2020 Annual Report Being an institution of the Republic, İşbank has been working for its extensive stakeholder group besides the Turkish economy, and retaining its position as the pioneer of banking in Turkey ever since its incorporation. İşbank is geared up for its second century with its investments in technology and digital transformation, as well as its qualified and trained human capital. Constantly strengthening its distribution channels in a bid to deliver the high added-value products and services produced with its innovative muscle and agile structure in the fastest and most efficient manner possible, the Bank also builds on its digital banking capabilities. Having positioned sustainability as a prime focus of its strategy, İşbank addresses economic, environmental, social and governance matters with a holistic approach, and generates shared and sustainable value for all its stakeholders. Contents Introduction 2 4 6 7 Corporate Profile İşbank in Figures Our Vision, Values, Strategic Goals and Strategy İşbank Since 1924 10 Firsts and Innovations 12 Message from the Chairperson 16 Message from the CEO Activities 20 21 22 24 26 64 74 80 86 88 The Global Economy The Turkish Economy 2020 Developments in the Banking Sector İşbank Banking İşbank and its Activities in 2020 Digital Banking Subsidiaries Corporate Social Responsibility Activities Sustainability at İşbank Annual Report Compliance Opinion Corporate Governance 90 91 92 93 94 96 98 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 Annual Meeting Documents 100 Changes in the Organizational Structure 101 Managers of Internal Systems 101 Information about the Meetings of the Board of Directors 102 İşbank Committees 107 Human Resources Practices at İşbank 110 Information on the Transactions Carried out with İşbank’s Risk Group 111 Activities for which Support Services are Received in Accordance with the Regulation on Procurement of Support Services for Banks 112 Corporate Governance Principles Compliance Statement 112 Corporate Governance Compliance Report 117 Corporate Governance Information Form 124 Sustainability Principles Compliance Framework Financial Information and Risk Management 130 Audit Committee’s Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period 133 Explanations on Financial Position, Profitability and Solvency 134 Information on Risk Management Policies Applied per Risk Types 137 İşbank Credit Ratings 138 Unconsolidated Financial Statements As at and For the Year Ended December 31, 2020 With Independent Auditor’s Report Thereon 238 Consolidated Financial Statements As at and For the Year Ended December 31, 2020 With Independent Auditor’s Report Thereon 354 Financial Highlights and Key Ratios for the Five-Year Period 356 Direct and Indirect Subsidiaries 360 Changes in Share Percentages in Subsidiaries 362 Additional Information Regarding the Related Legislation 363 Amendments in the Articles of Incorporation in 2020 364 Information to Shareholders Corporate Profile Playing a part in building the financial futures of its millions of customers through its service network covering all over Turkey and its digital service channels, İşbank carries on its activities focused on innovation in line with its goal of contributing to the welfare of its stakeholders. Turkey’s Bank A Bank of Firsts for 96 Years As Turkey’s leading and largest private bank, İşbank celebrated its 96th year in 2020. Playing İşbank’s total assets reached TL 593.9 billion as a pioneering and guiding role in the Turkish at year-end 2020. İşbank is the leader among banking industry since the first day of its private banks also in terms of loans, deposits operations, İşbank carries out its activities in and shareholders’ equity, as well as asset size. line with its vision of developing innovative As of the end of 2020, İşbank meets the demands of its customers effectively and products, services and applications that are aligned with global banking trends. efficiently with high value-added products, The first ATM, the first internet branch and services and solutions offered through its the first mobile banking application can be 23,518 employees, 1,205 domestic and 22 cited among the many firsts İşbank introduced overseas branches, 6,521 domestic Bankamatik to Turkey with its focus on the future and ATMs, and mobile channels, of which the share innovation focusing on investments İşbank in total transactions increases day by day. makes a difference in the sector also in new generation digital banking application recently. According to year‑end 2020 data, İşbank is the leader among private banks in terms of total assets, loans, deposits and shareholders’ equity. 2 İşbank 2020 Annual Report 96th year Founded in 1924, İşbank celebrated its 96th year in 2020. Sustainability İşbank positions sustainability as one of the main focus areas of its strategy. Solid and Resilient Financial Structure Pioneer in Sustainability Since the day it was founded, İşbank has been İşbank possesses a solid, resilient and agile carrying out countless activities targeted at financial structure. In its history that nearly all components of the sustainability concept. spans a century, the Bank has always stood Managing economic, environmental, social and by companies, investors, entrepreneurs and governance issues with a holistic approach, individuals, and contributed to the development İşbank boasts an effective sustainability and advancement of the Turkish economy with management system structure. its banking products and services. Having undersigned numerous innovations As at year-end 2020, İşbank’s shareholders’ in the area of sustainability recently, İşbank equity amounted to TL 67.8 billion and its positions this topic as one of the main focus capital adequacy ratio was 18.7%, well above areas of its strategy. The Bank generates the regulatory limit. The Bank is determined to multi-dimensional value for all its stakeholders reinforce its support to its customers by taking under the sustainability framework with a the advantage of the opportunities created by long-term perspective. its sustainable and strong financial structure. Deep‑Rooted Banking Tradition Broad‑based Shareholding Structure İşbank owns a brand that stands for trust, A key characteristic of İşbank is its broad respectability and prestige in the eyes of its shareholder base made up of approximately stakeholders in national and international 165,000 shareholders and institutional markets. investors. Having undertaken pioneering roles and critical As of 2020 year-end, 37.08% of the duties through every period of the Turkish Bank’s capital belongs to İşbank Members’ economy, İşbank creates permanent value for its Supplementary Pension Fund, the members stakeholders in the medium- and long-term, as of which are around 50,000 employees and it does in the short-term, with its deep-rooted retirees. and powerful business model. Representing a well-established banking tradition, the Bank names its working concept as “İşbank Banking”, which is a solid and productive business model structured with a focus on “Shared and Sustainable Value Generation”. 3 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank in Figures Being one of the cornerstones of sustainable economic development in Turkey, İşbank has been supporting every sector from finance to agriculture and working to increase the welfare of the society since 1924. Shareholding Structure (*) İşbank Members’ Supplementary Pension Fund Free Float Atatürk Shares (Republican People’s Party) 37.08% 34.83% 28.09% (*) The shareholding structure is provided as of 31 December 2020. (31 December 2019: Pension Fund 39.10%, Atatürk Shares 28.09%, Free Float 32.81%). 4 İşbank 2020 Annual Report TL 67.8 billion Leader among private banks in terms of shareholders’ equity Key Financial Items (TL Million) 31.12.2020 31.12.2019 Change (%) Total Assets 593,902 468,059 Loans Deposits 345,150 270,360 368,876 295,922 Shareholders’ Equity 67,781 58,873 26.9 27.7 24.7 15.1 TL 345.2 billion Leader among private banks in terms of total loans TL 368.9 billion Leader among private banks in terms of total deposits Key Financial Ratios (%) Interest Earning Assets (1) / 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(2) (1) Interest earning assets include TL and FC required reserves at Central Bank. (2) Average figures are calculated based on quarterly balances. 31.12.2020 31.12.2019 89.4 58.1 93.6 5.6 63.7 41.7 11.4 18.7 10.9 89.0 57.8 91.4 6.5 54.7 28.4 12.6 17.9 11.4 5 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Our Vision, Values, Strategic Goals and Strategy Our Vision Our Strategic Goals Our Values Becoming the bank of the future, creating sustainable value with an inclusive and participatory approach • Commitment to our country • Strong and sustainable financial performance • Effective risk management • Flawless customer experience • Value creating technology and innovation leadership • Happy and productive human resources • Ethical and responsible banking, that is compassionate towards people, society and environment Innovation, solidarity, common sense, reliability, sincerity, transparency guided by the principles of “Intelligence, diligence, integrity; technical and methodical work” in reference to İşbank’s founding philosophy. Our Strategy Managing our balance sheet to ensure sustainable and value added growth while using our internal and external resources in accordance with the priorities of the country’s economy and preparing our enterprise for the future by continuously improving our business model in synergy with our group companies and all our business partners in the period of technological transformation. 6 İşbank 2020 Annual Report İşbank Since 1924 İşbank continued to support the real sector and Turkey’s economy steadily also in 2020. 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. 7 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management With TekCep service, Turkey’s first open banking application, İşbank provided the opportunity to track account movements in different banks through İşCep. 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. İşbank Since 1924 Maintaining strong and stable growth, İşbank relocated the Bank’s headquarters from Ankara to İstanbul in 2000. 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. 8 İşbank 2020 Annual Report İşbank has proven once again its success in providing long‑ term funds from international markets at favorable terms. 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. While 2020 was an extraordinary period in pandemic conditions, İşbank demonstrated its support to households and companies through special product and service applications. The Bank also proved once again its success in providing long-term funds from international markets under favorable conditions and further increased its support to the Turkish economy in this difficult year. 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. 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. 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. 9 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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. • 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 • 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. (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. • Introduced the “Temassız Kartla Para 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. 10 İşbank 2020 Annual Report • 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. • Launched “Sosyal Hesap” (Social • “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. • Within the scope of its work on alternative and innovative foreign trade solutions, it successfully carried out two pilot transactions; became the first Turkish bank to guarantee payment with blockchain technology in foreign trade. • In order to eliminate the security concerns of all e-commerce customers; Dynamic Security Code application was implemented for the first time in Turkey. • Digital Vault, the first step of the “Digital Identity” defined as the main product in the medium-term under the innovation strategy, was launched for İşbank customers and non-customer users. 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. • 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). 11 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Message from the Chairperson As we leave our 96th year behind, being a role model and a pioneering company, we continue to carry out our activities within the frame of our future‑oriented working concept. Füsun Tümsavaş Chairperson İşbank Banking İşbank’s value creation model Esteemed shareholders, In 2020 the Covid-19 pandemic dominated economic and social life all over the world. rate environment were downplayed to some extent, policies prioritizing the prevention of employment loss and bankruptcies were implemented. Due to the pandemic, international trade, tourism and particularly capital flows to emerging countries presented a negative picture for the most part of the year. On the other hand, the US presidential elections and the post-Brexit trade deal negotiations took up an important place in the global political agenda. In an effort to minimize the economic and financial impacts of the pandemic, major central banks and governments have introduced a set of measures to support the economy since March 2020. As risk factors such as high indebtedness and long-lived low-interest While the said measures limited the projected contraction of global economic activity to some extent, they provided a strong support to the financial markets particularly in developed countries. As the pandemic is anticipated to have permanent effects upon global supply chains and ways of doing business in the services sector in general, the vaccination process that was initiated in numerous countries in the final weeks of 2020 is regarded as the key element shaping the expectations regarding the coming period. 12 İşbank 2020 Annual Report Amid these tough conditions, Turkey once again proved its resilience against external shocks. Having contracted rapidly in the second quarter due to the restrictive measures introduced within the scope of the fight against Covid-19, economic activity registered a fast recovery in the third quarter, backed by the credit expansion, and recorded a 1.8 percent growth for the whole year. The banking sector achieved a fast growth in credits in 2020, driven by the policies adopted as part of the combat against the global crisis. The Turkish banking sector sustained its support to the economy amid the challenging global contraction conditions, while maintaining its solid structure. İşbank is in its 96th year As we leave our 96th year behind, being a role model and a pioneering company, we continue to carry out our activities within the frame of our future-oriented working concept. İşbank steadfastly adheres to its mission summed up in its slogan “Turkey’s Bank” in line with its vision of creating permanent value for all of its stakeholders, especially for the national economy as well as its shareholders. Our Bank continues to generate sustainable value for all of our stakeholders in line with our strong and productive business model that we call “İşbank Banking”. Geared up for the future with its strategy formulated with a long-term perspective, its physical and digital service network, technological infrastructure and human capital, İşbank stands by the individuals, SMEs, corporate companies, farmers and exporters in good days and difficult ones alike. Our Bank plays an important part in building a sustainable future by contributing to the lifecycles of millions of individuals with its high added-value products and services. To this end, İşbank also continues ceaselessly to further leverage its services. We carry on with our digital transformation in order to further upgrade our customers’ experience at all touchpoints, which will allow us to present personalized and life-easing solutions any time they need. As we move forward as an actor ready to undertake new and key roles in Turkey’s economic future, our collective shareholding structure constitutes one of our key strengths. Our approximately 165,000 shareholders including İşbank Members’ Supplementary Pension Fund, which is our majority shareholder representing nearly 50,000 employees and retirees of the Bank, and our institutional investors, position İşbank in a special and solid place within the Turkish capital markets. Sustainability and İşbank Sustainability requires incorporation of economic, environmental, social and governance aspects within the business model with a holistic approach. Ever since its incorporation, İşbank has been the flagbearer of all components of sustainability, and has increased its focus on the topic in keeping with the global approaches that evolved in time. Sustainability is currently positioned as one of the key focal points of our Bank’s strategy. Based on this working concept, we continue to create value with our qualified human resource that represents our most valuable capital, the capabilities bestowed upon us by our financial power, our brand equity identified with trust and prestige, and our extensive physical service network, combined with our digital service channels and the products and services we develop by internalizing sustainability. İşbank is a transparent and accountable institution, a reliable business partner, a fair employer, a company that is sensitive to the environment and society; in other words, İşbank is a bank that is conscious of its responsibilities to all its stakeholders. A signatory of the UN Global Compact, İşbank also supports Sustainable Development Goals. 13 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Being a signatory of the Women’s Empowerment Principles (WEPs), we will continue to conduct our activities targeted at strengthening the women’s place in the society across our entire value chain. Message from the Chairperson Being an organization possessing an exemplary Corporate Governance structure, we effectively utilize governance committees reporting to the Board of Directors. Since 2015, our sustainability-related activities were being conducted under the supervision of our Corporate Governance Committee. However, we set up a dedicated Sustainability Committee in 2020 in recognition of the intensive interdisciplinary communication and interaction required by this area. The Sustainability Committee is structured to enable effective oversight by the Board of Directors, as well as to allow all related activities to be tackled by all executive functions. We believe that the Committee will undertake a critical role in our activities owing to this characteristic. Our Bank has also been an establishment gaining the foreground with its egalitarian approach to women. There are countless examples of our stance in this respect from the loans we have extended for increasing women employment and supporting women entrepreneurs to the egalitarian approach ahead of its time that we have been exhibiting towards our women employees ever since the day we have been incorporated. The ratio of our women employees as of 2020 year-end is 55 percent, whereas the ratio of women managers is 45 percent. Being a signatory of the Women’s Empowerment Principles (WEPs), we will continue to conduct our activities targeted at strengthening the women’s place in the society across our entire value chain. Putting much emphasis on stakeholder communication and interaction and taking place in a number of domestic and international sustainability initiatives, İşbank relentlessly works towards satisfying the requirements arising from these commitments as well as expanding its sphere of influence in relation to sustainability. Possessing the infrastructure and resources necessary to support the transformation of its customers, suppliers, employees -in short all its stakeholders- in this respect, İşbank is already set for the future. İşbank fulfills its social responsibilities regardless of the conditions. Carrying on with its activities aimed at supporting social life through its social responsibility projects in the areas of education, culture, art and the environment, İşbank shares the value it generates in the economic cycle with our country’s people in the widest scale possible. Our priority in our social responsibility projects that we design with a long-term approach is the future generations, in other words, our children. Under the “One Million Books, One Million Children” campaign that is one of the most concrete and farthest-reaching examples of our initiatives in this area that left behind 13 years, we have given 14 million hard-copy books to primary school students to date. In delivering these books, we cross Turkey’s borders and take them to our children in the T.R.N.C., Iraq, UK, Kosovo, Germany, Russia and Georgia where we have an organization, have them printed in the Braille alphabet and send them to the schools providing education to visually impaired children, and we give them away to our children in Regional Boarding Secondary Schools, to children boarding in the housing of the General Directorate of Children’s Services, and those in the Youth Closed Prisons and Juvenile Reformatories. In the 2019-2020 academic year that marked the 13th year of the campaign, we carried our project to the digital platform with four books due to the coronavirus measures. Based on the thought that the chess sport is also an educational tool that has significant contributions to mental development of children and youth and protects them from harmful 14 İşbank 2020 Annual Report Having started operations right after the establishment of the Turkish Republic, our Bank successfully managed crises and turbulences in its history, and generated permanent value for Turkey. habits, we have become the main sponsor of the Turkish Chess Federation in 2005. Within the scope of this ongoing sponsorship, we have opened more than 27,500 chess classes to date across Turkey. Having started operations right after the establishment of the Turkish Republic, our Bank successfully managed crises and turbulences in its history, and generated permanent value for Turkey. As İşbank, we are running the Project “81 Students from 81 Cities” in collaboration with Darüşşafaka, which is one of the longest-lived and most comprehensive projects in the area of education ever undertaken in Turkey. Including the graduates, the number of our students who received education in this framework exceeded 750. Under the project, we continue to support our students, whose educational expenses at Darüşşafaka Educational Institutions are fully covered by İşbank, also through their university lives. For a bright future, İşbank will continue to extend multi-faceted social contribution and support to its stakeholders, and particularly to our children. The future must be better than today for the humankind. The pandemic served as sort of a warning regarding the future of the humankind. It is a joint responsibility for economic actors and authorities to understand this warning accurately and to fulfill its requirements quickly. Numerous topics from the resolution of the great injustice in the distribution of income to efficient use of scarce resources, as well as the combat against the climate crisis, are pending for solutions on the agenda of the humankind. İşbank employees hold a hopeful and determined outlook for the future as they stand united around their shared corporate ideals. Believing that the future must be better than today for the humankind, we continue to put our heart and soul in our efforts for topics that call for our contribution. Being Turkey’s largest private bank and an esteemed constituent of the global league, İşbank will continue to be by the side of its other stakeholders as well as its customers, and to deliver the best to them, as it has done for the past 96 years. On behalf of the Board of Directors, I would like to take this opportunity to thank all our stakeholders, and first and foremost the İşbank employees who have played a part in driving our Bank to its current position. Yours sincerely, Füsun Tümsavaş Chairperson 15 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Message from the CEO 2020: A year dominated by the pandemic Having started 2020 with the anticipation that the recovery in economic activity would gain momentum, the Turkish economy was put to an unprecedented test with the Covid-19 outbreak that became a global pandemic in March. While economic indicators hit the bottom in April 2020, a recovery trend followed with the effect of the easing of restrictive measures implemented against the pandemic and the steps taken by policymakers to support the economy. Although the risks stemming from the pandemic readopted an upturn in the last quarter of the year in our country as was the case in all over the world, the economic activity was impacted at a lower extent as compared to the second quarter of the year, and Turkey emerged as one of the very few countries that displayed positive growth in such a tough year. During this period, developments regarding the course of the pandemic have driven the global risk perception; hence, despite the loosened liquidity conditions, capital flows remained selective, taking country-specific factors into consideration. When considered in conjunction with other risks, the likely persistence of the economic damage caused by the pandemic indicates that pursuance of foreseeable economy policies will make a greater difference than ever before for a high-potential emerging country, such as Turkey. 16 İşbank continued to put its resources to use towards the country’s interests and to support its stakeholders during 2020. Adnan Bali Chief Executive Officer During the pandemic, we kept offering uninterrupted service to our broad and extensive customer base. İşbank 2020 Annual Report In the meanwhile, the banking sector once again proved that it possesses the strength and the capability to manage risks on the back of its solid financial structure and disciplined management approach, and sustained its support to the real sector, while adhering to its uninterrupted service concept. The period ahead embodies significant opportunities for Turkey to positively decouple from its peers and to create a new story of growth. Provided that the risks are carefully managed, the Turkish economy is equipped to navigate through the ongoing recovery process with the dynamic and flexible structure of its real sector and the solid banking sector. We acted with the motto “people come first” During the pandemic, we kept offering uninterrupted service to our broad and extensive customer base, and performed successfully in this process. Key drivers behind the success we achieved were the importance we attach to digitalization, our sustainability approach, our human resource, our far-reaching physical and digital service network, and our robust subsidiaries operating in different areas of financial services, as well as our solid financial structure. Upon emergence of Covid-19 cases in Turkey, we immediately introduced a series of preventive actions first of all, for the health of our employees and our customers. During 2020, we have fulfilled our responsibility to our country and our customers over a broad range from individuals to SMEs, from commercial establishments to our country’s large-scale investments, employing a more focused approach than ever before. Having reached its targets to a large extent in 2020, our Bank’s total assets grew by 26.9% year-over-year to TL 593.9 billion, while the Bank’s total cash and non-cash lending in the same timeframe rose to TL 345.2 billion and TL 119.6 billion, respectively, for a total contribution of TL 464.8 billion channeled to the economy in the form of loans. In 2020, the ratio of İşbank’s non-performing loans to total loans was registered as 5.6%. We supported the SMEs that make up our traditional customer base through multi-faceted credit and service packages also in 2020. Cash loans İşbank made available to the SMEs added up to TL 69.4 billion as at year-end 2020. Our individual customers made up of millions of households represent another important stakeholder group of our Bank. İşbank’s consumer loans book expanded by 39.2% in the twelve months to end-2020 and amounted to TL 68.2 billion. Being the preferred choice of savers in 2020 dominated by tough conditions, we grew our total deposits by 24.7% to TL 368.9 billion. With a shareholders’ equity that reached TL 67.8 billion in the same timeframe, our Bank further consolidated its leadership among private banks in this area. Amid the tough market conditions presented by 2020, İşbank also granted deferment on loans in the total amount of TL 42 billion of its corporate and individual customers. In summary, İşbank continued, as always, to put its resources to use towards the country’s interests and to support its stakeholders during the pandemic-burdened 2020. Uninterrupted support to the economy In this period, we were compelled to deal with challenges that we had never experienced before. Especially the world trade almost came to a standstill for a large number of goods and services in spring. The declined demand from the European Union countries that make one of our major export destinations and the issues confronted by the logistics industry led to plunges in production and exportation. In this period when, in our opinion, Turkey acquired a much more important position for the supply of various goods and services because of its location, as İşbank, we never hesitated to assume responsibility. Upon the emergence of the pandemic, we launched our economic relief packages concurrently with the public banks. With the “Solidarity and Support Packages” that we subsequently announced, we extended support particularly to our tradesmen, small enterprises and SMEs through this rough patch. 17 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 9.2 million Number of total digital customers The share of non‑branch channels in total transactions at İşbank reached 96% in 2020. Message from the CEO Under the protocol signed with the Turkish Exporters Assembly (TİM) by end-June, we have presented a cash loan package worth USD 500 million in total, which was available in Turkish lira and foreign currency to all the sectors without any exceptions. Within the scope of the protocol, we also offered special interest rates to women entrepreneurs. The new phase of digitalization The pandemic has been a test experienced under extraordinary circumstances for all the economic actors. In 2020, business models, corporate cultures and working schemes we had become accustomed to embarked upon a radical change process. I consider that a breaking point, the start of a transformation. People of all ages experienced first-hand the power and importance of digitalization during the pandemic that squeezed a change that would normally take a few years to take place within just several months. During the pandemic, İşbank found the opportunity to test its service delivery capability in the area of digital banking. The number of our active mobile banking customers went up from 7.8 million at year-end 2019 9 million at year-end 2020. In the same timeframe, the number of total digital customers arrived at 9.2 million, and the numbers of customers using Bankamatik ATMs and the Internet Branch reached 9.5 million and 3 million, respectively. The share of comparable transactions executed on non-branch channels in total transactions reached 96% in 2020. Maxi, our assistant application developed using Artificial Intelligence and natural language processing technologies, carried out nearly 60 million dialogues with more than 7.2 million customers as at year-end 2020. In 2020, İşbank took one more step and signed its name under the establishment of Turkey’s largest artificial intelligence center. Set up in cooperation with Koç University, the center operates out of the university campus and also İş Towers. I believe that this project that will form a good example of the university-private sector cooperation will contribute to promote Turkey to the global league in this area. Another collaboration we have made in 2020 for our country’s future was the Research Center for Infectious Diseases established at Koç University. The Center is intended to conduct advanced research on infectious diseases, to work on suggested solutions in the development of disease diagnostics and treatments and protection methods, and to enrich researcher and educator human capital in terms of quantity and qualifications. Yet another first: the first financing transaction using the Blockchain technology In 2020, we realized the first pilot financing transaction based on blockchain technology. This is the first step of a reliable and easier period in foreign trade finance, which is based on data matching. We are committed to rank among the world’s fast advancing emerging technology formations and to develop products targeted at the financing of international trade and supply chains over the blockchain technology. Our support to the startup universe continue with increasing diversity The founding mission of İşbank envisaged extension of support to entrepreneurship - a commitment that our Bank never compromised over the course of a century. In 2020, we continued to stand by entrepreneurs and startups with our multi-faceted support. We carried on with the Workup Entrepreneurship Program, transferring it to the online platform in the wake of the pandemic. While 18 startups from various cities in Turkey were admitted to the 7th term of the 18 İşbank 2020 Annual Report program commenced in August, the number of the program graduates reached 60 at the end of the year. Maxis Innovative Venture Capital Fund invested in two ventures in 2020, one of which is a Workup graduate. Including these two investments, which are engaged in the fields of cyber security and marketing technologies, the number of ventures the fund invested in reached four. We will continue to extend support to entrepreneurship which we deem vital for the growth of our economy with added value. Sustainability… 2020 has been a year of great momentum added to our sustainability-related initiatives. Carrying out its activities with the utmost environmental sensitivity since its incorporation, our Bank set its medium- and long-term emissions reduction targets in 2020, and unveiled its roadmap to become carbon-neutral. Having forthwith started its projects in line with these targets, our Bank decided to supply the entirety of the electricity it will procure in 2021 as an eligible consumer from electricity generated from renewable sources. In 2020, our Bank joined the United Nations Environment Programme – Finance Initiative (UNEP-FI), which seeks to improve and expand the links between the sustainability and financial performances of companies in the finance sector, and we have signed the Principles for Responsible Banking, which is a set of principles specific to the banking industry. Also in 2020, we have upgraded our Carbon Disclosure Project (CDP) Climate Reporting rating to “A-“ in only our second reporting, and qualified for the leadership category. This result attested to our Bank’s efficient utilization of natural resources and natural capital, and its effective management of climate-related risks and opportunities. On another note, our Bank was granted “Platinum Prize” in five different categories at the Spotlight and Inspire 2020 award programs organized by the League of American Communications Professionals (LACP) with its 2019 Integrated Report. We were happy to have achieved such good progress in the area of sustainability in the challenging year of 2020. İşbank will keep taking solid steps in this direction also in the following years and continue to generate shared value for all its stakeholders. One of the banks boasting the highest global brand strength Our high brand strength and reputation continued to shape our competitive stance and our core operations in global markets in 2020. İşbank secured two syndicated loans with a total amount of USD 1.6 billion in 2020 under two different deals. With these loans, support was extended to financing the foreign trade transactions of companies engaged in the real sector, and contribution was lent to the performance of the national economy. Our Bank also carried out subordinated issues worth USD 750 million on international markets in January 2020. The said deal has been the first subordinated market issue held abroad by a Turkish bank since February 2018. The investors’ demand for the issue exceeded USD 3.5 billion. Distinguished stakeholders, The pandemic served as a reminder of the delicate balance upon which our civilization on earth is established. Our hope is that the humankind will learn from its experience in this process, look ahead, and strive wholeheartedly to build a sustainable future. I would like to take this opportunity to extend my gratitude, first and foremost, to our employees who have produced the 2020 performance, and to our business partners and other stakeholders. I also would like to thank, on behalf of İşbank Family, the healthcare workers for their superhuman efforts and committed work throughout 2020. İşbank is more than a bank with its identity as a century-old establishment that welcomes you with a deep-rooted and strong sense of trust that assures ease of mind. I believe from the bottom of my heart that this relationship will continue for generations to come. Yours sincerely, Adnan Bali Chief Executive Officer 19 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Having taken the whole world in its grip in 2020, the Covid‑19 pandemic brought along a global economic crisis. Supportive policies were pursued during the pandemic. The Global Economy The pandemic has driven the course of the global economy in 2020. Having taken the whole world in its grip in 2020, the Covid-19 pandemic brought along a global economic crisis. Measures restricting social life introduced all over the world in an effort to prevent the spread of the pandemic brought the global economic activity almost to a complete halt particularly in the second quarter of the year, causing historic-high contractions in the world’s major economies. Despite the stronger-than-expected recovery of economic activity in the third quarter, the number of cases that took an upturn once again in the last quarter put pressure on recovery. In addition, the absence of a solid recovery in the services industry due largely to the lockdowns and travel restrictions led to significant decoupling in the course of manufacturing and services activity across the world. It is estimated that all major economies excluding China contracted significantly at the end of 2020. In 2020, geopolitical events, as well as the uncertainties related to protectionist trade policies, have had an impact on global economic activity. The US presidential election that took place in the second half of the year and the developments concerning the deal that will regulate the post-Brexit trade relationships between the EU and the UK were watched closely. Expansionary monetary and fiscal policies were implemented. The destruction that the pandemic caused to global economic activity compelled the implementation of supportive monetary and fiscal policies. As numerous countries announced relief packages at unprecedented scale, central banks of developed countries injected significant amounts of liquidity to the markets through low interest rate policies coupled with substantial bond purchases. The said central banks announced that they will maintain supportive policies and might adopt new measures if needed until the economic outlook and the labor market that experienced major employment losses recover markedly. Commodity prices have also been influenced by the pandemic. The fact that economic activity came to a halt all over the world because of the pandemic, particularly in the second quarter of the year, negatively affected energy and commodity prices. During this period, oil prices were close to the lowest levels of the past two decades, and producer countries attempted to curb the decline in prices through supply cuts. As the economic activity began recovering globally in the third quarter of the year, oil prices increased rapidly, but failed to reach the pre-pandemic levels. The investors’ shift towards safe-haven investment instruments during this period, on the other hand, fueled the demand for gold. Due also to the expansionary monetary policy implementations of the central banks of developed countries, gold price per ounce exceeded USD 2,000 in August. In the following period, gold prices decreased somewhat as the positive news flow regarding vaccination and medication efforts eased the concerns over the pandemic. Expectations for 2021 In 2021, global economy is projected to recover quickly due to the low base effect of 2020. The scale and success of vaccination campaigns will likely be influential upon the course of the said recovery. Although the policies of the central banks of developed countries which will possibly remain supportive of economic activity in 2021 provide a favorable outlook for the financing conditions of emerging economies, country-specific risks will determine the direction of capital flows. 20 İşbank 2020 Annual Report The Turkish Economy Macroeconomic developments in 2020 The Turkish economy exhibited a strong recovery in the second half of the year. After contracting by 10.3% on annual basis in the second quarter of 2020 due to the initial impacts of the Covid-19 outbreak and the restrictive measures adopted, the Turkish economy displayed a recovery trend in the second half of the year owing to the actions taken to support the economy, combined with the eased restrictive measures. As a result, Turkey positively decoupled from many countries in the whole year of 2020 and captured a growth rate of 1.8%. While the support channeled to the economy added up to more than TL 500 billion through a series of measures including credit guarantees, tax deferrals and direct transfers implemented within the scope of the combat against the pandemic, approximately 80% of this amount has been in the form of credit support. Against an export volume that was repressed by the pandemic, the imports volume that rose with the additional impact of increased gold imports led to a high 69.1% expansion in the foreign trade deficit in 2020. The two main sources of foreign currency for Turkey, export and tourism revenues that remained low due to the pandemic caused the current account balance to deteriorate. On the other hand, oil prices that were lower as compared to the pre-pandemic period limited the deterioration of the current account balance. Having closed 2019 with a surplus of USD 6.8 billion, the current account balance posted a deficit of USD 36.7 billion in 2020. Budget deficit continued to widen. The measures introduced by the public authorities in an effort to deal with the negative effects of the pandemic on the economy negatively affected the budget outlook in Turkey in 2020, as was the case in many other countries. The rise in public expenditures that outpaced that in revenues caused the central government’s budget deficit to widen by 38.5% year-over-year in 2020, bringing it up to TL 172.7 billion. Inflation followed an upward trend in the second half of the year. The domestic demand that increased with the effect of supportive measures taken to alleviate the impacts of the pandemic, high volatility in financial markets, and the impact of exchange rate pass-through, which was stronger as compared to previous periods, put an upward pressure on inflation particularly in the second half of the year. While annual CPI was registered as 14.60% in 2020, the annual rise in D-PPI that reflects the cost inflation was 25.15%. The CBRT implemented tightening in its monetary policy in the second half of the year. Having exhibited an expansionary monetary policy stance starting from the second half of 2019 with the aim of supporting economic activity, the CBRT discontinued the rate cut process in June 2020. Given the high volatility in financial markets and the higher-than-projected level of the inflation, the CBRT began implementing a tight monetary policy by increasing the weighted average funding cost from July onwards. Through gradual increases applied from September, the policy rate was raised to 17% at the end of the year, and the monetary policy was simplified in November, as the 1-week repo rate became the main funding tool. GDP ‑ Sectoral Growth Rates (%)(*) CPI and FC Basket (**) (Monthly Annual Changes, %) Agriculture Industry Services Construction GDP FC Basket CPI PPI 6 3 0 -3 -6 -9 2019 2020 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 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 0 2 J 0 2 F 0 2 M 0 2 A 0 2 M 0 2 J 0 2 J 0 2 A 0 2 S 0 2 O 0 2 N 0 2 D (*) Based on chain linked volume index (**) Currency Basket (0.5 * € + 0.5 * $) is calculated using the monthly average of the CBRT exchange rates. 21 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 2020 Developments in the Banking Sector TL credit volume grew rapidly. FC deposit volume continued to expand. The fact that the measures taken to ease the pressure the pandemic created upon the economy was substantially in the form of credit support and that the interest rates remained relatively low for the most part of the year caused a marked increase in the demand especially for Turkish lira loans. Excluding participation banks, TL lending of the banking sector expanded by 41.2% in 2020. On the other hand, FC credit volume in USD terms that displayed a weak performance parallel to the weak investment appetite and the depreciation of the Turkish lira, as well as the tendency to deleverage, fell by 3.8% in this period. Therefore, the rise in total lending volume in 2020 was at 33.1%. Higher volatility in domestic financial markets in recent years increased the dollarization tendency. This tendency persisted in 2020 with the impact of the expansionary monetary and fiscal policies implemented within the country, combined with the uncertainties created by the pandemic. In this context, FC deposit volume in USD terms grew by 14.4% in 2020, while the expansion in TL deposit volume in the same period was 23.6%. Thus, the increase in total deposit volume was registered as 33.3% for the whole year, which was driven also by the rise in exchange rates. Higher volatility in domestic financial markets in recent years increased the dollarization tendency. 22 İşbank 2020 Annual Report In 2021, the banking sector will continue to provide support to the economic activity. The sector has preserved its strong outlook. Expectations for 2021 Capital adequacy ratio of the banking sector went up from 18.42% at the end of 2019 to 18.81% at the end of 2020. The NPL ratio, which was 5.37% at year-end 2019, was registered as 4.10% at year-end 2020 with the support of the rapid rise in credit volume. The overall sector’s net profit grew by 20.7% as compared to 2019 and went up to TL 56.3 billion. In 2021, economic activity might possibly continue to recover in Turkey, and the inflation might follow a downward trend in the second half of the year due to the mild recovery in domestic demand, the weakening effect of exchange rate pass-through, coupled with the tight monetary policy implementations. As this situation provides the CBRT, which is anticipated to preserve its tight monetary stance in the first half of 2021, with room for maneuver for rate cuts in the second half of the year, it is also expected to reflect positively on the banking sector’s figures. Deposits and Loans in 2020 (*) (Change Compared to Year-end, %) Loans TL Deposits FC Deposits (US dollar) 40 30 20 10 0 -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (*)Source: BRSA Monthly Bulletin (excluding participation banks) 23 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank Banking Financial Capital Human Capital Natural Capital Intellectual Capital Social and Relationship Capital Manufactured Capital Capitals Global Trends External Factors Stakeholder Priorities İșbank’s Vision and Strategy Flawless customer experience Permanent undertaking to Turkey Solid financial performance Effective risk management İșbank Banking Producing sharable and sustainable value Technology and innovation leadership Happy and productive employees Responsible finance Ethical and transparent banking Operation Fields: Retail Banking Private Banking Corporate Banking Commercial Banking Outputs Return on average tangible equity 11.8% Total loans (cash & non-cash) TL 464.8 billion Capital adequacy ratio 18.7% Women employee ratio 55% Women ratio in management 45% Turnover ratio 1.6% Unionization rate 98% Share of renewable energy projects in total energy generation projects portfolio 69.5% Share of renewable energy projects in total financing 7.5% Number of digital banking customers 9.2 million Number of customers: 20 million Share of non-branch channels 96% Customer satisfaction score 86.2% Total number of branches 1,227 Number of Bankamatik ATMs 6,521 Created Value For investors and shareholders For customers For employees For society - Solid financial performance - Reliable investment with ethical, transparent and responsible banking approach - Financial support with responsible products and services - Access to financial services for al segments of society with inclusive products -Lifelong support with personalized products and services - Reputable and reliable employment - Equal opportunities in HR management - Decent, modern, healthy work environment both physically and psychologically - Professional and personal development opportunity - Contribution to social welfare with taxes paid - Contribution to the country’s economy with finance provided - Products, services and activities that contribute to combating climate change - Support for education and culture with long- term social investments - Support for increasing financial literacy Sustainable Impact 24 İşbank 2020 Annual Report Looking out for social benefit, as well as the needs and expectations of all its stakeholders, İşbank relates the outputs from its value creation process with the United Nations Sustainable Development Goals (UN SDGs) that it has contributed to, and manifests its support to global goals with its notion of creating shared and sustainable value. Since 2018, İşbank has been publishing integrated reports aligned with the IIRC (International Integrated Reporting Council) reporting framework and the GRI (Global Reporting Initiative) standards. 2019 Integrated Report that presents a holistic assessment of the value created by the Bank and forward-looking targets in view of the non-financial capital elements, as well as the Bank’s financial capital can be found on the website. Having undertaken pioneering roles and critical duties through every stage of the Turkish economy, İşbank produces permanent value for its stakeholders with its deep‑rooted and powerful business model allowing it to address its activities with a long‑term perspective. İŞBANK BANKING – A POWERFUL BUSINESS MODEL GENERATING SHARED AND SUSTAINABLE VALUE İşbank aims to generate shared and sustainable value for all its stakeholders with its business model called “İşbank Banking”, which it has been constantly evolving in the light of its corporate values nurtured and passed on from one generation to the other ever since its incorporation. Having positioned sustainability that underlies its business model as one of the main focal points of its corporate strategy with a holistic approach, the Bank carries out all of its activities to this end with the involvement of all employees and under the ownership of its senior management. İşbank generates versatile value by adopting an integrated approach to the management of its; - financial capital based on its robust financial structure, - human capital molded by its competent and experienced employees, - natural capital covering its resource management concept, environment-friendly products and services, - social and relationship capital allowing it to create added value for the society and its stakeholders, - manufactured capital made up of its physical infrastructure that enriches its service quality, - intellectual capital enabling it to develop innovative products and services, nurtured by its digital transformation capabilities, as well as its know-how generated by its deep-rooted history. 25 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank and its Activities in 2020 As at year-end 2020, İşbank increased its total assets by 26.9% compared to the end of the previous year to TL 593.9 billion, and retained its title as “Turkey’s largest private bank”. İşbank also maintained its leadership among private banks in terms of total loans, total deposits and shareholders’ equity as well as total assets. Total loans, which grew by 27.7% over the previous year, reached TL 345.2 billion as at the end of the year, and the share of loans in total assets stood at 58.1%. Non-performing loan ratio was 5.6% at year-end 2020. Total deposits of the Bank grew by 24.7% compared to the previous year-end and reached TL 368.9 billion. Ranking first among private banks in terms of total deposits and FC deposits, İşbank continued to be the leader among private banks also in demand deposits and TL savings deposits. Being the Bank’s main source of funding, deposits’ share in total liabilities reached 62.1% as at 2020 year-end. In 2020, İşbank also continued to utilize non-deposit funding opportunities both in domestic and international markets, aiming to extend the maturity of its liabilities and diversify its İşbank maintained its leadership among private banks in terms of total assets, total loans, total deposits and shareholders’ equity. Total Assets (TL Million) Total Loans (TL Million) 593,902 468,059 26.9% Increase 345,150 270,360 27.7% Increase 2019 2020 2019 2020 Total Deposits (TL Million) Shareholders’ Equity (TL Million) 368,876 295,922 24.7% Increase 67,781 58,873 15.1% Increase 2019 2020 2019 2020 26 İşbank 2020 Annual Report 18.7% İşbank’s capital adequacy ratio stood at 18.7%. funding base with a cost sensitive approach. As at year-end 2020, the non-deposit funds, which comprise of repo transactions, funds borrowed, securities issued in domestic and international markets and subordinated debts, accounted for 19.6% of total liabilities. İşbank’s shareholders’ equity grew by 15.1% in 2020 and rose to TL 67.8 billion. The capital adequacy ratio of the Bank was 18.7% at the end of the year, above the regulatory limit. Having the most extensive distribution network among private banks with its 1,227 branches and 6,521 Bankamatik ATMs as at year-end 2020, İşbank kept positioning its physical and digital channels so as to complement one another. Having continued to deliver multidimensional banking services through its diversified digital service platforms during 2020, when digital transformation gained momentum amid the Covid-19 pandemic conditions, the number of İşbank’s digital customers rose to 9.2 million by the end of the year, while the share of non-branch channels reached 96% in total transactions. The number of customers using İşCep, Turkey’s first mobile banking application, reached 8.9 million at the end of 2020. TL 593.9 billion İşbank’s total assets reached TL 593.9 billion. Asset Composition (%) 2020 2019 Cash and Banks Securities Loans Subsidiaries and Participations Other Total 14.2 18.4 58.1 4.4 4.9 100 14.1 18.0 57.8 4.5 5.6 100 Liability Composition (%) 2020 2019 Deposits Funds Borrowed and Money Market Funds (1) Other Liabilities Shareholders’ Equity Total (1) Includes securities issued and subordinated debts in TL and FC 62.1 19.6 6.9 11.4 100 63.2 18.4 5.8 12.6 100 27 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management During 2020 that was outweighed by the negative effects of the pandemic, İşbank increased the support it extends to its customers in the corporate banking segment. İşbank and its Activities in 2020 CORPORATE BANKING İşbank deems it strategically important to develop permanent and multi-faceted relationships with corporate banking customers. The Bank is focused on sustaining its support to the real sector uninterruptedly. Main business partner and supporter of businesses İşbank has structured its corporate banking strategy upon establishing long-term cooperation with its customers and further deepening its existing relationships. Assuming the role of principal business partner of businesses in this field, the Bank delivers products and services blending customer needs and tendencies with emerging trends, and works to maximize its service quality and customer satisfaction. Sustaining its support to the real sector uninterruptedly amid any conjuncture, İşbank emphatically helps its customers build on their competitive strengths and capitalize on growth opportunities. Taking place among Turkey’s leader banks in the corporate banking segment, İşbank targets to deliver perfect customer experience by developing custom-tailored proactive solutions backed by innovative technology. Under the corporate banking roof, the Bank offers fast and exclusive service to domestic and multinational companies with its expert team working out of 10 dedicated corporate branches, four of which are located in İstanbul, and at its Multinationals Branch operating in İstanbul. During 2020, İşbank has stood by its customers with the services it offers for financial progress, as well as its robust liquidity structure and capital. The Bank extended support and financial solutions to its customers with its broad product range specifically developed for businesses and sectors in order to minimize the negative impacts of the global pandemic, and reinforced its pioneering position in the market by contributing added value to the national economy. The Bank continued to offer digital solutions peculiar to customer needs for all banking transactions of its corporate customers. In 2020, as a result of the Bank’s digital transformation climate, the Bank attached even greater importance to processes that will respond to customers’ accelerated and differentiated digital demands due to global pandemic in relation to banking and financial transactions. In line with its vision of being the businesses’ first choice in integrated digital solution partner within their financial and commercial ecosystems, the Bank has defined its key priorities in the corporate banking business line for 2020 as follows: - devise its business model so as to steer the payment and collection transactions of corporate companies rapidly, securely, productively and easily through innovative and fast digital platforms backed by the state-of-the-art IT infrastructure, - define customer needs, concentrate on products that will channel all cash cycles of businesses to the Bank, and develop services and solutions differentiated according to sectors in keeping with the approach centered on corporate companies and the impact they create upon other segment customers that they interact with, - determine the critical points in all processes involved in the operations of corporate companies, and maximize the benefit provided through banking services and solutions in these areas. 