost all non-life insurance service. Headquarter of the Company is in Istanbul. The Company’s shares are traded in the Borsa İstanbul A.Ş. Anadolu Hayat Emeklilik A.Ş. The Company was founded in 1990 and its’ headquarter is in Istanbul. The company’s main activities are private individual or group pension and life/death insurance and due to this branch are engaged in all kinds of insurance. There are 34 individual pension funds offered by the company to the subscribers. The company’s shares are traded in the Borsa Istanbul A.Ş. Efes Varlık Yönetim A.Ş. The field of activity of the company, which was founded in February 2011 is to purchase and sell the receivables with other assets of deposit banks, participation banks and other financial institutions. The Company’s headquarter is located İstanbul. İş Faktoring A.Ş. The field of operation of the Company, which operates in the factoring sector since 1993, is domestic and foreign factoring operations. The Company’s headquarter is in Istanbul. İş Finansal Kiralama A.Ş. The Company, whose field of activity is financial leasing within the country and abroad started its business in 1988. The headquarters of the Company is in Istanbul. The Company’s shares are traded in the Borsa İstanbul A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. The Company whose main field of activity is investing in real estate, capital market instruments backed by real estate, real estate projects and capital market instruments is conducting its business in the sector as a real estate investment trust since 1999. The Company’s shares are traded in the Borsa İstanbul A.Ş. since its establishment. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. Having started its venture capital business in the year 2000, the aim of the company is performing long-term investments to venture companies which have potential development and need resources where was founded and established in Turkey. The company’s shares are traded in the Borsa İstanbul A.Ş. since the year 2004. İş Portföy Yönetimi A.Ş. The purpose of the Company, which was founded in 2000, is to engage in capital market operations stated in its articles of association. Among the capital market operations, the company offers portfolio management and investment consulting services only to corporate investors. İş Yatırım Menkul Değerler A.Ş. The Company’s main field of activity is composed of intermediary, corporate finance, investment consulting and private portfolio management services. The Company’s shares are traded in the Borsa İstanbul A.Ş. since May 2007. İş Yatırım Ortaklığı A.Ş. The aim of the Company, which was founded in İstanbul in the year 1995, is operating capital market activities which is located in the principal agreement, is portfolio management. The Company’s shares are traded in the Borsa İstanbul A.Ş. since April 1996. İşbank AG İşbank AG was founded to carry out the banking transactions in Europe. İşbank AG has 11 branches in total, 10 branches in Germany and 1 branch in Netherlands. JSC İşbank The Bank, which was founded in 1998 and headquartered in Moscow, operating banking services by focusing on deposit, loan and brokerage operations with its 3 branches, including its head office in several regions of Russian Federation. 224 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) JSC İşbank Georgia The Bank which was established in Georgia in the third quarter of 2015, is operating banking services mainly deposit, loan and exchange transactions. As part of the organizational structure of Parent Bank in abroad. Batumi and Tbilisi branches which were established in 2012 and 2014 respectively and proceed its operations as JSC Isbank Georgia. Maxis Girişim Sermayesi Porföy Yönetimi A.Ş. The purpose of the Company, which was founded in November 2017, is to establish and manage capital investment funds in accordance with the Capital Markets Law and related legislations. Maxis Investments Ltd. The purpose of the Company, which was founded in England in the year 2005, is to operate in activities in foreign capital markets. Milli Reasürans T.A.Ş. The Company, which was founded in 1929 to provide reinsurance and retrocession services in foreign and domestic branches. It has 1 branch in Singapore. TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. The major field of activity of the Company, which was founded in 2006, is to create and develop an investment property portfolio and to invest in capital market instruments that are based on investment properties. The Company’s shares are traded in the Borsa İstanbul A.Ş. since April 2010. Türkiye Sınai Kalkınma Bankası A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. (TSKB) which is an industrial development and an investment bank is founded especially to support private sector investments in industry and to provide domestic and foreign capital to Turkish companies. The Bank’s shares are traded in the Borsa İstanbul A.Ş. Yatırım Finansman Menkul Değerler A.Ş. The Company was founded in 1976. The purpose of the Company is to engage in capital market operations stated in its articles of association. Yatırım Varlık Kiralama A.Ş. The company was founded in September 20, 2019. The purpose of the Company is to issue lease certificate exclusively within the framework of the Capital Market Law and related legislation provisions. VII. Existing or Potential, Actual or Legal Obstacles on the Transfer of Shareholders’ Equity between the Parent Bank and its Subsidiaries or the Reimbursement of Liabilities None. VIII. Written Policies on Assessment of Ensuring Compliance on Market Discipline, Disclosure Obligations, Frequency and Accuracy of the Related Disclosures The Parent Bank has written policies on assessment of ensuring compliance on market discipline, disclosure obligations, frequency and accuracy of related disclosures. The mentioned policies which are agreed by Board can be obtained from the Parent Bank’s website. 225 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Consolidated Balance Sheet As of December 31, 2019 THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2018) ASSETS Footnotes TL FC Total TL FC Total I. 1.1 1.1.1 1.1.2 FINANCIAL ASSETS (NET) Cash and Cash Equivalents Cash and Balances with Central Bank Banks 1.1.3 Money Market Placements 1.1.4 Expected Credit Loss (-) 52,312,184 94,371,995 146,684,179 43,048,785 70,734,999 113,783,784 8,301,164 67,456,533 75,757,697 9,120,481 46,978,521 56,099,002 V-I-a V-I-d 5,263,162 48,812,966 54,076,128 6,427,599 34,494,643 40,922,242 1,988,674 18,565,357 20,554,031 1,942,494 12,511,583 14,454,077 1,058,871 9,543 120,577 42,367 1,179,448 758,169 - 51,910 7,781 27,705 758,169 35,486 1.2 1.2.1 1.2.2 1.2.3 1.3 1.3.1 1.3.2 1.3.3 1.4 Financial Assets at Fair Value Through Profit or Loss V-I-b 2,481,683 2,319,812 4,801,495 939,793 2,557,312 3,497,105 Government Debt Securities Equity Securities Other Financial Assets Financial Assets at Fair Value Through Other Comprehensive Income Government Debt Securities Equity Securities Other Financial Assets Derivative Financial Assets 271,813 154,554 10,939 1,498 282,752 156,052 2,055,316 2,307,375 4,362,691 429,346 115,702 394,745 15,465 - 444,811 115,702 2,541,847 2,936,592 V-I-e 41,263,642 19,750,078 61,013,720 32,313,623 15,536,079 47,849,702 39,332,002 17,666,968 56,998,970 31,582,543 14,053,628 45,636,171 158,784 423,727 582,511 1,772,856 1,659,383 3,432,239 136,223 594,857 271,026 407,249 1,211,425 1,806,282 V-I-c-l 265,695 4,845,572 5,111,267 674,888 5,663,087 6,337,975 1.4.1 Derivative Financial Assets at Fair Value Through Profit or Loss 265,695 4,845,572 5,111,267 674,888 5,663,087 6,337,975 1.4.2 Derivative Financial Assets at Fair Value Through Other Comprehensive Income - - - - - - II. 2.1 2.2 2.3 2.4 Financial Assets Measured at Amortised Cost (Net) 200,552,565 153,100,675 353,653,240 179,388,814 150,955,326 330,344,140 Loans Lease Receivables Factoring Receivables V-I-f V-I-k 179,157,891 149,081,976 328,239,867 157,921,177 147,241,993 305,163,170 1,605,008 3,899,070 5,504,078 1,757,026 3,889,155 5,646,181 2,772,806 614,484 3,387,290 2,232,511 528,478 2,760,989 Other Financial Assets Measured at Amortised Cost (Net) V-I-g 30,339,422 3,299,879 33,639,301 26,501,047 2,512,460 29,013,507 2.4.1 Government Debt Securities 2.4.2 Other Financial Assets 30,050,721 2,685,879 32,736,600 26,180,153 2,047,977 28,228,130 288,701 614,000 902,701 320,894 464,483 785,377 Expected Credit Loss (-) 13,322,562 3,794,734 17,117,296 9,022,947 3,216,760 12,239,707 ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) V-I-q Held for Sale Discontinued Operations EQUITY INVESTMENTS Investments in Associates (Net) V-I-h 4.1.1 Associates Accounted by using Equity Method 4.1.2 Unconsolidated Associates 4.2 Subsidiaries (Net) 4.2.1 Unconsolidated Financial Subsidiaries 4.2.2 Unconsolidated Non-Financial Subsidiaries 4.3 Joint Ventures (Net) 4.3.1 Joint Ventures Accounted by using Equity Method 4.3.2 Unconsolidated Joint Ventures TANGIBLE ASSETS (Net) INTANGIBLE ASSETS (Net) Goodwill Other 1,178,529 1,178,529 - 11,190,991 255,838 220,768 35,070 - 10,929,898 5,255 - 5,255 11,691 1,190,220 11,691 1,190,220 256,334 256,334 - - - - - - - - - - - - - 11,190,991 9,418,560 255,838 220,768 35,070 212,705 181,741 30,964 10,929,898 9,202,767 - - 10,929,898 9,202,767 5,255 - 5,255 3,088 - 3,088 26,804 26,804 - - - - - - - - - - - 283,138 283,138 - 9,418,560 212,705 181,741 30,964 9,202,767 - 9,202,767 3,088 - 3,088 7,842,385 152,380 7,994,765 7,060,877 43,164 7,104,041 1,104,073 92,651 1,196,724 787,447 96,094 883,541 35,974 - 35,974 1,068,099 92,651 1,160,750 35,974 751,473 - 96,094 35,974 847,567 V-I-i 10,929,898 V-I-j V-I-m V-I-n INVESTMENT PROPERTY (Net) V-I-o 3,444,979 - 3,444,979 3,704,581 - 3,704,581 CURRENT TAX ASSET DEFERRED TAX ASSET OTHER ASSETS 21,145 2,501 23,646 166,238 4,590 170,828 V-I-p V-I-r 1,141,900 809,097 1,950,997 1,238,889 304,981 1,543,870 31,560,267 6,161,830 37,722,097 26,246,756 6,424,118 32,670,874 TOTAL ASSETS 310,349,018 254,702,820 565,051,838 271,317,281 228,590,076 499,907,357 2.5 III. 3.1 3.2 IV. 4.1 V. VI. 6.1 6.2 VII. VIII. IX. X. 226 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Balance Sheet As of December 31, 2019 I. II. III. IV. 4.1 4.2 4.3 V. 5.1 5.2 VI. VII. 7.1 7.2 LIABILITIES Footnotes TL FC Total TL FC Total THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2018) DEPOSITS FUNDS BORROWED MONEY MARKETS SECURITIES ISSUED (Net) Bills Asset Backed Securities Bonds FUNDS Borrower Funds Other FİNANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS V-II-a V-II-c 128,979,347 173,811,857 302,791,204 111,338,629 137,642,773 248,981,402 4,742,038 67,564,942 72,306,980 3,194,143 69,387,864 72,582,007 1,286,893 1,743,442 3,030,335 7,803,284 4,177,303 11,980,587 V-II-d 9,114,208 30,177,570 39,291,778 9,638,527 31,003,744 40,642,271 7,506,622 138,244 - - 7,506,622 8,370,994 138,244 - - - 8,370,994 - 1,469,342 30,177,570 31,646,912 1,267,533 31,003,744 32,271,277 2,494 2,494 56,456 56,456 58,950 58,950 2,408 2,408 30,121 30,121 32,529 32,529 - - - - - - - - - - - - DERIVATIVE FINANCIAL LIABILITIES V-II-b-h 681,191 2,050,633 2,731,824 1,700,398 2,857,888 4,558,286 Derivative Financial Liabilities at Fair Value Through Profit or Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income VIII. FACTORING PAYABLES IX. X. 10.1 10.2 10.3 10.4 XI. XII. XIII. 13.1 13.2 XIV. 14.1 14.2 XV. XVI. 16.1 16.2 LEASE PAYABLES (Net) PROVISIONS Restructuring Provisions Reserve for Employee Benefits Insurance Technical Provisions (Net) Other Provisions CURRENT TAX LIABILITY DEFERRED TAX LIABILITY LIABILITIES RELATED TO ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Held for Sale Discontinued Operations SUBORDINATED DEBT Loans Other Debt Instruments OTHER LIABILITIES SHAREHOLDERS’ EQUITY Paid-in capital Capital Reserves 16.2.1 Share Premium 16.2.2 Share Cancellation Profits 16.2.3 Other Capital Reserves 16.3 16.4 Accumulated Other Comprehensive Income or Loss Not Reclassified Through Profit or Loss Accumulated Other Comprehensive Income or Loss Reclassified Through Profit or Loss 16.5 Profit Reserves 16.5.1 Legal Reserves 16.5.2 Status Reserves 16.5.3 Extraordinary Reserves 16.5.4 Other Profit Reserves 16.6 Profit or Loss 16.6.1 Prior Periods’ Profit or Loss 16.6.2 Current Period Profit or Loss 16.7 Minority Shares 681,191 2,050,633 2,731,824 1,700,398 2,857,888 4,558,286 - - - - - - 822,574 134,310 956,884 - - - - - - - - - 15,281,940 2,578,645 17,860,585 13,316,436 1,845,249 15,161,685 - - - - - - 1,353,611 2,420 1,356,031 1,101,531 1,406 1,102,937 8,209,952 2,264,775 10,474,727 6,925,257 1,689,236 8,614,493 5,718,377 311,450 6,029,827 5,289,648 154,607 5,444,255 1,549,792 36,760 1,586,552 1,708,815 19,716 1,728,531 75,379 913 76,292 80,066 - - - - - - - - - - - - - - - - 80,066 - - - V-II-g V-II-i V-II-j V-II-j V-II-k V-II-l 2,281,084 13,095,892 15,376,976 1,136,214 11,572,361 12,708,575 - - - - - - 2,281,084 13,095,892 15,376,976 1,136,214 11,572,361 12,708,575 V-II-f V-II-m 39,770,069 3,511,942 43,282,011 32,393,567 3,442,958 35,836,525 65,945,911 (244,444) 65,701,467 56,822,220 (1,207,327) 55,614,893 4,500,000 1,126,870 39,250 - 1,087,620 - - - - - 4,500,000 4,500,000 1,126,870 1,129,862 39,250 39,234 - - 1,087,620 1,090,628 - - - - - 4,500,000 1,129,862 39,234 - 1,090,628 4,790,255 100 4,790,355 4,734,077 210 4,734,287 3,349,172 (388,660) 2,960,512 1,085,876 (1,198,836) (112,960) 36,840,268 4,896,373 135,606 4,619 1,930 36,844,887 29,032,549 4,898,303 4,486,040 4,619 1,930 29,037,168 4,487,970 - 135,606 112,204 - 112,204 31,808,289 2,689 31,810,978 24,434,305 2,689 24,436,994 - - - - - - 8,275,984 2,372,239 5,903,745 7,063,362 137,270 8,413,254 10,272,441 31,100 10,303,541 31,210 2,403,449 3,755,901 (124,183) 3,631,718 106,060 6,009,805 6,516,540 155,283 6,671,823 2,227 7,065,589 6,067,415 (44,420) 6,022,995 V-II-n TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 270,532,920 294,518,918 565,051,838 239,134,707 260,772,650 499,907,357 227 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Statement of Off-Balance Sheet Items As of December 31, 2019 OFF-BALANCE SHEET ITEMS GUARANTEES AND SURETYSHIPS Letters of Guarantee Guarantees Subject to State Tender Law Guarantees Given for Foreign Trade Operations Other Letters of Guarantee Bank Acceptances Import Letter of Acceptance Other Bank Acceptances Letters of Credit Documentary Letters of Credit Other Letters of Credit Prefinancing Given as Guarantee Endorsements Endorsements to the Central Bank of Turkey Other Endorsements Purchase Guarantees for Securities Issued Factoring Guarantees Other Guarantees Other Suretyships COMMITMENTS Irrevocable Commitments Forward Asset Purchase Commitments Forward Deposit Purchase and Sales Commitments Capital Commitments to Associates and Subsidiaries Loan Granting Commitments Securities Underwriting Commitments Commitments for Reserve Deposit Requirements Commitments for Cheque Payments Tax and Fund Liabilities from Export Commitments Commitments for Credit Card Expenditure Limits Commitments for Credit Cards and Banking Services Promotions Receivables from Short Sale Commitments Payables for Short Sale Commitments Other Irrevocable Commitments Revocable Commitments Revocable Loan Granting Commitments Other Revocable Commitments DERIVATIVE FINANCIAL INSTRUMENTS Derivative Financial Instruments Held for Risk Management Fair Value Hedges Cash Flow Hedges Net Foreign Investment Hedges Derivative Financial Instruments Held for Trading Forward Foreign Currency Buy/Sell Transactions Forward Foreign Currency Buy Transactions Forward Foreign Currency Sell Transactions Currency and Interest Rate Swaps Currency Swap Buy Transactions Currency Swap Sell Transactions Interest Rate Swap Buy Transactions Interest Rate Swap Sell Transactions Currency, Interest Rate and Security Options Currency Call Options Currency Put Options Interest Rate Call Options Interest Rate Put Options Securities Call Options Securities Put Options Currency Futures Currency Buy Futures Currency Sell Futures Interest Rate Futures Interest Rate Buy Futures Interest Rate Sell Futures Other A. OFF-BALANCE SHEET CONTINGENCIES and COMMITMENTS (I+II+III) I. 1.1 1.1.1 1.1.2 1.1.3 1.2 1.2.1 1.2.2 1.3 1.3.1 1.3.2 1.4 1.5 1.5.1 1.5.2 1.6 1.7 1.8 1.9 II. 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8 2.1.9 2.1.10 2.1.11 2.1.12 2.1.13 2.2 2.2.1 2.2.2 III. 3.1 3.1.1 3.1.2 3.1.3 3.2 3.2.1 3.2.1.1 3.2.1.2 3.2.2 3.2.2.1 3.2.2.2 3.2.2.3 3.2.2.4 3.2.3 3.2.3.1 3.2.3.2 3.2.3.3 3.2.3.4 3.2.3.5 3.2.3.6 3.2.4 3.2.4.1 3.2.4.2 3.2.5 3.2.5.1 3.2.5.2 3.2.6 B. CUSTODY AND PLEDGES RECEIVED (IV+V+VI) ITEMS HELD IN CUSTODY IV. Customers’ Securities Held 4.1 Investment Securities Held in Custody 4.2 Cheques Received for Collection 4.3 Commercial Notes Received for Collection 4.4 Other Assets Received for Collection 4.5 Assets Received for Public Offering 4.6 Other Items Under Custody 4.7 Custodians 4.8 PLEDGED ITEMS V. Marketable Securities 5.1 Guarantee Notes 5.2 Commodity 5.3 Warranty 5.4 Real Estates 5.5 Other Pledged Items 5.6 Pledged Items-Depository 5.7 ACCEPTED BILL, GUARANTEES AND SURETIES VI. Footnotes V-III CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2018) THOUSAND TL TL 166,281,278 32,395,132 32,246,614 576,475 1,935,615 29,734,524 - - - 107,344 95,025 12,319 - - - - - 12,703 28,471 - 58,369,590 57,351,837 930,528 - 3,588 18,930,150 - - 2,673,042 23,261 31,090,963 113,842 - - 3,586,463 1,017,753 932,753 85,000 75,516,556 - - - - 75,516,556 8,689,923 4,494,247 4,195,676 61,852,105 11,474,473 49,621,032 378,300 378,300 4,814,654 2,424,143 2,329,757 - - 24,499 36,255 54,833 54,293 540 - - - 105,041 657,586,215 89,812,045 - 73,390,917 13,109,079 2,945,032 - - 367,017 - 567,774,170 41,638,400 10,544,691 113,783,813 - 318,041,884 83,765,382 - - ¯Ω 360,245,368 64,198,200 39,300,725 976,230 15,083,874 23,240,621 6,040,332 302,090 5,738,242 16,209,490 12,420,423 3,789,067 - - - - - - 2,647,653 - 15,860,570 8,909,626 2,059,373 - 96,782 691,607 - - - - - - - - 6,061,864 6,950,944 6,950,944 - 280,186,598 16,520,430 16,520,430 - - 263,666,168 21,432,032 10,543,785 10,888,247 225,412,722 70,219,278 30,328,506 62,432,469 62,432,469 13,201,733 3,468,440 3,351,807 3,190,743 3,190,743 - - 64,219 7,329 56,890 - - - 3,555,462 682,851,813 34,047,245 - 4,784,135 12,313,077 12,494,982 - - 4,455,051 - 648,804,568 54,528,282 28,052,674 36,392,061 - 336,610,047 193,221,504 - - Total 526,526,646 96,593,332 71,547,339 1,552,705 17,019,489 52,975,145 6,040,332 302,090 5,738,242 16,316,834 12,515,448 3,801,386 - - - - - 12,703 2,676,124 - 74,230,160 66,261,463 2,989,901 - 100,370 19,621,757 - - 2,673,042 23,261 31,090,963 113,842 - - 9,648,327 7,968,697 7,883,697 85,000 355,703,154 16,520,430 16,520,430 - - 339,182,724 30,121,955 15,038,032 15,083,923 287,264,827 81,693,751 79,949,538 62,810,769 62,810,769 18,016,387 5,892,583 5,681,564 3,190,743 3,190,743 24,499 36,255 119,052 61,622 57,430 - - - 3,660,503 1,340,438,028 123,859,290 - 78,175,052 25,422,156 15,440,014 - - 4,822,068 - 1,216,578,738 96,166,682 38,597,365 150,175,874 - 654,651,931 276,986,886 - - TL 162,350,429 32,977,443 32,819,062 817,618 1,761,444 30,240,000 - - - 84,493 68,660 15,833 - - - - - 17,395 56,493 - 55,987,059 55,047,839 1,711,886 - 400 15,747,394 - - 2,600,948 17,791 27,477,673 113,226 - - 7,378,521 939,220 839,220 100,000 73,385,927 - - - - 73,385,927 8,758,823 4,562,249 4,196,574 56,335,555 14,173,178 41,458,577 351,900 351,900 7,949,592 4,088,149 3,797,202 - - 21,440 42,801 248,427 193,142 55,285 - - - 93,530 595,134,339 89,026,303 - 69,371,076 16,339,012 2,944,080 - - 372,135 - 506,108,036 26,775,543 9,438,396 104,598,885 - 297,464,738 67,830,474 - - FC 324,183,710 60,576,037 38,538,848 3,525,794 15,656,466 19,356,588 3,622,582 205,562 3,417,020 16,122,452 12,725,179 3,397,273 - - - - - - 2,292,155 - 18,164,982 9,726,323 3,332,103 - 97,405 363,815 - - - - - - - - 5,933,000 8,438,659 8,438,659 - 245,442,691 18,028,129 18,028,129 - - 227,414,562 16,445,556 8,080,591 8,364,965 191,467,112 61,593,554 33,382,858 48,245,350 48,245,350 12,988,081 5,348,163 5,674,940 982,489 982,489 - - 231,154 62,759 168,395 - - - 6,282,659 544,307,169 30,008,264 - 3,760,338 10,700,589 11,905,030 251 - 3,642,056 - 514,298,905 45,127,679 23,433,546 21,604,581 - 278,499,219 145,633,880 - - Total 486,534,139 93,553,480 71,357,910 4,343,412 17,417,910 49,596,588 3,622,582 205,562 3,417,020 16,206,945 12,793,839 3,413,106 - - - - - 17,395 2,348,648 - 74,152,041 64,774,162 5,043,989 - 97,805 16,111,209 - - 2,600,948 17,791 27,477,673 113,226 - - 13,311,521 9,377,879 9,277,879 100,000 318,828,618 18,028,129 18,028,129 - - 300,800,489 25,204,379 12,642,840 12,561,539 247,802,667 75,766,732 74,841,435 48,597,250 48,597,250 20,937,673 9,436,312 9,472,142 982,489 982,489 21,440 42,801 479,581 255,901 223,680 - - - 6,376,189 1,139,441,508 119,034,567 - 73,131,414 27,039,601 14,849,110 251 - 4,014,191 - 1,020,406,941 71,903,222 32,871,942 126,203,466 - 575,963,957 213,464,354 - - TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 823,867,493 1,043,097,181 1,866,964,674 757,484,768 868,490,879 1,625,975,647 228 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Statement of Income As of December 31, 2019 INCOME STATEMENT INTEREST INCOME Interest Income on Loans Interest Income on Reserve Deposits Interest Income on Banks Interest Income on Money Market Placements Interest Income on Marketable Securities Portfolio Financial Assets At Fair Value Through Profit or Loss Financial Assets At Fair Value Through Other Comprehensive Income Financial Assets At Measured at Amortised Cost Financial Lease Income Other Interest Income INTEREST EXPENSE (-) Interest on Deposits Interest on Funds Borrowed Interest on Money Market Funds Interest on Securities Issued Financial Lease Expense Other Interest Expenses NET INTEREST INCOME (I - II) NET FEES AND COMMISSIONS INCOME Fees and Commissions Received Non-cash Loans Other Fees and Commissions Paid Non-cash Loans Other DIVIDEND INCOME TRADING INCOME/(LOSS) (Net) Gains/(Losses) on Securities Trading Derivative Financial Transactions Gains/Losses Foreign Exchange Gains/(Losses) OTHER OPERATING INCOME GROSS OPERATING INCOME (III+IV+V+VI+VII) EXPECTED CREDIT LOSS (-) OTHER PROVISION EXPENSES (-) PERSONNEL EXPENSE (-) OTHER OPERATING EXPENSES (-) NET OPERATING INCOME/(LOSS) (VIII-IX-X-XI-XII) AMOUNT IN EXCESS RECORDED AS GAIN AFTER MERGER PROFIT/LOSS FROM ASSOCIATES ACCOUNTED FOR USING THE EQUITY METHOD NET MONETARY POSITION GAIN/LOSS PROFIT/LOSS ON CONTINUING OPERATIONS BEFORE TAX (XIII+...+XVI) TAX PROVISION FOR CONTINUING OPERATIONS (±) Current Tax Provision Deferred Tax Income Effect (+) Deferred Tax Expense Effect (-) NET PERIOD PROFIT/LOSS FROM CONTUNUING OPERATIONS (XVI±XVII) INCOME ON DISCONTINUED OPERATIONS Income on Assets Held for Sale Gain on Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Other Income on Discontinued Operations EXPENSE ON DISCONTINUED OPERATIONS (-) Expense on Assets Held for Sale Loss on Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Other Expense on Discontinued Operations PROFIT/LOSS ON DISCONTINUED OPERATIONS BEFORE TAX (XX-XXI) TAX PROVISION FOR DISCONTINUED OPERATIONS (±) Current Tax Provision Deferred Tax Expense Effect (+) Deferred Tax Income Effect (-) I. 1.1 1.2 1.3 1.4 1.5 1.5.1 1.5.2 1.5.3 1.6 1.7 II. 2.1 2.2 2.3 2.4 2.5 2.6 III. IV. 4.1 4.1.1 4.1.2 4.2 4.2.1 4.2.2 V. VI 6.1 6.2 6.3 VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. 18.1 18.2 18.3 XIX. XIX. 19.1 19.2 19.3 XX. 20.1 20.2 20.3 XXI. XXII. 22.1 22.2 22.3 XXIII. NET PERIOD PROFIT/LOSS FROM DISCONTINUED OPERATIONS (XXII±XXIII) XXIV. NET PERIOD PROFIT/LOSS (XIX+XXIV) 25.1 25.2 Group’s Profit/Loss Non-controlling Interest Profit/Loss (-) Earnings per Share (*) (*) Expressed in exact TL. Footnotes V-IV-a V-IV-b V-IV-c V-IV-d V-IV-e V-IV-f V-IV-f V-IV-g V-IV-h V-IV-i V-IV-j V-IV-h V-IV-i V-IV-j V-IV-k THOUSAND TL CURRENT PERIOD (01/01-31/12/2019) 48,426,682 35,649,278 391,921 710,205 379,584 10,259,795 73,285 6,115,454 4,071,056 486,593 549,306 25,654,752 16,509,692 2,907,975 1,201,463 4,795,089 157,497 83,036 22,771,930 4,611,770 7,071,129 1,091,699 5,979,430 2,459,359 20,580 2,438,779 20,819 (4,633,920) 430,068 (4,970,798) (93,190) 10,970,036 33,740,635 8,570,651 665,632 5,252,399 12,260,512 6,991,441 - 1,462,479 - 8,453,920 1,422,289 2,473,633 889,445 1,940,789 7,031,631 - - - - - - - - - - - - - - 7,031,631 6,009,805 1,021,826 0.053419421 PRIOR PERIOD (01/01-31/12/2018) 44,078,656 33,172,163 516,952 666,318 121,271 8,573,477 95,544 5,295,906 3,182,027 491,438 537,037 24,492,384 13,326,370 2,699,744 4,320,946 4,102,649 - 42,675 19,586,272 3,756,035 5,628,940 886,972 4,741,968 1,872,905 23,764 1,849,141 19,655 (2,293,686) 197,556 (2,601,163) 109,921 8,120,963 29,189,239 6,904,155 108,698 4,501,780 10,154,346 7,520,260 - 1,569,036 - 9,089,296 1,517,912 1,659,581 824,035 965,704 7,571,384 - - - - - - - - - - - - - - 7,571,384 6,671,823 899,561 0.059303907 229 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Statement of Profit or Loss and Other Comprehensive Income as of December 31, 2019 PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME PROFIT/LOSS FOR THE PERIOD OTHER COMPREHENSIVE INCOME Other comprehensive income that will not be reclassified to profit or loss Revaluation Surplus on Tangible Assets Revaluation Surplus on Intangible Assets Gains/(Losses) on remeasurements of Defined Benefit Plans I. II. 2.1 2.1.1 2.1.2 2.1.3 2.1.4 Other Income/Expense Items of Other Comprehensive Income not to be Reclassified to Profit Or Loss 2.1.5 Taxes Relating To Components Of Other Comprehensive Income not to be Reclassified To Profit Or Loss 2.2 Other Income/Expense Items not be Reclassified to Profit or Loss 2.2.1 Exchange Differences on Translation 2.2.2 Valuation and/or Reclassification Profit or Loss from Financial Assets at Fair Value through Other Comprehensive Income 2.2.3 Income/(Loss) Related with Cash Flow Hedges 2.2.4 Income/(Loss) Related with Hedges of Net Investments in Foreign Operations 2.2.5 Other Income/Expense Items of Other Comprehensive Income to be Reclassified to Other Profit or Loss 2.2.6 Taxes Relating To Components Of Other Comprehensive Income to be Reclassified To Profit Or Loss XII. TOTAL COMPREHENSIVE INCOME (I+II) THOUSAND TL CURRENT PERIOD (01/01-31/12/2019) PRIOR PERIOD (01/01-31/12/2018) 4,486,280 1,290,969 44,721 (3,386) 47,768 339 1,246,248 111,609 1,235,853 5,121,354 (669,782) 1,015,090 1,004,370 84,626 (73,906) (1,684,872) 1,233,847 (4,053,831) 136,778 (237,992) 301,619 833,493 10,337,624 8,165,166 230 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Statement of Cash Flows As of December 31, 2019 A. CASH FLOWS FROM BANKING OPERATIONS 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 17,270,799 16,900,414 Footnotes CURRENT PERIOD (01/01-31/12/2019) PRIOR PERIOD (01/01-31/12/2018) THOUSAND TL 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 1.1.8 1.1.9 Interest Received Interest Paid Dividend Received Fees and Commissions Received Other Income Collections from Previously Written Off Loans and Other Receivables Cash Payments to Personnel and Service Suppliers Taxes Paid Other 1.2 Changes in Operating Assets and Liabilities Net (Increase)/Decrease in Financial Assets at Fair Value Through Profit or Loss Net (Increase)/Decrease in Due From Banks Net (Increase)/Decrease in Loans Net (Increase)/Decrease in Other Assets Net Increase/(Decrease) in Bank Deposits Net Increase/(Decrease) in Other Deposits Net Increase/(Decrease) in Financial Liabilities at Fair Value Through Profit or Loss Net Increase/(Decrease) in Funds Borrowed Net Increase/(Decrease) in Matured Payables 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.2.8 1.2.9 1.2.10 Net Increase/(Decrease) in Other Liabilities 46,812,289 (25,968,978) 296,543 7,071,129 5,787,864 918,494 (8,579,659) (3,150,744) (5,916,139) 40,514,718 (23,599,120) 235,020 5,628,940 5,273,483 604,581 (7,202,631) (1,403,381) (3,151,196) 11,202,973 7,519,976 (1,229,408) (3,310,524) (10,509,133) (5,560,924) (8,532) 40,273,207 - (7,560,811) - (890,902) 75,461 7,926,833 (14,070,302) (6,031,809) (963,779) 29,719,651 - (265,422) - (8,870,657) V-VI V-VI Net Cash Provided From Banking Operations 28,473,772 24,420,390 CASH FLOWS FROM INVESTING ACTIVITIES Net Cash Provided from Investing Activities (11,931,289) (6,024,499) I. B. II. 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 C. III. 3.1 3.2 3.3 3.4 3.5 3.6 IV. V. Cash Paid for the Purchase of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Cash Obtained from Sale of Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Cash Paid for the Purchase of Tangible Asset Cash Obtained from the Sale of Tangible Asset Cash Paid for Purchase of Financial Assets at Fair Value Through Other Comprehensive Income Cash Obtained from Sale of Financial Assets at Fair Value Through Other Comprehensive Income Cash Paid for Purchase of Financial Assets Measured at Amortised Cost Cash Obtained from Sale of Financial Assets Measured at Amortised Cost (*) Other CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided from financing activities Cash obtained from funds borrowed and securities issued Cash used for repayment of funds borrowed and securities issued Equity Instruments Dividends Paid Payments for Finance Leases (**) Other (***) Effect of change in foreign exchange rate on cash and cash equivalents Net increase in cash and cash equivalents V-VI V-VI V-VI (7,523) - (319,080) 862,304 (23,879,647) 15,171,316 (11,600,127) 8,497,685 (656,217) (13,588) 3,840 (430,638) 270,638 (17,020,749) 12,785,480 (4,918,394) 3,737,743 (438,831) (4,352,732) (5,130,058) 32,030,875 (35,793,599) - (130,003) (460,005) - 23,325,704 (26,033,103) - (1,892,352) - (530,307) 909,669 84,514 13,099,420 13,350,347 34,639,188 21,288,841 47,738,608 34,639,188 VI. Cash and cash equivalents at beginning of the period VII. Cash and cash equivalents at end of the period (*) Includes Redeemed Financial Assets measured at amortized cost. (**) As of December 31, 2019, it includes payments for finance leases as required by the ”TFRS 16-Leases“ Standard which became effective as of January 1, 2019. (***) Prior periods balance is the amount of share repurchase made within the scope of the Board od Directors decision dated 17.08.2018. 231 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) Consolidated Statement of Changes in Shareholders’ Equity as of December 31, 2019 THOUSAND TL THOUSAND TL Accumulated Other Comprehensive Income That will not be Reclassified in Profit/(Loss) Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) Paid-in Capital Share Premium Share Certificate Cancellation Profits Other Capital Reserves Footnotes V-V Tangible assets accumulated revaluation reserve Increase/ (Decrease) Accumulated gains/(losses) on remeasurements of defined benefit plans Other (1) on translation value through other reserve comprehensive income Other (2) Profit Reserves Prior Period Profit/(Loss) Period Profit/ Non-controlling Non-controlling Shareholder’s (Loss) Interest Interest Equity Net Current Total Shareholders’ Equity Except Total Accumulated gains/ (losses) due to revaluation and/ or reclassification of financial assets measured at fair Exchange differences 4,500,000 40,921 1,614,759 2,546,105 (107,621) 1,121,262 282,015 (1,297,415) 671,373 24,778,705 8,766,299 42,916,403 5,208,212 48,124,615 4,500,000 40,921 1,614,759 2,546,105 (107,621) 1,121,262 24,778,705 9,364,813 44,418,987 5,206,934 49,625,921 904,624 (72,169) 312,801 6,671,823 7,144,289 1,020,877 8,165,166 904,070 904,070 (393,345) (1,530,453) 282,015 738,771 671,373 118,892 598,514 598,514 1,502,584 (1,278) 1,501,306 1,502,584 (1,278) 1,501,306 CHANGES IN SHAREHOLDERS’ EQUITY PRIOR Period (31/12/2018) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference I. II. 2.1 2.2 III. IV. V. VI. VII. VIII. Convertible Bonds IX. X. XI. 11.1 11.2 Subordinated Debt Increase/(Decrease) Through Other Changes (*) (1,687) (524,131) 29,300 (12) (3) 7 (220) Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other (**) 13,311 (171,502) 4,245,152 (5,561,593) (1,679,172) 3,882,421 (3,882,421) 362,731 (654,937) (1,316,441) (1,679,172) - 3,935 (651,002) (208,751) (1,525,192) (213,180) (1,892,352) - 362,731 4,429 367,160 Ending Balance (III+IV+…...+X+XI) 4,500,000 39,234 - 1,090,628 3,480,029 (179,802) 1,434,060 1,020,793 (1,924,018) 790,265 29,037,168 3,631,718 6,671,823 49,591,898 6,022,995 55,614,893 Current Period (31/12/2019) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves I. II. 2.1 2.2 III. IV. V. VI. VII. Paid-in-Capital inflation adjustment difference VIII. Convertible Bonds 4,500,000 39,234 1,090,628 3,480,029 (179,802) 1,434,060 1,020,793 (1,924,018) 790,265 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 4,500,000 39,234 1,090,628 3,480,029 (179,802) 1,434,060 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 (17,330) (63,214) 132,555 6,009,805 9,135,598 1,202,026 10,337,624 1,020,793 441,126 (1,924,018) 2,401,164 790,265 231,492 IX. X. XI. 11.1 11.2 Subordinated Debt Increase/(Decrease) Through Other Changes (*) 16 (3,008) 4,084 (26) (1) (182) (124) (4) 3,108 (105,394) Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other Ending Balance (III+IV+…...+X+XI) 4,500,000 39,250 - 1,087,620 3,466,783 (243,042) 1,566,614 1,461,737 477,022 1,021,753 36,844,887 2,403,449 6,009,805 58,635,878 7,065,589 65,701,467 7,804,611 (7,794,698) 7,794,698 (7,794,698) 9,913 (101,531) 9,913 - 9,913 (35,594) (123,838) (130,003) 6,165 (137,125) (113,925) (130,003) - 16,078 (1) Other Comprehensive Income of Associates and Joint Ventures Accounted for Using Equity Method that will not be Reclassified to Profit or Loss and Other Accumulated Amounts of Other Comprehensive Income that will not be Reclassified to Profit or Loss. (2) Accumulated gains/(losses) on cash flow hedges, Other Comprehensive Income of Associates and Joint Ventures Accounted for using equity method that will be classified to Profit/(Loss), Other Accumulated Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) Includes changes in the Group Shares. (**) According to the Articles of Incorporation of the Bank, since a portion of the net profit for the period is distributed to the employees as a dividend, the provision provided for employee dividend distribution within the scope of “TAS 19-Employee Benefits”, has been added to distributable profit. (***) In the prior period, repurchase of shares has been occured amounting to TL 530.307 in accordance with the Board of Directors decision dated 17.08.2018 has been accounted under Other Capital Reserves, regarding Article 612 of the Turkish Commercial Code. 232 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) CHANGES IN SHAREHOLDERS’ EQUITY Footnotes V-V PRIOR Period (31/12/2018) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves Paid-in-Capital inflation adjustment difference I. II. 2.1 2.2 III. IV. V. VI. VII. IX. X. XI. 11.1 11.2 I. II. 2.1 2.2 III. IV. V. VI. IX. X. XI. 11.1 11.2 VIII. Convertible Bonds Subordinated Debt Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other (**) Current Period (31/12/2019) Beginning Balance Adjustment in accordance with TAS 8 The Effect of Adjustments The Effect of Changes in Accounting Policies New Balance (I+II) Total Comprehensive Income Capital Increase in Cash Capital Increase Through Internal Reserves VII. Paid-in-Capital inflation adjustment difference VIII. Convertible Bonds Subordinated Debt Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other THOUSAND TL THOUSAND TL Accumulated Other Comprehensive Income That will not be Reclassified in Profit/(Loss) Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) Tangible assets accumulated Accumulated revaluation gains/(losses) on reserve remeasurements Share Certificate Other Capital Paid-in Capital Share Cancellation Premium Profits Reserves Increase/ (Decrease) of defined benefit plans Other (1) Accumulated gains/ (losses) due to revaluation and/ or reclassification of financial assets measured at fair value through other comprehensive income Exchange differences on translation reserve Other (2) Profit Reserves Prior Period Profit/(Loss) Net Current Period Profit/ (Loss) Total Shareholders’ Equity Except Non-controlling Interest Non-controlling Interest Total Shareholder’s Equity 4,500,000 40,921 1,614,759 2,546,105 (107,621) 1,121,262 282,015 (1,297,415) 671,373 24,778,705 8,766,299 42,916,403 5,208,212 48,124,615 4,500,000 40,921 1,614,759 2,546,105 (107,621) 1,121,262 904,624 (72,169) 312,801 282,015 738,771 904,070 904,070 (393,345) (1,530,453) 598,514 598,514 1,502,584 (1,278) 1,501,306 1,502,584 (1,278) 1,501,306 671,373 118,892 24,778,705 9,364,813 44,418,987 5,206,934 49,625,921 6,671,823 7,144,289 1,020,877 8,165,166 Increase/(Decrease) Through Other Changes (*) (1,687) (524,131) 29,300 (12) (3) 7 (220) 13,311 (171,502) 4,245,152 (5,561,593) (1,679,172) 3,882,421 (3,882,421) 362,731 (654,937) (1,316,441) (1,679,172) - 3,935 (651,002) (208,751) (1,525,192) (213,180) (1,892,352) - 362,731 4,429 367,160 Ending Balance (III+IV+…...+X+XI) 4,500,000 39,234 - 1,090,628 3,480,029 (179,802) 1,434,060 1,020,793 (1,924,018) 790,265 29,037,168 3,631,718 6,671,823 49,591,898 6,022,995 55,614,893 4,500,000 39,234 1,090,628 3,480,029 (179,802) 1,434,060 1,020,793 (1,924,018) 790,265 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 4,500,000 39,234 1,090,628 3,480,029 (179,802) 1,434,060 (17,330) (63,214) 132,555 1,020,793 441,126 (1,924,018) 2,401,164 790,265 231,492 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 6,009,805 9,135,598 1,202,026 10,337,624 Increase/(Decrease) Through Other Changes (*) 16 (3,008) 4,084 (26) (1) (182) (124) (4) 3,108 (105,394) 7,804,611 (7,794,698) 7,794,698 (7,794,698) 9,913 (101,531) 9,913 - 9,913 (35,594) (123,838) (130,003) 6,165 (137,125) (113,925) (130,003) - 16,078 Ending Balance (III+IV+…...+X+XI) 4,500,000 39,250 - 1,087,620 3,466,783 (243,042) 1,566,614 1,461,737 477,022 1,021,753 36,844,887 2,403,449 6,009,805 58,635,878 7,065,589 65,701,467 (1) Other Comprehensive Income of Associates and Joint Ventures Accounted for Using Equity Method that will not be Reclassified to Profit or Loss and Other Accumulated Amounts of Other Comprehensive Income that will not be Reclassified to Profit or Loss. (2) Accumulated gains/(losses) on cash flow hedges, Other Comprehensive Income of Associates and Joint Ventures Accounted for using equity method that will be classified to Profit/(Loss), Other Accumulated Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) Includes changes in the Group Shares. (**) According to the Articles of Incorporation of the Bank, since a portion of the net profit for the period is distributed to the employees as a dividend, the provision provided for employee dividend distribution within the scope of “TAS 19-Employee Benefits”, has been added to distributable profit. (***) In the prior period, repurchase of shares has been occured amounting to TL 530.307 in accordance with the Board of Directors decision dated 17.08.2018 has been accounted under Other Capital Reserves, regarding Article 612 of the Turkish Commercial Code. 233 Financial Informationand Risk Managementİşbank Annual Report 2019 Consolidated Statement of Profit Distribution Table As of December 31, 2019 I. DISTRIBUTION OF CURRENT YEAR PROFIT (1) 1.1 1.2 1.2.1 1.2.2 1.2.3 CURRENT PERIOD PROFIT TAXES AND DUES PAYABLE (-) Corporate Tax (Income Tax) Income Tax Withholding Other Taxes and Dues Payable (2) A. NET PROFIT FOR THE PERIOD (1.1-1.2) 1.3 1.4 1.5 PRIOR YEARS’ LOSSES (-) FIRST LEGAL RESERVES (-) OTHER STATUTORY RESERVES (-) THOUSAND TL CURRENT PERIOD (31/12/2019) PRIOR PERIOD (31/12/2019) 6,874,451 806,864 1,662,347 30,257 (885,740) 7,729,865 960,780 1,175,043 19,350 (233,613) 6,067,587 6,769,085 - - - - 337,273 6,431,812 B. NET PROFIT ATTRIBUTABLE TO [(A-(1.3+1.4+1.5)] 6,067,587 1.6 1.6.1 1.6.2 1.6.3 1.6.4 1.6.5 1.7 1.8 1.9 1.9.1 1.9.2 1.9.3 1.9.4 1.9.5 1.10 1.11 1.12 1.13 FIRST DIVIDEND TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Preferred Shares To Preferred Shares (Preemptive Rights) To Profit Sharing Bonds To Holders of Profit/Loss Share Certificates DIVIDENDS TO PERSONNEL (-) DIVIDENDS TO THE BOARD OF DIRECTORS (-) SECOND DIVIDEND TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Privileged Shares To Owners of Preferred Shares To Profit Sharing Bonds To Holders of Profit/Loss Share Certificates STATUTORY RESERVES (-) EXTRAORDINARY RESERVES OTHER RESERVES SPECIAL FUNDS II. DISTRIBUTION FROM RESERVES DISTRIBUTED RESERVES DIVIDENDS TO SHAREHOLDERS (-) To Owners of Ordinary Shares To Owners of Privileged Shares To Owners of Preferred Shares 2.1 2.2 2.2.1 2.2.2 2.2.3 2.2.4 To Profit Sharing Bonds 2.2.5 2.3 2.4 To Holders of Profit/Loss Share Certificates DIVIDENDS TO PERSONNEL (-) DIVIDENDS TO THE BOARD OF DIRECTORS (-) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - III. EARNINGS PER SHARE 3.1 3.2 3.3 3.4 TO OWNERS OF ORDINARY SHARES (3) TO OWNERS OF ORDINARY SHARES (%) TO OWNERS OF PRIVILEGED SHARES TO OWNERS OF PRIVILEGED SHARES (%) IV. DIVIDEND PER SHARE 4.1 4.2 4.3 4.4 TO OWNERS OF ORDINARY SHARES TO OWNERS OF ORDINARY SHARES (%) TO OWNERS OF PRIVILEGED SHARES TO OWNERS OF PRIVILEGED SHARES (%) (1): The decision for dividend payment is made at the Annual General Meeting. Annual General Meeting has not been held as of the reporting date. (2): Deferred Tax Income. (3): Expressed in exact TL. 234 0.0539 135 - - - - - - 0.0602 150 - - - - - - İşbank Annual Report 2019Türkiye İş Bankası A.Ş.The accompanying explanations and notes form an integral part of these financial statements.(Unless otherwise stated amounts are expressed in thousands of Turkish Lira (“TL”)) SECTION THREE: EXPLANATION ON ACCOUNTING POLICIES I. Basis of Presentation The consolidated financial statements, related notes and explanations in this report are prepared in accordance with the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” and other regulations on accounting records of Banks published by Banking Regulation and Supervision Agency and circulars and interpretations published by Banking Regulation and Supervision Authority, (together referred as “BRSA Accounting and Financial Reporting Legislation”) and requirements of Turkish Accounting Standards (TAS) published the Public Oversight Accounting and Auditing Standards Authority for the matters not regulated by the aforementioned legislations. In accordance with the ‘Communique amending the Communique on the Financial Statements and Related Disclosures and Footnotes to be Announced to Public by Banks’ published in the Official Gazette dated 1 February 2019 with No. 30673, the accompanying previous period financial statements were made compatible with the current period financial statement formats. Accounting policies applied in the current period are consistent with previous periods financial statements except for ‘TFRS 16 Leases’. As of January 1, 2019 the Bank and the Companies included in the consolidation have started to recognize operating leases in accordance with the TFRS 16 “leases” standard which was published in the Official Gazette dated April 16, 2018, no. 30393. In accordance with the applicable legislations of transition of the aforementioned standard, the prior period financial statements and footnotes have not been restated. Explanations on the application and effects of TFRS 16 are disclosed in footnote XXVII, section three. Additional paragraph for convenience translation to English The differences between accounting principles, as described in these preceding paragraphs and accounting principles generally accepted in countries in which consolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”) have not been quantified in these consolidated financial statements. Accordingly, these consolidated financial statements are not intended to present the financial position, results of operations and changes in financial position and cash flows in accordance with the accounting principles generally accepted in such countries and IFRS. The accounting policies and the valuation principles used in the preparation of the consolidated financial statements are presented in detail below. II. Strategy for Use of Financial Instruments and on Foreign Currency Transactions 1. The Group’s Strategy on Financial Instruments The Group’s main financial activities comprise a wide range of activities such as banking, insurance and reinsurance services, brokerage services, investment consulting, real estate portfolio and asset management, financial lease, factoring services, portfolio and asset management. The liabilities on the Group’s balance sheet are mainly composed of relatively short-term deposits, parallel to general liability structure of the banking system, which is its main field of other activity. As for the non-deposit liabilities, funds are collected through medium and short- term instruments. The liquidity risk that may arise from this liability structure can be easily controlled through deposit continuity, as well as widespread network of the correspondent banks, market maker status (The Parent Bank is one of the market maker banks) and by the use of liquidity facilities of the Central Bank of the Republic of Turkey (CBRT). The liquidity of the Group and the banking system can be perpetually monitored. On the other hand, foreign currency liquidity requirements are met by the money market operations and currency swaps. Most of the funds collected bear fixed-interest, and close monitoring the developments in the sector fixed and floating rate placements are made according to the yields of alternative investment instruments. Some of the fixed interest liabilities that are issued/used by the Group companies are subject to fair value hedge accounting. The fair value risk of the related fixed interest financial liabilities is protected by interest rate swaps. Explanations on hedge accounting are explained in Section Three, footnote IV.2. The principle of safety is prioritized in placement works, placements are directed to high yield and low risk assets by considering their maturity structures, while taking global and national economic expectations, market conditions, expectations and tendencies of current and potential loan customers, interest rate, liquidity, currency risks and etc, into consideration. In long term placements, a pricing policy aiming at high return is applied in general and attention is paid to maximizing non-interest income generation opportunities. In addition, the Bank and its subsidiaries within the scope of consolidation act in parallel with these strategies and within the legal limits in management of Financial Statements. The primary objectives related to balance sheet components are set by the long-term plans shaped along with budgeting; and the Parent Bank takes the required positions against the short-term currency, interest rates and price fluctuations in accordance with these plans and the course of the market conditions. Foreign currency, interest rate and price fluctuations in the markets are monitored instantaneously. While taking positions, in addition to the legal limits, the Parent Bank’s own transaction and control limits are also effectively monitored in order to avoid limit overrides. The Parent Bank’s asset-liability management is executed by the Asset-Liability Management Committee, within the risk limits determined by the Board of Directors, in order to keep the liquidity risk, interest rate risk, currency risk and credit risk within certain limits depending on the equity adequacy and to maximize profitability. 2. Foreign Currency Transactions The financial statements of the Parent Bank’s branches and financial institutions that have been established abroad are prepared in functional currency prevailing in the economic environment that they operate in; and when they are consolidated, they are presented in TL, which are the functional currency of the Parent Bank and also the currency used in presentation of the financial statements. Foreign currency monetary assets and liabilities on the balance sheet are converted into Turkish Lira by using the prevailing exchange rates at the balance sheet date. Non-monetary items in foreign currencies carried at fair value are converted into Turkish Lira by the rates at the date of which the fair value is determined. Exchange rate differences arising from the conversions of monetary foreign currency items and the collections of and payments in foreign currency transactions are reflected to the income statement. While the Parent Bank and Türkiye Sınai Kalkınma Bankası A.Ş. one of the consolidated subsidiaries, use their own foreign currency exchange rates for their foreign currency transactions, other consolidated institutions residing domestically use the CBRT rates for their foreign currency transactions. Assets and liabilities of the foreign branches of the Parent Bank and financial institutions that have been established abroad are converted into TL by using the prevailing exchange rates at the balance sheet date. Income and expenses of foreign branches are converted by at exchange rates at the dates of the transactions. Incomes and expenses of foreign financial institutions are converted into TL at average foreign currency rates of the balance sheet date as long as there is not a significant fluctuation in currency rates during the period. The exchange rate differences arising from the conversion to TL are recognized in the shareholders’ equity. 235 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) III. Information on the Consolidated Companies 1. Basis of Consolidation: The consolidated financial statements have been prepared in accordance with the procedures and principles listed in the “Communiqué Related to Regulation on the Preparation of the Consolidated Financial Statements of Banks” published in the Official Gazette numbered 26340 dated November 8, 2006. a. Subsidiaries: A subsidiary is an entity that is controlled by the Parent. Control; is the power of the Parent Bank to appoint or remove from office the decision-taking majority of members of board of directors through direct or indirect possession of the majority of a legal person’s capital irrespective of the requirement of owning minimum fifty-one per cent of its capital; or by having control over the majority of the voting right as a consequence of holding privileged shares or of agreements with other shareholders although not owning the majority of capital. As per the “Communiqué Related to the Preparation of Consolidated Financial Statements of Banks” published in the Official Gazette numbered 26340 dated November 8, 2006, as at the current period, the Parent Bank has no subsidiaries, qualified as credit institutions or financial institutions, excluded from consolidation. Detailed information about the consolidated subsidiaries is given in Section Five.Note I.i.3. Under full consolidation method, the assets, liabilities, income and expenses, and off-balance sheet items of subsidiaries are combined with the equivalent items of the Parent Bank. The book value of the Parent Bank’s investment in each of the subsidiaries and the Group’s portion of equity of each subsidiary are eliminated. All significant transactions and balances between the Parent Bank and its consolidated subsidiaries are eliminated reciprocally. Non-controlling interests in the net income and in the equity of consolidated subsidiaries are calculated separately from the Group’s net income and the Group’s shareholders’ equity. Non-controlling interests are presented separately in the balance sheet and in the income statement. In preparing its consolidated financial statements, the Bank performed necessary correction to ensure uniformity accounting policies used by the subsidiaries which are included in the consolidated financial statements with the Parent Bank’s. On the other hand, insurance companies under consolidation are obliged to carry their activities in accordance with the regulations issued by Republic of Turkey Prime Ministry Undersecretariat of Treasury and in the accompanying consolidated financial statements, financial reporting presentations of these companies are in accordance with the insurance legislation of the Undersecretariat of Treasury. TFRS 3 “Business Combinations” standard prescribes no depreciation to be recognized for goodwill arising on the acquisitions on or after March 31, 2004, realizing positive goodwill as an asset and application of impairment analysis as of balance sheet dates. In the same standard, it is also required from that date onwards that the negative goodwill, which occurs in the case of the Group’s interest in the fair value of acquired identifiable assets and liabilities exceeds the acquisition cost to be recognized in profit or loss. Details of positive goodwill arising from Bank’s investments to its subsidiaries in investment basis are as follows: Name of the Investment İş Finansal Kiralama A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. Anadolu Anonim Türk Sigorta Şirketi JSC İşbank Total Amount of the Positive Consolidation Goodwill 611 4,792 1,767 28,804 35,974 The structured entity that is established within the Bank’s securitization loan transactions are included in the consolidated financial statement although the bank does not have any subsidiaries. b. Associates: An associate is a domestic or foreign entity which the Parent Bank participates in its capital and over which it has a significant influence but no control. Significant influence is the power to participate in the financial and operating policy of the investee. If the Parent Bank holds qualified shares in the associate, it is presumed that the Parent Bank has significant influence unless otherwise demonstrated. A substantial or majority ownership by another investor does not necessarily preclude the Parent Bank from having significant influence. Qualified share is the share that directly or indirectly constitutes ten or more than ten percent of an entity’s capital or voting rights and irrespective of this requirement, possession of privileged shares giving right to appoint members of board of directors. Equity method is a method of accounting whereby the book value of the investor’s share capital in the subsidiary or the joint venture is either added to or subtracted in proportion with investor’s share from the change in the subsidiary’s or joint venture’s equity within the period. The method also foresees that profit will be deducted from the subsidiaries’ or joint venture’s accordingly recalculated value. Arap-Türk Bankası A.Ş. is a subsidiary of the Bank acting as a credit institution or financial institution, is accounted under the equity method in the consolidated financial statements according to the “Communiqué on the Preparation of Consolidated Financial Statements”. Accounting policies of Arap Türk Bankası A.Ş. are not different than the Parent Bank’s accounting policies. Detailed information about Arap Türk Bankası A.Ş. is given in Section Five Note I.h.2. c. Jointly controlled entities: A joint venture is an agreement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. The Bank does not have any jointly controlled entities which are credit or financial institutions in nature and to be consolidated in the financial statements by the equity method according to the “Regulation on Preparation of Consolidated Financial Statements of Banks”. d. Principles applied during share transfer, merger and acquisition: None. 2. Presentation of subsidiaries, associates and jointly controlled entities which are not credit or financial institutions in consolidated financial statements: The subsidiaries, associates and jointly controlled entities which are not credit or financial institutions owned by the Bank and its subsidiaries are accounted accordingly to the equity method described in TAS 28 “Investments in Associates and Joint Ventures” as of March 31, 2018. 236 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Forward, Option Contracts and Derivative Instruments Derivative transactions of the Bank consist of foreign currency and interest rate swaps, forwards, foreign currency options and interest rate options. The Bank has no derivative instruments decomposed from the main contract. The Group classifies derivative products “Derivative Financial Instruments at Fair Value through Profit or Loss” or ‘’Derivative Financial Instruments through Other Comprehensive Income’’ according to the “TFRS 9-Financial Instruments” principles. 1. Derivative Financial Instruments Derivative transactions are recorded at their fair values as of the date of the contract and receivables and payables arising from these transactions are followed under off-balance sheet accounts. Derivative transactions are valued at their fair values in the reporting periods after their recognition and if the valuation difference is positive, difference is presented under the “Derivative Financial Assets at Fair Value through Profit or Loss” and if the valuation difference is negative, then it is presented under the “Derivative Financial Liabilities at Fair Value through Profit and Loss”. The differences arising from the valuation of derivative transactions are associated with the income statement. On off-balance sheet items table, options which generated assets for the Group are presented under “call options” line and which generated liabilities are presented under “put options” line. 2. Hedging Derivative Financial Instruments TFRS 9 “Financial Instruments” rules that TAS 39 “Financial Instruments: Recognition and Measurement” value hedge accounting may continue to be implemented to hedge the fair value changes against interest rate risk. In this context, the principles of TAS 39 regarding hedge accounting for fair value hedge accounting continue to be applied in the accompanying financial statements. Interest rate swaps are performed in order to hedge the changes in fair value of fixed interest rate financial instruments. In this context, if the valuation differences of the derivative transactions are positive, they are included in “Derivative financial assets at Fair Value through Profit or Loss” and if the valuation differences are negative, they are included in “Derivative Financial Liabilities at Fair Value through Profit or Loss”. Changes in the fair value of the fixed rate financial liabilities subject to hedge accounting and changes in the fair value of interest rate swaps as hedging instruments are recorded under “Trading Profit/Loss” in the statement income. At the beginning of the hedging transaction and in each reporting period, it is expected that the hedging transaction will offset the changes in the hedged risk arising from the hedged transaction (related to the hedged risk) and effectiveness tests are performed in this context. Efficiency tests are carried out with the “Dollar off-set method” and the hedging accounting is continued if the efficiency is between 80% and 125%. The hedge accounting is terminated if the hedging instrument is terminated, realized, sold or the effectiveness test is ineffective. In the case of termination of fair value hedge accounting, the valuation effects of the fair value hedge accounting applied on the hedged financial instruments is reflected to the statement of profit or loss on a straight-line basis over the life of the hedged financial instrument. V. Interest Income and Expenses Interest income is calculated by using the effective interest rate method (the rate that equals the future cash flows of a financial asset or liability to its present net book value) to gross carrying amount of financial asset in conformity with “TFRS 9 Financial Instruments” except financial asset that is not a purchased or originated credit-impaired financial asset but subsequently has become credit-impaired. Under the scope of TFRS 9 application, the Group does not reverse the interest accruals and rediscounts of non-performing loans and other receivables and monitors the related amounts in interest income and calculates expected credit loss provisions on these amounts according to the related methodology. VI. Fees and Commission Income and Expenses Wages and commissions other than those that are an integral part of the effective interest rate of the financial instruments measured at amortized cost are accounted for in accordance with “TFRS 15 - Revenue from Customer Contracts”. Fees and commission income and expenses are recognized either on accrual basis or by using the effective interest method. Income earned in return for services rendered contractually or due to operations like sale or purchase of assets on behalf of a third party real person or corporate body are recognized in income accounts in the period of collection. VII. Financial Assets As of January 1, 2018, the Bank and its subsidiaries within the scope of “TFRS 9 Financial Instruments”, classifies and accounts its financial assets as “Financial Assets at Fair Value Through Profit or Loss”, “Financial Assets at Fair Value Through Other Comprehensive Income” or “Financial Assets at Measured at Amortised Cost” by taking into account their business model and contractual cash flow characteristics. Financial assets are recognized or derecognized according to TFRS 9 “Recognition and Derecognition in Statement of Financial Position” requirements. The Bank recognizes a financial asset in its statement of financial position when it becomes party to the contractual provisions of the instrument. Financial assets are measured at their fair value on initial recognition in the financial statements. The Group has three different business models for classification of financial assets; - Business model aimed at holding financial assets in order to collect contractual cash flows: Financial assets held under the mentioned business model are managed to collect contractual cash flows over the life of these assets. The Group manages its assets held under this portfolio in order to collect certain contractual cash flows. - Business model aimed at collecting contracted cash flows of financial assets and selling; in this business model, the Group intends both to collect contractual cash flows of financial assets and to sell these assets. - Other business models; A business model in which financial assets; are not held within the scope of a business model aimed at collection of contractual cash flows and within the scope of a business model aimed at collecting and selling contracted cash flows, are measured by reflecting fair value in profit or loss. The Group is able to reclassify all affected financial assets in case it changes the business model that is used for the management of financial asset. In the event of the termination of the rights related to the cash flows from a financial asset, the transfer of all risks and rewards of the financial asset to a significant extent or has no longer control of the financial assets, the Group derecognizes the financial asset. 237 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 1. Financial Assets at Fair Value Through Profit or Loss Financial assets other than financial assets that are measured at amortized cost or at fair value through other comprehensive income, are measured at fair value through profit or loss. Financial assets at fair value through profit or loss are financial assets held for the purpose of generating profit from short-term fluctuations in price or similar factors in the market or being part of a portfolio for profitability in the short term, regardless of the acquisition reason or financial assets that are not held in a business model that aims at collecting and/or selling contractual cash flows of financial assets. Financial assets at fair value through profit or loss are initially measured at fair value on the balance sheet and are subsequently re-measured at fair value. Gains or losses arising from the valuation are related to profit and loss accounts. In some cases, restructuring, alteration or counterparty changes of contractual cash flows of loans may lead to derecognition of related loans in accordance with TFRS 9. When the change in the financial asset results from derecognizing the existing financial asset from the financial statements and the revised financial asset is recognized in the financial statements, the revised financial asset is considered as a new financial asset in accordance with TFRS 9. When the Group determines that there are significant changes between the first conditions in the new conditions of the revised financial asset, the Group evaluates the new financial asset according to the current business models. When it is determined that the contractual conditions do not only result in cash flows that include principal and interest payments at certain dates, the financial asset is recognized at fair value and is subject to valuation. The differences arising from the valuation are reflected in the nominal accounts. The Group recognizes loans at fair value through profit or loss, if the contractual terms of the loan, do not result in cash flow including the principal payments and interest payments generated from principal amounts at certain dates. These loans are valued at their fair values after their recognition and the losses or gains arising from the valuation are included in the profit and loss accounts. 2. Financial Assets at Fair Value Through Other Comprehensive Income Financial assets at fair value through other comprehensive income are financial assets that are held under a business model that aims both to collect contractual cash flows and to sell financial assets, and financial assets with contractual terms that lead to cash flows that are solely payments of principal and interest on the principle amount outstanding at specific dates. Financial assets at fair value through other comprehensive income are initially recognized at their fair value including their transaction costs on the financial statements. The initial recognition and subsequent valuation of such financial assets, including the transaction costs, are carried out on a fair value basis and the difference between amortized cost and the cost of borrowing instruments is recognized in profit or loss by using the effective interest method. Dividend income arising from investments in equity intruments that are classified as at fair value through other comprehensive income is also recognized in income statement. Gains and losses, except impairment gain or loss and foreign exchange gain or loss, arising from changes in the fair value of financial assets at fair value through other comprehensive income are reflected to other comprehensive income until derecognized or reclassified. When the value of the financial asset is collected or when financial asset is disposed, the related fair value differences accumulated in the shareholders’ equity are transferred to the income statement. During the initial introduction to financial statements, amendments to the fair value of an investment in an equity instrument within the framework of TFRS 9 that are not held for trading or that are not valued in a financial statement of an entity that acquires a business combinations under the “TFRS 3 Business Combinations” may be subject to an irreversible preference regarding these amendments being accounted in other comprehensive income. In such case dividends taken from mentioned investment will be accounted in financial statement as profit or loss. 3. Financial Assets at Measured at Amortised Cost Financial assets measured at amortized cost are those financial assets that are held within the framework of a business model aimed at collecting contractual cash flows over the life of the asset and which result in cash flows that include principal and interest on the principal amount outstanding at specific dates. Financial assets measured at amortized cost with the initial recognition at fair value including transaction costs are subject to valuation with their discounted cost value by using the effective interest rate method, net of any provision for impairment. Interest income from financial assets measured at amortized cost are recognized in the income statement as an “interest income”. The Group’s loans and receivables from leasing transactions and factoring receivables are evaluated within the framework of existing business models and depending on these evaluations, they can be classified as Financial Assets measured at Amortized Cost. VIII. Impairment of Financial Assets In accordance with the “TFRS 9- Financial Instruments” and the regulation “Procedures and Principals regarding Classification of Loans and Allowances Allocated for Such Loans” issued by BRSA, in the current period the Bank recognizes expected credit loss allowance on financial assets at fair value through other comprehensive income, financial assets measured at amortized cost and impaired credit commitments and financial guarantee contracts. Within the scope of TFRS 9, the expected credit loss is calculated according to the “three-stage” impairment model based on the change in the loan quality of financial assets after the initial recognition and detailed in the following headings: Stage 1: An important determinant for calculating the expected credit loss in accordance with TFRS 9 is to assess whether there is a significant increase in the credit risk of the financial asset. Financial assets that have not experienced a significant increase in credit risk since the initial recognition are monitored in the first stage. Impairment for credit risk for the Stage 1 financial assets is equal to the 12-month expected credit losses. Stage 2: Financial assets that experienced a significant increase in the credit risk since initial recognition, are transferred to Stage 2. The expected credit loss of these financial assets are measured at an amount equal to the instrument’s lifetime expected credit loss. In order to classify a financial asset in the Stage 2, the following criteria is considered: - Overdue between 30-90 days - Restructuring of the loan - Significant deterioration in the probability of default In the event of a significant deterioration in the probability of default, the credit risk is considered to be increased significantly and the financial asset is classified as stage 2. 238 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The absolute and gradual thresholds used to increase the probability of default are differentiated on the basis of portfolio and product group. In this manner, for the commercial portfolio, definition of increase in the probability of default is the comparison between the probability of default on loan’s opening date, obtained from the integrated rating/score based on internal rating and probability of default of the same loan on reporting date, obtained from the integrated rating/score based on internal rating. For the individual portfolio, it is accepted that the probability of default is worsened in cases where the behavioral score falls below the thresholds determined on the basis of the product and the probability of default exceeds the thresholds determined on the basis of the product. Stage 3: Financial assets with sufficient and fair information for impairment at the reporting date, are classified in the third stage. The expected credit loss of financial assets is measured at an amount equal to the lifetime expected credit loss. The following basic factors are considered for the classification of a financial asset in the third stage. - More than 90 days past due - Whether the credit rating is weakened, has suffered a significant weakness or can not be collected or there is a certain opinion on this matter While estimating the expected credit loss, statistical models, methods and tools are used in accordance with the relevant legislation and accounting standards. Expected credit loss is measured using reasonable and supportable information by taking into account current and forecasts of future economic information, including macroeconomic factors. Three scenarios, base scenario, optimistic scenario and the worst scenario, are used in forecasting studies made by macroeconomic models. The macroeconomic variables used in these estimates are Industrial Production Index, and fundamental financial indicators. The validity of the risk parameter estimates used in the calculation of expected credit losses is reviewed and evaluated at least annually within the framework of model validation processes. Macroeconomic forecasts and risk delinquency data used in risk parameter models are re-evaluated every quarter to reflect the changes in economic conjuncture and are updated if needed. In the expected credit loss calculations, macroeconomic information is taken into account under multiple scenarios. Except for demand or revolving loans, the maximum period for which expected credit losses are to be determined is the contractual life of the financial asset. For demand or revolving loans, maturity is determined by taking into account the future risk mitigation processes such as behavioral maturity analyses performed by the Bank and cancellation/revision of the Bank’s credit limit. While calculating the expected credit loss, aside from assessment of whether there is a significant increase in credit risk or not, basic parameters expressed as probability of default, loss given default and exposure at default are used. Probability of Default: Represents the probability of default on the loan over a specified time period. In this context, the Bank has developed models to calculate 12-month and life-time default probabilities by using internal rating based credit rating models. As for the Group Companies historical probability of default data has also been observed. Loss Given Default (LGD): Defined as the damage caused by the default of borrower to the total balance of the exposure at the time of default. The LGD estimates are determined in terms of credit risk groups that are detailed in the Bank’s data resources and system facilities. The model used for the estimation of the LGD was established by taking into account the direct cost items during the collection process, based on the historical data of the Bank’s collection, cash flows are discounted at effective interest rates. Exposure at Default: For cash loans, the cash balance at the date of report, for non-cash loans the balance calculated using the Credit Conversion Factor (CCF) is represented by Exposure at Default. Credit Conversion Factor: Calculated for non-cash loans (undrawn limit for revolving loans, commitments, non-cash loans etc.) The historical limit usage data of the Bank for revolving loans are analyzed and the limit amount that can be used until the moment of default is estimated. For non-cash loans, the cash conversion ratio of the loan amount is estimated by analyzing the product type and the past compensation amount of the Group. Credit risks, which require qualitative assessments due to their characteristics and differ by grouping in this manner, are considered as individual within the internal policies. Calculations are made by the method of discounted cash flows with the effective interest rate expected from the relevant financial instrument. Discounted cash flows are estimated for 3 different scenarios in which parameters are differentiated, and individual expected credit loss is calculated by taking into consideration the cash deficit amounts weighted according to probabilities. Expected credit loss is reflected in the income statement. Released provisions in the current year are accounted under “Expected Credit Losses”, released provision which is carried from the prior year are accounted under “Other Operating Income”. IX. Offsetting Financial Instruments Financial assets and financial liabilities shall be offset and the net amount shall be presented in the balance sheet only when a party currently has a legally enforceable right to set off the recognized amounts or intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. X. Sale and Repurchase Agreements and Securities Lending Transactions Marketable securities subject to repurchase agreements are classified under “Financial Assets at Fair Value through Profit and Loss”, “Financial Assets at Fair Value through Other Comprehensive Income” or “Financial Assets Measured at Amortised Cost” in the Group’s portfolio and they are valued according to the valuation principles of the related portfolios. Funds obtained from the repurchase agreements are recognized under “Funds from Repurchase Transactions” account in liabilities. For the difference between the sale and repurchase prices determined by the repo agreements for the period; expense accrual is calculated using the effective interest rate method. Reverse repo transactions are recognized under the “Receivables from Reverse Repo Transactions” account. For the difference between the purchase and resale prices determined by the reverse repo agreements for the period; income accrual is calculated using the effective interest rate method. XI. Non-current Assets Held for Sale and Discontinued Operations and Related Liabilities Assets that meet the criteria to be classified as held for sale are measured at the lower of its carrying amount and fair value less costs to sell. Assets held for sale are not amortized or depreciated and presented in the financial statements separately. In order to classify a tangible fixed asset as held for sale, the asset (or the disposal group) should be available for an immediate sale in its present condition subject to the terms of any regular sales of such assets (or such disposal groups) and the sale should be highly probable. For a highly probable sale, the appropriate level of management must be committed to a plan to sell the asset (or the disposal group), and an active programme to complete the plan should be initiated to locate a customer. Also, the asset (or the disposal group) should have an active market sale value, which is a reasonable value in relation to its current fair value. Events or circumstances may extend the completion of the sale more than one year. Such assets are still classified as held for sale if there is sufficient evidence that the delay in the sale process is due to the events and circumstances occurred beyond the control of the entity or the entity remains committed to its plan to sell the asset (or disposal group). A discontinued operation is a component of a group that either has been disposed of, or is classified as held for sale. Gains or losses relating to discontinued operations are presented separately in the income statement. 239 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) XII. Goodwill and Other Intangible Assets The Group’s intangible assets consist of consolidation goodwill, software programs and rights. Goodwill arising from the acquisition of a subsidiary represents the excess of cost of acquisition over the fair value of Group’s share of the identifiable assets, liabilities, or contingent liabilities of the acquired subsidiary at the date of acquisition of the control. Goodwill is recognized as an asset at cost and then carried at cost less accumulated impairment losses. In impairment-loss test, goodwill is allocated between the Group’s every cash-generating unit that is expected to benefit from the synergies of the business combination. To control whether there is an impairment loss in the cash-generating units that goodwill is allocated, impairment- loss test is applied every year or more often if there is indications of impairment loss. In the cases, recoverable amount of cash-generating unit is smaller than its book value; impairment loss is firstly used in reduction of book value of the cash-generating unit, and then the other assets proportionally. Goodwill which is allocated for the impairment losses could not be reversed. When a subsidiary is to be sold, related goodwill amount is combined with the profit/loss relating to this disposal. Positive goodwill arising from the Group’s investments in its subsidiaries is recognized in “Intangible Assets”. Explanations on consolidation goodwill are given in Section Three, Note III.1.a. As for other intangible assets, the purchased items are presented with their acquisition costs less the accumulated amortization and impairment losses. In case there is an indication of impairment, the recoverable amount of the related intangible asset is estimated within the framework of TAS 36 “Impairment of Assets” and impairment provision is set aside in case the recoverable amount is below its acquisition cost. Such assets are amortized by the straight-line method considering their estimated useful life. The amortization method and period are periodically reviewed at the end of each year. XIII. Tangible Assets Tangible assets purchased before January 1, 2005, are presented in the financial statements at their inflation adjusted acquisition costs as at December 31, 2004, and the items purchased in the subsequent periods are presented at acquisition costs less accumulated amortization and impairment provisions. In 2015, the Group, has been changed its accounting policies from historical cost method to revaluation method for the real estate properties which are held for own use in accordance with “TAS 16-Property, Plant and Equipment”. The positive difference between the net book value of real estate property values and the renewed expertise values which are determined by the licensed valuation companies in 2018 are recorded under the shareholders’ equity. In case there is an indication of impairment, the recoverable amount of the related intangible asset is estimated within the framework of “TAS 36 - Impairment of Assets” and impairment provision is set aside in case the recoverable amount is below its acquisition cost. Tangible assets other than the land and construction in progress are amortized by the straight-line method, according to their estimated useful lives. The estimated useful life, residual amount and the method of amortization are reviewed every year for the possible effects of the changes that occur in the estimates and if there is any change in the estimates, they are recognized prospectively. Assets held under finance lease are depreciated over the expected useful life of the related assets. Assets subject to leasing are depreciated according to relevant contract periods. Leasehold improvements are amortized in equal amounts considering their useful life. However, in any case the useful life cannot exceed leasing term. When the lease period is not certain or longer than 5 years, the amortization period is recognized as 5 years. The difference between the sales proceeds arising from the disposal of tangible assets or the decommissioning of a tangible asset and the book value of the tangible assets are recognized in the income statement. Regular maintenance and repair costs incurred for tangible assets are recognized as expense. There are no pledges, mortgages and similar encumbrances on tangible assets. The “Regulation on Procedures and Principles for the Trading of Precious Metals by Banks and the Disposal of Commodities and Real Properties acquired by Banks due to their Receivables” has been abolished by BRSA effective from January 1, 2017. Real properties acquired by Group due to their receivables and not treated in the scope of “TFRS 5 - Non-current Assets Held for Sale and Discontinued Operations” has been started to follow under “Other Assets” in accordance with the related accounting standard from the current period. The depreciation rates used in amortization of tangible assets and their estimated useful lives are as follows: Buildings Safe Boxes Other Movables XIV. Investment Property Estimated Economic Life (Year) Depreciation Rate 50 2-50 2-25 2% 2% - 50% 4% -50% Investment properties are kind of properties held by the Group to earn rent income or benefit from valuation surplus. The investment properties of the Group are measured at their fair values in the consolidated financial statements in accordance with “TAS 40 Investment Property”. Any gains or losses arising from changes in fair values of investment properties are recognised in “Other Operating Incomes” and “Other Operating Expenses” for the related period. XV. Leasing Transactions Assets acquired through financial leases are carried at fair values less the discounted value of the lease payments. Leasing payables are recognized as liabilities in the balance sheet while the interest payable portion of the payables is recognized as a deferred amount of interest. Finance lease payments are separated as financial expense and principal amount payment, which provides a decrease in finance lease liability, thus helps a fixed rate interest on the remaining principal amount of the debt to be calculated. Within the context of the Group’s general borrowing policy, financial expenses are recognized in the income statement. Assets held under financial leases are recognized under the tangible assets account and are depreciated by using the straight-line method. There is one company which exclusively does finance leases (İş Finansal Kiralama A.Ş.) and one bank (Türkiye Sınai Kalkınma Bankası A.Ş.) which operates finance lease activities as per provisional article No 4 of the Banking Law No 5411. Finance lease activities are operated according to the “Law on Financial Leasing. Factoring and Financing” No 6361. 240 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) As of January 1, 2019 the Bank and the Companies in scope of consolidation have started to recognize operating leases in accordance with the TFRS 16 “leases” standard. Operating leases within the framework of the aforementioned standard are monitored in a similar manner to financial leases. For the agreements within the scope of TFRS 16, the right-of-use-asset and the lease payments are reflected to the financial statements and they are presented under “Tangible Assets” and “Liabilities from Financial Leases”, respectively. The lease liability is calculated by discounting the future lease payments by the use of the Banks or alternative borrowing interest rates at the date of initial application or contract date. Fixed assets, which are accounted as usage right-of-use-assets, are subject to depreciation considering the period of the contract. Interest expenses and foreign exchange differences related to the lease liabilities are associated with profit and loss statement. Explanations on the application and effects of TFRS 16 are disclosed in footnote XXVII, section three. XVI. Insurance Technical Income and Expense In insurance companies premium income is obtained subsequent to the share of reassurer in policy income is diminished. Claims are recorded in expense on accrual basis. Outstanding loss provisions are recognized for the claims reported but not paid yet and for the claims that incurred but not reported. Reassurer’ share of claims paid and outstanding loss are offset in these provisions. XVII. Insurance Technical Provisions TFRS 4 requires that all contracts issued by insurance companies be classified as either insurance contracts or investment contracts. Contracts with significant insurance risk are considered insurance contracts. Insurance risk is defined as risk, other than financial risk, transferred from the holder of a contract to the issuer. Contracts issued by insurance companies without significant insurance risk are considered investment contracts. Investment contracts are accounted for in accordance with TAS 39 “Turkish Accounting Standard for Financial Instruments: Recognition and Measurement”. Within the framework of the current insurance regulation, insurance technical provisions accounted by insurance companies for unearned premium claims, unexpired risk reserves, outstanding claims and life-mathematical reserves are presented in the consolidated financial statements. Unearned premium reserve is recognized on accrued premiums without discount or commission which extends to the next period or periods on a daily basis for the current insurance contracts. In case the expected loss premium ratio is over 95%, the unexpired risk reserves are recognized for the main branches specified by the Undersecretariat of Treasury. For each main branch, the amount found by multiplying the ratio exceeding 95% by the net unearned premium provision, is added to the unearned premium provision of that main branch. If the outstanding claim reserve is established and confirmed by approximation and if there are unpaid or unidentified compensation amounts in both prior and current accounting periods; it is separated for estimated yet unreported compensation amounts. Mathematical reserve is recognized on actuarial bases in order to meet the requirements of policyholders and beneficiaries for life, health and personal accident insurance contracts for a period longer than a year. On the other hand, actuarial chain ladder method is used to estimate the reserve amount to be set aside in the current period by looking at the data of the past materialized losses. If the reserve amount found as a result of this method exceeds the amount of reserve for the amount of uncertain indemnity, additional reserve must be set aside for the difference. Reinsurance companies recognize for the outstanding claims that is declared by the companies, accrued and determined on account. Insurance companies of the Group cede premium and risks in the normal course of business in order to limit the potential for losses arising from risks accepted. Insurance premiums ceded to reinsurers on contracts that are deemed to transfer significant insurance risk are recognized as an expense in a manner that is consistent with the recognition of insurance premium revenue arising from the underlying risks being protected. Costs which vary and are directly associated with the acquisition of insurance and reinsurance contracts including brokerage, commissions, underwriting expenses and other acquisition costs are deferred and amortized over the period of contract, consistent with the earning of premium. XVIII. Provisions and Contingent Liabilities As of the end of the reporting period, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists, the entity recognizes a provision in the financial statements. As of the end of the reporting period where it is more likely that no present obligation exists at the end of the reporting period, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote. 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 reliable estimates of management on the expenses to incur as of the balance sheet date to fulfill the liability by considering the risks and uncertainties related to the liability. In case the provision is measured by using the estimated cash flows required to fulfill the existing liability, the book value of the related liability is equal to the present value of the related cash flows. If the amount is not reliably estimated and there is no probability of cash outflow from the Group to settle the liability, the related liability is considered as “contingent” and disclosed in the footnotes to the financial statements. XIX. 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 Parent Bank and the Group. Since showing the contingent assets in the financial statements may result in the accounting of an income, which will never be generated, the related assets are not included in the financial statements. Nevertheless, the developments related to the contingent assets are constantly evaluated and 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. XX. Liabilities Regarding Employee Benefits 1. Severance Indemnities and Short-Term Employee Benefits According to the related regulation and the collective bargaining agreements, the Parent Bank and consolidated Group companies (excluding the subsidiaries residing outside Turkey) are obliged to pay termination benefits for employees who retire, die, quit for their military service obligations, who have been dismissed as defined in the related regulation or (for the female employees) who have voluntarily quit within one year after the date of their marriage. Within the scope of TAS 19 “Employee Benefits”, the Parent Bank allocates seniority pay provisions for employee benefits by estimating the present value of the probable future liabilities. According to TAS 19, all actuarial gains and losses occurred are recognized under equity, As the legislations of the countries in which the Parent Bank’s non-resident subsidiaries operate do not require retirement pay provision, no provision liability has been recognized for the related companies. In addition, provision is also allocated for the unused paid vacation. 241 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 2. Retirement Benefit Obligations İşbank Pension Fund (Türkiye İş Bankası A.Ş. Emekli Sandığı Vakfı), of which each employee of the Parent Bank is a member, has been established according to the provisional Article 20 of the Social Security Act numbered 506. As per provisional article numbered 23 of the Banking Law numbered 5411, it is ruled that Bank pension funds, which were established within the framework of Social Security Institution Law, will be transferred to the Social Security Institution, within 3 years after the publication of such law. Methods and principles related to transfer have been determined as per the Cabinet decision dated November 30, 2006 numbered 2006/11345. However, the related article of the act has been cancelled upon the President’s application dated November 2, 2005, by the Supreme Court’s decision dated March 22, 2007. Nr.E.2005/39. K.2007/33, which was published on the Official Gazette dated March 31, 2007 and numbered 26479 and the execution decision were ceased as of the issuance date of the related decision. After the justified decree related to cancelling the provisional Article 23 of the Banking Law was announced by the Constitutional Court on the Official Gazette dated December 15, 2007 and numbered 26731. Turkish Grand National Assembly started to work on establishing new legal regulations, and after it was approved at the General Assembly of the TGNA, the Law numbered 5754 “Emendating Social Security and General Health Insurance Act and Certain Laws and Decree Laws”, which was published on the Official Gazette dated May 8, 2008 and numbered 26870, came into effect. The new law decrees that the contributors of the bank pension funds, the ones who receive salaries or income from these funds and their rightful beneficiaries will be transferred to the Social Security Institution and will be subject to this Law within 3 years after the release date of the related article, without any need for further operation. The three-year transfer period can be prolonged for maximum 2 years by the Cabinet decision. However related transfer period has been prolonged for 2 years by the Cabinet decision dated, March 14, 2011. which was published on the Official Gazette dated April 9, 2011 and numbered 27900, In addition, by the Law “Emendating Social Security and General Health Insurance Act”, which was published on the Official Gazette dated March 8, 2012 and numbered 28227, this period of 2 years has been raised to 4 years after that related transfer period has been prolonged for one more year by the Cabinet decision dated April 8, 2013, which was published on the Official Gazette dated May 3, 2013 and numbered 28636 also this period has revalidated one more year by the Cabinet decision dated February 24, 2014, which was published on the Official Gazette dated April 30, 2014 and numbered 28987. The Council of Ministers has been lastly authorized to determine the transfer date in accordance with the last amendment in the first paragraph of the 20th provisional article of Law No.5510 implemented by the Law No. 6645 on Amendment of the “Occupational Health and Safety Law and Other Laws and Decree Laws” published in the Official Gazette dated April 23, 2015 and numbered 29335. This authority was transferred to the President with the delegated legislation No.703 which published in the repetitive Official Gazette No. 30473 dated July 9, 2018. On the other hand, the application made on June 19, 2008 by the Republican People’s Party to the Constitutional Court for the annulment and motion for stay of some articles, including the first paragraph of the provisional article 20 of the Law, which covers provisions on transfers, was rejected in accordance with the decision taken at the meeting of the afore-mentioned court on March 30, 2011. The above mentioned Law also states that; - Through a commission constituted by the attendance of one representative separately from the Social Security Institution, Ministry of Finance, Turkish Treasury, State Planning Organization. Banking Regulation and Supervision Agency. Savings Deposit Insurance Fund, one from each pension fund, and one representative from the organization employing pension fund contributors, related to the transferred persons, the cash value of the liabilities of the pension fund as of the transfer date will be calculated by considering their income and expenses in terms of the lines of insurance within the context of the related Law, and technical interest rate of 9.8% will be used in the actuarial calculation of the value in cash - And that after the transfer of the pension fund contributors, the ones who receive salaries or income from these funds and their rightful beneficiaries to the Social Security Institution, these persons’ uncovered social rights and payments, despite being included in the trust indenture that they are subject to, will be continued to be covered by the pension funds and the employers of pension fund contributors. In line with the new law, the Bank obtained a technical actuarial valuation report from a licenced actuary for the year ended December 31, 2019 and provided full provision for the total amount of technical and actual deficit in the actuarial report in the financial statements. The actuarial assumptions used in the related actuarial report are given in Section Five Note II-i-5-1. Besides the Parent Bank; Anadolu Anonim Türk Sigorta Şirketi, Milli Reasürans T.A.Ş. and Türkiye Sınai Kalkınma Bankası A.Ş. also had actuarial valuations as of 31 December 2019 for their pension funds. According to actuarial report of Milli Reasürans T.A.Ş., the amount of actuarial and technical deficit which was measured according this report and reflected to the year-end financial statements, was kept in the financial statements for the current period. According to actuarial report of Anadolu Anonim Türk Sigorta Şirketi and Türkiye Sınai Kalkınma Bankası, there is not any additional operational or actuarial liability. Türkiye İş Bankası A.Ş. Members’ Social Security and Solidarity Pension Fund is a foundation established by the Parent Bank in accordance with the sentences of the Turkish Commercial Code and the Turkish Civil Code to provide essential benefits with additional social security and assistance rights. Those are also valid for the supplementary pension funds of the employees of Anadolu Anonim Türk Sigorta Şirketi, Milli Reasürans T.A.Ş. and Türkiye Sınai Kalkınma Bankası A.Ş. which are among the other financial institutions of the Group. XXI. Taxation 1. Corporate Tax: Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. With the change in Law no: 7061, in accordance with the Article 32 of the Corporate Tax Law No: 5520, the corporate tax rate is calculated at the rate of 22% for 2018, 2019 and 2020 taxation period’s income. As per the Corporate Tax law, temporary tax is calculated and paid quarterly in line with the principles of the Income Tax Law and at the corporate tax rate. The temporary tax payments are deducted from the current period’s corporate tax. The 4rd temporary provisional tax for the year 2019 will be paid in February, 2020 and will be offset with the current period’s corporate tax. Tax expense consists of current tax and deferred tax. The current tax liability is calculated over the portion of the period subject to taxation. The taxable profit differs from the profit stated in the income statement, as the income and expense items that can be taxable or deductible at other periods, and items that are not taxable or deductible are excluded. The current tax amounts payable are netted off with prepaid tax amounts and presented on the financial statements. Within the framework of the Corporate Tax Law numbered 5520, 75% of the gains on the sale of the participation shares, which were held in the assets for a minimum of 2 whole years and 75% of the gains on the sale of immovable are exempt from tax provided that they are added to the capital as set forth by the Law or that they are kept in a special fund under liabilities for a period of 5 years. However, in accordance with Article 89/a of the Law No. 7061 and Article 5.1.e and Article 5.1.f of the Corporate Tax Law, which were published in the Official Gazette dated December 5, 2017 and numbered 30261, the 75% applied in terms of immovable sales mentioned above has been reduced to 50% which is effective from the date of publication of the Law. 2. Deferred Tax: Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. 242 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Free provisions that are allocated for possible future risks are included in the tax base and they are not subject to deferred tax calculation. No tax assets or liabilities are recognized for the temporary timing difference that affects neither the taxable profit nor the accounting profit and that arises from the initial recognition in the balance sheet, of assets and liabilities, other than the goodwill and mergers.The carrying values of deferred tax assets are 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. Deferred tax is measured at enacted tax rates prevailing in the period or about to be enacted when the assets are realized or liabilities are settled, and the tax is recognized as income or expense in the income statement. Nonetheless, if the deferred tax is related to assets directly associated with the equity in the same or different period, it is directly recognized in the equity accounts. According to a change in Corporate Tax Law, which were published in the Official Gazette dated December 5, 2017 and numbered 30261, Article 91, Corporate Tax has been increased to 22% from 20% in order to be applied to the profits of the institutions for the taxation periods of 2018, 2019 and 2020. Within this context deferred tax is calculated using the related rates considering the periods when deferred tax assets and liabilities are realized. Although according to BRSA article numbered BDDK.DZM.2/13/1-a-3 dated December 8, 2004, deferred tax calculation for general provision and free provision is not made, the Bank has started to calculate deferred tax for the expected credit loss for stage 1 and 2 as of January 1, 2018. Deferred tax calculation is not provided for free provisions. Deferred tax assets and liabilities of banks and consolidated companies are shown by way of offsetting in separate financial statements of each entities. In the consolidated financial statements, on the other hand, the deferred tax assets and liabilities that come from the companies as offset are separately shown in the assets and liabilities. 