28 İşbank 2020 Annual Report 2020 has been a year of decelerated growth in general with respect to project finance as compared to earlier years. Leader in project finance business line A year of slowdown in greenfield investments Project loan transactions lost momentum due to economic uncertainties in domestic and international markets, fluctuations in exchange rates, increased funding/capital costs and decreased domestic demand, coupled with the negative developments in sectors such as energy and construction contracting, which contributed significantly to the Bank’s project finance volume in previous years. As the impacts of the pandemic began to be felt, greenfield investment appetite also declined and planned investments were postponed. In brief, 2020 has been a year of decelerated growth in general with respect to project finance as compared to earlier years. Loan disbursements continued in parallel with the course of major construction projects such as Çanakkale Bridge and Highway, Ankara-Niğde Highway, Northern Marmara Highway, Ankara Etlik Health Campus, Galataport and energy projects the financial closing of which had taken place in previous years. Besides its leadership in project finance, İşbank preserved its position as the pioneering bank in the creation of sustainable economic development with its determinant role assumed for the formulation and realization of project finance structures and its experience in this field. The Bank signs its name under numerous important projects that contribute to the performance of the national economy through the financing solutions based on its experiences and rational analyses and the resources it makes available to the real sector. In keeping with the responsibility emanating from its pioneering and leader role, when evaluating investments, İşbank produces financing solutions for the realization of projects that create added value for the national economy, satisfy investors’ expectations and will contribute benefits to the country in the long term. Custom-designed financing packages at international standards are created by giving the foreground to quality and customer satisfaction by an expert and experienced team possessing the necessary sectoral and technical competencies. The Bank allocates significant amount of resources for the financing of acquisition projects that also incorporate privatizations, with a special focus on investments in energy, infrastructure, transportation, manufacturing and construction that serve as the engine of the national economy. 29 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management In 2020, management of customers’ risk exposure was facilitated by developing customer‑focused risk management solutions. İşbank and its Activities in 2020 İşbank’s plans for project finance in 2021 are as follows: Sustainable cooperation with international institutions in the financing of investments • Assessing the financing needs of new highway projects based on Build-Operate-Transfer (BOT) model, the tender proceedings of which have been finalized, • Reviewing potential financing demands for new renewable energy investments within the scope of the new Renewable Energy Resources Support Mechanism (YEKDEM) that is expected to come into effect in the second half of the year, • Following up the tender processes for mini YEKA Solar Power Plant (SPP) with a total installed capacity of 1,000 MW, which will be organized in the first quarter of the year under the Renewable Energy Resources Area (YEKA) model according to the announcement made, • Considering financing greenfield investment needs emerging in electricity distribution regions upon announcement of the tariffs for the fourth five-year period, • Continuing to work on marketing the “Solar Loan by İşbank”, which was created to finance unlicensed rooftop SPPs with a maximum installed capacity of 5 MW to be set up for self-consumption by industrial facilities and which was introduced in 2019. 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; including the new disbursements in the amount of USD 61.9 million in 2020, total financing made available to customers added up to USD 142.6 million. The Bank allocated the fund secured under the MidSEFF Program to its customers for financing mid-sized investments in renewable energy and industrial energy efficiency. Contribution to customer satisfaction continues at an increasing rate through customized risk management products offered. İşbank offers custom-designed risk management tools in line with the needs of its corporate banking customers seeking hedging against market risks. In 2020, the Bank ensured management of its 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 2021, İşbank will increase its support to its customers with derivative products and specific risk management solutions that are configured according to needs and expectations. 30 İşbank 2020 Annual Report FAST FAST instant payment infrastructure has been set up and Easy Address, an important layer service, was made available to all customers through digital channels. Innovative cash management products and money transfer initiatives Strong business partner in foreign trade İşbank keeps leading digital transformation with innovative cash management products. İşbank continues to produce custom-tailored solutions also in foreign trade through technological infrastructure developments. İşbank continued to act as its customers’ business partner of foreign trade also in 2020, and redesigned its work processes in the form of centralized, uninterrupted processes in order to increase transacting speed and operational efficiency, and to offer faster and higher quality service to its customers by making use of expert teams. In this respect, the Bank also finalized and introduced technological infrastructure developments. Robotic processes also began to be employed in efforts carried out in this vein, and robotic automation is intended to be expanded in 2021. During 2020, work continued regarding alternative and innovative foreign trade solutions, and in this context, two pilots were successfully realized on the Marco Polo platform, and İşbank has been the first Turkish bank to offer payment guarantee with blockchain technology in foreign trade. In 2021, İşbank will continue to improve its technological infrastructure with an export-oriented approach, diversify the products and solutions offered through digital channels, and produce special solutions for foreign trade customers drawing on its extensive correspondent network and experienced human resource. In 2020, cash management products gained a high level of importance owing to customers’ digitalization needs. Customized solutions were produced for online payment and collection systems, electronic signature, accounting integration and bulk payment systems, thus contributing to customers’ digitalization and internal processes. During the reporting period, İşbank joined major innovative efforts in relation to money transfers. The Bank became a SWIFT gpi(*) bank; hence, international transfers can now be followed up end-to-end transparently and became faster. Named Instant and Continuous Transfer of Funds System (FAST) and launched by the CBRT, an instant payment infrastructure has been set up, and Easy Address, which is an important layer service of FAST, has been offered to customers through digital channels. The Bank integrated into the Secure Payment System of the Turkish Union of Public Notaries allowing simultaneous exchange of the vehicle’s ownership and the sales price, thus allowing customers to perform second-hand vehicle purchase and sales transactions quickly, easily and securely. TekCep, the Bank’s innovative product in open banking area, was enriched with additional features, which include TekPOS that allows customers’ POS transactions with different banks to be followed up on a single screen, and TekEkstre, an account statement generating a single report on all account information held at all banks. (*)The new application of SWIFT, gpi (global payment innovation) allows tracking the status of foreign currency transfers between gpi-member banks, following up fees and charges collected by correspondent banks, and faster execution of transactions. 31 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management In keeping with the vision of being the “integrated solution partner of businesses”, SME Banking Marketing Department started operations employing agile working principle in 2020. İşbank and its Activities in 2020 COMMERCIAL BANKING Support extended through strong value‑added and innovative solutions In keeping with its founding mission, İşbank has always stood by the industrialists, merchants, SMEs and artisans ever since 1924. In 2020, the Bank delivered its products and services to its customers with commercial banking solutions, and resolutely increased its support to the sustainable development of the Turkish economy. In line with the vision of being “companies’ integrated solution partner”, SME Banking Marketing Department started its activities employing agile working principle in 2020. In this context, efforts will be spent to further increase the Bank’s influence in the areas of SME, business segment and tradesmen banking segments. 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 46 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. Due to the negative impacts of the pandemic conditions in 2020, regional sales teams effectively followed up branch teams through online meetings that provided the best alternative to physical branch visits. On the other hand, during this period when branches offered service with limited number of employees, field teams and Agriculture Direct Sales teams realized nearly 127,000 and 60,000 customer visits, respectively, which numbers include other means of contact such as video calls besides physical visits. As a requirement of ensuring customer satisfaction and uninterrupted service concept, teleworking Bank employees’ contribution to branch activities became all the more important in 2020. In this framework, commercial sales teams and particularly teleworking employees established sales-oriented contacts through phone calls or alternative methods with customers presenting a high sales potential, which were identified by technological methods such as artificial intelligence (AI) and machine learning which are in the focal point of the Bank’s field of activity. Work was carried out intensely especially for delivering digital products to the Bank’s extensive customer base and for finalizing Commercial Banking customers’ needs in the shortest time possible. All these steps contributed to alleviating the workload on employees working in İşbank branches, and to enhancing the satisfaction of customers receiving high quality service without any, or with minimum, physical contact. The Bank’s reach in the field of agriculture continued to be expanded at the same speed in 2020, and the number of agricultural customers exceeded the 300,000 mark. 32 İşbank 2020 Annual Report TL 60.7 billion Installment commercial loans portfolio reached TL 60.7 billion in volume as at year‑end 2020. The most preferred private bank in installment commercial loans in 2020. İşbank plays a pioneering role in financing not only large-scale commercial companies but also tradesmen and SMEs. Preserving its ongoing leadership among private banks in 2020 with a market share of 10.6% in installment commercial loans, which is the primary loan type preferred by the above mentioned segments for their financing, İşbank’s installment commercial loans portfolio reached a volume of TL 60.7 billion as at year-end 2020. During the pandemic, in order to overcome the difficulties of commercial life in cooperation, the customers were offered the “Economic Support Package Due to the Coronavirus Pandemic” in order to reach the financing they will need in their rent and salary payments. Upon the transition to normalization during the summertime, “Solidarity and Support Packages” continued, which were aimed at contributing to the continuity of commercial life. Those campaigns for digitalization investments, Intracity Passenger Transport, pharmacists, and custom-tailored loan campaigns were targeted at easing the pressures the pandemic put on economic activity. As at 2020 year-end, 38,123 customers held a total of 41,136 İŞİM (My Business) cards. Instant Commercial Credit Card service launched in May 2020 has been instrumental in making tradesmen and real person tradesmen customers cardholders via the mobile apps İşCep and Maximum İşyerim without leaving their workplaces. With the purpose of producing the payment solutions that best respond to the needs of diverse customer segments, the Bank continued to develop regional business partnerships. In this scope, the new commercial card, Maximiles TİM Exporter Card, which was co-developed with the Turkish Exporters Assembly and tailored according to exporter customers’ needs, was launched in June 2020. The number of cards in use reached 4,221 at year-end 2020. As an outcome of the investments in technologies adding speed to card payments, commercial credit cards began to be delivered incorporating commercial virtual card feature. Acting as commercial customers’ business partner also 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, 2019 and 2020. Within the scope of this collaboration that lends major contribution to the efficiency of CGF backed by the Turkish Treasury, İşbank extended loans worth approximately TL 43 billion. Under a protocol signed by and between İşbank and the Central Bank of the Republic of Turkey (CBRT) for fulfilling the financing needs of exporters and businesses engaged in FC-earning services and activities, the fund secured from the CBRT continued to be extended to firms as discounted FC loans in 2020. During the pandemic, the CBRT also enabled the disbursement of these loans in Turkish lira. 33 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank and KOSGEB cooperation continued in 2020 within the scope of various support protocols. İşbank and its Activities in 2020 As part of the activities targeted at specific professional groups, İşbank continued to collaborate with the Turkish Pharmacists Union (TEB) in 2020. Disbursements were carried on in 2020 within the scope of the SME Finance Support Program Protocol, signed in October 2019 by and between CGF, KOSGEB (Small and Medium Enterprise Development Organization) and 10 banks including İşbank, and “Samsun Province Terme and Salıpazarı Districts Urgent Support Loan Protocol” signed in November 2019 by and between CGF, KOSGEB and 9 banks including İşbank. In February, 10 banks including İşbank, CGF and KOSGEB signed the “Elazığ and Malatya Provinces Urgent Support Loan Protocol”; in September, 11 banks including İşbank, CGF and KOSGEB signed the “Rize Province Çayeli District and Giresun Province Urgent Support Loan Protocol”. In August, 9 banks including İşbank, CGF and KOSGEB signed the “İstanbul Province Esenyurt District Urgent Support Loan Protocol” and finally in December, 7 banks including İşbank, CGF and KOSGEB signed the “İzmir Province Urgent Support Loan Protocol”. The loans made available by İşbank under these protocols amounted to TL 245.6 million as at year-end 2020. Loan allocations within the frame of these collaborations are going on. Continuous access to foreign funding facilities In order to contribute to the flourishing of commercial life, İşbank continued to tap foreign funding facilities for various fields including energy, agriculture, women entrepreneurship and mitigation of economic hardships resulting from the pandemic, and kept channeling these special purpose facilities to customers in 2020. 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 2020, loans in the amount of approximately USD 16.6 million have been allocated out of this fund. Under the loan agreement signed in 2020 by and between İşbank and the European Bank for Reconstruction and Development, (EBRD), İşbank was provided with a funding of USD 54 million to be on-lent at affordable rates to alleviate the economic difficulties faced by companies, especially SMEs, due to the pandemic. Work is in progress for the placement of this facility. Within the scope of the loan agreement signed by and between İşbank and PROPARCO (Societe de Promotion et de Participation pour la Cooperation Economique S.A.), an affiliate of the French Development Agency (AFD), a facility in the amount of EUR 25 million has 34 İşbank 2020 Annual Report A fund in the amount of USD 54 million was obtained from the EBRD to be on‑lent to the SMEs to be used for eliminating the impacts of the pandemic. been obtained. Work is ongoing for on-lending this facility to the SMEs engaged in agriculture and agribusiness sectors for financing their operating capital requirements and their investments in energy and/or resource efficiency in agriculture. 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, whereas the second tranche in the amount of USD 20 million was received in March 2020. It is envisaged to on-lend 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 disbursement of the first tranche in the amount of USD 20 million has been finalized in the first quarter of 2020, and work is ongoing for the allocation of the second tranche. Foreign trade solutions devised with strong capabilities Comprised of multilingual İşbank 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 or hold online contacts with them, during which they instantly respond to all kinds of queries about foreign trade transactions. İşbank supports the export-driven growth of companies exporting goods and/or services and helps them access the low-cost financing in an effort to back the national economy. In June 2020, İşbank signed a cooperation protocol with the Turkish Exporters Association (TİM), the most important umbrella organization that steers Turkey’s foreign trade and represents exporters, under which a very advantageous support package will be offered to exporters. With the aim of reaching the highest number of exporters possible, loans in a maximum amount of USD/EUR 150,000 or TL 1,000,000 are being disbursed to any given company under the package. In addition, “Solidarity and Support Package for Exporters”” was designed for fulfilling the exporter customers’ needs and expectations that were reshaped due to the pandemic. Hence, loans in terms of US dollar, Euro or Turkish lira are made available at affordable rates. 35 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank and its Activities in 2020 “Women Entrepreneurs Export Support Loan” and “Young Entrepreneur Export Support Loan” protocols addressing women and young entrepreneurs were signed with Turk Eximbank for helping women and young entrepreneurs gain increased prominence in exports, and loan disbursements began thereunder. İşbank is the first bank to sign “Young Entrepreneurs Export Support Loan”. While 25 bps interest rate discount is applied to FC loans, TL 100 million and USD 200 million have been allocated in total funds under each protocol. After the issuance of letter of guarantee with secure electronic signature by banks legally, the Electronic Letter of Guarantee Platform has been set up before Credit Registry Agency (KKB), which enables electronic handling of associated procedures. İşbank finalized its integration with the said platform in September 2019, and acquired the capability to perform letter of guarantee procedures electronically. From the same date, İşbank began issuing electronic letters of guarantee and letters of intent addressed to the Directorate General of Customs and Turk Eximbank. In 2020, İşbank continued to cooperate with the leading e-commerce companies, and enabled its customers to register with e-commerce websites at discounted prices. Wherever there is renewable energy, İşbank is there İşbank continues to finance renewable energy and energy efficiency projects. During 2020, İşbank kept extending “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. Committed contribution 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. In 2020, “Women Entrepreneurs Export Support Loan” and “Young Entrepreneur Export Support Loan” protocols addressing women and young entrepreneurs were signed with Turk Eximbank. 36 İşbank 2020 Annual Report Arya Cooperation Within the scope of the cooperation with Arya, besides financially supporting women entrepreneurs, various activities are carried out for contributing to their development by way of training programs like Arya İş Workshops, and assisting with the promotion of their products and services. In 2020, the cooperation between İşbank and Arya, Turkey’s first female oriented investment platform, continued, which was initiated in 2018 for financially supporting women entrepreneurs and for contributing to their development through bringing them together with the investors network, besides giving them access to bank loan products. “Arya Cooperation” events, offering free-of-charge attendance to women entrepreneurs were organized three times in 2020, addressing women leading technology startups, women seeking to grow and transform their businesses, and women industrialists. The workshops addressed various topics such as financial literacy, balance sheet management, sales, brand and digital marketing, e-commerce, innovation, data management and human resources, and practical information for solution of most common problems of entrepreneurs and case studies were tackled. Sponsored by İşbank, Arya Retreat Pitching Challenge (ARPC) and Arya Retreat event were held digitally in 2020. Under the ARPC, women entrepreneurs who have realized their ventures and needing investment support to grow their businesses are brought together with investors following a 6-week event of training programs, feedbacks and mentorship. Attended by successful people in business, experienced and novel investors, the Arya Retreat provides the setting for ARPC finalist women entrepreneurs for presenting their projects and finding investors for their ventures. In 2020, it was targeted to give the women entrepreneurs that participated in events co-organized by İşbank and Arya reach to a broader customer group. The Bank organized campaigns introducing the products and services of women entrepreneurs to its customers, and enabled them to take place in platforms such as İşbank Maximum Mobile Gördüm Aldım (Splurchase) application and İŞİM application. The Bank facilitated the participation of successful and powerful women leaders in business in the Arya Challenge Club, organized by Arya Women Investment Platform and intended to create women investors out of women leaders. The platform brings together women leaders in CEO, owner, second generation executive, entrepreneur and executive positions with the target of benefiting from their experiences and building a broad network. 37 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management In 2020, the number of İşbank’s Commercial Business Unit digital customers reached 798 thousand. İşbank and its Activities in 2020 The greatest supporter of the startup ecosystem İşbank carried on with its efforts to propagate the Technology Startup Package, which is designed to help technology startups sustain their development and give them free-of-charge or discounted access to basic banking services. In addition to its objectives of cooperating with startups and dealing with them as a customer, campaigns intended to let startups reach İşbank customers were carried on throughout 2020. The Bank digitally got together with the entrepreneurs who participated in the Startup at İş with Anka competition, a collaborative organization by the Young Entrepreneurship and Governance Association (GGYD) and Ankara University Technology Park. During the event, entrepreneurs told about their startup journeys, and were given an introduction to life-easing products and services that they might need. In addition, following the event, startups with validated business models, are headed towards scaling up, and embodying global growth potential were connected with investment platforms, and firstly with Maxis. Moving forward with powerful banking products 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. As at year-end 2020, the number of the Commercial Business Unit digital customers using any digital channel grew by 95,000 as compared to 2019 year-end, and the number of digital customers went up to 798,000. The number of İşCep Commercial users, which was 359,000 at the end of 2019, exceeded 389,000 as at 2020-year-end. Approximately 72% of 1.1 million active customers have used at least one digital channel within the last 12 months. The functions of “TekCep” application, which was put into life in 2019 in partnership with Softtech Yazılım Teknolojileri Araştırma Geliştirme ve Pazarlama Ticaret A.Ş., a subsidiary of İşbank, was enriched with TekPOS added in August. With the TekPOS service, İşbank, the sector’s pioneer in open banking, enabled its corporate customers to follow up the POS transactions of different banks and total balances to be viewed on a single screen on İşCep Commercial and Commercial Internet Branch. Through integration of account movements and POS movements, TekCep supports commercial customers handle their cash management processes spending less effort and achieving greater efficiency. Through its 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. 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, is being enriched with new additions. The new features added to the product in 2020 consist of interest rate differentiation according to the term entered and the option to take out a loan with a grace period of up to 3 months, which were designed in line with the target of enhancing customer experience and aligned with the needs arising during the pandemic. 38 İşbank 2020 Annual Report Focus was placed on affordable fulfillment of producers’ financing needs under the Hand in Hand with our Farmers Support Package. The loans disbursed through the Instant Commercial Loan application added up to TL 504.6 million in 2020. On another note, Commercial Credit Card Application capability was launched, which allows applications to be made via İşCep, upon which the card is produced and sent to the customers’ addresses via messenger service. Under this new feature, 9,361 cards with a total credit line of TL 298.3 million were produced during 2020. 2020 has also seen new capabilities added to POS, which is a critical product for establishments. Instant POS Application made available on İşCep offers an end-to-end digital process for allocation of POS devices to customers. Under this function, member merchant initiation is performed automatically on the system and a demand for POS installation is automatically forwarded to the service provider. My Commercial Credit Ready and My Commercial Credit Card Ready applications were launched, which start at the branch and are finalized with digital customer approval based on cross-channel transaction perspective. These two applications allowed remote applications for, and allocation of, loans and credit cards without a branch visit from customers. Under this feature, installment commercial loans worth TL 144.4 million were extended and 716 credit cards with a total credit line of TL 15.7 million were produced in 2020. To contribute to sustainable agriculture İşbank’s interest in the agricultural sector increased strongly in 2020. Analyzing the needs on a global and national scale, taking into consideration also the large ecosystem surrounding the agricultural sector, İşbank has included contributing to sustainable agriculture within its priority targets. Within this framework, the Bank set up a new organization under the name Agricultural Banking Marketing Department in October 2020. In line with this restructuring, the Bank added momentum to its efforts for developing collaborations with the sector stakeholders with the objective of delivering the products and services customized according to agriculture based on responsible banking concept, with an approach that will create added value primarily for producers and then for the agricultural ecosystem. Throughout the reporting period, İşbank continued to offer products and services aligned with the needs and demands of customers engaged along the agricultural value change amid the pandemic conditions. During 2020, focus was placed on fulfillment of the producers’ need for financing at affordable terms under the “Hand in Hand with our Farmers Support Package” in order to help restrain the negative implications of the pandemic that adversely impacted economic conditions upon agricultural and food security in 2020. The said support was put to the use of producers with the help of branches and agricultural field teams that carried on with their activities during the pandemic. In addition, the Bank exhibited its sensitivity by urging producers to be wary of their health through an informative video produced about the Measures for Producers Against the Coronavirus Pandemic, followed up by emailing, SMS and banners based thereupon. At İşbank, 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 39 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İmeceMobile, an application running on smart phones launched in October 2019, reached a broad audience during 2020. İşbank and its Activities in 2020 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 2020. Securing funds and undertaking collaborations aimed at energy efficiency, İşbank acts with a social responsibility notion that also aims at flourishing the country’s agriculture, and authors initiatives that support women and young farmers, encourage organic agriculture and digitalization, and display sensitivity to combating draught and water management. In 2020, Hero Product Cotton Workshop was organized in Şanlıurfa. In addition, the Bank participated in, and sponsored, online conferences and summits. Digital Transformation in Agriculture Adopting a sustainability-focused and inclusive perspective for the agricultural sector, İşbank continued to give increasing importance to improving the digital and financial literacy of sector participants and to technological transformation in agriculture in 2020. Efforts are ongoing to proliferate the Digital Agriculture Solution that uses agricultural forecasting and early warning systems that rely on advanced technology in agricultural activities and operations, which was launched in partnership with Vodafone Business in 2019. Through early warnings enabled by digital agriculture stations introduced on olive fields in Bursa, the initial costs of which were borne by İşbank, more than TL 15 million was saved, whereas the saving secured in strawberry cultivation closed in on TL 5 million thanks to stations set up in Silifke, Mersin. Launched in October 2019, İmeceMobile, an application that runs on smart phones, reached a large audience during 2020. The application gave producers easy access to various information from their homes or fields during the pandemic. Using the app, producers can access information that is important for their productions ranging from weather and agricultural warnings to market hall/exchange prices free-of-charge. Moreover, users can also ask questions to experts and receive information from them, view İmece Card campaigns and information, and apply for loans and products. With the number of current users that topped 100 thousand, İmeceMobile app’s “fertilization suggestions” development was completed in 2020, and was launched for use by producers in 2021. İşbank extended support and lent contribution to the Digital Agriculture Platform (DİTAP) launched by the Republic of Turkey Ministry of Agriculture and Forestry. The second edition of the Agribusiness Entrepreneurship Competition was held online, which is designed to uncover and support ventures having innovative projects in the agricultural sector; the entrants that ranked in the first and second spots qualified to take part in İşbank Workup program. Growing support through uninterrupted cooperation and organization approach İşbank aims to help render the operations and developments of its customers sustainable by contributing to the digitalization processes of its commercial customers through the cooperations it establishes and campaigns it organizes. 40 İşbank 2020 Annual Report Under the campaign organized with İş Net, İşbank customers were able to use e‑document services free‑of‑charge for a period of one year. In 2020, İşbank continued to sponsor the Digital Transformation Center (DDM), which started operations in 2019 under TÜRKONFED (Turkish Enterprise and Business Federation). All of its processes migrated to the digital environment following the pandemic, DDM has provided free access to more than 350 companies to their digital scorecards and more than 100 firms free-of-charge mentoring about digitalization. From among the businesses seeking to design and introduce digital transformation projects under DDM, which will carry on with its activities in 2021, eligible ones will also be able to receive project management support, which will be partly covered by İşbank. Initiated in 2018 as a collaborative initiative of İşbank and TÜRKONFED with the aim of supporting the digitalization process of the SMEs that make the backbone of the Turkish economy, Digital Anatolia meetings continued on online platforms in 2020 due to the pandemic. Participated by senior executives and experts in various fields, the online events focused on digitalization and its contribution to work processes. During 2020, ten meetings were streamed live and free-of-charge. Under the campaign organized with İşNet, İşbank customers that started using e-documents during 2020 as per regulatory arrangements or those wishing to take advantage of the benefits of using e-documents were given the chance to utilize e-document services free-of-charge for a period of one year. On another note, more than 2,500 customers benefited from the campaign organized with TÜRKTRUST company for e-signature, which acquires constantly increasing usage and importance in work processes. İşbank customers were able to acquire e-signature at a 50% discounted price under the campaign. İŞ’TE KOBİ The revamped İŞ’TE KOBİ website, designed for SMEs, has given businesses access to educational content digitally on main business functions including marketing, entrepreneurship, technology while contributing directly to their digitalization through offering a combination of the applications and solutions that will support their business processes. The user profile of the website was supported and expanded with contents tailored for visitors from tradesmen, startup, farmer and women entrepreneur personas. By incorporating the applications and solutions from the startup ecosystem, İŞ’TE KOBİ aims to contribute to businesses in gaining competitive advantage as well as to the startup ecosystem. İŞ’TE KOBİ has won 34 awards in various national and international organizations to date and the website’s registered users exceeded 87 thousand as at year-end 2020. Through İŞ’TE KOBİ website, businesses are able to reach current developments closely concerning them, blog posts, educational contents and the Bank’s campaigns. İŞ’TE KOBİ also serves as a hub to apply for commercial products and services, to ask questions to experts in various topics such as marketing, agriculture and livestock breeding, taxation and accounting, startup law etc., and to receive free-of-charge advisory. Over 6 thousand businesses take place under the SME Market section where they can promote their products and services and pin their contact information on Yandex Maps. 41 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Amid the pandemic conditions that brought life to a standstill in the first quarter of 2020, İşbank’s priority has been to mobilize all the means available to it for the benefit of its customers. İşbank and its Activities in 2020 RETAIL BANKING All customers, existing and potential, make the focal point of İşbank’s retail banking activities. • İşCep and Maximum Mobile banking applications through which the Bank offers service around the clock, independent of time and place Customers’ most preferred financial solution partner • Mobile payment, contactless payment, instant card provision services 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”. Amid the pandemic conditions that brought life to a standstill in the first quarter of 2020, İşbank’s priority has been to mobilize all the means available to it for the benefit of its customers. In the presence of the social distancing rule that is among the most basic requirements for protection against the disease, digital experiences gained the foreground as the ideal solution. Throughout this period when it has become critical to observe social distancing requirements, avoiding contact and staying at home for prolonged periods of time, İşbank stood by its customers and supported them through the following capabilities enabled by its ongoing investments in mobile technologies, payment systems, AI and robotic technologies within the scope of its digital transformation activities: • Contactless cash withdrawal and depositing technology using QR-code • Service by Maxi, the AI-based personal assistant possessing natural language processing (NLP) capability • Card campaigns to support the budget given the increased frequency of shopping during the pandemic • Free-of-charge money transfers • Loan debt deferment campaigns • Loan campaigns entailing instalment deferrals for new cash needs Communication concept entailing individual‑oriented, empathetic and contextual marketing Throughout these extraordinary times, İşbank pursued a focused approach to correctly understand its customers including their circumstances, worries and expectations, and embraced empathy in managing all the processes from value proposal design to communication. 42 İşbank 2020 Annual Report 74% In 2020, more than 74% of total transactions at İşbank went through İşCep and Maximum Mobile. In 2020, İşbank targeted to preserve and further strengthen its perception as a brand that understands and stands by its customers through hard times. Along this line, the Bank created its proposals related to retail banking activities with a contextual marketing approach along the entire customer journey that leads to product and service purchase and entails post-experience sharing. The Bank maintained its transparent and candid tone of communication. Through the communication activities conducted with 34 social network accounts under its various brands on various social media platforms during 2020, İşbank reached approximately 2.7 million in the number of followers. İşbank intensely carried on with its marketing initiatives on digital media, which allows communicating with the targeted individuals at the right time, at the right place and with the right content. In 2020, the Bank used conventional media, as well as digital media, and cooperation was maintained with numerous eminent conferences that went online, digital content providers and broadcasting platforms, thus providing continuance of communication activities in a multi-faceted fashion. İşbank continued to invest in digital marketing technologies enabling personalized communication, and further built on its marketing capabilities through location- and time-based personalized offers through all channels, and mainly from İşCep and Maximum Mobile as a result of its investments in AI technologies. İşbank acts with the consciousness of being an organization that creates value and makes life easier for its customers by combining technology with its own field of business. Innovative products and services developed within the scope of digital transformation, technology infrastructure investments, and initiatives targeted at startup ecosystem make an important part of the Bank’s forward-looking activities. Mobile channels as the main touch point In 2020, more than 74% of total transactions at İşbank went through İşCep and Maximum Mobile. A great majority of retail banking services carried out for new customer acquisition or existing customer activation features the integrated capabilities of İşCep and Maximum Mobile 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 touch points which grow in number owing to digitalization, and recovery campaigns are organized for customers with lifetime high value, who have reduced their relations with the Bank. 43 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank and its Activities in 2020 The balance in term deposit accounts opened through digital channels reached TL 38.5 billion at year‑end 2020, up by 40.2%. Growth in retail loans and savings deposits At 2020 year-end, İşbank’s consumer loans book expanded by 39.2% to TL 68.2 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 35.1% year-over-year and reached TL 86.2 billion in 2020. At the end of 2020, İşbank’s general purpose loans increased by 48.1% to TL 44.1 billion, housing loans by 21.2% to TL 21.1 billion, and auto loans by 132.5% to TL 1.2 billion. Support was extended in the form of support packages introduced by İşbank and, following suit in the sector, deferments granted on loan debts with the purpose of helping ease temporary liquidity squeezes and mitigating the negative effects of decelerated economic activity in line with customer demands. While İşbank’s total deposits increased by 24.7% year-over-year at the end of 2020 to TL 368.9 billion, savings deposits also went up by 33.3% in the same timeframe and reached TL 260.9 billion. Moreover, the Bank is the leader among private banks in TL savings deposits, FX deposit accounts, overall FX deposits and total deposits as at 2020 year-end. In 2020, 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, 89.3% of the expansion in total deposits as at the end of the year stemmed from the increase in savings deposits. İşbank kept widening its deposit products range in the reporting period. Accumulating Young Account was added to the product portfolio, whereas the number of term deposit products went up to 20 and savings products to 44. 44 İşbank 2020 Annual Report Artificial Intelligence By the end of 2020, almost all of the applications for consumer loans were being priced by the AI‑based model. 21.5% rise in retail credit cards balance At the end of 2020, retail credit cards balance of İşbank reached TL 18 billion, up 21.5%. The Maximum program satisfied the needs of retail credit card customers by offering innovative solutions that make life easier in the digital world. Maximum Youth Program The Bank had first reached university students aged 18 and above under the brand “İş’te Üniversiteli” in 2007; in February 2020, “Maximum Youth” program was introduced, which expanded the scope of the target audience to include the working youth, in addition to those pursuing studies. Its launch having taken place in July, Maximum Youth Program was presented as a brand new service and product package, designed to cater to the needs of all youngsters in the 18-25 age interval. Holding a Maximum Youth credit card or Maximum Youth debit card suffices for inclusion in the Maximum Youth Program. Maximum Youth program incorporates versatile services and privileges that touch numerous different moments in the youth’s lives and dreams, from financial services to campaigns that will facilitate purchases, entertainment to personal development, personal finances to saving up easily. Maximum Youth cards custom-designed in vertical format for the youth offer advantageous loyalty points (MaxiPuan) earning, and free-of-charge use and discounts at businesses enabled by various collaborations. At year-end 2020, the Maximum Youth credit card holders numbered 117 thousand, whereas the number of customers included in the program was 210 thousand. 54% of the new Maximum Youth card customers acquired during 2020 comprised of youngsters who are fresh customers of the Bank. Involving the youth in the designs, Maximum Youth Advisory Board was put into life in December, representing an additional initiative to the product and campaign communications aimed at broadening the Bank’s young customers portfolio and at forming a solid basis for brand loyalty among the young generation. Selected from amongst Entrepreneurship Foundation (GİRVAK) Fellows, İşbank MasterClass Digital Development Program students, youngsters representing the Future Hub Development Program, and young employees of İşbank, the members of the Maximum Youth Advisory Board carry out activities to act as the voice of the youth in the 18-25 age interval. Bringing the youth to product management, Maximum Youth program has joined among the retail banking activities as an example of contributive banking. 45 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Through the “I Want to Become a Customer” service, 82 thousand new retail customers were acquired by year‑end 2020. İşbank and its Activities in 2020 Developments in the World of Retail Credit Cards New products and services at İşbank’s digital touch points On the occasion of its 10th year, Maximum TEMA Card visuals were renewed and the product was relaunched for the nature-lover customers. Furthermore, within the scope of the 10th year of collaboration with the TEMA Foundation, the product named NatureFriendly MaxiPara Card was added to the TEMA Card family with the aim of expanding the customer segment seeking to support the TEMA Foundation with their spending. Available only as a digital card, NatureFriendly MaxiPara Card started to accept applications via Maximum Mobile by end-December. At the end of December, Maximum Paw Card was introduced as the “animal lover credit card that supports your and your little mate’s needs” for all pet owners and those who connect with stray lives that they feed. Maximum Göztepe Card was added among the set of the Bank’s sports logo cards and introduced for İzmir’s sports fans. “Gaming” campaigns were devised, whereby customers can design their own campaigns and select the different sectors from which they can do their purchases. The first such campaign was announced to the customers in December. During the pandemic, the Bank organized various campaigns targeted at customer needs, including installment cash advance, sector-based installments and extra installments, and Maximiles holders were given the possibility to redeem their accumulated MaxiMiles in specific business places on the Gördüm Aldım (Splurchase) section on Maximum Mobile, during these days when travels are restricted. With the “I Want to Become a Customer” service available on İşCep, anyone wishing to become a customer of İşbank can complete his or her application process by way of video chat within minutes, and become an İşbank customer easily and quickly upon verification of identity by the messenger service sent to the address. As at year-end 2020, 82 thousand new retail customers were acquired through the “I Want to Become a Customer” service. Development work was initiated in accordance with the Draft Communiqué for Remote Identity Verification Methods to be Used by Banks published by the BRSA at the end of September. Work on end-to-end digitalization of the process has reached its final stage. Digital retail loan and savings deposits implementations 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 84% in terms of quantity and 71% in terms of amount in 2020. Within the scope of the digital consumer loan with a grace period of up to 90 days, which was introduced in April 2020, 525 thousand disbursements amounting to TL 7.5 billion were made in 2020 through İşbank’s digital channels, 30% of which entailed grace periods of and above 45 days in 2020. 46 İşbank 2020 Annual Report İşbank has been contributing to the protection of the environment for 10 years through its cards bearing the TEMA Foundation’s logo. Disbursements made under the Installment Overdraft Account product launched in June 2020, which allows utilization of the overdraft limit in installments, amounted to TL 285 million in total, and the overdraft balance reached TL 1,733 million. Installment Overdraft Account got 8.1% share of total overdraft account balance. The preferred bank in salary payments In 2020, İşbank carried on with 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. In March 2020, customers using İşCep Instant Loan began to be offered Instant Overdraft Account proposal at the end of the transaction, which served to allocation of overdraft account limits for TL 16.9 million as at year-end 2020. Under the Pay via İşbank implementation launched in 2019, purchase payments worth TL 70 million were made from contracted e-commerce websites and more than 150 thousand money transfers were made during 2020. 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 in a faster and problem-free manner to İşbank. Solid position in retail cash management Digital Channels played a big part in the increased deposits volume in 2020. The balance in term deposit accounts opened through digital channels went up from TL 27.5 billion to TL 38.5 billion in the twelve months to end-2020, up by 40.2%. 15.1% of the expansion in İşbank’s total deposits was attributable to the rise in term deposits on Digital Channels. As at year-end 2020, the share of İşbank’s savings deposits to total deposits excluding banking deposits was 71.5%, 4.3 points higher than what it was at the end of 2019. As part of its phase two efforts for developing Personal Finances Management application, İşbank introduced several functions designed to give 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. İşbank facilitates bill payments through İşCep application, its Internet Branch, Bankamatik ATMs, and Maximum Mobile from their accounts or via credit cards instantly, or on the basis of automated payment order. 47 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Anadolu Sigorta bancassurance channel ranked first among private banks in the sector as at year‑end. İşbank and its Activities in 2020 The API developed for bill payments allows contracted payment companies, electronic money institutions and banks to access İşbank’s bill payment infrastructure to make payments to over 400 billing institutions and to offer the related payment service to their own customers. 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. The Leading Bank in OGS and HGS At the end of 2020, 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. İşbank began collecting pass-through fees of the Ankara-Niğde Highway that was opened for service in 2020 via HGS and OGS systems. 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. Along this line, it was made possible in February 2020 to switch from Individual İşCep Insurance menu to Sigortam Cepte, which is the mobile application of Anadolu Sigorta, without entering a password. This allows online purchasing of various products that are not sold on İşCep, such as Housing Insurance and Complementary Health Insurance through İşbank’s brokerage, and making premium payments and submit claims notifications electronically. In addition, My Flight is Assured, Compulsory Motor TPL and Motor Own Damage policies were made available for purchase in June, October and December, respectively, on the Insurance menu that went live on Maximum Mobile application. Total premium production on non-life insurance through digital applications amounted to TL 8.9 million at 2020 year-end. In non‑life insurance products Under the collaboration between İşbank and Anadolu Sigorta, Anadolu Sigorta premium production via the bank channel went up by 16.9% year-over-year to TL 1,016.6 million by the end of 2020, and Anadolu Sigorta bank channel got 10.2% share in the sector. Anadolu Sigorta bancassurance channel ranked first among private banks in the sector as at year-end. 48 İşbank 2020 Annual Report 41 awards In 2020, İşbank was recognized with a total of 41 national and international awards in the retail banking segment. In life insurance segment As at year-end 2020, the bank channel of Anadolu Hayat Emeklilik wrote premiums in the amount of TL 1,069.1 million on Term Life Insurance. In the same timeframe, the bank channel had 9.8% market share in Term Life Insurance production. Developments in PPS In the wake of the pandemic, matches, tournaments, festivals and final events that were previously held physically within the scope of gaming and e-sports that have become an indispensable part of the digital world were also moved to the digital environment. Through event sponsorships conducted under Maximum Gaming Card, products and services offered on the digital medium were promoted to gaming fans. Under the prepaid Maximum Gaming Card that was launched in November 2019, the version bearing the 1907 Fenerbahçe e-sports logo designed specifically for Fenerbahçe Sports Club fans was introduced in September 2020. Achievements crowned with awards In 2020, İşbank was recognized with a total of 41 national and international awards in the retail banking segment. In 2020, the number of participants linked to private pension accounts, which were opened through branches and outbound calls of the Bank that serves as the agency of Anadolu Hayat Emeklilik, was approximately 140 thousand. A subsidiary of the Bank, Anadolu Hayat Emeklilik commanded 15.8% market share with 1.1 million participants as at year-end 2020. İşbank and e‑sports İşbank invests in e-sports that represents the most effective medium for increasing its contact and for communicating with the young generation undergoing the greatest degree of change in their attitudes and behaviors due to the digitalizing world. As part of the e-sports communication activities carried out since 2017 under the Maximum Gaming brand, the Bank has been steadfastly carrying on with its sponsorship of the e-sports teams of Turkey’s deep-rooted national sports clubs, content production and campaign management on social network platforms, and support to e-sports events. 49 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management The numbers of credit cards and debit cards issued by İşbank reached 8.8 million and 11.2 million respectively, as at 2020 year‑end. İşbank and its Activities in 2020 PAYMENT SYSTEMS Within the frame of its approach to create sustainable value based on an inclusive and participative concept, İşbank continues to introduce many novelties to the payment systems market in keeping with its target of delivering its customers a healthy, secure and seamless payment system experience. İşbank, a leading player in the payment systems market, reached the following numbers as at year-end 2020: • 8.8 million credit cards, 11.2 million debit cards, • TL 137.6 billion credit card retail volume corresponding to 14.4% market share, • TL 179.4 billion acquiring volume corresponding to 15.3% market share. Growth in digital ecosystems Maximum Mobile and Maximum İşyerim digital ecosystems kept expanding with new products and services. Total number of customers that activated the Maximum Mobile application was up by 29% year-over-year to 3.1 million at year-end 2020, whereas the number of monthly active users increased by 34% to 1.3 million. Total volume of monetary transactions performed through the app doubled over the previous year and reached TL 3.3 billion. Mobile contactless payment transactions volume via the app, on the other hand, augmented by 290% as compared to the previous year. As for the Maximum İşyerim app, the number of commercial customers who realized activation was up by 88.8% year-over-year to 78 thousand at end-2020, whereas the number of member merchants making use of the app has reached 193 thousand. Total volume of monetary transactions performed on the app amounted to TL 130 million. Furthermore, My Flight is Assured, Foreign Travel, Green Card Insurance, Motor Own Damage and Motor TPL insurance products of Anadolu Sigorta began to be offered to customers via Maximum Mobile, and participative campaigns began to be organized that customers can take part in via Maximum İşyerim. E‑commerce and new digital contactless payment options for member merchants In response to pandemic conditions, member merchants were supported with e-commerce and new digital contactless payment products and services. Gördüm Aldım marketplace platform went live on Maximum Mobile and Maximum İşyerim applications, where member merchants can display their products, and İşbank intermediates the payments for these products that app users add to their carts. Under a new capability, member merchants can now accept payments by WeChat Pay via mobile phones through İşbank’s physical POS devices and Maximum İşyerim application. Linkle Tahsilat (Pay by Link) function of the Maximum İşyerim app, which enables remote payments without the involvement of a POS device, now allows member merchants to 50 İşbank 2020 Annual Report In view of the pandemic conditions, self‑service and contactless payment convenience and comfort were brought to everyday lives of retail and commercial customers through innovative digital products and services. perform installment transactions besides cash transactions. The app was also enriched with several other capabilities including DCC support and Bahşiş POS (Tip POS). Amid the pandemic conditions where it has become extremely common to deliver individuals’ and families’ needs to the homes by courier services, Tip POS function that had been supported on physical POS devices was also made available for use by business places using Virtual POS, and thus, it was made possible for card holders to make their payments for e-commerce purchases by adding the tip to the purchase price. İş’te Tahsilat menus were added to the web channel of the Maximum İşyerim app, which allows member merchants making bulk or periodic collections to store the card data on the Maximum İşyerim Web application and to define payment order for stored cards, and to issue one-time or recurrent payment orders. UnionPay mobile application was added among the applications accepting payments with QR technology via Maximum İşyerim app. In an effort to minimize the physical contact in customers’ shopping experiences, developments were completed for enabling installments via QR POS, which is supported by Maximum İşyerim app. DCC POS capabilities, that was available for Turkish currency in POS transactions performed using foreign cards, are now supported for foreign currencies as well. Self‑service and contactless payment convenience in everyday life In view of the pandemic conditions, self-service and contactless payment convenience and comfort was brought to everyday lives of retail and commercial customers through innovative digital products and services. As part of the initiatives to let retail and commercial customers digitally access payment systems using self-service and contactless functions, the following capabilities were introduced: real person tradesmen customers can digitally finalize their member merchant application processes end-to-end on İşCep and Maximum İşyerim channels, • real person tradesmen customers can attain an end-to-end digital and contactless experience by applying for Maximum Business Card and İşim Card via Maximum İşyerim and İşCep apps; with the delivery of the cards to customers’ addresses following the application, • “Digital Bankamatik ATM Card” can be created instantly on Maximum Mobile app to use in e-commerce transactions, without waiting for the delivery of the plastic card, • Applications for debit cards can be forwarded also via İşCep app, • Commercial virtual cards can be created on Maximum İşyerim channel, 51 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank customers are offered the ability to send money to foreign cards from their credit, debit and prepaid cards. To deliver the products to a broader customer segment Efforts continued for embedding digital contactless payment services within everyday lives of a broad customer segment. Under the steps taken to let payment systems products accompany customers’ shopping journeys in their everyday lives and to expand them across broad customer segments; • Transportation cards covering a total of 36 cities and 19 districts, and particularly 4 cities incorporated in Asis intra-city transportation infrastructure, can be topped up from İşbank cards through Maximum Mobile app, • Payment can be made using İstanbulKart at İşbank POS devices, Maximum Mobile and Maximum İşyerim applications, and • Following Petrol Ofisi, Opet and Aytemiz fuel oil companies were included in the scope of Maximum Mobile ”Araçta Öde (Pay Inside the Car)” service. İşbank and its Activities in 2020 • Credit and debit card holders can report their charge back request to the Bank quickly via Maximum Mobile without filling in and signing a hard copy form, follow up the process, and even obtain a result the same day through end-to-end automated processes in certain types of charge back requests. The scope of İşlem Anında Limit (Limit Increase during Transaction) implementation was expanded; accordingly credit card limit can be increased: - At the GO (Secure Payment) step used as identity authentication tool in e-commerce transactions, - Within the app during the shopping made in Maximum Mobile application, and - Via the POS device during shopping involving physical POS devices. Hence, increased credit card limit need of customers began to be satisfied with a single button. As the rise in international money transfers persists, MasterCard Moneysend capability that can be defined as instant card-to-card international money transfer was included among the overseas money transfer service channels that previously included SWIFT and Western Union. Under this feature, customers are offered the ability to send money to foreign cards from their credit, debit and prepaid cards. 