3. Tax Practices in the Countries that Foreign Branches Operate: Turkish Republic of Northern Cyprus (TRNC) In accordance with TRNC tax legislation, 15% income tax is accrued on the remaining tax base after 10% corporate tax is deducted from corporate income. The tax bases for companies are determined by adding the expenses that cannot be deducted according to TRNC regulations, to commercial gains and by subtracting exemptions and deductions from commercial gains. Income tax is paid in June, and corporate tax payment is made in two installments, in May and in October. On the other hand, withholding tax is paid in TRNC over interest income and similar gains of the companies. The related withholding tax payments are deducted from corporate tax payable and the difference between withholding amount and corporate tax payable is discounted from income tax provided that the withholding tax amount is higher than corporate tax amount. England Corporate earnings are subject to 19% corporate tax in England. The relevant rate is applied to the tax base that is determined by adding the expenses that cannot be deducted due to the regulations, to commercial gains and by subtracting exemptions and deductions from commercial gains. On the other hand, if the a specific balance within the scope of the regulations’ tax base of the relevant year, is higher than the amount found the corporate tax payments are made as temporary tax payments in four installments in July and October of the relevant year and in January and April of the following year. Relevant temporary tax payments are deducted from the corporate tax that is finalized until the end of January of the second year following the relevant year. On the other hand, if the tax base is under the determined balance, corporate tax is paid by the end of September following the year that the profit is made. Bahrain Banks in Bahrain are not subject to tax according to the regulations of the country. The Republic of Iraq (Iraq) The corporate tax is 15% in Iraq. In central government-dependent cities tax is paid in the following year to the related tax administration by the end of May at the latest and in the cities under the administration of Northern Iraq tax is paid in the following year to the related tax administration by the end of June, at latest and the financial statements must be presented and accrued taxes must be paid. In accordance with the agreement reached between the Central Administration of Iraq and the Northern Iraq Regional Government at the end of 2018, the corporate tax of the Bank’s Iraq Branches will be paid in Erbil in a consolidated manner starting from the 2017 financial period. Kosovo Corporate earnings are subject to income tax rate of 10% according to the Kosovo legislation. This ratio is applied to the tax base that will be calculated as a result of the implementation of exemptions, deductions, addition of disallowable expenses, to the corporate income and that are calculated in accordance with the tax laws. Tax has to be paid in advance until April, July, October and January of the current year and the 15th day of January of the following year by four installments. If those prepaid taxes are lower than the final corporate tax, the difference is paid until the end of March of the following year, in case of a claim made by company, if it is higher, then the difference is returned to the institution by the tax authorities after the inspection conducted by those institution. Georgia Corporate earnings are subject to income tax rate of 15% according to the Georgian legislation. This ratio is applied to the tax base that will be calculated as a result of the implementation of exemptions, deductions, addition of disallowable expenses, to the income of corporations and that are calculated in accordance with the tax laws. In addition, in accordance with the legislation of Georgia, each year during May, July, September and December the amount of tax, that calculated according to the previous year income tax, is paid to the tax office by four equal installments of the probable income that is likely to be obtained the current year. If those prepaid taxes are lower than the final corporate tax, the difference is paid until the beginning of April of the following year, if it is higher, then the difference is returned to the institution by the tax authorities. Germany According to the tax regulations in Germany, corporate gains are subject to 15% corporate tax. In addition to this, a solidarity tax of 5.5% is calculated over this corporate tax. The tax bases for corporate are determined by adding the expenses that cannot be deducted according to Germany regulations, to interest, commissions and other operating gains and by subtracting exemptions and deductions from these. The corporate tax payments are made as temporary tax payments in four installments and are deducted from the corporate tax that is finalized at the end of the current year. Russia According to the Russian regulations, corporate gains are subject to 20% corporate tax. The corporate tax base is determined on accrual basis and it is measured by adding the non- deductible expenses to the corporate income gained during the period. Companies in Russia make quarterly tax returns and make provisional tax payment by offsetting the advance taxes paid during the period. Final taxation period for corporate tax is one year and the corporate tax is paid until March 28, by considering the provisional taxes paid during the year. Corporate earnings are subject to 15% corporate tax from the coupon income earned from the government bonds which are issued after the date January 1, 2018. Corporate tax from the coupon income earned from the government bond is paid by the end of 10 weekday from the month following the end of the coupon payments. Taxes arise from other financial instruments are paid when Corporate tax is paid. 243 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 4. Transfer Pricing: Transfer pricing is regulated through Article 13 of Corporate Tax Law titled “Transfer Pricing through Camouflage of Earnings”. Detailed information for the practice regarding the subject is found in the “General Communiqué Regarding Camouflage of Earnings through Transfer Pricing”. According to the aforementioned regulations, in the case of making purchase or sales of goods or services with relevant persons/corporations at a price that is determined against “arm’s length principle”, the gain is considered to be distributed implicitly through transfer pricing. In accordance with Article 11 of Corporate Tax Law, this type of income distrubition is not accepted as a reduction in terms of corporate tax. XXII. Additional Information on Borrowings The Parent Bank and its consolidated Group companies whenever required, generates funds from individuals and institutions residing domestically and abroad by approaching the borrowing instruments in the form of syndication, securitization, collateralized borrowing and issue of bonds/bills. Such transactions are at first carried at acquisition cost, and in the following periods they are valued at amortized cost measured by using the effective interest method. Part of the bills issued by the Group with fixed interest and a part of its liabilities with fixed interest are subject to fair value hedge accounting. While the rediscounted credit risk and accumulated interest amount subject to hedging liability are recognized in “Interest Expenses” under income statement; net amount resulted of the hedge accounting other than the credit risk and accumulated interest amount are recognized in “Derivative Financial Transactions Gains/Losses” under income statement by using fair value model. In the balance sheet, these valuations are presented with the related liabilities. XXIII. Information on Equity Shares and Issuance of Equity Shares Share issuance related to costs is recognized as expenses. Dividend income related with the equity shares are determined by the General Assembly of the Shareholders. Weighted average number of shares outstanding is taken into account in the calculation of earnings per share. In case the number of shares increases by way of bonus issues as a result of the capital increases made by using the internal sources, the calculation of earnings per share is made by adjusting the weighted average number of shares, which were previously calculated as at the comparable periods. The adjustment means that the number of shares used in calculation is taken into consideration as if the bonus issue occurred at the beginning of the comparable period. In case such changes in the number of shares occur after the balance sheet date, but before the ratification of the financial statements to be published, the calculation of earnings per share are based on the number of new shares. The Parent Bank’s earnings per share calculations taking place in the consolidated income statement are as follows. Group’s net profit Weighted average number of shares (thousands) Earnings per share - (in exact TL) XXIV. Bank Acceptances and Bills of Guarantee Current Period 6,009,805 112,502,250 0.053419421 Prior Period 6,671,823 112,502,250 0.059303907 Bill guarantees and acceptances are realized simultaneously with the customer payments and they are presented as possible liabilities and commitments in the off-balance sheet accounts. XXV. Government Incentives There are no government incentives that the Group has received from both curent and prior period. XXVI. Segment Reporting Business segment is the part of an enterprise. - Which conducts business operations where it can gain revenues and make expenditures (including the revenues and expenses related to the transactions made with the other parts of the enterprise). - Whose operating results are regularly monitored by the authorities with the power to make decisions related to the operations of the enterprise in order to make decisions related to the funds to be allocated to the segment and to evaluate the performance of the segment and - Which has its separate financial information. Information on the Group’s business segmentation and related information is explained in Section Four footnote XII. XXVII. Other Disclosures As of January 1, 2019 operating leases within the framework of the “TFRS 16-Leases” standard are recognized in a similar manner to financial leases. During transition by the Parent Bank and the companies in scope of the consolidation, simplified application was preferred and in this context, comparative information has not been restated in the consolidated financial statements. According to the standard, the lease agreements are examined; their components, the lease periods and the amounts are evaluated by categories, by taking the exceptions and similar items into account. For the contracts considered within the scope of TFRS 16, at the initial application date and/or at the time of signing the contract, the leasing liability and the right to use asset are reflected in the financial statements. The direct costs incurred by the lessee in the beginning were evaluated, it is concluded that amounts are insignificant, initial costs are not included in the right of use asset. In accordance with TFRS 16, the right of use asset can be measured with its cost or fair value, and the Group measures the right of use assets with its cost. The net lease liability is calculated by discounting the future lease payments by the use of the Bank or alternative borrowing interest rates at the date of initial application or contract date. Fixed assets which are recognized as right of use asset are subject to straight-line depreciation considering the lease period. Interest expenses related to the lease liabilities and foreign exchange differences are associated with statement of income. The effect of TFRS 16 on financial statements, in accordance with the selected transition method and related accounting policies, is given below. Tangible Assets (Net) Liabilities for Leasing Transactions (Net-Discounted with borrowing rate) January 1, 2019 December 31, 2019 8,187,167 1,053,877 7,994,765 956,884 244 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) SECTION FOUR: INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE GROUP I. Explanations on Shareholders’ Equity: 1. Explanations on Consolidated Shareholders’ Equity The Bank’s consolidated capital adequacy ratio is 16.37%. (December 31, 2018: 15.33%) COMMON EQUITY TIER I CAPITAL Paid-in Capital to be Entitled for Compensation after All Creditors Share Premium Legal Reserves Other Comprehensive Income According to TAS Profit Net Current Period Profit Prior Period Profit Bonus Shares from Associates, Subsidiaries and Joint-Ventures not Accounted in Current Period’s Profit Minority Shares Common Equity Tier I Capital Before Deductions 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 (-) Leasehold improvements on operational leases (-) Goodwill Netted with Deferred Tax Liabilities Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights Remaining after deducting from the related deferred tax liability with the deferred tax asset based on future taxable income, except for deferred tax assets based on temporary differences 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 1 Capital (-) Shares Obtained against Article 56, Paragraph 4 of the Banking Law (-) Total of Net Long Positions of the Investments in Equity Items of Consolidated 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 Consolidated 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 (-) Mortgage Servicing Rights (amount above 10% threshold of above Tier I capital) (-) Deferred Tax Assets Arising from Temporary Differences (amount above 10% threshold of above Tier I Capital) (-) Amount Exceeding the 15% Threshold of Tier 1 Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Evaluation of Capital Adequacy 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 (-) Excess Amount arising from Mortgage Servicing Rights 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 1 Total Common Equity Tier I capital ADDITIONAL TIER I CAPITAL Privileged stocks not included in common equity and 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) Shares of Third Parties in Additional Tier I Capital Shares of Third Parties in Additional Tier I Capital (Covered by Temporary Article 3) Additional Tier I Capital before Deductions Deductions from Additional Tier 1 Capital Direct and Indirect Investments of the Bank on its own Additional Core Capital (-) Current Period Amount as per the Regulation before 1/1/2014 (1) 6,115,938 39,250 36,232,507 8,614,017 8,413,254 6,009,805 2,403,449 (1,165) 1,854,685 61,268,486 247,616 91,213 35,974 1,089,257 538,334 2,002,394 59,266,092 1,315,049 1,315,049 1,854,685 35,974 1,089,257 245 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Current Period Amount as per the Regulation before 1/1/2014 (1) 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 1 Capital during the Transition Period Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) Net Deferred Tax Asset/Liability not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) Deduction from Additional Tier 1 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) 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) Shares of Third Parties in Additional Tier I Capital Shares of Third Parties in Additional Tier I Capital (Covered by Temporary Article 3) Provisions (Amounts explained in the first paragraph of the article 8 of the Regulation on Bank Capital) Tier II Capital before Regulatory Adjustments 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 (-) 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 Total Equity (Total Tier I and Tier II Capital) Deductions from Total Equity Loans Granted against the Articles 50 and 51 of the Banking Law 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 Other items to be Defined by the BRSA 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 (-) 1,315,049 60,581,141 6,969,800 1,627,800 700,296 5,177,555 14,475,451 14,475,451 75,056,592 973 135 838 246 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) CAPITAL Total Capital (Total of Tier I Capital and Tier II Capital) Total Risk Weighted Assets CAPITAL ADEQUACY RATIOS Consolidated CET1 Capital Ratio (%) Consolidated Tier I Capital Ratio (%) Consolidated Capital Adequacy Ratio (%) BUFFERS Total Additional Common Equity Requirement Ratio (a+b+c) a) Capital Conservation Buffer Ratio (%) b) Bank-specific Counter-Cyclical Capital Buffer Ratio (%) c) Systemic Bank Buffer Ratio (%) Additional CET1 Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation (%) 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 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) General Loan Provisions for Exposures in Standard Approach Limited by 1,25% of Risk Weighted Assets Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué on Calculation of Credit Risk by Internal Ratings Based Approach Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué 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 January 1, 2018 - January 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 (1) Represents the amounts taken into consideration according to transition clauses. Amount as per the Regulation before 1/1/2014 (1) Current Period 75,055,619 458,404,654 12.93 13.22 16.37 4.050 2.500 0.050 1.500 7.22 220,768 1,950,997 6,191,382 5,177,555 1,627,800 6,618,200 247 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Amount as per the Regulation before 1/1/2014 (1) 1,651,883 35,974 822,850 COMMON EQUITY TIER I CAPITAL Paid-in Capital to be Entitled for Compensation after All Creditors Share Premium Legal Reserves Other Comprehensive Income according to TAS Profit Net Current Period Profit Prior Period Profit Bonus Shares from Associates, Subsidiaries and Joint-Ventures not Accounted in Current Period’s Profit Minority Interest Common Equity Tier 1 capital before deductions Common Equity Tier 1 capital: regulatory deductions 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 (-) Leasehold improvements on operational leases (-) Goodwill Netted with Deferred Tax Liabilities Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights Deferred Tax Assets that Rely on Future Profitability Excluding Those Arising from Temporary Differences (net of related tax 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 1 Capital (-) 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 more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) Mortgage Servicing Rights (amount above 10% threshold) (-) Deferred Tax Assets Arising from Temporary Differences (amount above 10% threshold, net of related tax liability) (-) 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 more than 10% of the Issued Share Capital not deducted from Tier I Capital (-) Excess Amount arising from Mortgage Servicing Rights 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 Total Common Equity Tier I capital ADDITIONAL TIER I CAPITAL 6,115,938 39,234 28,434,743 7,287,274 10,303,541 6,671,823 3,631,718 (1,165) 1,651,883 53,831,448 2,587,667 99,855 35,974 822,850 3,054 3,549,400 50,282,048 248 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Privileged stocks not included in common equity and 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) Shares of Third Parties in Additional Tier I Capital Shares of Third Parties in Additional Tier I Capital (Covered by Temporary Article 3) Additional Tier 1 capital before regulatory deductions Deductions from Additional Tier 1 Capital Direct and Indirect Investments of the Bank on its own Additional Tier I (-) 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 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 1 Capital during the Transition Period Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) Net Deferred Tax Asset/Liability not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) Deductions from Additional Tier 1 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) 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) Shares of Third Parties in Additional Tier I Capital Shares of Third Parties in Additional Tier I Capital (Covered by Temporary Article 3) Provisions (Amounts explained in the first paragraph of the article 8 of the Regulation on Bank Capital) Tier II Capital before Regulatory Deductions 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 (-) 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 Total Equity (Total Tier I and Tier II Capital) Deductions from Total Equity Loans Granted against the Articles 50 and 51 of the Banking Law (-) 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 (-) Other items to be Defined by the BRSA (-) Items to be Deducted from the Sum of Tier I and Tier II Capital (Capital) during the Transition Period Prior Period Amount as per the Regulation before 1/1/2014 (1) 1,131,501 1,131,501 1,131,501 51,413,549 5,260,500 2,105,200 632,464 4,783,065 12,781,229 12,781,229 64,194,778 4,958 2,824 2,134 249 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Amount as per the Regulation before 1/1/2014 (1) Portion of the total of net long positions of investments made in Common Equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or less of the issued common share capital exceeding 10% of Common Equity of the Bank not to be deducted from the Common Equity, Additional Tier I Capital, Tier II Capital as per the 1st clause of the Provisional Article 2 of the Regulation on the Equity of Banks. (-) Portion of the total of net long positions of direct or indirect investments made in Additional Tier I and Tier II Capital items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital exceeding 10% of Common Equity of the Bank not to be deducted from the Additional Tier I Capital and Tier II Capital as per the 1st clause of the Provisional Article 2 of the Regulation on the Equity of Banks. (-) Portion of the total of net long positions of investments made in Common Equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital. deferred tax assets based on temporary differences and mortgage servicing rights not deducted from Common Equity as per the 1st and 2nd Paragraph of the 2nd clause of the Provisional Article 2 of the Regulation on the Equity of Banks (-) CAPITAL Total Capital (Total of Tier I Capital and Tier II Capital) Total Risk Weighted Assets CAPITAL ADEQUACY RATIOS Consolidated Common Equity Tier I Capital Ratio (%) Consolidated Tier I Capital Ratio (%) Consolidated Capital Adequacy Ratio (%) BUFFERS Total Additional Common Equity Tier I Capital Ratio (%) (a+b+c) a) Capital Conservation Buffer Ratio (%) b) Bank-specific Counter-Cyclical Capital Buffer Ratio (%) c) Systemic Significant Bank Buffer Ratio (%) Additional Common Equity Tier I Capital Over Total Risk Weighted Assets Ratio Calculated According to the Article 4 of Capital Conservation and Counter-Cyclical Capital Buffers Regulation (%) 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 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) General Loan Provisions for Exposures in Standard Approach Limited by 1.25% of Risk Weighted Assets Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué on Calculation of Credit Risk by Internal Ratings Based Approach Total Loan Provision that Exceeds Total Expected Loss Calculated According to Communiqué 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 January 1, 2018- January 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 (1) Represents the amounts taken into consideration according to transition clauses. 64,189,820 418,763,034 12.01 12.28 15.33 3.040 1.875 0.040 1.125 6.277 181,741 1,543,870 5,509,052 4,783,065 2,105,200 5,230,800 250 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 2. Information on Subordinated Liabilities: Issuer Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) US900151AB70 - XS0847042024 US900151AF84 - XS1003016018 US90016BAF58-XS1623796072 Governing law(s) of the instrument With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. With the exception of certain substances will be subject to Turkish law is subject to English law. The BRSA dated 1 November 2006 and published in Official Gazette No. 26333 on the Equity of the Bank were issued under the Regulation. Taking into account in equity calculation Reduced by 10% from 01.01.2015 Yes No No Eligible at unconsolidated/consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Instrument type (types to be specified by each jurisdiction) Amount recognized in regulatory capital (Currency in mil. as of most recent reporting date) Bond 214 Par value of instrument (Expressed in million TL) 5,890 Bond 1,414 2,356 Bond 2,945 2,945 Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date. contingent call dates and redemption amount Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities 24.10.2012 Dated 10 Years Yes 10.12.2013 Dated 10 Years Yes 29.06.2017 Dated 11 Years Yes The Bank; (1) provided that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date a) can purchase b) can redeem all bonds if any taxes imposed or levied (2) can redeem all bonds in case of the deduction from equity. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) can redeem all bonds if any taxes imposed or levied (b) can redeem all bonds in case of the deduction from equity. The Bank has the option to repay all of the related bonds on June 29, 2023 provided that subject to having obtained the prior approval of the BRSA. The Bank; (1) provided that subject to having obtained the prior approval of the related legislation, can purchase or otherwise acquire treasury stock (2) provided that subject to having obtained the prior approval of the BRSA, (a) can redeem all bonds if any taxes imposed or levied (b) can redeem all bonds in case of the deduction from equity. Subsequent call dates. if applicable None Coupons/dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary. partially discretionary or mandatory Existence of step up or other incentive to redeem Fixed % 6 None None None None Fixed % 7.85 None None None None Fixed % 7 None None None Noncumulative or cumulative Noncumulative Convertible or non-convertible None Noncumulative None Noncumulative None If convertible. conversion trigger (s) If convertible. fully or partially If convertible. conversion rate If convertible. mandatory or optional conversion If convertible. specify instrument type convertible into If convertible. specify issuer of instrument it converts into Write-down feature None In accordance with Regulations on Equities of Banks.Article 8 (2) (ğ).bonds have deleted option from records. In accordance with Regulations on Equities of Banks.Article 8 (2) (ğ).bonds have deleted option from records. 251 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Issuer Türkiye İş Bankası A.Ş. If write-down. write-down trigger(s) Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (i) its operating license is to be revoked and the Bank is liquidated or (ii) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable). Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (i) its operating license is to be revoked and the Bank is liquidated or (ii) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable) Partially or completely Partially or completely Permanent Permanent If write-down. full or partial If write-down. permanent or temporary If temporary write-down. description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. In compliance with article number 7 and 8 of “Own fund regulation” Yes. Yes. Yes. Details of incompliances with article number 7 and 8 of “Own fund regulation” Don’t vest with the conditions stated in clause of the Article 7 and the clause of 8.2. (ğ) To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. 252 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Issuer Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) TRSTISB72712 TRSTISB62911 TRSTISB92918 Governing law(s) of the instrument Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Is subject to Turkish Law. Has been issued in accordance with the BRSA Communiqué regarding the Equity of Banks. Taking into account in equity calculation Subject to 10% deduction as of 01.01.2015 No No. No. Eligible at unconsolidated/consolidated Unconsolidated -Consolidated Unconsolidated - Consolidated Unconsolidated - Consolidated Instrument type (types to be specified by each jurisdiction) Amount recognized in regulatory capital (Currency ın TL million, as of most recent reporting data) Bond 1,100 Nominal value of instrument (TL Million) 1,100 Bond 800 800 Bond 350 350 Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities 08.08.2017 Dated 10 Years Yes 19.06.2019 Dated 10 Years Yes 26.09.2019 Dated 10 Years Yes The Bank; (1) can purchase bills that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date (2) (a) can redeem all bonds if any taxes imposed or levied (b) can redeem all bonds in case of the deduction from equity The Bank; (1) can purchase bills that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date (2) (a) can redeem all bonds if any taxes imposed or levied (b) can redeem all bonds in case of the deduction from equity The Bank; (1) can purchase bills that subject to having obtained the prior approval of the BRSA and the date which may not be earlier than fifth anniversary of the Issue Date (2) (a) can redeem all bonds if any taxes imposed or levied (b) can redeem all bonds in case of the deduction from equity Subsequent call dates, if applicable None. Interest/Dividend Payment Fixed or floating coupon/dividend payments Floating None. Floating None. Floating Coupon rate and any related index Government Debt Security for 5 years+350 base points TRLIBOR with 3 month maturity + 100 base points Government Debt Security for 5 years+350 base points Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem None. None. None. None. None. None. None. None. None. Noncumulative or cumulative Non-cumulative Convertible into equity shares None. Non-cumulative None. Non-cumulative None. If convertible, conversion trigger (s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into Write-down feature In accordance with Regulations on Equities of Banks, Article 8.2.ğ, bonds have deleted option from records. In accordance with Regulations on Equities of Banks, Article 8.2.ğ, bonds have deleted option from records. In accordance with Regulations on Equities of Banks, Article 8.2.ğ, bonds have deleted option from records. 253 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Issuer Türkiye İş Bankası A.Ş. If write-down, write-down trigger(s) Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable) Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable) Due to the losses incurred, where the Bank is at the point at which the BRSA may determine pursuant to Article 71 of the Banking Law that: (1) its operating license is to be revoked and the Bank is liquidated or (2) the rights of all of its shareholders (except to dividends), and the management and supervision of the Bank, are to be transferred to the SDIF on the condition that losses are deducted from the capital of existing shareholders (occurrence of either condition means the issuer has become non-viable) If bond can be written-down, full or partially Partially or Completely Partially or Completely Partially or Completely If bond can be written-down, permanent or temporary Permanent If temporary write-down, description of write-up mechanism Permanent Permanent Posıtıon in subordination hierarchy in case of liquidation (instrument type immediately senior to the instrument) Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. Paid before shares and the primary of subordinated debt and after all the other debts. In compliance with article number 7 and 8 of Regulation on Bank Capital Yes. Yes. Yes. Details of incompliances with article number 7 and 8 of Regulation on Bank Capital To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. 254 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Issuer Türkiye Sınai Kalkınma Bankası A.Ş. Unique identifier (ex CUSIP. ISIN or Bloomberg identifier for private placement) XS1584113184 Governing law(s) of the instrument Taking into account in equity calculation Transitional Basel III rules Eligible at unconsolidated/consolidated Instrument type (types to be specified by each jurisdiction) Amount recognized in regulatory capital (Currency in mil. as of most recent reporting date) Par value of instrument Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Communiqué on SPK-II-31.1 Borrowing Instruments Regulation on Equity of BRSA Banking Sector No Unconsolidated - Consolidated Bond 300 300 Subordinated Debts 28.03.2017 Dated 10 Years Yes Optional call date. contingent call dates and redemption amount 29.03.2022 (After 5th year) There is a early payment option. Subsequent call dates. if applicable Coupons/dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary. partially discretionary or mandatory Existence of step up or other incentive to redeem Noncumulative or cumulative Convertible or non-convertible If convertible. conversion trigger (s) If convertible. fully or partially If convertible. conversion rate If convertible. mandatory or optional conversion If convertible. specify instrument type convertible into If convertible. specify issuer of instrument it converts into Write-down feature If write-down. write-down trigger(s) If write-down. full or partial If write-down. permanent or temporary If temporary write-down. description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) After 5th year, there is a refund option only once. Fixed/interest payment semiannually, principle payment at the maturity date. % 7.625 None None None Noncumulative None None None None None None In accordance with Banking Law No. 5411 and the Turkish Commercial Code No. 6102, if the possibility of the removal and liquidation of the Bank’s operation permission is determined within the framework of the Article 71 of the Banking Law, the BRSA will be able to delete it from the records. Partially or completely Permanent None After the debts, before the additional main capital, same as the tier II capital In compliance with article number 7 and 8 of “Own fund regulation” To vest conditions stated in clause of the Article 8. Details of incompliances with article number 7 and 8 of “Own fund regulation” Don’t vest the conditions stated in clause of the Article 7. 255 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 3. Explanations on Reconciliations of Amounts in the Consolidated Capital Items Table and Carrying Amounts in the Consolidated Financial Statements Shareholders’ Equity Group Share Minority Interest Leasehold improvements on operational leases Goodwill and intangible assets Provisions Subordinated debt Deductions from shareholders’ equity Capital Carrying Amount Amounts in Equity Calculation (1) 65,701,467 58,635,878 7,065,589 91,213 1,196,724 6,191,382 15,376,976 9,000 62,505,908 58,635,878 3,870,030 (91,213) (1,125,231) 5,177,555 8,597,600 (9,000) 75,055,619 (1) The related amounts are calculated in accordance with “Regulation on Equities of Banks”. In this context, part of the expected credit loss of stage 1 and stage 2 up to 1.25% of amount subject to credit risk, part; subordinated loans according to fourth article of the regulation, have been taken into consideration in equity calculation. II. Explanations on Credit Risk 1. Credit risk is defined as the possibility of incurring loss where the counterparty in a transaction, partially or completely fails to meet its contractual obligations in due time in an agreement with the Bank and its consolidated financial subsidiaries. Banks and financial institutions subject to consolidation, carry out their placement activities in accordance with the credit limitations stipulated by legal regulations of the countries in which they operate. The Parent Bank’s position against the credit risk limits defined by the current legislation is monitored by the Board. Within this framework, loans extended to Risk Groups and the Parent Bank’s Risk Group, including the Parent Bank; loans in high amounts and limitations regarding the shares in participations are monitored according to the limits determined in connection with the size of the shareholders’ equity calculated on a bank-only and consolidated basis. Credit risk limits of customers are determined depending on the financial situation and loan requirements of the borrowers, in strict compliance with the relevant banking legislation, within the framework of loan authorization limits of Branches, Regional Offices, Loan Divisions, and the Deputy Chief Executives responsible for loans, the CEO, the Credit Committee and the Board of Directors. These limits may be changed as may be deemed necessary by the Bank. Moreover, all commercial credit limits are revised periodically, provided that each period does not exceed a year. Furthermore, the borrowers and borrower groups forming a large proportion of the overall placement are subject to risk limits in order to provide further minimization of potential risk. The geographical distribution of borrowers is consistent with the concentration of industrial and commercial activities in Turkey. The distribution of borrowers by sector is monitored closely for each period and sectoral risk limits have been determined to prevent concentration of risk in sectoral sense. The credit-worthiness of customers is monitored on a consistent basis by using company rating and scoring models specially developed for this purpose, and the audit of statements of account received is assured to have been made in accordance with the provisions as stipulated by the relevant legislation The Parent Bank and its financial affiliates give utmost importance to ensure that loans are furnished with collaterals. Most of the loans extended are collateralized by taking real estate, movable or commercial enterprise under pledge, promissory notes and other liquid assets as collateral, or by acceptance of bank letters of guarantee and individual or corporate guarantees. Non-performing and impaired loans has classified in accordance with the “TFRS 9-Financial Instruments” and BRSA’s “Regulation on Procedures and Principles for Classification of Loans and Provisions to be set aside”. The detailed descriptions of these methods correspond with accounting practices, are included in Section Three Note VIII. Credit risk is the risk reduction effects without taking into consideration the total amount of exposures after offsetting transactions with different risk classes according to the types and amounts of disaggregated risks are listed below the average for the period. 256 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Amount subject to credit risk (1) Risk Classifications Current Period Risk Amount Average Risk Amount (2) Conditional and unconditional exposures to central governments or central banks 154,510,707 142,159,460 Conditional and unconditional exposures to regional governments or local authorities Conditional and unconditional exposures to administrative bodies and non-commercial undertakings Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Conditional and unconditional exposures to banks and brokerage houses Conditional and unconditional exposures to corporate Conditional and unconditional retail exposures Exposures secured by residential real estate property Exposures secured by commercial real estate property Past due loans Items in regulatory high-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Exposures in the form of collective investment undertakings Stock investments Other items 144,923 435,933 1,514 43,362,642 250,095,077 101,094,237 14,259,232 23,073,062 9,583,511 731,415 3,175,390 11,773,502 22,602,091 134,477 473,389 2,658 42,536,194 245,691,487 85,427,955 16,126,271 24,887,836 8,355,377 825,044 2,112,372 10,952,941 22,370,271 (1) The figures represent total risk amounts after credit risk mitigation and after credit conversion factor. (2) Average risk amount is identified by using arithmetical averages of risk amounts calculated quarterly in the current period reports. 2. There are certain control limits on forward transactions in terms of counter parties, and the risks taken for derivative instruments are evaluated along with other potential risks resulting from the market fluctuations. 3. As a result of the current level of customers’ needs and the progress in the domestic derivatives market in this particular area, the Parent Bank uses derivative transactions either for hedging or for commercial purposes. Derivative instruments with a remarkable volume are monitored with consideration that they can always be liquidated in case of need. 4. Indemnified non-cash loans are considered as having the same risk weights as unpaid cash loans. The rating and scoring systems applied by the Parent Bank, includes detailed company analysis and enables rating of all companies and loans without any restrictions regarding credibility. Loans and companies, which have been renewed, restructured or rescheduled, are rated within the scope of this system. Specialized loans are evaluated by a special rating system, which is based on the credibility of the counterparty as well as the feasibility and risk analysis of the cash flows created mainly by the projects undertaken or the asset financed. 5. Determining the country risks of the countries concerned in the context of the current rating system credit transactions carried out abroad, market conditions, legal constraints and risks related to the country on this issue into account. In addition, banks and other financial institutions credit worthiness abroad, foreign rating agencies by based on credit ratings that are determined and CDS-IR (based on credit default swaps) a supported developed degree approach is allocated and monitored. 6. (i) The share of the Group’s receivables from the top 100 and 200 cash loan customers in the overall cash loan portfolio stands at 27% and 37% respectively (December 31, 2018: 28%, 36%). (ii) The share of the Group’s receivables from the top 100 and 200 non-cash loan customers in the overall non-cash portfolio stands at 45% and 58% respectively (December 31, 2018: 48%, 62%). (iii) The share of the Group’s cash and non-cash receivables from the top 100 and 200 credit customers in the overall assets and non-cash loans stands at 16% and 22% (December 31, 2018: 17%, 23%). Companies that are among the top loan customers ranked according to cash, non-cash and total risks are leaders in their own sectors, the loans advanced to them are in line with their volume of industrial and commercial activity. A significant part of such loans is extended on a project basis, with their repayment sources being analyzed in accordance with the banking principles to be considered as satisfactory, and associated risks are determined and duly covered by obtaining appropriate guarantees when deemed necessary. 257 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 7. Total value of the Stage 1 and Stage 2 expected credit loss allocated for the credit risk carried by Parent Bank and consodilated companies is TL 5,813,839. 8. The Parent Bank measures the quality of its loan portfolio by applying different rating/scoring models on cash commercial/corporate loans, retail loans and credit cards. The breakdown of the rating/scoring results, which are classified as “Strong”, “Standard” and “Below Standard” by considering their default features, is shown below. The loans whose borrowers’ capacity to fulfill their obligations is very good, are defined as “Strong”, whose borrowers’ capacity to fulfill its obligations in due time is reasonable, are defined as “Standard” and whose borrowers’ capacity to fulfill their obligations is poor, are defined as “Below Standard”. Strong Standard Below Standard Table shows rating/scoring results. Current Period Prior Period 43.92% 47.42% 8.66% 40.93% 52.77% 6.30% 9. The net values of the collaterals of the Group’s closely monitored loans are given below in terms of collateral types and risk matches. Type of Collateral Real Estate Mortgage (1) Cash Collateral (Cash, securities pledge, etc.) Pledge on Wages and Vehicles Cheques & Notes Personal 1,006,352 31,021 1,201,815 Current Period Commercial and Corporate 9,073,348 185,823 398,310 460 Credit Cards Personal 1,163,210 12,438 770,711 Prior Period Commercial and Corporate 8,810,357 204,022 289,508 2,521 Credit Cards Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Non-collateralized Total 243,422 23,253,292 1,195,702 2,790,307 1,138,507 198,675 844,405 20,125,328 2,305,990 1,096,016 3,678,312 35,701,540 1,138,507 2,989,439 31,737,726 1,096,016 (1) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair values of collaterals in expertise reports; and after comparing the results to the mortgage/pledge amounts and loan balances, the smallest figures are considered to be the net value of collaterals. 10. The net values of the collaterals of the Group’s non-performing loans are given below in terms of collateral types and risk matches. Type of Collateral Real Estate Mortgage (1) Cash Collateral Vehicle Pledge Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Current Period Prior Period Net Value of the Collateral Loan Balance Net Value of the Collateral Loan Balance 6,266,997 6,266,997 4,083,888 4,083,888 1,680 350,072 1,680 350,072 7,099,102 7,099,102 3,259 466,913 1,169,421 3,259 466,913 1,169,421 (1) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair values of collaterals in expertise reports; and after comparing the results to the mortgage/pledge amounts and loan balances, the smallest figures are considered to be the net value of collaterals. 258 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 11. The aging analysis of the recievables past due but not impaired in terms of financial asset classes, is as follows: Current Period Loans (1) Corporate/Commercial Loans (3) Consumer Loans Credit Cards Lease Receivables (1) Insurance Receivables Total 31-60 Days(2) 61-90 Days(2) 658,061 373,073 95,936 189,052 7,105 30,657 695,823 771,599 636,302 53,635 81,662 8,766 13,174 793,539 Total 1,429,660 1,009,375 149,571 270,714 15,871 43,831 1,489,362 (1) The loans classified under close monitoring that are not past due or past due for less than 31 days is TL 35,510,447. (2) Related figures show only overdue amounts of installment based commercial loans and installment based consumer loans; the principal amounts of the loans which are not due as of the balance sheet date are equal to TL 2,531,497 and TL 1,030,888 respectively. (3) Includes factoring receivables. Prior Period Loans (1) Corporate/Commercial Loans (3) Consumer Loans Credit Cards Lease Receivables Insurance Receivables Total 31-60 Days(2) 61-90 Days(2) 645,369 311,287 93,875 240,207 7,006 45,324 697,699 840,442 702,644 47,415 90,383 3,218 16,028 859,688 Total 1,485,811 1,013,931 141,290 330,590 10,224 61,352 1,557,387 (1) The loans classified under close monitoring that are not past due or past due for less than 31 days is TL 30,823,460. (2) Related figures show only overdue amounts of installment based commercial loans and installment based consumer loans; the principal amounts of the loans which are not due as of the balance sheet date are equal to TL 2,320,719 and TL 1,182,967 respectively. (3) Includes factoring receivables. 259 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 12. Profile of Significant Risk Exposures in Major Regions Domestic European Union OECD Countries (2) Off-Shore Banking Regions USA, Canada Other Countries Investments in Associates, Subsidiaries and Jointly Controlled Entities Unallocated Assets/ Liabilities (3) Total 151,461,991 102,083 85,074 667,385 2,194,174 154,510,707 144,916 435,840 331 7 93 1,183 17,551,383 17,239,496 1,803,323 10,361 5,307,773 1,450,306 239,540,872 4,409,219 114,765 831,618 807,820 4,390,783 99,480,676 516,894 33,448 1,175 29,855 1,032,189 37,065,335 9,522,928 166,019 40,708 27,218 265 253 13,114 2,977 731,288 2 4 60,355 16,633 121 144,923 435,933 1,514 43,362,642 250,095,077 101,094,237 37,332,294 9,583,511 731,415 3,175,390 22,583,402 13,018 5,671 11,773,502 3,175,390 22,602,091 11,773,502 581,694,021 22,487,770 2,069,768 843,407 6,828,924 9,145,844 11,773,502 634,843,236 Current Period Risk Groups (1) Contingent and Non-Contingent Receivables from Central Governments or Central Banks (4) Contingent and Non-Contingent Receivables from Regional Government or Domestic Government Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises Contingent and Non-Contingent Receivables from Multilateral Development Banks Contingent and Non-Contingent Receivables from International Organizations Contingent and Non-Contingent Receivables from Banks and Intermediaries Contingent and Non-Contingent Corporate Receivables Contingent and Non-Contingent Retail Receivables Contingent and Non-Contingent Receivables Secured by Residential Property Non-Performing Receivables Receivables are identified as high risk by the Board Secured Marketable Securities Securitization Positions Short-term Receivables and Short- term Corporate Receivables from Banks and Intermediaries Investments as Collective Investment Institutions Other Receivables Stock Investments Total (1).The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. (2) OECD Countries other than EU countries, USA and Canada. (3) Assets and liabilities that are not consistently allocated. (4) Credits guaranteed by the Undersecretariat of Treasury are included in the class of receivables from central government. 260 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Domestic European Union OECD Countries (2) Off-Shore Banking Regions USA, Canada Other Countries Investments in Associates, Subsidiaries and Jointly Controlled Entities Unallocated Assets/ Liabilities (3) Total 125,354,010 931,546 78,525 1,702,318 128,066,399 Prior Period Risk Groups (1) Contingent and Non-Contingent Receivables from Central Governments or Central Banks(4) Contingent and Non-Contingent Receivables from Regional Government or Domestic Government Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises Contingent and Non-Contingent Receivables from Multilateral Development Banks Contingent and Non-Contingent Receivables from International Organizations Contingent and Non-Contingent Receivables from Banks and Intermediaries Contingent and Non-Contingent Corporate Receivables Contingent and Non-Contingent Retail Receivables Contingent and Non-Contingent Receivables Secured by Residential Property Non-Performing Receivables Receivables are identified as high risk by the Board Secured Marketable Securities Securitization Positions Short-term Receivables and Short- term Corporate Receivables from Banks and Intermediaries Investments as Collective Investment Institutions Other Receivables Stock Investments Total 99,506 375,490 1,583 28,698 71 14,561,904 16,291,313 1,722,937 131,544 4,327,486 1,554,803 235,212,347 3,566,156 92,988 597,983 90,190 4,851,874 76,821,002 457,163 31,789 1,307 26,452 759,181 42,062,063 5,230,647 221,627 45,760 36,634 249 441 19,235 452 295,520 3 56,582 17,115 764 511,565 21,589,169 522,113,223 21,515,151 1,963,122 731,275 4,463,815 8,971,406 9,825,810 9,825,810 (1).The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. (2) OECD Countries other than EU countries, USA and Canada. (3) Assets and liabilities that are not consistently allocated. (4) Credits guaranteed by the Undersecretariat of Treasury are included in the class of receivables from central government. 128,204 375,561 1,583 38,589,987 244,411,538 78,096,894 42,396,582 5,294,223 296,287 511,565 21,589,169 9,825,810 569,583,802 261 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 13. Risk Profile by Sectors or Counterparties: (1) (**) (2) Sectors/Counterparty (*) Agriculture Farming and Stockbreeding Forestry Fishing Industry Mining Production Electricity, gas, and water Construction Services 188,628 179,340 3,877 5,411 3,594,042 102,088 3,437,125 54,829 1,418,499 58,975,028 Wholesale and Retail Trade 4,528,990 Hotel, Food and Beverage Services Transportation and Telecommunication Financial Institutions Real Estate and Renting Services Self-Employment Services Education Services Health and Social Services 290,228 634,217 52,937,789 156,839 90,982 151,608 184,375 Other Total 90,334,510 154,510,707 144,923 144,923 Current Period Consolidated Current Period Consolidated (3) 542 542 157,275 15 157,260 4,797 229,892 1,159 77 703 (4) (5) (6) (7) (8) (9) (12) (13) (14) TL FC Total 1,588,697 1,993,673 983,218 1,965,724 8,411 597,068 9,416 18,533 422,272 302,666 1,219 118,387 118,041,411 5,372,637 7,367,921 4,985,510 136,257 148,298 65,991,375 5,076,658 6,034,123 47,064,526 159,722 1,185,500 30,692,806 3,083,897 3,682,071 331 41,183,344 78,859,331 44,498,944 14,433,565 2,575,566 1,356,120 103,040,729 143,409,045 246,449,774 28,329,688 12,725,034 7,306,589 5,369,807 1,405,089 2,449,522 20,772,078 4,596,038 1,659,050 160,951 331 41,183,344 10,333,482 23,467,060 524,819 2,575,566 8,723 49,159 7,296 1,824 43,427 435,933 7,786,563 1,217,569 765,660 4,284,484 872,306 591,792 303,845 537,780 1,547,975 258,673 298,340 388,597 1,183 1,514 2,179,298 20,912,832 46,145,086 11,426,465 43,362,642 250,095,077 101,094,237 37,332,294 599,824 3,175,390 22,602,091 22,602,091 528,129 154,297,859 41,605,848 195,903,707 11,773,502 321,642,335 313,200,901 634,843,236 (10) 81,919 68,911 756 12,252 3,395,832 18,354 1,254,695 2,122,783 1,209,249 4,176,103 1,280,404 218,002 156,318 2,306 2,440,521 48,527 14,789 15,236 720,408 9,583,511 (11) 7,347 5,469 169 1,709 201,314 8,691 187,562 5,061 95,673 161,550 98,572 3,709 40,128 239 2,830 14,164 443 1,465 265,531 731,415 9,889,253 45,751,087 102,268,598 148,019,685 15,284,322 24,902,670 40,186,992 55,092 36,543,215 17,782,313 54,325,528 3,578,934 6,157,500 9,736,434 3,268,338 3,206,399 23,418 38,521 799,358 37,252,070 7,699,659 9,939,995 43,687,152 5,484,596 1,000,170 1,190,068 1,616,599 1,014,740 299,471 430 714,839 4,599,840 54,618,736 43,050,022 4,283,078 3,505,870 23,848 753,360 5,399,198 91,870,806 50,749,681 17,990,675 88,727,625 27,930,670 132,414,777 7,331,161 1,270,696 351,913 3,797,162 12,815,757 2,270,866 1,541,981 5,413,761 9,889,253 72,138 1,228,890 (1) Contingent and non-contingent exposures to central governments or central banks (2) Contingent and non-contingent exposures to regional governments or local authorities (3) Contingent and non-contingent exposures to administrative bodies and non-commercial undertakings (4) Contingent and non-contingent exposures to multilateral development banks (5) Contingent and non-contingent exposures to international organizations (6) Contingent and non-contingent exposures to banks and brokerage houses (7) Contingent and non-contingent corporate receivables (8) Contingent and non-contingent retail receivables (9) Contingent and non-contingent exposures secured by real estate property (10) Past due receivables (11) Receivables in regulatory high-risk categories (12) Investments in the nature of collective investment enterprise (13) Other Receivables. (14) Stock Investments. (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) Credit Guarantee Fund guaranteed by the undersecreteriat of treasury are included in the receivables from central governments. 262 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) (1) (**) (2) (4) (5) (6) (7) (8) (9) Current Period Consolidated Wholesale and Retail Trade 4,528,990 28,329,688 12,725,034 7,306,589 331 41,183,344 78,859,331 44,498,944 14,433,565 160,951 331 41,183,344 10,333,482 23,467,060 524,819 Other Total 90,334,510 154,510,707 144,923 144,923 1,183 1,514 2,179,298 20,912,832 46,145,086 11,426,465 43,362,642 250,095,077 101,094,237 37,332,294 1,588,697 1,993,673 983,218 1,965,724 8,411 597,068 9,416 18,533 422,272 302,666 1,219 118,387 118,041,411 5,372,637 7,367,921 4,985,510 136,257 148,298 65,991,375 5,076,658 6,034,123 47,064,526 159,722 1,185,500 30,692,806 3,083,897 3,682,071 5,369,807 1,405,089 2,449,522 20,772,078 4,596,038 1,659,050 7,786,563 1,217,569 765,660 4,284,484 872,306 591,792 303,845 537,780 1,547,975 258,673 298,340 388,597 13. Risk Profile by Sectors or Counterparties: Sectors/Counterparty (*) Agriculture Farming and Stockbreeding Forestry Fishing Industry Mining Production Construction Services Electricity, gas, and water Hotel, Food and Beverage Services Transportation and Telecommunication Financial Institutions Real Estate and Renting Services Self-Employment Services Education Services Health and Social Services 188,628 179,340 3,877 5,411 3,594,042 102,088 3,437,125 54,829 1,418,499 58,975,028 290,228 634,217 52,937,789 156,839 90,982 151,608 184,375 (3) 542 542 157,275 15 157,260 4,797 229,892 1,159 77 703 8,723 49,159 7,296 1,824 43,427 435,933 (1) Contingent and non-contingent exposures to central governments or central banks (2) Contingent and non-contingent exposures to regional governments or local authorities (3) Contingent and non-contingent exposures to administrative bodies and non-commercial undertakings (4) Contingent and non-contingent exposures to multilateral development banks (5) Contingent and non-contingent exposures to international organizations (6) Contingent and non-contingent exposures to banks and brokerage houses (7) Contingent and non-contingent corporate receivables (8) Contingent and non-contingent retail receivables (9) Contingent and non-contingent exposures secured by real estate property (10) Past due receivables (11) Receivables in regulatory high-risk categories (12) Investments in the nature of collective investment enterprise (13) Other Receivables. (14) Stock Investments. governments. (*) Risk amounts after the credit conversions and the effects of credit risk mitigation (**) Credit Guarantee Fund guaranteed by the undersecreteriat of treasury are included in the receivables from central (10) 81,919 68,911 756 12,252 3,395,832 18,354 1,254,695 2,122,783 1,209,249 4,176,103 1,280,404 218,002 156,318 2,306 2,440,521 48,527 14,789 15,236 720,408 9,583,511 (11) 7,347 5,469 169 1,709 201,314 8,691 187,562 5,061 95,673 161,550 98,572 3,709 40,128 239 2,830 14,164 443 1,465 265,531 731,415 Current Period Consolidated (12) (13) (14) TL FC Total 3,268,338 3,206,399 23,418 38,521 1,014,740 299,471 430 714,839 4,283,078 3,505,870 23,848 753,360 9,889,253 45,751,087 102,268,598 148,019,685 9,889,253 799,358 37,252,070 7,699,659 4,599,840 54,618,736 43,050,022 5,399,198 91,870,806 50,749,681 15,284,322 24,902,670 40,186,992 2,575,566 1,356,120 103,040,729 143,409,045 246,449,774 55,092 36,543,215 17,782,313 54,325,528 2,575,566 72,138 1,228,890 3,578,934 6,157,500 9,736,434 9,939,995 43,687,152 5,484,596 1,000,170 1,190,068 1,616,599 17,990,675 88,727,625 27,930,670 132,414,777 7,331,161 1,270,696 351,913 3,797,162 12,815,757 2,270,866 1,541,981 5,413,761 599,824 3,175,390 22,602,091 22,602,091 528,129 154,297,859 41,605,848 195,903,707 11,773,502 321,642,335 313,200,901 634,843,236 263 Financial Informationand Risk Managementİşbank Annual Report 2019 14. Analysis of maturity-bearing exposures according to remaining maturities: Current Period Remaining Maturities Risk Groups (1) 1 Month 1-3 Months 3-6 Months 6-12 Months Over 1 Year Total Contingent and Non-Contingent Receivables from Central Governments or Central Banks Contingent and Non-Contingent Receivables from Regional Governments or Domestic Governments Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises The multilateral development banks and non-contingent receivables 2,184,366 3,090,875 2,884,674 3,253,014 91,348,625 102,761,554 101 123 3,395 10,250 131,037 144,906 14,074 2,594 331 27,876 1,183 173,007 203,545 421,096 1,514 Contingent and Non-Contingent Receivables from Banks and Intermediaries 19,220,930 5,122,500 3,247,098 5,688,305 5,844,234 39,123,067 Contingent and Non-Contingent Corporate Receivables 17,999,269 16,918,095 19,066,613 29,555,001 168,297,495 251,836,473 Contingent and Non-Contingent Retail Receivables 18,141,193 1,357,406 2,146,880 6,289,339 46,016,969 73,951,787 Contingent and Non-Contingent Collateralized Receivables with Real Estate Mortgages Receivables are identified as High Risk by the Board Total 1,218,847 141,357 832,641 1,378,248 2,291,859 29,687,341 35,408,936 9,325 41,151 72,199 446,361 710,393 58,920,137 27,333,890 28,797,118 47,332,974 341,975,607 504,359,726 (1) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. 15. Information on Risk Classes: In the calculation of the amount subject to credit risk, determining the risk weights related to risk classes stated on the sixth article of “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, is based on the Fitch Ratings’ international rating. While receivables from resident banks in abroad which is assessed in the risk class of “Contingent and Non-Contingent Receivables from Banks and Brokerage Agencies” and receivables from central governments which is assessed in the risk class of “Contingent and Non-Contingent Receivables from Central Governments or Central Banks” will be subjected to risk weights with the scope of ratings; therefore domestic resident banks accepted as unrated, the risk weight is applied according to receivables from relevant banks, type of exchange and original maturity. If a receivable-specific rating is performed, risk weights to be applied on the receivable are determined by the relevant credit rating. The table related to mapping the ratings used in the calculations and credit quality grades, which is stated in the Annex of Regulation on Measurement and Evaluation of Capital Adequacy of Banks, is given below: Credit Quality Grades Risk Rating Risk Amounts according to Risk Weights 1 2 3 4 5 6 AAA via AA- A+ via A- BBB+ via BBB- BB+ via BB- B+ via B- CCC+ and lower Risk Weight Amount Before Credit Risk Mitigation(1) Amount After Credit Risk Mitigation 0% 20% 35% 50% 75% 100% 150% 250% Mitigation in Shareholders’ Equity 148,993,549 23,657,788 14,284,426 30,885,148 83,985,424 338,163,965 1,035,774 220,768 1,216,444 160,664,899 23,657,788 14,259,232 30,882,509 78,180,571 325,941,695 1,035,774 220,768 1,216,444 (1) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. 264 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 16. Miscellaneous Information According to Type of Counterparty of Major Sectors Significant Sectors/Counterparty Current Period Agricultural Farming and Raising Livestock Forestry Fishing Industry 1 1.1 1.2 1.3 2 2.1 Mining 2.2 2.3 3 4 Production Electricity, gas, and water Construction Services 4.1 Wholesale and Retail Trade Hotel, Food and Beverage Services Transportation and Telecommunication 4.2 4.3 4.4 Financial Institutions 4.5 Real Estate and Renting Services 4.6 Self-Employment Services 4.7 Education Services 4.8 Health and Social Services 5 6 Other Total Loans Depreciated (TFRS 9) Provisions Significant Increase in Credit Risk (Stage 2) Non-Performing (Stage 3) Expected Credit Loss (TFRS 9) 330,928 322,555 5,029 3,344 18,542,999 169,513 6,854,707 11,518,779 5,186,550 11,395,201 2,813,078 270,878 229,903 5,128 35,847 6,686,903 101,825 3,335,129 3,249,949 3,362,137 8,319,278 3,447,118 192,097 175,660 3,906 12,531 5,298,244 90,853 2,548,316 2,659,075 2,617,679 5,399,390 2,566,135 1,881,500 428,255 307,592 2,982,967 16,494 2,007,420 410,285 117,148 1,166,309 5,062,681 40,518,359 476,799 11,775 3,689,345 127,171 51,684 87,131 2,463,534 21,102,730 812,541 10,664 1,349,859 103,406 55,086 194,107 1,888,091 15,395,501 17. Information on Value Adjustments and Change in Credit Provisions Beginning Balance Provisions Reversal of Provisions Other Value Adjustments Ending Balance Stage 3 Provisions Stage 1 and Stage 2 Provisions 7,060,841 5,170,153 6,697,581 5,121,376 (2,466,713) (4,477,690) 18. Exposures Subject To Countercyclical Capital Buffer Explanations about exposures subject to consolidated private sector receivables: Country Turkey TRNC Germany England Russia USA Cayman Island Malta Georgia Kosovo Other RWA Calculations for Private Sector Loans in Banking Book RWA calculations for Trading Book 997,316 264 1,498 325,185,134 2,383,346 1,523,062 1,253,882 893,664 828,478 797,356 681,165 523,362 494,932 2,491,917 11,291,709 5,813,839 Total 326,182,450 2,383,346 1,523,326 1,253,882 893,664 829,976 797,356 681,165 523,362 494,932 2,491,917 265 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) III. Explanations on Currency Risk Foreign currency position risk for the Group is a result of the difference between the Group’s assets denominated in and indexed to foreign currencies and liabilities denominated in foreign currencies. Furthermore, parity fluctuations of different foreign currencies are another element of the currency risk. The currency risk for the Parent Bank is managed by the internal currency risk limits which are established as a part of the Parent Bank’s risk policies. The Assets and Liabilities Committee and the Assets and Liabilities Management Unit meet regularly to take the necessary decisions for hedging exchange rate and parity risks, within framework of the determined by the “Net Foreign Currency Overall Position/Shareholders’ Equity” standard ratio, which is a part of the legal requirement and the internal currency risk limits specified by the Board of Directors. Foreign exchange risk management decisions are strictly applied. In measuring currency risk, which the Group is exposed to, both the Standard Method and the Value at Risk Model and Expected Shortfall (VAR) are used as applied in the statutory reporting. Measurements made for the Parent Bank within the scope of the Standard Method are carried out on a monthly basis and form the basis of determining the capital requirement for hedging currency risk. Risk measurements made within the context of the VAR are made on a daily basis using the historical and Monte Carlo simulation methods. Furthermore, scenario analyses are conducted to support the calculations made within the VAR context. The results of the measurements made on currency risk are reported to the Key Management and the risks are closely monitored by taking into account the market and the economic conditions. The Parent Bank’s foreign currency purchase rates at the date of balance sheet and for the last five working days of the period announced by the Parent Bank in TL are as follows: Date December 31, 2019 December 30, 2019 December 27, 2019 December 26, 2019 December 25, 2019 December 24, 2019 USD 5.8900 5.8800 5.8879 5.8675 5.8637 5.8899 The Parent Bank’s last 30-days arithmetical average foreign currency purchase rates: USD: 5.7882 TL EURO: 6.4339 TL Sensitivity to currency risk: EUR 6.6100 6.5908 6.5721 6.5129 6.5029 6.5319 The Group’s sensitivity to any potential change in foreign currency rates has been analyzed. Within this framework, 10% change is anticipated in USD, EUR, RUB and GEL currencies and the possible impact of the related change is presented below. 10% is the ratio that is used in the internal reporting of the Parent Bank. % Change in Foreign Currency USD EUR RUB GEL 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease (1) Indicates the values before tax. Effects on Profit/Loss (1) Current Period Priod Period (74.040) 74.040 249.693 (249.693) 61.609 (61.609) 35.746 (35.746) (94.827) 94.827 (85.804) 85.804 31.292 (31.292) 15.791 (15.791) 266 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Information on currency risk: Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey (1) Banks Financial Assets at Fair Value through Profit/Loss (2) Money Market Placements Financial Assets at Fair Value through Other Comprehensive Income Loans(2) (3) Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Financial Assets measured at Amortized Cost Derivative Financial Assets Held for Risk Management Tangible Assets (2) Intangible Assets (2) Other Assets (2) Total Assets Liabilities Bank Deposits Foreign Currency Deposits (4) Money Market Funds Funds Provided from Other Financial Inst, Marketable Securities Issued (5) Miscellaneous Payables Derivative Financial Liabilities Held for Risk Management Other Liabilities (2) (6) Total Liabilities Net On Balance Sheet Position Net Off Balance Sheet Position Derivative Financial Assets (7) Derivative Financial Liabilities (7) Non-Cash Loans Prior Period Total Assets Total Liabilities Net Balance Sheet Position Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities Non-Cash Loans EUR USD Other FC Total 20,257,076 19,888,728 7,296,930 649,917 8,613,563 4,459,378 8,667,162 2,654,864 139,039 120,577 48,812,966 18,565,357 5,248,334 120,577 3,373,512 77,107,727 16,372,634 76,752,801 3,932 19,750,078 2,227,799 156,088,327 1,377,164 1,674,079 248,636 3,299,879 100,960 67,884 2,775 42,931 67,884 146,666 1,352,775 4,283,046 406,271 6,042,092 111,516,061 132,114,888 14,511,211 258,142,160 1,749,760 614,262 1,207,026 3,571,048 65,746,068 86,859,552 17,635,189 170,240,809 470,364 28,362,063 538,015 1,273,078 39,187,743 43,210,364 1,399,302 16,545 15,136 63,098 115,166 1,743,442 67,564,942 43,273,462 2,052,483 16,545 1,817,224 3,405,431 360,973 5,583,628 98,683,494 175,966,277 19,396,588 294,046,359 12,832,567 (43,851,389) (4,885,377) (35,904,199) (10,674,646) 45,099,931 5,583,108 40,008,393 14,762,806 63,697,449 6,881,289 85,341,544 25,437,452 28,650,106 18,597,518 32,135,021 1,298,181 3,413,073 45,333,151 64,198,200 92,229,825 132,029,494 10,558,681 234,818,000 81,179,000 165,992,345 12,576,254 259,747,599 11,050,825 (33,962,851) (2,017,573) (24,929,599) (10,216,147) 32,814,562 3,051,383 25,649,798 13,386,191 57,968,880 23,602,338 25,868,761 25,154,318 31,457,246 4,670,568 1,619,185 3,250,030 76,025,639 50,375,841 60,576,037 (1) Precious metals accounts amounting TL 8,271,399 are included. (2) In accordance with the principles of the “Regulation on the Calculation and Implementation of Foreign Currency Net General Position/Equity Standard Ratio by Banks on Consolidated and Non- Consolidated Basis”, Derivative Financial Instruments Foreign Currency Income Accruals (TL 1,849,166), Operating Lease Development Costs (TL 5,714), Deferred Tax Asset (TL 809,097), Prepaid Expenses (TL 131,737), expected credit loss for stage 1 and stage 2 ((TL 3,302,667)), Intangible Assets (TL 92,651) Assets Held for Sale and Related to Discontinued Operations(Net)(TL 11,691) in assets and Derivative Financial Instruments Foreign Currency Expense Accruals (TL 624,222), Shareholders’ Equity ((TL 244,444)) in liabilities and expected credit loss for stage 1 and stage 2 for non-cash loans (TL 91,867) are not taken into consideration in the currency risk measurement. (3) Includes foreign currency indexed loans, which are followed under TL account. Of the total amount of TL 3,037,134 of the aforementioned loans; TL 1,051,162 is USD indexed, TL 1,979,562 is EUR indexed, TL 1,177 is CHF indexed, TL 5,132 is GBP indexed and TL 101 is JPY indexed. (4) The item includes TL 10,432,383 precious metals deposit accounts. (5) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (6) The borrower funds are presented in the “Other Liabilities” according to their type of currency. (7) The derivative transactions in the context of forward foreign currency options and foreign currency forwards definitions included in the Communiqué above are taken into consideration. 267 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) IV. Explanations on Interest Rate Risk “Interest Rate Risk” is defined as the decrease that can arise in the value of the interest sensitive assets, liabilities and off-balance sheet operations a result of interest rate fluctuations. The method of average maturity gap according to the repricing dates is used for measuring the interest rate risk arising from the banking accounts, whereas the interest rate risk related to interest sensitive financial instruments followed under trading accounts is assessed within the scope of market risk. Potential effects of interest rate risk on the Parent Bank’s assets and liabilities, market developments, the general economic environment and expectations are regularly followed in meetings of the Asset-Liability Committee, where further measures to reduce risk are taken when necessary. The Parent Bank’s on and off-balance sheet interest sensitive accounts other than the assets and liabilities exposed to market risk are monitored and controlled by the limits on the ratio of structural interest rate risk to equity and tier 1 capital determined by the Board within the scope of asset-liability management risk policy. Moreover, scenario analyses formed in line with the average maturity gaps and the historical data and expectations are also used in the management of the related risk. Interest rate sensitivity: In this part, the sensitivity of the Bank’s assets and liabilities to the interest rates has been analyzed assuming that the yearend balance figures were the same throughout the year. Mentioned analysis shows how the FC and TL changes in interest rates by one point during the one-year period affect the Group’s income accounts and shareholders’ equity under the assumption maturity structure and balances are remain the same all year round at the end of the year. During the measurement of the Group’s interest rate sensitivity, the profit/loss on the asset and liability items that are evaluated with market value are determined by adding to/deducting from the difference between the expectancy value of the portfolio after one year in case there is no change in interest rates and the value of the portfolio one year later, which is measured after the interest shock, the interest income to be additionally earned/to be deprived of during the one year period due to the renewal or repricing of the related portfolio at the interest rates formed after the interest shock. On the other hand, in the profit/loss calculation of assets and liabilities that are not evaluated by the current market prices, it is assumed that assets and liabilities with fixed interest rates will be renewed at maturity date and the assets and liabilities having variable interest rates will be renewed at the end of repricing period with the market interest rates generated after the interest shock. Within this context, ceteris paribus, the possible changes that may occur in the Bank’s profit and shareholders’ equity in case of 100 base point increase/decrease in TL and FC interest rates on the reporting day are given below: % Change in the Interest Rate (1) Effect On Profit/Loss Effect on Equity (2) TL 100 bp increase 100 bp decrease FC (3) 100 bp increase 100 bp decrease Current Period Prior Period Current Period 144,911 (119,204) (89,635) 121,637 (1,095,881) 1,217,926 Prior Period (888,207) 991,863 (1) Changes in interest rates is calculated assuming that the expectations reflected in inflation. The effects on the profit/loss and shareholders’ equity are stated with their before tax values. (2) The effect on the shareholders’ equity is arising from the change of the fair value of securities followed under Financial Assets at Fair Value through other comprehensive income. (3) The negative shock imposed on FC interest rates remained below the aforementioned rates in some maturity segments due to LIBOR rates being in low levels. 268 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a. Interest rate sensitivity of assets, liabilities and off balance sheet items (Based on time remaining to repricing date): Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss (1) Money Market Placements Up to 1 Month 805,105 9,315,210 1,498,098 896,131 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-Interest Bearing Total 3,204,784 981,538 53,271,023 7,052,499 54,076,128 20,554,031 1,400,213 283,065 4,067,814 685,111 225,553 2,035,973 252 9,912,762 1,179,448 Financial Assets Available for Sale 13,801,531 7,406,549 10,366,064 13,600,354 14,021,049 1,818,173 61,013,720 Loans (2) Held to Maturity Investments Other Assets (3) Total Assets Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Marketable Securities Issued (4) Funds Provided from Other Financial Institutions Other Liabilities (5) (6) Total Liabilities Balance Sheet Long Position Balance Sheet Short Position Off Balance Sheet Long Position Off Balance Sheet Short Position 64,574,186 32,818,912 98,646,908 115,336,356 25,383,588 371,285 337,131,235 6,268,046 4,027,046 6,567,325 9,909,039 21,162 40,508 9,185,155 200,029 1,709,736 43,256,468 33,639,301 47,545,213 101,185,353 51,702,010 124,012,123 139,007,005 41,339,926 107,805,421 565,051,838 3,627,539 769,691 686,099 163,975,987 30,937,128 13,323,389 290,840 2,790,855 530,999 5,905,168 346,641 85,512,036 296,886,036 3,012,612 2,310,390 2,841,314 7,648 10,625 10,075 9,273 2,056 36,953,650 39,285,994 3,030,335 5,104,814 9,204,134 34,278,653 3,239,839 9,736,197 29,306,716 22,553,419 741,442 848,129 963,840 5,658,224 429,206 5,052,424 882,373 89,103,581 92,968,571 186,245,481 66,984,751 46,750,229 43,449,834 9,521,277 212,100,266 565,051,838 (85,060,128) (15,282,741) 2,348,491 8,977,261 77,261,894 95,557,171 31,818,649 204,637,714 (3,043,647) (169,384) (6,281,134) (104,294,845) (204,637,714) 11,325,752 (9,494,165) 54,668,754 72,306,980 Total Position (82,711,637) (6,305,480) 74,218,247 95,387,787 25,537,515 (104,294,845) 1,831,587 (1) Includes Derivative financial assets. (2) Leasing and factoring receivables are included. (3) Stage 1 and Stage 2 expected credit loss for performing loans are included in “non-interest bearing” column (4) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (5) Shareholders’ equity is included in “non-interest bearing” column. (6) The borrower funds are presented in “Up to 1 month” column in other liabilities. 269 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss (1) Money Market Placements Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 20,424,342 7,805,173 1,654,760 1,911,774 20,497,900 40,922,242 3,082,370 14,454,077 1,958,464 538,934 1,481,836 5,216,932 726,809 29,197 421,842 9,835,080 174,121 45,114 758,169 Financial Assets Available for Sale 10,150,841 6,484,009 8,558,347 9,820,260 12,109,972 726,273 47,849,702 Loans (2) Investments Held to Maturity Other Assets (3) Total Assets Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Marketable Securities Issued (4) Funds Provided from Other Financial Institutions Other Liabilities (5) (6) Total Liabilities Balance Sheet Long Position Balance Sheet Short Position Off Balance Sheet Long Position Off Balance Sheet Short Position 65,289,619 35,889,261 91,423,375 98,847,005 22,090,913 30,167 313,570,340 3,641,791 4,239,609 4,775,152 10,344,451 6,718,038 3,534,075 29,013,507 12,865 100,989 27,431 39,123,346 43,504,240 114,048,773 50,472,004 117,600,982 116,139,543 37,764,157 63,881,898 499,907,357 2,382,200 1,271,190 717,521 128,697,570 36,390,167 14,969,154 524,500 2,202,323 652,518 5,547,929 171,055 61,003,204 243,433,473 9,671,115 1,342,100 3,451,365 723,891 2,416 1,585,581 7,411 4,670 29,242,964 30,599,561 11,980,587 5,333,079 6,357,959 29,030,259 9,178,184 12,411,048 31,017,155 19,481,875 6,426,754 3,245,175 1,633,353 1,213,467 1,440,413 519,879 77,605,842 82,412,954 159,588,751 75,951,365 44,559,914 38,708,385 12,594,414 168,504,528 499,907,357 (45,539,978) (25,479,361) 2,288,187 3,831,055 73,041,068 77,431,158 25,169,743 175,641,969 (104,622,630) (175,641,969) 3,253,073 (3,668,697) (3,647,895) 53,350,846 72,582,007 9,372,315 (7,316,592) 2,055,723 Total Position (43,251,791) (21,648,306) 69,372,371 80,684,231 21,521,848 (104,622,630) (1) Includes Derivative financial assets. (2) Leasing and factoring receivables are included. (3) Stage 1 and Stage 2 expected credit loss for performing loans are included in “non-interest bearing” column (4) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (5) Shareholders’ equity is included in “non-interest bearing” column. (6) The borrower funds are presented in “Up to 1 month” column in other liabilities. 270 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Average interest rates applied to monetary financial instruments: Current Period Assets Cash (Cash in Vault. Foreign Currency Cash. Money in Transit. Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss Money Market Placements Financial Assets Available for Sale Loans (1) Investments Held to Maturity Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (2) Funds Funds Provided from Other Financial Institutions (1) Leasing and factoring receivables are included (2) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. Prior Period Assets Cash (Cash in Vault. Foreign Currency Cash. Money in Transit. Cheques Purchased) and Balances with the Central Bank of Turkey Banks Financial Assets at Fair Value through Profit/Loss Money Market Placements Financial Assets Available for Sale Loans (1) Held to Maturity Investments Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (2) Funds Funds Provided from Other Financial Institutions (1) Leasing and factoring receivables are included (2) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. JPY % 0.04 JPY % 4.50 0.01 EUR % 0.34 1.56 2.40 4.64 1.92 0.30 0.19 0.03 0.10 1.57 EUR % 2.12 3.93 3.00 4.78 0.44 0.54 0.85 0.61 0.75 1.39 USD % 1.03 9.42 5.12 7.01 4.43 2.58 1.17 2.46 5.87 1.25 3.69 USD % 2.00 1.95 6.28 4.94 7.60 4.18 2.72 2.44 4.01 5.83 1.50 4.16 TL % 9.84 9.48 12.44 14.12 16.31 14.26 11.21 7.99 10.18 14.22 7.50 12.25 TL % 13.00 22.91 17.46 23.52 17.66 20.18 15.67 23.71 17.17 23.88 22.28 15.00 17.70 271 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) V. Explanations on Equity Shares Risk Arising from Banking Book a. Related to the equity investments account practices about the associates and subsidiaries can be seen in the Section Three Note III.2. b. Balance sheet value of equity investment, fair value and for publicly traded, if the market value is different from the fair value comparison to the market price: Share Certificate Investments Quoted Stock Investment Group A Subsidiaries Financial Subsidiaries Non-Financial Subsidiaries (1) Non-Quoted Associate and Subsidiaries Financial Subsidiaries (2) Non-Financial Subsidiaries Subsidiaries Financial Subsidiaries Non-Financial Subsidiaries (1) Türkiye Şişe ve Cam Fabrikaları A.Ş. Comparison Book Value Fair Value Market Value 11,999,250 9,881,738 220,768 35,070 1,048,160 (2) Accounted under the equity method in the consolidated financial statements according to TAS 28 and 1st clause of Article 5 of the “Communiqué on the Preparation of Consolidated Financial Statements”. c. Information on revaluation surpluses and unrealised gains/losses on equity securities and results included in core and supplementary capitals: Portfolio Private Equity Investments Shares Traded on a Stock Exchange Other Stocks Total Realised Gains/losses During the period Total Including into Tier I Capital (1) Total Including into Tier I Capital Total Revaluation Increases Unrealized Gains and Losses 8,540,615 57,451 8,598,066 8,540,615 57,451 8,598,066 (1) Represents the amounts reflected to equity according to the equity method. d. Capital requirement as per equity shares: Portfolio Private Equity Investments Share Traded on a Stock Exchange Other Stocks Total Carrying Value Total RWA 9,881,738 1,303,998 11,185,736 9,881,738 1,635,150 11,516,888 Minimum Capital Requirement 790,539 130,812 921,351 VI. Explanations on Liquidity Risk and Consolidated Liquidity Coverage Ratio Liquidity risk may occur as a result of funding long-term assets with short-term liabilities. The Groups’ liquidity is managed by the Asset-Liability Management Committee in accordance with the business strategies, legal requirements, current market conditions and expectations regarding the economic and financial conjuncture. The Bank’s principal source of funding is deposits. Although the average maturity of deposits is shorter than that of assets as a result of the market conditions, the Bank’s wide network of branches and stable core deposit base are its most important safeguards of funding. Additionally, the Bank borrows medium and long-term funds from institutions abroad. Concentration limits are generally used in deposit and non-deposit borrowings in order to prevent adverse effects of concentrations in the liquidity risk profile of the Bank. In order to meet the liquidity requirements that may arise from market fluctuations, considerable attention is paid to the need to preserve liquidity and efforts in this respect are supported by projections of Turkish Lira and Foreign Currency (FC) cash flows. The term structure of TL and FC deposits, their costs and amounts are monitored on a daily basis. During these studies historical events and future expectations are taken into account as well, based upon cash flow projections, prices are differentiated for different maturities and measures are taken accordingly to meet liquidity requirements. Moreover, potential alternative sources of liquidity are determined to be used in case of extraordinary circumstances. The liquidity risk exposure of the Group has to be within the risk capacity limits which are prescribed by the legislation and the Group’s risk appetite defined in its business strategy. It is essential for the Group to have an adequate level of unencumbered liquid asset stock which can be sold or pledged, in case a large amount of reduction in liquidity sources occurs. The level of liquid asset buffer is determined in accordance with the liquidity risk tolerance which is set by the Board of Directors. Asset-Liability Management Committee is responsible for monitoring the liquidity position, determining appropriate sources of funds and deciding the maturity structure in accordance with the limits which are set by the Board of Directors. The Treasury Division is responsible for monitoring the liquidity risk, in accordance with the Asset and Liability Risk Policy limits, objectives set out in the business plan and the decisions taken at the meetings of Asset-Liability Management Committee. The Treasury Division is also responsible for making liquidity projections and taking necessary precautions to reduce liquidity risk, by using the results of stress testing and scenario analysis. Within this scope, Treasury Division is monitoring the Turkish Lira (TL) and foreign currency (FC) liquidity position instantly and prospectively based on the information provided from the branches, business units and IT infrastructure of the Bank. The assessment of long-term borrowing opportunities is carried out regularly in order to balance the cash inflows and outflows and to mitigate the liquidity risk. The Bank creates liquidity through repurchase agreements and secured borrowings based on the high quality liquid asset portfolio, through securitization and other structured finance products which are created from the asset pools like credit card receivables and retail loans. 272 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The Bank applies liquidity stress tests to measure liquidity risk. These liquidity stress tests reveal the Bank’s liquid assets’ ability to cover cash outflows within one-month-horizon. Liquidity adequacy limits for TL and FC are determined by Board of Directors, based on the liquidity requirements and risk tolerance of the Bank. The liquidity risk is measured by the Risk Management Division and results are reported to the related executive functions, senior management and Board of Directors. It is essential for the Bank to monitor the liquidity position and funding strategy continuously. In case of a liquidity crisis that may arise from unfavorable market conditions, extraordinary macroeconomic situations and other reasons which are beyond the control of the Bank. “Emergency Action and Funding Plan” is expected to be commissioned. In that case, aforementioned committees have to report the precautions taken and their results to the Board of Directors through Audit Committee. The Group’s Foreign Currency (FC) and total (TL+FC) liquidity coverage ratio (LCR) averaged for the last three months are given below. October 31, 2019 November 30, 2019 December 31, 2019 October 31, 2018 November 30, 2018 December 31, 2018 Current Period TL+FC 168.96 178.92 200.82 Prior Period TL+FC 112.61 119.23 138.11 FC 275.51 328.70 338.46 FC 202.41 168.26 196.69 The Bank’s Foreign Currency (FC) and total (TL+FC) liquidity coverage ratio (LCR) averaged for the last three months are given below. Liquidity Coverage Ratio: Current Period High Quality Liquid Assets High Quality Liquid Assets Cash Outflows Retail and Small Business Customers, of which; Stable deposits Less stable deposits Unsecured wholesale funding of which; Operational deposits Non-operational deposits Other unsecured funding Secured funding Other cash outflows, of which; Derivatives cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions Obligations related to structured financial products Commitments related to debts to financial markets and other off-balance sheet obligations Other revocable off-balance sheet commitments and contractual obligations Other irrevocable or conditionally revocable off-balance sheet obligations Total Cash Outflows Cash Inflows Secured lending Unsecured lending Other cash inflows Total Cash Inflows Total HQLA Stock Total Net Cash Outflows Liquidity Coverage Ratio (%) Total Unweighted Value (1) Total Weighted Value (1) TL+FC FC TL+FC FC 121,555,112 56,371,580 196,763,195 36,666,295 160,096,900 92,163,597 564,159 67,798,730 23,800,708 111,492,296 111,492,296 44,303,837 4,105 39,938,703 4,361,029 53,711,962 26,539,661 17,843,005 1,833,315 16,009,690 49,709,052 141,040 33,524,004 16,044,008 999,514 53,711,962 11,149,230 11,149,230 22,650,364 1,026 19,190,843 3,458,495 998,967 26,539,661 50,211,076 23,038,775 50,211,076 23,038,775 3,500,886 26,430,681 143,964,846 3,500,886 21,401,268 59,934,013 3,500,886 1,321,534 15,073,463 3,500,886 1,070,063 7,397,989 138,658,530 69,806,274 279,825 33,236,614 47,900,864 81,417,303 117,115 18,385,134 40,641,242 59,143,491 23,580 23,988,876 47,900,864 71,913,320 121,555,112 66,745,210 182.90 23,152 15,260,319 40,641,242 55,924,713 56,371,580 18,128,795 314.22 (1) The simple arithmetic average calculated for the last three months of the monthly simple arithmetic average. 273 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Total Unweighted Value (1) Total Weighted Value (1) TL+FC FC TL+FC FC Prior Period High Quality Liquid Assets High Quality Liquid Assets Cash Outflows Retail and Small Business Customers, of which; 166,087,989 91,074,959 Stable deposits Less stable deposits Unsecured funding, of which; Operational deposits Non-operational deposits Other unsecured funding Secured funding Other cash outflows, of which; 33,152,428 132,935,561 75,676,075 596,816 51,214,303 23,864,956 91,074,959 36,019,232 6,673 31,951,711 4,060,848 51,213,599 28,457,076 74,296,715 35,953,603 14,951,177 1,657,621 13,293,556 43,368,686 149,204 25,914,483 17,304,999 136,465 51,213,599 9,107,496 9,107,496 19,108,193 1,668 15,483,266 3,623,259 118,455 28,457,076 Derivatives cash outflow and liquidity needs related to market valuation changes on derivative or other transactions Obligations related to structured financial products Commitments related to debts to financial markets and other off-balance sheet obligations 51,213,599 28,457,076 51,213,599 28,457,076 Other revocable off-balance sheet commitments and contractual obligations Other irrevocable or conditionally revocable off-balance sheet obligations 19,001,406 123,599,415 15,994,204 69,225,399 950,070 15,084,780 799,710 7,939,425 Total Cash Outflows Cash Inflows Secured lending Unsecured lending Other cash inflows Total Cash Inflows Total HQLA Stock Total Net Cash Outflows Liquidity Coverage Ratio (%) 94,019 28,612,275 46,434,755 75,141,049 79,949 12,751,754 38,162,961 50,994,664 125,704,777 65,530,355 18,883,792 46,434,755 65,318,547 74,296,715 60,386,230 123.32 9,325,314 38,162,961 47,488,275 35,953,603 19,234,603 189.12 (1) The simple arithmetic average calculated for the last three months of the weekly simple arithmetic average.. With respect to prior period’s consolidated liquidity coverage ratio averages, an increase in the foreign currency liquidity coverage ratio and in the total liquidity coverage ratio has been observed for the fourth quarter of 2019. The consolidated foreign currency liquidity coverage ratio and total liquidity coverage ratio have increased due to the increase in the stock of high quality liquid assets. On the other hand, total and consolidated foreign currency liquidity coverage ratios are currently far above the minimum level (respectively for 100% and 80% in 2019) pursuant to legal legislations. The Liquidity Coverage Ratio which has been introduced to ensure banks to preserve sufficient stock of high quality assets to meet their net cash outflows that may occur in the short term is calculated as per the Communiqué on “Measurement and Assessment of the Liquidity Coverage Ratio of Banks’. The ratio is directly affected by the level of unencumbered high quality assets which can be liquidated at any time and net cash inflows and outflows arising from the Group’s assets, liabilities and off-balance sheet transactions. The Group’s high quality liquid asset stock primarily consists of cash, the accounts held at CBRT and unencumbered government bonds which are issued by Turkish Treasury.The Bank’s principal source of funding is deposits. In terms of non-deposit borrowing, funds received from repurchase agreements, marketable securities issued and funds borrowed from financial institutions are among the most significant funding sources of the Bank. The main funding source of the Bank is deposits. Non-deposit borrowing items; Funds obtained from repo transactions, securities issued and borrowings from financial institutions are emerging as other significant sources of funds. In order to manage liquidity effectively, concentration of liquidity sources and usages should be avoided. Due to the strong and stable core deposit base of the Bank, deposits are received from a diversified customer portfolio. In addition, in order to provide diversification in liquidity sources and usages, liquidity concentration limits are used effectively. Total amount of funds borrowed from a single counterparty or a risk group is closely and instantaneously monitored, taking liquidity concentration limits into account. Cash flows of derivatives that will take place within 30 days are taken into account in calculation of liquidity coverage ratio. Cash outflows of derivatives that arise from margin obligations, are subsequently reflected to the results in accordance with the methodology calculated in the related legislation. Liquidity risk of the Bank, its foreign branches and subsidiaries that are to be consolidated are managed within the regulatory limits and in accordance with the Group strategies. For the purposes of effectiveness and sustainability of liquidity management, funding sources of Group company and funding diversification opportunities in terms of markets, instruments and tenor are evaluated and liquidity position of the group companies are monitored continuously by the Parent Bank. 274 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Presentation of assets and liabilities according to their remaining maturities: Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Unallocated (*) Total Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey 29,655,510 24,420,618 Banks 7,580,495 8,787,216 3,204,782 981,538 Financial Assets at Fair Value through Profit/ Loss (**) 2,024,849 1,636,644 1,475,442 4,153,694 565,020 57,113 Money Market Placements 896,131 283,065 252 54,076,128 20,554,031 9,912,762 1,179,448 Financial Assets at Fair Value Through Other Comprehensive Income 1,818,173 617,642 1,797,788 3,396,042 29,742,875 23,641,200 61,013,720 Loans (***) 14,992,557 33,519,831 24,280,397 78,102,038 131,086,586 33,945,521 21,204,305 337,131,235 Financial Assets Measured at Amortised Cost 963,739 1,298,501 1,865,077 23,697,368 5,814,616 33,639,301 6,925,313 5,811,084 67,391 104,374 412,784 34,224,267 47,545,213 62,996,897 76,652,905 32,407,366 88,603,015 185,504,633 63,458,450 55,428,572 565,051,838 Other Assets Total Assets Liabilities Bank Deposits Other Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (****) 531,001 3,627,537 769,691 686,099 290,840 85,512,035 163,974,896 30,936,853 13,317,743 2,797,868 346,641 4,118,426 4,802,576 28,194,861 23,383,699 11,807,418 3,012,612 7,648 10,075 2,940,384 2,378,367 9,705,462 34,123,617 5,520,924 Miscellaneous Payables 25,535,220 13,472,368 173,762 9,273 Other Liabilities Total Liabilities Liquidity Gap 3,056,725 3,641,806 1,620,756 1,200,483 169,435 82,429,040 92,968,571 114,634,981 194,788,029 40,689,653 53,123,996 61,541,721 17,844,418 82,429,040 565,051,838 (51,638,084) (118,135,124) (8,282,287) 35,479,019 123,962,912 45,614,032 (27,000,468) 95,371 850,326 Net Off Balance Sheet Position (1,314) 7,232 (369,404) 1,540,901 673,867 (1,208) Derivative Financial Assets Derivative Financial Liabilities 962,593 43,993,437 24,170,288 28,756,327 37,655,859 43,238,110 963,907 43,986,205 24,539,692 27,215,426 36,981,992 43,239,318 54,722,663 2,082,801 5,729,978 18,729,423 10,541,533 4,786,934 Non-cash Loans Prior Period Total Assets Total Liabilities Liquidity Gap 65,164,233 63,852,754 28,126,803 86,232,690 160,449,105 65,200,142 30,881,630 499,907,357 83,438,434 163,313,793 49,581,730 50,711,134 58,667,112 24,233,924 69,961,230 499,907,357 (18,274,201) (99,461,039) (21,454,927) 35,521,556 101,781,993 40,966,218 (39,079,600) Net Off Balance Sheet Position (138) (1,282,502) (2,210,477) 672,195 1,418,974 149,018 Derivative Financial Assets Derivative Financial Liabilities 507,307 46,493,448 22,399,307 22,090,753 34,751,903 32,545,126 507,445 47,775,950 24,609,784 21,418,558 33,332,929 32,396,108 Non-cash Loans 51,826,697 2,932,474 6,040,893 19,217,646 8,577,867 4,957,903 (1,252,930) 158,787,844 160,040,774 93,553,480 (1) Assets, such as Tangible Assets, Subsidiaries and Associates, Office Supply Inventory, Prepaid Expenses and Non-Performing Loans, which are required for banking operations and which cannot be converted into cash in short-term, other liabilities such as Provisions which are not considered as payables and Shareholders’ Equity, are shown in ‘Unallocated” column. (2) The balances include financial derivative assets. (3) Leasing and factoring receivables are included. (4) Stage 3 non-performing loans is included in “Unallocated” column. (5) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (6) The borrower funds are presented in “Up to 1 month” column in other liabilities. 