52 İşbank 2020 Annual Report 22.6% Attaining a market share of 22.6% as at year‑end 2020, İşbank sustained its leadership in the field of e‑commerce. Being the first bank to provide alternative payment methods to member merchants in Turkey in e-commerce, İşbank continued to support the country’s businesses with e-exports by accepting nearly 40 alternative payment methods recognized in nearly 50 countries. In a bid to eliminate all e-commerce customers’ security concerns, Dynamic Security Code implementation was introduced as the first of its kind in Turkey to ensure the security of e-commerce transactions, which allows performance of transactions using a unique security code generated on Maximum Mobile and Maximum İşyerim applications for each e-commerce transaction, instead of using the CVV printed on the back of the cards. Pioneering and leading bank in e‑commerce and online shopping İşbank’s pioneering and leading position in e-commerce and online shopping continued and was even further strengthened with new products and services. Attaching special importance to e-commerce, İşbank attained a market share of 22.6% at year-end 2020 and thus sustained its leadership in this area. A Share Purchase Agreement was signed with the shareholders in Moka Ödeme Kuruluşu A.Ş. with the aim of expanding İşbank’s coverage in the payment services universe that sits at the center of e-commerce and platform economy. In December, the CBRT’s approval process for share transfer was finalized. With this investment, it is targeted to add to the Bank’s competitive strength in digital payment systems thanks to the agility that will be contributed by fintechs to the institutional way of doing business. 53 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Total assets of private banking customers managed by İş Asset Management, including 12 private family funds, increased by 55% year‑over‑year and reached TL 2.2 billion. İşbank and its Activities in 2020 PRIVATE BANKING A business model generating optimal returns for customers amid fluctuating market conditions In 2020 that was dominated by transformed economic and social conditions resulting from the pandemic that grasped the whole world, İşbank Private Banking kept delivering the return opportunities arising in the market through products and services ensuring optimal risk/return balance. Through the most intensive days of the pandemic, one-to-one personalized service offering to private banking customers continued uninterruptedly. As of year-end 2020, management service was offered for total assets worth more than TL 32 billion of approximately 11 thousand customers through a diverse investment products portfolio responding to customers’ evolving return needs with the contribution of İşbank’s strategic partnerships with its financial subsidiaries. Private banking and wealth management activities were carried on 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. Under the pandemic related circumstances that sustained their impact throughout the entire year, İşbank Private Banking continued its activities without any compromise in its high quality service concept that focuses on customers’ needs and expectations. Competent and holistic wealth management service enabled by strategic cooperation with subsidiaries Return opportunities that arose amid the year-long fluctuations in market dynamics due to the pandemic were identified in cooperation with İş Portföy Yönetimi A.Ş. (İş Asset Management) and were presented to private banking customers through diversified investment instruments aligned with customer risk/return expectations within the frame of the business model based on strategic partnership. Under the framework of “intergenerational banking”, the amount of total assets under management rose 55% annually to TL 2.2 billion, inclusive of 12 private family funds set up at İş Asset Management for clients requiring professional service for transferring their assets to future generations. Demands of customers wishing to invest in domestic stock market and all kinds of overseas securities markets at optimal terms continued to be fulfilled with the expertise of İş Yatırım Menkul Değerler A.Ş. (İş Investment). Under the strategic cooperation maintained with Anadolu Hayat Emeklilik A.Ş., private banking customers receive one-to-one private customer management service from the experts of Anadolu Hayat Emeklilik. Custom-tailored pension fund investment planning service is rendered via İş Asset Management to customers with pension savings above a certain level. At the end of 2020, total amount of savings of private banking customers invested in Anadolu Hayat Emeklilik products was up by 78% as compared to end 2019, and reached TL 695 million. 54 İşbank 2020 Annual Report TL 13 billion In 2020, the volume of transactions carried out with classic and structured derivative products by private banking customers exceeded TL 13 billion. Alternative investment products and services focused on diverse risk profiles and return opportunities Throughout 2020, customers were offered structured derivatives, as well as classic derivative products such as dual currency deposits (DCD), options and forwards. In 2020, the volume of transactions carried out in these products by private banking customers exceeded TL 13 billion. In the same period, total demand amount of private banking customers in İş Investment mediated corporate bond offerings issued by İşbank and private companies reached TL 3.3 billion. As customers aiming to invest in foreign currency owing to market uncertainties in 2020 showed increased tendency towards government debt securities issued in FC, which offered more attractive returns as compared to FC deposits, the balance of FC debt securities has grown by 330% over the previous year and reached TL 3.85 billion. Privia branded products and services In 2020, İşbank continued to create value for its customers with credit card, retail loan and mutual fund products, with processes customized according to the needs of private banking customers and which entail exclusive advantages. Inspired by the new life order imposed by the pandemic, ads were redesigned with visuals with a focus on the concept of digital that emphasized change as well as İşbank’s leading, deep-seated and reliable stance in the sector. In 2021 In 2021, İşbank Private Banking will continue to focus on catering to ever evolving customer risk/return expectations amid variable market conditions with a proactive service approach in strategic collaboration with all financial subsidiaries. In line with the goal of being its customers’ primary choice in banking at all times, the Bank will keep adding value to the lives of customers at all contact points with the Bank on the back of its advanced digital technology infrastructure, and the best-in-class and competitive product and service designs. 55 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management In 2020, İşbank increased its debt securities issuance volume to TL 16.9 billion. Having carried out domestic bills/bonds issuances in the nominal amount of TL 8.9 billion through sales to qualified investors and TL 8 billion through public offerings in 2020, İşbank preserved its effectual position among private deposit banks with over 9% market share in outstanding domestic TL securities according to year-end data. High market share in gold transactions İşbank customers’ holdings in gold deposit accounts reached 82.9 tons at the end of 2020, and the Bank’s market share in gold deposit accounts among deposit banks was registered as 16.5%. In 2020, the Bank continued to hold “Gold Days” at branches, thereby recovering the so- called “under-the-mattress” physical gold for the registered economy. İşbank and its Activities in 2020 CAPITAL MARKETS Efficiency and pioneership in money and capital market transactions İşbank retained its leading position in the sector with an intermediation volume of TL 1.6 trillion in Borsa İstanbul and OTC debt securities markets as of year-end 2020. As part of actions for sustainability under the main topic of environment, İşbank supported the Nature Education Programs of the TEMA Foundation with the revenues derived on Turkey’s first environmental fund, İş Asset Management TEMA Variable Fund. Under the program, the educational programs implemented in 81 cities of Turkey reached more than 167 thousand children at preschool and primary school age in the 2019-2020 academic year. Increase in corporate bond issuances In 2020, debt securities issuances were preferred as an alternative funding source as a result of the pursuit to diversify the balance sheet funding structure in the banking sector. In the reporting period, İşbank increased its debt securities issuance volume to TL 16.9 billion. Also in 2020, İşbank carried out debt securities 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 • offsetting short term interest rate risk. 56 İşbank 2020 Annual Report 12.9% İşbank has distribution share of 12.9% in the investment funds sector as of end of 2020. İşbank plays an active role in custody with 33% market share and TL 71 billion assets under custody for services provided to discretionary and collective portfolios. With 31 real estate investment funds and venture capital investment funds covered among the mutual funds provided with asset custody service, İşbank has assumed a pioneering role in the sector with respect to custody of alternative mutual funds. In 2021… In 2021, 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 - its service channels aligned with customer needs ensuring uninterrupted and high-quality service delivery. One of the pioneering institutions in the equity market Generating 9.6% of the trading volume on Borsa İstanbul Equity Market together with its subsidiary İş Investment as of end-2020, İşbank is one of the leading institutions in the market. İşCep International Markets service, which enables customers to carry out equity and futures transactions on more than 20 exchanges across three continents, continued to provide access to international organized markets via the bank distribution channel. The number of investors who opened international markets account topped 40 thousand during the reporting period. Fund consultancy service via Robofon Advisor to those wishing to save up İşbank sustained its position as the leading fund distributor by intermediating 12.9% of the mutual funds distribution in the sector as of year-end 2020. The Money Box Hybrid Fund, the first mutual fund designed for children, continues to be the leader across its category in terms of the number of investors. Launched by mid-2019 and accessible through İşCep and Internet Branch, the Robofon Advisor advises funds from among İş Asset Management Robofon Family aligned with the risk preferences to those wishing to save up, helping them with their investment decisions. The fund advisory service continued to be provided successfully in 2020, and the number of customers who responded to the investor profile questionnaire and received fund suggestions exceeded 150 thousand in total. 57 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank’s assets increased by 26.9% in 2020. The key determinant of this growth was the expansion in loan volume. İşbank and its Activities in 2020 TREASURY MANAGEMENT Targets were achieved in 2020 despite the tough economic conditions stemming from the pandemic. The reporting period in which central banks and financial authorities of developed and developing countries took series of measures in order to maintain financial stability against the pandemic that affected the whole world. The financial markets have been the scene to major fluctuations. Having mobilized all the means available to it to keep supporting the real sector and households in spite of the globally tough economic conditions, İşbank quickly and successfully adapted to changing conditions focusing on products and services that would back asset quality, cost control and capital through profitability, and achieved its sustainable profitable growth target without any problems. During 2020 which was an intensive year in terms of the regulatory changes and frameworks governing the banking sector, İşbank’s balance sheet was managed so as to quickly adapt to changing dynamics. Success through dynamic and proactive management Regarded as a period of economic recovery, 2020 had started off with the prediction that the capital strength and liquidity would remain critical for the banking sector and moderate growth would be recorded in assets. Due to the fragility and volatility in global markets stemming from the pandemic, İşbank focused on a dynamic balance sheet management that prioritized strong liquidity and sustainable growth. The Bank’s TL and FC liquidity was shaped with a holistic approach, with the main target of increasing cost, maturity and funding diversity, and creating a sustainable funding composition. Short and long-term liquidity requirements were evaluated under different assumptions and stress conditions, while the use of alternative instruments elaborated optimally, also considering the Bank’s profitability. Always standing by its customers, İşbank uninterruptedly sustained its support to the economy amid the extraordinary conditions of 2020 as well. In this context, the expansion in the loan volume has been the key determinant of the 26.9% asset growth, and the share of loans in total assets was increased in this period. The loan growth was all across the board in the retail and commercial segments and wide spread through the year. In the reporting period, interest-earning assets constituted 89% of total assets. Deposits continued to serve as the main source of funding on İşbank’s balance sheet. Customers who want to invest their savings in FC deposits and precious metal deposit accounts due to the rising dollarization tendency also preferred İşbank in the this period, as always. The balance sheet strategy, which was handled with the power and responsibility given by this trust, was managed flexibly and so as to adjust to changing conditions. 58 İşbank 2020 Annual Report 41.7% The share of demand deposits in total deposits substantially increased. The expansion in money supply throughout the year, and the need to remain liquid during the pandemic together with the low interest rate environment brought along the rise in demand deposits, whose share in total deposits increased markedly to 41.7%. Hence, the course of high share of demand deposits in total deposits throughout the year has been another element that positively affected the costs. In 2020, loan growth surpassed deposit growth by 3 points. As a result, loans-to-deposit ratio increased slightly, but was managed below 100% across the year. In line with well-balanced and sustainable growth strategies, the share of loans, securities portfolio and deposits in total balance sheet was recorded as 58.1%, 18.4% and 62.1% respectively. Sustaining its pioneering role in the capital markets and money markets, İşbank made maximum use of medium-long term non-deposit funding facilities thanks to its high credibility in international markets. At the end of 2020, funds borrowed and total securities issued, including subordinated debt issuances, made up 15.7% of liabilities. Effective risk management and solid balance sheet structure The primary objective of İşbank is to concentrate on asset quality, cost control, and effective capital utilization, so as to establish an optimum risk vs. return balance, and further strengthen its balance sheet structure on the back of sustainable profitable growth strategy. Within the scope of Treasury operations, liquidity, interest rate and exchange rate risks were managed in line with the Asset/Liability Management Risk Policy principles also in 2020, in parallel to the Bank’s risk appetite. Policies specific to the period, such as maturity gap management, protection of strong liquidity and establishment of sustainable net interest margin were followed up in line with current needs, taking into consideration the scenarios entailing various effects of the differentiation in the market conjuncture upon the balance sheet. Total and FC liquidity coverage ratios were well above the regulatory limits in 2020. İşbank’s FC liquidity buffer is at a level to cover three times the Bank’s FC liabilities with a maturity of up to 1 year. Potential risks that may arise from the interest rate structure and İşbank’s FC position, which is managed as an important element of the liquidity composition, were followed up ad-hoc and on scenario basis, alongside other interrelated positions. Effective risk management was exercised by utilizing derivative products, along with money and capital markets products depending on the market conditions. 59 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank raised a total funding of USD 1.6 billion from global financial markets in 2020. The term of the existing framework agreement concerning obtaining funds from Taiwan Eximbank to finance customers’ imports from Taiwan was extended for a period of 1 year. A loan in the amount of EUR 46 million with a 6-year term was obtained from HSBC Bank Middle East Limited under the coverage of SACE, Export Credit Insurance Agency of Italy, with the aim of funding Italy-related import transactions realized through İşbank. Awards in Transfer Transactions In 2020, İşbank was rewarded by its Belgium correspondent KBC Bank NV for its smooth cooperation and solid relationships in EUR account services and payments, and by Standard Chartered Bank for high Straight Through Processing (STP) rates of transfers in terms of Euro and USD. Confidence reaffirmed through syndicated loans 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 1.6 billion from global financial markets despite the challenging market conditions of 2020 shaped by the pandemic that dominated the whole world. İşbank and its Activities in 2020 INTERNATIONAL BANKING İşbank’s distinction in foreign trade and payment services Despite all the negative conditions that prevailed in global and domestic markets in 2020, through an effective correspondent network of more than one thousand banks based in 121 countries, İşbank; - offered a rich selection of foreign trade, payment and letters of guarantee products and services to its customers, and - intermediated foreign trade transactions performed between Turkey and more than 200 different countries, and preserved its pioneering position in this field. 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. 60 İşbank 2020 Annual Report In 2020, İşbank established its Sustainability Bond Framework to enable sustainability‑ themed issuances. 46 financial institutions from the US, Canada, Europe, Middle East and Asia participated in the syndications completed in May and November. The high number of participating banks and the absolute high amounts of the facilities once again confirmed the confidence held both in İşbank and in our country’s banking sector. 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. Tier II capital subordinated eurobond issuance in global financial markets Within the scope of its Global Medium Term Note Program, on 22 January 2020, İşbank issued Tier II capital subordinated eurobonds in the amount of USD 750 million which has a maturity of 10 years, with a call option in the 5th year. The bond was sold to real and legal persons residing outside Turkey. Under the Program, another issuance was carried out for the amount of USD 15 million in the form of private placement, which had a 3-month term. İşbank Sustainability Bond Framework In January 2020, İşbank Sustainability Bond Framework was established to enable issuing Eurobonds, which have an important share in non-deposit funding sources, also in the form of green, social or sustainability bonds. In addition to projects with positive environmental impact in the areas of renewable energy, energy efficiency, recycling, organic agriculture, clean transportation, green buildings and circular economy, the funds to be generated from the bond issuances under the Framework will be allocated to finance loans with positive social impact such as the financing of SMEs and women entrepreneurs in underdeveloped regions. A second party opinion was obtained for the Framework, which was prepared in accordance with the Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines released by the International Capital Market Association (ICMA). 61 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Under the agreement signed with the European Bank for Reconstruction and Development (EBRD) on 7 September 2020, İşbank obtained a 367-day loan with an amount of USD 54 million. The loan is being used for financing of the funding needs of SMEs affected by the pandemic. Under the agreement signed with the Industrial and Commercial Bank of China Group on 26 November 2020, İşbank obtained a loan in the amount of USD 250 million with an approximately three year maturity. The said loan is being used for general corporate purposes and financing of foreign trade transactions. İşbank kept on diversifying its funding structure in 2020 through funds obtained from international markets. İşbank and its Activities in 2020 Other funds obtained from international markets on the basis of bilateral agreements Under the “Inclusive Access to Finance Project Loan” its subsidiary Türkiye Sınai Kalkınma Bankası (TSKB) obtained from the International Bank for Reconstruction and Development (IBRD) affiliated to the World Bank under the guarantee of the Undersecretariat of Treasury, İşbank signed a loan agreement on 3 December 2018 that gives the Bank access to a fund of up to USD 40 million with a 6 year maturity from TSKB. On 11 March 2020, İşbank disbursed the second tranche of the fund in the amount of USD 20 million to be used for supporting SMEs that promote women’s participation in labor force and women friendly working environment, and SMEs operating in less developed sub-regions under temporary protection. Under the agreement signed on 30 June 2020 with PROPARCO, the French Development Agency’s representative in the private sector, İşbank obtained a loan with an amount of EUR 25 million and 10-year maturity. The loan will be used for medium- and long-term financing of agriculture in general as well as energy and resource efficiency initiatives of SMEs engaged in agricultural and agribusiness sectors. 62 İşbank 2020 Annual Report USD 7 billion As of the end of 2020, total assets of İşbank’s overseas organization amounted to USD 7 billion. Cross‑Border Banking Operations 2020 highlights... İşbank pursues its banking operations via İşbank Germany in Germany, İşbank Russia in Russia and İşbank Georgia in Georgia. An extensive group with presence in 11 countries İşbank has presence in 11 different foreign countries. 10 of the total of 36 branches belong to Frankfurt-based (Germany) İşbank AG, whereas Moscow-based (Russia) JSC İşbank and Tbilisi-based (Georgia) JSC İşbank Georgia have 2 branches each. In addition, there is 1 representative office in Kazan, which is affiliated to JSC İşbank. In addition to the aforementioned, 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 2020, total assets of İşbank’s overseas organization amounted to USD 7 billion. The share of overseas subsidiaries in this total is 36%, while that of overseas branches is 64%. 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 generates added value for the region. Mobile banking service was launched in Iraq in 2020; cash loans volume and customer deposits volume were increased by 33% and 70%, respectively. In 2020, İşbank reaped the results of its efforts aimed at expanding its customer deposit base and increasing the number of customers in Kosovo. Personal internet banking branch also went live during the reporting period. The positive relationships developed with the Gulf countries via Bahrain Branch contributed to İşbank’s effort to increase the diversity of funds. Despite the negative effects of the pandemic environment, services continued uninterruptedly in the UK in 2020, and significant rises were achieved particularly in POS transactions volume. The level of relationships with businesses residing in London was further increased. Technological developments were carried on, and the data center of branches was migrated to the cloud platform. All preparations are completed for compliance with “open banking” requirements in the UK. 63 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Digital Banking Amid the pandemic conditions of 2020, İşbank offered much needed uninterrupted and unlimited remote‑access banking to its millions of customers thanks to the strong digital banking competencies it possesses. 9.2 million Number of total digital customers reached 9.2 million as at year‑end 2020. 1.9 million Number of Maximum Mobile users exceeded 1.9 million. 96% The share of non‑branch channels in total transactions reached 96% at İşbank. 64 İşbank 2020 Annual Report 17.5 million The number of users served by Bankamatik ATMs, including other banks’ customers, reached 17.5 million. İşbank creates a perfect and secure customer experience at all touchpoints employing digital technologies and analytical methods with an innovative approach. 36% Bankamatik ATMs got 36% share in total monetary transactions. 65 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Numerous activities were executed in 2020 that increased İşCep’s ease of use and improved customer experience. İşbank and its Activities in 2020 DIGITAL BANKING • developing solutions and value propositions Digitalization and advancements in technology significantly reshaped customer expectations and the way they interact with institutions. The ability of companies to deliver an easy and fast personal experience independent from time and place has become one of the necessities of the digital age. İşbank carries out initiatives that build on its digital competencies in parallel with its identity as the solution partner that accompanies its customers through all stages of their lives and makes life easier for them with the user 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 flawless and secure customer experience at all touch points, • co-developing services with non-Bank stakeholders to ensure an end-to-end seamless experience within its vision to offer banking service anywhere, and deploying services outside İşbank’s channels, • supporting the entrepreneurship ecosystem through Workup Entrepreneurship Program and collaborating with startups that will create value to the Bank, group companies and customers, that will assist the consumers and organizations in making healthy financial decisions, • becoming companies’ integrated business partner in commercial banking and the gateway for all personal 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 7.8 million at 31st December 2019 to 9 million at 31st December 2020. In the same timeframe, the number of the Bank’s total digital customers reached 9.2 million, whereas the number of customers using Bankamatik ATMs and Internet Branch reached 9.5 million and 3 million, respectively. Beside İşbank customers, Bankamatik ATMs were also used by a total of 8 million other bank customers, 1.2 million of them non-residents and 6.8 million residents. As a result, the share of comparable transactions performed through non-branch channels in total transactions reached 96% at İşbank. 66 İşbank 2020 Annual Report Total number of transactions that can be executed through İşCep increased from 316 to 392. The mobile banking app with Turkey’s most comprehensive transaction set: İşCep • I Want to Become a Customer and credit card application processes for retail customers were renewed. In 2020, İşCep, the mobile banking platform offering the widest set of transactions in the sector, has been working in line with the strategies to improve the customer experience by increasing the ease of use of the platform and to increase revenues with sales made through digital channels. Total variety of transactions that can be made through İşCep increased from 316 to 392 on İşCep and from 480 to 509 on the Internet branch. Additional developments regarding İşCep included the following; • • İşCep’s design has been renewed and new features have been added enabling personalization according to user preferences. İşCep Market went live, which is the platform banking model allowing apps of subsidiaries and also of 3rd parties to offer their products and services to İşCep customers, expanding İşCep’s product and service range with a low development cost and giving end-users reach to an innovative and richer set of transactions. Through İşCep Market, customers can access 22 different applications under the headings of Insurance, Investment, Payment Systems, Life, Culture & Art, Official Transactions and Commerce. • Short videos began to be posted about the Bank’s products, services and innovations in the Stories section available on the no-password area. • My Documents menu has been added, where users can reach information such as account statements, receipts etc. that entail sensitive or confidential data. • TekEkstre and TekPOS functions were incorporated in TekCep, Turkey’s first and only open banking app, for commercial customers. Servicing 17.5 million Bankamatik ATM users At the end of 2020, İşbank preserved its position as the private bank with the broadest ATM network in Turkey with 6,521 domestic Bankamatik ATMs, 4,598 of which are disabled-friendly. Bankamatik ATMs, which offer service 24/7 in 12 different languages to 17.5 million users (9.5 million of them İşbank customers and 8 million customers of other domestic and foreign banks), have 36% share of total monetary transactions. With the developments made in 2020, total number of functions offered on Bankamatik ATMs reached 153. New Generation Technologies İşbank’s personal banking assistant developed employing artificial intelligence and natural language processing technologies and enabling customers to execute transactions by talking or texting at digital touch points, Maxi had nearly 60 million dialogues with more than 7.2 million customers as at 2020 year-end. Natural language processing capabilities and transaction diversity of Maxi were further improved, and the total number of functions increased to 420. Nine APIs were added to the API Portal giving access to the APIs produced with Open Banking approach, thus bringing the number of APIs to 41. Through the existing APIs, 32 different integrations have been implemented. 67 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 261 different ideas 181 İşbank employees submitted 261 different ideas to the İşbank Intrapreneurship Program. İşbank and its Activities in 2020 In line with its initiatives related to blockchain, İşbank joined R3, the world’s leading blockchain consortium, becoming the first Turkish bank to do so. Within the scope of R3 Corda platform membership, the Bank was involved in the Marco Polo project, under which the pilot stage was completed for the activities aimed at improving “payment guarantee provision” processes from alternative payment methods in foreign trade. As a result of the initiative conducted with the involvement of Commerzbank, Şişecam and Kuraray, İşbank has been the first Turkish bank providing payment guarantee in foreign trade deploying blockchain technology. Innovation and entrepreneurship at İşbank Initiatives were carried out to support the startup ecosystem and expand entrepreneurship in Turkey and within the Bank. Concrete collaborations continued with startups, and campaigns, proof of concept and purchasing of products and services were carried out with 22 startups in 2020 Workup Entrepreneurship Program was moved to the online platform in March with the emergence of the pandemic and the number of graduates reached 60 with the Demo Day held in July. 18 startups from different cities of Turkey were accepted to the 7th cohort of the program initiated in August. Moreover, Workup has become one of the important reference points for entrepreneurship in Turkey owing to online events organized for the startup ecosystem in this period. Maxis Innovative Venture Capital Fund, of which İşbank is the main investor, invested TL 1.1 million in PCI Checklist, a Workup graduate cyber security startup, and TL 3.8 million in Denebunu, a marketing technologies platform, in 2020. With these two investments, the number of startups in which the fund invested went up to 4 and total investment amount reached USD 2.8 million. With the Workup Entrepreneurship Program, Maxis Innovative Venture Capital Fund, and Softtech Ventures established this year, a powerful ecosystem was created under İşbank and its subsidiaries, for helping thrive and supporting startups having the potential to scale up globally, with a special emphasis on the Bank’s strategic focal points. İşbank Intrapreneurship Program was initiated in order to strengthen the entrepreneurial competencies of Bank Employees’ and gain new generation skills that will allow contributing to innovation as well as to encourage the creating of innovative business ideas. 181 employees applied 261 different ideas to the Program. Training and mentorship activities for the teams that will actualize the selected six ideas commenced in December. New Technologies are followed up via the Bank’s innovation centers in the US, China and Turkey; proof of concept studies continued aimed at usage of these Technologies with an innovative approach and creating digitally-driven new products. Digital Vault, the first step of the “Digital Identity” defined as the main product in the medium-term under the innovation strategy, was launched for İşbank customers and non-customer users. Users can store all their files and passwords in the digital environment, backup their contacts, save notes and log in to other applications with their saved passwords in the Digital Vault, accessible for all users at dijitalkasa.com.tr or can be downloaded as a mobile app in application stores. Key customer experience initiatives 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; the Bank aims to always guide and interact with its customers when they 68 İşbank 2020 Annual Report In 2020, the Bank acquired the capability to digitally measure customer experience across all branches and digital channels. need help with their banking operations. Based on this vision, the Bank has 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. solutions were generated for smooth completion of transactions in situations posing difficulties. 200 thousand product applications and 487 thousand account openings were realized, whereas the guidance provided for uninterrupted experience of customers’ digital journeys exceeded 1 million. With 50%, service quality has the biggest impact on Net Promoter Score, a metric used worldwide for measuring customer experience. In order to measure service quality, instant and continual customer experience measurement performed at all branches were carried on in 2020, and customer experience indicators were monitored for branches, besides sales targets. During the pandemic, level of customer satisfaction at branches were monitored on a daily basis, and special care was taken to usher customers into branches on a first-come-first-served basis instead of getting a queue number from the Queuematic; to maintain social distancing; and to practice Covid measures painstakingly in line with the feedbacks and legislative regulation. In 2020, the Bank also acquired the capability to digitally measure customer experience across branches and all digital channels. The feedbacks received from these measurements were extensively used by İşbank to offer better services to customers. New generation analytical capabilities were acquired to improve the experience on digital channels that have become customers’ primary touch point and to create real-time contextual scenarios and offer guidance to customers on all digital channels primarily on İşCep, İşbank’s mobile app. In this framework, real-time analyses based on customers’ behavioral data were conducted, over 100 contextual scenarios were created and interacted with more than 20 million customers. While correct proposals and guidance were offered to customers at the time of need through these interactions, According to the 2020 study conducted by Nielsen, an independent research company, İşbank succeeded in being the bank with the highest net promoter score as compared to its peers. Digital assets Efforts to enrich the sales tunnels by following the digital footprints of the users on İşbank’s websites continued in 2020. Accordingly, application forms that are compatible with visitors’ browsers and devices were developed. In addition to personalization of web pages according to A/B tests, surveys and user flows, POS and credit card product finders were launched. Contextual marketing activities are carried out on websites based on 200 active scenarios. Search Engine Optimization (SEO) activities were conducted to increase the visibility of İşbank’s websites in relevant Google searches without incurring any cost. Key word visibility in Google search results was increased from 170 thousand to 210 thousand. “Audio Blog” section was launched on İşbank’s blog, which enabled users to listen to the contents. The Bank’s website isbank.com.tr that was relaunched with its revamped format with the purpose of gaining new customers in the digital world and deepening relationships with the existing visitors, won Golden Sardis in the “Best Website” category at the Sardis Awards. In addition, maximumgenc.com.tr was introduced with the aim of rapidly fulfilling the communication needs and to respond to competition. 69 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management During 2020, Instant loan process was developed, which made possible for commercial customers of SME segment to use credit quickly via underwriting decision engine. İşbank and its Activities in 2020 INNOVATIVE IMPLEMENTATIONS AND PRODUCT DEVELOPMENT Innovative implementations in credit products For standardized and error‑free processes İşbank automates its operational processes using the Robotic Process Automation (RPA) technology. RPA is a software that mimics human activities 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 2020, the number of robots increased to 54 with 27 additional robots purchased. In total, 244 robotic processes were designed, and robots began working on them. Process development for full-time utilization of robot capacities are going on rapidly. Tasks are being assigned to robots in areas with routine and high-volume tasks such as operations, lending, HR, sales, capital markets, pricing, and support services, thereby freeing up employees to carry out tasks with higher added value. Robotic process development capability was deployed across the Bank’s business units through online training programs carried out in 2020. The number of departments that were given robotic process development training went up to 34, and the project has been instrumental in letting employees benefit from automation opportunities in their daily tasks as well. İşbank is determined to make use of RPA at an increasing extent, which it regards as an opportunity for the digital transformation of the Head Office, and to increasing its customer service quality and speed. In 2017, İşbank launched the Instant Commercial Loan Application that allows automated credit allocation to real person tradesmen at branches. This was followed by the Instant Loan process that went live in 2018 for the same customer segment, and introduced the commercial loan allocation and disbursement function through the Instant Banking channels. In 2020, automated lending process was introduced for legal person customers in the business segment. Within this scope, the lending process that took one hour on average from the moment of application to disbursement was shortened to 10-15 minutes end-to-end. On another note, loans in the nature of Overdraft Accounts began to be made available to commercial loan customers through Commercial Instant Banking channels. Kripton Allocation Process In 2020, İşbank began implementing the Kripton Allocation process in all allocations. Under this implementation, information received at the time of application is transferred to the allocation application by the system, thus precluding repetitive data entry in different applications. Fields that need to be manually filled in by users during proposal steps were decreased, and the process design that automatically extracts the data from other applications and external systems began to be used across the entire allocation line. Kripton Disbursement Process Kripton Disbursement process was deployed for loans in the nature of Overdraft Accounts, after the TL Installment Commercial Loans, and the process is designed as a flow consisting of several steps, which are pricing, entry of repayment schedule for commercial loans payable in installments, listing of agreements associated with the loan, viewing collaterals, approval, file opening and disbursement. 70 İşbank 2020 Annual Report İş Bank underwent restructuring in order to ensure maximum efficiency in the execution of credit allocation, monitoring and tracking organization processes. 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. Increased efficiency in commercial loans tracking In order to introduce a more effective tracking system for commercial loans, AI-based Early Warning and Collection Models were developed, whereby the system suggests tracking actions aligned with the customers’ risks and behaviors. Actions suggested by the system are automatically assigned to related units, and processes designed for each action are run over the system. İşbank underwent restructuring in order to ensure maximum efficiency in the execution of credit allocation, monitoring and tracking organization processes. Digitalization in financial analysis Under the Financial Analysis Digitalization Project, interim balance sheets were created based on trial balances, and basic corrections were automated. The project will presumably cut the time spent for financial analysis from 2 to 4 hours on average down to half an hour. The project is currently in pilot phase. E‑mortgage integration Actions for integration with the e-mortgage system launched by the Directorate General of Title Deed and Cadaster were completed and the application was made available for use by İşbank branches for mortgages taken as collateral for personal housing loans. As a result of the initiative, the Bank employees no longer need to go to title deed directorates, and the mortgagor completes the procedures at the title deed directorate. Branch analytics With the aim of providing fast and easy access to all sorts of data needed in the management of İşbank’s sales activities and of replacing emailing for this purpose by a more efficient model to be introduced, İşbank branches were offered the following applications: • Instant Sales Panel which enables viewing personal and commercial sales transactions in real time and on the basis of employee number • Branch Performance Panel which enables tracking branch performance on the basis of key metrics. Gains from paperless banking The number of digital approvals given at the Bank during 2020 reached 17.3 million, and 71% of the agreements were executed digitally, without printing a hard copy and executing a wet signature thereon. 41.5 million sheets of paper (approximately 603 trees) were saved with the inclusion of the Banking Services Agreement (BSA) within the scope of digital approval by early 2020. The ratio of digital approval is anticipated to increase further in the post-pandemic period. Novelties in payment systems The Bank integrated into the Secure Payment System established by the Turkish Union of Public Notaries, enabling İşbank customers to securely realize the money transfer involved in second-hand vehicle sales through Personal and Commercial Internet Banking branches. The service will also be available on the İşCep channel as well. 71 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management FAST “Instant and Continuous Transfer of Funds” system allows 24/7 money transfer between banks. İşbank and its Activities in 2020 With the related initiatives commenced by the CBRT, Instant and Continuous Transfer of Funds (FAST) system that will enable interbank money transfers 24/7 was opened for pilot use in December 2020. Within the frame of the limit set by the CBRT, transactions for TL 1,000 and less can be transferred between banks 24/7 through İşCep and Internet Banking Branch channels. Easy Address were made available for use on İşCep and Internet Banking Branch channels; the function lets customers match their IBAN with an easy-to-remember address (phone number, email address, T.R. ID no., Foreigner ID no.) and use it in money transfers instead of their account numbers. The “sweep” function added to Money Transfer/ EFT screens performs Money Transfer/EFT transactions automatically from customer accounts at set times. Automated sweep orders can be defined by branches on the system. In order to preclude erroneous recipient IBAN data in EFT transactions performed via the Bank’s digital channels, recipient IBAN began to be verified. At the EFT approval stage, the title and the initial letters of the names and surnames of the IBAN owner as stated by the customers are shown, while the rest of the title and name are masked. In case of an erroneous IBAN, an error message is sent to the customer, but it is left to the customer’s discretion whether or not to proceed with the transaction. Novelties in treasury processes The infrastructure improvement efforts have reached the final stage, which will enable publication of the Bank’s gold rates to branches and to customers via non-branch channels 24/7 without involving a manual intervention in accordance with İşbank’s strategies and market dynamics. The project is slated for introduction in January 2021. AI initiatives for foreign currency pricing served to differentiate pricings in relation to FC buying/ selling and account opening transactions retail customers execute via İşCep and Internet Banking by the AI on the basis of customers and their price sensitivity. Developments were completed that offer customers receiving order transmission intermediation service from the Bank the possibility to purchase equity on account in return for taking the equity in their investment accounts as collateral; the said capability was made available for use on digital channels. For the collection of the Exchange Transaction Tax (ETT) levied on customers’ gold and FC buying transactions, applications and screens performing gold and FC transactions were integrated in a single module, and the exemptions of ETT rate began to be managed parametrically, and accounting and tax base report began to be generated automatically. Platform İŞ’TE FX, which will allow customers to perform FC buying/selling with same day, tom next, spot value and FC based swap, forward on their own account and name via İşbank branches, was made available for use by Head Office units covering all products, and for use by branches for same day value FC buying/selling transactions. Artificial Intelligence During 2020, developments were completed for retail next-product-to-buy (Retail NPTB), retail deposit and loan pricing, retail revenue estimation and limit assignment, and BT anomaly detections. Work is in progress in relation to developments for SME customer pricing, consumer loan allocation, foreign currency pricing, ATM cash optimization, personal credit card allocation and enterprise allocation. 72 İşbank 2020 Annual Report Agile Transformation activities proceeded from the pilot phase to scale‑up phase. Developments for enhancing service quality at branches • Increase in the employee engagement rate emerged. In accordance with the Protection and Control Measures in Bank Branches guide prepared by the T.R. Ministry of Health in connection with the pandemic, İşbank limited the number of customers that can be served simultaneously in branches. The limitation forced customers to wait in line outside service buildings. Accordingly, in an effort to prevent accumulations outside service buildings, development work was initiated to let the customer line-up system run in integration with İşCep application, and is in the phase of deployment across branches. As a result of the initiative, customers will be able to view the density in a given branch using the application, and get a queue number and track it on İşCep. Agile Management During 2020, İşbank’s initiatives for Agile Transformation of Headquarter departments, which the Bank refers to as the “organizational equivalent of digitalization”, proceeded from the pilot phase to scale-up phase. The following outcomes were observed in the pilot run that was conducted since June 2018: • The execution speed increased for tasks carried out by Agile Teams (Time to market ratio of specific comparable tasks went down from 16 weeks to 4 weeks), • Successful results were achieved in the domains which were focused by the Agile Teams. (Compared to the past performance, min %20 increase in the financial results was observed in selected areas), Within the scope of agile practices at İşbank, Chapter and Center of Expertise structures are also being established to ensure competence development, continuity, business integrity and coherence, as well as Agile Teams and tribes. Activities in relation to this model wherein agile structures will run in harmony with corporate structures are being carried out under the “Corporate Agility” model and strategy, without being restricted to increasing the number of and scaling up Agile Teams. In this framework, an Agile Management Department was established in order to implement the transformation roadmap effectively. As the end of 2020, more than 50 Agile Teams composed of approximately 400 individuals were working in Agile Tribes such as Retail Banking Marketing, SME Banking Marketing, Agricultural Banking Marketing, Corporate and Commercial Banking Marketing, Artificial Intelligence and Robotic Process Automation. Over the course of the next two years, it is planned to reach a size of 1,500 individuals in total, whereby at least 20% of the Head Office teams and related technology teams will be working together in Agile teams, giving priority to units producing products and services targeted at dynamic, variable business areas subject to intensive technological integration and digitalization. Bank prioritizes business functions which serve in the most dynamic, volatile and complex markets; for the reason that these functions get the most benefit of agile model. 73 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management As at year‑end 2020, İşbank’s participations portfolio had a total worth of TL 26.3 billion. Subsidiaries 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 26 companies as at year-end 2020. In the same period, İşbank had direct or indirect control over 106 companies. As at year-end 2020, İşbank’s participations portfolio had a total worth of TL 26.3 billion, with the shares of 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. that make up 73.7% of the portfolio being traded on Borsa İstanbul. Furthermore, Anadolu Anonim Türk Sigorta Şirketi, İş Girişim Sermayesi Yatırım Ortaklığı A.Ş., TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. and İş Yatırım Ortaklığı A.Ş. are the other publicly-held Group companies controlled by İşbank through indirect shareholding. The ratio of the participations portfolio in İşbank’s total assets stood at 4.4% as at year-end 2020. The building blocks of İşbank’s equity stake strategy are efficiency and profitability. 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. 74 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, 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 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. Having recently celebrated its 70th year of service in 2020, TSKB continues to contribute sustainable value for stakeholders and the national economy with the value it generates in economic, environmental and social aspects. Offering its customers a wide range of innovative services with its in-depth knowledge in 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. Within the frame of the loan agreements executed with development finance institutions, TSKB provides loans in the İşbank 2020 Annual Report TSKB TSKB takes place among Turkey’s pioneering organizations in the area of sustainability. areas of environment, energy and resource efficiency, as well as social loans related to women employment, supporting employment in underdeveloped areas, occupational safety and health 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 in the Turkish financial sector to release an Integrated Report in 2017. Having authored a first in Turkey and CEEMEA with 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 Principles for Responsible Banking as a founding signatory in 2019, TSKB became the tenth member of the Steering Committee of IDFC, of which it has been a member since 2011 with the leading international development banks, the same year. Environmental, social, and governance (ESG) matters continue to take a growing place within the Bank’s activities. In October 2020, TSKB established the “TSKB Green Swan Platform” aimed at taking joint action to tackle the climate emergency that the Bank regards as the major obstacle to sustainable and inclusive development. Accordingly, the Bank continues to work towards raising awareness of climate-related risks and to enrich its collaborations in this respect. Ranked number 1 in Turkey and among the best banks in the world with its ESG rating, TSKB has been the first Turkish bank to sign a loan agreement linked to ESG rating in December 2020. In the reporting period, TSKB also launched the Sustainable Development Goals Loan Model that it has co-developed with its subsidiary, Escarus. On the investment banking front, the Bank intermediated the issuance of the first sustainable lease certificate. Ms. Ece Börü, the first women CEO of TSKB who at the same time serves as the head of the Bank’s Sustainability Committee, was included in the honors list of the “Asia Top Sustainability Superwomen 2020” by CSR Works International and named among the 13 women leaders creating value, and has been the only woman leader representing Turkey in the honors list. Having authored the year’s first issuance with a Eurobond issue of USD 400 million in January, TSKB signed a USD 200 million funding agreement with the Asian Infrastructure Investment Bank under the guarantee of the Ministry of Treasury and Finance of The Republic of Turkey, to support companies negatively affected by the Covid-19 pandemic. Again in 2020, the Bank secured a syndicated loan in the amount of USD 150 million from international markets. Taking place among the pioneering organizations in corporate governance, the Bank preserved its place among the highest scorers in corporate governance ratings in 2020. The Bank’s corporate governance rating of 9.56 on a scale of 10 was affirmed in October 2020. On a consolidated basis, TSKB had TL 6.1 billion in shareholders’ equity and TL 52.4 billion in total assets as of year-end 2020. In its review, Fitch Ratings affirmed TSKB’s long-term local currency IDR rating as “BB-”, and foreign currency IDR as “B+”, and the outlook for the Bank’s long-term local currency rating was revised from stable to negative. Finally, TSKB was assigned a national long term rating of AA (tur), Viability Rating of (b+) and a “stable” outlook. On 16 September 2020, Moody’s confirmed TSKB’s long-term issuer rating as “B3”, its baseline credit assessment as ‘caa1’, with a ‘negative’ outlook assigned. www.tskb.com.tr 75 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Subsidiaries İşbank Germany İşbank Georgia A leading financial institution backed by Turkish capital in Europe İşbank’s organization in Georgia Founded in 1992, İşbank Germany developed and thrived within the financial system in Europe over the course of the 28 years since then, and helped customers in Turkey to access the financial system in Europe. 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. Since 1992, İşbank Germany has been helping customers in Turkey access the financial system in Europe. Offering mostly corporate banking services and having 63 employees, İşbank Georgia had total assets worth USD 100.1 million and its shareholders’ equity amounted to USD 25.5 million as at year-end 2020. www.isbank.ge 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 2020, the Company had total assets worth TL 36 billion and shareholders’ equity of TL 1.6 billion on a consolidated basis. As of the same date, total customer assets managed by the Company in private pension and life insurance combined is TL 33.6 billion. www.anadoluhayat.com.tr Having successfully adapted to the changing dynamics throughout its operations for more than a quarter of a century, İşbank Germany operates in Germany with nine branches and in the Netherlands with one branch. As of year-end 2020, the Bank had EUR 1.8 billion in total assets, and EUR 218.6 million in total shareholders’ equity. While its activities are mostly concentrated in corporate banking, İşbank Germany, with its 164 employees, offers the full range of banking products to its customers. www.isbank.de İşbank Russia Serving customers at three locations in Russia İşbank has been cultivating its presence and efficiency in Russia, one of Turkey’s important trade partners, since 2011. Having 103 employees on its payroll, İşbank Russia has two branches in total, located in Moscow and Saint-Petersburg, and a representative office in Kazan. Concentrated mostly on corporate banking services, İşbank Russia’s total assets were worth USD 157.5 million and its shareholders’ equity was registered as USD 57.4 million as of year-end 2020. www.isbank.com.ru 76 İşbank 2020 Annual Report Millî Reasürans The Company has been playing a part in driving the progress of the Turkish insurance business since 1929. Anadolu Sigorta The pioneer of the Turkish insurance sector Operating in non-life insurance business and being one of Turkey’s leading insurance companies, Anadolu Anonim Türk Sigorta Şirketi (Anadolu Sigorta) generated a premium production of TL 8 billion as at year-end 2020. As of year-end 2020, the Company had TL 11.7 billion in total assets and TL 2.4 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 2020. www.anadolusigorta.com.tr Millî Reasürans Uninterrupted reinsurance services since 1929 Established in 1929 and having undertaken an important role in the formation and development of the Turkish insurance business, Millî Reasürans T.A.Ş. (Millî Reasürans) has total assets worth TL 15.8 billion and shareholders’ equity worth TL 3.6 billion on a consolidated basis as at year-end 2020. 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. As of year-end 2020, premiums written abroad accounted for 27% of the Company’s total written premiums. The financial strength rating of Millî Reasürans was revised as ‘B’ in June 2020 by A.M. Best, the world’s most prestigious rating institution in the insurance sector. The Company’s national credit rating was affirmed as ‘tr A+’ in June 2020 by Standard & Poor’s. 