275 5,905,168 296,886,036 72,306,980 3,030,335 54,668,754 39,285,994 1,850,074 178,776,614 176,926,540 96,593,332 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) In compliance with the “TFRS 7”, the following table indicates the maturities of the Group’s major financial liabilities which are not qualified as derivatives. The following tables have been prepared by referencing the earliest dates of payments without discounting the liabilities. The interest to be paid to the related liabilities is included in the following table. Adjustments column shows the items that may cause possible cash flows in the following periods. The values of the related liabilities registered in balance sheet do not include these amounts. Current Period Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (Net) (1) Leasing Liabilities (2) Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total 86,043,036 167,938,057 31,960,063 14,213,840 3,198,763 399,399 303,753,158 961,954 302,791,204 4,100,506 5,040,886 29,521,491 26,823,978 12,998,370 78,485,231 6,178,251 72,306,980 2,976,782 45,681 10,149 3,032,612 2,277 3,030,335 2,904,052 2,544,694 12,382,030 40,345,165 7,535,365 65,711,306 11,042,552 54.668.754 28,410 56,032 235,503 737,217 436,483 1,493,645 536,761 956,884 (1) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (2) TFRS 16 “Leasing” standard has started to be applied as of January 1, 2019 and no correction was made in prior period. Prior Period Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (Net) (1) Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) “Balance Sheet Value Total 61,655,721 131,637,381 38,550,442 16,140,289 2,822,524 208,792 251,015,149 2,033,747 248,981,402 2,346,803 5,172,123 27,194,226 29,741,005 15,156,801 79,610,958 7,028,951 72,582,007 9,677,137 750,531 1,631,115 12,058,783 78,196 11,980,587 3,506,340 4,474,676 8,990,052 35,821,205 12,141,809 64,934,082 11,583,236 53,350,846 (1) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. The following table shows the remaining maturities of non-cash loans of the Group. Demand 9,463,410 44,430,047 341,439 487,767 Up to 1 Month 655,786 900,365 1-3 Months 3-12 Months 1-5 Years 744,157 4,321,570 1,131,911 5 Years and Over Total 16,316,834 2,911,806 11,396,726 8,847,838 3,060,557 71,547,339 517,170 2,074,015 2,996,168 66,539 45,001 6,040,332 9,480 14,959 495,245 1,681,376 2,688,827 54,722,663 2,082,801 5,729,978 18,729,423 10,541,533 4,786,934 96,593,332 Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Total 5,125,787 1,361,001 2,534,884 6,956,546 225,678 3,049 16,206,945 45,964,678 1,265,242 2,741,961 10,016,265 7,796,371 3,573,393 71,357,910 424,260 311,972 306,231 597,907 166,141 2,244,117 718 50,067 505,751 3,622,582 1,381,461 2,366,043 51,826,697 2,932,474 6,040,893 19,217,646 8,577,867 4,957,903 93,553,480 Current Period Letters of Credit Letters of Guarantee Acceptances Other Total Prior Period Letters of Credit Letters of Guarantee Acceptances Other Total 276 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The following table shows the remaining maturities of derivative financial assets and liabilities of the Group. Current Period Forwards Contracts- Buy Forwards Contracts- Sell Swaps Contracts -Buy Swaps Contracts -Sell Futures Transactions-Buy Futures Transactions-Sell Options-Call Options-Put Other Total Prior Period Forwards Contracts - Buy Forwards Contracts - Sell Swaps Contracts - Buy Swaps Contracts - Sell Futures Transactions - Buy Futures Transactions - Sell Options - Call Options - Put Other Total Demand 700,344 801,705 Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over 2,114,708 2,222,144 7,510,330 2,490,506 2,123,121 2,219,209 7,419,249 2,520,639 Total 15,038,032 15,083,923 38,522,335 20,536,627 18,577,266 33,237,912 41,890,595 152,764,735 38,530,294 20,832,261 17,232,242 32,533,918 41,891,807 151,020,522 540 540 60,852 56,670 230 220 61,622 57,430 2,866,619 1,099,096 1,946,607 1,847,990 1,347,513 9,107,825 2,784,795 1,086,451 1,841,813 1,847,990 1,347,513 8,908,562 424,451 1,036,690 596,670 1,444,246 158,446 3,660,503 1,926,500 87,979,642 48,709,980 55,971,753 74,637,851 86,477,428 355,703,154 Demand 450,289 Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over 3,059,733 1,617,530 4,306,690 3,208,598 474,976 3,005,900 1,600,669 4,281,425 3,198,569 Total 12,642,840 12,561,539 39,863,693 18,981,205 11,751,702 30,236,318 32,545,128 133,378,046 40,264,858 19,860,233 11,104,178 28,827,375 32,396,106 132,452,750 14,586 14,567 120,403 88,353 120,912 120,760 3,158,588 1,335,242 4,727,006 1,219,405 3,091,956 1,458,321 4,727,750 1,219,405 89,487 1,795,517 1,947,135 2,368,888 175,162 255,901 223,680 10,440,241 10,497,432 6,376,189 1,014,752 94,269,398 47,009,091 43,509,311 68,084,832 64,941,234 318,828,618 VII. Explanations on Leverage Ratio a. Explanations on Differences Between Current and Prior Years’ Leverage Ratios The Bank’s consolidated leverage ratio is calculated in accordance with the principles of the “Regulation on Measurement and Evaluation of Banks’ Leverage Level”. The Bank’s consolidated Leverage ratio is 8.16% (December 31, 2018: 7.42%). According to Regulation the minimum leverage ratio is 3%. The changes in the leverage ratio are mostly due to the increase in common equity. b. Summary Comparison Table Related to Total Amount of Asset and Risk Situated in The Consolidated Financial Statements Prepared in Accordance with TAS Summary Comparison Table Related to Total Amount of Asset and Risk Situated in The Consolidated Financial Statements Prepared in Accordance with TAS (1) The difference between Total Amount of Asset in the Consolidated Financial Statements Prepared in Accordance with TAS and the Communiqué on Preparation of Consolidated Financial Statements of Banks (1) The difference between total amount and total risk amount of derivative financial instruments with credit derivative in the Communiqué on Preparation of Consolidated Financial Statements of Banks (2) The difference between total amount and total risk amount of risk investment securities or commodity collateral financing transactions in the Communiqué on Preparation of Consolidated Financial Statements of Banks (2) The difference between total amount and total risk amount of off-balance sheet transactions in the Communiqué on Preparation of Consolidated Financial Statements of Banks (2) The other differences between amount of assets and risk in the Communiqué on Preparation of Consolidated Financial Statements of Banks (2) Total Exposures (2) Current Period Prior Period 522,510,821 497,788,697 (1,965,094) (2,118,660) (2,466,092) (2,331,604) 1,565,916 7,911,768 (593,265) 721,302,308 11,151,168 9,473,668 1,278,881 682,101,137 (1) As per Article No 5 of Clause No 6 in the Communiqué on Preparation of Consolidated Financial Statements of Banks, the amounts are represented in the table as of June 30, 2019 since the consolidated financial statements dated December 31, 2019 are not published as per legal regulations as of report date. (2) The amounts in the table represents the average of three months. 277 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c. Explanations on consolidated leverage ratio On-Balance Sheet Items On-balance sheet items (excluding derivatives and SFTs. but including collateral) Asset amounts deducted in determining Basel III Tier 1 capital The total amount of risk on-balance sheet exposures Derivative exposures and credit derivatives Replacement cost associated with derivative financial instruments and credit derivatives The potential amount of credit risk with derivative financial instruments and credit derivatives The total amount of risk on derivative financial instruments with credit derivatives Investment securities or commodity collateral financing transactions Current Period (1) Prior Period (1) 545,377,636 (1,183,412) 544,194,224 4,902,196 2,466,092 7,368,288 502,918,430 (922,979) 501,995,451 7,010,670 2,331,604 9,342,274 The amount of risk investment securities or commodity collateral financing transactions (Excluding on balance sheet items) 2,938,119 5,648,006 Risk amount of exchange brokerage operations The total amount of risk investment securities or commodity collateral financial transactions 2,938,119 5,648,006 Off -Balance Sheet Items Gross notional amount for off-balance sheet items Adjustments for conversion to credit equivalent amounts The total amount of risk for off-balance sheet items Capital and Total Exposures Tier 1 Capital Total Exposures Leverage Ratio Leverage Ratio 174,219,331 (7,417,654) 166,801,677 58,827,327 721,302,308 174,222,497 (9,107,091) 165,115,406 50,613,463 682,101,137 8.16 7.42 (1) Three-month average of the amounts in Leverage Ratio table. VIII. Explanations on Other Price Risk The Group is exposed to stock price risk due to its investments in companies being traded on the BIST. The Group’s sensitivity to stock price risk at the reporting date was measured with an analysis. In the analysis, with the assumption of all other variables were held constant and the data (stock prices) used in the valuation method are 10% higher or lower. According to this assumption in shares traded in Borsa Istanbul and followed under Financial Assets at Fair Value through Profit or Loss account, expected to have an effect amounting to TL 15,605 increase/decrease. IX. Explanations on Presentation of Assets and Liabilities at Fair Value 1. Information on fair values of financial assets and liabilities Financial Assets Money Market Placements Banks Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets Measured at Amortized Cost Loans (1) Financial Liabilities Banks Deposits Other Deposits Funds Provided from Other Financial Institutions Marketable Securities Issued (2) Miscellaneous Payables (1) Factoring and Leasing Receivables are included. Book Value Fair Value Current Period Prior Period Current Period Prior Period 1,179,448 20,554,031 61,013,720 33,639,301 316,028,505 5,905,168 296,886,036 72,306,980 54,668,754 39,344,944 758,169 14,454,077 47,849,702 29,013,507 301,078,302 5,547,929 243,433,473 72,582,007 53,350,846 30,632,090 1,179,448 20,536,034 61,013,720 33,757,348 316,422,287 5,832,104 296,379,917 70,338,442 54,785,418 39,344,944 758,169 14,472,748 47,849,702 26,919,760 286,988,954 5,458,683 243,463,550 70,840,615 49,945,534 30,632,090 (2) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. Strike prices, quotations, market prices determined by the CBRT and published in the Official Gazette and the values calculated by using alternative models, are taken as the basis in the fair value determination of financial assets at fair value through other comprehensive income. When the prices of the financial assets measured at amortized cost cannot be measured in an active market, fair values are not deemed to be reliably determined and amortized cost, calculated by the internal rate of return method, are taken into account as the fair values. Fair values of banks, loans granted, deposits and funds borrowed from other financial institutions are calculated by discounting the amounts in each maturity bracket formed according to repricing periods, using the rate corresponding to relevant maturity bracket in the discount curves based on current market conditions. 278 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) 2. Information on fair value measurements recognized in the financial statements TFRS 13 - “Fair Value Measurement” standard requires the items, which are recognized in the balance sheet at their fair values to be shown in the notes by being classified within a range. According to this, the related financial instruments are classified into three levels in such a way that they will express the significance of the data used in fair value measurements. At the first level, there are financial instruments, whose fair values are determined according to quoted prices in active markets for identical assets or liabilities, at the second level, there are financial instruments, whose fair values are determined by directly or indirectly observable market data, and at the third level, there are financial instruments, whose fair values are determined by the data, which are not based on observable market data. The financial assets, which are recognized in the balance sheet at their values, are shown below as classified according to the aforementioned principles of ranking. Current Period Financial Assets at Fair Value Through Profit and Loss Debt Securities Equity Securities Derivative Financial Assets at Fair Value through Profit and Loss Other Financial Assets at Fair Value Through Other Comprehensive Income(1) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 408,556 156,052 131,615 42,288,372 58,140 1,159,455 Level 2 142,884 5,111,267 1,805,479 16,292,498 477,481 76,207 2,731,824 Level 3 7,096 2,149,813 614,677 (1) Since they are not traded in an active market, the equity securities (TL 46,890) under the financial assets at fair value through other comprehensive income are shown in the financial statements at acquisition cost and the related securities are not shown in this table. Prior Period Financial Assets at Fair Value Through Profit and Loss Debt Securities Equity Securities Derivative Financial Assets Held for Trading Other Financial Assets Available-for-Sale(1) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 622,517 115,702 83,966 33,911,148 53,600 150,423 Level 2 39,430 6,337,975 217,842 13,034,782 318,421 168,600 4,558,286 Level 3 61 2,417,587 177,500 (1) Since they are not traded in an active market, the equity securities (TL 35,228) under the financial assets available-for-sale are shown in the financial statements at acquisition cost and the related securities are not shown in this table. The movement table of financial assets at level 3 is given below: Balance at the Beginning of the Period Purchases Redemption or Sales Valuation Difference Transfers Balance at the end of the Period Current Period 2,595,148 476,387 (51,633) 277,913 (526,229) 2,771,586 Prior Period 245,659 106,912 (67,307) 2,148 2,307,736 2,595,148 Properties that are recorded under tangible assets at fair value by the Bank and consolidated companies are classified in the 3rd level, whereas investment properties are clasiffied both in the 2nd and 3rd level. The loans measured at fair value through profit and loss under Level 3 consists of loan granted to the special purpose entity which is disclosed in the Section V footnote I-f.2 and footnote I.r. The mentioned loan’s fair value is determined by the various valuation methods. The potential changes in the fundamental estimations and assumptions in the valuation work can affect the carrying fair value of the loan. X. Explanations on Transactions Carried Out on Behalf of Third Parties and Fiduciary Transactions The Group gives trading, custody, fund management services in the name and on the account of its customers. The Group has no fiduciary transactions. 279 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) XI. Explanations on Risk Management Objectives and Policies Explanations according to “Communiqué on Public Disclosures about Risk Management” published on the Official Gazette No.29511 dated October 23, 2015 are included below. The Bank uses standardised approach for calculation of capital charge for credit risk, therefore explanations about internal ratings-based approach are not included. a. General Information on Risk Management and Risk Weighted Amounts a.1 Risk Management Approach of the Group The Group is exposed to financial and non-financial risks which are required to be analyzed, monitored and reported within specific risk management principles and with the perspective of Group risk management. The risk management process is organized within the framework of risk management and serves the creation of a common risk culture in corporate level; which brings “corporate governance” to forefront, the independence of the internal audit and monitoring units from the business units that undertake risks is established risk is defined in accordance with international regulations and in this context measurement, analysis, monitoring, reporting and control functions are carried. Risk management process and the functions involved in the process is one of the primary responsibilities of the Board of Directors. The Risk Committee operates to prepare the Group’s risk management strategies and policies, submit them to the Board of Directors for approval and monitor the implementations. Evaluating the capital adequacy and observing the active use of results in planning and decision making processes, establishing and monitoring limits related to main risks, monitoring the activities of risk management (determining, defining, measuring, evaluating and managing risk) and monitoring results and methods in measuring risk are also under their authority and responsibility of the Committee. Committee reports activity results to the Board of Directors through Audit Committee. The Risk Management Department, which operates under the Parent Bank’s Board of Directors has been organized as Asset-Liability Management Risk Unit, Credit Risk and Economic Capital Unit, Operational Risk and Associate Risk Unit and Validation Unit. The Group’s risk management process is carried out within the framework of risk policies which are issued by the Board of the Directors by taking the recommendations of the Risk Management Department into account and which include the written standards that are implemented by the business units. These policies which are entered into force in line with the international practices are general standards which contain organization and scope of the risk management function, risk measurement policies, duties and responsibilities of the risk management group, procedures for determining risk limits, ways to eliminate limit violations, compulsory approvals and confirmations to be given in a variety of events and situations. In the aforementioned risk policies, the Group’s risk appetite framework is defined as a set of approaches that determine the risk capacity, the risk appetite, the risk tolerance and that include the policies, procedures, controls and systems for reporting and monitoring of the limits set for the Group’s risk profile and the indicators in the framework. The Group’s risk appetite framework, which is formed in accordance with the above-mentioned factors and entered into force with the Board of Directors approval, includes indicators that are aligned with the business plan, the strategic programme, capital and remuneration planning and comparable on a business unit level to the extent possible. The compliance to the limits within the framework is periodically monitored and the realization of the risk appetite indicators are reported to the Risk Committee and the Boards on a monthly basis. In order to build a strong corporate culture that has a risk management perspective, the Group has policies, processes, systems and a control system that is integrated with the risk management system. All employees of the Group essentially perform their duties in a responsible manner that aims to develop controls to reduce or eliminate the probability of the Group to incur losses related to the operational risks. In the process risk analysis studies, risks and the related controls are evaluated together with employees performing the relevant process in a holistic approach. Procedures to be followed in case of a risk threshold breach and risk definitions are given in the risk politics. Code of conducts, operation manuals, the sharing of duties between business units and risk units are announced to staff. The risk reports that analyse the results reached by the Parent Bank and the comprehensive risk assessment and comparison of these results with a risk management perspective are periodically submitted to the Risk Committee and to the Board through the Audit Committee. The content of the above mentioned reports could be summarised as follows: - Capital adequacy ratio, the progression of the components of this ratio and the issues that affect the aforementioned ratio, - Monitoring the compliance status of the limits set by the Board of Directors as a part of therisk appetite framework and based on the components of the main risk types, - In addition to the assesment of the loan portfolio on the basis of counterparties and loan types, monitoring of the portfolio as a whole according to parameters such as maturity, sector, geography, risk ratings, arrears, defaults, - Measuring the assets and liabilities management risk, and reporting of measurement results, - Monitoring of all risks assessed in the context of operational risk, loss events that occurred in the Bank caused by operational risksand the risk indicators, - Testing the measurement results in terms of completenessand realiability, - Analysing the level of risk indicators under various stress scenarios, - Examining various concentration indicators and the course followed by these indicators. In addition, analyzes and evaluations regarding the risk level of the companies included in the consolidated risk policies are also included in the mentioned report. As per the communique on “Bank’s Internal Systems and Internal Capital Adequacy and Assessment Process” and “Guidelines for Stress Testing of Banks to Use in Capital and Liquidity Planning”, stress tests are conducted for the entire risks that the Group is exposed to and on the basis of significant risk categories. As a part of the holistic stress tests, risk appetite, capital planning, strategic plan and budget, action plans for emergencies and unexpected situations related to miscellaneous risks and other issues considered as significant are taken into consideration. In the above-mentioned stress tests, the methods that form the basis of regulatory reporting (standard method for credit and market risk, basic indicator method for operational risk) are used. On the other hand, in the stres tests for individual risk types the most advanced approaches used for risk measurement in the Parent Bank are leveraged. In the stress tests, both the first pillar risks (credit risk, market risk, operational risk) in scope of the regulatory framework and all the other risks that the Group is exposed to independent of the regulatory framework are taken into account in a holistic perspective. In determining the course of capital adequacy under various scenarios during the planning horizon, the actions that the Group will take in case of stress conditions and the impact of the diversified growth strategies of business units on the capital adequacy and the balance sheet are considered. The scope and content of the Parent Bank’s risk management system in terms of the main risk types are listed below. Risk mitigation strategies and processes for the assessment of their effectiveness are given in Fourth Section II No. “Explanations on Credit Risk” under the Fourth Chapter XI-c.2 notes. No. “The Public Disclosure of Qualitative Information Related to the Market Risk “ mentioned in the section. 280 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Credit Risk Credit risk is defined as the risk of the failure to comply with the requirements or failing to fulfill its obligations partially or totally of the counter side of the transaction contract with the Parent Bank. The methodology and responsibilities of the credit risk management, controlling and monitoring and the framework of credit risk limitations specified with the credit risk policy. The Bank defines measures and manages credit risk of the all products and activities. Board of Directors review the Parent Bank’s credit risk policies and credit risk strategy on an annual basis as a minimum. Key Management is responsible for the implementation of credit risk policies which are approved by Board of Directors. As a result of loans and credit risks analysis all findings are reported to Board of Directors and Key Management on a regular basis. In addition to transaction and company based credit risk assessment process, monitoring of credit risk also refers to an approach with monitoring and managing the credit as a whole maturity, sector, security, geography, currency, credit type and credit rating. In the Parent Bank’s credit risk management, along the limits as required by legal regulations, the Parent Bank utilizes the risk limits to undertake the maximum credit risk within risk groups or sectors that the Board of Directors determines. These limits are determined such a way that prevents risk concentration on particular sectors. Excess risk limits up to legal requirements and boundaries limits are considered as an exception. The Board of Directors has the authority in exception process. The results of the control of risk limits and the evaluations of these limits are presented by Internal Audit and Risk Management Group to Key Management and Board of Directors. The Bank uses credit decision support systems which are created for the purpose of credit risk management, lending decisions, controlling the credit process and credit provisioning. The consistency of the credit decision support systems with the structure of the Parent Bank’s activities, size and complexity is examined continuously by internal systems. Credit decision support systems contain the Risk Committee assessment and approval of Board of Directors. Asset and Liability Management Risk Asset-liability management risk defined as the risk of Group’s incurring loss due to managing all financial risks that are inflicted from the assets, liabilities and off-balance sheet transactions, ineffectively. Trading book portfolio’s market risk, structural interest rate risk and liquidity risk of the banking portfolio; are considered within the scope of the asset liability management. Complying the established risk limits and being at the limits that stipulated by the legislation are the primary priority of Asset-liability management risk. Risk limits are determined by the Board of Directors by taking into consideration of the Group’s liquidity, target income level and general expectations about changes in risk factors Board of Directors and the Audit Committee are responsible for following the Group’s capital is used optimally; for this purpose, checking the status against risk limits and providing the necessary actions are taken. Asset and Liability Management Committee is responsible for managing the Asset and Liability risk within the framework of operating principles that are involved in the risk appetite and risk limits are set by the Board of Directors in accordance with the policy statement. Asset and liability management processes and compliance with the provisions of the policy are controlled and audited by the internal audit system. The execution of the audit, reporting the audit results, action plans for the elimination of errors and gaps identified as a result of inspections regarding the fulfillment of the principles, are determined by the Board of Directors. Operational Risk Operational risk is defined as “the probability of loss due to the inadequate or failed internal processes, people, systems, external factors or legal risks”. All risks except financial risks are considered within the scope of operational risk. Studies consisted and are formed of occur by execution of identification, definition, measurement, analysis, monitoring of operational risk, providing and reporting the necessary control related to monitoring the progress of our country and the world, the development of techniques and methods, necessary legal reporting, notification and conduct of follow-up transactions. Studies on the subject are conducted by the Department of Risk Management. Operational risks that arise due to the activities are defined in “Bank Risk Catalogue” and classified in respect of species. Bank Risk Catalogue is kind of the fundamental document that used for identification and classification of all at the risk that may be encountered. It is updated in line with the changes in the nature of the processes and activities. Qualitative and quantitative methods are used in a combination for measurement and evaluation of the operational risks. In this process, information use that obtained from “Impact- Probability Analysis”, “Missing Event Data Analysis”, “Risk Indicators” methods. Methods prescribed by legal regulations are applied as minimum in determining the capital requirement level for the operating risk. All risks are assessed in the context of operational risk, loss events and the risk indicators same as operational risks that occurred in the Parent Bank, are monitored on a regular basis by the Department of Risk Management and reported periodically to the Risk Committee and the Board of Directors. Validation Activities Risk measurement models are validated at least once a year under international standards. The performance and soundness of the models are evaluated by the validation unit by statistical methods, the compliance of the processes applied within the scope of the model with the related laws, communiqués and regulations are analyzed, and the appropriateness of the data quality and IT applications used in the models is monitored. The results of the validation activities are reported to the Risk Committee and the Board of Directors. Subsidiaries Risk Operations Corporations within the Bank’s consolidated risk policy, in terms of their own business lines, measure, evaluate and monitor risks, establish risk limits. Risk limits are approved by their own Board of Directors. Risk levels are reported to the Bank’s Risk Committee within the periods set by the Bank, to monitor risk levels on consolidated basis. The Bank’s Risk Committee, assesses the risk levels and report the results to the Board of the Directors of the Bank. 281 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.2. General Information on Risk Management and Risk Weighted Amounts Overview of Risk Weighted Amounts: Credit risk (excluding counterparty credit risk) (CCR) Of which standardised approach (SA) Of which internal rating-based (IRB) approach Counterparty credit risk Of which standardised approach for counterparty credit risk (CCR) Of which internal model method (IMM) Equity positions in banking book under basic risk weighting or internal rating-based approach Equity investments in funds - look-through approach Equity investments in funds - mandate-based approach Equity investments in funds - 1250% weighted risk approach Settlement risk Securitization positions in banking accounts Of which IRB ratings-based approach (RBA) Of which IRB Supervisory formula approach (SFA) Of which SA/simplified supervisory formula approach (SSFA) Market risk Of which standardised approach (SA) Of which internal model approaches (IMM) Operational Risk Of which Basic Indicator Approach Of which Standardised approach (SA) Of which Advanced measurement approach Risk Weighted Amount Minimum Capital Requirements Current Period 401,894,678 401,894,678 8,582,423 8,582,423 Prior Period 370,823,510 370,823,510 10,905,200 10,905,200 Current Period 32,151,574 32,151,574 686,594 686,594 3,175,390 461,008 254,031 1,125 6,431,838 6,431,838 29,686,001 29,686,001 8,563,275 8,563,275 35,636,968 35,636,968 685,062 685,062 2,850,957 2,850,957 The amounts below the thresholds for deduction from capital (subject to a 250% risk weight) 551,920 454,353 44,154 Floor adjustment Total 458,404,654 418,763,034 36,672,372 282 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Linkages Between Financial Statements and Risk Amounts b.1 Differences and linkage between scopes of accounting consolidation and regulated consolidation Carrying values of items in accordance with Turkish Accounting Standards(TAS)(2) Carrying values in financial statements prepared as per TAS (1) Carrying values in consolidated financial statements prepared as per TAS (2) Subject to credit risk Subject to counterparty credit risk Securitization Positions Subject to market risk Not subject to capital requirements or subject to deduction from capital 43,787,918 54,076,128 54,076,128 Current Period Assets Cash and CBRT Banks and Money Market Placements 20,090,684 21,733,479 21,733,479 Financial Assets at Fair Value Through Profit/ Loss Financial Assets at Fair Value Through Other Comprehensive Income Derivative Financial Assets at Fair Value Through Profit/Loss Derivative Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets at Measured at Amortised Cost - Loans (3) Financial Assets at Measured at Amortised Cost - Other Financial Assets Financial Assets at Measured at Amortised Cost - Expected Credit Loss (-) Assets Held for Sale and Discontinued Operations Investment in Associates, Subsidiaries and Joint-Ventures Tangible Assets Intangible Assets Investment Properties Current Tax Asset Deferred Tax Asset Other Assets Total Assets Liabilities Deposits Funds Borrowed Money Market Funds Marketable Securities Issued Derivative Financial Liabilities at Fair Value Through Profit/Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income Leasing Liability Provisions Current Tax Liability Deferred Tax Liability Subortinated Debts Other Liabilities Shareholders’ Equity Total Liabilities 4,533,067 4,801,495 1,074,673 52,689,375 61,013,720 61,013,720 5,372,307 5,111,267 5,111,267 5,111,267 3,726,822 484,050 2,473,546 148,257 317,641,043 337,131,235 337,131,235 34,473,845 33,639,301 33,639,301 15,416,715 17,117,296 17,117,296 662,585 1,190,220 1,190,220 862,114 11,190,991 11,190,991 22,326,181 1,638,526 4,278,929 100,842 3,007,255 7,994,765 1,196,724 3,444,979 23,646 7,994,765 1,196,724 3,444,979 23,646 1,950,997 1,950,997 26,314,608 37,670,187 37,670,187 91,213 1,125,231 522,510,821 565,051,838 561,325,016 5,111,267 6,684,418 1,216,444 8,040,905 2,863,882 2,731,824 258,652,586 302,791,204 80,366,496 72,306,980 10,281,829 45,755,636 3,030,335 39,291,778 4,025,877 2,731,824 120,139 1,271,839 956,884 18,394,052 17,860,585 1,413,333 361,368 1,586,552 76,292 14,620,010 15,376,976 20,493,036 43,340,961 66,754,620 65,701,467 522,510,821 565,051,838 10,904,787 2,731,824 (1) June 30, 2019 amounts are represented, as consolidated financial statements dated December 31, 2019 prepared in accordance with Article No 5 of Clause No 6 in the Communiqué on Preparation of Consolidated Financial Statements of Banks are not published as of reporting date. (2) Financial statements balances are represented as of December 31, 2019. (3) Leasing and Factoring Receivables are included. 283 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Carrying values of items in accordance with Turkish Accounting Standards(TAS)(2) Carrying values in financial statements prepared as per TAS Carrying values in consolidated financial statements prepared as per TAS Subject to credit risk Subject to counterparty credit risk Securitization Positions Subject to market risk Not subject to capital requirements or subject to deduction from capital 40,846,414 40,922,242 40,922,242 Prior Period Assets Cash and CBRT Banks and Money Market Placements 15,619,444 15,212,246 15,212,246 3,504,888 3,497,105 2,417,587 47,859,826 47,849,702 47,849,702 6,337,975 6,337,975 6,337,975 6,337,975 1,079,518 874,188 3,662,236 312,264,351 313,570,340 313,570,340 30,780,111 29,013,507 29,013,507 12,283,289 12,239,707 12,239,707 283,339 283,138 283,138 859,618 19,666,272 1,588,723 4,281,513 205,884 2,352,038 9,418,560 7,104,041 883,541 3,704,581 170,828 1,543,870 9,418,560 7,104,041 883,541 3,704,581 170,828 1,543,870 23,621,590 32,635,388 32,635,388 99,855 858,824 497,788,697 499,907,357 498,827,839 6,337,975 5,615,942 958,679 246,122,957 248,981,402 77,779,020 11,980,587 72,582,007 11,980,587 42,362,850 40,642,271 6,758,265 9,489,236 4,558,566 4,558,286 4,558,286 17,245,387 15,161,685 1,982,036 328,773 1,728,531 80,066 12,708,575 12,708,575 19,179,708 35,869,054 63,540,238 55,614,893 497,788,697 499,907,357 16,247,501 4,558,286 Financial Assets at Fair Value Through Profit/ Loss Financial Assets at Fair Value Through Other Comprehensive Income Derivative Financial Assets at Fair Value Through Profit/Loss Derivative Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets at Measured at Amortised Cost - Loans (1) Financial Assets at Measured at Amortised Cost - Other Financial Assets Financial Assets at Measured at Amortised Cost - Expected Credit Loss (-) Assets Held for Sale and Discontinued Operations Investment in Associates, Subsidiaries and Joint-Ventures Tangible Assets Intangible Assets Investment Properties Current Tax Asset Deferred Tax Asset Other Assets Total Assets Liabilities Deposits Funds Borrowed Money Market Funds Marketable Securities Issued Derivative Financial Liabilities at Fair Value Through Profit/Loss Derivative Financial Liabilities at Fair Value Through Other Comprehensive Income Leasing Liability Provisions Current Tax Liability Deferred Tax Liability Subortinated Debts Other Liabilities Shareholders’ Equity Total Liabilities (1) Leasing and Factoring Receivables are included. 284 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b.2 The main sources of the differences between the risk amounts and the amounts assessed in accordance with TAS in the financial statements Current Period Asset carrying value amount under scope of TAS Liabilities carrying value amount under scope of TAS Total Credit Risk Counterparty credit risk Securitization Position 565,051,838 561,325,016 5,111,267 (10,904,787) Total net amount under regulatory scope of consolidation 565,051,838 561,325,016 16,016,054 Market risk 6,684,418 2,731,824 3,952,594 Off-balance sheet amounts Repurchase Transactions Valuation Adjustments(1) Differences in valuations Differences due to different netting rules Differences due to consideration of provisions Differences due to prudential filters 359,716,424 68,019,093 7,598,552 3,203,936 1 2 3 4 5 6 7 8 9 10 Differences due to risk mitigation(2) 11 Risk Amounts (4,956,387) 624,387,722 10,802,488 3,952,594 (1) According to the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, it is the counterparty credit risk amount calculated for repo style transactions. (2) The source of the difference is the collateral for receivables under credit risk mitigation in the calculation of capital adequacy. Prior Period Asset carrying value amount under scope of TAS Liabilities carrying value amount under scope of TAS Total Credit Risk Counterparty credit risk Securitization Position 499,907,357 498,827,839 6,337,975 (16,247,501) Market risk 5,615,942 Total net amount under regulatory scope of consolidation 499,907,357 498,827,839 22,585,476 5,615,942 Off-balance sheet amounts Repurchase Transactions Valuation Adjustments(1) Differences in valuations Differences due to different netting rules Differences due to consideration of provisions Differences due to prudential filters 339,812,803 65,352,486 8,402,989 4,869,902 1 2 3 4 5 6 7 8 9 10 Differences due to risk mitigation(2) 11 Risk Amounts (7,873,623) 556,306,702 13,272,891 5,615,942 (1) According to the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks”, it is the counterparty credit risk amount calculated for repo style transactions. (2) The source of the difference is the collateral for receivables under credit risk mitigation in the calculation of capital adequacy. The differences between financial statements resulting from legal consolidation and the ones resulting from accounting consolidation are mainly due to the differences in the scope of companies included in consolidation. Legal consolidation only includes partnerships that are in the form of credit institutions or financial institutions in accordance with Article No 5 of Clause No 1 in the “Communiqué on Preparation of Consolidated Financial Statements of Banks” while accounting consolidation includes all partnerships regardless of them being in the form of credit institutions or financial institutions in accordance with Article No 5 of Clause No 6 in the same communiqué. Bank using the valuation methodology are mainly based on data observed may in accordance with TFRS 13 aims to use methods that measure the fair value. In this context, securities qualification reality in the fair value measurement of financial assets in the transaction prices, quotes, set by the CBRT and as the price published in the Official Gazette as are used also necessary from internal pricing models. As for the derivative transactions interest rates, yield curves, foreign exchange, the basis of valuation models using market data such as volatility curves, valuation service is also available from third parties. The market prices used to value the scope of the independent price verification process, data and/or model inputs for accuracy is regularly subjected to control, as well as compliance of the results provided by the pricing services obtained from third parties with respect to certain ranges tested. 285 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c. Explanations on Credit Risk c.1. General Information on Credit Risk c.1.1. General Qualitative Information on Credit risk Relevant information is given in the footnotes below Section Four footnote II “Explanations on Credit Risk” and Section Four footnote numbered XI-a.1. c.1.2. Credit Quality of Assets: Current Period Loans (1) Debt Securities Off-balance sheet exposures Total Gross carrying value in financial statements prepared in accordance with Turkish Accounting Standards (TAS) Defaulted 21,102,730 1,025,318 22,128,048 Non-defaulted 316,028,505 91,478,421 161,829,477 569,336,403 Allowances/Amortization and Impairments 11,291,709 538,085 11,829,794 (1) Credit balance which is monitored as Financial Assets at Fair Value Through Profit or Loss is not included in the above table. It is shown in detail in Section 5 footnote 1.b.3. Prior Period Loans (1) Debt Securities Off-balance sheet exposures Total Gross carrying value in financial statements prepared in accordance with Turkish Accounting Standards (TAS) Defaulted 12,194,630 548,071 12,742,701 Non-defaulted 292,968,540 73,902,984 157,779,571 524,651,095 Allowances/amortization and impairments 6,900,407 366,677 7,267,084 (1) Credit balance which is monitored as Financial Assets at Fair Value Through Profit or Loss is not included in the above table. It is shown in detail in Section 5 footnote 1.b.3. c.1.3. Changes in Stock of Default Loans and Debt Securities (1) Defaulted loans and debt securities at end of the previous reporting period Loans and debt securities that have defaulted since the last reporting period Receivables back to non-defaulted status Amounts written off Other Changes Defaulted loans and debt securities at end of the reporting period Current Period 12,492,038 13,812,459 (109,537) (1,572,250) (3,519,980) 21,102,730 Net Values 325,839,526 91,478,421 162,316,710 579,634,657 Net Values 298,262,763 73,902,984 157,960,965 530,126,712 Prior Period 5,798,871 14,070,206 (92,081) (1,166,361) (6,118,597) 12,492,038 (1) Indemnified non-cash loans or non-cash loans not converted into cash, of the firms which are followed under “Non-performing Loans” accounts are not included in the table. c.1.4. Additional Information on Credit Quality of Assets Bank’s methods for determining provision amounts and classification of its loans are mentioned in the Section Three Note VIII. The bank is restructuring its loans classified as first and second group as well as non-performing loans and receivables. Restructuring in performing loans are made by granting a new loan or extending the term date of credit given to customer by Bank with changing conditions of contract aiming the enhancing of solvency of customer or customer’s demand. Restructuring in non-performing loans are generally made by establishing a new redemption plan within the context of a protocol aiming the collection of those receivables whose redemption plan are not valid because of delinquency previously. The breakdown of receivables in terms of geographic regions, sectors and remaining maturities are represented in “Explanations on Credit Risk” in the Fourth Section note II. 286 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) On the basis of sector-based provisions for receivables are presented in the footnote numbered Section Four II-16. The amounts of the receivables that are set aside for the geographical regions are as follows. The amount of non-performing loans which are written off in 2019 is TL 1,572,250 and it includes the credit which detailed in the Section Five Note I.f.10.2 Current Period Prior Period Non-Performing Loans Specific Provisions Non-Performing Loans Specific Provisions Domestic EU Countries OECD Countries (1) Off-Shore Banking Regions USA, Canada Other Countries Total 20,704,129 224,265 1,604 8,505 164,227 21,102,730 10,953,691 183,557 1,339 5,528 147,594 11,291,709 12,109,719 207,501 1,249 5 2,138 171,426 12,492,038 6,742,219 161,741 1,000 5 1,565 154,311 7,060,841 (1) OECD Countries other than EU countries, USA and Canada. The aging analysis of past-due receivables are disclosed under Section Four note II-11. c.2. Credit Risk Mitigation c.2.1. Qualitative Public Disclosures On Credit Risk Mitigation Techniques In the calculation of the Group’s Credit Risk Mitigation in accordance with the “Communiqué on Credit Risk Mitigation Techniques” published in the Official Gazette numbered 29111 on September 6, 2014, the financial collaterals are taken into consideration. The Group takes local currency and foreign currency deposit pledges into consideration as financial collaterals in calculating regulatory capital adequacy. Colleteral valuation and its management policy and primary features processes are givin are given at Section Four note.II under “Information on Credit Risk” disclosure. c.2.2. Credit Risk Mitigation Techniques - Standard Approach Current Period Loans (2) Debt securities Total Of which defaulted Exposures unsecured Exposures secured by collateral Collateralized amount of exposures secured by collateral Exposures secured by financial guarantees (1) Collateralized amount of exposures secured by financial guarantees Collateralized amount of exposures secured by credit derivatives Exposures secured by credit derivatives 306,053,674 6,102,217 4,994,669 13,683,635 11,463,742 91,478,421 397,532,095 6,102,217 4,994,669 13,683,635 11,463,742 9,811,021 (1) Consists loans of Credit Guarantee Fund guaranteed by the Undersecretariat of Treasury. (2) Credit balance which is monitored as Financial Assets at Fair Value Through Profit or Loss is not included in the above table. It is shown in detail in Section 5 footnote 1.b.3. Prior Period Loans (2) Debt securities Total Of which defaulted Collateralized amount of exposures secured by collateral Exposures secured by financial guarantees (1) Exposures secured by collateral Collateralized amount of exposures secured by financial guarantees Collateralized amount of exposures secured by credit derivatives Exposures secured by credit derivatives 5,267,511 2,602,449 16,245,456 14,098,901 Exposures unsecured 276,749,796 73,902,984 350,652,780 5,267,511 2,602,449 16,245,456 14,098,901 5,294,223 (1) Consists loans of Credit Guarantee Fund guaranteed by the Undersecretariat of Treasury. (2) Credit balance which is monitored as Financial Assets at Fair Value Through Profit or Loss is not included in the above table. It is shown in detail in Section 5 footnote 1.b.3. c.3. Credit Risk Under Standardised Approach c.3.1. Qualitative Disclosures on Banks’ Use of External Credit Ratings Under the Standardised Approach for Credit Risk Aformentioned explanations are disclosed under Section Four note XI-a.1. 287 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.3.2. Standard Approach: Credit risk exposure and credit risk mitigation techniques: Exposures before CCF and CRM Exposures post-CCF and CRM RWA and RWA density On-balance sheet amount Off-balance sheet amount On-balance sheet amount Off-balance sheet amount Risk- Weighted Amount Risk-Weighted Amount Density Exposures to banks and securities firms 30,687,284 12,411,405 30,687,284 142,701,140 144,716 223,299 154,164,883 345,824 22,389,428 464 144,717 206 72,465 386,112 1,183 158,109 661 385,230 1,183 50,703 331 435,933 203,125,776 103,818,304 193,031,579 103,231,779 14,121,459 20,946,268 9,583,511 485,929 44,406,370 373,541 3,653,998 1,032,838 97,683,478 14,098,417 20,435,990 9,583,511 485,929 12,675,358 57,063,498 3,410,759 160,815 2,637,072 245,486 19,876,641 248,281,705 58,635,428 4,990,731 15,488,980 8,681,632 881,041 Exposures to banks and securities firms 23,771,958 16,346,596 23,771,961 3,090,390 22,480,268 11,773,502 85,000 2,792,276 3,090,390 22,480,268 11,773,502 85,000 121,823 3,105,954 16,901,658 12,104,654 562,759,317 168,956,265 558,046,361 76,796,875 411,846,250 Exposures before CCF and CRM Exposures post-CCF and CRM RWA and RWA density On-balance sheet amount Off-balance sheet amount On-balance sheet amount Off-balance sheet amount Risk- Weighted Amount Risk-Weighted Amount Density 194,273 127,640,746 425,653 17,585,330 416 128,054 150 89,859 13.73% 70.09% 113,542,021 128,054 328,189 177,288 7,017 328,110 375,561 100.00% 198,861,309 106,398,614 188,661,906 80,312,976 18,742,625 22,935,909 5,294,223 209,634 36,147,570 406,751 2,574,894 545,107 75,111,161 18,723,901 21,697,093 5,294,223 209,634 47,451 1,583 14,818,026 55,749,632 2,985,733 173,349 1,802,239 86,653 18,161,073 242,581,803 45,869,444 6,614,038 16,450,951 4,580,192 315,116 411,565 21,589,169 9,825,810 100,000 411,565 21,589,169 9,825,810 100,000 461,008 16,657,117 10,098,422 495,953,442 162,898,526 493,393,333 76,190,469 379,839,914 Current Period Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non- commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due Receivables Exposures in higher-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment Undertakings Other exposures Equity investments Total Prior Period Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non- commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to corporates Retail exposures Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment Undertakings Equity investments Other exposures Total 288 14.49% 50.00% 100.00% 0.00% 45.84% 99.27% 75.00% 35.00% 67.13% 90.59% 120.46% 97.81% 74.78% 102.81% 64.87% 47.06% 99.25% 75.00% 35.00% 70.01% 86.51% 106.35% 90.12% 77.15% 102.77% 66.69% İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.3.3 Standardised Approach: Exposures by Risk Classes and Risk Weights: 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Consolidated 132,049,286 1,514 143,987 144,916 22,317,434 7 435,933 23,165,913 491,875 9,966,876 2,843,051 10,169,519 246,756,845 60,334 3,306 Retail exposures 22,913,666 78,180,571 14,259,232 15,168,165 2,332,013 7,904,897 6,723,244 528,254 144,628 142,907 443,880 154,510,707 144,923 435,933 1,514 43,362,642 250,095,077 101,094,237 14,259,232 23,073,062 9,583,511 731,415 Current Period Risk Groups Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non-commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment Undertakings Equity investments Other exposures 5,700,433 138,873 3,036,517 11,552,734 16,901,658 3,175,390 220,768 11,773,502 22,602,091 Total 160,664,899 23,657,788 14,259,232 30,882,509 78,180,571 325,941,695 1,035,774 220,768 634,843,236 289 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Risk Groups Exposures to sovereigns and their central banks Exposures to regional and local governments Exposures to administrative bodies and non-commercial entities Exposures to multilateral development banks Exposures to international organizations Exposures to banks and securities firms Exposures to corporates Exposures secured by residential property Exposures secured by commercial property Past-due loans Exposures in higher-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment Undertakings Equity investments Other exposures 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Consolidated 110,382,803 1,583 196,532 76,691 17,487,064 51,513 375,561 16,969,240 143,697 13,707,622 3,429,554 7,912,548 577 240,838,287 18,897,250 14,096,762 1,630,243 9,402,570 3,461,800 202,180 128,066,399 128,204 375,561 1,583 38,589,987 244,411,538 78,096,894 18,897,250 23,499,332 5,294,223 65,551 127,528 103,208 296,287 4,932,052 101,115 410,450 9,644,069 16,657,117 511,565 181,741 9,825,810 21,589,169 Retail exposures 16,937,635 61,159,259 Total 132,254,073 17,112,937 18,897,250 33,304,070 61,159,259 306,368,507 305,965 181,741 569,583,802 d. Explanations on Counterparty credit risk d.1. Qualitative Disclosures on Counterparty Credit Risk Approach The counterparty credit risk that the Parent Bank exposed to is managed within the framework of general limit allocation and credit risk mitigaiton that are outlined the credit risk policy. In setting general credit limits, the counterparty credit risks of customers as well as their cash and noncash risks are taken into account with a holistic view. Moreover, the total position of the transactions which create counterparty credit risk is also monitored under a separate risk limit. The counterparty credit risk, which stems from derivatives and repo like transactions including transactions with qualified central counterparties that result in liabilities for both sides, is measured according to the Appendix-2 and Appendix-4 of the “Regulation on Measurement and Evaluation of Capital Adequacy of Banks” which is published on the Official Gazette no 29511 dated November 23, 2015. Counterparty credit risk valuation method based on the calculation of fair values of the derivative transactions is implemented. In calculating the potential credit risk, the amount of the contract is multiplied by the rates given in the regulation. The replacement costs of derivative instruments are calculated based on the valuation of the related contracts according to the fair value method. Most of the credit risk related to the derivative transactions with other banks is subject to daily collateral clearing agreements mutually signed with related parties and the counterparty credit risk is hence reduced. On the other hand, the risk-reducing effect of such agreements is not considered in the calculation of the counterparty credit risk under the capital adequacy legislation. There are no guarantees received or sold by credit derivatives by the Bank in the context of trading or banking accounts. 