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 2020, İş Leasing had TL 12.8 billion in total assets and TL 1.7 billion in shareholders’ equity on a consolidated basis, while its leasing receivables amounted to TL 7.2 billion. With a statement made on 1 September 2020, 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)’. The outlook of the Company’s long-term local currency rating was revised from stable to negative in parallel with the national credit rating outlook. www.isleasing.com.tr 77 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Subsidiaries İŞ GYO İş GYO possesses a diversified and well‑balanced portfolio. İş Faktoring İş Yatırım An innovative approach to the accounts receivable funding sector A leading and pioneering investment house in the capital markets 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 2020, İş Faktoring has TL 4.6 billion in total assets and TL 477 million in shareholders’ equity. İş Leasing holds 78.23% share in the capital of İş Faktoring. İş Yatırım Menkul Değerler A.Ş. (İş Yatırım) offers brokerage services in domestic and international capital markets, investment advisory, and corporate finance services. Listed on the Stars Market, the Company is the only brokerage house in Turkey traded on BIST 100. Assigned long-term and short-term national credit ratings of ‘AAA’ and ‘A1+’ respectively by SAHA Kurumsal Yönetim ve Kredi Derecelendirme A.Ş. with a stable outlook, İş Yatırım had TL 8.8 billion in total assets and TL 2.2 billion in shareholders’ equity on a consolidated basis as of 2020 year-end. www.isfaktoring.com.tr www.isyatirim.com.tr GLASS Şişecam The founder and the unchanging leader of the Turkish glass industry Founded in 1935, Türkiye Şişe ve Cam Fabrikaları A.Ş. (Şişecam) is the holding company of Şişecam Group comprising of companies operating in flat glass, glassware, glass packaging and chemicals, mainly soda ash and chromium chemicals. 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, the investment for the facility in the US is in progress. 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 2020, the Company’s total assets amounted to TL 5.2 billion and its shareholders’ equity totaled TL 4.1 billion. Based on the review conducted by Saha Kurumsal Yönetim ve Kredi Derecelendirme Hizmetleri A.Ş. in August 2020, 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 78 İşbank 2020 Annual Report Şişecam Group exported to more than 150 countries as at year‑end 2020. Having produced 46% of total glass output outside Turkey (as measured on a tonnage basis) and generated 60% of total sales revenues from facilities based abroad and exports from Turkey, Şişecam Group’s exports to more than 150 countries amounted to USD 685 million as of year-end 2020. productivity, efficiency, leanness and agility. Along this line, the merger of Anadolu Cam Sanayii A.Ş., Denizli Cam Sanayii ve Ticaret A.Ş., Paşabahçe Cam Sanayii ve Ticaret A.Ş., Soda Sanayii A.Ş. and Trakya Cam Sanayii A.Ş. under Türkiye Şişe ve Cam Fabrikaları A.Ş. through acquisition of all their assets and liabilities was completed on 30 September 2020. Positioned as one of the world’s and Europe’s leading companies in the industry, the Şişecam Group ranked second 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 2020. www.sisecam.com.tr SOFTWARE Softtech Experienced solution partner in information technologies Established in İstanbul in 2006, Softtech is among Turkey’s largest software companies with approximately 1,500 employees and total assets close to TL 250 million. Besides its experience in the banking and finance sector, Softtech develops customer-oriented solutions in the domestic and international markets with products in diverse fields, and takes initiatives aimed at creating new opportunities and collaborations with a focus on technology. The Company has offices in Ankara and Cyprus and has subsidiaries in İstanbul, San Francisco, Shanghai and Frankfurt at the heart of the startup ecosystem to monitor, develop and invest in innovation on-site. www.softtech.com.tr Ranking fourth in Europe in terms of soda production capacity, the Group is the world leader in the production of basic chromium sulphate and ranks second in the world in the production of sodium bichromate. As at year-end 2020, Şişecam had TL 44.2 billion in total consolidated assets and TL 22.5 billion in shareholders’ equity. In its review in August 2020, Fitch assigned Şişecam a long-term foreign currency credit rating of ‘BB-’ with a ‘negative’ outlook. Moody’s, on the other hand, assigned the Company a long-term foreign currency rating of ‘B2’ with a ‘negative’ outlook in September 2020. The Company’s Corporate Governance Rating was determined as 9.54 in December 2020. In line with the Şişecam Group’s long-term strategies and competitive goals in global markets, it is targeted to merge Şişecam’s operations under a single roof so as to capitalize on potential joining of forces and to contribute positively to the Company’s market capitalization, with the aim of increasing 79 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank contributes to social development by investing in educational, environmental and culture & art projects. Corporate Social Responsibility Activities The importance İşbank attaches to social responsibility dates back to its founding years. Established one year after the proclamation of the Turkish Republic with the aim of achieving economic independence, İşbank goes beyond its core business of banking and contributes to social progress, in keeping with the mission spelled out by Mustafa Kemal Atatürk. Within the frame of the responsibility it has assumed towards the society, the Bank conducts long-term, widespread and sustainable projects in various areas, including sponsorship of different educational projects such as supporting educational institutions such as Darüşşafaka, developing environmental awareness, and contributions to culture and art. İşbank contributes to social development by investing in educational, environmental and culture & arts projects. 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. The Bank has been the sponsor of the chess discipline for 15 years. The main motives behind the sponsorship decision included propagating chess particularly among children, 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 963,022 - chess trainers increased from 7,000 to 86,959 - chess tournaments increased from 400 to 11,400 - chess clubs increased from 600 to 2,212 - title-holder chess players increased from 39 to 199 - referees increased from 1,738 to 11,196 - and the total number of medals claimed in tournaments reached 490. The titles won to date are presented below: - 25 world championships, 30 second place and 39 third place titles in worldwide organizations, - 68 European championships, 67 second place and 58 third place titles in Europe-wide 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 In keeping with the objective of making chess an easily accessible sport, chess classes are being opened at primary and secondary schools 80 İşbank 2020 Annual Report In 2020, four books were given away to children on the digital environment within the scope of the One Million Books, One Million Children campaign. 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. Darüşşafaka offers high quality boarding education in contemporary conditions with full scholarship from fifth grade through to the end of high school. The total number of chess classes opened at schools reached 26,566. Turkey Junior, Youth and Veterans Chess Championships At the Turkey Junior (aged 7-12), Youth (aged 13-18) and Veterans (aged 55-65 and above) Chess Championships held concurrently in Antalya between 18–25 January 2020, 2,474 players from 81 cities in Turkey and from the Turkish Republic of Northern Cyprus competed. During the championships, stress management seminars were organized for parents, and an experience area was designed for the players to give them a pleasant time Since March 2020 physical tournaments in the rest of the year were cancelled within the frame of the preventive measures implemented due to the coronavirus pandemic that also dominated Turkey. In a bid to contribute to the development of children who stayed at home, continued with their education through remote access and were confined to a limited social life, İşbank organized two online chess tournaments. 1,805 registrations were made for the first “İşbank Online Chess Tournament” organized for players in the 9-20 age group on the occasion of April 23rd National Sovereignty and Children’s Day, whereas 2,115 players applied for the second tournament. 81 Students from 81 Cities Founded with the mission of “equal opportunities in education”, Darüşşafaka provides education to students who have lost one or both parents and are in financial need. 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, İşbank covers educational expenses of all students included in the program. At the end of 2019-2020 academic year, the fourth term of students graduated, bringing the total number of graduated students to 231 under the Project. Within the scope of the project 81 Students from 81 Cities, İşbank keeps extending support to students who are admitted to a higher education program upon graduation from Darüşşafaka. 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 the graduates, the number of supported students reached approximately 750. One Million Books, One Million Children One of the biggest book campaigns ever undertaken in Turkey, “One Million Books, One Million Children” was launched by İşbank at the end of the 2007-2008 academic year. With this campaign, the Bank aims to: • help build on children’s cognitive and cultural intellectual skills, • 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. 81 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management In cooperation with the Koç University, İşbank led the establishment of the Artificial Intelligence Center, and contributed to the Research Center for Infectious Diseases. Corporate Social Responsibility Activities Held for the 13th time at the end of the 2019-2020 academic year, the campaign was moved to the digital platform within the scope of the measures adopted in response to coronavirus. This year, a total of 4 books were offered to children: • Journey to the Center of the Earth • Dr. Ox’s Experiment • Treasure Island • Turkish Scientists’ North Pole Expedition In addition, a certain number of books were printed in the Braille alphabet and delivered to the libraries of schools providing education to the visually impaired. The books given away under the campaign and a selection of other children’s books were sent for the children in Regional Boarding Secondary Schools, to children boarding in the housing of the General Directorate of Children’s Services, and those in the Youth Closed Prisons and Juvenile Reformatories. 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. Launched with the objective of presenting high quality, educational and entertaining contents to children, the Kumbara Magazine portal has become an important medium for reaching children who stayed at home due to the coronavirus pandemic in 2020. In Kumbara Magazine which Is the main portal of the One Million Books, One Million Children campaign and the chess tournaments, featured entertaining contents developed in collaboration with İş Sanat, “A Kumbara Adventure” game designed to teach financial literacy to children, and many others including “Science Heroes Series”, “Fun Experiments” and “Arduino”. Book donations to schools and libraries As an extension of the Bank’s social responsibility initiatives seeking to contribute to education, books published by Türkiye İş Bankası Kültür Yayınları publishing house are being sent to schools and public libraries all over the country. In 2020, books delivered to approximately one thousand schools and libraries numbered nearly 22 thousand. 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 3,700. Artificial Intelligence Center İşbank and Koç University jointly established the Artificial Intelligence Center with the motive to contribute to Turkey’s scientific and academic activities and to undertake advanced studies in relation to artificial intelligence, a topic of the utmost importance worldwide. At the Artificial Intelligence Center which has been established under the roof of Koç University faculty of Engineering; Koç University faculty members carry out activities that train and educate experts for the industry and the academy, and also seek to produce solutions for the problems of the business world. Research Center for Infectious Diseases At a time when the world and Turkey were held in the firm grip of the coronavirus pandemic, İşbank and Koç University authored a crucial collaboration, and led the establishment of the Research Center for Infectious Diseases, which will work towards contributing to the country’s scientific and academic activities in relation to public health. 82 İşbank 2020 Annual Report During 2020, Türkiye İş Bankası Kültür Yayınları brought more than 15 million books to the readers. Set up at Koç University with the sponsorship of İşbank, the Research Center for Infectious Diseases is intended to conduct advanced research on infectious diseases, develop suggested solutions for the diagnosis, treatment and protection methods for diseases, and enrich the researcher and educator human capital in terms of quantity and qualifications. Working in coordination with the School of Medicine, and the Colleges of Engineering, Sciences, Administrative Sciences & Economics, and Social Sciences and Humanities under the Koç University, the Center carries out its activities out of the Koç University Hospital located in Topkapı. 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 upkeeping of the saplings for a five-year period following the planting. Including the complementary plantings, the total number of saplings planted exceeded 3 million. The success rate in forested areas was 84% as at year-end 2020. Aimed at raising awareness of ecological literacy among children, the program was implemented with the participation of over 167 thousand preschool and primary school children across 81 cities in the 2019-2020 academic year. Face-to-face education was suspended in March within the scope of the measures adopted against the coronavirus, and digital education contents were published on EBA TV within the scope of distance education and on social network platforms. CULTURE AND ART Türkiye İş Bankası Kültür Yayınları Established in 1956 by Hasan Âli Yücel, the former Minister of Education, Türkiye İş Bankası 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, Türkiye İş Bankası Kültür Yayınları has brought more than 15 million books to the readers in 2020. 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 leading art institutions with the performance and music events it organizes, its activities in plastic arts, and its contribution to the protection of cultural heritage. Nature Education Programs Music Events The revenues generated on İş Asset Management TEMA Environmental Variable Fund were utilized towards supporting the Nature Education Program being conducted by the TEMA Foundation. Having celebrated its 20th year, İş Sanat had planned 50 events for 2020, but had to cancel all the events scheduled after 13 March due to the coronavirus pandemic. Until then, 32 events had taken place, reaching a hall occupancy rate of 98%. 83 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management The total number of visitors since the initial opening of the İşbank Museum exceeded 1.8 million. Corporate Social Responsibility Activities From 19 March, original content began to be produced for the social media under the heading “İş Sanat at Home”. 416 contents streamed over the course of 74 days on İş Sanat’s Instagram, Twitter, Facebook and YouTube accounts were viewed by more than 17 million times, received more than 380 thousand likes and 6 thousand comments, and shared by more than 8 thousand times. Taking into consideration the importance of solidarity in fighting against the hardships brought along by the period, İş Sanat developed a program populated by Turkish artists for its 21st season. Covering numerous events ranging from classical music concerts to domestic projects, story and poetry recitations to tale theater, from closet drama to virtual exhibitions, the new season opened with the İstanbul Ensemble concert held on 5 November 2020. The recordings of the concert that was held at the İş Towers Concert Hall without an audience within the scope of the pandemic measures can be viewed free of charge on İş Sanat’s social network accounts until the end of the season. Galleries Kibele Art Gallery and Ankara Art Gallery Kibele Art Gallery and Ankara Art Gallery showcase exhibitions by masterful artists in plastic arts. In 2019-2020 season, Kibele Art Gallery hosted “Kibele’s Memory”, and exhibitions of Tomur Atagök and Nevhiz Tanyeli, whereas Beril Anılanmert exhibition planned for this season was postponed due to the pandemic. Closed to visits on 15 March 2020, the Gallery was visited by a total of 9,880 people until then. Ankara Art Gallery showcased the thematic exhibition titled “A Journey to Nâzım” and an exhibition of Yalçın Gökçebağ in the 2019–2020 season. Closed to visits on 15 March 2020, the Gallery was visited by a total of 17,826 people until then. No exhibitions are scheduled to take place in the 2020-2021 seasons at the galleries. 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. As part of this cooperation, Artworks Conservation and Restoration BA program was established at the University in the 2013-2014 academic year, where education is ongoing. Activities in Museology and History İşbank Museum (Yenicami, İstanbul) Having opened its doors in November 2007, İşbank 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. 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. In 2020, over 5,000 students attended the workshops held at the Museum until 12 March, which was the date of the last workshop. Inaugurated in March 2019 and met with great interest, the exhibition titled “Independence” in tribute to the centennial of the inception of the War of Independence continued to be showcased in 2020. The exhibition puts on display approximately 1,000 documents, photographs, films and objects. The total number of visitors since the initial opening of the İşbank Museum exceeded 1.8 million. 84 İşbank 2020 Annual Report Patara Patara was proclaimed the tourism theme of the year 2020 by the Ministry of Culture and Tourism. İşbank Economic Independence Museum (Ulus, Ankara) With the aim of sharing its collections that are of great importance for the national economic history, İşbank converted the historic building located in Ulus, Ankara, which also served for many years as the third Head Office building of the Bank, into a museum. The historic Ulus building that is among the landmarks of the capital city opened its doors to visitors as İşbank Economic Independence Museum in 2019, housing the documents and memories of the country’s economic independence and development process. The Museum hosts a permanent exhibition on the 1st and 2nd floors, houses İş Sanat Ankara Gallery on the 3rd floor, temporary exhibition halls on the 4th floor, and activity hall on the 5th floor. The temporary exhibition halls showcase the “Independence” Exhibition, one leg of which is on display in İstanbul. In addition to offering special guided exhibition tours organized for student groups, the Museum welcomed more than 2,000 students in workshops during 2020. Total number of visitors of İşbank Economic Independence Museum exceeded 80 thousand people. Closed to visits on 16 March 2020 due to the coronavirus pandemic, İşbank Economic Independence Museum reopened on 16 June 2020 with the measures adopted. Museums were closed to visits once again on 20 November 2020 due to the pandemic conditions that were aggravated in fall. Preparations for the Art Museum 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 in Nizip, Gaziantep, commenced in 2012, and the work was completed in October 2019. The book entitled “Zeugma Between Two Worlds: The Houses and Tombs of Zeugma from Life to Eternity” by Prof. Kutalmış Görkay, the director of excavations at the ancient city of Zeugma, was published in Turkish and English languages in 2020. Since 2016, İşbank, together with its subsidiaries Şişecam and TSKB, has been lending support to the excavations in the ancient city of Patara in Kaş, Antalya. Patara was proclaimed the tourism theme of the year 2020 by the Ministry of Culture and Tourism. A promotional film was produced by İşbank in collaboration with the Ministry. In addition, the documentary titled “The Treasure Concealed in the Sand: Patara” was prepared within the scope of the sponsorship. In addition, support is being extended to excavations of the Dionysus Temple in the ancient city of Teos in Seferihisar İzmir since 2018, and of the column-lined street in the ancient city of Nysa in Sultanhisar, Aydın since 2019. During the ongoing digs of the column-lined street in Nysa, a monumental fountain was unearthed in 2020. It is considered that the archeological assets that were and will be uncovered with the sponsorships of excavations will shed light not only on the history of civilization in Anatolia, but will also contribute greatly to the world cultural heritage. The restoration of the historic building of Beyoğlu Branch allocated to house İşbank’s art collection commenced on 6 July 2020. Contributions to Archeology İşbank extends support to archeological excavations with the purpose of unearthing and Istanbul Foundation for Culture and Arts International İstanbul Music Festival İşbank sponsored the “Bilkent Symphony Orchestra & Gökhan Aybulus” concert held online within the scope of the 48th İstanbul Music Festival organized by the Istanbul Foundation for Culture and Arts. 85 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Sustainability at İşbank Ever since its incorporation, İşbank has always been the key supporter of the country’s economic and social development. Executing all its operations with an integrated and long-term perspective, İşbank has positioned sustainability as a focal point of its corporate strategy. With its business model focused on generating shared value, the Bank expands its sphere of multi-dimensional positive influence. for Investor Relations and Sustainability function assumed the Sustainability Leader role in order to strengthen the ownership of ESG topics at a senior level and to support their constant development. The following policies that define İşbank’s sustainability approach can be accessed on the website. • Sustainability İşbank contributes to community welfare, transitioning to a low-carbon economy, development of responsible finance practices, and development of Turkey as well, besides the contribution it lends through the value it creates on the financial axis. • Environmental and social impacts • Human rights and human resources • Anti-bribery and anti-corruption • Gifts and hospitality. Sustainability management at İşbank Responsible banking Sustainability Management System of İşbank is an integrated management system that addresses the whole set of activities within the framework of their impacts in relation to sustainability. The system enables integrated management of a wide variety of topics ranging from lending operations to employee development initiatives, from purchasing decisions to the Bank’s environmental footprint. İşbank’s Sustainability Policy and other complementary policies underpin the operation of the Sustainability Management System. Handled by the Corporate Governance Committee until 2020, sustainability activities were assumed by the dedicated Sustainability Committee which was set up in 2020. Thanks to its composition covering the members of the Board of Directors and the Executive Committee, the Sustainability Committee enables inclusive representation of business units and holistic oversight of sustainability-related matters. Ms. Gamze Yalçın, Deputy Chief Executive responsible İşbank’s responsible banking approach covers development of products, services and solutions in many different areas ranging from the financing of renewable energy projects that support transition to low carbon economy to the empowering of SMEs and women entrepreneurs that are the backbone of the economy, and to management of environmental and social impacts resulting from the investments financed. As İşbank generates sustainable value for all its stakeholders within the framework responsible banking notion, it also contributes directly or indirectly to the resolution of global issues that make the subject matter of the UN Sustainable Development Goals (SDGs). Combating climate change Tackling financial, social and environmental risks with an integrated risk management approach within the scope of its efforts to combat climate emergency, İşbank classifies climate-related risks under the strategic risks category. Having declared its medium- and long-term emissions reduction targets under the Carbon Disclosure Project (CDP) Climate Change 2020 Reporting, İşbank submitted its commitment to the Science Based Target Initiative for science based validation of its targets. İşbank’s activities related to the combat against climate change are carried out in two main paths. As a prerequisite of its responsible banking notion, the Bank supports green economy with its responsible products and services, and works to mitigate the environmental impacts stemming from its operations. Analyzing and managing environmental and social impacts, alongside economic feasibility, represent an important aspect of loan assessment processes. At İşbank, potential environmental and social risks of all greenfield investment projects and the investors requesting loans with a total investment amount of more than USD 10 million are subjected to an assessment using the Environmental and Social Risk Evaluation Tool (ERET). In keeping with its responsible banking notion, İşbank does not consider loan demands for activities listed in İşbank Exclusion List attached to its Environmental and Social Impacts Policy. İşbank Exclusion List can be found in attachment to the Environmental Social Impacts Policy available on the website. Financing renewable energy Through renewable energy investments, İşbank supports not only the combat against negative impacts associated with climate change, but also social development by way of creating new employment areas. Renewable energy finance is of the utmost importance in the transition to a low-carbon economy. 86 İşbank 2020 Annual Report Providing financing to renewable energy projects along this line, İşbank contributes to the mitigation of the risks and impacts stemming from climate change and to accelerating the green transition. After 2015, the Bank allocated greenfield project financing for electricity generation investments completely to renewable energy projects. As at year-end 2020, renewable energy finance accounted for 69% of total energy generation projects portfolio, whereas it made up 7.5% of the total financing by the Bank. Carrying on with its financing support in this area, İşbank works committedly to decrease its share of financing provided to energy generation from coal and gas-based thermal power plants. Happy and productive İşbank employees İşbank’s workforce made up of qualified and happy employees are among the Bank’s key competitive advantages. 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. The Bank conducts training programs aimed at increasing employees’ awareness of sustainability, as well as continuously providing them with information about the sub-components of the sustainability concept at the necessary level. Business ethics, combating bribery and corruption, and human rights are incorporated in the Bank’s different training modules, and offered to employees from the inception of employment. Environmental management system training is provided to related personnel within the scope of ISO 14001 certification process. Managing 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 data such as waste generation, water and energy consumption and carbon emissions at the Bank’s Head Office buildings and branches are followed up, and work is carried out to minimize the adverse environmental impacts of the Bank’s operations. Long‑lasting and inclusive social investment programs İşbank has a pioneering and guiding role in social progress and development. In keeping with its founding mission, the Bank implements comprehensive and long-lasting social investment programs. 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 80 of this Report. National and international collaborations İşbank continues to collaborate with national and international organizations and institutions so as to augment the value created for all its stakeholders. Aiming to accelerate its sustainability- related efforts through its collaborations, İşbank is an active signatory of the UN Global Compact since 2012. In 2020, on the other hand, the Bank added new dimensions to its cooperation with international initiatives by affiliating to the United Nations Environment Programme – Finance Initiative (UNEP FI) and becoming a signatory of the Principles for Responsible Banking (PRB) and Women’s Empowerment Principles (WEPs). The Bank will continue to implement the principles of the initiatives it is affiliated to along the value chain and to reproduce its transformative power as a financial institution in this respect, by taking its impact across broader segments of the society. İşbank is a constituent of Borsa İstanbul (BIST) Sustainability Index since 2015, and of the FTSE4Good Emerging Markets Index since 2016. In 2020, the Bank received a rating from Sustainalytics, an ESG (Environmental, Social, Governance) rating agency. This rating clearly indicates the concrete contribution the Bank-wide initiatives make in different aspects of sustainability. Integrated reporting Attaching great importance to transparency and stakeholder communication, İşbank has been publishing sustainability reports besides annual reports since 2012. Further enriching its reporting practice, the Bank began preparing integrated reports in 2019. Prepared in accordance with the International Integrated Reporting Council (IIRC) reporting framework and the Global Reporting Initiative (GRI) standards, the Bank’s integrated reports address non-financial capital, as well as financial capital, and present information about the Bank’s activities and performance with a holistic perspective in revealing the value created on the basis of six capitals. İşbank’s Integrated Reports can be found on the Bank’s website. 87 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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 (Convenience translation of a report originally issued in Turkish) 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, 2020 – December 31, 2020. 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 2020 and 31 December 2020 dated February 8, 2021, the unconsolidated and consolidated financial statements as at December 31, 2020 include a free provision at an amount of TL 2,875,000 thousands of which TL 1,125,000 thousands was provided in prior years and TL 1,750,000 thousands provided 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 8, 2021 on the full set consolidated and unconsolidated financial statements of the Group for the period of 1/1/2020-31/12/2020. 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. 88 İşbank 2020 Annual Report 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. March 9, 2021 İstanbul, Türkiye 89 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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. 90 İşbank 2020 Annual Report Summary Report of the Board of Directors Esteemed Shareholders, Welcome to our Bank’s 97th Annual General Meeting. As we present the Board of Directors’ Report, the Balance Sheet and the Income Statement covering the results of our activities in 2020 fiscal year for your review and approval, we respectfully greet all of you here today. Having taken the whole world in its grip in 2020, the Covid-19 pandemic brought along a global economic crisis, resulting in a significantly differentiated course of the economic activity in the manufacturing and services industries worldwide. Geopolitical events, as well as the uncertainties related to protectionist trade policies, have been influential upon global economic activity. Although the restrictive measures implemented in the wake of the Covid-19 pandemic interrupted the recovery trend observed in the Turkish economy at the start of 2020 following the rebalancing period in 2019, the Turkish economy recuperated rapidly upon the easing of the restrictive measures and effects of the steps taken to support the economy, and ended 2020 with 1.8% growth. Due to the fact that the measures taken in response to the pandemic were substantially in the form of credit support and that the interest rates remained relatively low for the most part of the year, TL lending of the banking sector, excluding participation banks, expanded by 41.2% in 2020. FC credit volume in USD terms that displayed a weak performance parallel to the weak investment appetite and the depreciation of the Turkish lira, as well as the tendency to decrease FC debt, fell by 3.8% in this period. Within this framework, the rise in total lending volume in 2020 was measured at 33.1%. On the other hand, while FC deposit volume registered 42.8% growth year-over-year by the end of 2020, the expansion in TL deposit volume in the same period was 23.6%. Thus, the increase in total deposit volume was registered as 33.3% for the whole year. When compared to the end of the previous year, as of 31 December 2020; • Our loans grew by 27.7% to TL 345.2 billion, • Our deposits expanded by 24.7% to TL 368.9 billion, • Our total assets increased by 26.9% to TL 593.9 billion, • Our shareholders’ equity rose by 15.1% to TL 67.8 billion, • while our net profit for 2020 amounted to TL 6.8 billion. During 2020, the Bank’s balance sheet was dynamically managed with a focus on asset quality and profitability. Our non-performing loans ratio was registered as 5.6% at year-end 2020. While the volume of deposits continued to increase, the Bank also kept utilizing non-deposit funding sources in domestic and international markets, with a cost sensitive approach in order to diversify the funding base. Standing at 18.7% as of 2020 year-end, our capital adequacy ratio continued to be well-above the regulatory requirement. At the end of 2020, our Bank posted a return on assets of 1.3% and a return on equity of 10.9%. Esteemed Shareholders, We hereby submit our Annual Report, Balance Sheet and Income Statement pertaining to our 2020 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 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 attendance. TÜRKİYE İŞ BANKASI A.Ş. BOARD OF DIRECTORS 91 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Agenda of the Annual Meeting 1 - Opening Ceremony, establishment of the Council of Chairmanship 2 - Discussion of 2020 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 2020 4 - Determination of the dividend distribution and the method and date of allotment of dividends 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 Internal Directive on the Principles and Procedures of Operation of the General Assembly 10 - Amendment of the articles 25, 28 and 62 of the Articles of Incorporation 11 - Presenting information to the shareholders on the subjects held in Capital Markets Board Corporate Governance Communique principle no. 1.3.6 12 - Presenting information to the shareholders about the donations 92 İşbank 2020 Annual Report Dividend Distribution Proposal As a result of our activities in 2020, our Bank booked a net profit for the period of TL 6,810,916,962.14. On the other hand, due to the disposal of some of the Bank’s real estates that were being followed up employing the revaluation model under the Turkish Accounting Standard (TAS) no. 16 “Tangible Fixed Assets”, prior years’ profit was registered in the amount of TL 6,262,305.70. Accordingly, the Bank’s total accounting profit was realized as TL 6,817,179,267.84. The portion of TL 17,066,578.00 of the accounting profit consists of earnings on real estate disposal, which is decided to be maintained under a specific fund account under liabilities to benefit from the exemption provisions set out in Article 5 of the Corporate Tax Law no. 5520 and to be used for capital increases when needed. On the other hand, the Bank has prior years’ profit in the total amount of TL 6,270,908,336.65 which results from the application of the TFRS 9 – Financial Instruments reporting standard and stems from the equity method specified in the TAS 27 – Separate Financial Statements accounting standard that regulates the accounting policy for our subsidiaries and affiliates. Accordingly, it is proposed as follows: - the accounting profit making the basis of the distribution be determined as TL 6,817,179,267.84, which is the net profit for the period plus the amounts associated with the real estates disposed of during the fiscal that were being followed up under the “prior years’ profit” as per the relevant accounting standard, - out of the accounting profit, the portion in the amount of TL 17,066,578.00 arising from the earnings on disposal of real estates be transferred to relevant reserves for being maintained in a specific fund account and for conversion into the capital when needed; and the portion of TL 135,000,000.00 be set aside as venture capital fund to be allocated to venture capital investment trusts and funds, - based on the distributable amount so formed, 10% thereof that needs to be set aside as first extraordinary reserves be increased within the frame of the provisions of the Banking Law and the Turkish Commercial Code and a total of TL 2,885,008,383.88 be set aside as first extraordinary reserves, - The distributable amount of TL 6,665,112,689.84, which includes the first extraordinary reserves mentioned above, be distributed as follows pursuant to the provisions of applicable legislation and Article 58 of the Articles of Association of İşbank. PROFIT FOR THE PERIOD PRIOR YEARS’ PROFIT NET ACCOUNTING PROFIT UNDISTRIBUTED PROFIT DISTRIBUTABLE PROFIT I. FIRST DISTRIBUTION (Articles of Association Art. 58/a-b) - 5% Legal Reserves - First Extraordinary Reserves - First Dividends To Group A Shares To Group B Shares To Group C Shares II. SECOND DISTRIBUTION (Articles of Association Art. 58/c-d-e) - To Founder Shares - 20% to the Bank Employees - 10% Legal Reserves - 10% Second Extraordinary Reserves - Second Dividends To Group A Shares To Group B Shares To Group C Shares TL 6,810,916,962.14 6,262,305.70 6,817,179,267.84 -152,066,578.00 6,665,112,689.84 333,255,634.49 5,390,238,128.89 60.00 1,740.00 269,998,200.00 3,731.22 134,323,785.29 59,041,548.53 67,161,892.65 219.25 3,179.08 411,084,570.44 5,993,493,763.38 671,618,926.46 671,618,926.46 Provided that the proposal above is accepted by the General Assembly, dividend payout to the Bank’s shareholders will commence on 02 April 2021, and gross profit shares shown in the table below will be distributed to each share group with a nominal value of TL 1 and to each founder share: Type of Share To Group A shares with a nominal value of TL 1 To Group B shares with a nominal value of TL 1 To Group C shares with a nominal value of TL 1 To each Founder Share Gross TL 0.2792500 0.1696234 0.1513527 1.5179902 93 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Board of Directors 1 2 3 4 5 Mr. Yusuf Ziya Toprak, who was elected as a member of İşbank’s Board of Directors on 31 March 2020 and as the Vice Chairperson of the Board on 1 April 2020, also serves as the Chairman of the Audit Committee, T.R.N.C. Internal Systems Committee and Operational Risk Committee, a member of the Risk Committee, and an alternate member of the Credit Committee. 3‑ Adnan Bali Member of the Board and Chief Executive Officer 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 Chairperson of the Credit Committee and Sustainability Committee, and member of the Risk Committee. Mr. Adnan Bali is the Chairman of Şişecam Group and İşbank Members’ Supplementary Pension Fund. 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. 1‑ Füsun Tümsavaş Chairperson 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 Chairperson of Anadolu Anonim Türk Sigorta and 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, 31 March 2017 and 31 March 2020. Ms. Tümsavaş also serves as the Chairperson of the Risk Committee and Remuneration Committee and as a member of Corporate Governance Committee and Credit Committee. 2‑Yusuf Ziya Toprak Vice Chairperson Mr. Yusuf Ziya Toprak was born in Trabzon in 1943, and graduated from Istanbul Economics and Commercial Sciences Academy, Department of Finance. Mr. Toprak started to work as an Assistant Inspector on the Board of Inspectors at İşbank in 1967. In the following years, he served as Assistant Manager and Group Manager in Automation and Organization Departments, as Manager in Securities Department, and General Manager at Yatırım Finansman Securities. He was appointed as Deputy Chief Executive at İşbank in 1999. Mr. Toprak, who has retired in 2004, continued serving as the Vice Chairperson and a Member of the Board of Directors at Şişecam until 2010. 4‑ 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, 31 March 2017 and 31 March 2020, also serves as a member of the Corporate Social Responsibility Committee, Credit Committee, Remuneration Committee and Sustainability Committee. 5‑ 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. Mr. Çiftçioğlu, who was elected to İşbank’s Board of Directors on 31 March 2017 and 31 March 2020, also serves as the chairperson of the Corporate Governance Committee and a member of TRNC Internal Systems Committee, Audit Committee and Sustainability Committee. 94 İşbank 2020 Annual Report 6 7 8 9 10 11 6‑ Fazlı Bulut Member of the Board 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 and 31 March 2020, also serves as a member of the Corporate Social Responsibility Committee and as an alternate member of Credit Committee. 7‑ Durmuş Öztek Member of the Board Mr. Durmuş Öztek was born in Sivas, Şarkışla in 1953 and graduated from Ankara University Faculty of Political Sciences, Department of Economics and Finance. He completed his master’s degree in Economics at Vanderbilt University in the USA. Mr. Öztek served as a Finance Auditor between 1975-1986 in the Ministry of Finance. In the following years, he served as Department Head, Deputy General Manager and General Manager in the General Directorate of Budget and Financial Control; Chief Auditor and Member of Financial Advisory Committee in the Ministry of Finance; Auditor in Turk Telekom, Member of the General Committee in Council of Higher Education, Financial Counselor in Turkish Embassy in Brussels. He served as a Ministry Counselor in the Ministry of Finance between 2006-2011. Mr. Öztek, who was elected to İşbank Board of Directors on 31 March 2020, serves as a member of the Corporate Social Responsibility Committee. Mr. Selçuk, who also serves as a Certified Public Accountant since 2003, is an Independent Auditor at BDD Bağımsız Denetim ve Danışmanlık A.Ş., and a partner at Girişim YMM Limited Şti. 8‑ Recep Hakan Özyıldız Member of the Board Mr. Recep Hakan Özyıldız was born in Bursa in 1956 and graduated from Ankara University Faculty of Political Sciences, Department of Economics and Finance. He completed his master’s degree in Economics at Northeastern University in the USA. Mr. Özyıldız started to work at the Ministry of Treasury and Finance as an Assistant Treasury Specialist in 1978. In the following years, he served as Branch Manager at the Undersecretary of Treasury and Foreign Trade and the General Directorate of Banking and Foreign Exchange; Department Head, Deputy General Manager and General Manager at the General Directorate of Public Finance under Ministry of Treasury and Finance,; Auditor at İşbank, General Manager of the State Economic Enterprises in the Treasury, Senior Advisor of Economics in Turkish Embassy in London and Assistant Undersecretary in the Ministry of Treasury and Finance. Mr Özyıldız, who is also a columnist and commentator, continues to serve as a part-time academic tutor in Ankara University, Faculty of Political Sciences. Mr. Özyıldız was elected to İşbank Board of Directors on 31 March 2020. 9‑ Mustafa Rıdvan Selçuk Member of the Board Mr. Mustafa Rıdvan Selçuk was born in Malatya in 1955, and graduated from Ankara University, Faculty of Political Sciences, Department of Economics and Finance. He received his master’s degree on Economics from Vanderbilt University in the USA. Mr. Selçuk started his career in the Ministry of Finance in 1978 as an Assistant Account Expert. In the following years, he served as Account Expert, Senior Account Expert, Department Head in the General Directorate of Revenues, General Manager and Chairman of Bağkur in the Ministry of Labor and Social Security, Labor and Social Security Advisor in Turkish Embassy in Copenhagen and as Ministry Advisor in the Ministry of Finance. Mr. Selçuk was elected to İşbank Board of Directors on 31 March 2020. 10‑ Ahmet Gökhan Sungur Member of the Board Mr. Ahmet Gökhan Sungur was born in Yozgat in 1953. He graduated from Middle East Technical University, Department of Chemical Engineering and received his master’s degree from the same department. Mr. Sungur, who started his career in 1975 at General Institute of Mineral Research and Exploration Department of Technology as Chief Specialist Chemical Engineer, worked in Hisarbank and Güntekin İnşaat A.Ş. as a System Analyst between 1981-1982. Later, between 1982-1999, he served as Manager of Software Development at İşbank and Chief Executive Officer at İş Net A.Ş. between 1999-2003. Mr. Sungur was elected as an Independent Member of İşbank Board of Directors on 31 March 2020. 11‑ Sadrettin Yurtsever Member of the Board Mr. Sadrettin Yurtsever was born in Darabi in 1964 and graduated from Gazi University, Faculty of Education, Department of English Language Education. Mr. Yurtsever, who started his career at İşbank as a candidate officer in İzmir Branch in 1993, served in the same branch as Section Head and Sub-Manager. He served as Assistant Manager in SME Loans Underwriting Division of Denizli Region in 2006, İzmir Central II. Region Sales Division Assistant Regional Manager in 2007, Regional Manager in the same division in 2011, Branch Manager of Bornova/İzmir Commercial Branch in 2013 and Mediterranean/Antalya Corporate Branch in 2018. Mr. Yurtsever, who was elected to İşbank Board of Directors on 31 March 2020, serves as a member of the Corporate Governance Committee and the Corporate Social Responsibility Committee. 95 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Executive Committee 1 2 3 4 5 6 1‑Adnan Bali Member of the Board and Chief Executive Officer 2‑Hakan Aran Deputy Chief Executive 5‑Murat Bilgiç 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 Sustainability Committee, and member of the Risk Committee. Mr. Adnan Bali is the Chairman of Şişecam Group and İşbank Members’ Supplementary Pension Fund. 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 a 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. 4‑Senar Akkuş Deputy Chief Executive Born in Diyarbakır in 1969. Ms. Senar Akkuş graduated from the Economics Department of the Middle East Technical University, Faculty of Economics 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. Born in Ankara in 1968. Mr. Murat Bilgiç graduated from the International Relations Department of the Middle East Technical University, Faculty of Economics 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. 6‑N. Burak Seyrek Deputy Chief Executive 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. 96 İşbank 2020 Annual Report 7 8 9 10 11 12 13 7‑Şahismail Şimşek Deputy Chief Executive 9‑Gamze Yalçın Deputy Chief Executive 11‑Ozan Gürsoy 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. 8‑Ebru Özşuca Deputy Chief Executive Born in Ankara in 1971. Ms. Ebru Özşuca graduated from the Economics Department of the Middle East Technical University, Faculty of Economics 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. Born in Ankara in 1971. Ms. Gamze Yalçın graduated from the Economics Department of the Middle East Technical University, Faculty of Economics 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. Ms. Yalçın also serves as İşbank Sustainability Leader. Born in Adana in 1974. Mr. Ozan Gürsoy graduated from the Public Administration Department of Middle East Technical University, Faculty of Economic and Administrative Sciences. He also holds a master’s degree in International Banking and Finance from the University of Birmingham in UK. He joined İşbank as an Assistant Inspector on the Board of Inspectors in 1996. Throughout his career, Mr. Gürsoy served in various units of İşbank and Gebze Corporate Branch of the Bank and was appointed as Deputy Chief Executive of İşbank on 26.08.2019. 10‑H. 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. 12‑Sezgin Yılmaz Deputy Chief Executive Born in Kırcaali in 1975. Mr. Sezgin Yılmaz graduated from Uludağ University, Faculty of Economics and Administrative Sciences, Department of Economics. Mr. Yılmaz started his career as an Officer at Bursa Branch in 1997. Mr. Yılmaz served in various units and branches of İşbank and was elected to İşbank Board of Directors on 29 March 2019. Mr. Yılmaz appointed as Deputy Chief Executive of İşbank on 26.08.2019. 13‑Serkan Uğraş Kaygalak Deputy Chief Executive Born in Bingöl in 1975. Mr. Serkan Uğraş Kaygalak graduated from the Business and Administration Department of Middle East Technical University, Faculty of Economics and Administrative Sciences. In 1997, he began his career at İşbank as an Assistant Inspector on the Board of Inspectors and served in various units and as Branch Manager in Tarsus Branch. Mr. Kaygalak appointed as Deputy Chief Executive of İşbank on 26.08.2019. 97 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management BOARD OF DIRECTORS CHIEF EXECUTIVE Adnan Bali DEPUTY CEO Hakan Aran DEPUTY CEO Yalçın Sezen DEPUTY CEO Senar Akkuş DEPUTY CEO Murat Bilgiç INFORMATION TECHNOLOGIES DIVISION RETAIL BANKING MARKETING DIVISION FINANCIAL MANAGEMENT DIVISION RETAIL LOANS UNDERWRITING DIVISION DIGITAL BANKING OPERATIONS DIVISION RETAIL BANKING SALES DIVISION SUBSIDIARIES DIVISION PROJECT FINANCE DIVISION STRATEGY & CORPORATE PERFORMANCE MANAGEMENT DIVISION MANAGERIAL REPORTING & INTERNAL ACCOUNTING DIVISION COMMERCIAL LOANS UNDERWRITING DIVISION CORPORATE LOANS UNDERWRITING DIVISION DATA MANAGEMENT DIVISION RETAIL BANKING PRODUCT DIVISION CONSUMER LOANS DIVISION DIGITAL BANKING DIVISION Organization Chart(*) BOARD OF INSPECTORS HEAD OFFICE COUNSELLORSHIP CORPORATE COMMUNICATIONS COORDINATION AND GENERAL SECRETARY INFORMATION SECURITY COORDINATORSHIP CORPORATE COMMUNICATIONS DIVISION INTERNAL CONTROL DIVISION RISK MANAGEMENT DIVISION SECRETARIAT TO THE BOARD OF DIRECTORS CORPORATE COMPLIANCE DIVISION (*) Last revised on January 20, 2021 98 İşbank 2020 Annual Report AUDIT COMMITTEE Yusuf Ziya Toprak Ersin Önder Çiftçioğlu DEPUTY CEO N. Burak Seyrek DEPUTY CEO Şahismail Şimşek DEPUTY CEO Ebru Özşuca DEPUTY CEO Gamze Yalçın DEPUTY CEO H. Cahit Çınar DEPUTY CEO Ozan Gürsoy DEPUTY CEO Sezgin Yılmaz DEPUTY CEO Serkan Uğraş Kaygalak HR MANAGEMENT DIVISION SME BANKING SALES DIVISION TREASURY DIVISION FINANCIAL INSTITUTIONS DIVISION LEGAL COUNSELLORSHIP CORPORATE AND COMMERCIAL BANKING MARKETING DIVISION SUPPORT SERVICES DIVISION RETAIL LOAN & CARD OPERATIONS DIVISION TALENT MANAGEMENT DIVISION AGRICULTURAL BANKING MARKETING DIVISION ECONOMIC RESEARCH DIVISION INVESTOR RELATIONS AND SUSTAINABILITY DIVISION LEGAL AFFAIRS AND FOLLOW‑UP DIVISION FREE ZONE BRANCHES CONSTRUCTION & REAL ESTATE MANAGEMENT DIVISION PAYMENT SYSTEMS ECOSYSTEM DIVISION ENTERPRISE ARCHITECTURE DIVISION COMMERCIAL BANKING PRODUCT DIVISION AGILE MANAGEMENT DIVISION SME BANKING MARKETING DIVISION RETAIL LOANS RECOVERY DIVISION COMMERCIAL BANKING SALES DIVISION BANKING OPERATIONS & PAYMENT OPERATIONS DIVISION PRIVATE BANKING MARKETING AND SALES DIVISION COMMERCIAL & CORPORATE LOANS RECOVERY DIVISION BRANCHES ABROAD AND FOREIGN REPRESENTATIVES (OFFICES) FOREIGN TRADE & COMMERCIAL LOAN OPERATIONS DIVISION CAPITAL MARKETS DIVISION CREDITS PORTFOLIO MANAGEMENT DIVISION CREDIT MONITORING DIVISION INTERNAL OPERATIONS DIVISION PAYMENT SYSTEMS PRODUCT DIVISION PROCUREMENT DIVISION 99 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Changes in the Organizational Structure During 2020; · Information Systems security function was positioned under the Information Security Coordinatorship that directly reports to the CEO; · As part of the reorganized loan functions, Credit Monitoring Division and Project Finance Division were set up; Consumer Loans Underwriting Division and SME Loans Underwriting Division were merged under the name Retail Loans Underwriting Division, and the functions of the Financial Analysis and Credit Information Division were transferred to underwriting divisions; · Branch Network Development Division’s functions were transferred to the Enterprise Architecture Division; · Agile Management Division was set up as part of the efforts to transition to the agile working model; · Agricultural Banking Marketing Division was set up, which is concentrated on agricultural banking; · Investor Relations Division was renamed as Investor Relations and Sustainability Division given the constantly growing importance of the strategic management of sustainability-related activities; · The names of the Commercial Banking Marketing Division and Corporate Banking Marketing and Sales Division were updated as SME Banking Marketing Division, and Corporate and Commercial Banking Marketing Division; · International Financial Institutions Division was renamed as Financial Institutions Division since the division’s fields of activity also covered domestic banks. · Payment Systems Ecosystem Division was set up for the performance of payment systems strategy management, monitoring, e-commerce and ecosystem activities, and in this context, the name of the Card Payment Systems Division was updated as Payment Systems Product Division. 100 İşbank 2020 Annual Report 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 3 year 8 months Professional Experience 29 years Head of Risk Management: Hürdoğan Irmak Term of Office 3 year 18 days Professional Experience 20 years Departments Worked Previously Board of Inspectors, Nonperforming Loans Division, Commercial and Corporate Loans Monitoring & Recovery Division, Corporate Compliance Division Academic Background B.A. Degree from a Domestic University Departments Worked Previously Corporate Loans Underwriting Division, Board of Inspectors, Risk Management Division Academic Background B.S. Degree from a Domestic University Head of Corporate Compliance Division (Compliance Officer): Süleyman H. Özcan Term of Office 6 months Professional Experience 27 years Departments Worked Previously Board of Inspectors, Accounting Division, Change Management Board, Strategy and Corporate Performance Management Division, Investor Relations Division Academic Background B.A. Degree from a Domestic University Head of Internal Control: Hamit Umut Togay Term of Office 6 year 10 months Professional Experience 23 years Departments Worked Previously Board of Inspectors, Retail Banking Product Division, Galata Branch Academic Background 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 2020, 14 Board meetings were held and 12 of them were held by full participation. 747 pages of minutes were recorded for the said meetings, which lasted 66 hours in total. As of 2020 year-end a total of 274 files were reviewed, which split as 215 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 187 loan decisions. A total of 315 files were reviewed on non-credit matters and 315 resolutions were taken. Consequently, 697 Board resolutions were made in 2020, including 195 those that were passed during the meetings. 101 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank Committees Assessments on İşbank Committees İşbank committees presented their decisions and reports to Board of Directors in 2020, 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 reconstituted by the resolution of the Board of Directors dated 29.5.2020 and Nr. 43822 is chaired by Mr Yusuf Ziya Toprak, Vice Chairperson of the Board of Directors. The other member of the Committee is Mr. Ersin Önder Çiftçioğlu, 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. 102 İşbank 2020 Annual Report • 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, • 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 2020, Audit Committee held 50 meetings with full participation and adopted 76 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 which was reconstituted, has two members and as per the resolution of the Board of Directors, dated 29.05.2020, Nr. 43823 the Committee is chaired by Mr. Yusuf Ziya Toprak, the Vice Chairperson of the Board of Directors. The other member of the committee is Mr. Ersin Önder Çiftçioğlu who is a 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 2020 year-end, TRNC Internal Systems Committee held meetings 9 times with full participation of the members and took 11 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 2020, by the evaluation of 86 files under the authority of the Credit Committee, 63 resolutions were adopted with full participation of the members. As per the resolution of the Board of Directors, dated 01.04.2020, Nr. 43752, Chief Executive Officer, Mr. Adnan Bali is the Chairperson of the Committee and regular member, Chairperson Ms. Füsun Tümsavaş and member of the Board of Directors Ms. Feray Demir are the Credit Committee members. Mr. Yusuf Ziya Toprak, Vice Chairperson of the Board of Directors and Mr. Fazlı Bulut, member of the Board of Directors are alternate members of the Credit Committee. 103 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank Committees 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 Mr. Ertuğrul Bozgedik, the Vice Chairperson of the Board of Directors, Ms. Feray Demir, and Mr. Ersin Önder Çiftçioğlu who are members of the Board of Directors as per the Board of Directors’ resolution dated 23.12.2019, Nr. 43455 for the year 2020; has completed its analyses and evaluations regarding certain firms and groups under the authorization of Board of Directors and Credit Committee on 27.03.2020. For the year 2021, the Credit Revision Committee is reconstituted with its members being Füsun Tümsavaş, Chairperson of the Board of Directors and Vice Chairperson Yusuf Ziya Toprak as well as Feray Demir, Ersin Önder Çiftçioğlu, and Mr. Sadrettin Yurtsever Board of Directors members; as per the Board of Directors’ resolution dated 21.12.2020, Nr. 44157. Corporate Social Responsibility Committee The Corporate Social Responsibility Committee held 5 meetings, 2 of them online, in 2020 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. Fazlı Bulut, Durmuş Öztek (as of 01.04.2020), Sadrettin Yurtsever (as of 01.04.2020) and deputy chief executives Mr. Yalçın Sezen and Ms. Senar Akkuş, and Mr. Suat Sözen, Corporate Communications Coordination And General Secretary and Mr. Bülent Yumuşaker, Head of Corporate Communications Division. 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 three members. With the decision n.43988, dated 03.09.2020; Mr. Ersin Önder Çiftçioğlu, Member of the Board, was elected as the Chairperson of the Committee, Ms. Füsun Tümsevaş, Chairperson of Board of Directors, Board Member Mr. Sadrettin Yurtsever, and Head of Investor Relations and Sustainability Ms. Neşe Gülden Sözdinler were elected as Committee Members. As of 2020 year-end, the Corporate Governance Committee convened 4 times with full participation of the members and took 5 decisions. Operational Risk Committee Operational Risk Committee which is established by the Board decision dated 30.04.2020 and numbered 43790, operates to determine the strategies and policies for managing operational risks that Bank may be exposed to, improve the operational risk management framework and strengthen governance model regarding operational risks. Operational Risk Committee is formed to meet at least twice during a calendar year, and the members are listed below. • Yusuf Ziya Toprak: Vice Chairperson of Board of Directors, Head of Audit Committee, Head of Operational Risk Committee. • Adnan Bali: CEO, Head of Credit Committee • Hakan Aran: Deputy Chief Executive • N. Burak Seyrek: Deputy Chief Executive • Sezgin Yılmaz: Deputy Chief Executive • Ertuğrul Senem: Information Security Coordinator • Süleyman H. Özcan: Head of Corporate Compliance Division • H. Umut Togay: Head of Internal Control Division • Hürdoğan Irmak: Head of Risk Management Division • Burcu Nasuhoğlu: Unit Manager of Risk Management Division 104 İşbank 2020 Annual Report Committee functions in coordination with Risk Committee and reports operating results to the Board through Audit Committee. By the end of 2020, Operational Risk Committee had 1 meeting with the attendance of all members and 1 decision have been taken. 