290 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Replacement Cost 5,111,267 Potential Future Exposure Exposure after Credit Risk Mitigation 2,153,387 7,264,654 Risk Weighted Amounts 4,931,689 d.2. Counterparty Credit Risk (CCR) Approach Analysis: Current Period Standardised Approach - CCR (for derivatives) (1) Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) (1) Transactions with central counterparties are not included. Prior Period Standardised Approach - CCR (for derivatives) Comprehensive Approach for Credit Risk Mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) Total 5,111,267 2,153,387 3,183,774 10,448,428 1,285,486 6,217,175 Replacement Cost 6,337,975 Potential Future Exposure Exposure after Credit Risk Mitigation 2,065,014 8,402,989 Risk Weighted Amounts 5,802,533 Total 6,337,975 2,065,014 d.3. Capital obligation for credit valuation adjustment (CVA): 4,869,902 13,272,891 2,294,300 8,096,833 Total portfolio value with standardized approach CVA capital change Total subject to the CVA capital change d.4. CCR exposures by risk class and risk weights: Current Period Risk Groups Current Period Prior Period Risk Amounts 7,264,654 7,264,654 Risk Weighted Amounts 2,357,342 2,357,342 Risk Amounts 8,402,989 8,402,989 0% 10% 20% 50% 75% 100% 150% Risk Weights Risk Weighted Amounts 2,803,995 2,803,995 Total Credit Exposure Conditional and unconditional exposures to sovereigns and their central banks 38,113 53,754 91,867 7,758 7,758 2,627,076 4,154,789 102,293 3,408,305 56,340 6,884,158 3,408,305 56,340 Conditional and unconditional exposures to regional and local governments Conditional and unconditional exposures to administrative bodies and non-commercial entities Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Conditional and unconditional exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Past-due items Exposures in high-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings Other exposures Equity investments Total 38,113 2,627,076 4,154,789 56,340 3,572,110 10,448,428 291 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period Risk Groups 0% 10% 20% 50% 75% 100% 150% Total Credit Exposure Risk Weights Conditional and unconditional exposures to sovereigns and their central banks 160,347 Conditional and unconditional exposures to regional and local governments Conditional and unconditional exposures to administrative bodies and non-commercial entities Conditional and unconditional exposures to multilateral development banks Conditional and unconditional exposures to international organizations Conditional and unconditional exposures to banks and securities firms Exposures to corporates Retail exposures Exposures secured by residential property Past-due items Exposures in high-risk categories Exposures in the form of bonds secured by mortgages Short term exposures to banks, brokerage houses and corporates Equity investments in the form of collective investment undertakings 3,809 164,156 1,698 1,698 1,594,920 7,466,977 2,541 83,662 3,938,867 20,070 9,145,559 3,941,408 20,070 160,347 1,594,920 7,469,518 20,070 4,028,036 13,272,891 Collateral used in derivative transactions Collateral used in other transactions Received Collateral Given Collateral Segregated Segregated Segregated Not Not Segregated Received Collateral Given Collateral 2,477,943 7,870,503 397,413 93,412 33,068 10,872,339 Collateral used in derivative transactions Collateral used in other transactions Received Collateral Given Collateral Segregated Segregated Segregated Not Not Segregated Received Collateral Given Collateral 7,136,907 8,845,937 34,648 16,017,492 Other exposures Equity investments Total d.5. Collateral for CCR: Current Period Cash- Domestic Currency Cash- Other Currencies Government bills/bonds-Domestic Government bills/bonds-FC Corporate bills/bonds Total Prior Period Cash- Domestic Currency Cash- Other Currencies Government bills/bonds-Domestic Corporate bills/bonds-FC Total d.6. Credit derivatives exposures: None. 292 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Post CRM risk exposure 423,129 354,060 333,898 20,162 44,734 24,335 RWA 7,906 7,081 6678 403 825 Post CRM risk exposure 236,485 210,519 208,966 1,553 20,552 5,414 RWA 4,373 4,210 4,179 31 163 d.7. Exposures to central counterparties (CCP): Exposure to Qualified Central Counterparties (QCCPs) (total) Exposures for trades at WCCPs (excluding initial margin and default fund contributions); of which (i) OTC Derivatives (ii) Exchange-traded Derivatives (iii) Repo-reverse transactions, credit securities transactions and securities or commodities lending or borrowing (iv) Netting sets where cross-product has been approved Segregated initial margin Non-segregated initial margin Paid guarantee fund amount Unpaid guarantee fund commitment Exposures to non-QCCPs (total) Exposures for trades at non-QCCPs (excluding initial margin and default fund contributions); of which (i) OTC Derivatives (ii) Exchange-traded Derivatives (iii) Repo-reverse transactions, credit securities transactions and securities or commodities lending or borrowing (iv) Netting sets where cross-product has been approved Segregated initial margin Non-segregated initial margin Pre-funded default fund contributions Unfunded default fund contributions e. Explanations on securitisations: None. f. Explanations on Market Risk: f.1. Qualitative information disclosed to the public regarding Market Risk Market risk is defined as the risk that may reduce the market value of the trading portfolio due to the changes in the risk factors named interest rate, exchange rates, equities and the price of commodities and options. The procedures for the management of market risk are discussed in the Parent Bank’s “Asset and Liability Management Risk Policy” and those procedures are in line with the risk/return expectations and with the limits that are defined in the risk appetite framework. Limits related to market risk; are established by the Board and are revised periodically in order to reflect market conditions and best practices in the industry. Compliance to those limits is closely monitored by the Risk Management Department, Asset and Liability Management Committee and by the executive departments. Additionally, compliance with the provisions relating to the procedures and policies of market risk management is audited by the internal audit system. Trading activities of the securities that are included in the calculation of market risk is carried out by taking the Asset-Liability Committee decisions, risk policies and established limits into consideration and risks arising due to these activities are hedged using derivatives transactions where necessary. Measurement of market risk, reporting of results, and monitoring compliance with the risk limits are among the key responsibilities of the Risk Management Department. Analyses related to market risk are reported to the Risk Comittee and to the Board via the Audit Committee by the Risk Management Deparment. The trading book of the Parent Bank included in market risk calculations consists of on balance-sheet financial assets that are held for trading intent, derivatives that provide hedge to those instruments and foreign currency positions. The market risk carried by the Group is measured and monitored using methods known respectively as the Standard Method and the Value at Risk Model (VAR) and Expected Shortfall in accordance with the local regulations which are established in compliance with the international legislations. In this context, the exchange rate risk emerges as the most important component of the market risk. The market risk calculations using the Standard Method are performed at the end of each month and the measurement results are included in the statutory reports as well as being reported to the Bank’s top management. The Value at Risk Model and Expected Shortfall is another alternative for the Standard Method used for measuring and monitoring market risk. This model is used to measure the market risk on a daily basis in terms of interest rate risk, currency risk and equity share risk and is a part of the Bank’s daily internal reporting. Further retrospective testing (back-testing) is carried out on a daily basis to determine the reliability of the daily risk calculation by the VAR model, which is used to estimate the maximum possible loss for the following day. Scenario analyses which support the VAR model used to measure the losses that may occur in the ordinary market conditions are practiced, and the possible impacts of scenarios that are developed based on the future predictions and the past crises, on the value of the Bank’s portfolio are determined and the results are reported to the Bank’s top management. 293 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.2. Standardised Approach Outright Products Interest rate risk (general and specific) Equity risk (general and specific) Foreign exchange risk Commodity risk Options Simplified approach Delta-plus method Scenario approach Securitisations Total g. Explanations on Operational Risk RWA Current Period Prior Period 8,175,301 3,021,050 965,063 3,825,625 363,563 387,974 387,974 6,281,763 2,508,913 764,475 2,277,750 730,625 150,075 150,075 8,563,275 6,431,838 The operational risk capital requirement is calculated according to “Regulation on Measurement and Evaluation of Capital Adequacy of Banks” article number 24, is measured using the Basic Indicator Approach once a year in parallel with domestic regulations. As of December 31, 2019 the consolidated operational risk amount is TL 35,636,968 information about the calculation is given below (December 31, 2018: TL 29,686,001): Current Period Gross Income Value at operational risk (Total*12.5) Prior Period Gross Income Value at operational risk (Total*12.5) h. The interest rate risk of the banking book items: 2PP Amount 1PP Amount CP Amount Total/Positive Years of Gross Income Amount Rate (%) Total 16,179,326 18,527,745 22,312,078 3 15 2,850,957 2PP Amount 1PP Amount CP Amount 35,636,968 Total/Positive Years of Gross Income Amount Rate (%) Total 12,790,530 16,179,326 18,527,745 3 15 2,374,880 29,686,001 Interest rate risk arising from the banking accounts is defined as negative effect risk on capital of the changes in market interest rates due to differences in interest settlement and re- pricing on, differences in interest-earning assets taking part in the banking book; interest-bearing liabilities; interest-bearing derivative transactions inclusive of the policies established by the Board of Directors, is managed within the framework of the strategies set by the Parent Bank Asset-Liability Committee. Compliance with internal risk limits for banking portfolio is closely and continuously monitored by the Risk Management Department and Asset-Liability Committee and the measurement results are reported to the Board of Directors on a monthly basis. Duration and sensitivity analysis are conducted on a monthly basis by the Bank in the scope of monitoring of interest rate risk arising from the banking books about Interest Rate Risk in the Banking Accounts from the Regulation on Measurement and Assessment of Standard Shock Method which is published in the Official Gazette No. 28034 dated August 23, 2011. In the duration analysis, the maturity gap between assets and liabilities of the balance sheet are determined by the calculation of the weighted average maturities based on the asset that sensitive to interest rate and liabilities and off-balance sheet transactions re-pricing period. In the interest rate risk sensitivity analysis, the influence of the various interest rate change scenarios to the economic value of the Bank’s capital is examined. The interest rate risk of the banking book item in accordance with the legal regulations is measured and monitored on a monthly basis within the scope of the Regulation about Measurement and Assessment of Interest Rate Risk in the Banking Accounts by Standard Shock Method. In the calculations committed due to the mentioned regulations, behavioral maturity modeling method is used for the deposits with low sensitivity to interest rate changes and demand deposits which is original maturities is longer than contractual maturities. Currency TL TL EUR EUR USD USD Total (for Negative Shocks) Total (for Positive Shocks) i. Remuneration policy Applied Shock (+/- x basis point) (+) 500 (-) 400 (+) 200 (-) 200 (+) 200 (-) 200 Gains Loss (7,266,235) 6,862,050 (570,281) 481,972 (219,256) 522,364 7,866,386 (8,055,772) Revenue/Shareholders’ Equity - Loss/Shareholders’ Equity (10.50)% 9.92% (0.82)% 0.70% (0.32)% 0.75% 11.37% (11.64)% The Remuneration Committee, which is established to carry out the duties and activities related to the monitoring and supervision of the Bank’s remuneration applications on behalf of the Board of Directors, consists of two members. The Remuneration Committee meets at least twice a year, not exceeding six months, and reports to the Board of Directors on the results of the activities carried out and important matters considered to have an impact on the Bank’s position. As of the end of 2019, the Remuneration Committee met 7 times and made a total of 13 decisions. 294 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Regarding compliance with the Corporate Governance Principles, the Remuneration Committee monitors and supervises the practices related to wage management on behalf of the Board of Directors; the fees are in line with the Bank’s ethical values, internal balances and strategic objectives; the evaluation of the remuneration policy and its practices in the context of risk management; it is responsible for the presentation of the proposals determined in line with the requirements of the salary policy and the other responsibilities determined by the provisions of the applicable legislation and the fulfillment of the duties given by the Board of Directors in this framework. As of the end of 2019, the number of qualified employees working at the Bank is 23. The monetary and social rights of employees are determined in accordance with the Chartering Policy in the framework of the legislation related to the Collective Labor Agreement. The Bank carries out its practices with regard to remuneration policies within the framework of relevant banking and capital market legislation. This policy includes all managers and employees. Premium payments are made once a year to managers and managers who work in branches and headquarters units. It is considered that managerial premium payments are in line with the Bank’s long-term strategy and the risks assumed, as well as the performance of its employees. There are no variable fees for qualified employees in the Bank. The compliance of the wage levels in the bank with the sector wage levels is monitored by participating in independent and anonymous wage surveys, which are held twice a year. Within the scope of the remuneration policy, the Bank’s pricing practices are planned and executed on the basis of effective risk management, prevention of excessive risk taking, compliance with relevant legislation and scope and structure of the bank’s activities, strategies, long-term objectives and risk management structures. The fees to be paid to the managers and employees of the Bank at every stage; It is essential that the Bank is in line with its ethical values, internal balances and strategic objectives, and that it is not only associated with its short-term performance. Payments made to employees are determined in a manner that will positively impact the Bank’s corporate values and on the basis of objective conditions. Payments to be made to the managers of the units within the internal systems and to their staff are determined by taking into account the performance of the relevant personnel in relation to their functions, as they are in the audit or oversight, or are independent of the performance of the activity unit they control. XII. Explanations on Segment Reporting The Group’s activities are classified under corporate/commercial banking, retail/private banking, treasury operations and investment activities, insurance and reinsurance activities and others. Services to the large corporations, SMEs and other trading companies are provided through various financial media within the course of the corporate and commercial operations. Services such as project financing, operating and investment loans, deposit and cash management, credit cards, cheques and bills, foreign trade transactions and financing, letter of guarantee, letter of credit, forfeiting, foreign currency trading, bill collections, payrolls, investment accounts, tax collections and other banking services are provided for the aforementioned customer segments. Retail banking services are comprised of individuals needs such as deposits, consumer loans, overdraft accounts, credit cards, bill collections, remittances, foreign currency trading, safe- deposit boxes, insurance, tax collections, and investment accounts and by other banking services. Private banking category, are comprised of any kind of financial and cash management related services are provided for individuals within the high-income segment. Treasury transactions are comprised of medium and long term funding tools such as securities trading, money market transactions, spot and forward TL and foreign currency trading, and derivative transactions such as forwards, swaps, futures and options, as well as syndications and securitizations. Investment activities of intermediary institutions and venture capital and real estate investment partnerships are also classified in this area. Investments of subsidiaries who operate in the real sector, investments of associates who operate both in financial and real sector and investments of jointly controlled entities that are presented in the consolidated financial statements are evaluated within the scope of investment activities. Insurance and reinsurance activities include individual pension, life/non-life insurance transactions and reinsurance transactions. The Group’s financial leasing, factoring, asset management and portfolio management activities are classified under the ‘Other’ heading. Information about The Group’s segments are presented below. Current Period Interest Income Interest Expense Fees and Commissions Income Fees and Commissions Expense Dividend Income Trading Income/Loss (Net) Other Income Expected Credit Loss Other Operating Expense Income/Loss from Investments in Subsidiaries Accounted by Equity Method Income Before Tax Tax Provision Net Period Profit Group Profit/Loss Minority Interest Profit/Loss Total Assets Total Liabilities Corporate/ Commercial Banking 27,687,607 6,433,501 4,646,334 9,146 Individual/ Private Banking 7,793,667 9,286,642 1,915,386 489 838,536 5,736,914 1,850,790 245,000 560,736 3,920,797 Treasury Transaction/ Investment Activities 11,851,835 7,996,356 229,275 52,939 20,819 (4,633,920) 545,737 20,022 490,568 1,462,479 Insurance and Reinsurance Activities 17,295 51,744 1,015,141 Other/ Unallocated 1,120,721 1,920,958 228,390 1,381,644 7,298,879 74,057 6,658,170 2,014,736 2,844,554 4,592,586 Total 48,453,830 25,654,752 7,071,129 2,459,359 20,819 (4,633,920) 10,942,888 9,236,283 17,512,911 1,462,479 8,453,920 1,422,289 7,031,631 6,009,805 1,021,826 252,901,903 57,143,269 144,938,347 27,117,194 82,951,125 565,051,838 146,599,366 167,353,047 114,223,366 40,146,062 96,729,997 565,051,838 295 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Corporate/ Commercial Banking Individual/Private Banking 25,812,219 5,217,508 3,666,750 6,592 530,804 3,414,162 1,437,452 6,956,376 7,730,886 1,500,831 234 208,930 442,152 3,078,791 Treasury Transaction/ Investment Activities 9,983,915 10,325,480 223,051 55,275 19,655 (2,293,686) 471,048 16,807 448,542 1,569,036 Insurance and Reinsurance Activities Other/Unallocated 81,861 819,515 5,862,783 89,076 5,714,277 1,326,146 1,218,510 156,447 991,289 1,047,398 3,050,656 3,977,064 Prior Period Interest Income Interest Expense Fees and Commissions Income Fees and Commissions Expense Dividend Income Trading Income/Loss (Net) Other Income Expected Credit Loss Other Operating Expense Income/Loss from Investments in Subsidiaries Accounted by Equity Method Income Before Tax Tax Provision Net Period Profit Group Profit/Loss Minority Interest Profit/Loss Total 44,078,656 24,492,384 5,628,940 1,872,905 19,655 (2,293,686) 8,120,963 7,012,853 14,656,126 1,569,036 9,089,296 1,517,912 7,571,384 6,671,823 899,561 Total Assets Total Liabilities 240,453,866 119,429,648 51,082,961 137,473,005 117,286,430 124,631,025 20,391,713 31,082,110 70,692,387 87,291,569 499,907,357 499,907,357 SECTION FIVE: DISCLOSURES AND FOOTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS I. DISCLOSURES AND FOOTNOTES ON CONSOLIDATED ASSETS a. Cash and Central Bank of the Republic of Turkey: a.1. Information on Cash and Balances with the Central Bank of the Republic of Turkey: Cash in TL/Foreign Currency Central Bank of the Republic of Turkey Other Total a.2. Information on Balances with the CBRT: Unrestricted Demand Deposit Unrestricted Time Deposit Restricted Time Deposit Other (1) Total Current Period Prior Period TL 2,091,656 3,171,506 FC 3,428,324 45,204,187 180,455 TL 2,256,662 4,170,937 FC 2,600,766 31,819,518 74,359 5,263,162 48,812,966 6,427,599 34,494,643 Current Period TL FC Prior Period TL FC 3,171,506 20,792,607 4,170,937 14,050,734 3,171,506 24,411,580 45,204,187 4,170,937 17,768,784 31,819,518 (1) The amount of reserve deposits held at the Central Bank of the Republic of Turkey. a.3. Information on reserve requirements: As per the Communiqué no. 2013/15 “Reserve Deposits” of the Central Bank of the Republic of Turkey (“CBRT”), banks keep reserve deposits at the CBRT for their TL and FC liabilities mentioned in the communiqué. The reserve deposit rates vary according to their maturity compositions; the reserve deposit rates are realized between 1% - 7% for TL deposits and other liabilities, between 15% - 19% for FC deposits and between 5% - 21% for other FC liabilities. Reserves are calculated and set aside every two weeks on Friday for 14-day periods. Interest is paid for required reserves in accordance with the procedures and principles determined by the CBRT. b. Information on Financial Assets at Fair Value through Profit and Loss: b.1. Financial assets at fair value through profit and loss, which are given as collateral or blocked: Financial assets at fair value through profit and loss, which are given as collateral or blocked as at December 31, 2019 are amounting to TL 44,061 (December 31, 2018: 37,207 TL). b.2. Financial assets at fair value through profit and loss, which are subject to repurchase agreements: Financial assets at fair value through profit and loss, which are subject to repurchase agreements as at December 31, 2019 are amounting to TL 91,705 (December 31, 2018: TL 202,590). 296 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b.3. All creditors including the Group reached an agreement on restructuring the loans granted to the company which was previously followed under Loans in the previous period. As previously stated, loans of the company had been planning to be restructured based on required permits and necessary approvals within a new special purpose entity which was already incorporated or will be incorporated in the Republic of Turkey and owned by the creditors either directly or indirectly through takeover of the shares, that have been pledged by the company as a guarantee for the credit risk. Above mentioned process was completed in 2018 and, in this context the Bank owns 11.5972% and Türkiye Sınai Kalkınma Bankası A.Ş, a group company owns 1.6172% of the newly formed special purpose entity. At the Ordinary Meeting of the General Assembly of 2018 held in the current period, it has been decided to increase the share capital of the mentioned company by TL 3,982,230, all to be covered by common receivables. Whereas the Bank’s and Türkiye Sınai Kalkınma Bankası A.Ş.’ ownership ratio in the company has not changed, the nominal value of the shares owned increased from TL 6 to TL 461,833 and from TL 1 to TL 64,403 respectively. Amount in question is recognized under Assets Held for Sale and Discontinued Operations account. This remaining loan amount after the capital increase of the mentioned company amounting to TL 2,149,813 (31.12.2018: TL 2,417,587) is accounted under financial assets at fair value through profit or loss. The amount of impairment recognized for the total asset converted into loan and capital is TL 286,360 and is classified under the specified item. Assets, which are converted into loan and capital, amounted TL 2,676,049 are measured at fair value under TFRS 9 “Financial Instruments” standard and TFRS 5 “Assets Held for Sale and Discontinued Operations” Standard. The mentioned loan’s fair value is determined by an independent valuation company, considering the various valuation method such as discounted cash flows, similar market multipliers, similar transaction multipliers in the same sector, market value and analyst reports. The potential changes in the fundamental estimations and assumptions in the valuation work may affect the carrying fair value of the asset. Balance of related asset is followed in financial statements as Level 3 within the scope of “TFRS 13 - Fair Value Measurement” standard. If the case that the growth rate and risk-free return rate on investment used in the discounted cash flow method in the valuation report are increased or decreased by 0.25%, provided that all other variables are constant, the total value of assets recognized in the financial statements and profit before tax will increase by about 63 million (full TL amount) or decrease 56 million TL (full TL amount). b.4. TL 1,061,158 of other financial assets consists of the mutual funds; Quasar İstanbul Konut Gayrimenkul and Quasar İstanbul Ticari Gayrimenkul which were founded by İş Portföy Yönetimi A.Ş. c. Positive differences on derivative financial assets held for trading: Derivative Financial Assets at Fair Value through Profit and Loss (1) Forward Transactions Swap Transactions Futures Options Other Total Current Period Prior Period TL 95,400 168,784 FC 320,138 4,403,159 TL 257,032 411,428 FC 467,616 4,968,271 1,511 54,391 6,428 227,200 265,695 4,777,688 674,888 5,663,087 (1) Includes the positive differences related to derivative financial assets held for trading in derivative financial assets. Information on derivative financial assets for hedging purposes is disclosed in Section Five footnote l d. Banks Account d.1 Information on Banks: Banks Domestic Banks Foreign Banks Foreign Head Office and Branches Total d.2. Information on foreign banks: EU Countries USA, Canada OECD Countries (1) Off-shore Banking Regions Other Total (1) OECD countries other than the EU countries, USA and Canada. Current Period TL FC Prior Period TL 1,767,681 220,993 5,338,759 13,226,598 1,658,080 284,414 FC 3,672,159 8,839,424 1,988,674 18,565,357 1,942,494 12,511,583 Current Period Prior Period Unrestricted Amount 6,655,724 4,165,684 62,203 1,820,577 12,704,188 Resticted Amount Unrestricted Amount Resticted Amount 5,131,979 2,151,729 41,265 743,403 743,403 1,517,721 8,842,694 281,144 281,144 297 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Expected credit loss for cash and cash equivalents: Provisions beginning of the period Additional provisions within the period Transfers within the period Write-offs from Assets Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Currency Exchange Difference Provisions at the end of the period Current Period Prior Period Stage 2 Stage 3 Stage 1 35,635 36,637 (20,601) 239 51,910 Stage 2 Stage 3 Stage 1 24,840 23,703 (14,837) 1,929 35,635 e. Information on Financial Assets at Fair Value through Other Comprehensive Income: e.1. Information on financial assets at fair value through other comprehensive income, which are given as collateral or blocked: Financial assets at fair value through other comprehensive income, which are given as collateral or blocked amount to TL 9,802,629 as at December 31, 2019. (December 31, 2018: TL 9,571,244) e.2. Information on financial assets at fair value through other comprehensive income, which are subject to repurchase agreements: Financial assets at fair value through other comprehensive income which are subject to repurchase agreements amount to TL 2,423,549 as at December 31, 2019. (December 31, 2018: TL 6,653,057) e.3. Information on financial assets at fair value through other comprehensive income: Debt Securities Quoted on a Stock Exchange Not-Quoted (1) Share Certificates Quoted on a Stock Exchange Not-Quoted Provision for Impairment Losses (-) Other Total Current Period 59,981,477 41,483,412 18,498,065 592,349 31,479 560,870 831,857 1,271,751 Prior Period 49,646,972 34,627,782 15,019,190 411,949 29,039 382,910 2,577,316 368,097 61,013,720 47,849,702 (1) Refers to the debt securities, which are not quoted on the Stock Exchange or which are not traded, while quoted, on the Stock Exchange at the end of the related period. f. Information related to loans: Leasing and factoring receivables are considered as loans in the notes of this section. f.1. Information on all types of loans and advances given to shareholders and employees of the group: Direct Lending to Shareholders Corporate Shareholders Individual Shareholders Indirect Lending to Shareholders Loans and Other Receivables to Employees Total Current Period Prior Period Cash Non-Cash Cash Non-Cash 270,296 270,296 444 444 244,748 244,748 374 374 298 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.2. Information about the Standard Loans and Loans Under Close Monitoring and Loans Under Close Monitoring that have been restructured or rescheduled: Cash Loans Non-specialized loans Corporation Loans Export Loans Import Loans Loans Extended to Financial Sector Consumer Loans Credit Cards Other Specialized Loans Other Receivables Total 12 Month Expected Credit Losses Significant Increase in Credit Risk Loans Under Close Monitoring Restructured Loans Loans Not Subject to Restructuring Loans with Revised Contract Terms 19,225,408 12,186,109 618,152 2,634,357 664,780 3,122,010 9,947,650 6,122,835 148,264 201 473,727 3,202,623 Refinanced 11,345,301 5,635,911 152,391 1,044,840 4,512,159 Standard Loans 275,510,146 111,770,759 20,877,021 9,726,272 45,543,045 18,772,757 68,820,292 275,510,146 19,225,408 9,947,650 11,345,301 Current Period Prior Period Standard Loans 1,710,047 Loans Under Close Monitoring Standard Loans 2,054,722 Loans Under Close Monitoring 4,103,792 3,115,431 Changes observed in the expected credit loss for the Stage 1 and Stage 2 loans according to TFRS 9, is due to the fluctuation of credit default probabilities mainly depending on the expectations. The increase in the loan balance classified in Stage 2 also affects the mentioned change. The increase in the expected loss for the Stage 3 loans is affected by the increase in the loan balance classified in this group. f.3. Information on Maturity analysis of cash loans: Cash Credit Short-term Loans Medium and Long-term Loans Loans Under Close Monitoring Standard Loans 68,565,684 206,944,462 Loans Not Subject to Restructuring 2,663,635 16,561,773 Refinanced 1,160,054 20,132,897 299 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.4. Information on consumer loans, retail credit cards, personnel loans and personnel credit cards: Short-Term 1,379,351 11,446 27,250 1,340,655 662 662 13,861,588 5,494,744 8,366,844 22,527 22,527 18,847 18,847 464 464 104,822 41,068 63,754 477 477 1,219,416 41,396 Medium and Long- Term Interest and Income Accruals 45,827,240 17,305,368 499,549 28,022,323 4,615 4,615 186,717 12,791 225 173,701 775,948 775,948 124,656 2,464 146 122,046 4,835 897 3,938 2,798 2,798 380,418 116,101 5,137 259,180 14,768 14,768 691 55 636 52,224 52,224 1,167 8 1 1,158 26 8 18 194 194 17,174 16,649,550 46,926,809 466,662 Total 47,587,009 17,432,915 531,936 29,622,158 19,383 19,383 188,070 12,846 225 174,999 14,689,760 6,270,692 8,419,068 22,527 22,527 144,670 2,472 147 142,051 5,325 905 4,420 107,814 43,866 63,948 477 477 1,236,590 41,396 64,043,021 Consumer Loans-TL Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans - FC Indexed Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Consumer Loans - FC Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Retail Credit Cards-TL With Instalments Without Instalments Retail Credit Cards-FC With Instalments Without Instalments Personnel Loans-TL Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Personnel Loans- FC Indexed Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Personnel Loans-FC Real Estate Loans Vehicle Loans General Purpose Consumer Loans Other Personnel Credit Cards-TL With Instalments Without Instalments Personnel Credit Cards-FC With Instalments Without Instalments Overdraft Accounts - TL (real persons) Overdraft Accounts - FC (real persons) Total 300 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Short-Term 2,336,598 339 97,766 2,238,493 Medium and Long Term Interest and Income Accruals 733,050 7,712 22,411 702,927 38,208,813 893,940 2,143,039 35,171,834 Commercial Loans With Instalments-FC 102,758 5,356,678 f.5. Information on commercial installments loans and corporate credit cards: Commercial Loans With Instalments-TL Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Commercial Loans With Instalments-FC Indexed Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other 41,607 61,151 5,004,540 2,203,031 2,801,509 655 655 1,377,574 553 8,822,678 Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Corporate Credit Cards-TL With Instalments Without Installments Corporate Credit Cards-FC With Instalments Without Instalments Overdraft Accounts - TL (corporate) (corporate) Overdraft Accounts - FC (corporate) Total f.6 Allocation of loan by borrowers: Public Private Total f.7. Domestic and foreign loans: Domestic Loans Foreign Loans Total f.8. Loans granted to subsidiaries and associates: Direct Loans Granted to Subsidiaries and Associates Indirect Loans Granted to Subsidiaries and Associates Total f.9. Information on impairment provisions of Loans (Stage 3): Loans with Limited Collectability Loans with Doubtful Collectability Uncollectible Loans Total f.10. Information on non-performing loans (Net): 798,805 16,264 74,852 707,689 5,144,670 212,008 70,846 70,846 541,159 12,029 42,143 486,987 56,662 54,722 1,940 14,645 14,645 35,770 44,435,142 1,381,286 Current Period 4,747,562 311,280,943 316,028,505 Current Period 304,151,714 11,876,791 316,028,505 Total 41,278,461 901,991 2,263,216 38,113,254 1,339,964 28,293 116,995 1,194,676 5,516,098 5,240,999 275,099 5,090,031 2,273,877 2,816,154 655 655 1,413,344 553 54,639,106 Prior Period 1,447,728 299,630,574 301,078,302 Prior Period 288,313,809 12,764,493 301,078,302 Current Period 218 Prior Period 278 218 278 Current Period 815,278 3,246,343 7,230,088 11,291,709 Prior Period 1,074,128 1,439,225 4,547,488 7,060,841 f.10.1. Information on non-performing loans, which are restructured or rescheduled by the Group: Group III Loans with Limited Collectibility Group IV Loans with Doubtful Collectibility Group V Uncollectible Loans Current Period (Gross amounts before the provisions) Restructured Loans Prior Period (Gross amounts before the specific provisions) Restructured Loans and Other Receivables 66,918 66,918 47,359 47,359 1,041,075 1,041,075 54,189 54,189 878,136 878,136 74,445 74,445 301 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.10.2. Movement of total non-performing loans: Prior Period Ending Balance Corporate and Commercial Loans Retail Loans Credit Cards Other Additions (+) Corporate and Commercial Loans Retail Loans Credit Cards Other Transfers from Other NPL Categories (+) Corporate and Commercial Loans Retail Loans Credit Cards Other Transfers to Other NPL Categories (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Collections (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Write-Offs (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Debt Sale (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Currency Exchange Effect Corporate and Commercial Loans Retail Loans Credit Cards Other Current Period Ending Balance Corporate and Commercial Loans Retail Loans Credit Cards Other Specific Provisions (-) Corporate and Commercial Loans Retail Loans Credit Cards Other Group III Loans with Limited Collectability 3,172,533 2,863,171 159,048 103,523 46,791 13,085,544 11,556,626 907,654 570,410 50,854 12,992,394 11,800,113 678,219 450,510 63,552 1,326,043 978,593 208,296 115,921 23,233 19,421 17,654 343 156 1,268 1,950 1,830 120 1,922,169 1,625,267 179,964 107,346 9,592 815,278 658,246 86,130 66,855 4,047 Group IV Loans with Doubtful Collectability 3,447,008 3,098,012 207,231 135,927 5,838 328,879 319,174 5,296 2,608 1,801 12,992,394 11,800,113 678,219 450,510 63,552 8,480,687 7,699,756 441,592 320,692 18,647 1,042,147 815,041 138,424 69,172 19,510 10,827 6,684 592 516 3,035 115 82 33 80,507 79,386 1,121 7,315,012 6,775,204 311,177 198,632 29,999 3,246,343 2,930,232 165,635 135,575 14,901 Group V Uncollectible Loans 5,872,497 4,330,229 766,827 645,159 130,282 398,036 365,161 3,744 904 28,227 8,480,687 7,699,756 441,592 320,692 18,647 1,364,826 1,071,926 202,799 84,103 5,998 873,597 841,013 4,725 22,163 5,696 668,290 166,154 227,234 272,751 2,151 21,042 18,444 2,598 11,865,549 10,334,497 780,003 587,738 163,311 7,230,088 5,961,914 614,418 522,534 131,222 Net Balance on Balance Sheet 1,106,891 4,068,669 4,635,461 The part of the receivables constitute non-performing loans amounting to TL 246,108 are transferred to Gelecek Varlık Yönetimi A.Ş. in May 2019 by collecting TL 23,600 amount of sales amount in cash and part of the receivables constitute non-performing loans amounting to TL 422,297 are transferred to Hayat Varlık Yönetimi A.Ş., Birikim Varlık Yönetim A.Ş. and Doğru Varlık Yönetimi A.Ş. in September 2019 by collecting TL 29,700 of sales amount in cash. Remaining balance regarding non-performance loans receivables transferred to Efes Varlık Yönetim A.Ş. that is within the scope of consolidation is classified as “write-off”. 302 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) f.10.3. Information on foreign currency non-performing loans: Current Period Balance at the End of the Period Provisions (-) Net Balance on Balance Sheet (1) Prior Period Balance at the End of the Period Specific Provisions (-) Net Balance on Balance Sheet (1) (1) In addition to the loans extended in foreign currency, loans which are monitored in Turkish Lira are included. f.10.4. Information on gross and net non-performing loans as per customer categories: Group III Group IV Group V Loans with Limited Collectibility Loans with Doubtful Collectability Uncollectible Loans 138,677 58,278 80,399 1,841,915 436,801 1,405,114 4,532,552 1,755,399 2,777,153 1,880,923 636,590 1,244,333 5,438,318 2,387,791 3,050,527 1,342,334 1,077,708 264,626 Group III Group IV Group V Loans with Limited Collectibility Loans with Doubtful Collectibility Uncollectible Loans Current Period (Net) Loans to Individuals and Corporate (Gross) Provisions (-) Loans to Individuals and Corporate (Net) Banks (Gross) Provisions (-) Banks (Net) Other Loans (Gross) Provisions (-) Other Loans (Net) Prior Period (Net) Loans to Individuals and Corporate (Gross) Provisions (-) Loans to Individuals and Corporate (Net) Banks (Gross) Provisions (-) Banks (Net) Other Loans (Gross) Provisions (-) Other Loans (Net) 1,106,891 1,922,169 815,278 1,106,891 4,068,669 7,315,012 3,246,343 4,068,669 2,098,405 3,172,533 1,074,128 2,098,405 2,007,783 3,447,008 1,439,225 2,007,783 4,635,461 11,750,967 7,130,240 4,620,727 114,582 99,848 14,734 1,325,009 5,773,424 4,463,222 1,310,202 99,073 84,266 14,807 f.10.5. Information on interest accruals, valuation differences and related provisions calculated for non-performing loans: Current Period (Net) Interest accruals and valuation differences Provisions (-) Prior Period (Net) Interest accruals and valuation differences Provisions (-) Group III Group IV Group V Loans with Limited Collectibility Loans with Doubtful Collectibility Uncollectible Loans 64,964 121,568 56,604 188,001 276,637 88,636 403,659 694,560 290,901 174,307 312,795 138,488 317,600 730,154 412,554 24,140 57,168 33,028 f.10.6 Outline of the liquidation policy for uncollectible loans and other receivables In order to ensure the liquidation of non-performing loans, all possibilities evaluated to ensure maximum collection according to the legislation. First of all, administrative initiatives are taken to deal with the borrower. Collection through legal proceedings used if there is no possibility of collection and configuration with the interviews for other receivables. f.10.7. Explanations on write-off policy: The Bank’s general policy for write-offs of receivables under follow-up is to write of such receivables that are proven to be uncollectible in legal follow-up process within the instructions of Tax Procedure Law. In addition, loans that are allocated for special provisions and considered as there’s no reasonable expectations to collect back can also be write-off. In the current period, the Bank does not have any loans that are write-off within the framework of this method. Current Period Prior Period Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 303 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Provisions beginning of the period Additional provisions within the period Transfers within the period Write-offs from Assets Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Currency Exchange Difference Provisions at the end of the period 2,054,722 1,264,618 3,115,431 3,290,871 (1,388,955) (1,566,481) 7,060,841 5,591,903 (990,900) (1,463,249) (6,580) (5,984) 2,268,504 642,091 (811,360) 58,522 (326,884) (84,310) 308,159 1,379,766 2,876,423 (154,866) (50,380) 331,693 (1,350,864) 83,659 4,262,696 2,911,316 (406,385) (1,166,361) (8,142) (4,809) 1,435,174 37,352 121,867 (340,375) (46,968) 45,138 (115,287) 346,359 (1,019,624) 1,066,592 52,523 39,086 1,710,047 4,103,792 11,291,709 2,054,722 3,115,431 7,060,841 g. Financial Assets Measured at Amortised Cost: g.1. Financial Assets Measured at Amortised Cost given as collateral or blocked: Financial assets measured at amortised cost given as collateral or blocked amount to TL 2,580,545 as at December 31, 2019. (December 31, 2018: TL 2,694,226) g.2. Financial Assets Measured at Amortised Cost subject to repurchase agreements: Financial assets measured at amortised cost, which are subject to repurchase agreements amount to TL 465,212 at December 31, 2019. (December 31, 2018: TL 4,380,775) g.3. Information on government securities measured at amortised cost: Government Bonds Treasury Bills Other Public Debt Securities Total g.4. Information on financial assets measured at amortized cost: Debt Securities Quoted on a Stock Exchange Not Quoted (1) Impairment Losses (-) Total (1) Indicates unlisted debt securities, and debt securities that have not been traded at the end of the related periods while they are listed. g.5. Movement of financial assets measured at amortized cost within the year: Beginning Balance Foreign Exchange Differences Arising on Monetary Assets Purchases During the Year Disposals through Sales and Redemption Impairment Losses (-) Valuation Effect Balance at the End of the Period Current Period 32,736,600 Prior Period 28,228,130 32,736,600 28,228,130 Current Period 33,639,301 32,779,106 860,195 Prior Period 29,013,507 27,918,919 1,094,588 33,639,301 29,013,507 Current Period 29,013,507 375,173 11,617,638 (8,515,412) 1,148,395 33,639,301 Prior Period 9,193,175 668,592 21,501,275 (3,737,743) 1,388,208 29,013,507 İtfa edilmiş maliyeti üzerinden değerlenen finansal varlıklar için ayrılan beklenen zarar karşılıkları: Current Period Prior Period Stage 2 Stage 3 Stage 2 Stage 3 Stage 1 8.564 7.476 (4.539) 247 11.748 Stage 1 7.423 6.603 (5.773) 311 8.564 Provisions beginning of the period Additional provisions within the period Transfers within the period Write-offs from Assets Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Currency Exchange Difference Provisions at the end of the period 304 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h. Information on Associates (Net): As per the “Communiqué on Preparation of Consolidated Financial Statements of Banks”, credit institutions or financial institutions associates are included in the scope of consolidated financial statements. Within this context, credit institutions and financial associates are accounted in the consolidated financial statements according to TAS 28 - Investments in Associates and Joint Ventures”. h.1. Information on credit institution or financial institution associates that are not accounted by the equity method: None. h.2. Information on credit institution or financial institution associates that are accounted by the equity method: Title Address (City/Country) Arap Türk Bankası A.Ş. İstanbul/Turkey Information on financial statements of associates in the above order: Bank’s Share Percentage-If Different. Voting Percentage (%) 20.58 Bank’s Risk Group Share Percentage (%) 79.42 Total Assets 5,249,643 Shareholders’ Equity Total Tangible Assets Interest Income (1) Securities Income Current Period Profit/Loss Prior Period Profit/ Loss Fair Value 1,072,947 154,138 346,762 15 164,509 103,243 (1) Includes interest income on securities. h.3. Movement of investments in consolidated associates (1): Beginning Balance Movements during the period Purchases Bonus shares acquired Dividends received from the current year profit Sales Revaluation Increase (2) Impairment Balance at the end of the period Capital commitments Contribution in equity at the end of the period (%) (1) Includes the information related to associate which is a credit institution in which the Bank has direct shares. (2) Includes the equity method accounting differences. Current Period Prior Period 181,741 163,821 39,027 17,920 220,768 181,741 305 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h.4. Sectoral information on consolidated associates and the related carrying amounts (1): Banks Insurance Companies Factoring Companies Leasing Companies Finance Companies Other Financial Participations Total (1) Includes the information related to associate which is a credit institution in which the Bank has direct shares. h.5. Consolidated associates traded on a stock exchange: None. h.6. Consolidated associates disposed of in the current period: None. h.7. Consolidated associates acquired in the current period: None. h.8. Other issues related to associates: Current Period Prior Period 220,768 181,741 220,768 181,741 As explained in Note III.2 of Section Three, subsidiaries, associates and joint ventures that are not credit institutions/financial institutions are accounted by using the equity method defined in TAS 28 “Investments in Associates and Joint Ventures” within the framework of TAS 27 “Individual Financial Statements”. i. Information on subsidiaries (Net): As per the “Communiqué on Preparation of Consolidated Financial Statements of Banks”, the Bank includes credit institutions or financial institutions subsidiaries in the scope of consolidated financial statements. i.1. Information on equity adequacy of major subsidiaries: COMMON EQUITY TIER I CAPITAL Common Equity Tier I Capital Before Deductions Deductions from Common Equity Tier I Capital (-) Total Common Equity Tier I Capital ADDITIONAL TIER I CAPITAL Additional Tier I Capital before Deductions Deductions from Additional Tier I Capital (-) Total Capital TIER II CAPITAL Tier II Capital Before Deductions Deduction from Tier II Capital (-) Total Additional Tier II Capital Total Capital and Tier II Capital Deductions from Total Capital and Additional Tier I Capital (-) Türkiye Sınai Kalkınma Bankası A.Ş. 5,736,081 441,749 5,294,332 Insurance/ Reinsurance Companies 5,615,767 224,622 5,391,145 İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Finansal Kiralama A.Ş. İş Yatırım Menkul Değerler A.Ş. 3,860,612 1,316 3,859,296 1,209,037 4,967 1,204,070 1,114,079 74,173 1,039,906 5,294,332 5,391,145 3,859,296 1,204,070 1,039,906 2,273,513 2,273,513 7,567,845 5,391,145 3,859,296 1,204,070 1,039,906 CAPITAL 7,567,845 5,391,145 3,859,296 1,204,070 1,039,906 i.2. Information on unconsolidated subsidiaries: None. 306 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i.3. Information on consolidated subsidiaries: No Title Address (City/Country) Bank’s Share Percentage-If Different. Voting Rights (%) (1) Bank’s Risk Group Share Percentage (%) 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- 15- 16- 17- 18- 19- Anadolu Anonim Türk Sigorta Şirketi Anadolu Hayat Emeklilik A.Ş. Efes Varlık Yönetim A.Ş. İş Faktoring A.Ş. İş Finansal Kiralama A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. İş Portföy Yönetimi A.Ş. İş Yatırım Menkul Değerler A.Ş. İş Yatırım Ortaklığı A.Ş. İşbank AG JSC İşbank JSC Isbank Georgia İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey Frankfurt/Germany Moscow/Russia Tblisi/Georgia Maxis Girişim Sermayesi Portföy Yönetimi A.Ş. İstanbul/Turkey Maxis Investments Ltd. Milli Reasürans T.A.Ş. TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. Yatırım Finansman Menkul Değerler A.Ş. 20- Yatırım Varlık Kiralama A.Ş. London/England İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Türkiye 44.16 73.49 65.06 43.52 43.41 56.25 33.95 66.92 68.48 25.67 100.00 100.00 100.00 68.48 68.48 77.06 39.26 43.95 42.66 42.66 (1) Indirect share of the Group is considered as the Parent Bank’s share percentage. Financial statement information related to consolidated subsidiaries in the above order: Total Assets Shareholders’ Equity Total Tangible Assets Interest Income (1) Securities Income Current Period Profit/Loss Prior Period Profit/Loss 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- 15- 16- 17- 18- 19- 20- 9,439,606 27,146,995 244,311 3,265,228 9,088,299 5,716,357 265,801 142,195 6,717,106 276,918 12,000,811 1,598,549 570,461 3,345 97,536 4,531,965 575,200 42,253,011 927,722 150,647 1,827,674 1,285,889 21,162 300,494 1,273,933 3,860,227 261,774 124,895 1,393,135 275,238 1,369,801 403,334 177,827 2,457 19,546 2,135,841 310,107 5,178,989 116,324 173 (1) Includes interest income on securities. (2) Fair value is the companies’ market value. 280,445 259,064 12,053 2,409 18,371 4,025,325 1,715 9,916 154,037 724 168,516 46,994 1,931 651 692 639,471 563,012 690,601 10,804 9 322,149 293,169 60,928 463,111 951,136 12,812 9,267 9,966 254,079 37,886 369,824 99,454 33,007 458 6,046 285,103 1,715 3,313,001 56,342 92,018 35,062 37 2,404 4,593 708 9,094 14,776 378,617 18,628 2,565 12,055 68,809 13,399 5,264 449,201 360,692 (5,796) (23,348) 84,292 297,390 1,736 37,145 420,975 64,271 77,784 16,796 11,640 (782) (235) 312,511 52,113 736,141 16,588 23 324,507 254,663 394 147,018 197,537 341,611 3,074 26,254 234,285 31,366 132,734 10,286 12,993 (1,732) (1,574) 278,213 (61,889) 663,263 11,361 Fair Value (2) 2,229,000 2,941,630 2,667,182 1,673,019 248,518 1,623,060 297,590 406,200 3,421,600 55.84 26.51 34.94 56.48 56.59 43.75 66.05 33.08 31.52 74.33 0.00 0.00 0.00 31.52 31.52 22.94 60.74 56.05 57.34 57.34 Additional Shareholders’ Equity Required 307 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i.4. Movement of investments in subsidiaries (1): Balance at the Beginning of the Period Movements in the Period Purchases (2) Bonus Shares Acquired Dividends Received from the Current Year Profit Sales Revaluation Surplus (3) Impairment Balance at the End of the Period Capital Commitments Contribution in equity at the end of the period (%) Current Period 8,255,742 Prior Period 6,447,697 8,500 157,796 1,651,460 1,650,249 9,915,702 8,255,742 (1) Reveals the information related to companies subject to consolidation in which Bank directly owns share. (2) The amount in the current period is due to the purchasing shares of Milli Reasurans T.A.S. in cash and the amount in the previous period is due to cash capital increase realized by Isbank AG and JSC Isbank Georgia. (3) Consists of Equity method accounting differences. i.5. Sectoral information on consolidated subsidiaries and the related carrying amounts (1): Banks Insurance Companies Factoring Companies Leasing Companies Finance Companies Other Financial Subsidiaries Total (1) Reveals the information related to companies subject to consolidation in which Bank directly owns share. i.6. Consolidated subsidiaries traded on stock exchange (1): Traded on domestic stock exchanges Traded on foreign stock exchanges (1) Reveals the information related to companies subject to consolidation in which Bank directly owns share. i.7. Consolidated subsidiaries disposed of in the current period: None i.8. Subsidiaries acquired in the current period: None i.9. Other issues on subsidiaries: Current Period 4,183,845 2,836,609 Prior Period 3,432,976 2,294,172 331,262 300,038 2,563,986 9,915,702 2,228,556 8,255,742 Current Period 6,065,370 Prior Period 5,082,435 Nevotek Bilişim Ses ve İletişim Sistemleri San. ve Tic. A.Ş. which is the subsidiary of İş Girişim Sermayesi Yatırım Ortaklığı A.Ş, one of the companies included in the consolidation, increased a total of TL 7,399 capital in the current period which, TL 526 from internal resources and TL 6,873 from cash. All of the cash capital increase by restricting the pre-emptive rights of other shareholders is covered by İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. and the share of the Company increased from 93.46% to 95.37% The accounting method for non-financial subsidiaries, associates and jointly controlled associates is changed in accordance with TAS 27 “Individual Financial Statements” to the equity method introduced in TAS 28. The effects of this changed is given in Section Three III.2 numbered footnotes in detail. 308 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) j. Information on jointly controlled entities (Net): As per the “Communiqué on Preparation of Consolidated Financial Statements of Banks”, credit institutions or financial institutions jointly controlled entities are included in the scope of consolidated financial statements. There are no jointly controlled entities which are excluded in the scope of the consolidation. The accounting method for non-financial subsidiaries, associates and jointly controlled associates is changed in accordance with TAS 27 “Individual Financial Statements” to the equity method introduced in TAS 28. The effects of this changed is given in Section Three I and III.2 numbered footnotes in detail. k. Information regarding finance lease receivables (Net): k.1. Presentation of finance lease receivables according to their remaining maturities: Current Period Prior Period Less than 1 Year 1-4 Years More than 4 Years Total k.2. Information regarding net investments made on finance lease: Gross Finance Lease Investment Unearned Finance Revenue from Finance Lease (-) Net Finance Lease Investment Gross 2,439,094 3,132,209 281,364 5,852,667 Net 2,075,844 2,775,490 266,556 5,117,890 Gross 2,553,899 3,186,473 392,699 6,133,071 Current Period 5,852,667 734,777 5,117,890 Net 2,181,081 2,827,903 354,005 5,362,989 Prior Period 6,133,071 770,082 5,362,989 k.3. Presentation of operating lease receivables according to their remaining maturities: As at December 31, 2019 the remaining maturities of the Group’s operating lease receivable is less than 1 year the total amount is TL 15,278 (December 31, 2018: TL 16,800). l. Explanations on hedging derivative assets Positive differences related to derivative financial instruments for hedging purposes. Derivative Financial Assets at Fair Value through Profit or Loss (1) Current Period Gross Fair Value Hedges Cash Flow Hedges Net Investment Hedge Abroad Total Prior Period Gross Net Net 67,884 67,884 (1) Includes the positive differences related to derivative financial assets held for trading in derivative financial assets. The contractual amounts for the hedging derivative financial instruments and their net fair values are disclosed in Note II.h of Section Five. 309 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) m. Information on tangible assets: Current Period Prior Period Cost Accumulated Depreciation Net Book Value Current Period End: Net Book Value at the Beginning of the Period Change During the Period (Net) (1) Depreciation Impairment Net Currency Translation Differences(1) Cost at the Period End Accumulated Depreciation at the Period End Closing Net Book Value (1) Includes the movements in cost and accumulated depreciation items. n. Information on Intangible Assets: Real Estates Right of use Assets Leased Tangible Assets Vehicles Other Tangible Assets Total 6,078,539 (17,827) 6,060,712 6,060,712 65,977 (50,553) 5,052 6,145,347 (64,159) 6,081,188 1,258,025 (328,564) (627) 1,512,690 (583,856) 928,834 216,222 216,222 216,222 8,126 224,348 224,348 28,073 (17,337) 10,736 10,736 9,819 (4,513) (60) 36,221 (20,239) 15,982 3,016,341 9,339,175 (2,199,970) (2,235,134) 816,371 7,104,041 816,371 181,450 (267,207) 7,104,041 1,523,397 (650,837) 13,799 18,164 2,938,507 10,857,113 (2,194,094) (2,862,348) 744,413 7,994,765 Explanation regarding consolidation goodwill that is included in intangible assets is given in Section Three under the caption of “XII. Explanations on Goodwill and Other Intangible Assets.” The table consisting movements of other intangible assets are presented below. Net Book Value at the Beginning of the Period Change During the Period (Net)(1) Depreciation Impairment Currency Translation Differences (1) Cost at Period End Accumulated Depreciation at Period End Net Book Value at the End of the Period (1) The balance includes the movements in cost and accumulated depreciation items. o. Information on investment property: Current Period 847.567 656.215 (352.303) 9.271 3,372,579 (2,211,829) 1,160,750 Prior Period 746.079 438.027 (361.958) 25.419 2,697,676 (1,850,109) 847,567 Investment properties are properties that the Group holds to earn rentals. Explanations on these subjects are given in Section Three Note XIV. Total rental income obtained from investment properties during the period is TL 177,081. (December 31, 2018: TL 160,525) Net Book Value at the Beginning of the Period Change During the Period (Net) (1) Revaluations Surplus/Deficit Net Book Value at the End of the Period Current Period 3,704,581 (501,456) 241,854 3,444,979 Prior Period 3,454,409 73,197 176,975 3,704,581 (1) In the current period, investment property amounting TL 264,260 sold to the Türkiye Şişe ve Cam Fabrikaları A.Ş. which is non-financial partnership included in Bank’s risk group at cost of TL 310,000. 310 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) p. Information on deferred tax asset: As at December 31, 2019, the Parent Bank and the other consolidated Group companies has deferred tax asset amounting to TL 1,950,997. Such deferred tax asset is calculated based on the temporary differences between the book value of assets and liabilities and their tax basis measured as per the prevailing tax regulation. When the items comprising the temporary differences are followed under equity, the related tax asset/liability is directly recognized under equity items. Tangible Assets Base Differences Provisions (1) Finance Lease Income Accruals Valuation of Financial Assets Other Net Deferred Tax Asset Current Period 438,369 (2,521,953) 11,924 180,161 (59,498) (1,950,997) Prior Period 371,911 (2,187,060) 8,484 253,845 8,950 (1,543,870) (1) Comprised of employee termination benefits, actual and technical deficits of the pension fund, insurance technical provisions, the provisions for credit card bonus points, expected credit loss for Stage 1 and Stage 2 loans and other provisions. The movement of deferred tax asset is as follows: Balance at the Beginning of the Period Deferred Tax Income/(Expense) (Net) Deferred Tax Recognized under Equity Foreign Currency Difference Other (1) Deferred Tax Asset (2) Current Period Prior Period 1,463,804 1,051,344 (644,322) 3,879 469,786 141,669 379,164 1,480 471,705 1,874,705 1,463,804 (1) Consists of the opening effect of TFRS 9 and TFRS 15, and the deferred tax amount which are both recognized under prior year’s profit or loss. (2) In current period’s consolidated financial statements, there is TL 1,950,997 of deffered tax asset and TL 76,292 of deferred tax liability which are netted off within the Movement Table. The explanations on deferred tax liability are given in Section V Note II.j.2 r. Information on assets held for sale and discontinued operations: Net Balance at the Beginning of the Period Change during the periods (Net) Amortized Cost Foreign Currency Difference Net Book Value at the End of the Period Current Period Prior Period 283,138 900,446 (119) 6,755 1,190,220 184,644 96,267 (80) 2,307 283,138 Investment in a special purpose company whose details be given in section five footnote I.b.3 is classified within the scope of “TFRS-5 Assets Held for Sale and Discontinued Operations” since prior period. As stated in the same footnote, the Bank’s and Türkiye Sınai Kalkınma Bankası A.Ş.’s shares’ nominal values in company share increased from TL 6 to TL 461,833 and TL 1 to TL 64,403 respectively and this amount is located in the line of Transfers (Net). On the other hand, an international investment bank is authorized as a sales advisor in the current period for the sale of the relevant company or the shares owned by the company and in this context, necessary works related to the sale and negotiations with potential investors will be initiated. The other assets classified as “Assets Held for Sale” consist of real estates. Other than the capital investment mentioned above, the change balance in the current period includes TL 330,000 of real estate acquired due to a receivable classified as assets held for sale during the period while being monitored under other assets. Announcements about the real estates subject to sale are also made by means of newspaper advertisements and similar media. Additionally, the Parent Bank’s real estates subject to sale are announced on the Bank’s web site. The Group has no discontinued operations. 311 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) s. Information on Other Assets of the Group: The “other assets” item does not exceed 10% of total assets. II. DISCLOSURES AND FOOTNOTES ON CONSOLIDATED LIABILITIES a. Information on Deposits: a.1. The maturity structure of deposits (Current Period): Savings Deposits Foreign Currency Deposits Residents in Turkey Residents Abroad Public Sector Deposits Commercial Deposits Other Institutions Deposits Precious Metals Deposits Interbank Deposits The Central Bank of Turkey Domestic Banks Foreign Banks Participation Banks Other Total Demand 17,391,846 46,488,317 39,951,664 6,536,653 947,893 11,789,957 459,012 8,435,010 531,001 485 36,422 493,918 176 7 Days Notice Up to 1 Month 1-3 Months 3-6 Months 6 Months to 1 Year 1 Year and Over Accumulated Deposits Total 5,038,638 54,412,656 2,914,178 918,450 876,065 10,875 81,562,708 17,469,285 75,753,321 5,327,074 2,671,973 12,096,970 1,488 159,808,428 16,266,859 64,762,481 3,456,218 1,304,672 3,804,364 1,072 129,547,330 1,202,426 10,990,840 1,870,856 1,367,301 8,292,606 416 30,261,098 2,499 48,966 422 1 8,665,520 15,227,940 411,937 1,504,425 572,741 4,072,570 1,096,957 160,474 184,611 37,813 1,689,738 192 72,812 48,199 85,211 1,853,743 1,782,719 137,895 418,051 1,181,759 858,050 995,693 42,937 1,739,782 137,895 244,518 173,533 1,181,759 999,973 37,672,591 6,409,953 10,432,383 5,905,168 485 1,181,927 4,722,580 176 86,043,036 33,602,426 151,482,783 9,926,276 7,363,112 14,361,208 12,363 302,791,204 a.2. The maturity structure of deposits (Prior Period): Savings Deposits Foreign Currency Deposits Residents in Turkey Residents Abroad Public Sector Deposits Commercial Deposits Other Institutions Deposits Precious Metals Deposits Interbank Deposits The Central Bank of Turkey Domestic Banks Foreign Banks Participation Banks Other Total Demand 12,472,415 34,049,703 28,632,603 5,417,100 936,429 8,284,634 367,443 4,892,580 652,517 126 10,316 641,975 100 7 Days Notice Up to 1 Month 1-3 Months 3-6 Months 6 Months to 1 Year 1 Year and Over Accumulated Deposits Total 1,873,572 47,480,107 7,676,938 596,930 672,433 9,964 70,782,359 11,558,087 61,291,529 6,362,894 3,522,348 11,262,980 1,324 128,048,865 10,147,637 52,426,146 4,359,441 1,179,939 3,586,575 1,099 100,333,440 1,410,450 8,865,383 2,003,453 2,342,409 7,676,405 225 27,715,425 2,804 38,128 1,045 1 546 4,555,061 10,570,388 2,081,922 203,302 1,120,811 81,886 98,617 3,750,022 6,353,013 142,590 1,067,498 1,550,728 778,507 29,923 981,989 359,776 52,839 56,276 1,138,903 835,454 232,044 1,550,728 603,030 175,477 2,044 4,165 357,732 1,134,738 978,953 26,816,118 10,635,126 6,172,052 5,547,929 126 1,455,009 4,092,694 100 61,655,721 19,237,525 124,823,492 23,254,319 5,694,269 14,304,788 11,288 248,981,402 312 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.3. Savings deposits which are under the guarantee of Savings Deposits Insurance Fund exceeding the insurance limit: Savings Deposits Savings Deposits Foreign Currency Savings Deposits Other Deposits in the Form of Savings Deposits Foreign Branches’ Deposits Under Foreign Authorities’ Insurance Off-shore Banking Regions’ Deposits Under Foreign Authorities Insurance Under the Guarantee of Savings Deposits Insurance Fund Exceeding the Limit of Deposit Insurance Fund Current Period Prior Period Current Period 44,102,037 34,185,261 5,898,896 11,930,319 31,872,642 21,865,360 3,254,664 10,175,089 36,391,606 66,511,898 4,305,318 1,266,511 Prior Period 38,047,628 56,323,397 2,616,606 1,059,409 a.4. Savings deposits which are not under the guarantee of deposit insurance fund: Foreign Branches’ Saving Deposits and Other Accounts Deposits and Other Accounts held by Main Shareholders and their Relatives Deposits and Other Accounts of the Chairperson and Members of Board of Directors. Chief Executive Officer. Senior Executive Officers and their Relatives Deposits and Other Accounts Covered by Assets Generated Through the Offenses Mentioned in Article 282 of the Turkish Criminal Code Numbered 5237 and Dated 26 September 2004 Deposits in the Banks to be Engaged Exclusively in Off-shore Banking in Turkey b. Information on Derivative Financial Liabilities Held for Trading: Current Period 1,170,490 Prior Period 1,028,605 22,831 28,304 Derivative Financial Liabilities at Fair Value through Profit/Loss (1) Forward Transactions Swap Transactions Futures Options Other Total Current Period Prior Period TL 162,530 518,102 FC 196,592 1,780,176 TL 394,935 1,303,096 559 57,320 2,367 681,191 2,034,088 1,700,398 FC 270,107 2,154,610 257,359 3,554 2,685,630 (1) Includes negative differences related to derivative financial liabilities held for trading and clsassified under derivative financial liabilities. Information on derivative financial liabilities for hedging purposes is disclosed in Note II.h of Section Five. c. Banks and Other Financial Institutions: c.1. Information on banks and other financial institutions: Central Bank of Turkey Domestic banks and institutions Foreign banks. institutions and funds Total c.2. Maturity analysis of funds borrowed: Short-term Medium and Long-term Total Current Period TL 3,246,629 1,495,409 4,742,038 FC 925,967 4,768,303 61,870,672 67,564,942 Prior Period TL 1,159,839 2,034,304 3,194,143 Current Period Prior Period TL 2,701,261 2,040,777 4,742,038 FC 4,933,433 62,631,509 67,564,942 TL 1,110,046 2,084,097 3,194,143 FC 539,698 3,883,280 64,964,886 69,387,864 FC 5,492,850 63,895,014 69,387,864 313 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) c.3. Information on funds borrowed: Information on funds received through syndicated loans and securitization deals, which take a significant place among funds borrowed, are given below. Syndication loans: Date of Use April 2019 May 2019 July 2019 Funds Borrowed 75,000,000 EUR 323,500,000 USD + 644,940,000 EUR 67,500,000 USD + 97,500,000 EUR November 2019 215,000,000 USD + 545,000,000 EUR Securitization deals: Maturity 1 year 1 year 1 year 1 year The Parent Bank obtained funds by way of putting on securitization deals all its claims and receivables based on diversified payment rights in USD, EUR and GBP through its consolidated structured entity TIB Diversified Payment Rights Finance Company. The Parent Bank monitors securitization credits under the “Borrowings” on its financial statements as per its nature. Information on funds received through securitization is given below. Date June 2012 December 2013 December 2014 March 2015 October 2015 October 2016 December 2016 December 2017 December 2017 December 2017 Other Transactions: Amount 125,000,000 EUR 50,000,000 EUR 220,000,000 USD 555,000,000 USD 221,200,000 USD 240,000,000 USD 158,800,000 USD 265,000,000 USD 125,000,000 EUR 125,000,000 USD Final Maturity Remaining Debt Amount as at December 31, 2019 12 year 12 year 14 year 5-15 year 10 year 5-12 year 10-13 year 5-7 year 5 year 9 year 59,375,000 EUR 30,000,000 EUR 180,000,000 USD 82,000,000 USD 158,987,500 USD 162,138,833 USD 152,850,000 USD 265,000,000 USD 125,000,000 EUR 125,000,000 USD As of August 2014, in connection with the future cash flows securitization program amounting to USD 500 million on 10 years maturity, the bank has increased the total amount of the financial instrument USD 600 million by obtaining the same structured USD 100 million in September 2017. d. Information on Debt Securities Issued (Net): Bond Asset Backed Security Bills Total e. Concentration of the liabilities of the Group: Current Period Current Period TL 7,506,622 138,244 1,469,342 9,114,208 FC 30,177,570 30,177,570 TL 8,370,994 1,267,533 9,638,527 FC 31,003,744 31,003,744 Group’s liabilities 54% are comprised of deposits, 13% are comprised of funds borrowed, 10% are comprised subordinated debt and marketable securities issued and 1% are comprised of debt from money markets. Deposits are distributed among a large variety of customers with different characteristics. The borrowings, on the other hand, are comprised of various funds obtained from financial institutions through syndication, securitization, post-financing and money market operations. f. Information on Other Liabilities: Other liabilities do not exceed 10% of the balance sheet total. 314 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) g. Information on Lease Payables (Net): Less than 1 year 1-4 years More than 4 years Total Current Period Gross 29,821 267,671 1,196,153 1,493,645 h. Information on Derivative Financial Liabilities Held for Risk Management: h.1. Fair Value Hedges: Derivative Financial Liabilities at Fair Value through Profit or Loss Interest Rate Swap Transactions FC TL Current Period Prior Period Contract Amount 16,520,430 16,520,430 Assets 67,884 67,884 Liabilities Contract Amount Assets 16,545 16,545 18,028,129 18,028,129 The details of derivative transactions for fair value hedge in the current period are given below. Current Period: Hedging Instrument Hedged Financial Item Type of Risk Interest Rate Swap Transactions Interest Rate Swap Transactions Fixed Interest rate Eurobonds and Greenbonds Interest rate risk Fixed Rate Loans Used Interest rate risk Fair Value Difference of Hedging Assets (1) 16,960 (5,481) Net fair value of hedging instrument(1) Assets Liabilities 69,500 (13,577) 4,597 (1) The fair value of the protected assets and the hedged assets subject to hedge accounting is shown as the net market value excluding the credit risk and the accumulated interest. Prior Period: Net 12,608 200,625 743,651 956,884 Liabilities 172,258 172,258 Income statement effect (profit/loss from derivative financial transactions) 72,883 (884) Income statement effect (profit/loss from derivative financial transactions) Hedging Instrument Hedged Financial Item Type of Risk Interest Rate Swap Transactions Interest Rate Swap Transactions Fixed Interest rate Eurobonds and Greenbonds Interest rate risk Fixed Rate Loans Used Interest rate risk Fair Value Difference of Hedging Assets (1) 127,988 20,723 Net fair value of hedging instrument(1) Assets Liabilities (137,854) (9,866) (21,390) (667) (1) The fair value of the protected assets and the hedged assets subject to hedge accounting is shown as the net market value excluding the credit risk and the accumulated interest. h.2. Cash flow hedges: none i. Information on Provisions: i.1. Reserves for employee benefits: According to the related regulation and the collective bargaining agreements, the Parent Bank is obliged to pay employee termination benefits to employees who retire, die, quit for their military service obligations, who have been dismissed as defined in the related regulation or to the female employees who have voluntarily quit within one year after the date of their marriage. In accordance with the related regulations, the amount of employee termination benefits is TL 6,379.86 (exact TL amount as of December 31, 2019), which is one month salary for each service year and cannot exceed the base salary ceiling for employee termination benefits. A provision for severance pay to allocate that employees need to be paid upon retirement is TL 1,260,666 as of December, 31 2019. (December 31, 2018: TL 1,024,853). The main actuarial assumptions used in the calculation of the employee termination benefits are as follows: - Discount rate which is 11,70% and inflation rate which is 7,20%, were used for the calculation and the real rate of increase in salaries was taken as 2%. - TL 6,379.86 (full TL amount) salary ceiling, which was effective as at December 31, 2019 was taken into account for the calculations. - The age of retirement is considered as the earliest age possible that an individual can retire. - CSO 1980 table is used for the mortality rate for female and male employees. 315 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) The movements related to provision for employee termination benefits are given below: Present value of defined benefit obligation at the beginning of the period Current Service Cost Interest Cost Benefits paid Loss/(Gain) due to Settlements/Reductions/Terminations Prior Year Service Cost Actuarial loss/(gain) Defined benefit obligation at the end of the period Current Period 1,024,853 79,108 157,671 (83,745) 823 5 81,951 1,260,666 Prior Period 823,400 64,465 92,169 (49,784) 857 19 93,727 1,024,853 In addition to the retirement pay liability, the Bank and the Group companies included in the consolidation reserve provisions for unused vacation. As of December 31, 2019 the unused vacation provision amount is TL 95,365 (December 31, 2018: TL 78,084). i.2. Provisions for exchange losses in the principal amount of foreign currency indexed loans: Since foreign currency indexed loans are followed based on the rates on the lending date, the Parent Bank incurs a loss if the exchange rates decrease and makes profit if the exchange rate increases. As at December 31, 2019 and December 31, 2018 there is no provision amount for the currency evaluation losses in the principal amount of foreign currency indexed loans. i.3. Specific provisions for non-cash loans, which are not indemnified and not converted into cash: As at December 31, 2019, TL 538,085 provision (December 31, 2018: TL 366,677) is allocated for the non-cash loans of companies whose loans are followed under non-performing loans accounts. i.4. Information on other provisions: i.4.1. Liabilities arising from retirement benefits: Liabilities of pension funds founded as per the Social Security Institution: Within the scope of the explanations given in Section Three Note XX.2, in the actuarial report which was prepared as of December 31, 2019 for Türkiye İş Bankası A.Ş. Emekli Sandığı Vakfı (İşbank Pension Fund) by a licensed actuary, of which each Bank employee is a member, and which has been established according to the provisional Article 20 of the Social Security Act numbered 506, the amount of actuarial and technical deficit stands at TL 3,494,026 (December 31,2018 TL 2,875,305). According to the actuarial report as at December 31, 2018 of Milli Reasürans T.A.Ş. besides the Parent Bank, the amount of actuarial and technical deficit was determined to be TL 53,217 (December 31, 2018 TL 44,737). There is a provision on financial statements to compensate the deficit in mentioned period, the mentioned provision is preserved on current year financial statements aswell. The above mentioned actuarial audit, which was made in accordance with the principles of the related law, measures the cash value of the liability as of December 31, 2019, in other words, it measures the amount to be paid to the Social Security Institution by the Parent Bank. Actuarial assumptions used in the calculation are given below. - 9.8% technical deficit interest rate is used. - 34.5% total premium rate is used. - CSO 1980 woman/man mortality tables are used. Below table shows the cash values of premium and salary payments of the Parent Bank as of December 31, 2019, taking the health expenses within the Social Security Institution limits into account. Net Present Value of Total Liabilities Other Than Health Net Present Value of Long Term Insurance Line Premiums Net Present Value of Total Liabilities Other Than Health Net Present Value of Health Liabilities Net Present Value of Health Premiums (1) Net Present Value of Health Liabilities Pension Fund Assets Amount of Actuarial and Technical Deficit (1) Short term insurance lines included. The assets of the pension fund are as follows: Cash and Cash Equivalents Securities Portfolio Other Total Current Period (11,295,446) 4,695,781 (6,599,665) (1,347,791) 3,404,441 2,056,650 1,048,989 (3,494,026) Prior Period (9,329,382) 3,952,714 (5,376,668) (1,211,775) 2,865,717 1,653,942 847,421 (2,875,305) Current Period Prior Period 301,165 696,788 51,036 1,048,989 538,880 207,462 101,079 847,421 On the other hand, after the transfer, the currently paid health benefits will be revised within the framework of the Social Security Institution legislation and related regulations. 316 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) i.4.2. Provision of credit cards and promotion of banking services applications: The Bank has recognized provisions amounting to TL 89,062 for the amount which is recognized within the framework of credit card expenses of credit card customers or promotions for banking services as of December 31, 2019. (December 31, 2018: TL 85,673) i.4.3. As mentioned public disclosures of the Bank on December 31, 2012 and December 19, 2013; an inspection has been made by the inspectors of Tax Inspection Board to “Türkiye İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı” (“İşbank Supplementary Pension Fund”), which was founded as per the provisions of the Turkish Commercial and Civil Codes, regarding the payments that fulfill İşbank’s liabilities within the framework of the Articles of Foundation of the Pension Fund and the relevant legislation. As a result of this investigation, tax audit reports were prepared for the years 2007, 2008, 2009, 2010, 2011 claiming that the aforementioned liabilities should be taxed in terms of wage base, thus, they should be subject to withholding tax and stamp duty. According to this report, the total amount of tax and penalties notified to Bank was TL 74,353 for 2007 and 2008; and as of reporting date TL 151,899 for 2009, 2010 and 2011 and it was stated that the Bank applied to tax courts to cancel these tax notifications and some of the court decisions were determined in favor of the Bank and some others were determined against the Bank. In this context, for the finalized decisions of Regional Administrative Courts related to the years 2007 and 2008 against the Bank, the Bank applied to the Constitutional Court. According to decisions made by Constitutional Court up to reporting date, there is no predictability in legal conformity for taxing the Bank’s contributions to the Pension Fund in terms of wage base and for this reason it was accepted that property right of the Bank has been violated according to the 35th article of Constitution. The Court decided that the amount of tax, penalties and default interest which was paid by the Bank should be paid back to the Bank as for compensation with its legal interest. Besides of the Bank, an inspection was conducted by Tax Audit Committee Inspectors regarding to the contribution obligations mentioned above for the period 2007-2011 on Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı Mensupları which is founded according to Turkish Commercial Law and Civil Law, owned by “Türkiye Sınai Kalkınma Bankası A.Ş”. “Milli Reasürans T.A.Ş”, and Anadolu Anonim Türk Sigorta Şirketi. As a result of the issued report that companies a total of TL 33 million (exact amount) tax penalty notices were notified. Assessments made on the subject by the company’s application in accordance with the legislation, which was suspended for Tax Administration concluded that the lack of legal basis of assessment and said assessment were filed in court against the various tax. A number of cases concluded in favor of the Bank, another part of lawsuits concluded against the Bank. According to the decision of the Constitutional Court, it is expected that the cases related to the periods 2007, 2008, 2009, 2010 and 2011 will conclude in favor of the Bank and the litigant Group companies. In this context, the provisions amounting to TL 217,265 which had been allocated for the mentioned periods, reversed at 2015. Within the scope of the legal process, the lawsuits amounting to TL 61,060 with respect to 20 period of 2012-2013 have been concluded against the Bank, is an ongoing process. In addition, at a case file, which was one of the lawsuits regarding the repayment of income tax stoppage and stamp tax which has been paid by reservation statement beginning from December 2013, of which its court decision was rendered in favour of the Bank, has been reversed by the majority of the votes of the Assembly after it was submitted to the General Assembly of Tax Courts. Regarding the mentioned issue, the legal process is ongoing. In this process, the Group companies are acting together with the Parent Bank and in this period the Bank have been transferred to the provision account for the current period amounting to TL 74,017 (December 31, 2018: TL 63,337). i.4.4. In 1993, Dışbank A.Ş. shares which were owned by the Bank were sold to Lapis Holding A.Ş. In 2008, it was claimed that USD 52,6 million of the amount, which was paid upfront within the context of the sale agreement, had been provided from the funds of the insolvent TYT Bank A.Ş. by the buyer and payment of USD 52,6 million as well as the interest to be calculated to the Savings Deposit Insurance Fund (SDIF) was demanded. The administrative actions initiated by the SDIF in 2008 were revoked by Council of State Administrative Law Chambers 13th upon the application of the Bank. The decisions which were in favour of the Bank were reversed by Plenary Session of the Law Chamber upon the appeal of the SDIF, Council of State Administrative Law Chambers 13th decided to reject the applications of the Bank in January 2016 due to their obligation to obey the decisions of reversal. After the aforementioned court decisions, while the legal process was still in progress, the collection procedures were carried out within the context of Law No. 6183 and TL 298,466 including the default interest, was collected from the Bank by the SDIF at prior period and made provision for the whole amount. As a part of the legal process, individual application to the Constitutional Court of Republic of Turkey has been made by the Bank was not concluded positively. On the other hand the legal process is continued within the framework of the ongoing lawsuits and other available legal options. i.4.5. Except the other provisions indicated above, other provisions consist of a free provision amounting to TL 1,125,000, of which TL 1,200,000 thousands was provided in prior years and TL 75,000 thousands reversed in the current period and in accordance with the precautionary principle by the Group management by taking into consideration the possible changes in the economy and market conditions, provisions allocated for expenses and provisions allocated for ongoing lawsuits and other provisions set aside for miscellaneous reasons. j. Information on Tax Liability: j.1. Information on current tax liability: j.1.1. Information on tax provision: Explanations on taxation and calculations are explained in Note XXI of Section Three. As of December 31, 2019, as a result of the clarification of the Group’s corporate tax liability and temporary taxes paid, the remaining corporate tax liability amounts to TL 952,085 and as a result of the separate clarification process of each partnership and tax authority, current tax asset amounting to TL 23,646 occurs. j.1.2. Information on taxes payable: Corporate Tax Payable Tax on Securities Income Tax on Real Estate Income Banking Insurance Transaction Tax Foreign Exchange Transaction Tax Value Added Tax Payable Other Total Current Period 952,085 253,643 5,120 234,527 7,439 12,671 102,588 1,568,073 Prior Period 1,126,004 212,204 5,037 270,761 122 22,431 76,970 1,713,529 317 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) j.1.3. Information on premiums: Social Security Premiums - Employees Social Security Premiums - Employer Bank Pension Fund Premiums - Employees Bank Pension Fund Premiums - Employer Pension Fund Membership Fees and Provisions-Employees Pension Fund Membership Fees and Provisions-Employer Unemployment Insurance - Employees Unemployment Insurance - Employer Other Total j.2. Information on deferred tax liabilities: Current Period 3,120 3,675 5,038 2 2,210 4,426 8 18,479 Prior Period 2,525 2,999 3,789 1 1,928 3,756 4 15,002 The Parent Bank and the consolidated Group companies have TL 76,292 deferred tax liability as at December 31, 2019. The related deferred tax liability is calculated over the temporary differences between the book values of assets and liabilities in the records and their tax base values calculated according to tax. Tangible Assets Base Differences Provisions Valuation of Financial Assets Other Deferred Tax Liability k. Information on Payables for Assets Held for Sale and Discontinued Operations The Bank does not have any payables for assets held for sale and discontinued operations. l. Information on subordinated loans The Bank; Current Period Prior Period 76,520 (3,432) 3,690 (486) 76,292 84,800 (26,823) 23,676 (1,587) 80,066 - As of October 24, 2012, issued 10 year-term bills with a nominal value of USD 1,000,000,000; as of December 10, 2013 issued 10 year-term bills with a nominal value USD 400,000,000 and as of June 29, 2017 issued 11 year-term bills with recall option on 6th year and a nominal value USD 500,000,000 which all have the characteristic of subordinated loans for the purpose of making available to the individuals and legal persons who are resident abroad. Interest rates of aforementioned bonds are 6.00%, 7.85% and 7% respectively. -As of August 8, 2017, June 19, 2019 and September 26, 2019; the Bank has issued 10 year-term bills with a nominal value of TL 1,100,000,000, 800,000,000 and 350,000,000 (full TL amount) respectively, with floating interest rates for qualified investors without being offered to the public in Turkey, The bills mentioned are amounting to TL 13,546,931 as of December 31, 2019 (December 31, 2018: TL 11,158,801). As of March 28, 2017, TSKB, the subsidiary of the Parent Bank, included in the consolidation, issued a bond with a maturity of 10 years and a nominal value of USD 300 million with an interest rate of 7.625% with an interest payment of six months and a quasi-subordinated loan. The balance sheet value of the mentioned borrowing instrument at the end of the period is TL 1,830,045. (December 31, 2018: 1,549,774.) Current Period TL FC Prior Period TL FC Debt Instruments To Be Included In Additional Capital Calculation Subordinated Loans Subordinated Debt Instrument Debt Instruments To Be Included In Contribution Capital Calculation 2,281,084 13,095,892 1,136,214 11,572,361 Subordinated Loans Subordinated Debt Instrument Total m. Information on consolidated shareholders’ equity: m.1. Presentation of paid-in capital: Common shares Preferred shares Total 318 2,281,084 2,281,084 13,095,892 13,095,892 1,136,214 1,136,214 11,572,361 11,572,361 Current Period 4,499,970 30 Prior Period 4,499,970 30 4,500,000 4,500,000 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) m.2. Explanation as to whether the registered share capital system ceiling is applicable at bank, if so, the amount of registered share capital: Capital System Registered Capital System Paid-in Capital Ceiling 4,500,000 10,000,000 m.3. The capital increase made in current period: None. m.4. Capital increase through transfer from capital reserves during the current period: None. m.5. Significant commitments of the Parent Bank related to capital expenditures within the last year and the following quarter, the general purpose thereof, and the estimation of funds required for them: None m.6. Information on shares acquired by the Company: The Parent Bank has repurchased shares amounting to TL 530,307 in accordance with the Board of Directors Decision dated August 17, 2018. m.7. Previous periods’ indicators related to income, profitability and liquidity, and the estimated effects of forecasts, which are to be made by taking into consideration the uncertainties of these indicators, on the Group’s equity: The Parent Bank’s and the Group companies’ balance sheets are managed in a prudent way to ensure that the effect of risks arising from interest rates, exchange rates and loans is at the lowest level. m.8. Privileges Granted to Shares: Turkish Commercial Law and related registration are kept conditionally; Group (A) shares each with a nominal value of 1 Kurus have the privileges of; - receiving 20 times the number of shares in the distribution of bonus shares issued from conversion of extraordinary and revaluation reserves generated in accordance with the relevant laws (Article 18 of the Articles of Incorporation), - exercising the preference rights as 20 times (Article 19 of the Articles of Incorporation) and despite having a lower nominal value, Group (B) shares, each with a nominal value of 1 Kurus, have the same rights with the Group (C) shares having a nominal value of 4 Kurus each. Furthermore, Group (A) and (B) shares, each with a nominal value of 1 Kurus are granted privileges in distribution of profits pursuant to Article 58 of the Articles of Incorporation. m.9. Information on marketable securities value increase fund: Current Period Prior Period Financial Assets Available for Sale Valuation Difference Deferred Tax Effect on Valuation Foreign Exchange Differences Total n. Information on minority interest Balance at the beginning of the period Effect due to the Change in Accounting Policies Distributed Dividend Subsidiaries Profit/Loss on minority interest Effect of change in subsidiaries equity Effect of change in Group’s minority interest Period Ending Balance TL 859,773 1,078,795 (228,123) 9,101 859,773 FC (382,751) (510,696) 127,945 (382,751) Current Period 6,022,995 (130,003) 1,021,826 180,200 (29,429) 7,065,589 TL (725,182) (955,967) 223,887 6,898 (725,182) FC (1,198,836) (1,488,540) 289,704 (1,198,836) Prior Period 5,208,212 (1,278) (213,180) 899,561 121,316 8,364 6,022,995 III. DISCLOSURES AND FOOTNOTES ON CONSOLIDATED OFF-BALANCE SHEET ITEMS a. Explanations to Liabilities Related to Off-Balance Sheet Items: a.1. Types and amounts of irrevocable loan commitments: Commitment for customer credit card limits amounts to TL 31,090,963 and commitment to pay for cheque leaves amounts to TL 2,673,042. The amount of commitment for the forward purchase of assets is TL 1,494,782 and for the forward sale of assets is TL 1,495,120. a.2. The structure and amount of probable losses and commitments resulting from off-balance sheet items, including those below: The Group’s provisions for indemnified non-cash loans balance is TL 538,085 as of December 31, 2019 (December 31, 2018: TL 366,677) which is allocated for the non-cash loans of companies whose loans are followed under “Non-performing Loans” accounts, Commitments are shown in the table of “Off-balance sheet items”. a.3. Guarantees, bank acceptances, collaterals that qualify as financial guarantees, and non-cash loans including other letters of credit: Bank Acceptances Letters of Credit Other Guarantees Total Current Period 6,040,332 16,316,834 2,688,827 25,045,993 Prior Period 3,622,582 16,206,945 2,366,043 22,195,570 319 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.4. Certain guarantee, provisional guarantees, suretyships and similar transactions: Letters of Tentative Guarantees Letters of Certain Guarantees Letters of Advance Guarantees Letters of Guarantee Given to Customs Offices Other Letters of Guarantee Total a.5. Total Non-cash Loans: Non-cash Loans against Cash Risks With Original Maturity of 1 Year or Less With Original Maturity More Than 1 Year Other Non-cash Loans Total a. 6. Sectoral Risk Concentration of Non-cash Loans: Agriculture Farming and Stockbreeding Forestry Fishery Industry Mining and Quarrying Manufacturing Electricity, Gas, Water Construction Services Wholesale and Retail Trade Hotel and Restaurant Services Transportation and Communication Financial Institutions Real Estate and Rental Services Self-Employed Services Educational Services Health and Social Services Others Total Current Period 914,451 42,252,919 9,011,022 3,236,625 16,132,322 71,547,339 Current Period 18,989,874 4,831,681 14,158,193 77,603,458 96,593,332 TL 165,814 141,388 17,966 6,460 10,047,167 222,368 5,557,865 4,266,934 3,936,383 18,063,990 10,643,561 352,326 2,037,173 3,454,633 1,003,655 311,050 64,814 196,778 181,778 Current Period Prior Period (%) 0.51 0.44 0.06 0.01 31.01 0.69 17.16 13.16 12.15 55.76 32.86 1.09 6.29 10.66 3.10 0.96 0.20 0.60 0.57 FC 78,134 16,894 17 61,223 36,088,890 511,873 30,176,635 5,400,382 10,400,674 17,075,360 8,187,144 728,812 4,130,266 2,370,223 937,813 254,673 1,708 464,721 555,142 (%) 0.12 0.03 0.00 0.09 56.21 0.80 47.01 8.40 16.20 26.60 12.75 1.14 6.43 3.69 1.46 0.40 0.00 0.73 0.87 TL 138,435 101,744 30,549 6,142 (%) 0.42 0.31 0.09 0.02 FC 67,949 32,833 17 35,099 10,545,222 31.98 32,826,928 220,160 5,801,063 4,523,999 4,193,450 17,924,103 9,778,187 278,028 1,416,160 4,392,196 1,482,924 314,960 67,124 194,524 176,233 0.67 17.59 13.72 12.72 54.35 29.65 0.84 4.29 13.32 4.50 0.96 0.20 0.59 0.53 263,049 28,249,553 4,314,326 10,096,862 17,087,056 8,839,963 562,036 3,157,976 2,559,582 1,221,193 256,185 2,846 487,275 497,242 Prior Period 730,285 40,427,889 12,341,170 3,004,272 14,854,294 71,357,910 Prior Period 16,516,174 5,275,408 11,240,766 77,037,306 93,553,480 (%) 0.11 0.05 0.00 0.06 54.19 0.43 46.63 7.13 16.67 28.21 14.59 0.93 5.21 4.23 2.02 0.42 0.00 0.81 0.82 32,395,132 100.00 64,198,200 100.00 32,977,443 100.00 60,576,037 100.00 a.7. Non-cash Loans classified under Group I and Group II: Non-cash Loans Letters of Guarantee Bank Acceptances Letters of Credit Endorsements Underwriting Commitments of the Securities Issued Factoring Related Guarantees Other Guaranties and Warranties 320 Group I TL FC Group II TL FC 30,522,917 62,642,934 1,872,215 1,555,266 30,374,399 37,799,216 1,872,215 1,501,509 6,038,417 107,344 16,157,648 1,915 51,842 12,703 28,471 2,647,653 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Explanation on Derivative Financial Instruments: Majority of the Group’s derivative transactions comprise foreign currency and interest rate swaps, forward foreign exchange trading, and currency and interest rate options. Even though some derivative transactions economically provide risk hedging, since all necessary conditions to be defined as items suitable for financial risk hedging accounting are not meet the Group does not have any derivative transaction recognized as held for trading purposes. Derivatives, which are designed to hedge changes in fair values of financial instruments and meet required criterion are classified as derivatives held for hedge accounting purposes. c. Explanations Related to Contingencies and Commitments: The balance of the “Other Irrevocable Commitments” account, which comprised the letters of guarantees, guarantees and commitments submitted by the Group pursuant to its own internal affairs and guarantees given to third parties by other institutions in favor of the Parent Bank and the commitments due to housing loans extended within the scope of unfinished house projects followed, amounts to TL 9,648,327. The cheques given to customers is presented under off balance sheet commitments, as per the related regulations is amounting to TL 2,673,042 in case the cheques presented for payment to beneficiaries are not covered, the Parent Bank will be obliged to pay the uncovered amount up to TL 1,255 (exact amount expressed) for the cheques that are subject to the Law numbered 3167 on “the Regulation of Payments by Cheque and Protection of Cheque Holders”, and up to TL 2,030 (exact amount) for the cheques that are subject to the “Cheque Law” numbered 5941, The uncollected amount will be followed under “Indemnified Non-Cash Loans. d. Explanations related to transactions made on behalf of or on the account of others: It is explained in Note X under Section Four. IV. DISCLOSURES AND FOOTNOTES ON THE CONSOLIDATED INCOME STATEMENT a. Interest Income a.1. Information on interest income on loans: Interest Income on Loans (1) Short-term Loans Medium and Long-term Loans Interest on Non-performing Loans Premiums Received from State Resource Utilization Support Fund Current Period TL FC Prior Period TL 7,331,060 17,423,428 948,843 1,154,921 8,724,143 94,031 7,342,647 16,007,634 803,263 FC 788,227 8,186,255 44,137 Total 25,703,331 9,973,095 24,153,544 9,018,619 (1) Includes fee and commission income on cash loans. a.2. Information on interest income on banks: The Central Bank of Turkey Domestic Banks Foreign Banks Foreign Head Offices and Branches Total a.3. Information on interest income from securities: Financial Assets at Fair Value through Profit and Loss Financial Assets at Fair Value through Other Comprehensive Income Financial Assets Measured at Amortized Cost Total a.4. Information on interest income received from associates and subsidiaries: Interest Income from Associates and Subsidiaries Current Period TL FC Prior Period TL 232,872 218,028 65,338 193,967 422,946 44,042 FC 1,481 150,020 47,829 450,900 259,305 466,988 199,330 Current Period Prior Period TL 66,658 5,211,180 3,944,090 9,221,928 FC 6,627 904,274 126,966 1,037,867 TL 85,957 4,507,308 3,108,475 7,701,740 FC 9,587 788,598 73,552 871,737 Current Period Prior Period 130 321 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) b. Interest Expense b.1. Information on interest expense from funds borrowed: Banks Central Bank of Turkey Domestic Banks Foreign Banks Foreign Head Offices and Branches Other Institutions Total (1) (1) Includes fee and commission expenses from cash loans. b.2. Information on interest paid to associates and subsidiaries: Interest Paid to Associates and Subsidiaries b.3. Information on interest paid on marketable securities issued: Interest on Securities Issued b.4. Information on Interest Expense on Deposits According to Maturity Structure: Current Period Prior Period TL FC TL FC 652,615 1,347,680 576,137 1,310,255 401,149 251,466 2,738 129,501 1,215,441 246,954 329,183 2,481 92,823 1,214,951 3,811 903,869 2,794 810,558 656,426 2,251,549 578,931 2,120,813 Current Period Prior Period 65,199 63,790 Current Period Prior Period TL FC TL FC 2,152,510 2,642,579 1,569,764 2,532,885 Demand Deposits Up to One Month Up to Three Months Up to Six Months Up to One Year Over One Year Accumulated Deposits Time Deposits 178,126 313,781 450 123,118 8,356,242 8,621 81 849,297 35 1,449 118,412 910 125,482 12 17 951,617 2,055,076 222,323 89,649 163,793 71,575 589,640 448,182 9,440 248 Total 303,684 1,330 9,764,544 9,118 3,482,475 1,119,085 17 1,515,549 11,132,697 1,519,918 218,950 290,445 1,330 14,678,906 727 4,235 163,875 3,935 1,233,022 8,993 104,168 4,577 65,241 7,396 209,726 10,531 22 1,776,781 39,667 4,962 4,979 858 1,865 98 168,668 1,243,880 108,843 10,728 83,365 1,684,217 12,376,577 1,628,761 302,315 789 221,046 511,491 14,338 22 1,830,786 1,352 16,509,692 Current Period TL Bank Deposits Savings Deposits Public Sector Deposits Commercial Deposits Other Institutions Deposits Deposits with 7 Days Notice Total FC Foreign Currency Deposits Bank Deposits Deposits with 7 Days Notice Precious Metals Deposits Total Grand Total 322 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Prior Period TL Bank Deposits Savings Deposits Public Sector Deposits Commercial Deposits Other Institutions Deposits Deposits with 7 Days Notice Total FC Foreign Currency Deposits Bank Deposits Deposits with 7 Days Notice Precious Metals Deposits Total Grand Total Demand Deposits Up to One Month Up to Three Months Up to Six Months Up to One Year Over One Year Accumulated Deposits Time Deposits 1 1 7 261,787 244,865 160 78,816 7,076,423 6,707 606,941 1,639,678 8523 513,587 113 133,902 194 44,014 31,581 165 48,605 24 71,937 816 38,286 329,788 191,843 2,590 229 Total 349,486 7,928,311 7,004 2,484,046 562,736 9 1,152,039 9,131,412 847,968 78,379 120,960 816 11,331,583 777 3,226 180,548 5,753 1,209,076 20,393 106,252 3,273 67,439 6,762 376,101 5,583 20 1,940,213 44,990 4,003 4,012 1278 187,579 1267 1,230,736 1,339,618 10,362,148 40 109,565 957,533 6,510 80,711 159,090 489 382,173 503,133 20 836 9,584 1,994,787 13,326,370 e. Information on dividend income: Financial Assets at Fair Value Through Profit and Loss Financial Assets at Fair Value Through Other Comprehensive Income Other Total f. Information on trading income/losses (Net): Income Securities Trading Gains Gains on Derivative Financial Instruments (1) Foreign Exchange Gains Losses (-) Securities Trading Losses Losses on Derivative Financial Instruments (1) Foreign Exchange Losses Trading Income/Losses (Net) Current Period Prior Period 9,749 9,721 1,349 20,819 12,976 5,501 1,178 19,655 Current Period Prior Period 529,061,005 746,676,800 17,579,583 9,689,144 35,365,769 20,732,885 476,115,653 716,254,771 533,694,925 748,970,486 17,149,515 9,491,588 40,336,567 23,334,048 476,208,843 716,144,850 (4,633,920) (2,293,686) (1) Income arising from foreign currency changes related to derivative transactions amounting TL 30,910,020 and the losses amounting TL 35,780,431 and the amount of net loss is TL 4,870,411. (December 31, 2018: income TL 17,401,443, losses TL 20,842,723 and net loss TL 3,441,280) g. Information on other operating income: As at reporting period, TL 7,186,461 of other operating income sources from inclusion and classification of operations of insurance and reinsurance companies; 93% of which is from insurance premiums. (December 31, 2018: 5,800,208 TL, 90%). The remaining amount mainly consists of expected credit losses and reversals of free provisions amounting TL 375,000 for possible risks which was provided in the current period or collections from Stage 3 loans, income from fees received from customers in return for various banking services and sales of fixed assets. 