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. • Suggesting proposals regarding the determination of risk appetite statement and its amendments to the Board. • Taking measures to establish risk culture in the Bank, creating processes to fulfill the responsibility of supervision, understanding all of the risks arising from the activities of the Bank and supervising the integration of these risks to risk management system of the Bank. Committee Members: • Füsun Tümsavaş: Chairperson of Board of Directors and Head of Risk Committee • Yusuf Ziya Toprak: Vice Chairperson of Board of Directors and Head of Audit Committee • 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 • Süleyman H. Özcan: 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 Subsidiaries Division also attend the meetings. In the Risk Committee meetings held in 2020, risk management practices of İşbank and its subsidiaries under consolidated risk policies have been evaluated, risk reports have been presented to the Committee, the results have been analyzed and decisions regarding the risk management systems and processes were taken. By the end of 2020, the Committee had 12 meetings and 30 decisions have been taken. 105 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management İşbank Committees Sustainability Committee Sustainability Committee has been established for preparing the Bank’s sustainability strategy and policies and submitting them for the approval of the Board of Directors, ensuring coordination within the Bank for determining and implementing sustainability targets and action plans, observing the reflection of sustainability-related issues on strategic business plans, monitoring the development of metrics and targets, and performing tasks related to similar issues. The Committee is the highest authority responsible for sustainability activities in the Bank. The Committee, which was established with the decision of our Board of Directors dated 24.12.2020 an Nr. 44176, has a chairman and twelve members. Mr. Adnan Bali was the Chairman of the Committee, and the members of the committee are Ms. Feray Demir, Mr. Ersin Önder Çiftçioğlu, Ms. Gamze Yalçın, Ms. Senar Akkuş, Mr. Murat Bilgiç, Mr. Ozan Gürsoy, Mr. Şahismail Şimşek, Mr. Yalçın Sezen, Mr. Sezgin Yılmaz, Mr. Suat E. Sözen, Hürdoğan Irmak and Ms. Neşe Gülden Sözdinler. 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 01.04.2020 and Nr. 43757. 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 2020, Remuneration Committee held 6 meetings with full participation of the members and adopted 9 resolutions. 106 İşbank 2020 Annual Report Human Resources Practices at İşbank The coronavirus pandemic that domineered the whole world and our country compelled certain changes in İşbank’s human resources practices from early on in 2020. Even to this backdrop, İşbank successfully implemented its sustainable and value-added growth strategy in the area of Human Resources, acting as an organization setting the future competition and banking business standards with its identity as a dynamic and agile organization within the frame of its vision to pioneer digitalization. A believer in collective working culture and shared wisdom that has internalized these values, the Bank has always acted in keeping with the “people first” notion, prioritized employees’ and their families’ health in Occupational Health and Safety practices, and concentrated on the countermeasures and monitoring in response to the pandemic. Even before the emergence of the disease in our country, written and visual detailed information was shared with the employees; pandemic and crisis management plans were updated, and preparatory steps were taken. Following the announcement of the first case, widescale measures were forthwith enforced, taking into consideration the practices and recommendations of the World Health Organization, the T.R. Ministry of Health, Infectious Diseases Associations, other countries’ institutions and agencies. Numerous steps were taken such as putting all employees with chronic conditions, with infants, and pregnant employees on administrative leave, shifting to rotating working model of home-based working and in-office presence, introduction of flexible working hours, supplementary payments for pandemic to employees physically present at work places, setting up the pandemic communication hotline through which all employees can reach the Occupational Health and Safety Teams and directly the top management including the CEO any time of the day, provision of psychological and medical support and information and online contacts with doctors, introduction of casual dress code at all units including branches, digital training and security implementations, comprehensive cleaning, mask, gloves, ventilation and sanitation measures, etc. During this period, thousands of questions and notifications were responded to which were conveyed by employees through internal communication channels such as email, phone, maximo, and I Have a Suggestion platform. All Covid-19-positive employees were followed up closely; necessary measures and actions were taken to prevent any negative impacts to other employees in the branches/regional offices/Head Office locations where such employees work, and the course of the pandemic at İşbank was reported regularly. Additionally, “Corona Positive/Negative Case Reporting Hotline” was set up in a short period of time, which enables reporting and follow-up of employees’ current status in relation to Covid-19 through the system, and was made available for use by all employees. Upon logging in the system, the procedure covering the measures and actions to be taken are e-mailed to employees and managers. On another note, emergency response plans were renewed for all branches and locations, and pandemic risk assessment reports and pandemic plans were created for all branches and locations. Basic Occupational Health and Safety Training prepared in line with the new regulation was made available for employees use during 2020. In addition, the structure was also set up for issuing and e-mailing the certificates of attendance automatically to those who complete the training. Within the scope of the overall strategy of İşbank that targets healthy and sustainable growth in every aspect, individuals possessing the competencies and qualifications required by the relevant positions were employed using the appropriate assessment tools and methods also in the reporting period. In 2020, 145 new employees were hired in Turkey and 17 abroad in various title groups. The Bank had 23,518 people in total on its payroll as at year-end 2020, 23,193 of them employed domestically and 325 in foreign countries. The onboarding processes were executed on the digital platform in a faster and more user-oriented manner, and the scope of online hiring exam processes were expanded. İşbank MasterClass Digital Development Program, which is a completely digital program designed to attract skilled and successful potential candidates to İşbank, to familiarize them with the Bank, and also to contribute to these students’ personal and professional development, was completed successfully by 51 students, who received their certificates of attendance. Additionally, “İş’te YBL Development Program”, which is conducted in cooperation with Yenibirlider Association, had its second cohort of graduates, and participant selection processes were initiated for the program that will continue under the name Future Hub in the new term. Various career events and workshops designed to enhance İşbank’s position as the “Employer of Choice” among candidates continued at the same speed on the digital platform, and along this line, competitions under various themes (artificial intelligence, machine learning, ideathon, etc.) were organized for the students that will constitute the workforce of the next century. Events held on university campuses were transferred to the digital platform under the name “İşbank Digitalk Career”, which brought the Bank together with nearly 500 students in 16 events. Efforts were started to revamp the existing candidate application system with the aim of enhancing the user experience of candidates applying for a position at İşbank. 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. 107 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Human Resources Practices at İşbank 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 27 identified employees working at İşbank by year-end 2020. In 2020, besides fulfillment of regulatory obligations in Human Resources Management processes, manual processes were systematized, thus increasing their efficacy, practicability, accessibility and efficiency. Also, operational processes were rendered faster with the use of robots. Pharmacy Provision System process and infrastructure were renewed and digitalized so that payments can be realized automatically. In addition, İşbank’s Health Provision System’s (Medigap) process and infrastructure were also upgraded and digitalized to enable automatic payment and the pilot phase is in progress. Within the scope of the digitalization of HR practices and processes, June marked the launch of İŞİM, a mobile application for keeping the communication with employees alive on a 24/7 basis, posting announcements, sending personal messages specific to each employee, and increasing the synergy among employees through campaigns and competitions run on the app. İŞİM reached more than 14 thousand employees in its first 6 months. Through the app that covers profile, Bank announcements, current events, İŞ AİLEM, health, podcast, posts, events, Q&A, and stories tabs, the activities carried out under the heading Employee Communication Program and Platform (ÇİPP) were carried on online during the pandemic. “Morale Chain”, a photo sharing activity for boosting internal motivation carried out in the early months of the pandemic, e-sports tournament that encompassed employees and their children, and guided tours for participation by the whole family were realized. In the digital era, care is taken to make the utmost use of technology for leveraging İşbank’s qualified human resource as the Bank’s digital muscle is reflected in its ways of doing business and processes. Giving the priority to employee health and safety during the pandemic, all training and development activities were rapidly adapted to the emerging conditions. Minimized in number in February, classroom training sessions, academy programs, seminars, on-the-job trainings and other training programs planned to be conducted in physical environments were completely halted in March; the learning and development of employees continued to be supported uninterruptedly during this period through digital classrooms offered via Cisco Webex platform and named as “Live Digital Training” in combination with other digital learning resources. For the employees working remotely, digital learning contents, designed to support their well-being and daily routines through this rough period, were offered via Öğrenme Dünyası (Learning World) portal that is accessible from all devices, anytime and anywhere also from non-İşbank network. In this period when remote-working acquired increased importance, a digital learning content named as “Cyber Security Measures at Home” was designed for employees, which aimed to enhance the awareness of potential cyber security risks that can be faced when working remotely and the measures that can be adopted against them; in addition, the digital learning program named as “Guide for Remote Working” which is prepared in alignment with İşbank’s remote working principles was served to increase the efficiency of remote working and to ensure sustainability of work. With its talent development initiatives, İşbank was awarded with 2020 BEST Award by the Association for Talent Development (ATD) that recognizes organizations that invests in enterprise-wide employee talent development and employs talent development as a strategic tool to achieve the targeted results. In addition, the Bank received two gold medals in “Best Advance in Assessment Utilization to Guide Talent Decisions” and “Best Advance in Succession and Career Management” categories at the Brandon Hall Human Capital Management (HCM) Excellence 2020 Awards, one of the leading international recognition programs in its respective field. Being one of the initiatives realized by benefiting from the means offered by digitalization in keeping with the Bank’s focus on improving employees’ learning experiences, books compiled to help employees -particularly those who will take promotion exams- build on their technical competencies in relation to the banking legislation and the Bank’s practices were offered through Öğrenme Dünyası (Learning World) in e-book format. In Training Catalogue and Management Development Conferences offering development opportunities to employees in line with their individual needs and preferences, training programs dwelling on different topics in the areas of technology, innovation, customer experience, personal and professional development and leadership were offered in order to build on the competencies stand out in “Future of Work” studies. 108 İşbank 2020 Annual Report İşbank is gearing up for the future of work and competencies of the future through learning and development programs and began using game-based assessments and inventories of digital corporate citizenship potentials in addition to applications like competency-based Assessment Center in the recruitment processes carried out with the aim of employing the appropriate human resource aligned with the competencies of the future, whereby candidates were delivered a fair, objective and holistic assessment experience. In order to support the targeted cultural shift and leverage agile principles in the way of working, learning journeys were designed for the teams that started to operate within the scope of agile transformation. Specialized competency development programs were introduced in line with the needs of differentiated roles of employees, who seek to generate constant value while adapting to change rapidly. Studies on design of development programs specific to each chapter or center of excellence are in progress, for maintaining synchronized transfer of knowledge and skills across all tribes. “Diversity and Inclusion” module was added to the career training programs and conferences were organized throughout the year under the headings of “Being a Woman in Professional Life”, “Creating an Egalitarian Language” and “Diversity Management” with the aim of ensuring that diversity and inclusion principles making the foundation of Human Resources and Talent Management practices at İşbank are embraced by all employees and supporting awareness of the importance of guaranteeing diversity through handling individual differences within the organization together and adopting an inclusive culture. Management and leadership development programs were carried on, which are being conducted for managers at different levels and intended to improve development-focused leadership culture that supports İşbank’s vision of “being the bank of the future that generates sustainable value with an inclusive and participative approach”. The second cohort of the Artificial Intelligence Academy was completed, which is intended to support the knowledge and skills of the teams working in the field of artificial intelligence so as to enable them to design artificial learning-supported solutions and decision support systems based on big data, and which is conducted in cooperation with the Koç University. 2021 goals Digital transformation efforts initiated in recruitment processes will be carried on in 2021, and they will be further proliferated with new headings in line with the business requirements of the digital age. Targeted at reducing operational risks and costs, increasing the efficacy and efficiency of the interaction with the target group, and enhancing candidate satisfaction, 2021 plans include efficient use of artificial intelligence and decision support systems, consideration of mobile solutions compatible with the new generation and needs of the digital era, perpetuation and diversification of activities for university students, and carrying out activities that will attract the best candidates who will steer the future of İşbank and contribute value to it. Another goal for 2021 is to share with the employees the transfers that are being managed based on a transparent, fair and rational evaluation process and to facilitate their traceability, on condition that the evaluation principles for transfer requests that have been covered in the Collective Agreement so far will be adhered to. Along this line, “Transfer Scoring” system was introduced. Upon the transition to the Scoring System, family unity and health status of employees working under titles other than managers will continue to have priority and will be given weight in scoring criteria, as has been customary; however, possibility will also be provided for employees who have long been requesting a transfer for reasons other than the afore mentioned to be transferred to the requested locations in view of their waiting periods and in line with the score they earn. Devised in accordance with the rules in the Collective Agreement, the new structure is intended to let a high number of employees requesting transfer to locations without staffing needs track the ranking of their requests and to let them plan their lives by taking action accordingly, as well as enabling transparent follow-up of transfer requests. In 2021, developments will continue to move the processes that continue to be handled manually to the system so that employees will be given easier reach to HR Practices processes and perform their procedures easily. Appointments and transfers that the Career Management Unit performs through Sinerji will be moved to İKON and the process will be automated, whereas the hard copy declaration taken by the Social Affairs Unit will be digitalized. As part of the targets 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 to improve operational processes by migrating them to the system by utilizing robots. Efforts are ongoing to enrich the İŞİM application with new features. ÇİPP (Employee Communication Program and Platform) activities, on the other hand, are planned to continue online given the circumstances, and it is planned to add workshops to guided trips. In 2021, onboarding and basic OHS refresher trainings will continue to be implemented online to ensure satisfaction of İşbank’s legal obligations and to 109 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Human Resources Practices at İşbank 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. On another hand, weight will be given to preventive healthcare practices at İşbank to help the employees lead a physically and mentally healthy life, to follow-up and extend support to those with chronic and prechronic conditions, to preclude the problems they might be faced with 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 healthcare practices with OHS practices, and thus to more effectively follow up healthcare processes. Accordingly, the steps for the purchasing of a new software have been completed. The system will most likely be started to be used during 2021 upon completion of the efforts coordinated by the Information Technologies Division and Softtech. To enable talent conversion in analytical and digital roles, it is planned to introduce the Data Literacy Certification Program in 2021. Basically intending to build on employees’ knowledge and skills in understanding and working with the data and to ensure a broad-based adoption of the culture of data-driven decision-making, the program will start with basic training accessible by all employees, and will be offered in a structure where training journeys will be customized as it moves towards advanced analytical roles. In addition, work started regarding the design of a new academy training program on data engineering for employees working as data scientists. The first cohort of Data Engineering Academy is targeted to be completed during 2021. In line with the advancements in technology and changing user habits, the new digital learning infrastructure development project is in progress, which is intended to offer personalized learning contents to employees in a modern setting. This project is targeted to be completed and introduced employees during 2021. 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 2020, the loans extended to the Group companies had all been significantly below the regulatory risk limits. 110 İşbank 2020 Annual Report 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; • 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. 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; • Service received from Definex Danışmanlık A.Ş. for the development of credit process optimization software. • 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; • Service received from Iron Mountain Arşivleme Hizmetleri A.Ş.. regarding physical archive services, • 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; • Service received from İnfoteks Bilgisayar Elektronik Telekom San. Tic. LTD. Şti. regarding Bank application work and maintenance services in new generation cash registers; • 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; • Service received from Key Yazılım Çözümleri A.Ş. regarding expertise software, • 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; • International transportation service received from Loomis Güvenlik Hizmetleri A.Ş. • Customer collection, transportation, processing and storage service received from Loomis Güvenlik Hizmetleri A.Ş., • The service purchased from Obase Bilgisayar Danışmanlık Hizmetleri Ticaret San. A.Ş. for outsourcing in data analytics studies; • Secure e-payment infrastructure service related to electronic commerce purchased from Payten Teknoloji A.Ş. • 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 Postkom 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; • The service received from Mikrosaray Mikrobilgisayar Paz. ve Tic. A.Ş. regarding Bank application work and maintenance services in 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; • The service received from Token Finansal Teknolojiler A.Ş. regarding Bank application work and maintenance services in ÖKCs 111 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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 which is published with the approval of our Board of Directors. 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. Under the section of the “Sustainability Principles Compliance Framework” in our Annual Report, the Bank’s practices and information regarding the principles within the scope of the regulation with the same title published by the Capital Markets Board are also included. Corporate Governance Compliance Report Company Compliance Status Yes Partial No Exempted Not Applicable Explanation Corporate Governance Compliance Report 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. X X X X X 1.3.11 - The General Shareholders' Meeting was held open to the public, including the stakeholders, without having the right to speak. X 112 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. İşbank 2020 Annual Report Company Compliance Status Yes Partial No Exempted Not Applicable Explanation 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. 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. X X X X X X X X X X X X X X X X X X In our Bank, minority rights are exercised in line with the related legislation. X Information considered necessary for international investors is available on the Bank’s website, in the Investor Relations section also in English. 113 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Corporate Governance Compliance Report Company Compliance Status Yes Partial No Exempted Not Applicable Explanation İşbank employees participate in the management of the Bank via their beneficiary status in İşbank Members’ Supplementary Pension Fund, which holds 37.08% of İşbank shares. Performance related compensation is used in certain positions. X X 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. 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. X X X X X X X X X X X X X 114 İşbank 2020 Annual Report Company Compliance Status Yes Partial No Exempted Not Applicable Explanation 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. X X X X X X X X X X 4.2.8 - The company has subscribed to a Directors and Officers liability insurance covering more than 25% of the capital. X 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. X 4.3.10 - At least one member of the audit committee has 5 years of experience in audit/accounting and finance. X Our Bank’s Board of Directors and Executives are insured 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, however, the coverage of insurance is below the mentioned amount. No target ratio is set for the number of female members in the Board of Directors. As of the end of 2020, 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 18%. 115 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Corporate Governance Compliance Report Company Compliance Status Yes Partial No Exempted Not Applicable Explanation 4.4. BOARD MEETING PROCEDURES 4.4.1-Each board member attended the majority of the board meetings in person. X X X X X X X X 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 116 X X In 2020, 7 meetings of the 14 meetings were held electronically due to pandemic conditions. On the other hand, physical signatures of our members of the Board of Directors were taken for the resolutions subject to these meetings. 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. 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. İşbank 2020 Annual Report Corporate Governance Information Form 1. SHAREHOLDERS 1.1. Facilitating the Exercise of Shareholders Rights The number of investor meetings (conference, seminar/ etc.) organised by the company during the year 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) Whether the company provides materials for the General Shareholders' Meeting in English and Turkish at the same time 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 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 Identified stakeholder groups that participated in the General Shareholders' Meeting, if any 1.4. Voting Rights Whether the shares of the company have differential voting rights 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 1.5. Minority Rights Whether the scope of minority rights enlarged (in terms of content or the ratio) in the articles of the association 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 In 2020, İşbank participated 9 conferences online for stock and bond investors. In these events, a total of 97 meetings were conducted. In addition to 5 investor events in teleconference and videoconference format, where investors participated via remote access, 229 meetings were held via online connection. - - https://www.kap.org.tr/en/Bildirim/823675 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 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. None Article 47 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 2020. No - 37,08% No - Home Page >About Us > Investor Relations > Corporate Governance > Dividend Distribution Policy 117 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Corporate Governance Information Form 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. PDP link to the related general shareholder meeting minutes in case the board of directors proposed to the general assembly not to distribute dividends 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 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 2. DISCLOSURE AND TRANSPARENCY 2.1. Corporate Website Specify the name of the sections of the website providing the information requested by the Principle 2.1.1. 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. 118 Banking Regulation and Supervision Agency has sent an evaluation regarding the year 2019 to The Banks Association of Turkey, which indicated that the profits and reserves should not be distributed in such a way to cause a cash outflow, emphasizing the necessity to maintain the prudent policy to keep the equity structures of the banks strong. Out of total TL 6,071,460,806.58, which is composed of our net profit for the year 2019 amounting to TL 6,067,586,899.23 and our previous years’ profit subject to tax exemption that was created during the period as a result of TAS-16 Tangible Fixed Assets accounting standard amounting to TL 3,873,907.35; it has been decided to transfer TL 26,394,081.00 resulting from real estate sales gains to the relevant reserves to be kept in a special fund account and capitalized when necessary, reserve TL 20,000,000.00 as venture capital funds to be directed to venture capital investment trusts and funds, Out of the remaining TL 6,025,066,725.58, it has been decided to allocate legal reserves in the amount of TL 301,253,336.28 in accordance with subparagraph (a) of Article 58 of our Bank’s Articles of Association and the remaining TL 5,723,813,389.30 will be transferred to extraordinary reserves. https://www.kap.org.tr/en/Bildirim/833671 31 March 2020 0 86.68% 0.00003% 86.68% Home Page > About Us > Investor Relations > Disclosures to BIST - - 420 https://www.kap.org.tr/en/Bildirim/833671 Home Page>About Us>Investor Relations Home > About Us > Investor Relations > Corporate Overview > Corporate Information > Ownership Structure Turkish and English İşbank 2020 Annual Report 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 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 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 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 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 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 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% 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 3. 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 The number of definitive convictions the company was subject to in relation to breach of employee rights 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 Additional Information Regarding the Related Legislation İşbank Committees Information about the Meetings of the Board of Directors No legislation change that would significantly impact İşbank activities has occurred Unconsolidated Financial Statements as at and for the Year Ended 31 December 2020 with Independent Audit's Report Thereon - Information on Other Provisions None İşbank has no cross ownership subsidiaries. Human Resources Practices at İşbank / Corporate Social Responsibility Activities Compensation principles for Bank employees are determined by the Collective Bargaining Agreement which is shared with the employees through İşbank's Corporate Intranet Portal. None 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 37.08% of İşbank shares. 119 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Corporate Governance Information Form 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. The number of definitive convictions the company is subject to in relation to health and safety measures 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 4. BOARD OF DIRECTORS‑I 4.2. Activity of the Board of Directors Date of the last board evaluation conducted Whether the board evaluation was externally facilitated Whether all board members released from their duties at the GSM Name(s) of the board member(s) with specific delegated duties and authorities, and descriptions of such duties Number of reports presented by internal auditors to the audit committee or any relevant committee to the board 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 Name of the Chairman Name of the CEO If the CEO and Chair functions are combined: provide the link to the relevant PDP announcement providing the rationale for such combined roles 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 The name of the section on the corporate website that demonstrates current diversity policy targeting women directors The number and ratio of female directors within the Board of Directors 120 Board of Directors create succession plans. Home Page>About Us>Sustainability>Our Policies There isn't an employee stock ownership programme Home Page>About Us>Sustainability>Our Policies None Home Page > About Us > Investor Relations > Corporate Governance > Ethical Principles Home Page>About Us>Sustainability>Our Reports Home Page>About Us>Sustainability>Our Policies 24-25.12.2020 No Yes No delegation of authority in İşbank 68 Audit Committee's Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period Füsun Tümsavaş Adnan Bali Chairman and General Manager seats are held by different persons Our Bank’s Board of Directors and Executives are insured 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, however, the coverage of insurance is below the mentioned amount. On the other hand, this issue has not been disclosed on the Public Disclosure Platform. None 2 / 18% İşbank 2020 Annual Report Whether The Director Has At Least 5 Years’ Experience On Audit, Accounting And/Or Finance Or Not Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Composition of Board of Directors Name, Surname of Board Member Whether Executive Director Or Not Whether Independent Director Or Not The First Election Date To Board Link To PDP Notification That Includes The Independency Declaration Whether the Independent Director Considered By The Nomination Committee Whether She/ He is the Director Who Ceased to Satisfy The Independence or Not FÜSUN TÜMSAVAŞ Non-executive YUSUF ZİYA TOPRAK ADNAN BALİ Non-executive Executive FERAY DEMİR Non-executive ERSİN ÖNDER ÇİFTÇİOĞLU FAZLI BULUT Non-executive Non-executive DURMUŞ ÖZTEK Non-executive Non-executive Non-executive RECEP HAKAN ÖZYILDIZ MUSTAFA RIDVAN SELÇUK AHMET GÖKHAN SUNGUR Non Independent Director Independent Director Non Independent Director Non Independent Director Independent Director Non Independent Director Non Independent Director Non Independent Director Non Independent Director 28 March 2008 - 31 March 2020 1 April 2011 25 March 2016 Not Considered - - 31 March 2017 Not Considered 29 March 2019 31 March 2020 31 March 2020 31 March 2020 - - - - - No - - No - - - - Non-executive Independent Director 31 March 2020 Considered No Home > About Us > Investor Relations > Disclosures to BIST SADRETTİN YURTSEVER Non-executive Non Independent Director 31 March 2020 - - Yes 4. 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 Whether the board uses an electronic portal to support its work or not Number of minimum days ahead of the board meeting to provide information to directors, as per the board charter The name of the section on the corporate website that demonstrates information about the board charter Number of maximum external commitments for board members as per the policy covering the number of external duties held by directors 4.5. Board Committees Page numbers or section names of the annual report where information about the board committees are presented Link(s) to the PDP announcement(s) with the board committee charters 7 98.35% Yes 3 work days Articles of Association None İşbank Committees https://www.kap.org.tr/tr/Bildirim/262622 121 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Corporate Governance Information Form Composition of Board Committees‑I Names Of The Board Committees Corporate Governance Committee Corporate Governance Committee Corporate Governance Committee Corporate Governance 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 Other Other Other Other Other Other Other Other Other Other Other 122 Name Of Committees Defined As “Other” In The First Column 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 Credit Revision Committee Credit Revision Committee Credit Revision Committee Credit Revision Committee Credit Revision Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Corporate Social Responsibility Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Operational Risk Committee Name‑Surname of Committee Members Ersin Önder Çiftçioğlu Füsun Tümsavaş Sadrettin Yurtsever Neşe Gülden Sözdinler Yusuf Ziya Toprak Ersin Önder Çiftçioğlu Füsun Tümsavaş Feray Demir Adnan Bali Füsun Tümsavaş Feray Demir Yusuf Ziya Toprak (Alternate Member) Fazlı Bulut (Alternate Member) Yusuf Ziya Toprak Ersin Önder Çiftçioğlu Füsun Tümsavaş Yusuf Ziya Toprak Feray Demir Ersin Önder Çiftçioğlu Sadrettin Yurtsever Feray Demir Sadrettin Yurtsever Fazlı Bulut Durmuş Öztek Senar Akkuş Suat E. Sözen Bülent Yumuşaker Yalçın Sezen Füsun Tümsavaş Yusuf Ziya Toprak Adnan Bali Senar Akkuş Murat Bilgiç Ebru Özşuca Süleyman H. Özcan Hürdoğan Irmak Yusuf Ziya Toprak Adnan Bali Hakan Aran N. Burak Seyrek Sezgin Yılmaz Ertuğrul Senem Süleyman H. Özcan H. Umut Togay Hürdoğan Irmak Burcu Nasuhoğlu Whether Committee Chair or Not Yes No No No Yes No Yes No Yes No No No No Yes No No No No No No No No No No No No No No Yes No No No No No No No Yes No No No No No No No No No Whether Board Member or Not 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 Board member Board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member İşbank 2020 Annual Report Other Other Other Other Other Other Other Other Other Other Other Other Other Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Sustainability Committee Adnan Bali Ersin Önder Çiftçioğlu Feray Demir Gamze Yalçın Senar Akkuş Murat Bilgiç Ozan Gürsoy Şahismail Şimşek Yalçın Sezen Sezgin Yılmaz Suat E. Sözen Hürdoğan Irmak Neşe Gülden Sözdinler Yes No No No No No No No No No No No No Board member Board member Board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member Not board member 4. 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) 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 Committe which was established within the context of the related legislation is presented in "İşbank Committees" section of the Annual Report. 4.6. Financial Rights 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) 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) CEO’s Message Home Page > About Us > Investor Relations > Corporate Governance > Remuneration Policy Additional Information Regarding the Related Legislation Composition of Board Committees‑II Names of The Board Committees Corporate Governance Committee Audit Committee Remuneration Committee Other Other Other Other Other Other Other Name of committees defined as “Other” in the first column The Percentage of Non‑ executive Directors 75% The Percentage of Independent Directors in The Committee 25% The Number of Meetings Held In Person 3 physical, 1 online The Number Of Reports on its Activities Submitted To The Board - Credit Committee Turkish Republic of Northern Cyprus Internal Systems Committee Credit Revision Committee Corporate Social Responsibility Committee Risk Committee Operational Risk Committee Sustainability Committee 100% 100% 80% 100% 100% 50% 50% 50% 23% 100% 0% 20% 100% 40% 0% 12.5% 10% 8% 50 6 - 9 11 3 physical, 2 online 6 physical, 6 online 1 online - 12 - - 2 1 6 13 - - 123 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Sustainability Principles Compliance Framework COMPLIANCE DEFINITION Yes Home > About Us > Sustainability > Our Policies Yes Yes Yes 2019 Integrated Report, page 19-25 2020 CDP Climate Change Report, page 19-25 2020 Annual Report, İşbank Committees, Sustainability Committee, page 106 Home > About Us > Sustainability > Our Organization 2019 Integrated Report, page 19-25 2020 CDP Climate Change Report, page 19-25 Yes 2019 Integrated Report, page 35,43, 51, 63, 73, 79, 87 Yes 2019 Integrated Report, page 46-49, 57-63 Home > About Us > Sustainability > Our Reports Yes 2019 Integrated Report 2020 CDP Climate Change Report Yes Home > About Us > Sustainability Home > About Us > Investor Relations Yes 2019 Integrated Report, page 16-17 Yes Yes 2019 Integrated Report, page 30-31 https://www.kap.org.tr/en/Bildirim/890391 Yes 2019 Integrated Report, page 100-103 PRINCIPLES A. General Principles A1. Strategy, Policy and Targets The Board of Directors determines material ESG issues, risks and opportunities and creates ESG policies accordingly. In terms of the effective implementation of these policies; internal directives, business procedures of Companies etc. can be prepared. The Board of Directors takes decisions for these policies and they are publicly disclosed. Determines the company Strategy in line with the ESG policies, risks and opportunities. It determines and publicly discloses its short and long term goals in line with the Company Strategy and ESG policies. A2. Implementation/Monitoring It determines and publicly discloses the committees / units responsible for the implementation of ESG policies. The responsible committee / unit reports the activities carried out within the scope of the policies to the Board of Directors at least once a year and in any case within the maximum periods determined for the public disclosure of the annual activity reports in the relevant regulations of the Board. It forms implementation and action plans in line with the determined short and long term targets and publicly discloses them. It determines the Key ESG Performance Indicators (KPI) and announces them on a yearly basis. In the presence of verifiable data, it presents KPIs with local and international sector comparisons. Discloses innovation activities that improve sustainability performance for business processes or products and services. A3. Reporting It reports its sustainability performance, goals and actions at least once a year and makes it public. Discloses the information on sustainability activities within the scope of the annual report. It is essential to share information that is important for stakeholders in understanding the position, performance and development of the company in a direct and concise manner. It can also discloses detailed information and data on the corporate website, and prepare separate reports that directly meet the needs of different stakeholders. It exercises maximum care in terms of transparency and reliability. It objectively explains all kinds of developments about material issues in disclosures and reporting within the scope of the balanced approach. It gives information about which of the United Nations (UN) 2030 Sustainable Development Goals its activities are related to. Makes disclosure regarding the lawsuits filed and / or concluded against environmental, social and corporate governance issues. A4. Verification If verified by independent third parties (independent sustainability assurance providers), it discloses its sustainability performance measurements to the public and endeavors to increase such verification processes. 124 İşbank 2020 Annual Report PRINCIPLES B. Environmental Principles Discloses its policies and practices, action plans, environmental management systems (known by the ISO 14001 standard) and programs in the field of environmental management. Complies with environmental laws and other relevant regulations and discloses them. Explains the limitations of the environmental report to be included in the report to be prepared within the scope of the Sustainability Principles, reporting period, reporting date, data collection process and reporting conditions. Describes the highest level responsible, relevant committees and duties in the company on the issue of environment and climate change. Describes the incentives it offers for the management of environmental issues, including the achievement of goals. Explain how environmental matters are integrated into business goals and strategies. Discloses the sustainability performances for business processes or products and services and the activities to improve this performance. Explains how it manages environmental issues not just in terms of direct operations but throughout the company’s value chain and integrates suppliers and customers into its strategies. It explains whether it is involved in policy-making processes on environmental issues (sectoral, regional, national and international), its cooperation with the associations, related organizations and non-governmental organizations it is a member of, and the tasks it has taken, if any, and the activities it supports. Reports information on its impacts in a periodically comparable manner within the scope of environmental indicators (Greenhouse gas emissions (Scope-1 (Direct), Scope-2 (Energy indirect), Scope-3 (Other indirect)), air quality, energy management, water and wastewater management, waste management, biodiversity impacts) Describes the standard, protocol, methodology and base year details used to collect and calculate its data. Discloses the status of environmental indicators for the reporting year (increase or decrease) in comparison with previous years. Sets short and long term goals and discloses these goals to reduce its environmental impact. It is recommended that these goals be determined based on Science as suggested by the United Nations Conference of the Parties on Climate Change. If there is progress in the reporting year with respect to the targets set before, it provides information on the subject. COMPLIANCE DEFINITION Yes Yes Yes Yes Yes Yes 2019 Integrated Report, page 78 2019 Integrated Report, page 38-43 2019 Integrated Report, page 3, 96-99 2020 CDP Climate Change Report, page 1 2020 Annual Report, İşbank Committees, Sustainability Committee, page 106 2020 Annual Report, Executive Committee, page 96-97 2020 CDP Climate Change Report, page 5-6 2019 Integrated Report, page 18-25 2020 CDP Climate Change Report, page 17-18 Yes 2019 Integrated Report, page 57-63, 74-79 2019 Integrated Report, page 74-76 Yes Yes Yes Yes Yes Yes Home > About Us > Sustainability > Our Policies > Supplier Code of Conduct 2020 Annual Report, Sustainability at İşbank, page 86-87 2019 Integrated Report, page 88 Home > About Us > Investor Relations > 2020 Investor Presentation (page 23) Home > About Us > Sustainability > Environmental and Social Impacts Home > About Us > Sustainability > Environmental and Social Impacts Home > About Us > Sustainability > Environmental and Social Impacts 2020 CDP Climate Change Report, page 25-34 2020 Annual Report, Sustainability at İşbank, page 86-87 2020 CDP Climate Change Report, page 20 125 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Sustainability Principles Compliance Framework PRINCIPLES Discloses its strategy and actions for combating the climate crisis. COMPLIANCE DEFINITION 2020 Annual Report, Sustainability at İşbank, page 86-87 Describes the program or procedures for preventing or minimizing the potential negative impact of the products and / or services it offers; explains the actions to reduce greenhouse gas emissions of third parties. Discloses the actions taken to mitigate its environmental impacts, the total number of projects and initiatives carried out along with the environmental benefits / benefits cost savings they provide. It reports the total energy consumption data (excluding raw materials) and explains the energy consumption as Scope-1 and Scope-2. Provides information on electricity, heat, steam and cooling generated and consumed in the reporting year. Carries out studies on increasing the use of renewable energy, transition to zero or low carbon electricity and explains these studies. Discloses data on its renewable energy production and consumption. Develops energy efficiency projects and explains the amount of energy consumption and emission reduction enabled by these studies. Reports the amount of water withdrawn, used, recycled and discharged from underground or aboveground, its sources and procedures (Total water withdrawal by source, water sources affected by water withdrawal; percentage and total volume of recycled and reused water, etc.). Discloses whether its operations or activities are included in any carbon pricing system (Emission Trading System, Cap & Trade or Carbon Tax). Discloses the carbon credit information accumulated or purchased during the reporting period. Yes 2020 CDP Climate Change Report, page 17-25 Yes 2019 Integrated Report, page 55-58 Yes 2019 Integrated Report, page 77-78 Yes Yes Yes Yes Yes Yes Home > About Us > Sustainability > Environmental and Social Impacts > Environmental Indicators Home > About Us > Sustainability > Environmental and Social Impacts > Environmental Indicators 2020 Annual Report, Sustainability at İşbank, page 86-87 2020 Annual Report, Sustainability at İşbank, page 86-87 2020 CDP Climate Change Report, page 23-25, 31-32 2019 Integrated Report, page 74-79 Home > About Us > Sustainability > Environmental and Social Impacts > Environmental Indicators Irrelevant No 2019 Integrated Report, page 96-99 İşbank is the only member from Turkey to participate in the working group established within the International Finance Institute to expand the voluntary carbon markets. Carbon credit markets are closely monitored and development opportunities will be evaluated. There are no carbon credits accumulated or purchased during the reporting period. However, the Bank will be able to purchase carbon credits in order to reduce its emissions to a minimum level in the following years, in line with its medium and long term emission reduction and carbon neutral targets. 126 İşbank 2020 Annual Report PRINCIPLES Explains the details if carbon pricing is applied within the company. COMPLIANCE Discloses all compulsory and voluntary platforms where reports its environmental information. C. Social Principles C1. Human Rights and Employee Rights Forms a Human Rights and Employee Rights Policy with a commitment to fully comply with the Universal Declaration of Human Rights, ILO Conventions which Turkey has confirmed and the legal framework and regulations governing the operation of corporate life in Turkey. Discloses the policy in question and the roles and responsibilities associated with its implementation. Provides equal opportunity in recruitment processes. Considering the supply and value chain effects, it includes fair labor, improvement of labor standards, women's employment and inclusion issues (such as women, men, religious belief, language, race, ethnic origin, age, disability, refugee, etc.) in its policies. Describes the measures taken throughout the value chain for the protection of groups sensitive to certain economic, environmental, social factors (low-income groups, women, etc.) or securing minority rights / equal opportunities Reports developments regarding discrimination, inequality, human rights violations, forced labor and corrective practices. Explain the regulations to prevent child labor. Explains policies regarding investment in employees (training, development policies), compensation, vested benefits, right to unionize, work / life balance solutions and talent management. Determines dispute resolution processes by creating mechanisms for employee complaints and dispute resolution. It regularly explains the activities carried out to ensure employee satisfaction. Creates occupational health and safety policies and makes them public. Explain the precautions and accident statistics taken to prevent work accidents and to protect health. DEFINITION At this stage, there is no carbon pricing practice in our bank. On the other hand, all activities of our Bank are in a continuous development with the ESG focus, and the implementation of the carbon pricing practice will be evaluated in the following period. Home > About Us > Sustainability > Environmental and Social Impacts > Environmental Indicators 2020 CDP Climate Change Report 2019 Integrated Report Home > About Us > Sustainability > Our Policies > Human Rights and Human Resources Home > About Us > Sustainability > Our Policies > Human Rights and Human Resources Home > About Us > Sustainability > Our Policies > Supplier Code of Conduct No Yes Yes Yes Yes 2019 Integrated Report, page 57-63 Yes 2019 Integrated Report, page 106 Yes Yes 2020 Annual Report, Human Resources Practices at İşbank, page 107-110 Home > About Us > Investor Relations > Corporate Governance > Remuneration Policy 2019 Integrated Report, page 64-73 Home > About Us > Sustainability > Our Policies > Occupational Health and Safety Policy 2019 Integrated Report, page 94 Creates and publicly discloses personal data protection and data security policies. Yes Home > Privacy Policy 127 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Sustainability Principles Compliance Framework PRINCIPLES Creates an ethical policy (including work, work ethics, compliance processes, advertising and marketing ethics, open information, etc.) and discloses it to the public. Explains the work within the scope of social investment, social responsibility, financial inclusion and access to finance. Organizes information meetings and training programs for employees on ESG policies and practices. C2. Stakeholders, International Standards and Initiatives Carries out its activities in the field of sustainability by taking into account the needs and priorities of all stakeholders (employees, customers, suppliers and service providers, public institutions, shareholders, society and non-governmental organizations, etc.). Regulates and publicly discloses a customer satisfaction policy regarding the management and resolution of customer complaints. Conducts stakeholder communication continuously and transparently; It explains which stakeholders, for what purpose, on what issue and how often it communicated, and the developments in sustainability activities. Publicly discloses the international reporting standards it has adopted (Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board (SASB), Climate- Related Financial Disclosures Task Force (TCFD) etc.). Publicly discloses the international organizations or principles (Equator Principles, United Nations Environment Program Finance Initiative (UNEP-FI), United Nations Global Principles (UNGC), United Nations Principles for Responsible Investment (UNPRI) etc.) which it is a signatory or member of, and international principles adopted (International Capital Market Association (ICMA) Green / Sustainable Bond Principles). Makes concrete efforts to be included in Borsa Istanbul Sustainability Index and international sustainability indices (Dow Jones Sustainability Index, FTSE4Good, MSCI ESG Indices, etc.). COMPLIANCE DEFINITION Yes Yes Yes Home > About Us > Investor Relations > Corporate Governance > Ethical Principles 2019 Integrated Report, page 80-87 2020 Annual Report, Sustainability at İşbank, page 86-87 2019 Integrated Report, page 39-97 Yes 2019 Integrated Report, page 16-17 Yes https://www.isbank.com.tr/en/contact-us https://www.isbank.com.tr/en/contact-form https://www.isbank.com.tr/iletisim-formu-takip 2019 Integrated Report, page 49-50 Yes 2019 Integrated Report, page 91 Yes 2019 Integrated Report, page 3 2020 CDP Climate Change Report Yes 2020 Annual Report, Sustainability at İşbank, page 86-87 Yes 2020 Annual Report, Sustainability at İşbank, page 86-87 128 İşbank 2020 Annual Report PRINCIPLES D. Corporate Governance Principles Makes maximum effort to comply with all Corporate Governance principles as well as the mandatory Corporate Governance principles within the scope of the Capital Markets Board Corporate Governance Communiqué numbered II-17.1. Takes into account the sustainability issue, the environmental impacts of its activities and the principles in this regard while determining its corporate management strategy. Takes the necessary measures to comply with the principles regarding the stakeholders and to strengthen the communication with the stakeholders and applies to the opinions of stakeholders in determining the measures and strategies in the field of sustainability as stated in the Corporate Governance Principles. Works on raising awareness on the issue of sustainability and its importance through social responsibility projects, awareness activities and trainings. Strives to become a member of international standards and initiatives on sustainability and to contribute to studies. Explains policies and programs for the fight against bribery and corruption and the principle of tax integrity. COMPLIANCE DEFINITION Yes Yes 2020 Annual Report, Corporate Governance Compliance Report, page 112-116 2020 Annual Report, Corporate Governance Information Form, page 117-125 2019 Integrated Report, page 16-17, 36-43 2020 CDP Climate Change Report, page 2 Yes 2019 Integrated Report, page 16-17 Yes Yes Yes 2020 Annual Report, Corporate Social Responsibility Activities, page 80-85 2019 Integrated Report, page 80-87 2020 Annual Report, Sustainability at İşbank, page 86-87 2019 Integrated Report, page 88 Home > About Us > Sustainability > Our Policies > Anti-bribery and Anti-corruption The internet address where the Bank’s Anti-Bribery and Anti- Corruption Policy can be accessed is given above, and detailed information about its tax liability can be found under the heading “Explanations on Tax Applications”. Home > About Us > Investor Relations > Publications and Results 2019 Integrated Report 2020 CDP Climate Change Report 129 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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. The Board of Inspectors conducts inspections, 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 154 auditors 1, 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 depending 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 2020, The Board undertook audits of 186 domestic and 4 overseas branches, 3 Head Office divisions, 5 subsidiaries, 3 Regional Directorates subject to Retail Loans Underwriting Division, top 200 companies with the highest risk in the Bank. Moreover, - Model, - Sustainability Management System, - Central Counterparty Practice, - Valuation Process, - Asset Custody Service, - Policy for Combating Financial Crimes And Sanctions (current name of the policy) - Compliance Policy on Treasury Backed Guarantees, - ATM Channel, - TFRS 9, - Compliance Policy on Personal Data Protection Law, - Customer Relationship Program, - Compliance Policy on Good Practice Guidelines for Risk Center Data Security are audited. Audits of 22 domestic branches, 1 Head Office division, Model Audit, Asset Custody Service, Sustainability Management System, Liquidity Risk Management and 4 subsidiaries which are started in 2020, 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. 1Junior and senior auditors are combined. 130 İşbank 2020 Annual Report According to the results of the banking processes and IT audits conducted in 2020, 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 2020. During 2020, Data Analytics team continued the development and maintenance activities of; - the Human Resources Risk Matrix, which is the basis of personnel related risks determination, - the Branch based Credit Risk Matrix, which is the basis for the determination of the credit portfolio to be audited in a risk-focused way, - the other applications that provide data for internal fraud detection and investigation activities. 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. 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. In accordance with the Bank’s Sustainability Policy, control activities regarding the operations carried out within the scope of the Sustainability Management System were conducted. In addition, in terms of assessment and management of environmental impacts, the Bank complies with the international ISO 14001 Environmental Management System standards, and the “internal review” activities defined in this system were carried out by the Internal Control Division. 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. 131 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Audit Committee’s Assessments on the Operation of Internal Control, Internal Audit and Risk Management Systems and Its Activities in the Reported Period Compliance Compliance is the foremost duty and responsibility of all managers and employees of the Bank at any level. The functions and activities regarding compliance executed in the Head Office Divisions, Branches of the Bank local and abroad, and its subsidiaries 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 in line with the materiality and risk-based approach and control this risk in an appropriate and efficient manner and in this regard to execute and manage the activities of the Bank continuously in compliance with the relevant laws, regulations and standards. The Bank oversees the effectiveness of corporate compliance activities in its subsidiaries as well. 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 three sub-units, namely, Regulatory 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 fiscal offences and sanctions 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. Ersin Önder Çiftçioğlu Member of the Board and the Audit Committee Yusuf Ziya Toprak Vice Chairperson of the Board of Directors and Chairperson of the Audit Committee 132 İşbank 2020 Annual Report Explanations on Financial Position, Profitability and Solvency İşbank increased its total assets by 26.9% to TL 593.9 billion by the end of 2020 compared to the end of the previous year, and retained its title as “Turkey’s largest private bank”. In the same period, İşbank also maintained its leader position among private banks in terms of total loans, total deposits and shareholders’ equity. The Bank’s total cash loans reached TL 345.2 billion as of the end of 2020. Compared to the previous year-end, TL loans increased by 34.5% and FC loans decreased by 5.8% when adjusted for the impact of exchange rate. As at year-end 2020, loans and securities portfolio accounted for 58.1% and 18.4% of total assets, respectively. Maintaining its effective risk management and healthy growth policy in loan underwriting processes, İşbank’s non-performing loan ratio was realized at 5.6% at 2020 year-end. In line with its strategy of being the closest bank to the customer, İşbank carried on with its multidimensional banking services with its widespread branch network and diversified digital service platforms, and continued to be the primary choice of savers. In 2020, İşbank maintained its leadership among private banks in total deposits and FC deposits. İşbank’s total deposits grew by 24.7% and reached TL 368.9 billion by the end of 2020. While TL deposits increased by 2.5% compared to the end of the previous year, the increase in FC deposits was 13.5% when adjusted for the exchange rate. As of 2020 year-end, the share of demand deposits in total deposits was 41.7%. Accounting for 62.1% of liabilities by the end of 2020, 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 extend the maturity profile of liabilities. The share of İşbank’s non-deposit funding sources in total liabilities was 19.6% as of the end of 2020. The Bank’s shareholders’ equity reached TL 67.8 billion at the end of 2020, up by 15.1% compared to the previous year-end. Maintaining its solid capitalization, İşbank’s capital adequacy ratio stood at 18.7% at the end of the year. In 2020, İşbank booked a net profit of TL 6.8 billion and achieved a return on average on equity of 10.9% and a return on average on assets of 1.3%. 133 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management 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 2021, the course of the epidemic, the results of the vaccine studies and the monetary policies to be followed by developed countries are expected to affect the global growth. Accordingly, it seems likely that in 2021, global liquidity is predicted to remain high in an environment where expansionary monetary policies are expected to continue. Hence, the risk appetite towards developing countries is expected to be strong given that there is no significant problem in COVID-19 vaccine roll-out and the inflationary outlook of the developed countries. Considering the precautions taken by legal authorities to reduce the effects of pandemic are expected to be lifted gradually, it is anticipated that the risks regarding asset quality will be in the spotlight in 2021. These evaluations are included in the financial statement footnotes. Due to the COVID-19 pandemic since March of 2020, alongside country administrations many institutions including banks have taken various precautions to prevent COVID-19 from spreading and decrease its social and economic impacts on society. Apart from financial risks, being in the first place health and workplace safety, customer conduct, IT and cyber risks; non-financial risks are considered to stand out in 2021 due to COVID-19 pandemic. Also, due to COVID-19 pandemic, legal risks are anticipated to maintain their importance for banking sector. 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 used. In this context, breaches in market, liquidity, structural interest rate, credit and operational risk limits are monitored by Risk Management Division and by taking market and sector conditions into consideration, findings and evaluations about breaches are reported to the Audit Committee and Board of Directors. 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. 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. 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. 134 İşbank 2020 Annual Report 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 maintained 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. 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 programme is defined as the collection of studies and analyses to assess the risks generated by Bank’s activities and the programme covers the methodologies, assumptions and scenarios related with those analyses. In order to ensure the validity and appropriateness of the results; stress testing programme 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 programme oriented to assess the risks both from a 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 programme as a whole. The Board of Directors ensures that the outputs of the stress testing programme are evaluated and used as an input for decision making on the relevant fields. Executing the analyses included in stress testing programme, 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 programme, 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”. This definition includes legal risk. 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 135 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Information on Risk Management Policies Applied per Risk Types Operational risk is managed on the basis of the three lines of defense approach within the framework of risk management policies approved by the Board. Risk appetite and affiliated internal limits which are determined by the Board for the operational risks are monitored periodically. Internal and external factors that may affect banking operations negatively are considered in the process of determining operational risks. Operational risk management process combines both qualitative and quantitative approaches in measurement and assessment. In the process of measurement and assessment, risks are prioritized with respect to financial, legal, reputational and operational effects of operational risks that Bank is exposed to. Apart from the calculations executed within the scope of legislation, “internal measurement methods”, “impact - likelihood analysis”, “loss data analysis”, “scenario analysis”, “stress testing” and “key risk indicators” are utilized. Studies are reported to the Board through Risk Committee and Operational Risk Committee. Operational risks that the Bank is exposed in the banking and information systems processes, risk levels of new product, service and activities, support and valuation services, operational risk related loss events and risk indicators are monitored regularly by Risk Management Division and reported periodically to the Risk Committee and the Board. 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. 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. Model Risk Management Policy The purpose of the Model Risk Management Policy is to regulate the procedures and principles, regarding the model risk management by considering the end to end life cycle of the models used by the Bank. With the policy, it is aimed to manage the model risk, caused by errors, malfunctions or deficiencies in the life cycle of the models used in the activities of the Bank, with a holistic perspective. In the bank, model risk is managed by the three line of defense structure; first line of defense (model owner, model development team, model implementation team, model user), second line of defense (model risk management team, validation team, internal control) and the third line of defense (internal audit). Model risk management covers the entire model life cycle. The main activities in each step of the model life cycle and the responsibilities within the scope of these activities are determined in the policy. 136 İşbank 2020 Annual Report İşbank Credit Ratings Credit Ratings Assigned by Rating Agencies to the Bank and Related Explanations: Rating Outlook(*) MOODY’S 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 Issuer Credit Rating Short-term Issuer Credit Rating Long-term National Scale Rating Short-term National Scale Rating B3 B3 B3 NP NP B+ B+ B B A+(tur) b+ 5 B+ B trA+ trA-1 Negative Negative Negative - - Negative Negative - - Stable - - Negative - - - The dates on which the Bank’s credit ratings/outlook was last updated are given below: Moody’s 10.12.2020, Fitch Ratings: 01.09.2020, 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. 137 IntroductionActivitiesCorporate GovernanceFinancial Information andRisk Management Unconsolidated Financial Statements As at and For the Year Ended December 31, 2020 With Independent Auditor’s Report Thereon (Convenience Translation of Unconsolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish) 138 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report 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 unconsolidated statement of balance sheet as at December 31, 2020, 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, 2020 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 and IV.f, the accompanying unconsolidated financial statements as at December 31, 2020 include a free provision at an amount of TL 2,875,000 thousands of which TL 1,125,000 thousands was provided in prior years and TL 1,750,000 thousands provided 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. 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. 139 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 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 by 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. involving our Information technology and process audit specialists. - Evaluating the reasonableness and appropriateness of management’s key estimates and judgements in expected credit loss calculations including the responses to COVID-19, through selection of methods, models, assumptions and data sources. - 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 - Evaluating 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. - Evaluating the impact of the COVID-19 outbreak on staging of loans and macroeconomic parameters used in expected credit losses together with forward-looking estimates and significant assumptions. - 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. 140 İşbank 2020 Annual Report 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.2 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 2020 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 uncertainty 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”. 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. 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. 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 assessment of operating effectiveness of the key controls in the process of fair value determination. 141 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Independent Auditor’s Report 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. 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 skepticism 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, 2020 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 8, 2021 Istanbul, Turkey 142 İşbank 2020 Annual Report Türkiye İş Bankası A.Ş. The Unconsolidated Financial Report As at and for the Year Ended December 31, 2020 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 AUDITOR’S 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. Ersin Önder Çiftçioğlu Member of the Board and the Audit Committee Yusuf Ziya Toprak Deputy Chairperson of the Board of Directors and Chairperson of the Audit Committee Füsun Tümsavaş Chairperson of the Board of Directors 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: Neşe Gülden Sözdinler/Head of Investor Relations and Continuity Division Phone No: Fax No: E-mail: +90 212 316 16 02 +90 212 316 08 40 Nese.Sozdinler@isbank.com.tr investorrelations@isbank.com.tr Website: www.isbank.com.tr 143 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Contents SECTION I General Information about the Bank Page Number I. II. III. IV. V. VI. 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 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 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 VII. 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 I. II. III IV. V. Balance Sheet (Statement of Financial Position) - Assets Balance Sheet (Statement of Financial Position) - Liabilities Statement of Off-Balance Sheet Items Statement of Profit or Loss Statement of Profit or Loss and Other Comprehensive Income VII. Statement of Cash Flows VI. Statement of Changes in the Shareholders’ Equity VIII. Statement of Profit Distribution SECTION III Explanations on Accounting Policies I. II. III. IV. V. VI. Basis of Presentation Strategy for Use of Financial Instruments and Foreign Currency Transactions Associates and Subsidiaries Forward, Option Contracts and Derivatives Instruments Interest Income and Expenses Fees and Commission Income and Expenses VII. Financial Assets 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 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 144 146 146 146 147 147 147 147 148 149 150 151 152 153 154 156 157 157 158 158 158 158 158 159 160 160 160 160 161 161 161 161 162 162 163 163 164 164 164 164 İşbank 2020 Annual Report SECTION IV Information on the Financial Position and Risk Management of the Bank I. II. III. IV. V. VI. 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 VII. 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. 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 VII. 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 Independent Audit Report I. II. Explanations on the Auditors’ Independent Audit Report Explanations and Footnotes of the Independent Auditors Report Page Number 164 173 182 184 187 188 193 193 194 195 195 210 211 223 229 230 233 234 235 236 236 237 237 237 145 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 of December 31, 2020, 37.08% 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 34.83% are on free float (December 31, 2019: Fund 39.10%, CHP 28.09%, Free float 32.81%). 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 Yusuf Ziya Toprak Adnan Bali Chairperson of the Board of Directors, Chairperson of Remuneration Committee and Risk Committee, Member of the Corporate Governance Committee and Credit Committee Deputy Chairperson of the Board of Directors, Chairperson of the Audit Committee, TRNC Internal Systems Committee and Operational Risk Committee, Member of the Risk Committee and Substitute Member of the Credit Committee Chief Executive Officer and Board Member, Chairperson of the Credit Committee, Human Resources Committee, Information Systems Strategy Committee and Continuity Committee, Natural Member of the Risk Committee, Member of the Operational Risk Committee, Chairperson of the Executive Committee Feray Demir Director, Member of the Credit Committee, Remuneration Committee, Continuity Committee and Corporate Social Responsibility Committee Ersin Önder Çiftçioğlu Director, Chairperson of the Corporate Governance Committee, Member of the Audit Committee, TRNC Internal Systems Committee and Continuity Committee Fazlı Bulut Durmuş Öztek Director, Member of Corporate Social Responsibility Committee and Substitute Member of the Credit Committee Director, Member of Corporate Social Responsibility Committee Recep Hakan Özyıldız Mustafa Rıdvan Selçuk Ahmet Gökhan Sungur Director Director Director Sadrettin Yurtsever Director, Member of Corporate Governance Committee and Corporate Social Responsibility Committee Chief Executive Officer and Deputy Chief Executives: Name and Surname Areas of Responsibility Adnan Bali Hakan Aran Yalçın Sezen Senar Akkuş Chief Executive Officer and Board Member, Chairperson of the Credit Committee, Human Resources Committee, Information Systems Strategy Committee and Continuity Committee, Natural Member of the Risk Committee, Member of the Operational Risk Committee, Chairperson of the Executive Committee Information Technologies, Digital Banking Operations, Data Management, Member of the Information Systems Strategy Committee and Operational Risk Committee Retail Banking Marketing, Sales and Products, Retail Loans, Digital Banking, Member of the Corporate Social Responsibility Committee and Continuity Committee Financial Management, Strategy and Corporate Performance Management, Managerial Reporting and Internal Accounting, Subsidiaries, Member of the Corporate Social Responsibility Committee, Risk Committee, Information Systems Strategy Committee and Continuity Committee Murat Bilgiç Corporate Loans, Commercial Loans and Retail Loans Allocation, Project Finance, Member of the Risk Committee and Continuity Committee Nevzat Burak Seyrek Corporate Architecture, Human Resources and Talent Management, Agile Management, Consumer Relations Coordination Officer, Member of the Information Systems Strategy Committee and Operational Risk Committee Şahismail Şimşek SME and Enterprise Banking Marketing and Sales, Agricultural Banking Marketing, Commercial Banking Product and Member of the Continuity Committee Ebru Özşuca Gamze Yalçın H. Cahit Çınar Ozan Gürsoy Sezgin Yılmaz Treasury, Economic Research, Member of the Risk Committee International Financial Institutions, Investor Relations and Continuity, Member of Corporate Management Committee and Continuity Committee Legal Affairs and Legal Proceedings, Legal Consultancy, Commercial and Corporate Loans and Retail Loans Proceedings, Loans Monitoring, Credits Portfolio Management Corporate and Commercial Banking Marketing, Commercial Banking Sales, Free Zone Branches, Transboundary Banking, Member of Continuity Committee Banking Base Operations, Support Services, External Operations and Commercial Loan Operations, Internal Operations, Construction and Real Estate Management, Acquisition, Member of the Operational Risk Committee and Continuity Committee Serkan Uğraş Kaygalak Retail Loan and Card Operations, Payment Systems, Private Banking Marketing and Sales, Capital Markets At the meeting of the Bank’s Board of Directors on 28.01.2021, it was decided for Sabri Gökmenler, Information Technologies Department Manager, and Sezgin Lüle, Corporate Architecture Department Manager to be appointed as Deputy Chief Executives after making the necessary notifications to the Banking Regulation and Supervision Agency and obtaining permissions . 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. 146 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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) V. Summary Information on the Bank’s Functions and Business Lines 1,688,613 1,264,142 37.08% 28.09% 1,688,613 1,264,142 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. 147 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Unconsolidated Balance Sheet (Statement of Financial Position) SECTION TWO: UNCONSOLIDATED FINANCIAL STATEMENTS ASSETS FINANCIAL ASSETS (NET) Cash and Cash Equivalents Cash and Balances with Central Bank Banks I. 1.1 1.1.1 1.1.2 1.1.3 Money Market Placements 1.1.4 Expected Credit Loss (-) THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) Footnotes TL FC Total TL FC Total 50,998,250 108,186,227 159,184,477 43,873,366 81,575,604 125,448,970 V-I-a V-I-d 5,987,913 78,424,127 84,412,040 5,941,992 60,217,752 66,159,744 5,563,679 65,342,682 70,906,361 5,262,530 47,970,711 53,233,241 427,313 13,104,745 13,532,058 683,360 12,270,949 12,954,309 - 3,079 - - 23,300 26,379 - 3,898 - - 23,908 27,806 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 1,466,421 2,714,953 4,181,374 1,475,121 1,897,655 3,372,776 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 167,674 147,257 566,315 261,922 733,989 409,179 258,360 137,669 10,939 - 269,299 137,669 1,151,490 1,886,716 3,038,206 1,079,092 1,886,716 2,965,808 V-I-e 43,348,436 22,182,510 65,530,946 36,236,812 15,635,533 51,872,345 42,920,765 20,327,275 63,248,040 35,822,081 14,488,127 50,310,208 76,843 350,828 269,119 345,962 1,586,116 1,936,944 63,903 350,828 369,921 777,485 433,824 1,128,313 V-I-c-l 195,480 4,864,637 5,060,117 219,441 3,824,664 4,044,105 1.4.1 Derivative Financial Assets at Fair Value Through Profit or Loss 195,480 4,864,637 5,060,117 219,441 3,824,664 4,044,105 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) 249,597,920 134,219,237 383,817,157 190,990,350 113,653,733 304,644,083 Loans Lease Receivables Factoring Receivables V-I-f V-I-k 231,136,428 134,385,174 365,521,602 175,565,322 113,678,236 289,243,558 - - - - - - - - - - - - Other Financial Assets Measured at Amortised Cost (Net) V-I-g 35,451,053 6,208,384 41,659,437 28,041,103 2,847,252 30,888,355 2.4.1 Government Debt Securities 2.4.2 Other Financial Assets 35,395,702 5,029,387 40,425,089 27,752,402 2,361,186 30,113,588 55,351 1,178,997 1,234,348 288,701 486,066 774,767 2.5 III. 3.1 3.2 IV. 4.1 Expected Credit Loss (-) 16,989,561 6,374,321 23,363,882 12,616,075 2,871,755 15,487,830 ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) V-I-r Held for Sale Discontinued Operations EQUITY INVESTMENTS 1,214,294 1,214,294 - 5,800 5,800 - 1,220,094 1,100,815 1,220,094 1,100,815 - - 1,366 1,366 - 1,102,181 1,102,181 - 23,387,451 2,614,932 26,002,383 19,109,551 1,961,003 21,070,554 Investments in Associates (Net) V-I-h 266,305 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 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 - 266,305 - - - 266,305 250,459 - - 266,305 250,459 - - - 250,459 - 250,459 V-I-i 23,121,146 2,614,932 25,736,078 18,859,092 1,961,003 20,820,095 10,389,989 2,614,932 13,004,921 7,954,699 1,961,003 9,915,702 V-I-j V-I-m V-I-n V-I-o V-I-p V-I-r 12,731,157 - - - 6,576,739 1,329,996 - 1,329,996 - - - - - - 12,731,157 10,904,393 - - - - - - - - - - 10,904,393 - - - 33,540 6,610,279 6,430,266 32,301 6,462,567 845 - 845 - - 1,330,841 912,885 - - 1,330,841 912,885 - - - - 624 - 624 - - 913,509 - 913,509 - - 2,093,900 1,326,594 3,420,494 1,038,789 792,319 1,831,108 5,046,647 7,270,060 12,316,707 2,468,498 4,118,001 6,586,499 TOTAL ASSETS 340,245,197 253,657,235 593,902,432 265,924,520 202,134,951 468,059,471 148 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Unconsolidated Balance Sheet (Statement of Financial Position) I. II. III. IV. 4.1 4.2 4.3 V. 5.1 5.2 VI. VII. 7.1 7.2 LIABILITIES 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 THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) Footnotes TL FC Total TL FC Total V-II-a V-II-c 134,513,823 234,362,668 368,876,491 131,290,175 164,631,827 295,922,002 2,113,127 38,318,218 40,431,345 1,856,265 38,394,368 40,250,633 17,958,135 5,038,402 22,996,537 739,089 448,671 1,187,760 V-II-d 5,436,832 25,403,816 30,840,648 6,423,545 24,693,665 31,117,210 3,960,641 - - - 3,960,641 5,231,941 - - - - 5,231,941 - 1,476,191 25,403,816 26,880,007 1,191,604 24,693,665 25,885,269 - - - - - - - - - - - - - - - - - - - - - - - - DERIVATIVE FINANCIAL LIABILITIES V-II-b-h 1,336,155 6,598,330 7,934,485 349,231 1,785,132 2,134,363 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 1,336,155 6,598,330 7,934,485 349,231 1,785,132 2,134,363 - - 1,330,308 9,644,891 - 1,481,897 - 8,162,994 2,415,583 - - - - - - - - - - - - - - 58,909 1,389,217 1,348,114 48,149 1,396,263 579,699 10,224,590 6,772,459 269,898 7,042,357 - - - - - 1,481,897 1,237,995 - - - - - - 1,237,995 - 579,699 8,742,693 5,534,464 269,898 5,804,362 4,524 2,420,107 1,194,439 28,346 1,222,785 - - - - - - - - - - - - - - - - - - - - V-II-g V-II-i V-II-j V-II-j V-II-k V-II-l 2,286,510 19,852,049 22,138,559 2,281,084 11,265,847 13,546,931 - - - - - - 2,286,510 19,852,049 22,138,559 2,281,084 11,265,847 13,546,931 V-II-f V-II-m 15,321,692 3,547,309 18,869,001 12,844,278 2,521,424 15,365,702 67,900,540 (119,088) 67,781,452 59,249,365 (375,900) 58,873,465 4,500,000 1,125,985 90,520 - 1,035,465 - 204 204 - - 4,500,000 4,500,000 1,126,189 1,043,623 90,724 - 5,610 - 1,035,465 1,038,013 - 204 204 - - 4,500,000 1,043,827 5,814 - 1,038,013 4,233,464 (617) 4,232,847 4,370,921 (617) 4,370,304 4,880,015 (118,675) 4,761,340 3,351,446 (375,487) 2,975,959 40,079,251 4,673,489 - 35,405,762 - 13,081,825 6,270,908 6,810,917 - - - - - - - - 40,079,251 34,007,790 4,673,489 4,372,235 - - 35,405,762 29,635,555 - - 13,081,825 11,975,585 6,270,908 5,907,998 6,810,917 6,067,587 - - - - - - - - 34,007,790 4,372,235 - 29,635,555 - 11,975,585 5,907,998 6,067,587 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 260,257,596 333,644,836 593,902,432 224,348,044 243,711,427 468,059,471 149 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Unconsolidated Statement of Off-Balance Sheet Items 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) 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 Footnotes V-III CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) THOUSAND TL TL 216,016,443 39,746,728 39,206,983 687,709 4,416,349 34,102,925 84,800 - 84,800 454,945 435,024 19,921 - - - - - - - - 70,648,692 69,830,795 2,240,523 - - 24,688,380 - - 2,641,068 26,068 37,915,127 179,370 - - 2,140,259 817,897 752,897 65,000 105,621,023 - - - - 105,621,023 6,312,076 4,782,648 1,529,428 95,665,431 4,334,346 89,556,285 887,400 887,400 1,523,960 951,985 571,975 - - - - 2,119,556 1,521 2,118,035 - - - - 616,280,990 43,881,000 - 25,350,314 15,218,680 2,858,449 - - 453,557 - 572,399,990 45,877,542 2,669,349 109,623,146 - 344,351,988 69,877,965 - - FC 398,524,226 79,828,486 48,225,907 535,767 24,422,710 23,267,430 9,374,903 216,670 9,158,233 19,082,336 13,372,331 5,710,005 - - - - - - 3,145,340 - 20,505,458 14,234,226 4,198,612 - - 1,009,054 - - - - - - - - 9,026,560 6,271,232 6,271,232 - 298,190,282 - - - - 298,190,282 28,172,122 12,591,821 15,580,301 237,078,233 87,338,121 22,896,516 63,421,798 63,421,798 14,050,208 2,936,454 3,273,722 3,920,016 3,920,016 - - 1,949,448 1,948,141 1,307 - - - 16,940,271 563,097,495 70,901,615 - 4,451,310 37,822,146 17,207,412 - - 11,420,747 - 492,195,880 156,869 19,101,121 31,574,919 - 340,246,167 101,116,804 - - Total 614,540,669 119,575,214 87,432,890 1,223,476 28,839,059 57,370,355 9,459,703 216,670 9,243,033 19,537,281 13,807,355 5,729,926 - - - - - - 3,145,340 - 91,154,150 84,065,021 6,439,135 - - 25,697,434 - - 2,641,068 26,068 37,915,127 179,370 - - 11,166,819 7,089,129 7,024,129 65,000 403,811,305 - - - - 403,811,305 34,484,198 17,374,469 17,109,729 332,743,664 91,672,467 112,452,801 64,309,198 64,309,198 15,574,168 3,888,439 3,845,697 3,920,016 3,920,016 - - 4,069,004 1,949,662 2,119,342 - - - 16,940,271 1,179,378,485 114,782,615 - 29,801,624 53,040,826 20,065,861 - - 11,874,304 - 1,064,595,870 46,034,411 21,770,470 141,198,065 - 684,598,155 170,994,769 - - TL 149,796,339 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 60,697,736 - - - - 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 - - - - - - - - - - - 547,916,565 41,199,588 - 25,209,839 12,690,407 2,932,325 - - 367,017 - 506,716,977 39,135,450 2,977,525 92,058,677 - 314,369,096 58,176,229 - - FC 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 - 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 - - - - - - - - 2,343,115 414,540,975 32,346,684 - 3,179,363 12,294,549 12,417,721 - - 4,455,051 - 382,194,291 5,890 15,525,296 19,501,597 - 270,300,149 76,861,359 - - Total 440,756,337 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 - - - - - - - - 2,343,115 962,457,540 73,546,272 - 28,389,202 24,984,956 15,350,046 - - 4,822,068 - 888,911,268 39,141,340 18,502,821 111,560,274 - 584,669,245 135,037,588 - - TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 832,297,433 961,621,721 1,793,919,154 697,712,904 705,500,973 1,403,213,877 150 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Unconsolidated Income Statement 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. XX. 19.1 19.2 19.3 XXI. 20.1 20.2 20.3 XXII. XXIII. 22.1 22.2 22.3 XXIV. NET PERIOD PROFIT/LOSS FROM DISCONTINUED OPERATIONS (XXII±XXIII) XXV. NET PERIOD PROFIT/LOSS (XIX+XXIV) Earnings per Share (*) 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 THOUSAND TL CURRENT PERIOD (01/01-31/12/2020) PRIOR PERIOD (01/01-31/12/2019) 42,516,332 31,987,586 84,888 134,033 666 10,276,024 27,489 6,161,252 4,087,283 - 33,135 17,274,293 9,521,065 1,448,001 1,496,380 3,972,083 235,210 601,554 25,242,039 5,617,613 6,790,418 1,111,518 5,678,900 1,172,805 1,518 1,171,287 21,487 (3,341,357) 335,938 (10,390,437) 6,713,142 2,436,205 29,975,987 10,213,836 2,516,084 5,191,989 6,604,997 5,449,081 - 3,406,471 - 8,855,552 2,044,635 3,823,786 434,581 2,213,732 6,810,917 - - - - - - - - - - - - - - 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 - - - - - - - - - - - - - - V-IV-k 6,810,917 0.060540274 6,067,587 0.053933028 151 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Unconsolidated Statement of Profit or Loss and Other Comprehensive Income 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 Other Income/Expense Items of Other Comprehensive Income not to be Reclassified to Profit Or Loss Taxes Relating To Components Of Other Comprehensive Income not to be Reclassified To Profit Or Loss Other Income/Expense Items not be Reclassified to Profit or Loss Exchange Differences on Translation Valuation and/or Reclassification Profit or Loss from Financial Assets at Fair Value through Other Comprehensive Income Income/(Loss) Related with Cash Flow Hedges I. II. 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.2 2.2.1 2.2.2 2.2.3 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 III. TOTAL COMPREHENSIVE INCOME (I+II) THOUSAND TL CURRENT PERIOD (01/01-31/12/2020) PRIOR PERIOD (01/01-31/12/2019) 6,810,917 1,647,924 (137,457) (17,036) - (72,288) (64,294) 16,161 1,785,381 587,725 930,213 - - 459,584 (192,141) 8,458,841 8,458,841 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) 9,241,633 9,241,633 152 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Unconsolidated Statement of Cash Flows THOUSAND TL Footnotes CURRENT PERIOD (01/01-31/12/2020) PRIOR PERIOD (01/01-31/12/2019) A. CASH FLOWS FROM BANKING OPERATIONS 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 28,104,080 10,690,936 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 38,484,202 (16,404,956) 543,139 6,801,535 787,561 1,597,389 (9,077,374) (3,077,002) 8,449,586 40,743,322 (23,866,286) 470,493 6,940,115 730,481 908,016 (7,108,597) (2,308,000) (5,818,608) V-VI 1.2 Changes in Operating Assets and Liabilities (2,891,050) 10,205,225 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 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 (634,886) (4,669,874) (43,633,155) (4,013,134) (1,055,791) 35,499,546 - (271,746) (3,077,291) (10,188,922) 1,727,554 (461,278) 38,477,867 - (8,474,053) (8,533,986) - - 1.2.10 Net Increase/(Decrease) in Other Liabilities V-VI 24,090,297 (7,466,973) Net Cash Provided From Banking Operations 25,213,030 20,896,161 CASH FLOWS FROM INVESTING ACTIVITIES Net Cash Provided from Investing Activities (17,791,592) (9,837,471) 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 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. V-VI V-VI V-VI (635,402) - (530,639) 214,005 (20,625,367) 12,958,458 (15,274,452) 6,752,597 (650,792) (8,500) - (248,842) 494,844 (18,850,009) 12,196,027 (11,142,522) 8,299,543 (578,012) (2,831,398) (528,663) 20,922,579 (23,253,700) - - (500,277) - 13,975,887 (13,983,203) - - (521,347) - (1,105,433) 787,421 3,484,607 11,317,448 41,877,301 30,559,853 45,361,908 41,877,301 153 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Unconsolidated Statement of Changes in Shareholders’ Equity THOUSAND TL Accumulated Other Comprehensive Income That will not 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) on translation reserve income Other (2) Reserves (Loss) Profit/(Loss) Equity Exchange differences through other comprehensive Profit Prior Period Profit/ Net Current Period Total Shareholder’s 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 -17,224 -167,175 1,705,154 -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 CHANGES IN SHAREHOLDERS’ EQUITY Footnotes V-V PRIOR 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 IX. X. XI. Subordinated Debt Increase/(Decrease) Through Other Changes 282 -3,888 Profit Distribution 11.1 Dividend Paid 11.2 Transfer to Reserves 11.3 Other 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 THOUSAND TL Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) Accumulated gains/(losses) due to revaluation and/or reclassification of financial assets measured at fair value CURRENT PERIOD (31/12/2020) 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 5,814 1,038,013 2,734,864 -226,266 1,861,706 930,843 395,484 1,649,632 34,007,790 11,975,585 58,873,465 4,500,000 5,814 1,038,013 2,734,864 -226,266 1,861,706 -15,332 -57,831 -64,294 930,843 587,725 395,484 738,072 1,649,632 459,584 34,007,790 11,975,585 6,810,917 58,873,465 8,458,841 IX. X. XI. Subordinated Debt Increase/(Decrease) Through Other Changes (*) 84,910 -2,548 Profit Distribution 11.1 Dividend Paid 11.2 Transfer to Reserves 11.3 Other Ending Balance (III+IV+…...+X+XI) 4,500,000 90,724 1,035,465 2,719,532 -284,097 1,797,412 1,518,568 1,133,556 2,109,216 40,079,251 6,270,908 6,810,917 67,781,452 (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. 6,769,085 -85,186 -6,769,085 6,769,085 -6,769,085 6,071,461 366,784 -6,071,461 6,071,461 -6,071,461 -88,792 449,146 154 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report CHANGES IN SHAREHOLDERS’ EQUITY Footnotes Capital Premium Profits Reserves (Decrease) benefit plans Other (1) Share Tangible assets Accumulated accumulated gains/(losses) on Certificate Other revaluation remeasurements Paid-in Share Cancellation Capital reserve Increase/ of defined 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 Shareholder’s Equity 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) THOUSAND TL 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 -17,224 -167,175 1,705,154 -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 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 11,975,585 58,873,465 4,500,000 5,814 1,038,013 2,734,864 -226,266 1,861,706 -15,332 -57,831 -64,294 930,843 587,725 395,484 738,072 1,649,632 459,584 34,007,790 11,975,585 6,810,917 58,873,465 8,458,841 Increase/(Decrease) Through Other Changes (*) 84,910 -2,548 6,071,461 366,784 -6,071,461 6,071,461 -6,071,461 449,146 Ending Balance (III+IV+…...+X+XI) 4,500,000 90,724 1,035,465 2,719,532 -284,097 1,797,412 1,518,568 1,133,556 2,109,216 40,079,251 6,270,908 6,810,917 67,781,452 (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 (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 Income that will not be Reclassified to Profit or Loss. Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) Includes changes in the Group shares. I. II. 2.1 2.2 III. IV. V. VI. IX. X. XI. I. II. 2.1 2.2 III. IV. V. VI. IX. X. XI. PRIOR PERIOD (31/12/2019) Beginning Balance V-V 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 11.1 Dividend Paid 11.2 Transfer to Reserves 11.3 Other CURRENT PERIOD (31/12/2020) 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 11.1 Dividend Paid 11.2 Transfer to Reserves 11.3 Other 155 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Unconsolidated Statement of Profit Distribution Table 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) THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) 8,855,552 2,044,635 3,788,280 35,506 -1,779,151 6,874,451 806,864 1,662,347 30,257 -885,740 A. NET PROFIT FOR THE PERIOD (1.1-1.2) 6,810,917 6,067,587 1.3 1.4 1.5 PRIOR YEARS’ LOSSES (-) FIRST LEGAL RESERVES (-) OTHER STATUTORY RESERVES (-) - - - - 301,253 46,394 B. NET PROFIT ATTRIBUTABLE TO [(A-(1.3+1.4+1.5)] 6,810,917 5,719,940 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. 156 - - - - - - - - - - - - - - - - - - - - - - - - - - 0.0605 151 - - - - - - - - - - - - - - - - - - - - - - 5,719,940 - - - - - - - - - - - 0.0539 135 - - - - - - - Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report 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. The COVID-19 outbreak, which started in China and spread globally in the first half of 2020, caused serious effects on both economic and social life. In order to control the outbreak, many countries around the world have implemented measures that have negative consequences for not only social life, but also economic activity both on regional and global scale. As in other countries where the pandemic is also effective, various social and economic cautions are also implemented with partial changes in our country in order to contain the pandemic and mitigate the damages it has caused. negativity. The Bank sustains its activities for the period precisely by closely monitoring the processes related to the outbreak, postponing retail and non-retail customers’ due debts, restructuring with grace periods and existing or additional limit allocations in respect with customers’ needs. Assessments regarding to possible effects of the COVID-19 outbreak through the measurement of expected credit losses as of December 31, 2020 financial statements are explained in the Section Three “VIII. “Explanations on Impairment of Financial Assets”. “Interest Rate Benchmark Reform- Stage 2”, brought changes in various TAS/TFRSs effective from January 1, 2021, was released in December 2020 within the scope of the project of transition of the benchmark interest rates carried out by the International Accounting Standards Board (IASB). Although early implementation was permitted, it was concluded that early implementation is not required by evaluating the effects of these changes on the Bank’s financial statement. The Bank continues to perform required studies to comply with the Interest Rate Benchmark Reform. 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 applied in the current period are in line with the prior period financial statements. 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 closely monitoring the developments in the sector, both fixed and floating rate placements are made based on the yields of alternative investment instruments. 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. 157 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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. IV. Forward, 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 As of 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 except financial assets 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 it is determined that there are significant changes between the new conditions of the revised financial asset and the first conditions in related agreements, 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. 158 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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. 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 financial asset is disposed, the related fair value differences accumulated in the shareholders’ equity are transferred to the profit or loss 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 Amortized 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, after eliminating any provision for impairment if there is any. Interest income measured by using the effective interest rate method 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 stage one. Impairment for credit risk for the Stage 1 financial assets is equal to the 12-month expected credit losses. Based on the decisions taken by the BRSA regarding to the COVID-19 outbreak that being effective from the date 17.03.2020 until 30.06.2021, the 30-days past due period foreseen for loans, in order to be classified as Stage 2, has been started to be applied as 90 days past due for Stage 1 loans. In addition, the Bank provides provisions for customers in this group with a delay of more than 30 days, in accordance with its own risk policies and models, which also evaluate the borrower’s conditions. 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 other respect, the 30-days past due period foreseen for loans to be classified as Stage 2, started to be applied as 90 days for Stage 1 loans until the date of 30.06.2021 in accordance with the decisions, that being effective from the date 17.03.2020, taken by BRSA in regard to the COVID-19 outbreak. For the abovementioned group with a past due date more than 90 days, the Bank allocates provisions in accordance with its risk policies and applies grouping approach and models in which also evaluate the borrower’s conditions. In case 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 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. 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 In other respect, the 90-days past due period foreseen for loans to be classified as non-performing loan, started to be applied as 180 days until the date of 30.06.2021 in accordance with the decisions, that being effective from the date 17.03.2020, taken by BRSA in regard to the COVID-19 outbreak. 159 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 current and forecasts of future economic information into consideration, 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 other 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 the future risk mitigation processes into account 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 bank. 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. On the other hand, the Bank has updated the macroeconomic data used in the scenarios again in the current year regarding to the effects of COVID-19 outbreak on Expected Credit Losses, and besides that, as mentioned above, the Bank allocated expected credit losses by reflecting additional provisions through individual assessments performed for the customers that operates in sectors where the impact might be high in accordance with the Bank’s risk policies. Expected credit loss is reflected in the income statement. Released provisions in the current year are accounted under “Expected Credit Loss Expenses” and released provision which is carried from the prior year are accounted under “Other Operating Income”. Receivables evidenced through the Legal Process that collection is not possible can be written-off by fulfilling the requirements of the Tax Procedure Law. Besides, the loans for which specific provision is allocated and for which there is no reasonable expectation of recovery might be written-off. 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 Amortized 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 within the scope of “TFRS 5 - Non-current Assets Held for Sale and Discontinued Operations” are measured at the lower one of their fair value and their carrying amount which from the costs to sell are deducted and presented separately within the financial statements. 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 consist 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. 160 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 at 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 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 through 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 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. 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 on footnotes 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 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, but if there is a possibility that an inflow of economic benefits of these assets may occur then it is explained in the footnotes of 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. 161 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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, all actuarial gains and losses occurred are recognized under shareholder’s 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. 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 aforementioned 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 an actuarial valuation report prepared by an actuary registered in the actuaries register for the year ended December 31, 2020. In related period’s financial statements, Bank provided full provision for the total amount of technical and actual deficit stated in the actuarial report of the aforementioned period. The actuarial assumptions used in the related actuarial report are given in Section Five Note II-i-4.1. İşbank Members’ Supplementary Pension Fund has been founded to provide beneficiaries with additional social security and solidarity rights to compulsory social security benefits 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 provisional tax for the year 2020 will be paid in February 2021 for to be deducted from the corporate tax of the current taxation period. 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 asset or liability is determined by calculating the tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts considered in the legal tax base account, by taking the legal tax rates into account. 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. 162 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 20% to be effective from 2021 (prior period 22%) 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. 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 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 and provisional tax paid every quarter during the year are deducted from corporate tax payable and the difference between withholding and provisional tax amounts and corporate tax payable is discounted from income tax provided that the withholding tax and paid provisional tax amounts are 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 rate in Iraq is 15%, and the corporate tax is paid on a consolidated basis to the tax office of the foreign bank’s central branch. The first branch established in Iraq is considered as the central branch. Foreign bank branches whose central branch is within the boundaries of the Central Government must submit their consolidated financial statements to the relevant tax office by the end of May of the following year, and branches of foreign banks whose central branch is within the boundaries of the Northern Iraq Regional Government by the end of June of the following year at the latest and must pay the tax. Northern Iraq Regional Government tax offices can accrue fixed taxes other than the specified rate and can postpone the last payment 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) Current Period 6,810,917 112,502,250 0.060540274 Prior Period 6,067,587 112,502,250 0.053933028 163 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management XXI. Bank Acceptances and Bills of Guarantee 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. 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 None. 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 18.68%. (31.12.2019: 17.87%). The capital adequacy standard ratio for the current period was calculated based on the Regulation on Measurement and Assessment of Capital Adequacy of Banks and other legal regulations and the BRSA temporary regulation dated 08.12.2020 and numbered 9312. Within the scope of this temporary regulation, the equity amount calculated without reflecting the negative net valuation differences of the securities included in the “Fair Value Through Other Comprehensive Income” portfolio acquired before 23.03.2020 was taken into consideration. In the calculation of the amount subject to credit risk in accordance with the same regulation, the simple arithmetic average of the last 252 business days in the foreign exchange buying rates of the Central Bank of the Republic of Turkey was used. 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 90,724 39,469,305 10,088,593 13,081,825 6,810,917 6,270,908 68,846,385 393,890 48,658 Other Intangible Assets Netted with Deferred Tax Liabilities Except Mortgage Servicing Rights 1,207,338 1,207,338 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 530,307 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 164 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 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 Total of Net Long Positions of the Investments in Equity Items of Unconsolidated 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 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 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 Unconsolidated 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 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 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 2,180,193 66,666,192 66,666,192 11,481,250 1,253,000 5,141,120 17,875,370 17,875,370 84,541,562 1,102 721 381 165 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 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. 84,540,460 452,476,866 14.73 14.73 18.68 2.560 2.500 0.060 0.000 8.73 242,174 3,420,494 10,923,729 5,141,120 1,253,000 9,086,000 166 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 5,814 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 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 the10% 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 (-) 530,307 2,106,500 57,971,231 167 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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) 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 168 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 14.97 14.97 17.87 2.551 2.500 0.051 0.000 8.97 220,768 1,831,108 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 5,476,404 4,405,791 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. 1,627,800 6,618,200 169 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Information on Subordinated Liabilities: Issuer Türkiye İş Bankası A.Ş. Türkiye İş Bankası A.Ş. Türkiye İş Bankası A.Ş. Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) US900151AB70 - XS0847042024 US900151AF84 - XS1003016018 US90016BAF58 - XS1623796072 XS2106022754 Governing law(s) of the instrument It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. Taking into account in equity calculation Subject to 10% deduction as of 1/1/2015 Yes No No No Eligible at unconsolidated/consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Instrument type Amount recognized in regulatory capital (Currency in million, 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 71 7,385 Bond 1,182 2,954 Bond 3,692 3,692 Bond 5,539 5,539 Subordinated Liabilities 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 22.01.2020 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) 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. The Bank has the option to repay all of the related bonds on January 22, 2025 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. None. Fixed 7.75% None. None. None. Noncumulative or cumulative Noncumulative Convertible or non-convertible None. Noncumulative 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 170 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. Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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) 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) If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism Partially or completely Partially or completely Partially or completely Permanent Permanent Permanent 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. 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 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. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. 171 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 (types to be specified by each jurisdiction) Amount recognized in regulatory capital (Currency in 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 Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities Accounting classification Original date of issuance Perpetual or dated Original maturity date 08.08.2017 Dated 10 Years Issuer call subject to prior supervisory approval Yes 19.06.2019 Dated 10 Years Yes 26.09.2019 Dated 10 Years Yes Optional call date, contingent call dates and redemption amount 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 months 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 If write-down, write-down trigger(s) 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. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. 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 Permanent Permanent 172 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report If temporary write-down, description of write- up mechanism Position 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. 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 67,781,452 48,658 1,330,841 10,923,729 22,138,559 1,102 Amounts in Equity Calculation (*) 67,922,188 (48,658) (1,207,338) 5,141,120 12,734,250 (1,102) 84,540,460 (*) 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. On the other hand, in the calculation, the equity amount calculated in accordance with the BRSA’s temporary regulation dated 08.12.2020 and numbered 9312, temporary regulation and the credit risk amount calculated in accordance with same regulation. 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 collaterals 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 disincline concentration on collaterals. 173 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Non-performing and impaired loans have 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 Conditional and unconditional exposures to central governments or central banks 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 Current Period Risk Amount Average Risk Amount (**) 175,099,720 157,034,139 454,665 547,034 228,951 32,123,693 253,996,106 109,073,532 10,450,092 23,010,640 7,342,980 165,756 1,581,841 21,296,877 26,315,903 387,615 498,626 98,302 32,768,399 230,426,858 97,409,931 11,750,387 22,116,456 7,339,163 248,142 1,379,709 18,835,979 23,689,002 (*) 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. 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 27%, 36%, respectively (December 31, 2019: 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%, 58% respectively (December 31, 2019: 45%, 57%). (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, 2019: 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. 7. The total value of the stage 1 and stage 2 expected credit loss allocated for credit risk stands at TL 10,375,920 (December 31, 2019: 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 The table data comprises behavior rating/scoring results. 174 Current Period Prior Period 48.71% 43.51% 7.78% 43.92% 47.42% 8.66% Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Non-collateralized Total Personal 681,452 37,128 1,469,688 236,678 1,432,206 3,857,152 8,318,497 291,707 204,747 586 23,694,264 5,398,670 37,908,471 Current Period Commercial and Corporate Credit Cards Personal 978,177 28,982 1,199,790 Prior Period Commercial and Corporate 6,911,845 172,846 382,587 460 Credit Cards 1,067,462 1,067,462 243,349 1,194,740 22,182,474 2,140,828 3,645,038 31,791,040 1,138,507 1,138,507 (*) 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 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 Loan Balance Net Value of the Collateral 5,580,741 5,580,741 366 286,435 7,262,883 366 286,435 7,262,883 5,423,511 437 348,010 6,516,987 Loan Balance 5,423,511 437 348,010 6,516,987 (*) 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 receivables 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 120,921 28,118 60,020 1,564,999 1,685,920 147,779 184,618 175,897 244,638 209,059 1,897,396 2,106,455 (*) The loans classified as closely monitored that are not past due or past due for less than 31 days is TL 37,329,789. (**) 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 2,660,732 and TL 736,109 respectively. (***) Consists of overdue amounts (TL 1,369,804) of the loans with more than 90 days past due date yet classified under close monitoring based on the decisions taken by the BRSA within the scope of COVID-19 outbreak, being effective since 17.03.2020, and mentioned loans’ undue balance is amounting to TL 2,097,786. Prior 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. 175 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 12. Profile of significant exposures in major regions 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 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 Share Certificate Investments 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 171,550,123 554 1,381,513 2,167,530 175,099,720 454,664 546,941 36,797 192,154 1 93 5,040,922 16,705,749 5,463,934 11,772 3,678,389 1,222,927 245,186,583 878,894 760,374 592,449 902,905 5,674,901 107,085,755 341,011 127,212 1,358 48,685 1,469,511 33,285,077 7,321,663 110,679 12,428 29,606 208 126 9,658 2,231 25,586 6,450 165,740 1 15 1,581,841 21,287,537 9,340 26,315,903 454,665 547,034 228,951 32,123,693 253,996,106 109,073,532 33,460,732 7,342,980 165,756 1,581,841 21,296,877 26,315,903 Total 593,506,846 18,086,113 6,582,828 605,705 6,023,381 10,567,014 26,315,903 661,687,790 (*) 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. 176 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 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 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 140,965,666 724 667,385 2,033,483 143,667,258 144,915 427,971 331 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 35,168,937 166,019 8,545,147 4,371 27,218 213 253 13,114 2,856 60,355 4,856 503,896 2 4 1 1,273,213 15,557,343 13,018 5,671 21,504,378 144,922 428,064 331 26,069,632 204,233,221 77,240,762 35,435,896 8,557,443 503,903 1,273,213 15,576,032 21,504,378 481,462,397 15,575,621 1,817,360 818,513 6,207,043 7,249,743 21,504,378 534,635,055 (*) 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. 177 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 Other Total 133 137,801 133 137,801 3,544 Current Period Bank (4) (3) 333 333 (5) (6) (7) (8) (9) (10) (13) (14) TL FC Total Current Period Bank (12) 1,960,037 3,226,594 974,976 3,178,022 11,224 973,837 15,978 32,594 114,074,129 6,320,699 5,231,489 148,028 66,585,328 6,022,541 42,257,312 150,130 29,624,131 3,078,725 5,910,969 2,001,423 11,645,630 50,214,340 92,916,861 143,131,201 376,885 344,901 904 31,080 84,094 5,618,664 208,211 3,417,217 14,359,425 6,635,823 1,789,949 1,434,810 622,434 2,965,625 248,066 260,106 402,612 46,889 40,283 466 6,140 10,220 720,822 1,270,381 2,112,393 2,667,544 1,119,284 586,196 100,425 2,100 796,960 31,112 10,284 21,183 (11) 925 914 4 7 20,096 4,913 13,026 2,157 26,074 43,487 28,470 825 3,605 78 815 8,991 46 657 14,502,168 24,816,084 39,318,252 4,393,817 4,315,709 29,783 48,325 1,000,502 40,372,727 8,841,111 42,111,003 4,257,287 12,321,619 6,894,279 1,549,904 1,202,433 2,112,901 1,341,490 340,003 630 5,735,307 4,655,712 30,413 1,000,857 1,049,182 4,554,771 53,123,360 35,238,730 5,555,273 93,496,087 44,079,841 20,189,704 62,300,707 6,830,702 11,087,989 18,897,706 31,219,325 5,032,709 11,926,988 322,794 718,694 3,337,871 1,872,698 1,921,127 5,450,772 11,645,630 82,408 89,700 11,971,713 2,051,961 364,284 228,951 32,107,179 86,571,988 26,808,555 1,311,251 14,195,782 99,346,766 145,051,972 244,398,738 62 561 35,434,391 15,395,542 6,675,241 1,748,350 22,749,941 6,349,149 317,859 228,951 32,107,179 10,741,668 384,681 1,311,251 28,897,340 89,721,792 118,619,132 1,931 37,507 6,158 206 41,072 4,924,310 1,078,817 690,114 1,248,199 4,108,124 791,784 286,411 773,821 16,514 21,765,821 69,638,959 547,034 228,951 32,123,693 253,996,106 109,073,532 9,396,236 514,731 33,460,732 7,342,980 75,174 165,756 270,590 1,581,841 21,296,877 21,296,877 474,491 183,127,678 45,976,614 229,104,292 26,315,903 351,584,769 310,103,021 661,687,790 123,644 116,283 1,837 5,524 3,020,321 76,529 2,890,076 53,716 1,056,168 65,740,292 3,604,789 287,366 491,134 60,931,218 106,569 65,124 109,923 144,169 105,159,295 175,099,720 454,532 454,665 (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. 