323 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) h. Information on provision expenses on loans and other receivables: Expected Credit Loss Expected Credit Loss for 12 Months (Stage 1) Significant Increase in Credit Risk (Stage 2) Non-Performing Loans (Stage 3) Impairment Losses on Marketable Securities Financial Assets at Fair Value through Profit and Loss Financial Assets at Fair Value Through Other Comprehensive Income Impairment Losses on Investments in Associates, Subsidiaries, Jointly Controlled Entities and Investments Held to Maturity Associates Subsidiaries Jointly Controlled Entities Other (1) Total Current Period Prior Period 8,570,651 602,233 1,151,702 6,816,716 1,485 1,485 664,147 9,236,283 6,904,155 452,877 2,237,703 4,213,575 5,080 5,080 4,524 4,524 99,094 7,012,853 (1) Includes provision for impairment of financial assets at fair value through profit or loss, doubtful trade receivables and free provisions amounting TL 300,000 in the current period. i. Other operating expenses: Reserve for Employee Termination Benefits Bank Pension Fund Deficit Provisions Impairment Losses on Tangible Assets Depreciation Expenses of Tangible Assets Impairment Losses on Intangible Assets Impairment Losses on Goodwill Amortization Expenses of Intangible Assets Impairment Losses on Investments Accounted Under Equity Method Impairment Losses on Assets to be Disposed Depreciation Expenses of Assets to be Disposed Impairment Losses on Assets Held for Sale and Subject to Discontinued Operations Other Operating Expenses Leasing Expenses Related to Exceptions to IFRS 16 (1) Repair and Maintenance Expenses Advertisement Expenses (2) Other Expenses (2) Loss on Sale of Assets Other Total Current Period Prior Period 154,623 627,201 650,956 113,971 242,492 49,927 298,340 352,303 361,958 435 3,030,987 122,386 248,109 251,738 2,408,754 46,345 7,397,662 4,436 2,965,690 418,811 191,342 235,361 2,120,176 5,579 6,111,953 12,260,512 10,154,346 (1) TFRS 16 Leases standard has been started to be applied as of 01.01.2019 and no adjustment has been made in the previous period. (2) Expense amount of the Bank’s donation, aid and social responsibility projects is TL 65,742 in the current period. (December 31, 2018: TL 54,244) In the table above, TL 5,831,689 of the operating expenses classified as “Other” are consist from the related sector companies due to the expense related to the activities of insurance and reinsurance companies in this item, and significant portion of the related expenses constitute paid compensation expenses (December 31, 2018: TL 5,652,737). In the current period, TL 503,192 consists of the fees, taxes, duties and funds are other expenses classified under “Other”. j. Information on profit/loss before tax from continuing and discontinued operations The Group’s pre-tax profit stems from ongoing activities. Profit before tax consists of net interest income of TL 22,799,078, net fees and commission income of TL 4,611,770 and total of other operating expenses is TL 17,512,911. i. Information on Provision for taxes including taxes from continuing and discontinued operations As of December 31, 2019 the amount of the Group’s tax provision is TL 1,422,289 and the amount consists of current tax expense amounting to TL 2,473,633 and consists of deferred tax income amounting TL 1,051,344. Group has no discontinued operations. j. Information on net operating profit/loss from continuing and discontinued operations: The Group’s net profit generated from its continuing operations amounts to TL 7,031,631. 324 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) k. Information on net period profit/loss: k.1. Income and expenses resulting from ordinary banking activities: There is no specific issue required to be disclosed for the Group’s performance for January 1, 2019-December 31, 2019. k.2. Effects of changes in accounting estimates on the current and future periods’ profit/loss: There is no issue to be disclosed. k.3. “The Other’’ item which is located at the bottom “Fees and Commissions Received” in the income statement consist of various fees and commissions received from transactions such as credit card transactions, capital market transactions and insurance-reinsurance transactions. k.4. Net profit/loss of Minority Interest: Net Profit/Loss of Non-controlling Interest l. Information on other items in income statement Current Period 1,021,826 Prior Period 899,561 Other items do not exceed 10% of the total amount of the income statement. V. DISCLOSURES AND FOOTNOTES ON CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY The paid-in capital is TL 4,500,000 in legal records. As of balance sheet date, the balance of legal reserves is TL 4,898,303, the balance of extraordinary reserves is TL 135,606 and the balance of statuary reserves is TL 31,810,978. The details of revaluation surplus account of securities are shared in the Note Section V-II-l-9. TL (100,178) of this amount is the deferred tax effect on marketable securities at fair value through other comprehensive income (December 31, 2018: TL 513,591). VI. DISCLOSURES AND FOOTNOTES ON THE CONSOLIDATED STATEMENS OF CASH-FLOWS The consolidated operating profit of TL 17,290,799 before the changes in operating assets and liabilities mostly comprised of TL 46,839,437 of interest received from loans and securities, and TL 25,968,978 of interest paid on deposits, money market transactions and funds borrowed by the Bank. An important part of other revenues, TL 5,760,716 consists of premium collections of insurance companies. The account “Other” classified under operating profit other than fees and commissions paid, cash payments to personnel and service suppliers and taxes paid consists of other operating expenses and foreign exchange gains/losses accounts is TL (5,916,139) (December 31, 2018: (3,151,196)). Net Increase (Decrease) in Other Liabilities account classified in changes of assets and liabilities resulting from the changes in Funds Provided Under Repurchase Agreements, miscellaneous payables, other liabilities and taxes, duties, charges, and premiums is decreased by TL 890,902 (December 31, 2018: TL 8,870,657 increase). The Net Cash Provided from Other Investing Activities account includes net cash flows from the sale of intangible assets and declined by TL 656,217 (December 31, 2018: TL 438,831 decrease). The effect of changes in foreign exchange rates on cash and cash equivalents is on the positive side TL 909,669 as of December 31, 2019. Due to the high rate of turnover of related foreign currency assets, the difference between the last 30 days’ arithmetic average of currency exchange rates and the year-end currency exchange rate is used to calculate the effect of change in foreign exchange rate. Under the same assumption, the effect of change in foreign exchange rate on cash and cash equivalents is calculated. Cash, cash in foreign currency, unrestricted deposits in Central Bank of Turkey, money in transit, cheques purchased, money market operations as well as demand deposits and time deposits up to 3 months are defined as cash and cash equivalents. Cash and cash equivalents at beginning of period: Cash Cash in TL and Foreign Currency Central Bank of Turkey and Other Cash Equivalents Receivables from Money Market Operations Banks’ Demand Deposits and Time Deposits Up to 3 Months Total Cash and Cash Equivalents December 31, 2018 December 31, 2017 23,065,119 4,857,428 18,207,691 11,574,069 753,146 10,820,923 34,639,188 12,794,015 3,342,048 9,451,967 8,494,826 464,818 8,030,008 21,288,841 The total amount resulting from the transactions made in the previous period shows the total cash and cash equivalents as of the beginning of the current period. Cash and Cash equivalents as of end of the period: Cash Cash in TL and Foreign Currency Central Bank of Turkey and Other Cash Equivalents Receivables from Money Market Operations Banks’ Demand Deposits and Time Deposits Up to 3 Months Total Cash and Cash Equivalents December 31, 2019 December 31, 2018 29,663,454 5,519,980 24,143,474 18,075,154 1,166,865 16,908,289 47,738,608 23,065,119 4,857,428 18,207,691 11,574,069 753,146 10,820,923 34,639,188 325 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) VII. DISCLOSURES AND FOOTNOTES ON THE GROUP’S RISK GROUP a. Information on the volume of transactions relating to the Group’s risk group, incomplete loan and deposit transactions and period’s profit and loss: a.1. Information on loans held by the Group’s risk group: Current Period: Group’s Risk Group Loans and other receivables Balance at the beginning of the period Balance at the end of the period Interest and commission income received Prior Period: Group’s Risk Group Loans and other receivales Balance at the beginning of the period Balance at the end of the period Interest and commission income received a.2. Information on deposits held by the Group’s risk group: Group’s Risk Group Deposits Balance at the beginning of the period Balance at the end of the period Interest expense on deposits Group’s Risk Group Deposits Balance at the beginning of the period Balance at the end of the period Interest expense on deposits Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Cash Non-Cash Cash Non-Cash Cash Non-Cash 278 218 5,830,957 5,999,538 497 447,270 2,963,240 213,567 530,059 884,605 2,354 Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Cash Non-Cash Cash Non-Cash Cash Non-Cash 225 278 130 3,936,058 5,830,957 314 239,279 447,270 35,557 464,648 530,059 1,805 Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Current Period Current Period Current Period 581,002 932,049 64,882 178,624 8,896 10,004 2,597,067 7,802,825 199,317 Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group Prior Period Prior Period Prior Period 852,148 581,002 61,933 148,163 178,624 38,950 2,634,406 2,597,067 146,667 326 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) a.3. Information on forward and option and other similar agreements made with the Group’s risk group: Current Period: Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group 102,582 20,898 Investments in Associates, Subsidiaries and Jointly Controlled Entities (Joint Ventures) Direct and Indirect Shareholders of the Bank Other Real Persons and Corporate Bodies that have been Included in the Risk Group 102,582 20,898 (94) Group’s Risk Group Transactions at Fair Value Through Profit and Loss Beginning of the period End of the period Total Profit/Loss Transactions for hedging purposes Beginning of the period End of the period Total Profit/Loss Prior Period: Group’s Risk Group Transactions at Fair Value Through Profit and Loss Beginning of the period End of the period Total Profit/Loss Transactions for hedging purposes Beginning of the period End of the period Total Profit/Loss b. Disclosures for the Group’s risk group: In accordance with the relevant decision of the Banking Regulation and Supervision Agency, the special purpose entity and the mentioned company’s subsidiary Türk Telekom A.Ş, are not included in the Bank’s risk group, where details are disclosed in Section V, footnote I.f.2 and footnote I.r. b.1. The relations of the Group with corporations in its risk group and under its control regardless of any transactions between the parties: All types of corporate and retail banking services are provided to these corporations in line with the articles of Banking Law. b.2. The type and amount of transaction carried out, and its ratio to the overall transaction volume, values of principal items and their ratios to overall items, pricing policy and other items in addition to the structure of the relationship: The transactions carried out are mainly loan and deposit transactions, The ratio of loans extended to the risk group to the overall loans is 0.96%, while the ratio to the overall assets is 0.52% the ratio of deposits of the risk group corporations to the overall deposits is 2.89%, while the ratio to overall liabilities is 1.55%, The comparable pricing policy is used for the transactions. b.3. Purchase and sale of real estates, other assets and services, agency agreements, finance lease contracts, transfer of information obtained through research and development, license agreements, funding (including loans and provision of support as cash capital or capital-in-kind), guarantees and collaterals and management agreements: The Parent Bank’s branches act as agents for Anadolu Anonim Türk Sigorta Şirketi and Anadolu Hayat Emeklilik A.Ş. Furthermore, through its branches the Bank also acts as agent for İş Yatırım Menkul Değerler A.Ş, and İş Portföy Yönetimi A.Ş, 17 mutual funds which are founded by the Anadolu Hayat Emeklilik A.Ş, are managed by İş Portföy Yönetimi A.Ş, throughout the requirements, the Bank acquires its properties through its associate, İş Finansal Kiralama A.Ş.If requested, the cash and non-cash loan needs of the risk group companies are met in accordance with the limits imposed by Banking Law and the prevailing market conditions. c. Total salaries and similar benefits paid to the (executive members and senior executives) In the current period, the net payment provided to the key management of Group amounts TL 116,469. (December 31, 2018: TL 102,382). 327 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) VIII. DISCLOSURES ON THE GROUP’S DOMESTIC, FOREIGN, OFF-SHORE BRANCHES OR PARTICIPATIONS AND REPRESENTATIVE OFFICES The Parent Bank - Türkiye İş Bankası A.Ş. Domestic Branches(1) Foreign Representative Offices Foreign Branches Number 1,249 Employees 23,736 Country of Incorporation 1 1 2 15 2 2 1 3 2 42 200 36 28 6 China Egypt England TRNC Iraq Kosovo Bahrain Off-Shore Branches (1) The Branches located in Free Trade Zones in Turkey are included among domestic branches. İşbank AG Domestic Branches(1) Foreign Representative Offices Number 10 Employees 160 Country of Incorporation Total Assets 18,576,897 6,621,320 1,369,402 901,150 3,839,311 Legal Capital 777 80,000 293,236 66,100 Foreign Branches 1 5 Netherlands Total Assets 584,703 Legal Capital Off-Shore Branches (1) The branches of the company, which is headquartered in Germany, in Germany are shown as domestic branches Milli Reasürans T.A.Ş. Domestic Branches Foreign Representative Offices Foreign Branches Off-Shore Branches Number 1 1 Employees 203 Country of Incorporation Total Assets Legal Capital 12 Singapore 265,647 178,206 328 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) JSC İşbank Domestic Branches (1) Foreign Representative Offices Foreign Branches Off-Shore Branches Number 3 Employees 122 Country of Incorporation (1) The branches of the company, which is headquartered in Moscow, in Russia are shown as domestic branches. JSC İşbank Georgia Domestic Branches (1) Foreign Representative Offices Foreign Branches Off-Shore Branches Number 2 Employees 68 Country of Incorporation (1) The branches of the company, which is headquartered in Tiflis, in Georgia are shown as domestic branches. Number of employees of consolidated companies that does not have agencies and branches abroad: Anadolu Anonim Türk Sigorta Şirketi Anadolu Hayat Emeklilik A.Ş. Efes Varlık Yönetimi A.Ş. İş Faktoring A.Ş. İş Finansal Kiralama A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. İş Portföy Yönetimi A.Ş. İş Yatırım Menkul Değerler A.Ş. İş Yatırım Ortaklığı A.Ş. Maxis Girişim Sermayesi Yatırım Ortaklığı A.Ş Maxis Investments Ltd (1) TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. Yatırım Finansman Menkul Değerler A.Ş. Total Assets Legal Capital Total Assets Legal Capital Employees 1,317 1,086 128 114 135 72 10 67 345 6 4 11 10 375 121 (1) The Company, which is headquartered in London, does not have any branch or representative office beside its head office. Yatırım Varlık Kiralama A.Ş. which is included to scope of consolidation during the current period does not have any employees. IX. SUBSEQUENT EVENTS With the resolution of the Bank’s Board of Directors decision dated September 17, 2019 regarding issuance of securities, the Bank has issued commercial paper with total nominal value of TL 2,829,837 thousand after December 31, 2019. With the resolution of the Bank’s Board of Directors decision regarding issuance of securities abroad, Bank has issued a marketable security with 10 years maturity, recall option on 5th year, nominal value of USD 750,000,000 and 7.75% interest rate on January 22, 2020. With the resolution of the Board of Directors of Türkiye İş Bankası A.Ş. (Isbank) dated 30.01.2020, the Head Office has been authorized to carry out necessary activities regarding the merger process of Türkiye Şişe ve Cam Fabrikaları A.Ş. with Trakya Cam Sanayii A.Ş., Anadolu Cam Sanayii A.Ş., Soda Sanayii A.Ş., Paşabahçe Cam San. ve Tic. A.Ş. and Denizli Cam Sanayii ve Tic. A.Ş. through acquisition which is considered to contribute to the enhancement of financial performance, profitability and company value of Şişecam Group in line with its long term strategies and competitive targets in global markets. This authorization is subject to the continuity of Isbank’s control share in paid-up capital of Türkiye Şişe ve Cam Fabrikaları A.Ş., based on company values and exchange ratios to be determined by the Expert Institution Report, which will be drawn-up as a result of the independent valuation process that should be undertaken by the companies being a party to merger in accordance with the related legislation. Türkiye Sınai Kalkınma Bankası A.Ş. has issued a eurobond with nominal value of USD 400,000,000 to abroad. The redemption date of the fixed rate, 5 years maturity eurobond which was sold on January 23, 2020 is January 23, 2025 and it has 6% coupon rate. 329 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Rating Outlook (*) B3 B3 B3 NP NP B+ B+ B B A+ (tur) b+ 4 B+ B trA+ trA-1 Rating B B+ B B A+(tur) 4 Negative Negative Negative - - Negative Stable - - Stable - - Negative - - - Outlook Negative Negative - - Stable - SECTION SIX: OTHER EXPLANATIONS I. EXPLANATIONS ON THE GROUP’S CREDIT RATINGS: MOODY’S Long-term Foreign Currency Deposit Long-term Local Currency Deposit Long-term Foreign Currency Senior Debt Short-term Foreign Currency Deposit Short-term Local Currency Deposit FITCH RATINGS Long-term Foreign Currency Issuer Default Rating Long-term Local Currency Issuer Default Rating Short-term Foreign Currency Issuer Default Rating Short-term Local Currency Issuer Default Rating National Long-term Rating Viability Rating Support Rating STANDARD & POOR’S Long-term Counterparty Credit Rating Short-term Counterparty Credit Rating Long-term National Scale Rating Short-term National Scale Rating İş Finansal Kiralama A.Ş. FITCH RATINGS Long-term Foreign Currency Issuer Default Rating Long-term Local Currency Issuer Default Rating Short-term Foreign Currency Issuer Default Rating Short-term Local Currency Issuer Default Rating National Long-term Rating Support Rating 330 İşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Türkiye Sınai Kalkınma Bankası A.Ş. MOODY’S Baseline Credit Assessment Long-term Foreign Currency Issuer Rating Short-term Foreign Currency Issuer Rating Long-term Local Currency Issuer Rating Short-term Local Currency Issuer Rating Senior Unsecured Debt Foreign Currency Issuer Rating Foreign Currency GMTN Program Rating FITCH RATINGS Long-term Foreign Currency Issuer Default Rating Long-term Local Currency Issuer Default Rating Short-term Foreign Currency Issuer Default Rating Short-term Local Currency Issuer Default Rating Long-term National Rating Support Rating Support Rating Subordinated Debt Rating Financial Capacity Rating (*) Outlook: Rating Outlook(*) caa1 B3 NP B3 NP B3 (P)B3 B+ BB- B B AA 4 B+ B b+ - Negative - Negative - Negative - Stable Stable - - Stable - - - - “Stable” indicates that the current rating will not be changed in the short term; “positive” indicates that the current rating is very likely to be upgraded and “negative” indicates that the current rating is very likely to be downgraded. The dates below given are on which the credit ratings were last updated: Moody’s: 18.06.2019 Fitch Ratings: November 12, 2019. Standard&Poor’s: August 17, 2018. SECTION SEVEN: EXPLANATIONS ON THE INDEPENDENT AUDITORS’ REPORT I. EXPLANATIONS ON THE INDEPENDENT AUDITORS’ REPORT: The consolidated financial statements and disclosures for the period ended December 31, 2019 have been audited by Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi (A member firm of Ernst&Young Global Limited) and the independent auditor’s report dated February 7, 2020, is presented preceeding the consolidated financial statements. II. EXPLANATIONS AND FOOTNOTES OF THE INDEPENDENT AUDITORS REPORT There are no significant issues or necessary disclosures or notes in relation to the Group’s operations other than those mentioned above. 331 Financial Informationand Risk Managementİşbank Annual Report 2019Türkiye İş Bankası A.Ş.Notes to the Consolidated Financial StatementsFor the Year Ended December 31, 2019(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three)(Amounts expressed in thousand Turkish Lira (TL) unless otherwise stated.) Financial Highlights and Key Ratios for the Five-Year Period UNCONSOLIDATED ASSETS (TL thousand) Cash and Equivalents Banks and Receivables from Interbank Money Markets (1) Securities (Net) (2) Loans (3) Associates and Subsidiaries (Net) Fixed Assets (Net) Other Assets (4) Total Assets LIABILITIES (TL thousand) Deposits Funds Borrowed and Interbank Money Market Placements (5) Provisions (6) Other Liabilities Shareholders’ Equity Total Liabilities INCOME STATEMENT (TL thousand) Interest Income (7) Interest Expenses (7) Net Interest Income Net Trading Income Net Fees and Commissions Income Dividend Income Other Operating Income Total Operating Income Operating Expenses (8) NET OPERATING PROFIT/LOSS (9) Provision for Losses on Loans and Other Receivables (10) Profit/Loss from subsidiaries Based on Equity Method PROFIT/(LOSS) BEFORE TAXES Provision for Taxes NET PERIOD PROFIT/LOSS KEY RATIOS Interest Earning Assets (11) / Total Assets Interest Earning Assets (11) / Interest Bearing Liabilities Securities / Total Assets Loans / Total Assets Loans / Deposits Retail Loans / Total Loans NPL Ratio Coverage Ratio Demand Deposits / Total Deposits Shareholders’ Equity / Total Liabilities Capital Adequacy Standard Ratio Return on Average Assets (12) Return on Average Equity (12) Cost / Income (13) OTHER INFORMATION (TL thousand) Regulatory Capital Core Capital Free Capital (14) Demand Deposits 2015/12 2,844,408 30,325,618 44,780,864 177,036,620 9,393,597 4,747,116 6,589,361 275,717,584 2015/12 153,802,426 72,305,908 4,241,917 13,332,343 32,034,990 275,717,584 2015/12 19,200,361 10,214,805 8,985,556 -868,620 2,388,802 554,940 1,108,588 12,169,266 6,327,389 5,841,877 2,058,180 - 3,783,697 701,006 3,082,691 2015/12 91.3% 111.4% 16.2% 64.2% 115.1% 26.4% 2.0% 75.1% 22.6% 11.6% 15.6% 1.2% 10.4% 52.0% 2015/12 37,766,807 32,380,827 21,723,275 34,683,265 2016/12 3,742,497 30,913,211 51,309,768 203,143,845 11,890,718 4,838,475 7,235,720 313,074,234 2016/12 177,359,976 78,872,749 4,470,748 14,961,459 37,409,302 313,074,234 2016/12 22,327,585 11,490,304 10,837,281 -816,736 2,840,357 682,673 1,313,972 14,857,547 6,506,124 8,351,423 2,597,641 - 5,753,782 1,052,576 4,701,206 2016/12 91.1% 111.3% 16.4% 64.9% 114.5% 24.9% 2.4% 77.5% 24.6% 11.9% 15.2% 1.6% 13.6% 43.8% 2016/12 40,996,321 35,505,450 24,295,964 43,598,933 2017/12* 3,363,250 35,060,422 57,351,543 239,408,795 13,802,243 5,162,561 8,094,719 362,243,533 2017/12* 203,752,032 92,457,257 8,808,734 14,241,243 42,984,267 362,243,533 2017/12* 27,655,465 14,447,809 13,207,656 -1,878,444 3,373,715 11,072 1,146,647 15,860,646 7,395,787 8,464,859 2,633,246 1,610,386 7,441,999 1,240,720 6,201,279 2017/12* 91.5% 111.9% 15.8% 66.1% 117.5% 23.8% 2.2% 86.0% 26.3% 11.9% 16.7% 1.8% 15.4% 42.3% 2017/12* 50,559,960 42,474,633 29,874,011 53,501,377 2018/12 4,888,627 43,630,394 68,133,659 260,316,291 17,638,720 5,996,958 15,782,955 416,387,604 2018/12 245,268,846 94,468,343 6,256,462 20,673,329 49,720,624 416,387,604 2018/12 38,840,381 21,788,130 17,052,251 -4,071,660 4,405,201 6,425 1,912,307 19,304,524 8,039,721 11,264,803 6,343,674 2,808,736 7,729,865 960,780 6,769,085 2018/12 89.3% 109.4% 16.4% 62.5% 106.1% 22.4% 4.1% 58.7% 24.4% 11.9% 16.5% 1.7% 14.8% 36.4% 2018/12 58,950,530 49,052,634 29,896,338 59,961,577 2019/12 5,661,559 60,525,991 84,246,760 270,360,084 21,070,554 8,478,257 17,716,266 468,059,471 2019/12 295,922,002 86,102,534 7,042,357 20,119,113 58,873,465 468,059,471 2019/12 43,042,350 23,183,222 19,859,128 -6,397,400 5,569,128 9,098 3,146,751 22,186,705 9,792,544 12,394,161 8,325,906 2,806,196 6,874,451 806,864 6,067,587 2019/12 89.0% 109.0% 18.0% 57.8% 91.4% 23.6% 6.5% 54.7% 28.4% 12.6% 17.9% 1.4% 11.4% 39.2% 2019/12 69,198,849 57,971,231 30,903,681 84,040,178 (*) Changes in accounting policy were applied retrospectively; accordingly, the financial statements of the year 2017 were restated due to the changes in the valuation methodology of associates and subsidiaries. (1) Includes balances at the Central Bank and required reserves. (2) 2019/12 balance does not include the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss. (3) Excludes Non-performing Loans. 2018/12 period includes the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss. (4) Includes general provisions after 2017/12 period, and includes the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss in 2019/12 period. (5) Includes Turkish Lira and foreign currency securities issued and subordinated debts. (6) Due to the change in accounting policy, general provisions are not classified in this item after 2017/12 period. (7) Fees and Commissions Received from Cash Loans are shown in Interest Income, Fees and Commissions Given to Cash Loans are shown in Interest Expenses. (8) Includes Personnel Expenses. (9) Net Operating Profit / Loss = Total Operating Income - Operating Expenses (10) Named as “Provision for Losses on Loans and Other Receivables” prior to the 2018/12 period. (11) Interest earning assets include Turkish Lira and foreign currency required reserves. (12) Averages are calculated by using restated year-end figures for 2017/12 period and by using quarterly balances for the other periods. (13) Operating Income = Total Operating Income + Profit/Loss from Subsidiaries Based on Equity Method (14) Free Capital = Shareholders’ Equity - (Fixed Assets + Non-Financial Associates and Subsidiaries + Net Non-performing Loans) 332 İşbank Annual Report 2019 CONSOLIDATED ASSETS (TL thousand) Cash and Equivalents Banks and Receivables from Interbank Money Markets (1) Securities (Net) (2) Loans, Factoring Receivables and Lease Receivables (3) Associates and Subsidiaries (Net) Fixed Assets (Net) Other Assets (4) Total Assets LIABILITIES (TL thousand) Deposits Funds Borrowed and Interbank Money Market Placements (5) Provisions (6) Other Liabilities Shareholders’ Equity Total Liabilities INCOME STATEMENT (TL thousand) Interest Income (7) Interest Expenses (7) Net Interest Income Net Trading Income Net Fees and Commissions Income Dividend Income Other Operating Income Total Operating Income Operating Expenses (8) NET OPERATING PROFIT/LOSS (9) Provision for Losses on Loans and Other Receivables (10) Profit/Loss from subsidiaries Based on Equity Method PROFIT/(LOSS) BEFORE TAXES Provision for Taxes NET PERIOD PROFIT/LOSS KEY RATIOS Interest Earning Assets (11) / Total Assets Interest Earning Assets (11) / Interest Bearing Liabilities Securities / Total Assets Loans / Total Assets Loans / Deposits Retail Loans / Total Loans NPL Ratio Coverage Ratio Demand Deposits / Total Deposits Shareholders’ Equity / Total Liabilities Capital Adequacy Standard Ratio Return on Average Assets (12) Return on Average Equity (12) Cost / Income (13) OTHER INFORMATION (TL thousand) Regulatory Capital Core Capital Free Capital (14) Demand Deposits 2015/12 2,870,757 37,303,516 52,558,209 198,060,048 4,948,894 9,405,417 20,352,131 325,498,972 2015/12 154,201,290 98,396,171 13,562,294 22,655,691 36,683,526 325,498,972 2015/12 21,406,966 11,211,101 10,195,865 -325,160 1,807,881 256,696 5,869,814 17,805,096 10,940,293 6,864,803 2,289,722 14,818 4,589,899 850,228 3,739,671 2015/12 88.3% 113.8% 16.1% 59.3% 125.1% 24.4% 2.0% 73.8% 22.9% 11.3% 15.1% 1.2% 10.7% 51.6% 2015/12 41,654,637 35,428,502 21,427,087 35,239,348 2016/12* 3,770,953 39,186,809 59,622,108 230,824,082 6,010,149 9,921,047 24,485,116 373,820,264 2016/12* 179,159,438 110,736,096 14,813,554 27,300,009 41,811,167 373,820,264 2016/12* 25,061,299 12,639,534 12,421,765 -417,002 2,148,533 318,223 6,716,704 21,188,223 11,314,488 9,873,735 2,835,495 12,871 7,051,111 1,353,214 5,697,897 2016/12* 88.1% 113.6% 15.9% 59.9% 125.0% 22.7% 2.3% 76.1% 24.9% 11.2% 14.3% 1.7% 14.5% 42.2% 2016/12* 45,092,524 38,967,938 24,755,176 44,601,611 2017/12* 3,395,184 44,638,342 66,218,177 275,721,584 7,387,455 10,342,126 30,054,547 437,757,415 2017/12* 207,880,492 130,496,873 17,044,695 34,210,740 48,124,615 437,757,415 2017/12* 31,108,967 16,277,297 14,831,670 -946,253 2,733,423 18,258 6,765,642 23,402,740 12,862,111 10,540,629 3,016,417 842,068 8,366,280 1,660,614 6,705,666 2017/12* 88.2% 114.1% 15.1% 61.0% 128.5% 21.4% 2.1% 84.1% 26.3% 11.0% 15.2% 1.7% 14.9% 42.2% 2017/12* 54,979,844 45,054,873 29,638,672 54,724,559 2018/12 4,931,787 51,202,701 77,942,727 303,495,889 9,418,560 11,975,301 40,940,392 499,907,357 2018/12 248,981,402 137,945,969 15,161,685 42,203,408 55,614,893 499,907,357 2018/12 44,078,656 24,492,384 19,586,272 -2,293,686 3,756,035 19,655 8,120,963 29,189,239 14,656,126 14,533,113 7,012,853 1,569,036 9,089,296 1,517,912 7,571,384 2018/12 86.4% 111.7% 15.6% 59.1% 118.6% 19.8% 4.1% 56.5% 24.8% 11.1% 15.3% 1.6% 14.8% 35.9% 2018/12 64,189,820 51,413,549 28,971,576 61,655,721 2019/12 5,700,435 70,109,172 97,567,800 316,028,505 11,190,991 13,826,688 50,628,247 565,051,838 2019/12 302,791,204 130,065,019 17,860,585 48,633,563 65,701,467 565,051,838 2019/12 48,453,830 25,654,752 22,799,078 -4,633,920 4,611,770 20,819 10,942,888 33,740,635 17,512,911 16,227,724 9,236,283 1,462,479 8,453,920 1,422,289 7,031,631 2019/12 85.8% 112.0% 17.3% 54.5% 101.6% 20.8% 6.4% 53.5% 28.4% 11.6% 16.4% 1.3% 11.8% 39.8% 2019/12 75,055,619 60,581,141 32,141,695 86,043,036 (*) Accounting policy changes made in 2017 and 2018 were applied retrospectively; accordingly, the financial statements of 2016 and 2017 were restated. - The financial statements of the year 2016 were restated due to the change in the calculation policy of the outstanding claims of the insurance and reinsurance companies, which are in the scope of consolidation. - The financial statements of the year 2017 were restated due to the change in the valuation policy of associates and subsidiaries. (1) Includes balances at the Central Bank and required reserves. (2) 2019/12 balance does not include the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss. (3) Excludes Non-performing Loans. 2018/12 period includes the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss. (4) Includes general provisions after 2017/12 period, and includes the loan granted to the special purpose entity, which is classified under Other Financial Assets at Fair Value Through Profit and Loss in 2019/12 period. (5) Includes Turkish Lira and foreign currency securities issued and subordinated debts. (6) Due to the change in accounting policy, general provisions are not classified in this item after 2017/12 period. (7) Fees and Commissions Received from Cash Loans are shown in Interest Income, Fees and Commissions Given to Cash Loans are shown in Interest Expenses. (8) Includes Personnel Expenses. (9) Net Operating Profit / Loss = Total Operating Income - Operating Expenses (10) Named as “Provision for Losses on Loans and Other Receivables” prior to the 2018/12 period. (11) Interest earning assets include Turkish Lira and foreign currency required reserves. (12) Averages are calculated by using quarterly balances whereas the restated year-end balances are used in the calculation of Return on Average Assets for the periods 2015/12 and 2017/12 and Return on Average Equity for all periods except 2018/12 and 2019/12. (13) Cost and income are netted against “Insurance Technical Income / Expense”. Operating Income = Total Operating Income + Profit/Loss from Subsidiaries Based on Equity Method. (14) Free Capital = Shareholders’ Equity - (Fixed Assets + Non-Financial Associates and Subsidiaries + Net Non-performing Loans) 333 Financial Informationand Risk Managementİşbank Annual Report 2019 Direct and Indirect Subsidiaries (*) DIRECT SUBSIDIARIES Name Anadolu Hayat Emeklilik A.Ş. Arap Türk Bankası A.Ş. Bankalararası Kart Merkezi A.Ş. İş Finansal Kiralama A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Merkezleri Yönetim ve İşletim A.Ş. İş Net Elektronik Bilgi Üret. Dağ. Tic. ve İlet. Hizm. A.Ş. İş Yatırım Menkul Değerler A.Ş. İşbank AG JSC İşbank JSC Isbank Georgia Kredi Kayıt Bürosu A.Ş. Kültür Yayınları İş Türk A.Ş. Millî Reasürans T.A.Ş. Trakya Yatırım Holding A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. Türkiye Şişe ve Cam Fabrikaları A.Ş. INDIRECT SUBSIDIARIES Name AC Glass Holding BV Anadolu Anonim Türk Sigorta Şirketi Anadolu Cam Investment BV Anadolu Cam Sanayii A.Ş. Anavarza Otelcilik A.Ş. Automotive Glass Alliance Rus AO Automotive Glass Alliance Rus Trading OOO Şişecam Glass Packaging B.V. Batı Karadeniz Elektrik Dağıtım ve Tic. A.Ş. Bayek Tedavi Sağlık Hizmetleri ve İşletmeciliği A.Ş. Cam Elyaf Sanayii A.Ş. Camiş Ambalaj Sanayii A.Ş. Camiş Egypt Mining Ltd. Co. Camiş Elektrik Üretim A.Ş. Camiş Madencilik A.Ş. Casaba Yönetim İşl.İmal.İth.İhr.Paz.Sağ.Tem.Güv.Ulş.Tic.ve San.A.Ş. CJSC Brewery Pivdenna Convera Uluslararası Yazılım Arge Teknoloji Yatırımları A.Ş. Covision Medical Technologies San. Tic. A.Ş. Covision Medical Technologies Limited Cromital SPA Çayırova Cam Sanayii A.Ş. Denizli Cam Sanayii ve Ticaret A.Ş. Efes Varlık Yönetim A.Ş. 334 31.12.2019 Direct Share Bank’s Risk Group Share Percentage 62.00% 20.58% 9.98% 27.79% 47.90% 86.33% 94.65% 65.65% 100.00% 100.00% 100.00% 9.09% 99.17% 77.06% 100.00% 41.44% 67.54% 83.00% 20.58% 9.98% 58.29% 63.70% 100.00% 100.00% 70.69% 100.00% 100.00% 100.00% 9.09% 100.00% 77.06% 100.00% 50.92% 75.81% Direct Share Bank’s Risk Group Share Percentage 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 64.31% 100.00% 77.27% 50.00% 100.00% 100.00% 100.00% 65.00% 99.80% 100.00% 100.00% 99.70% 100.00% 100.00% 50.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 51.00% 100.00% İşbank Annual Report 2019 INDIRECT SUBSIDIARIES Name Erişim Müşteri Hizmetleri A.Ş. Glasscorp S.A. Şişecam Flat Glass India Private Limited Istanbul Investment BV İŞ Altınhas İnşaat Taahhüt ve Tic. A.Ş. İş Faktoring A.Ş. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. İş Portföy Yönetimi A.Ş. İş Yatırım Ortaklığı A.Ş. JSC Mina Kanyon Yönetim İşletim ve Pazarlama A.Ş. Koridor Incorporated M4 Otelcilik ve Turizm A.Ş. Madencilik Sanayii ve Ticaret A.Ş. Maxi Digital GmbH Maxis Girişim Sermayesi Portföy Yönetimi AŞ. Maxis Investments Ltd. Maxitech Inc. Merefa Glass Company Ltd. Miltaş Turizm İnşaat Ticaret A.Ş. Nevotek Bilişim Ses ve İletişim Sistemleri San. ve Tic. A.Ş. Nevotek Intercorporation Nevotek Middle East FZ Limited Liability Company Nude Design Investment BV Nude Glass Investment BV Num Num Yiyecek ve İçecek A.Ş. OOO Energosystems OOO Posuda OOO Ruscam Glass Packaging Holding OOO Ruscam Management Company Ortopro Tıbbi Aletler San. Tic. A.Ş. Oxyvit Kimya Sanayii ve Ticaret A.Ş. Pasabahce Bulgaria EAD Pasific Soda LLC Paşabahçe (Shanghai) Trading Co. Ltd Paşabahçe Cam Sanayii ve Ticaret A.Ş. Pasabahce Egypt Glass Manufacturing SAE Paşabahçe Glass Gmbh Paşabahçe Investment BV (The table continues on the following page.) 31.12.2019 Direct Share Bank’s Risk Group Share Percentage 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 100.00% 100.00% 50.00% 100.00% 57.67% 100.00% 38.66% 100.00% 50.00% 74.66% 20.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 88.00% 95.37% 100.00% 100.00% 100.00% 100.00% 83.57% 100.00% 100.00% 100.00% 100.00% 90.63% 100.00% 100.00% 50.00% 100.00% 99.47% 100.00% 100.00% 100.00% 335 Financial Informationand Risk Managementİşbank Annual Report 2019 Direct and Indirect Subsidiaries (*) INDIRECT SUBSIDIARIES Name Paşabahçe Mağazaları A.Ş. Paşabahçe SRL Paşabahçe Spain SL Paşabahçe USA Inc Radore İnternet Hizmetleri A.Ş. Radore Veri Merkezi Hizmetleri A.Ş. Richard Fritz Holding Gmbh Richard Fritz Kft Richard Fritz Prototype Spare Parts Gmbh Richard Fritz Spol S.R.O. Rudnik Krecnjaka "Vijenac" D.O.O SC Glass Trading BV Soda Sanayii A.Ş. Softtech Yazılım Teknolojileri Araştırma Gel. ve Paz. Tic. A.Ş. Softtech (Shanghai) Technology Co. Ltd. Şişecam Automotive Bulgaria EAD Şişecam Trading co. Şişecam Bulgaria EOOD Şişecam Chem Investment Bv Şişecam Çevre Sistemleri A.Ş. Şişecam Dış Ticaret A.Ş. Şişecam Elyaf Sanayii A.Ş. Şişecam Enerji A.Ş. Şişecam Flat Glass Holding B.V. Şişecam Flat Glass Italy S.r.l. Şişecam Flat Glass South Italy SRL Şişecam Sigorta Aracılık Hizmetleri A.Ş. Şişecam Soda Lukavac DOO Şişecam Otomotiv A.Ş. Sisecam Chemicals USA Inc Tatilbudur Kurumsal Hizmetler Turizm ve Ticaret A.Ş. Tatilbudur Seyahat Acenteliği ve Turizm A.Ş. Toksöz Spor Malzemeleri Tic. A.Ş. Topkapı Yatırım Holding A.Ş. Trakya Cam Sanayii A.Ş. Trakya Glass Bulgaria Ead Trakya Glass Rus AO Trakya Glass Rus Trading OOO Trakya Investment BV TRSG Glass Holding BV TSKB Gayrimenkul Değerleme A.Ş. TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. TSKB Sürdürülebilirlik Danışmanlığı A.Ş. Yatırım Finansman Menkul Değerler A.Ş. Yatırım Varlık Kiralama A.Ş. (*) Includes the direct and indirect subsidiaries in which İşbank’s share is equal to or exceeds five percentage points. 336 31.12.2019 Direct Share Bank’s Risk Group Share Percentage 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 100.00% 100.00% 25.50% 25.50% 100.00% 100.00% 100.00% 100.00% 50.00% 100.00% 62.02% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 90.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 20.00% 20.00% 88.27% 100.00% 70.35% 100.00% 100.00% 100.00% 100.00% 70.00% 100.00% 86.23% 99.85% 98.42% 100.00% İşbank Annual Report 2019 Changes in Share Percentages in Subsidiaries (*) Companies Direct and Indirect Subsidiaries Firms that entered Bank’s Risk Group in 2019 Yatırım Varlık Kiralama A.Ş. Sisecam USA Chemicals Inc Pasific Soda LLC Maxi Digital GmbH Covision Medical Technologies San. Tic. A.Ş. Firms whose share ratio changed in Bank’s Risk Group in 2019 Direct Share of İşbank December 2018 Direct Share of İşbank December 2019 Bank’s Risk Group Share Percentage December 2018 Bank’s Risk Group Share Percentage December 2019 - - - - - 0.00% 0.00% 0.00% 0.00% 0.00% - - - - - 100.00% 100.00% 50.00% 100.00% 100.00% İş Gayrimenkul Yatırım Ortaklığı A.Ş. 47.44% 47.90% 63.24% 63.70% Millî Reasürans T.A.Ş. Türkiye Şişe ve Cam Fabrikaları A.Ş. Anadolu Cam Sanayii A.Ş. Bayek Tedavi Sağlık Hizmetleri ve İşletmeciliği A.Ş. 76.64% 66.30% 0.00% 0.00% 77.06% 67.54% 0.00% 0.00% 77.06% 74.58% 77.10% 99.77% 77.06% 75.81% 77.27% 99.80% Koridor Incorporated 0.00% 0.00% 64.29% 74.66% Reason Company Establishment Company Establishment Company Establishment Company Establishment Company Establishment Due to the transfer of the shares purchased to the subsidiary portfolio from BIST Share purchase Due to the transfer of the shares purchased to the subsidiary portfolio from BIST Share purchase The group share has increased due to the use of preferential right, which is not used by other shareholders in the capital increase of BAYEK, by Trakya Yatırım Holding A.Ş. The group share has increased due to the paid capital increase made within the scope of the option pool rights owned by the main shareholder Convera (Rest of the table is on the following page) 337 Financial Informationand Risk Managementİşbank Annual Report 2019 Changes in Share Percentages in Subsidiaries (*) Companies Firms that share ratio changed in Bank’s Risk Group in 2019 Nevotek Bilişim Ses ve İletişim Sistemleri San. ve Tic. A.Ş. Direct Share of İşbank December 2018 Direct Share of İşbank December 2019 Bank’s Risk Group Share Percentage December 2018 Bank’s Risk Group Share Percentage December 2019 Reason 0.00% 0.00% 93.46% 95.37% The group share has increased due to the paid capital increase by restricting the preferential rights of the shareholders except the main shareholder İş Girişim Paşabahçe Cam Sanayii ve Ticaret A.Ş. 0.00% 0.00% 84.62% 99.47% The acquisition of all shares of EBRD, which has a 14.85% share in the company’s capital, by Şişecam Soda Sanayii A.Ş. Trakya Cam Sanayii A.Ş. Firms that exit Bank’s Risk Group in 2019 Bilici Yatırım TSKB GYO Adana Oteli Projesi Adi Ortaklığı Ticari İşletmesi Camiş Limited Trakya Polatlı Cam Sanayii A.Ş. Trakya Yenişehir Cam Sanayii A.Ş. Firms whose title changed in Bank’s Risk Group in 2019 Old Title Balsand B.V. Şişecam Flat Glass India Limited 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 60.67% 69.45% 62.02% 70.35% Share purchase Share purchase - - - - 50.00% 100.00% 100.00% 100.00% - - - - Dissolution of an Entity Dissolution of an Entity Merger Merger New Title Şişecam Glass Packaging B.V. Şişecam Flat Glass India Private Limited Title change Title change Şişecam (Shangai) Trade Co. Ltd. Şişecam Trading co. Title change (*) Includes the subsidiaries and participations in which Bank’s direct or indirect share percentages exceeded five, ten, twenty, twenty-five, thirty three, fifty, sixty seven or hundred percent or fell below the said percentages and the reasons for these transactions. 338 İşbank Annual Report 2019 Additional Information Regarding the Related Legislation Duties İşbank Board of Directors’ members perform outside the Bank Name-Surname FÜSUN TÜMSAVAŞ ERTUğRUL BOZGEDİK ADNAN BALİ TURGAY BERKSOY FERAY DEMİR ERSİN ÖNDER ÇİFTÇİOğLU MURAT KARAYALÇIN ÖZCAL KORKMAZ AŞKIN TÜRELİ FAZLI BULUT Position in Bank Chairperson Vice Chairperson Member of the Board Member of the Board Member of the Board Member of the Board Member of the Board Duties outside the bank Vice Chairperson of the Board of Türkiye İş Bankası A.Ş. Members Supplementary Pension Fund None Chairman of Şişecam Group, Member of the Board of Directors of Vehbi Koç Foundation, Member of the High Advisory Board of Darüşşafaka Society, The Institute of International Finance (IIF), Institut International d'Etudes Bancaires (IIEB) and Member of the Board of Directors of The Banks Association of Turkey None Member of the Board of Türkiye İş Bankası A.Ş. Members Supplementary Pension Fund None Faculty member at T.C. İstanbul Kültür University and Girne American University Member of the Board Chairman of the Board of Directors of Korkmaz Yeminli Mali Member of the Board Member of the Board Müşavirlik A.Ş. None None Independence declaration of Prof. Dr. Turgay Berksoy who is an Independent Member of the Board Prof. Dr. Turgay Berksoy was nominated as Independent Member of the Board to the Corporate Governance Committee that performs the tasks of the Nomination Committee and Corporate Governance Committee’s “Evaluation Report of Independent Member Nominee” dated 24.01.2017 was submitted to the Board on the same date. Independence declaration of Prof. Dr. Turgay Berksoy who was elected as an Independent Member of the Board at the Ordinary General Meeting dated 31.03.2017 is quoted below: “As per the requirements of the legislation, Corporate Governance Principles of Capital Markets Board and the Articles of Incorporation of İşbank, due to my nomination as an “independent member” to the Board of Directors of İşbank, I hereby declare to the committee, İşbank shareholders and all the related parties that; • Within the last five years, no executive employment relation that would give important duties and responsibilities has been established between myself, my spouse, my second degree relatives by blood or by marriage and (i) İşbank and (ii) the subsidiaries of İşbank, and (iii) shareholders who control the management of İşbank or who have significant influence in İşbank and juridical persons controlled by these shareholders; and that I neither possess more than 5% of any and all capital or voting rights or privileged shares nor have significant commercial relations, • Within the last five years, I have not worked as an executive manager who would have important duties and responsibilities or have not been a member of the Board of Directors or been a shareholder (more than 5%) particularly in the companies that provide auditing, rating and consulting services for the Bank (including tax audit, legal audit, internal audit), and in the companies that the Bank purchase products and services from or sells products and services to within the framework of the agreements signed during the timeframe of selling/ purchasing of the products and services, • I possess the vocational education, knowledge and experience necessary to fulfill the duties I will assume in connection with being an independent board member, • I am not working fulltime in public institutions and organizations, • I am considered as a resident in Turkey according to the Income Tax Law (n.193) dated 31/12/1960, • I have high ethical standards, goodwill and experience necessary to contribute to İşbank’s activities, Maintaining my objectivity in conflicts of interest between İşbank and its shareholders and deciding independently by taking into account the rights of stakeholders, • I am capable of dedicating sufficient time to be able to observe the Bank’s activities and to fulfill the requirements of the duties I undertake, • I have not been a member of the Board of Directors of İşbank for more than 6 years in total within the last decade, • I have not been an independent member of the Board of Directors in more than three of the companies controlled by İşbank or by the shareholders who control the management of İşbank and in more than five of the publicly traded companies in total, • I have not been registered and announced on behalf of the juridical person elected as member of the Board of Directors, • I still have all the qualifications as per the Corporate Governance Principles to be an independent member and I will protect all these conditions during the duty term in case of being appointed as independent member. I will inform Board of Directors of İşbank and the Capital Markets Board (simultaneously) about the situation in writing including its reasons in case of losing my independency. And thus, I am independent.” Remuneration - Benefits paid to key management personnel in 2019 amount to TL 27,669 thousands. Moreover, cost of allowance, travel, accommodation, representation, as well as the opportunities in cash and in kind, insurance and similar guarantees for key management personnel in the same year amount to TL 6,263 thousands. Other Issues - The actions required with respect to the decisions made at Ordinary General Shareholders’ Meeting of 2019 were performed. - No custom audits were carried out at İşbank within the scope of Articles 207, 438 and 439 of the Turkish Commercial Code in 2019. Our bank is subject to public auditing, especially public institutions such as BRSA, CMB, Competition Board, Central Bank. If there is a situation that needs to be disclosed to the public regarding the audits of the aforementioned public institutions in our Bank, they are disclosed via KAP platform. - The companies that included in İşbank group do not have shares in the Bank’s capital. 339 Financial Informationand Risk Managementİşbank Annual Report 2019 Information to Shareholders Corporate Title: Türkiye İş Bankası Anonim Şirketi Trade Registry Number: 431112 Address: İş Kuleleri 34330 Levent/İstanbul Website: www.isbank.com.tr Contact Information of Branches: Please visit www.isbank.com.tr Annual General Meeting: As per the decision of the Board of Directors of İşbank, the Annual General Meeting of the Bank will be held at 14:00 on 31 March 2020, Tuesday in the İş Kuleleri Headquarters Auditorium, 34330 Levent-İstanbul. Independent Auditor: Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. A member firm of Ernst & Young Global Limited İstanbul Head Office Orjin Maslak Plaza, Eski Büyükdere Cad. Maslak Mah. No: 27, 34485, Sarıyer, İstanbul Telephone: +90 (212) 315 30 30 Fax: +90 (212) 230 82 91 Company Announcements and Financial Data: İşbank’s financial statements, independent auditor’s reports, annual reports, press releases and disclosures of material events are available on the Bank’s corporate website under the title of Investor Relations, in both Turkish and English. Investor Relations Division: Süleyman H. Özcan, Division Head İş Kuleleri Kule: 1 Kat: 15, 34330 Levent/İstanbul Telephone: +90 (212) 316 16 02 E-mail: investorrelations@isbank.com.tr Dividend Payments: İşbank’s dividend payment policy is set out in detail in article 58 of the Bank’s articles of incorporation. Information about the policy is provided in this annual report. The said information is also available on the Bank’s corporate website under the title of Investor Relations, in Turkish and English. Company Share Information: İşbank’s Group A, Group B shares are listed on the Main Market with the symbols of ISATR and ISBTR; İşbank’s Group C shares are listed on the Stars Market with the symbol of ISCTR. İşbank’s Group C shares are traded on London Stock Exchange as Global Depositary Receipts, being subject to “Regulation S”; they are also traded on over-the-counter markets in the USA as American Depositary Receipts, being subject to “Rule 144A”. 340 İşbank Annual Report 2019 Produced by Tayburn Tel: (90 212) 227 04 36 www.tayburnkurumsal.com www.isbank.com.tr TÜRKİYE İŞ BANKASI A.Ş. Head Office İş Kuleleri 34330 Levent/İstanbul Telephone: (+90 212) 316 00 00 Fax: (+90 212) 316 04 04 Call Center: (+90 850) 724 0 724 E-mail: musteri.iliskileri@isbank.com.tr This report has been printed on recycled paper.