178 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 13. Risk profile by sectors or counterparties: 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 Other Total 123,644 116,283 1,837 5,524 3,020,321 76,529 2,890,076 53,716 1,056,168 65,740,292 3,604,789 287,366 491,134 60,931,218 106,569 65,124 109,923 144,169 133 137,801 133 137,801 3,544 (3) 333 333 62 561 1,931 37,507 6,158 206 41,072 (1) (**) (2) (5) (6) (7) (8) (9) (10) Current Period Bank (4) 364,284 228,951 32,107,179 86,571,988 26,808,555 317,859 228,951 32,107,179 10,741,668 384,681 1,960,037 3,226,594 974,976 3,178,022 11,224 973,837 15,978 32,594 114,074,129 6,320,699 5,231,489 148,028 66,585,328 6,022,541 42,257,312 150,130 29,624,131 3,078,725 35,434,391 15,395,542 6,675,241 1,748,350 22,749,941 6,349,149 4,924,310 1,078,817 690,114 1,248,199 4,108,124 791,784 286,411 773,821 376,885 344,901 904 31,080 46,889 40,283 466 6,140 5,910,969 2,001,423 84,094 5,618,664 208,211 3,417,217 14,359,425 6,635,823 1,789,949 1,434,810 622,434 2,965,625 248,066 260,106 402,612 10,220 720,822 1,270,381 2,112,393 2,667,544 1,119,284 586,196 100,425 2,100 796,960 31,112 10,284 21,183 Current Period Bank (12) (13) (14) TL FC Total 4,393,817 4,315,709 29,783 48,325 1,341,490 340,003 630 5,735,307 4,655,712 30,413 1,000,857 1,049,182 11,645,630 50,214,340 92,916,861 143,131,201 11,645,630 1,000,502 40,372,727 8,841,111 4,554,771 53,123,360 35,238,730 5,555,273 93,496,087 44,079,841 14,502,168 24,816,084 39,318,252 1,311,251 14,195,782 99,346,766 145,051,972 244,398,738 1,311,251 82,408 89,700 11,971,713 2,051,961 42,111,003 4,257,287 12,321,619 20,189,704 62,300,707 6,830,702 11,087,989 18,897,706 31,219,325 28,897,340 89,721,792 118,619,132 6,894,279 1,549,904 1,202,433 2,112,901 5,032,709 11,926,988 322,794 718,694 3,337,871 1,872,698 1,921,127 5,450,772 (11) 925 914 4 7 20,096 4,913 13,026 2,157 26,074 43,487 28,470 825 3,605 78 815 8,991 46 657 105,159,295 175,099,720 454,532 454,665 547,034 228,951 32,123,693 253,996,106 109,073,532 16,514 21,765,821 69,638,959 9,396,236 514,731 33,460,732 7,342,980 75,174 165,756 270,590 1,581,841 21,296,877 21,296,877 474,491 183,127,678 45,976,614 229,104,292 26,315,903 351,584,769 310,103,021 661,687,790 (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 contingent exposures secured by real estate property (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- (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. 179 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 14. Analysis of maturity-bearing exposures according to remaining maturities: Risk Groups (*) 1 Month 1-3 Months 3-6 Months 6-12 Months Over 1 Year Total Time to Maturity 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 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 Collateralized Receivables with Real Estate Mortgages Receivables are identified as High Risk by the Board 7,447,751 4,719,762 8,570,370 8,497,273 84,414,952 113,650,108 2,184 1,982 36,797 12,952,134 14,168,583 21,279,134 197 3,211 401 8,176 3,957 440,151 454,665 341,065 191,752 36,305 143,472 526,035 228,950 1,457,795 1,232,308 4,919,824 4,596,092 25,158,153 20,325,194 27,260,561 32,058,376 152,824,228 246,636,942 1,500,020 2,814,796 7,251,580 71,217,301 104,062,831 655,789 10,071 966,627 2,716 1,132,155 2,664,322 26,394,429 31,813,322 18,138 4,977 124,642 160,544 Total 56,554,425 28,975,923 41,569,321 55,436,614 340,155,267 522,691,550 (*) 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 0% 20% 35% 50% 75% 100% Amount Before Credit Risk Mitigation (*) 172,847,436 21,218,008 10,468,700 39,915,972 114,139,630 307,895,351 Amount After Credit Risk Mitigation 182,115,524 21,218,008 10,450,092 39,912,463 109,073,532 298,308,051 150% 367,946 367,946 250% 242,174 242,174 Mitigation in Shareholders’ Equity (**) 1,255,381 1,255,381 (*) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. (**) In the calculation made in accordance with the BRSA temporary regulation dated 08.12.2020 and numbered 9312, the simple arithmetic average of the last 252 business days the Central Bank of the Republic of Turkey foreign exchange buying rates of the reporting date is used. 180 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 16. Miscellaneous Information According to Type of Counterparty or 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 4.2 Hotel, Food and Beverage Services 4.3 Transportation and Telecommunication 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) 273,650 270,523 2,786 341 20,037,948 67,507 7,975,524 11,994,917 4,429,993 12,999,311 3,588,573 3,131,267 2,952,157 13,084 1,666,732 270,606 187,214 1,189,678 5,092,183 42,833,085 172,067 153,868 2,572 15,627 5,601,703 64,759 2,833,194 2,703,750 4,856,377 7,399,441 3,418,639 1,355,181 402,672 11,993 1,983,864 109,517 52,713 64,862 2,341,884 20,371,472 157,365 145,045 2,811 9,509 8,043,763 68,053 3,608,566 4,367,144 3,671,667 6,680,615 2,850,473 1,241,468 878,290 11,141 1,330,425 101,621 65,525 201,672 2,231,720 20,785,130 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 10,326,031 5,154,031 3,926,427 7,529,985 (1,276,497) (2,308,096) 18. Exposures Subject to Counter-cyclical Capital Buffer Country Turkey TRNC Albania ABD Malta England Kosovo Cayman Island Marshall Island The United Arab Emirates Other RWA calculations for Trading Book 246,660 RWA Calculations for Private Sector Loans in Banking Book 291,895,851 2,467,904 1,243,123 903,229 796,078 762,726 600,611 592,448 474,180 406,266 647,015 12,975,961 10,375,920 Total 292,142,511 2,467,904 1,243,123 903,229 796,078 762,726 600,611 592,448 474,180 406,266 647,015 181 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management III. Explanations on Currency Risk The exposed currency risk of the Bank is result of the difference between the 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 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 the internal currency risk 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) and Expected Shortfall 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. Expected loss calculations are also carried out daily. 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 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, 2020 December 30, 2020 December 29, 2020 December 28, 2020 December 25, 2020 December 24, 2020 USD 7.3850 7.3065 7.3140 7.3493 7.4901 7.5142 EUR 9.0298 8.9856 8.9567 8.9793 9.1327 9.1568 The Bank’s last 30-days arithmetical average foreign currency purchase rates: USD: TL 7.6147 EUR: TL 9.2731 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, GBP and CHF. Prior Period (138,012) 138,012 244,576 (244,576) 3,100 (3,100) 23,368 (23,368) % Change in Foreign Currency Effects on Profit/Loss (*) Current Period 36,357 (36,357) 355,066 (355,066) 35,540 (35,540) 30,076 (30,076) USD EUR GBP CHF 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease (*) Indicates the values before tax 182 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 (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 Banks Deposits Foreign Currency Deposits (4) Money Market Funds Funds Provided from Other Financial Institutions Marketable 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 EUR USD Other FC Total 21,486,115 2,198,196 1,185,387 3,933,472 66,366,042 1,977,454 2,352,890 29,525,200 4,587,823 4,481,801 18,245,067 66,567,950 2,154,117 14,331,367 6,318,726 447,143 3,971 1,978,262 637,478 1,701,377 65,342,682 13,104,745 6,114,331 22,182,510 134,912,254 2,614,932 6,208,384 16,536 132 12,172 28,840 2,667,212 4,340,421 148,593 7,156,226 102,183,304 129,902,511 25,579,089 257,664,904 1,207,812 77,057,972 13,324,485 485,397 340,263 109,032,213 5,038,402 24,993,733 45,169,166 1,172,851 141,075 46,583,333 86,699 106,866 1,689,150 232,673,518 5,038,402 38,318,218 45,255,865 1,765,114 1,651,993 3,423,638 103,208 5,178,839 93,727,659 189,170,266 47,021,181 329,919,106 8,455,645 (59,267,755) (21,442,092) (72,254,202) (4,939,836) 60,694,619 14,700,689 19,640,525 37,579,765 83,998,250 23,303,631 37,803,128 81,706,566 76,165,666 5,540,900 (3,393,004) 12,347,552 15,740,556 28,080,966 108,979,229 149,320,339 (40,341,110) 40,826,778 55,005,759 14,178,981 29,667,289 22,680,380 23,965,091 1,284,711 4,445,593 13,689,715 18,027,718 (4,338,003) 4,911,925 5,993,884 1,081,959 3,337,566 78,435,163 122,664,030 44,228,867 79,828,486 204,375,510 243,513,723 (39,138,213) 42,345,699 73,347,195 31,001,496 61,085,821 (1) Precious metals accounts amounting TL 13,700,154 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 1,465,259), Operating Lease Development Costs (TL 4,700), Intangible assets (TL 845), Deferred Tax Asset (TL 1,326,594), Prepaid Expenses (TL 126,390), Stage 1 and Stage 2 expected credit loss (TL (6,083,307)), Assets Held for Sale and Related to Discontinued Operations (TL 5,800), in liabilities; Foreign Currency Expense Accruals of Derivative Financial Instruments (TL 3,641,612) and Shareholders’ Equity (TL (119,088)) in Stage 1 and Stage 2 expected credit loss for non-cash loans (TL 203,206) in liabilities are not included in currency risk calculations. (3) Foreign currency indexed loans amounting TL 853,950 presented in TL loans in the balance sheet are included in the table above. TL 395,434 is USD indexed, TL 452,930 is EUR indexed, TL 1,144 is CHF indexed, TL 4,442 is GBP indexed. (4) Precious metals deposit accounts amounting TL 36,807,875 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. 183 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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. A method which takes into consideration the effect of standard interest shocks on the economic values of the Bank’s on and off-balance sheet interest sensitive accounts 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 674.620 (1.226.541) Prior Period 136,010 (401,444) Current Period (1.124.477) 1.247.244 Prior Period (789,613) 871,744 (*) 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. 184 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report a. Interest rate sensitivity of assets, liabilities and off-balance sheet items (Based on time remaining to repricing date): Loans 71,342,009 32,663,401 108,725,501 129,701,034 22,956,660 18,325,551 8,933,436 12,984,006 11,561,103 13,291,720 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 Financial Assets Measured at Amortized 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 Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 3,076,982 4,522,726 136,518 45,738 67,829,379 70,906,361 8,827,076 13,532,058 1,381,494 1,290,113 4,005,775 997,989 7,470 1,558,650 9,241,491 435,130 132,997 22,439,507 65,530,946 365,521,602 41,659,437 27,510,537 8,288,856 5,071,030 7,600,549 16,871,549 7,319,256 1,579,227 112,008,648 50,624,017 142,632,569 149,579,382 37,835,077 101,222,739 593,902,432 2,584,686 409,869 768 160,014,577 37,603,795 13,737,662 526,688 1,080,222 4,075,545 152,918,224 364,800,946 22,996,534 425,062 1,080,972 1,059,824 2,586,492 3 5,104,639 23,448,656 2,756,982 12,275,296 13,126,348 1,755,976 24,729,251 9,789,049 14,527,257 2,303,162 1,154,150 493,355 1,090,336 84,322,597 93,666,533 22,996,537 14,952,319 52,979,207 40,431,345 190,748,147 69,323,944 40,896,050 28,713,251 11,372,740 252,848,300 593,902,432 Balance Sheet Long Position Balance Sheet Short Position Off Balance Sheet Long Position Off Balance Sheet Short Position 101,736,519 120,866,131 26,462,337 249,064,987 (78,739,499) (18,699,927) 3,665,121 9,971,763 649,650 (5,576,573) (8,123,500) (151,625,561) (249,064,987) 14,286,534 (13,700,073) Total Position (75,074,378) (8,728,164) 102,386,169 115,289,558 18,338,837 (151,625,561) 586,461 (*) The balance includes derivative financial assets (**) The expected loss provisions are shown in Non-Interest column. (***) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (****) Equity is included in ‘’non-interest bearing’’ column. 185 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 at Fair Value Through Other Comprehensive Income Loans Financial Assets Measured at Amortized 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 Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 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 4,481,401 477,960 4,450,505 6,611,475 28,670,433 21,746,804 10,914,492 455,147 859,624 2,671,878 660,713 11,418,430 3,239,839 436,058 1,187,760 12,100,455 44,664,141 40,250,633 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 Balance Sheet Long Position Balance Sheet Short Position Off Balance Sheet Long Position Off Balance Sheet Short Position (91,831,469) (20,465,769) 3,533,443 10,295,150 74,336,392 92,236,396 31,109,536 197,682,324 (1,270,459) (4,204,967) (6,954,496) (85,385,086) (197,682,324) 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 (*) The balance includes derivative financial assets (**) The expected loss provisions are shown in Non-Interest column. (***) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. (****) 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 Amortized 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. 186 EUR % 0.33 2.09 2.18 4.74 1.80 0.11 0.05 1.86 USD % 0.14 2.12 4.66 5.83 3.88 1.01 0.15 1.75 6.22 2.58 JPY % TL % 12.00 15.27 13.90 14.66 14.17 12.81 16.50 10.65 16.93 13.81 11.02 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 at Fair Value Through Other Comprehensive Income Loans Financial Assets Measured at Amortized 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. V. Explanations on Equity Shares Risk Arising from Banking Book 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 a. Accounting policies related to equity investments in 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: Investments in Shares Quoted Investments in Shares 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 20,008,561 22,468,675 7,867,083 11,553,281 242,174 24,131 5,137,838 1,177,876 c. Information on revaluation surpluses and unrealized gains/losses on equity securities and results included in Common Equity and Tier II 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 15,189,098 4,081,056 19,270,154 15,189,098 4,081,056 19,270,154 (*) 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 Minimum Capital Requirement 19,420,364 6,582,019 26,002,383 19,420,364 6,724,531 26,144,895 1,553,629 537,962 2,091,591 187 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 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 Management 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. The reflections of conveniences provided for loan customers on repayments due to the COVID-19 outbreak and pressure in financial markets on the Bank’s liquidity adequacy are analyzed under various scenarios. 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, related 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 156.34 FC 278.05 Prior Period TL+FC 176.54 FC 307.29 23.10.2020 16.10.2020 18.10.2019 25.10.2019 175.72 01.01.2021 509.90 11.12.2020 209.00 29.11.2019 412.66 03.01.2020 The lowest value Applicable week The highest value Applicable week 188 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 (%) (*) The simple arithmetic average calculated for the last three months of the weekly simple arithmetic average. Total Unweighted Value (*) Total Weighted Value (*) TL+FC FC TL+FC FC 130,597,014 79,075,224 277,386,679 46,269,638 231,117,041 105,988,053 1,349,088 86,784,021 17,854,944 181,076,534 181,076,534 60,698,942 67,444 54,115,267 6,516,231 5,539,673 8,108,203 25,425,186 2,313,482 23,111,704 51,951,497 337,272 39,686,643 11,927,582 5,506 5,539,673 18,107,653 18,107,653 29,970,499 16,861 23,622,939 6,330,699 5,506 8,108,203 1,794,273 4,362,803 1,794,273 4,362,803 3,745,400 7,028,663 196,973,518 3,745,400 6,284,510 92,425,535 3,745,400 351,433 21,527,379 104,800,674 1,484 33,794,601 1,596,986 35,393,071 21,391,709 44,734,361 66,126,070 25,760,071 1,596,986 27,357,057 3,745,400 314,226 11,455,358 67,961,445 18,943,694 44,734,361 63,678,055 Upper Limit Applied Value 130,597,014 77,443,617 169.04 79,075,224 18,754,820 435.80 189 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Prior Period HIGH QUALITY LIQUID ASSETS High Quality Liquid Assets CASH OUTFLOWS Retail and Small Business Customers, of which; Stable deposits Less stable deposits Unsecured 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 derivative 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 (*) Total Weighted Value (*) TL+FC FC TL+FC FC 201,855,265 42,057,131 159,798,134 78,465,947 580,222 63,272,420 14,613,305 114,216,455 114,216,455 38,624,455 7,461 36,483,263 2,133,731 117,412,446 54,916,614 18,082,670 2,102,857 15,979,813 42,055,130 145,055 32,858,221 9,051,854 11,421,646 11,421,646 20,163,163 1,865 18,095,008 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 3,259,918 5,509,752 153,049,122 3,259,918 4,730,020 66,605,870 3,259,918 275,488 15,905,483 120,997,412 9,835 26,890,371 40,235,432 67,135,638 16,339,545 35,879,375 52,218,920 20,193,796 40,235,432 60,429,228 3,259,918 236,501 8,111,253 59,855,471 14,457,952 35,879,375 50,337,327 Upper Limit Applied Value 117,412,446 60,568,184 194.49 54,916,614 15,313,743 361.35 (*) The simple arithmetic average calculated for the last three months of the weekly simple arithmetic average. Compared to the prior period, a decrease in the total liquidity coverage ratio and an increase in the foreign currency liquidity coverage ratio have been observed for the fourth quarter of 2020. While the foreign currency liquidity coverage ratio, increased due to the increase in the high-quality liquid asset stock, the total liquidity coverage ratio decreased due to the increase in net cash outflows. Total and Foreign Currency liquidity coverage ratios are continuing to hover far above the minimum level (respectively 100% and 80%) 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. 190 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 32,467,082 38,439,279 Banks 9,476,921 3,872,881 136,518 45,738 70,906,361 13,532,058 Financial Assets at Fair Value through Profit/Loss (**) Money Market Placements Financial Assets at Fair Value Through Other Comprehensive Income 1,554,821 1,297,223 1,239,405 4,006,149 1,136,305 7,588 9,241,491 435,130 3,399,017 1,989,465 7,584,954 28,533,443 23,588,937 65,530,946 Loans (***) 13,781,055 36,589,566 34,372,784 95,914,182 131,528,306 32,964,237 20,371,472 365,521,602 Financial Assets Measured at Amortized Cost Other Assets Total Assets Liabilities Bank Deposits Other Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (****) Miscellaneous Payables 3,556,347 8,042,533 2,512,555 6,647,357 20,631,038 8,312,140 41,659,437 53,047 188,399 19,226,558 27,510,537 57,715,009 95,196,846 40,303,774 114,198,380 182,017,491 64,872,902 39,598,030 593,902,432 1,080,222 2,584,686 409,869 768 152,918,224 160,014,185 37,602,176 13,734,084 532,277 469,947 3,619,285 20,218,982 14,621,273 1,501,858 22,996,534 3 1,080,972 1,744,682 12,275,296 25,802,698 12,075,559 14,344,211 209,899 510 397,699 4,075,545 364,800,946 40,431,345 22,996,537 52,979,207 14,952,319 Other Liabilities Total Liabilities Liquidity Gap 6,061,635 4,764,473 1,954,376 1,545,307 362,075 78,978,667 93,666,533 153,998,446 207,552,170 48,350,387 48,184,016 42,899,254 13,939,492 78,978,667 593,902,432 (96,283,437) (112,355,324) (8,046,613) 66,014,364 139,118,237 50,933,410 (39,380,637) Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities (1,843,165) (3,082,458) (232,208) 653,246 60,975,648 44,234,852 23,095,200 26,504,775 44,842,885 62,818,813 47,317,310 23,327,408 25,851,529 44,842,885 Non-cash Loans 67,592,573 2,568,566 5,824,087 23,768,593 15,584,033 4,237,362 (4,504,585) 199,653,360 204,157,945 119,575,214 Prior Period Total Assets Total Liabilities Liquidity Gap Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities 51,621,827 64,957,934 24,693,394 76,252,663 158,395,650 54,974,910 37,163,093 468,059,471 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) 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 1,349,407 139,763,331 138,413,924 92,989,062 Non-cash Loans 54,224,332 1,976,792 5,908,305 17,491,717 9,635,096 3,752,820 (*) 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. (***) Nonperforming loans are included in “Unallocated” column. (****) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. 191 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management In compliance with the “IFRS 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 Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (*) Leasing Liabilities Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total 153,998,446 163,018,733 38,316,955 13,925,240 555,303 369,814,677 938,186 368,876,491 475,361 3,724,126 20,846,201 15,834,477 1,565,678 42,445,843 2,014,498 40,431,345 23,044,216 3 23,044,219 47,682 22,996,537 1,298,508 1,925,408 15,144,504 32,577,652 15,571,435 66,517,507 13,538,300 52,979,207 36,530 76,918 262,719 1,053,002 1,914,942 3,344,111 1,954,894 1,389,217 (*) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. Prior Period Liabilities Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (*) Leasing Liabilities Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total 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. The following table shows the remaining maturities of non-cash loans of the Bank. Current Period Letters of Credit Letters of Guarantee Acceptances Other Total Prior Period Letters of Credit Letters of Guarantee Acceptances Other Total Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 980,613 941,460 3,190,944 533 5 Years and Over Total 19,537,281 1,261,618 4,065,504 16,134,892 10,858,891 2,584,214 87,432,890 326,335 817,123 4,348,430 3,901,311 94,327 823,298 1,653,148 9,459,703 3,145,340 14,423,731 52,527,771 66,504 574,567 67,592,573 2,568,566 5,824,087 23,768,593 15,584,033 4,237,362 119,575,214 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 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 192 Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 2,597,630 2,567,063 3,671,735 8,622,850 2,482,254 3,615,646 8,451,373 2,475,647 5 Years and Over Total 17,374,469 17,109,729 46,285,705 32,186,709 11,231,842 23,275,336 43,002,073 155,981,665 57,206,194 42,385,680 11,539,355 22,628,697 43,002,073 176,761,999 272,674 297,024 2,691,230 2,654,710 9,222,231 720,385 765,850 495,343 492,814 7,218,000 956,603 1,056,468 2,033,885 2,030,192 500,040 747,185 747,185 1,840,812 1,840,812 1,949,662 2,119,342 7,808,455 7,765,713 16,940,271 123,794,461 91,552,162 46,422,608 52,356,304 89,685,770 403,811,305 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Prior Period Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Forwards Contracts- Buy Forwards Contracts- Sell Swaps Contracts-Buy Swaps Contracts-Sell Futures Transactions-Buy Futures Transactions-Sell Options-Call Options-Put Other Total 1,256,189 1,253,231 32,434,720 32,506,930 1,937,177 1,934,854 16,279,125 16,415,096 5,780,168 5,691,025 12,383,204 11,402,337 2,163,397 2,194,627 20,456,930 20,154,652 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 38,148,561 38,148,561 1,347,513 1,347,513 Total 11,136,931 11,073,737 119,702,540 118,627,576 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 VII. Explanations on Leverage Ratio a. Explanations on Differences Between Current and Prior Years’ Leverage Ratios The Bank’s unconsolidated 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 7.88% (December 31, 2019: 9.07%). According to Regulation the minimum leverage ratio is 3%. The changes in the leverage ratio are mostly due to the increase in total risk amounts. 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 Current Period (*) Prior Period(*) 607,154,346 451,942,052 (1,185,021) (876,726) 605,969,325 451,065,326 8,811,454 2,608,300 11,419,754 3,694,184 1,942,906 5,637,090 The amount of risk investment securities or commodity collateral financing transactions (Excluding on balance sheet items) 4,969,503 2,463,078 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. VIII. Explanations on Other Price Risks 4,969,503 2,463,078 215,539,119 165,807,287 (6,838,414) (4,557,870) 208,700,705 161,249,417 65,479,340 56,276,404 831,059,287 620,414,911 7.88 9.07 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 14,726 increase/decrease. 193 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 13,532,058 65,530,946 41,659,437 12,954,309 51,872,345 30,888,355 13,531,298 65,530,946 41,641,633 12,951,453 51,872,345 31,039,054 345,150,130 270,360,084 328,268,442 271,214,596 4,075,545 4,714,738 4,068,196 4,695,910 364,800,946 291,207,264 363,992,492 290,548,279 40,431,345 52,979,207 14,952,319 40,250,633 44,664,141 12,100,455 39,928,073 53,708,214 14,952,319 39,661,083 44,957,049 12,100,455 (*) 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 market conditions. 2. Information on fair value measurements recognized in the financial statements “IFRS 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 Profit or Loss (*) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 Level 2 Level 3 167,674 147,257 42,667,184 468,938 261,922 5,060,117 1,145,638 22,077,803 320,025 89,168 7,934,485 103,229 1,886,716 350,829 (*) Since they are not traded in an active market, the equity securities TL 25,937 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 (*) Debt Securities Equity Securities Other Derivative Financial Liabilities Level 1 Level 2 Level 3 258,360 137,669 3,844 11,514 4,044,105 1,074,673 1,886,716 35,822,080 15,189,405 350,829 421,665 76,207 2,134,363 (*) Since they are not traded in an active market, the equity securities TL 12,159 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. 194 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 2,249,059 92,086 (8,843) 8,472 2,340,774 Prior Period 2,229,407 261,733 (1,365) 221,111 (461,827) 2,249,059 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 standardized approach for calculation of capital charge for credit risk, therefore explanations about internal ratings-based approach are not included. Reverse stress tests are regularly carried out by the Bank considering the increase in deteriorated loan portfolio and interest and exchange rate shocks which might cause the capital adequacy to fall within the legal limits. a. General Information on Risk Management Approach 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 Unit, Operational Risk and Subsidiary Risk Unit, Model Risk and Validation Unit, Internal Capital Assessment Process and Economic Capital 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 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 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. 195 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management The risk reports that analyze 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 summarized 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 the risk appetite framework and based on the components of the main risk types, - In addition to the assessment 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 reliability, - Analyzing 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 holistic and individual stress test processes carried out by the Bank, the most advanced approaches used in risk measurement in the Bank are used as much as possible, together with the methods that are the basis of legal reporting (standard approaches for credit and market risk, basic indicator approach for operational risk). 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 reflections of developments related to the COVID-19 outbreak on the Bank’s risk profile and risk appetite framework are closely monitored. The negative effects of the COVID-19 outbreak are also taken into account in the calculation of expected credit loss. The levels at which the capital adequacy ratio of the Bank will reach are estimated and monitored with stress tests. In addition, reverse stress tests are carried out regularly, by determining the problematic loan growth rate and increase in exchange rates, which will cause the Bank’s capital adequacy to fall within the legal limits. 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. Top 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 Top 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. In case of exceeding the limits, the excess and its reasons are immediately reported to the Risk Committee and Board of Directors. The actions to be taken to remedy the excess and the time to eliminate the excess are concluded under the authority of the Board of Directors. The results of the controls regarding the excess of the risk limits and the evaluations of these limits are presented by Internal Audit and Risk Management Group to Top 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. 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. 196 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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. Model Risk Management and Validation Operations Model risk is the risk of financial losses and/or loss of reputation that the Bank may be exposed to due to errors and/or malfunctions that occur during the creation, implementation or use of models used in its activities. In order to address the model risk in a holistic manner, the model definition, model life cycle and triple line of defense structure and the duties and responsibilities of all functions of the Bank in this structure are defined in the model risk management policy. Model risk management and validation activities in the second line of defense of the triple line of defense structure; creating the model inventory, determining and approving the model class, validating the models, preparing periodic reports on the Bank’s model risk and presenting those reports to the Risk Committee, Audit Committee and Board of Directors. Risk measurement models are validated at least once a year according to international standards. Within the scope of validation, activities are carried out to test the performance and validity of models with statistical methods, to examine the quality of the data used in the model development phase and the conceptual soundness of the selected methods, and to evaluate the health of the processes created for the use of the models. The results of the validation activities are reported to the Risk Committee, Audit Committee and the Board of Directors. a.2 Overview of risk weighted amounts: Credit risk (excluding counterparty credit risk) (CCR) Of which standardized approach (SA) Of which internal rating-based (IRB) approach Counterparty credit risk Of which standardized 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 standardized approach (SA) Of which internal model approaches (IMM) Operational Risk Of which Basic Indicator Approach Of which Standardized approach (SA) Of which Advanced measurement approach Risk Weighted Amounts Minimum Capital Requirements Current Period 400,826,455 400,826,455 8,461,390 8,461,390 Prior Period 343,738,969 343,738,969 6,949,485 6,949,485 Current Period 32,066,116 32,066,116 676,911 676,911 1,396,354 1,222,908 111,708 8,532,063 8,532,063 32,655,169 32,655,169 5,765,938 5,765,938 29,109,592 29,109,592 682,565 682,565 2,612,414 2,612,414 The amounts below the thresholds for deduction from capital (subject to a 250% risk weight) 605,435 551,920 48,435 Floor adjustment Total 452,476,866 387,338,812 36,198,149 197 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 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 70,906,361 13,532,058 4,181,374 70,906,361 13,532,058 3,294,280 65,530,946 65,530,946 Derivative Financial Assets at Fair Value Through Profit/Loss 5,060,117 5,060,117 5,060,117 Derivative Financial Assets at Fair Value Through Other Comprehensive Income Financial Assets at Amortized Cost-Credit 365,521,602 365,521,602 Financial Assets at Amortized Cost-Other Financial Assets 41,659,437 41,659,437 887,094 684,680 3,876,906 48,658 1,207,338 23,363,882 1,220,094 26,002,383 6,610,279 1,330,841 23,363,882 1,220,094 26,002,383 6,561,621 1,330,841 3,420,494 12,290,328 3,420,494 12,290,328 593,902,432 592,966,680 5,060,117 5,448,680 1,255,996 368,876,491 40,431,345 22,996,537 30,840,648 7,934,485 1,389,217 10,224,590 2,420,107 22,138,559 18,869,001 67,781,452 593,902,432 7,056,940 22,996,537 7,934,485 30,053,477 7,934,485 Financial Assets at Amortized 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 Subordinated Debts Other Liabilities Shareholders’ Equity Total Liabilities 198 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 3,372,776 51,872,345 4,044,105 53,233,241 12,954,309 1,074,673 51,872,345 4,044,105 4,044,105 2,298,103 484,050 2,088,024 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 Amortized Cost-Credit 289,243,558 289,243,558 Financial Assets at Amortized Cost-Other Financial Assets 30,888,355 30,888,355 Financial Assets at Amortized 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 Subordinated Debts Other Liabilities Shareholders’ Equity Total Liabilities 15,487,830 1,102,181 21,070,554 6,462,567 913,509 15,487,830 1,102,181 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 2,134,363 199 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 net amount scope of financial statement Off-balance sheet amounts Repo style transactions (*) Differences in valuations Differences due to different netting rules Differences due to consideration of provisions Differences due to prudential filters 1 2 3 4 5 6 7 8 9 10 Differences due to risk mitigation (**) 11 Risk Amounts Total Credit Risk 593,902,432 592,966,680 593,902,432 592,966,680 408,834,224 85,236,037 Securitization Positions Counterparty credit risk 5,060,117 (30,053,476) 35,113,593 7,523,188 4,717,151 Market risk 5,448,680 7,934,485 2,485,805 (21,923,476) (5,657,406) 650,621,835 12,240,339 2,485,805 (*) 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 Asset carrying value amount under scope of TAS Liabilities carrying value amount under scope of TAS Total net amount scope of financial statement Off-balance sheet amounts Repo style transactions (*) Differences in valuations Differences due to different netting rules Differences due to consideration of provisions Differences due to prudential filters 1 2 3 4 5 6 7 8 9 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. The Bank intends to use fair value measurement methods in accordance with IFRS 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 interest 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, Note II “Explanations on Credit Risk,” and Section Four, Note XI-a.1. 200 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report c.1.2. Credit quality of assets: Current Period Loans (*) Debt Securities Off-balance sheet exposures Total Gross Carrying Value in Financial Statements Prepared in Accordance with Turkish Accounting Standards (TAS) Defaulted 20,371,472 909,307 21,280,779 Non-defaulted 345,150,130 107,252,064 202,730,928 655,133,122 Allowances/amortization and impairments 12,975,961 694,245 13,670,206 (*) 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. Allowances/amortization and impairments Prior Period Loans (*) Debt Securities Off-balance sheet exposures Total Gross Carrying Value 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 (*) 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 table. 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 10,326,031 537,247 10,863,278 Current Period 18,883,474 5,120,175 (145,197) (37,283) (3,449,697) 20,371,472 Net Values 352,545,641 107,252,064 202,945,990 662,743,695 Net Values 278,917,527 82,803,376 157,234,808 518,955,711 Prior Period 11,191,689 12,782,901 (109,537) (1,569,431) (3,412,148) 18,883,474 (*) 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. Restructuring 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 2020 is TL 37,283. 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 20,176,357 39,197 1,275 8,560 146,083 20,371,472 12,802,981 26,484 1,067 6,329 139,100 12,975,961 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 (*) 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”. 201 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 336,672,229 107,252,064 4,761,729 3,987,435 11,111,682 9,097,809 443,924,293 4,761,729 3,987,435 11,111,682 9,097,809 Current Period Loans (**) Debt securities Total Of which defaulted 7,395,512 (*) 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 table. 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 Prior 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 table. 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 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 sovereigns and their central banks 164,764,668 454,543 505,480 228,549 18,683,494 193,661,164 110,514,185 10,323,829 20,410,195 7,342,980 63,926 1,231 490 103,885 803 16,676,675 123,382,253 51,613,908 312,988 3,555,456 869,651 173,863,011 454,435 504,767 228,549 18,683,494 185,880,826 105,736,196 10,306,924 20,410,195 7,342,980 63,926 1,236,709 230 42,267 402 13,440,199 68,115,280 3,337,336 143,168 2,600,445 101,830 2,163,946 227,333 547,034 10,446,986 249,859,909 81,805,149 3,657,532 14,214,647 5,617,703 166,103 1,516,841 21,278,047 26,315,903 65,000 6,112,340 1,516,841 21,278,047 26,315,903 65,000 18,830 1,396,354 12,346,061 26,679,164 576,063,804 202,694,680 572,586,094 89,101,696 409,127,921 1.24% 50.00% 100.00% 0.00% 32.52% 98.37% 75.00% 35.00% 61.77% 76.50% 100.21% 88.27% 57.97% 101.38% 61.83% 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 202 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Prior Period 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 sovereigns and their central banks 132,118,874 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 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% 203 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management c.3.3. Standardized Approach-Exposures by Risk Classes and Risk Weights: 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Bank 172,935,757 35 2,163,928 454,664 1 547,034 228,951 19,714,488 1,503,520 11,826,138 5,866,767 567,163 15,904 246,625,814 5 109,073,532 10,450,092 17,591,986 3,726,033 5,418,654 3,341,469 275,478 75,865 13,332 76,559 175,099,720 454,665 547,034 228,951 32,123,693 253,996,106 109,073,532 10,450,092 23,010,640 7,342,980 165,756 8,950,816 182,115,524 370,975 1,210,866 26,073,729 12,346,061 1,581,841 242,174 26,315,903 21,296,877 21,218,008 10,450,092 39,912,463 109,073,532 298,308,051 367,946 242,174 661,687,790 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 204 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 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 60,334 200,695,329 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 5,661,559 100,610 1,172,603 21,283,610 9,914,473 1,273,213 220,768 21,504,378 15,576,032 129,630,924 16,129,096 14,259,232 27,369,096 77,240,762 269,074,150 711,027 220,768 534,635,055 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”. 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. 205 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management d.2. Counterparty credit risk (CCR) approach analysis: Current Period Replacement Cost Potential Future Exposure Exposure after Credit Risk Mitigation Risk Weighted Amounts Standardized Approach -CCR (for derivatives) (*) 4,675,225 1,871,467 6,546,692 4,640,300 Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) Total 4,675,225 1,871,467 (*) Transactions with central counterparties are not included. 4,510,615 11,057,307 1,650,727 6,291,027 Prior Period Replacement Cost Potential Future Exposure Exposure after Credit Risk Mitigation Risk Weighted Amounts Standardized Approach -CCR (for derivatives) (*) 4,044,105 1,771,142 5,815,247 4,075,727 Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) Total 4,044,105 1,771,142 (*) Transactions with central counterparties are not included. d.3. Capital obligation for credit valuation adjustment (CVA): 2,320,084 8,135,331 930,636 5,006,363 Total portfolio value with standardized approach CVA capital charge Total subject to the CVA capital charge 6,546,692 6,546,692 2,160,332 2,160,332 5,815,247 5,815,247 1,938,968 1,938,968 Current Period Prior Period Risk Amounts Risk Weighted Amounts Risk Amounts Risk Weighted Amounts d.4. CCR exposures by risk class and risk weights: Current Period Risk Groups 0% 10% 20% 50% 75% 100% 150% Risk Weights Total Credit Exposure 1,066,957 Conditional and unconditional exposures to sovereigns and their central banks 1,066,957 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 2,201,826 3,867,157 976 146 146 3 3,906,228 14,014 6,068,986 3,907,204 14,014 1,066,957 2,202,802 3,867,157 14,014 3,906,377 11,057,307 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 206 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Prior 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 Conditional and unconditional exposures to banks and securities firms 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 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. 0% 10% 20% 50% 75% 100% 150% Total Credit Exposure Risk Weights 23,920 23,920 1,201 1,201 2,005,754 3,028,424 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 Collateral used in derivative transactions Received Collateral Given Collateral Segregated Unsegregated Segregated Unsegregated Collateral used in other transactions Received Collateral Given Collateral 19,280,623 10,055,863 29,336,486 Collateral used in derivative transactions Collateral used in other transactions Received Collateral Given Collateral Segregated Unsegregated Segregated Unsegregated Given Collateral Received Collateral 1,974,562 5,783,834 7,758,396 207 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Current Period Prior Period Post CRM risk exposure 478,874 432,350 428,010 RWA 10,031 8,647 8,560 4,340 87 46,524 1,384 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 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 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 Committee and to the Board via the Audit Committee by the Risk Management Department. 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. 208 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report f.2. Standardized 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 Securitizations Total g. Explanations on Operational Risk Current Period Prior Period RWA 8,428,564 3,109,788 521,550 4,714,538 82,688 103,499 103,499 RWA 5,535,576 1,876,275 386,538 2,923,650 349,113 230,362 230,362 8,532,063 5,765,938 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, 2020, the operational risk amount is TL 32,655,169 (December 31, 2019: TL 29,109,592) 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 15,503,039 17,545,195 19,200,037 3 15 2,612,414 2 PP Amount 1 PP Amount CP Amount 32,655,169 Total/No. of Years of Positive Gross Rate (%) Total 13,527,113 15,503,039 17,545,195 3 15 2,328,767 29,109,592 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. In the calculations made within the framework of the said regulation, behavioral maturity modeling is performed for demand deposits with low sensitivity to interest changes and whose original maturity is longer than the contractual maturity. In these studies, which are defined as core deposit analysis, based on historical data, calculations are made for what amount of demand deposits will remain within the bank for what maturity, and these analyzes are used as an input in quantifying the interest rate risk arising from banking accounts in a way that does not contradict legal provisions. Currency TL TL EUR EUR USD USD Total (for Negative Shocks) Total (for Positive Shocks) Applied Shock (+/- x basis point) (+) 500 (-) 400 (+) 200 (-) 200 (+) 200 (-) 200 Revenue/Loss Revenue/Shareholders’ Equity - Loss/Shareholders’ Equity (7,912,722) 7,425,467 (391,131) 379,998 521,609 (198,532) 7,606,933 (7,782,244) (9.36)% 8.77% (0.46)% 0.45% 0.62% (0.23)% 8.99% (9.20)% 209 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 2020, the Remuneration Committee met 6 times and made a total of 9 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 2020, the number of qualified employees working at the Bank is 27. 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 regarding 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 Bank’s operations are classified as corporate, commercial, retail and private banking, and treasury/investment banking. Services to the large corporations, SMEs and other trading companies are provided through various financial instruments within the scope 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 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. All kinds of financing and cash management services provided to individuals in the high-income level are recognized as Private Banking activities. 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 Fees and Commissions Income Fees and Commissions Expense Dividend Income Trading Income/Loss (Net) Other Income Expected Credit Loss and Other Provision Expenses Other Operating Expense Income/Loss from Investments in Subsidiaries Accounted by Equity Method Corporate/ Commercial Banking Individual/Private Banking 23,136,025 3,665,548 4,521,230 8,577,446 5,362,953 2,251,040 1,525,979 7,515,789 2,087,678 245,951 534,157 4,914,808 Treasury Transaction/ Investment Activities 10,495,611 6,916,464 21,487 (3,341,357) 122 20,047 3,406,471 Unallocated 307,250 1,329,328 18,148 1,172,805 664,153 4,659,927 4,794,500 Total 42,516,332 17,274,293 6,790,418 1,172,805 21,487 (3,341,357) 2,436,205 12,729,920 11,796,986 3,406,471 8,855,552 2,044,635 6,810,917 270,351,279 139,082,382 78,230,289 216,936,068 154,079,599 124,341,574 91,241,265 113,542,408 593,902,432 593,902,432 Income Before Tax Tax Provision Net Period Profit Total Assets Total Liabilities 210 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Prior Period Interest Income Interest Expense Commission İncome Commission Expense Dividend Income Trading Income/Loss (Net) Other Income Provision Expense Other 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 5,982,645 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 1,781,040 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 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 2,486,601 3,077,078 FC 6,615,956 58,365,617 361,109 TL 2,091,507 3,171,023 FC 3,397,846 44,400,659 172,206 5,563,679 65,342,682 5,262,530 47,970,711 Current Period TL FC Prior Period TL FC 3,077,078 19,977,563 3,171,023 20,785,146 3,077,078 38,388,054 58,365,617 3,171,023 23,615,513 44,400,659 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% - 6% for TL deposits and other liabilities, between 13% - 22% 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 which are in TL 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: As of December 31, 2020, and December 31, 2019 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, 2020 are amounting to TL 44,192 (December 31, 2019: TL 91,705). b.3. All creditors including the Bank reached an agreement on restructuring the loans granted to the company. 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. 211 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management At the Ordinary Meeting of General Assembly of 2018 held in the prior 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 (31.12.2019: TL 1,886,716), 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 997,428 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. Balance of related asset is followed in financial statements as Stage 3 within the scope of “TFRS 13 - Fair Value Measurement” standard. The Bank re-evaluated the fair value of the relevant financial asset as of the end of the period and did not make any change in the current value monitored during the current period. If the growth rate and risk-free return rate on investment used in the discounted cash flow method used in valuation 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 1,113,993 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. 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 (7,337) 26,379 212 Current Period Prior Period TL 150,545 41,156 3,779 FC 369,782 4,323,287 81,008 90,560 TL 82,015 136,748 FC 284,468 3,496,361 678 43,835 195,480 4,864,637 219,441 3,824,664 Current Period TL FC Prior Period TL FC 230,204 197,109 318,280 12,786,465 462,385 220,975 1,281,044 10,989,905 427,313 13,104,745 683,360 12,270,949 Restricted Amount Unrestricted Amount Current Period Prior Period Current Period Prior Period 5,672,853 3,185,966 2,007,029 5,061,814 4,125,760 53,765 1,593,433 12,459,281 1,277,301 10,518,640 524,293 524,293 692,240 692,240 Current Period Prior Period Stage 2 Stage 1 Stage 1 27,806 33,144 (27,234) Stage 1 Stage 2 Stage 2 17,651 27,076 (16,999) 78 27,806 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 17,730,908 as at December 31, 2020 (December 31, 2019: TL 6,258,965). 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 18,376,335 as at December 31, 2020 (December 31, 2019: TL 1,228,583). 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 65,691,796 42,827,077 22,864,719 345,962 345,962 643,691 136,879 65,530,946 Prior Period 52,115,479 35,881,877 16,233,602 433,824 433,824 777,157 100,199 51,872,345 (*) 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 297,475 297,475 864 864 264,231 264,231 203 203 f.2. Information about the Standard loans and loans under close monitoring and loans under close monitoring that have been restructured: 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 Refinance 15,117,345 9,792,393 726,038 2,332 2,360,060 670,120 1,566,402 12,149,377 15,566,363 8,145,061 8,996,866 40,982 353,138 397,342 3,565,992 1,497,092 4,719,267 Standard Loans 302,317,045 139,070,530 24,108,527 8,802,582 64,335,832 23,797,483 42,202,091 302,317,045 15,117,345 12,149,377 15,566,363 Current Period Prior Period Standard Loans 2,566,751 Loans Under Close Monitoring Standard Loans Loans Under Close Monitoring 1,457,857 7,809,169 3,696,174 Changes observed in the expected credit loss for the Stage 1 and Stage 2 loans calculated in accordance with TFRS 9, is mainly due to fluctuation of probability of credit defaults, and also increase in provisions allocated to loans classified as Stage 2 due to effects of COVID-19 has a role in aforementioned increase. 213 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 Standard Loans 83,651,615 218,665,430 Loans Not Subject to Restructuring 2,478,582 12,638,763 Restructured Loans 1,195,017 26,520,723 f.4. Information on consumer loans, retail credit cards, personnel loans and personnel credit cards: Short-Term 1,402,573 10,577 18,613 1,373,383 16,836,506 6,703,007 10,133,499 11,280 11,280 19,886 57 19,829 119,309 46,399 72,910 185 185 1,711,383 Medium and Long Term 64,145,234 20,926,235 1,207,802 42,011,197 3,557 3,557 Interest and Income Accruals 731,137 192,279 10,151 528,707 17,585 17,585 954,375 954,375 139,027 1,220 535 137,272 82,191 82,191 1,379 5 5 1,369 4,084 4,084 228 228 Total 66,278,944 21,129,091 1,236,566 43,913,287 21,142 21,142 17,873,072 7,657,382 10,215,690 11,280 11,280 160,292 1,225 597 158,470 123,621 50,483 73,138 185 185 21,223 1,732,606 20,101,122 65,246,277 853,743 86,201,142 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 Installments Without Installments Retail Credit Cards - FC With Installments Without Installments 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 Installments Without Installments Personnel Credit Cards-FC With Installments Without Installments Overdraft Accounts - TL (real persons) Overdraft Accounts - FC (real persons) Total 214 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 with Installments-FC Indexed Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Commercial Loans with Installments-FC Real Estate Loans Vehicle Loans Short-Term 7,228,878 1,085 170,712 7,057,081 Medium and Long Term 47,943,237 1,369,284 5,008,855 41,565,098 347,994 8,859 20,333 318,802 Interest and Income Accruals 846,424 10,356 37,829 798,239 402,860 9,584 19,939 373,337 Total 56,018,539 1,380,725 5,217,396 49,420,418 750,854 18,443 40,272 692,139 84,462 3,856,490 112,651 4,053,603 General Purpose Commercial Loans 84,462 3,856,490 112,651 4,053,603 Other 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 187,429 187,429 6,648,846 2,921,807 3,727,039 1,007 1,007 1,270,469 19,505 19,505 28,681 6,855,780 3,109,236 3,746,544 1,007 1,007 1,299,150 15,233,662 52,335,150 1,410,121 68,978,933 Current Period 4,665,025 340,485,105 345,150,130 Current Period 334,033,334 11,116,796 345,150,130 Prior Period 3,801,944 266,558,140 270,360,084 Prior Period 262,054,760 8,305,324 270,360,084 Current Period 5,368,800 Prior Period 1,735,386 5,368,800 1,735,386 Current Period Prior Period 12,659 1,325,036 11,638,266 12,975,961 571,870 2,930,004 6,824,157 10,326,031 215 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management f.10. Information on non-performing loans (Net): f.10.1. Information on non-performing loans, which are restructured or rescheduled: Current Period (Gross amounts before the provisions) Restructured Loans Prior Period (Gross amounts before the provisions) Restructured Loans f.10.2. Information on the movement of total non-performing loans Group III Loans with Limited Collectability Group IV Group V Loans with Doubtful Collectability Uncollectible Loans 323 323 65,922 65,922 109,749 109,749 445,066 445,066 Group III Loans with Limited Collectability Group IV Loans with Doubtful Collectability 1,641,053 1,641,053 832,989 832,989 Group V Uncollectible 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 216 1,304,883 1,020,648 176,889 107,346 2,850,285 2,307,818 437,232 105,235 3,970,014 3,232,625 552,081 185,308 171,770 83,525 61,031 27,214 725 715 6 4 12,659 11,601 1,003 55 12,659 11,601 1,003 55 6,454,399 5,947,251 308,516 198,632 1,651,852 1,452,671 62,691 136,490 3,970,014 3,232,625 552,081 185,308 8,320,949 7,413,625 556,666 350,658 838,261 602,085 160,231 75,945 543 275 186 82 2,916,512 2,616,562 206,205 93,745 1,325,036 1,160,300 109,624 55,112 1,591,476 11,124,192 9,700,621 721,251 587,738 114,582 618,038 592,694 5,240 3,707 16,397 8,320,949 7,413,625 556,666 350,658 2,584,863 2,176,395 280,654 125,488 2,326 36,015 34,666 545 620 184 17,442,301 15,495,879 1,001,958 815,995 128,469 11,638,266 9,959,730 839,594 727,220 111,722 5,804,035 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 (*) Prior Period Balance at the End of the Period 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) 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) Group III Group IV Group V Loans with Limited Collectability Loans with Doubtful Collectability Uncollectible Loans 11,050 11,050 81,910 36,242 45,668 1,652,612 665,110 987,502 3,916,536 1,628,380 2,288,156 9,050,836 5,001,086 4,049,750 5,187,955 2,167,497 3,020,458 Group III Group IV Group V Loans with Limited Collectability Loans with Doubtful Collectability Uncollectible Loans 12,659 12,659 1,591,476 2,916,512 1,325,036 1,591,476 733,013 1,304,883 571,870 733,013 3,524,395 6,454,399 2,930,004 3,524,395 5,804,035 17,313,832 11,526,544 5,787,288 128,469 111,722 16,747 4,300,035 11,009,610 6,724,309 4,285,301 114,582 99,848 14,734 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 Collectability Loans with Doubtful Collectability Uncollectible Loans 147,364 297,299 149,935 341,007 603,791 262,784 522,279 1,511,827 989,548 317,525 730,071 412,546 64,957 113,840 48,883 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. Primarily, administrative initiatives are taken to deal with the borrower. Collection through legal proceedings is applied if there is no possibility of collection, liquidation or structuring for receivables through negotiations. 217 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management f.10.7. Information on write-off policy Receivables classified as non-performing loans are collected primarily within the framework of administrative contacts with the debtors, and if no result is obtained, legal proceedings are applied. In case of deletion of NPLs from assets, one of the methods of destruction, receivable sale and write-off can be applied. In the Bank’s write-off policy within the framework following the amendment made in Article 53 of the Banking Law with the Law on Income Tax and amending Certain Laws No. 19.07.2019/7186, along with the “Classification of Loans and the Procedures and Principles for the Reserves to be Allocated” published in the Official Gazette No. 27.11.2019/30961, the following statements are issued: - The portion of the receivables, which are monitored under the Fifth Group-Uncollectible Loans and allocated for lifetime expected credit loss due to the default of the debtor, can be write-off to the extent of the maximum provision amount, - write-off is an accounting practice and does not result in the remission of the receivable, - the receivables to be write-off must be monitored as non-performing loans for at least 1 year. There are no receivables that have been write-off in the current period. Receivables that are proven to be uncollectible in legal follow-up process can be write-off within the instructions of Tax Procedure Law. 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 1,457,857 1,765,113 (737,231) 79,332 (69,133) (4,384) 75,197 Stage 2 3,696,174 5,463,265 Stage 3 10,326,031 3,500,177 (1,010,378) (1,235,396) (71,309) 73,848 (415,661) 73,230 (28,363) (8,023) (4,715) 420,045 6,205 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 2,566,751 7,809,169 12,975,961 1,457,857 3,696,174 10,326,031 g. Financial Assets Measured at Amortized Cost: g.1. Financial Assets Measured at Amortized Cost given as collateral or blocked: Financial assets measured at amortized cost given as collateral or blocked amount to TL 8,880,626 as at December 31, 2020 (December 31, 2019: TL 1,816,815). g.2. Financial Assets Measured at Amortized Cost subject to repurchase agreements: Financial assets measured at amortized cost, which are subject to repurchase agreements amount to TL 6,421,414 as at December 31, 2020 (December 31, 2019: TL 33,869). g.3. Information on government securities measured at amortized 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 (*) 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 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 218 Current Period 40,425,089 Prior Period 30,113,588 40,425,089 30,113,588 Current Period 41,659,437 40,626,988 1,032,449 Prior Period 30,888,355 30,111,594 776,761 41,659,437 30,888,355 Current Period 30,888,355 1,247,679 15,274,452 (6,752,597) 1,001,548 41,659,437 Prior Period 26,727,963 305,374 11,142,522 (8,299,544) 1,012,040 30,888,355 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Expected credit loss for financial assets measured at amortized cost Current Period Prior Period 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 h. Information on associates (Net): h.1. General information on associates: Stage 1 7,768 10,031 (5,869) 71 12,001 No. Title 1- 2- Arap Türk Bankası A.Ş. Kredi Kayıt Bürosu A.Ş. Address (City/Country) İstanbul/TURKEY İstanbul/TURKEY h.2. Information on financial statements of associates in the above order (*): Stage 1 Stage 2 Stage 2 Stage 1 Stage 2 6,468 5,421 (4,227) 106 7,768 Bank’s Share Percentage-If Different, Voting Percentage (%) Bank’s Risk Group Share Percentage (%) 20.58 9.09 20.58 9.09 Fair Value No. 1- 2- Total Assets 5,861,336 411,660 Shareholders’ Equity Total Tangible Assets 1,176,982 265,464 158,816 249,099 Interest Income (**) 292,839 5,882 Securities Income 33 Current Period Profit/Loss 100,781 48,549 Prior Period Profit/Loss 164,509 26,579 (*) Shows September 30, 2020 amounts for Kredi Kayıt Bürosu A.Ş. and December 31, 2020 amounts for Arap Türk Bankası A.Ş (**) 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 Other (**) 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. Current Period 250,459 Prior Period 206,775 25,199 (9,353) 266,305 43,684 250,459 (**) Due to the change in the ownership structure of Bankalararası Kart Merkezi A.Ş. and the loss of significant influence within the scope of “TAS 28-Investments in Subsidiaries and Joint Ventures”, the company is classified to Financial Assets at Fair Value through Other Comprehensive Income. 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 242,174 Prior Period 220,768 242,174 220,768 219 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management i. Information on subsidiaries (Net): i.1. Information on the equity 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. 6,179,047 78,986 6,100,061 4,131,257 1,243 4,130,014 Insurance/ Reinsurance Companies 4,254,655 93,645 4,161,010 İş Finansal Kiralama A.Ş. İş Yatırım Menkul Değerler A.Ş. 1,614,122 5,688 1,608,434 1,915,503 77,088 1,838,415 6,100,061 4,130,014 4,161,010 1,608,434 1,838,415 2,717,143 2,717,143 8,817,204 4,130,014 4,161,010 1,608,434 1,838,415 EQUITY 8,817,204 4,130,014 4,161,010 1,608,434 1,838,415 i.2. General information on subsidiaries (*): No Title Address (City/Country) Anadolu Hayat Emeklilik A.Ş. Joint Stock Company İsbank Join Stock Company Isbank Georgia İş Finansal Kiralama A.Ş. İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Merkezleri Yönetim ve İşletim A.Ş. İstanbul/TURKEY Moscow/RUSSIA Tbilisi/GEORGIA İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İş Net Elektronik Bilgi Üretim Dağıtım Ticaret ve İletişim Hizmetleri A.Ş. İstanbul TURKEY 1- 2- 3- 4- 5- 6- 7- 8- 9- 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. İstanbul TURKEY Frankfurt-Main/GERMANY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY İstanbul/TURKEY Bank’s Share Percentage-if Different, Voting Rights (%) Bank’s Risk Group Share Percentage (%) 62.00 100.00 100.00 27.79 50.51 86.33 100.00 65.65 100.00 99.17 87.60 100.00 47.23 50.93 83.00 100.00 100.00 58.24 63.89 100.00 100.00 70.69 100.00 100.00 87.60 100.00 50.92 57.02 (*) 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 are not included.(Board of Directors Decision dated December, 25, 2015) 220 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report i. Information on subsidiaries (Net): i.3. Financial statement information related to subsidiaries in the above order (*): No Total Assets Shareholders’ Equity Total Tangible Assets Interest Income 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- 36,087,753 1,601,893 283,990 1,162,816 761,827 12,760,612 5,225,405 114,346 129,415 8,775,444 16,619,872 81,777 5,506,298 1,031,711 52,430,920 44,228,036 424,924 212,555 1,717,698 4,130,954 54,271 74,594 2,184,415 1,940,155 54,961 2,638,634 721,214 6,130,769 22,491,233 40,219 10,780 24,902 4,303,529 8,213 34,283 132,850 205,860 2,623 673,646 370,270 729,654 18,039,813 326,451 86,512 42,569 873,785 7,940 2,926 6,693 276,611 373,213 640 185,985 12,241 3,336,674 584,340 Securities Income 56,441 11,400 6,943 7,669 27 3 799,894 5,989 338 128,523 8,153 19,968 879,643 Current Period Profit/Loss Prior Period Profit/Loss 526,939 2,647 20,760 197,586 266,502 8,971 16,203 977,305 59,514 18,061 348,599 40,598 709,473 360,692 16,796 11,640 84,292 297,390 10,782 (847) 420,975 77,784 9,982 312,511 3,953 736,141 Fair Value 3,697,570 2,710,290 2,346,061 6,265,040 4,989,600 2,824,571 2,700,319 22,468,675 Additional Shareholders’ Equity Required (*) 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. as of December 31, 2019, and others are December 31, 2020. 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/Deficit (**) Impairment Balance at the End of the Period Capital Commitments Contribution in equity at the end of the period (%) Current Period 20,820,095 Prior Period 17,431,945 831,528 8,500 4,084,455 3,379,650 25,736,078 20,820,095 (*) The amount in the current period is due to the purchasing shares of Türkiye Sınai Kalkınma Bankası A.Ş., İş Gayrimenkul Yatırım Ortaklığı A.Ş., Milli Reasürans T.A.Ş., İş Net Elektronik Bilgi Üretim Dağıtım Ticaret and İletişim Hizmetleri A.Ş. by cash, Türkiye Şişe ve Cam Fabrikaları A.Ş and İş Gayrimenkul Yatırım Ortaklığı A.Ş.’s shares followed in the Financial Assets at Fair Value Through Profit or Loss account is classified under subsidiaries and due to the capital increase of Trakya Yatırım Holding A.Ş. (**) Includes the differences between the equity method and the accounting method. i.5. Sectoral information on financial subsidiaries and the related carrying amounts: Related Companies 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 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. Current Period 5,580,606 3,659,077 442,361 3,322,877 13,004,921 Current Period 19,420,364 Prior Period 4,183,845 2,836,609 331,262 2,563,986 9,915,702 Prior Period 15,941,409 19,420,364 15,941,409 221 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 (*) 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: Real Estates Leased Tangible Assets Buildings Under Construction Vehicles Other Tangible Assets Total 4,490,249 (27,918) 1,934,382 (582,757) 17,028 4,462,331 1,351,625 17,028 4,462,331 (78,833) (17,922) 2,420 4,413,556 (45,560) 1,351,625 255,099 (323,575) 2,227,147 (943,998) 17,028 23,880 40,908 4,367,996 1,283,149 40,908 22,069 (15,599) 6,470 6,470 5,662 (3,340) 534 26,403 (17,077) 9,326 2,558,752 9,022,480 (1,933,639) (2,559,913) 625,113 6,462,567 625,113 545,609 (262,828) 1,006 6,462,567 751,417 (607,665) 2,420 1,540 3,060,702 9,768,716 (2,151,802) (3,158,437) 908,900 6,610,279 Current Period 913,509 650,812 (233,969) 489 3,428,397 (2,097,556) 1,330,841 Prior Period 623,294 578,024 (287,855) 46 2,776,848 (1,863,339) 913,509 As of December 31, 2020, the Bank has deferred tax asset amounting to TL 3,420,494. 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 482,628 (3,187,481) (670,706) (44,935) (3,420,494) 421,527 (2,318,125) 90,479 (24,989) (1,831,108) (*) 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. q. The deferred tax assets is as follows: Opening Balance Deferred Tax Income/(Expense) (Net) Deferred Taxes Recognized Under Shareholders’ Equity Deferred Taxes Recognized Under Previous Years’ Profits and Losses Exchange Rate Differences Deferred Tax Asset 222 Current Period 1,831,108 1,779,152 (175,980) (13,786) Prior Period 1,492,906 885,740 (547,538) 3,420,494 1,831,108 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 Prior Period 1,102,181 117,920 (7) 243,350 858,950 (119) 1,220,094 1,102,181 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”. 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 prior 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 has been initiated. The other assets classified as “Assets Held for Sale” consist of securities and real estates. 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 21,210,302 85,173,313 76,779,624 8,393,689 941,849 12,898,520 541,979 32,152,261 1,080,222 510 113,549 957,065 9,098 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 6,277,095 59,511,073 2,134,712 449,790 751,497 8,557 90,343,026 13,672,849 82,906,004 4,267,728 1,600,498 8,243,988 1,263 195,865,643 12,445,636 71,922,330 3,136,509 1,227,213 10,983,674 1,131,219 1,272 70,444 7,822,448 14,259,436 565,554 2,396,713 390,882 1,671,325 1,002,743 7,829 191,959 123,706 87,716 65,260 932,741 667,757 329 1,924,058 2,265 3,170,672 5,073,316 195 9,691 26,155 4,013,730 163,286 255,227 768 754,461 916,864 192,488 810,255 65,260 180,729 74,498 768 878 385 168,388,390 27,477,253 1,021,918 37,106,112 3,656,372 36,807,875 4,075,545 510 1,241,227 2,824,710 9,098 153,998,446 30,010,543 160,537,295 6,878,910 8,245,897 9,195,580 9,820 368,876,491 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 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 12,363 295,922,002 223 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 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 Under the Guarantee of Savings Deposits Insurance Fund Exceeding the Limit of Deposit Insurance Fund Current Period Prior Period Current Period 47,354,070 42,668,430 17,580,279 4,157,656 44,102,037 34,185,261 5,898,896 3,216,011 41,824,890 88,281,588 17,357,298 1,683,372 Prior Period 36,391,606 66,511,898 4,305,318 1,170,490 Current Period 1,683,372 Prior Period 1,170,490 Deposits and Other Accounts of the Chairperson and Members of Board of Directors, Chief Executive Officer, Senior Executive Officers and their Relatives 28,274 22,831 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 Held for Trading: Derivative Financial Liabilities at Fair Value Through Profit or Loss Forward Transactions Swap Transactions Futures Options Other Total c. 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 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 150,410 1,185,745 FC 234,473 5,879,693 33,164 451,000 TL 133,432 215,508 FC 180,380 1,557,988 291 46,764 1,336,155 6,598,330 349,231 1,785,132 Current Period TL 613,999 1,499,128 2,113,127 FC 12,010 3,573,917 34,732,291 38,318,218 Prior Period TL 618,412 1,237,853 1,856,265 FC 925,967 3,065,795 34,402,606 38,394,368 Current Period Prior Period TL 613,482 1,499,645 2,113,127 FC 1,259,942 37,058,276 38,318,218 TL 618,412 1,237,853 1,856,265 FC 2,674,532 35,719,836 38,394,368 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 May, 2020 November, 2020 Securitization deals: Funds Borrowed USD 207,500,000 + EUR 539,000,000 USD 238,000,000 + EUR 448,000,000 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. 224 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report Information on funds received through securitization is given below. Structured Entity Amount Final Maturity Remaining Debt Amount as at December 31, 2020 Date June 2012 TIB Diversified Payment Rights Finance Company December 2013 TIB Diversified Payment Rights Finance Company December 2014 TIB Diversified Payment Rights Finance Company EUR 125,000,000 EUR 50,000,000 USD 220,000,000 12 years 12 years 14 years March 2015 October 2015 October 2016 TIB Diversified Payment Rights Finance Company USD 75,000,000 7-15 years TIB Diversified Payment Rights Finance Company USD 221,200,000 10 years TIB Diversified Payment Rights Finance Company USD 240,000,000 5-12 years December 2016 TIB Diversified Payment Rights Finance Company USD 158,800,000 10-13 years December 2017 TIB Diversified Payment Rights Finance Company USD 265,000,000 5-7 years December 2017 TIB Diversified Payment Rights Finance Company December 2017 TIB Diversified Payment Rights Finance Company EUR 125,000,000 USD 125,000,000 5 years 9 years Other Transactions: EUR 46.875.000 EUR 25.000.000 USD 160.000.000 USD 30.000.000 USD 131.337.500 USD 99.849.913 USD 135.780.000 USD 184.000.000 EUR 83.333.333 USD 125.000.000 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 3,960,641 1,476,191 5,436,832 FC 25,403,816 25,403,816 TL 5,231,941 1,191,604 6,423,545 FC 24,693,665 24,693,665 62% of the Bank’s liabilities consists of deposits, 7% of loans borrowed, 9% of securities issued and Tier II subordinated loans. Deposits have spread to a wide customer base with different characteristics. Borrowings 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 Between 1-4 Years More than 4 Years Total h. Explanations on Hedging Derivative Financial Liabilities: The bank has no financial liabilities held for hedging derivatives. i. Information on Provisions: i.1. Reserves for employee benefits: Current Period Prior Period Gross 20,892 79,957 3,243,262 3,344,111 Net 19,984 72,306 1,296,927 1,389,217 Gross 4,809 189,857 3,172,184 3,366,850 Net 4,711 167,748 1,223,804 1,396,263 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 7,117.17 (exact TL amount as at December 31, 2020), which is one-month salary for each service year and cannot exceed the base wage ceiling for employee termination benefits. A provision for severance pays 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 December 31, 2020, provision amounting to TL 1,393,897 is reflected in the financial statements (December 31, 2019: TL 1,168,051). Main actuarial assumptions used in calculation of severance pay liability are as follows: - - In the calculation, the discount rate is 12.40%, the inflation rate is 8%, and the real wage increase rate is 2%. In the calculation, the ceiling of 7,117.17 TL (full TL amount) valid as of 31.12.2020 was taken as basis. - Retirement age is taken into account as the earliest age at which individuals can retire. - CSO 1980 mortality table is used for probability of death for women and men. 225 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 1,168,051 81,633 133,694 (67,817) 6,045 3 72,288 1,393,897 Prior Period 945,548 71,226 147,187 (70,581) 802 5 73,864 1,168,051 In addition to the employee termination benefits the Bank allocates provisions for the unused vacation pay liability. As of December 31, 2020, provision for unused vacation pay is amounting to TL 88,000 (December 31, 2019: TL 69,944). 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 Bank incurs a loss if the exchange rates decrease and makes profit if the exchange rate increases. As of December 31, 2020, and December 31, 2019, provision amount for the currency evaluation losses in the principal amount of foreign currency indexed loans is not available. i.3. As of December 31, 2020, the Bank’s specific provisions for indemnified non-cash loans balance is TL 694,245 (December 31, 2019: TL 537,247) 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, 2020 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 No. 506, the amount of actuarial and technical deficit stands at TL 4,236,111 (December 31, 2019: TL 3,494,026). As of the same date, a provision was reserved for this amount in the financial statements. 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, 2020, 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. Below table shows the cash values of premium and salary payments of the Bank as of December 31, 2020, 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 (12,863,517) 5,185,068 (7,678,449) (1,564,560) 3,759,175 2,194,615 1,247,723 (4,236,111) Prior 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) Current Period Prior Period 752,948 439,787 54,988 301,165 696,788 51,036 1,247,723 1,048,989 Health benefits that are still being paid will be determined within the framework of the Social Security Institution legislation and related regulations with the transfer. i.4.2. Provision of credit cards and promotion of banking services applications: As of December 31, 2020, the Bank has recognized provisions amounting to TL 72,709 for the amount which is recognized within the framework of credit card expenses of credit card customers or promotions for banking services. (December 31, 2019: TL 89,062). 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. 226 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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. 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 128,837 (December 31, 2019: TL 73,665). 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 the mentioned amount 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 favor 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 at prior periods 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 still ongoing within the framework of the ongoing lawsuits and other available legal options. i.4.5. Except the other provisions indicated above, the Bank Management allocated free provision within conservatism principle, for negative circumstances which may arise from the possible changes that may arise in the economy and market conditions, amounting to TL 2,875,000 of which TL 1,125,000 provided in prior years and TL 1,750,000 was provided in the current period. 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. As of 31.12.2020, the remaining corporate tax debt as a result of net off of temporary taxes paid with corporate tax liability is TL 1,938,446. 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 1,938,446 198,896 2,174 191,585 18,192 9,624 54,557 Prior Period 719,916 228,254 4,699 181,938 7,439 7,779 66,860 2,413,474 1,216,885 Current Period Prior Period 218 262 2,049 4,100 4 6,633 189 227 1,827 3,654 3 5,900 227 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Subordinated Loans Subordinated Debt Instrument Total m. Information on shareholders’ equity: m.1. Presentation of paid-in capital: Common shares Preferred shares Total 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 Bank has issued subordinated debt securities, to be included in the contribution capital calculation, with the following nominal values; - 10 year-term in the amount of USD 1,000,000 with interest rate of 6% on October 24, 2012, 10 year-term in the amount of USD 400,000,000 with interest rate of 7.85% on December 10, 2013, 11 year-term having a call option on 6th year in the amount of USD 500,000,000 with interest rate of 7% on June 29, 2017 and 10 year-term having a call option on 5th year in the amount of USD 750,000,000 with interest rate of 7.75% on January 22, 2020 for the purpose of making available to the individuals and legal persons who are resident abroad, - TL 1,100,000,000 on August 8, 2017, TL 800,000,000 June 19, 2019 and TL 350,000,000 September 26, 2019 (Full TL amount) each with a 10-year maturity and floating interest rates for qualified investors without being offered to the public in Turkey. The total of the aforementioned debt securities is TL 22,138,559 as of December 31, 2020 (December 31, 2019: TL 13,546,931). 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 2,286,510 19,852,049 2,281,084 11,265,847 2,286,510 2,286,510 19,852,049 19,852,049 2,281,084 2,281,084 11,265,847 11,265,847 Current Period 4,499,970 30 4,500,000 Prior Period 4,499,970 30 4,500,000 Ceiling 10,000,000 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 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 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: Financial Assets at Fair Value Through Other Comprehensive Income Valuation Difference Deferred Tax Effect Foreign Exchange Differences Total 228 Current Period Prior Period TL 1,309,647 1,631,517 (321,870) FC (176,091) (219,884) 43,793 TL 793,334 1,010,653 (217,319) FC (397,850) (529,233) 131,383 1,309,647 (176,091) 793,334 (397,850) Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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: Commitment for customer credit card limits amounts to TL 37,915,127 and commitment to pay for cheque leaves amounts to TL 2,641,068. The amount of commitment for the forward purchase of assets is TL 3,214,051 and for the forward sale of assets is TL 3,225,084. a.2. The structure and amount of probable losses and commitments resulting from off-balance sheet items, including those below: As of December 31, 2020, the Bank’s provisions for indemnified non-cash loans balance is TL 694,245 (December 31, 2019: TL 537,247) 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 a.4. Certain guarantees, 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 Livestock Forestry Fishery Industry Mining and Quarrying Manufacturing Industry Electricity, Gas, Water Construction Services Wholesale and Retail Trade Hotel and Restaurant Services Transport and Communications Financial Institutions Real Estate and Rental Services. Self-Employment Services Education Services Health and Social Services Other Total Current Period 9,459,703 19,537,281 3,145,340 32,142,324 Current Period 1,546,664 48,468,139 7,724,665 6,556,617 23,136,805 87,432,890 Current Period 23,136,802 3,374,827 19,761,975 96,438,412 119,575,214 Prior Period 6,504,495 13,589,521 2,647,653 22,741,669 Prior Period 914,451 41,417,828 7,642,728 3,236,625 17,035,761 70,247,393 Prior Period 17,035,758 4,595,363 12,440,395 75,953,304 92,989,062 (%) 0.13 0.03 0.00 0.10 54.35 0.79 47.41 6.15 17.05 27.38 13.49 1.05 6.75 3.39 1.53 0.40 0.01 0.76 1.09 100 229 Current Period Prior Period TL 189,630 155,107 27,935 6,588 11,217,718 182,761 7,049,096 3,985,861 4,443,454 23,704,537 15,091,119 329,800 2,388,311 3,984,452 1,286,263 383,396 57,331 183,865 191,389 39,746,728 (%) 0.48 0.39 0.07 0.02 28.22 0.46 17.73 10.03 11.18 59.64 37.97 0.83 6.01 10.02 3.24 0.96 0.15 0.46 0.48 100 FC 331,934 68,163 9 263,762 46,398,363 638,665 40,451,308 5,308,390 11,402,539 21,231,780 10,445,618 814,125 4,323,220 3,569,322 1,538,899 89,705 1,426 449,465 463,870 79,828,486 (%) 0.42 0.09 0.00 0.33 58.12 0.80 50.67 6.65 14.28 26.60 13.09 1.02 5.42 4.47 1.93 0.11 0.00 0.56 0.58 100 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 31,903,241 (%) 0.52 0.44 0.06 0.02 30.09 0.70 16.71 12.68 12.33 56.49 33.32 1.10 6.38 10.74 3.15 0.98 0.20 0.62 0.57 100 FC 78,134 16,894 17 61,223 33,199,239 482,456 28,961,551 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 61,085,821 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 b. Explanation on Derivative Financial Instruments: Group I TL 38,157,272 37,617,527 84,800 454,945 FC 77,394,179 45,897,245 9,356,000 18,995,594 3,145,340 Group II TL 1,589,456 1,589,456 FC 2,434,307 2,328,662 18,903 86,742 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 IFRS 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 11,166,819. The cheques given to customers is presented under off balance sheet commitments, as per the related regulations is amounting to TL 2,641,068. 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 1,345 (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 2,225 (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 FC Prior Period TL 5,386,490 17,841,576 611,055 782,646 7,310,803 55,016 7,133,477 17,094,464 878,903 FC 924,290 6,987,982 40,437 Total 23,839,121 8,148,465 25,106,844 7,952,709 (*) 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 Amortized Cost Total 230 Current Period TL 55,354 10,886 FC 3,006 2,277 62,510 Prior Period TL 48,009 65,311 FC 18,594 135,462 66,240 67,793 113,320 154,056 Current Period Prior Period TL 23,168 5,244,238 3,962,685 9,230,091 FC 4,321 917,014 124,598 1,045,933 TL 49,415 4,675,076 3,742,737 8,467,228 FC 360 718,729 91,487 810,576 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report a.4. Information on interest income received from associates and subsidiaries: Interest Income from Associates and Subsidiaries 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 439,591 Prior Period 122,737 Current Period Prior Period TL FC TL FC 211,590 950,388 248,471 1,156,746 59,876 151,714 1,667 79,944 63,067 2,738 81,534 868,777 185,404 1,072,474 286,023 395,750 211,590 1,236,411 248,471 1,552,496 Current Period 325,684 Prior Period 453,842 Current Period Prior Period TL FC TL FC 1,110,714 2,861,369 1,352,930 2,113,484 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 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 Total 187,795 74 1 24 1 114,908 516,129 571 67,871 5,217,171 4,704 887,694 1,340,325 33,334 239,748 4,170 212,256 363 45,680 31,626 772 50,900 9 145,999 7,996 95,003 11 6,125 385 817 6,092,277 5,658 2,425,847 313,090 100 1,552,636 6,869,819 294,095 205,676 101,524 817 9,024,667 95 63 158 258 34,528 1,537 302,570 1,764 2,332 36,065 306,666 1,588,701 7,176,485 17,640 987 453 19,080 313,175 11,750 1,468 105,814 1,561 12 472,409 7,380 12,719 25,937 231,613 1,105 108,480 210,004 16,609 496,398 9,521,065 12 829 231 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 178,275 313,781 450 123,118 81 8,356,242 849,297 8,621 17 977,803 2,278,516 71,575 589,640 35 259,360 448,182 1,449 118,412 96,724 9,440 910 125,482 12 164,089 248 Total 303,833 1,330 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 59 142 159 159,812 1,225,275 3,973 8,485 94,416 1,243 858 1,865 98 164,643 1,235,625 95,757 49,605 2,375 10,728 62,708 1,706,527 12,591,762 1,652,712 288,733 169,101 2,893 789 172,783 463,524 22 1,698,314 19,028 14,338 22 1,731,680 1,352 16,704,769 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 6,670 14,817 21,487 3,882 5,216 9,098 Current Period Prior Period 344,909 10,221,141 608,874,079 8,971 20,611,578 602,160,937 (3,341,357) 172,170 21,905,319 462,227,080 22,936 27,775,889 462,903,144 (6,397,400) (*) Income arising from foreign currency changes related to derivative transactions amounts to TL 5,574,364 and the losses amount to TL 15,102,319 and the amount of net losses TL (9,527,955) (December 31, 2019 profit: TL 19,215,917, loss: TL 24,768,014). e. Information on other operating income: Other operating income mainly consists of expected credit loss reversals or collections from Stage 3 loans, and income from fees received from customers in return for various banking services and sales of fixed assets. f. Information on expected credit loss and other provision expense: Expected Credit Loss 12 Month Expected Credit Loss (Stage I) Significant Increase in Credit Risk (Stage II) Non-performing Loans (Stage III) Impairment Losses on Marketable Securities 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 Jointly Controlled Entities Other (*) Total Current Period 10,213,836 1,323,697 4,307,187 4,582,952 20,047 2,129 17,918 Prior Period 7,778,690 498,467 968,664 6,311,559 1,485 1,485 2,496,037 12,729,920 545,731 8,325,906 (*) 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 1,750,000. 232 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report g. 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 and Subject to Discontinued Operations Other Operating Expenses Leasing Expenses Related to Exceptions to TFRS 16 Repair and Maintenance Expenses Advertisement Expenses (*) Other Expenses (*) Loss on Sale of Assets Other (**) Total Current Period Prior Period 153,557 742,085 607,672 148,639 618,721 574,237 233,969 287,855 5,320 3,219,275 99,885 194,017 207,975 2,717,398 1,836 1,641,283 6,604,997 2,520,785 85,844 198,005 191,774 2,045,162 2,321 1,356,242 5,508,800 (*) The amount of expenditure made by the Bank within the scope of donation, aid and social responsibility projects in the current period is TL 101,099 (December 31, 2019: TL 61,443). (**) In the current period the part of the related item amounting to TL 413,540 is comprised of expenses of fees, taxes, pictures and funds. i. Information on provision for taxes from continuing and discontinued operations The Bank’s profit before tax arises from continuing activities. As of 31 December 2020, TL 25,242,039 of the profit before tax consists of net interest income, TL 5,617,613 of net fee and commission income, and the total of personnel expenses and other operating expenses is TL 11,796,986. j. Information on provision for taxes from continuing and discontinued operations As of December 31, 2020, the amount of the Bank’s tax provision is TL 2,044,635 and the amount consists of current tax expense that is amounting to TL 3,823,786 and consists of deferred tax expense amounting TL 1,779,151. k. Information on Net Operating Profit/Loss after Net Profit/Loss from Continuing and Discontinued Operations: The Bank’s net profit made from its continuing operations as of December 31, 2020 amounts to TL 6,810,917. 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, 2020 - December 31, 2020. 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 “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. 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 4,673,489 and the balance of extraordinary reserves is TL 35,405,762. Detail of the securities increase fund is explained in Section Five Note II-m.9 and TL (278,077) of this amount is the deferred tax effect on financial assets at fair value through other comprehensive income (31 December 2019: TL (85,936)). 233 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management VI. DISCLOSURES AND FOOTNOTES ON STATEMENT OF CASH FLOWS The operating profit to TL 28,104,080 before the changes in operating assets and liabilities mostly comprised of TL 38,484,202 of interest received from loans and securities, and TL 16,404,956 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, exchange and derivative gains/losses accounts is TL 8,449,586 (December 31, 2019: TL (5,818,608)). 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 24,090,297 (December 31, 2019: TL 7,466,973 decrease). Net Cash Provided from Other Investing Activities account includes net cash flows from sale of intangible assets and declined by TL 650,792 (December 31, 2019: TL 578,012 decrease). The effect of changes in foreign exchange rates on cash and cash equivalents is TL (1,105,433) as of December 31, 2020 (December 31, 2019: TL 787,421). 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, 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 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 Current Period December 31, 2020 Prior Period December 31, 2019 32,467,082 9,102,557 23,364,525 12,894,826 12,894,826 29,616,634 5,489,353 24,127,281 12,260,667 12,260,667 45,361,908 41,877,301 234 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report VII. DISCLOSURES AND FOOTNOTES ON THE BANK’S RISK GROUP 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 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 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 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 Real Persons and Corporate Bodies that have been Included in the Risk Group Cash Non-Cash Cash Non-Cash Cash Non-Cash 1,735,386 5,368,800 438,338 5,971,958 9,877,227 4,916 3,855,442 2,585,068 157,039 658,330 494,875 7,028 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 Individuals and Corporates in Risk Group Current Period Prior Period Current Period Prior Period Current Period Prior Period 4,354,282 8,875,726 160,986 5,140,191 4,354,282 321,033 8,896 157,226 4,833 178,624 8,896 10,004 7,768,540 1,409,177 89,244 3,435,929 7,768,540 241,924 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 1,192,862 1,574,671 (70,139) 2,206,327 1,192,862 (224,924) 399,392 (12,541) 2,323,674 399,392 (239,520) 235 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management b. Disclosures for Bank’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.b.3 and I.r. b.1. The relation of the Bank with corporations in its risk group and under its control 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 2.30%, while the ratio (excluding NPL) to the overall assets is 1.34%; the ratio of deposits of the risk group corporations to the overall deposits is 2.83%, while the ratio to overall liabilities is 1.76%, the comparable pricing method 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: Security purchases are made by İş Finansal Kiralama A.Ş., a subsidiary of the Bank, through leasing activities when required. The Parent Bank’s branches act as agents of Anadolu Anonim Türk Sigorta Şirketi and Anadolu Hayat Emeklilik A.Ş. Furthermore, through its branches, the Bank mediates the order transmission for İş Yatırım Menkul Değerler A.Ş. and carries out agency activities of 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, 2020, 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 decision dated December 25, 2015 and relevant following decisions is TL 147,183 (December 31, 2019: TL 137,603). 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 amounts is TL 36,814 (December 31, 2019: TL 30,375). 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 1,205 Employees 23,193 Country of Incorporation 1 1 2 15 2 2 1 2 2 44 204 37 30 6 China Egypt England T.R.N.C. Iraq Kosovo Bahrain Off-Shore Branches (*) The Branches located in Free Trade Zones in Turkey are included among domestic branches. IX. SUBSEQUENT EVENTS Total Assets 20,577,621 8,776,308 2,159,548 1,270,258 3,483,661 Legal Capital 1,009 80,000 332,077 90,298 The Head Office was authorized by the Board of Directors of the Bank on July 27, 2020 to purchase 100% share of Moka Ödeme Kuruluşu A.Ş. for USD 3.8 million and to carry out all transactions related to the process. The process regarding the issue was completed and the 100% share of MOKA Ödeme Kuruluşu A.Ş. was transferred to the Bank in January 2021. Within the scope of the decision of the Board of Directors regarding the issue of debt instrument on September 8, 2020, the Bank issued a commercial paper with a nominal value of TL 336,533 after December 31, 2020. 236 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020İşbank 2020 Annual Report 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 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 Rating Outlook (*) B3 B3 B3 NP NP B+ B+ B B A+ (tur) b+ 5 B+ B trA+ trA-1 Negative Negative Negative - - Negative Negative - - Stable - - Negative - - - The dates below given are on which the Bank’s credit ratings/outlook was last updated: Moody’s: 10.12.2020, Fitch Ratings: 01.09.2020, 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 AUDITORS’ INDEPENDENT AUDIT REPORT I. EXPLANATIONS ON THE AUDITORS’ INDEPENDENT AUDIT REPORT: The unconsolidated financial statements and disclosures for the period ended December 31, 2020 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 8, 2020 is presented preceding 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. Türkiye İş Bankası Anonim Şirketi 237 Türkiye 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.)Notes to the Unconsolidated Financial Statements For the Year Ended December 31, 2020IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Consolidated Financial Statements As at and For the Year Ended December 31, 2020 With Independent Auditor’s Report Thereon (Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish) 238 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report 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 consolidated statement of balance sheet as at December 31, 2020, 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, 2020 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.4.6 and IV.e, the accompanying consolidated financial statements as at December 31, 2020 include a free provision at an amount of TL 2,875,000 thousands of which TL 1,125,000 thousands was provided in prior years and TL 1,750,000 thousands provided 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. 239 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 financial 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 by 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 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 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. involving our Information technology and process audit specialists. - Evaluating the reasonableness and appropriateness of management’s key estimates and judgements in expected credit loss calculations including the responses to COVID-19, through selection of methods, models, assumptions and data sources. - 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. - 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 - Evaluating 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. - Evaluating the impact of the COVID-19 outbreak on staging of loans and macroeconomic parameters used in expected credit lossess together with forward-looking estimates and significant assumptions. - 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. 240 İşbank 2020 Annual Report 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.2” 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, 2020 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 uncertainty 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”. 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. It has been addressed whether there have been any significant changes in regulations governing pension liabilities, employee benefit 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. 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 assessment of operating effectiveness of the key controls in the process of fair value determination. 241 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Independent Auditor’s Report 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. 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 skepticism 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, 2020 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 8, 2021 Istanbul, Turkey 242 İşbank 2020 Annual Report Türkiye İş Bankası A.Ş. The Consolidated Financial Report As at and for the Year Ended December 31, 2020 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 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. Ersin Önder Çiftçioğlu Member of the Board and the Audit Committee Yusuf Ziya Toprak Deputy Chairperson of the Board of Directors and Chairperson of the Audit Committee Füsun Tümsavaş Chairperson of the Board of Directors 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 consolidated financial report: Name - Surname/Title: Neşe Gülden Sözdinler/Head of Investor Relations and Continuity Division Phone No: Fax No: E-mail: +90 212 316 16 02 +90 212 316 08 40 Nese.Sozdinler@isbank.com.tr investorrelations@isbank.com.tr 243 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Contents SECTION I General Information about the Parent Bank Page Number I. II. III. IV. V. VI. 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 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 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 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 I. II. III. IV. V. VII. VI. Consolidated Balance Sheet - Assets Consolidated Balance Sheet - Liabilities Consolidated Statement of Off-Balance Sheet Items Consolidated Statement of Profit or Loss Profit or Loss and Other Comprehensive Income Consolidated Statement of Cash Flows Consolidated Statement of Changes in the Shareholders’ Equity VIII. Consolidated Statement of Profit Distribution SECTION III Explanations on Accounting Policies I. II. III. IV. V. VI. Basis of Presentation Strategy for Use of Financial Instruments and Foreign Currency Transactions Information on the Consolidated Companies Forward, Option Contracts and Derivative Instruments Interest Income and Expenses Fees and Commission Income and Expenses VII. Financial Assets 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 XX. Liabilities Regarding Employee Benefits XXI. Taxation XXII. Additional Information on Borrowings XXIII. Information on Equity Shares and Their Issuance XXIV. Bank Acceptances and Bills of Guarantee XXV. Government Incentives XXVI. Segment Reporting XXVII. Other Disclosures 244 246 246 246 247 247 247 249 249 250 251 252 253 254 255 256 258 259 259 260 261 261 261 261 262 263 263 264 264 264 264 265 265 265 265 265 266 266 268 268 268 268 268 268 İşbank 2020 Annual Report SECTION IV Information on the Financial Position and Risk Management of the Group I. II. III. IV. V. VI. 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 Consolidated Liquidity Coverage Ratio VII. 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 I. II. III. IV. V. VI. 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 VII. Disclosures and Footnotes on the Group’s Risk Group 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 Independent Audit Report I. II. Explanations on the Independent Auditors’ Report Explanations and Footnotes of the Independent Auditors Report Page Number 269 280 290 292 295 296 301 302 302 303 303 319 321 337 343 345 348 348 349 350 351 352 353 353 245 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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. 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 Parent Bank, any Changes in the Period, and Information on the Parent Bank’s Risk Group As of December 31, 2020, 37.08% 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 34.83% are on free float (December 31, 2019: Fund 39.10%, CHP 28.09%, Free float 32.81%). 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 Yusuf Ziya Toprak Adnan Bali Chairperson of the Board of Directors, Chairperson of Remuneration Committee and Risk Committee, Member of the Corporate Governance Committee and Credit Committee Deputy Chairperson of the Board of Directors, Chairperson of the Audit Committee, TRNC Internal Systems Committee and Operational Risk Committee, Member of the Risk Committee and Substitute Member of the Credit Committee Chief Executive Officer and Board Member, Chairperson of the Credit Committee, Human Resources Committee, Information Systems Strategy Committee and Continuity Committee, Natural Member of the Risk Committee, Member of the Operational Risk Committee, Chairperson of the Executive Committee Feray Demir Director, Member of the Credit Committee, Remuneration Committee, Continuity Committee and Corporate Social Responsibility Committee Ersin Önder Çiftçioğlu Fazlı Bulut Durmuş Öztek Recep Hakan Özyıldız Mustafa Rıdvan Selçuk Ahmet Gökhan Sungur Director, Chairperson of the Corporate Governance Committee, Member of the Audit Committee, TRNC Internal Systems Committee and Continuity Committee Director, Member of Corporate Social Responsibility Committee and Substitute Member of the Credit Committee Director, Member of Corporate Social Responsibility Committee Director Director Director Sadrettin Yurtsever Director, Member of Corporate Governance Committee and Corporate Social Responsibility Committee Chief Executive Officer and Deputy Chief Executives: Name and Surname Areas of Responsibility Adnan Bali Hakan Aran Yalçın Sezen Senar Akkuş Chief Executive Officer and Board Member, Chairperson of the Credit Committee, Human Resources Committee, Information Systems Strategy Committee and Continuity Committee, Natural Member of the Risk Committee, Member of the Operational Risk Committee, Chairperson of the Executive Committee Information Technologies, Digital Banking Operations, Data Management, Member of the Information Systems Strategy Committee and Operational Risk Committee Retail Banking Marketing, Sales and Products, Retail Loans, Digital Banking, Member of the Corporate Social Responsibility Committee and Continuity Committee Financial Management, Strategy and Corporate Performance Management, Managerial Reporting and Internal Accounting, Subsidiaries, Member of the Corporate Social Responsibility Committee, Risk Committee, Information Systems Strategy Committee and Continuity Committee Murat Bilgiç Nevzat Burak Seyrek Corporate Loans, Commercial Loans and Retail Loans Allocation, Project Finance, Member of the Risk Committee and Continuity Committee Corporate Architecture, Human Resources and Talent Management, Agile Management, Consumer Relations Coordination Officer, Member of the Information Systems Strategy Committee and Operational Risk Committee Şahismail Şimşek SME and Enterprise Banking Marketing and Sales, Agricultural Banking Marketing, Commercial Banking Product and Member of the Continuity Committee Ebru Özşuca Gamze Yalçın H. Cahit Çınar Ozan Gürsoy Sezgin Yılmaz Treasury, Economic Research, Member of the Risk Committee International Financial Institutions, Investor Relations and Continuity, Member of Corporate Management Committee and Continuity Committee Legal Affairs and Legal Proceedings, Legal Consultancy, Commercial and Corporate Loans and Retail Loans Proceedings, Loans Monitoring, Credits Portfolio Management Corporate and Commercial Banking Marketing, Commercial Banking Sales, Free Zone Branches, Transboundary Banking, Member of Continuity Committee Banking Base Operations, Support Services, External Operations and Commercial Loan Operations, Internal Operations, Construction and Real Estate Management, Acquisition, Member of the Operational Risk Committee and Continuity Committee Serkan Uğraş Kaygalak Retail Loan and Card Operations, Payment Systems, Private Banking Marketing and Sales, Capital Markets At the meeting of the Bank’s Board of Directors on 01.28.2021, it was decided for Sabri Gökmenler, Information Technologies Department Manager, and Sezgin Lüle, Corporate Architecture Department Manager to be appointed as Deputy General Manager after making the necessary notifications to the Banking Regulation and Supervision Agency and obtaining permissions . 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. 246 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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) V. Summary Information on the Parent Bank’s Functions and Business Lines 1,668,613 1,264,142 37.08% 28.09% 1,668,613 1,264,142 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 statements in this report includes the subsidiaries of the Bank, which are credit or financial institutions, in accordance with the BRSA regulations. As of current period, there is no credit or financial institution subsidiaries which are excluded in the scope of the consolidation. The Parent Bank and its subsidiaries; - ANADOLU ANONİM TÜRK SİGORTA ŞİRKETİ - ANADOLU HAYAT EMEKLİLİK A.Ş. - EFES VARLIK YÖNETİM A.Ş. - - - - - - - - - - İŞ FAKTORING A.Ş. İŞ FİNANSAL KİRALAMA A.Ş. İŞ GAYRİMENKUL 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. 247 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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. 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 located in Istanbul. The company’s main activities are private, or group pension and life/death insurance and all kinds of insurance services related to these branches. There are 34 private 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. 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. 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 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. The Company, which started its venture capital business in the year 2000, aims to make long term investments in venture capital firms which established or to be founded in Turkey, have potential development and need resources. 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 to operate in capital market activities which is stated in the principal agreement, and Company’s main field of activities 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 10 branches in total, 9 branches in Germany and 1 branch in Netherlands. JSC İşbank The Moscow-based Bank, which was acquired in 2011, carries out banking activities in the fields of corporate banking, project finance and foreign trade finance with its branches in Moscow and Saint Petersburg and representation in Kazan. 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 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, aims to provide reinsurance and retrocession services in foreign and domestic branches. It has 1 branch in Singapore. 248 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. The core business 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 specially 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 purpose of the Company, which is founded in September 20, 2019, is to issue lease certificates 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 of Directors can be obtained from the Parent Bank’s website. 249 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Consolidated Balance Sheet (Statement of Financial Position) SECTION TWO: CONSOLIDATED FINANCIAL STATEMENTS ASSETS FINANCIAL ASSETS (NET) Cash and Cash Equivalents Cash and Balances with Central Bank Banks I. 1.1 1.1.1 1.1.2 1.1.3 Money Market Placements 1.1.4 Expected Credit Loss (-) THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) Footnotes TP YP Toplam TP YP Toplam 62,727,896 122,443,294 185,171,190 52,312,184 94,371,995 146,684,179 10,540,314 83,293,471 93,833,785 8,301,164 67,456,533 75,757,697 V-I-a V-I-d 5,566,057 66,404,333 71,970,390 5,263,162 48,812,966 54,076,128 2,815,653 16,896,691 19,712,344 1,988,674 18,565,357 20,554,031 2,174,268 15,664 27,259 34,812 2,201,527 1,058,871 50,476 9,543 120,577 42,367 1,179,448 51,910 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 3,745,650 3,054,356 6,800,006 2,481,683 2,319,812 4,801,495 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 168,133 1,345,669 2,231,848 573,788 261,922 741,921 1,607,591 271,813 154,554 10,939 1,498 282,752 156,052 2,218,646 4,450,494 2,055,316 2,307,375 4,362,691 V-I-e 48,079,020 29,748,250 77,827,270 41,263,642 19,750,078 61,013,720 46,408,231 25,355,465 71,763,696 39,332,002 17,666,968 56,998,970 203,583 346,271 549,854 158,784 423,727 582,511 1,467,206 4,046,514 5,513,720 1,772,856 1,659,383 3,432,239 V-I-c-l 362,912 6,347,217 6,710,129 265,695 4,845,572 5,111,267 1.4.1 Derivative Financial Assets at Fair Value Through Profit or Loss 362,912 6,347,217 6,710,129 265,695 4,845,572 5,111,267 1.4.2 Derivative Financial Assets at Fair Value Through Other Comprehensive Income - - - - - - Financial Assets Measured at Amortised Cost (Net) 263,081,358 183,553,540 446,634,898 200,552,565 153,100,675 353,653,240 II. 2.1 2.2 2.3 2.4 Loans Lease Receivables Factoring Receivables Other Financial Assets Measured at Amortised Cost (Net) 2.4.1 Government Debt Securities 2.4.2 Other Financial Assets 2.5 III. 3.1 3.2 IV. 4.1 Expected Credit Loss (-) ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) Held for Sale Discontinued Operations EQUITY INVESTMENTS Investments in Associates (Net) 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 V-I-f V-I-f-k V-I-f V-I-g V-I-o V-I-h 4.3 Joint Ventures (Net) V-I-j 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-n V-I-o V-I-r 236,661,521 178,069,783 414,731,304 179,157,891 149,081,976 328,239,867 2,710,419 4,993,807 7,704,226 1,605,008 3,899,070 5,504,078 3,485,758 1,158,428 4,644,186 2,772,806 614,484 3,387,290 38,170,955 7,433,648 45,604,603 30,339,422 3,299,879 33,639,301 38,115,604 5,738,600 43,854,204 30,050,721 2,685,879 32,736,600 55,351 1,695,048 1,750,399 288,701 614,000 902,701 17,947,295 8,102,126 26,049,421 13,322,562 3,794,734 17,117,296 1,287,465 1,287,465 - 13,052,096 271,231 242,174 29,057 - 12,775,982 4,883 - 4,883 7,928,442 1,540,236 35,974 1,504,262 3,649,631 15,143 15,143 1,302,608 1,178,529 1,302,608 1,178,529 11,691 11,691 1,190,220 1,190,220 - - - - - - - - - - - - - 13,052,096 11,190,991 271,231 242,174 29,057 255,838 220,768 35,070 12,775,982 10,929,898 - - 12,775,982 10,929,898 4,883 - 4,883 5,255 - 5,255 - - - - - - - - - - - - 11,190,991 255,838 220,768 35,070 10,929,898 - 10,929,898 5,255 - 5,255 171,512 8,099,954 7,842,385 152,380 7,994,765 113,752 1,653,988 1,104,073 92,651 1,196,724 - 35,974 35,974 - 35,974 113,752 1,618,014 1,068,099 92,651 1,160,750 - 3,649,631 3,444,979 - 3,444,979 46,085 2,838 48,923 21,145 2,501 23,646 2,324,870 1,347,866 3,672,736 1,141,900 809,097 1,950,997 43,766,791 11,099,448 54,866,239 31,560,267 6,161,830 37,722,097 V-I-i 12,775,982 TOTAL ASSETS 399,404,870 318,747,393 718,152,263 310,349,018 254,702,820 565,051,838 250 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Consolidated Balance Sheet (Statement of Financial Position) I. II. III. IV. 4.1 4.2 4.3 V. 5.1 5.2 VI. VII. 7.1 7.2 LIABILITIES 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 THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) Footnotes TL FC Total TL FC Total V-II-a V-II-c 133,332,439 248,360,954 381,693,393 128,979,347 173,811,857 302,791,204 4,434,966 73,167,922 77,602,888 4,742,038 67,564,942 72,306,980 19,985,947 5,998,700 25,984,647 1,286,893 1,743,442 3,030,335 V-II-d 7,134,909 32,364,397 39,499,306 9,114,208 30,177,570 39,291,778 5,095,133 377,032 - - 5,095,133 7,506,622 377,032 138,244 - - 7,506,622 138,244 1,662,744 32,364,397 34,027,141 1,469,342 30,177,570 31,646,912 6,275 6,275 - 115,830 115,830 - 122,105 122,105 2,494 2,494 56,456 56,456 58,950 58,950 - - - - - - - - DERIVATIVE FINANCIAL LIABILITIES V-II-b-h 1,514,236 7,340,198 8,854,434 681,191 2,050,633 2,731,824 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 1,514,236 7,340,198 8,854,434 681,191 2,050,633 2,731,824 - - - - - - - - - - - - 756,372 162,368 918,740 822,574 134,310 956,884 20,036,922 3,990,144 24,027,066 15,281,940 2,578,645 17,860,585 - - - - - - 1,618,739 9,987,925 8,430,258 2,192 1,620,931 1,353,611 2,420 1,356,031 3,382,651 13,370,576 8,209,952 2,264,775 10,474,727 605,301 9,035,559 5,718,377 2,836,995 14,987 2,851,982 1,549,792 138,027 6,404 144,431 75,379 311,450 36,760 913 6,029,827 1,586,552 76,292 V-II-g V-II-i V-II-j V-II-j - - - - - - - - - - - - - - - - - - 2,286,510 22,139,611 24,426,121 2,281,084 13,095,892 15,376,976 - - - - 2,286,510 22,139,611 24,426,121 2,281,084 13,095,892 15,376,976 V-II-f V-II-m 50,970,159 6,195,271 57,165,430 39,770,069 3,511,942 43,282,011 74,597,926 263,794 74,861,720 65,945,911 (244,444) 65,701,467 4,500,000 1,216,307 124,549 - 1,091,758 - - - - - 4,500,000 4,500,000 1,216,307 1,126,870 124,549 39,250 - - 1,091,758 1,087,620 - - - - - 4,500,000 1,126,870 39,250 - 1,087,620 4,649,809 100 4,649,909 4,790,255 100 4,790,355 4,698,746 (60,675) 4,638,071 3,349,172 (388,660) 2,960,512 44,060,209 5,335,033 178,599 4,619 1,930 - 44,064,828 36,840,268 5,336,963 4,896,373 178,599 135,606 4,619 1,930 - 36,844,887 4,898,303 135,606 38,546,577 2,689 38,549,266 31,808,289 2,689 31,810,978 - 8,153,556 1,586,175 6,567,381 7,319,299 - 225,331 137,270 88,061 94,419 - - 8,378,887 8,275,984 1,723,445 6,655,442 2,372,239 5,903,745 - 137,270 31,210 - 8,413,254 2,403,449 106,060 6,009,805 7,413,718 7,063,362 2,227 7,065,589 V-II-n TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 318,031,683 400,120,580 718,152,263 270,532,920 294,518,918 565,051,838 251 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Consolidated Statement of Off-Balance Sheet Items 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) 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 Footnotes V-III CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) THOUSAND TL TL 229,466,822 40,128,375 39,563,027 687,709 4,416,349 34,458,969 84,800 - 84,800 454,945 435,024 19,921 - - - - - 9,355 16,248 - 72,767,824 71,400,021 2,250,035 - - 24,688,380 - - 2,641,068 26,068 37,915,127 179,370 - - 3,699,973 1,367,803 1,302,803 65,000 116,570,623 - - - - 116,570,623 8,922,687 6,936,738 1,985,949 101,415,909 6,088,408 93,752,701 787,400 787,400 2,003,720 1,023,470 707,100 - - 121,010 152,140 3,156,514 507,826 2,648,688 - - - 1,071,793 728,033,002 86,312,364 - 67,013,035 15,972,224 2,873,548 - - 453,557 - 641,720,638 47,823,113 11,883,928 131,913,263 - 352,717,245 97,383,089 - - FC 482,447,565 82,758,032 48,508,183 535,767 24,324,692 23,647,724 8,965,543 387,585 8,577,958 22,138,966 16,428,961 5,710,005 - - - - - - 3,145,340 - 26,364,767 14,882,602 4,322,672 - 127,172 1,009,173 - - - - - - - - 9,423,585 11,482,165 11,482,165 - 373,324,766 19,840,766 19,840,766 - - 353,484,000 41,994,015 18,551,563 23,442,452 273,410,206 96,398,304 29,719,050 73,646,426 73,646,426 14,257,333 3,069,627 3,346,049 3,920,016 3,920,016 - 1,625 2,794,386 2,647,387 146,999 - - - 21,028,060 906,245,389 73,210,438 - 6,643,025 37,840,329 17,306,337 - - 11,420,747 - 833,034,951 78,780,877 28,867,329 53,111,124 - 432,859,911 239,415,710 - - Total 711,914,387 122,886,407 88,071,210 1,223,476 28,741,041 58,106,693 9,050,343 387,585 8,662,758 22,593,911 16,863,985 5,729,926 - - - - - 9,355 3,161,588 - 99,132,591 86,282,623 6,572,707 - 127,172 25,697,553 - - 2,641,068 26,068 37,915,127 179,370 - - 13,123,558 12,849,968 12,784,968 65,000 489,895,389 19,840,766 19,840,766 - - 470,054,623 50,916,702 25,488,301 25,428,401 374,826,115 102,486,712 123,471,751 74,433,826 74,433,826 16,261,053 4,093,097 4,053,149 3,920,016 3,920,016 121,010 153,765 5,950,900 3,155,213 2,795,687 - - - 22,099,853 1,634,278,391 159,522,802 - 73,656,060 53,812,553 20,179,885 - - 11,874,304 - 1,474,755,589 126,603,990 40,751,257 185,024,387 - 785,577,156 336,798,799 - - 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 - - FC 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 - - TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 957,499,824 1,388,692,954 2,346,192,778 823,867,493 1,043,097,181 1,866,964,674 252 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Consolidated Statement of Profit or Loss STATEMENT OF PROFIT OR LOSS 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 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 Non-cash Loans 4.2.2 Other V. VI. 6.1 6.2 6.3 VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. PROFIT/LOSS ON CONTINUING OPERATIONS BEFORE TAX (XIII+...+XVI) XVIII. TAX PROVISION FOR CONTINUING OPERATIONS (±) 18.1 18.2 18.3 XIX. XX. 19.1 19.2 19.3 XXI. 20.1 20.2 20.3 XXII. PROFIT/LOSS ON DISCONTINUED OPERATIONS BEFORE TAX (XX-XXI) XXIII. TAX PROVISION FOR DISCONTINUED OPERATIONS (±) 22.1 22.2 22.3 XXIV. NET PERIOD PROFIT/LOSS FROM DISCONTINUED OPERATIONS (XXII±XXIII) XXV. NET PERIOD PROFIT/LOSS (XIX+XXIV) 25.1 25.2 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 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 Current Tax Provision Deferred Tax Expense Effect (+) Deferred Tax Income Effect (-) Group’s Profit/Loss Non-controlling Interest Profit/Loss (-) Earnings per Share (*) (*) Tam TL tutarı ile gösterilmiştir. THOUSAND 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 CURRENT PERIOD (01/01-31/12/2020) 47,960,977 34,768,023 84,960 488,822 116,834 11,565,656 58,357 7,008,929 4,498,370 543,503 393,179 18,898,262 9,483,464 2,344,979 1,584,227 4,733,389 146,707 605,496 29,062,715 4,919,413 7,381,481 1,150,770 6,230,711 2,462,068 6,232 2,455,836 31,057 (1,206,769) 1,228,185 (10,138,921) 7,703,967 11,733,929 44,540,345 11,379,112 2,770,928 6,301,193 14,877,965 9,211,147 - 1,455,956 - 10,667,103 2,915,351 4,778,594 1,206,397 3,069,640 7,751,752 - - - - - - - - - - - - - - 7,751,752 6,655,442 1,096,310 0.059158301 CURRENT PERIOD (01/01-31/12/2019) 48,453,830 35,676,426 391,921 710,205 379,584 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 22,799,078 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) 10,942,888 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 253 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Consolidated Statement of Profit or Loss and Other Comprehensive Income 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 III. TOTAL COMPREHENSIVE INCOME (I+II) THOUSAND TL CURRENT PERIOD (01/01-31/12/2020) PRIOR PERIOD (01/01-31/12/2019) 7,751,752 1,540,414 (195,473) (17,267) (73,754) (121,372) 16,920 1,735,887 607,580 1,079,211 262,834 (213,738) 9,292,166 7,031,631 3,305,993 49,594 (19,247) (81,951) 132,431 18,361 3,256,399 441,876 3,247,281 229,925 (662,683) 10,337,624 254 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report Consolidated Statement of Cash Flows A. CASH FLOWS FROM BANKING OPERATIONS 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 34,258,222 17,270,799 Footnotes CURRENT PERIOD (01/01-31/12/2020) PRIOR PERIOD (01/01-31/12/2019) 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 41,826,344 (18,786,386) 252,256 7,381,481 8,424,385 1,689,749 (10,687,883) (4,107,184) 8,265,460 46,839,437 (25,968,978) 296,543 7,071,129 5,760,716 918,494 (8,579,659) (3,150,744) (5,916,139) (6,144,854) 11,202,973 (1,588,087) (3,376,609) (49,982,247) (14,127,387) (620,878) 40,951,637 - (10,764,225) - 33,362,942 (1,229,408) (3,310,524) (10,509,133) (5,560,924) (8,532) 40,273,207 - (7,560,811) - (890,902) V-VI V-VI 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. Net Cash Provided From Banking Operations 28,113,368 28,473,772 CASH FLOWS FROM INVESTING ACTIVITIES Net Cash Provided from Investing Activities (19,012,653) (11,931,289) 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 (33,500) (24,025) (813,821) 322,076 (32,201,013) 23,640,507 (16,459,781) 7,309,408 (752,504) (7,523) - (319,080) 862,304 (23,879,647) 15,171,316 (11,600,127) 8,497,685 (656,217) (3,278,734) (4,352,732) 28,363,295 (31,014,962) - (190,292) (436,775) - 32,030,875 (35,793,599) - (130,003) (460,005) - (1,239,044) 909,669 4,582,937 13,099,420 VI. Cash and cash equivalents at beginning of the period 47,738,608 34,639,188 VII. Cash and cash equivalents at end of the period (*) Includes Redeemed Financial Assets measured at amortized cost. 52,321,545 47,738,608 255 Türkiye İş Bankası A.Ş.IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) Accumulated gains/ (losses) due to revaluation and/or reclassification of financial assets measured THOUSAND TL Total Shareholders’ Equity Net Current Except Non- Non- Total Consolidated Statement of Changes in Shareholders’ Equity THOUSAND TL Accumulated Other Comprehensive Income That will not 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) on translation reserve comprehensive income Other (2) Reserves Profit/(Loss) (Loss) Interest Interest Equity Exchange differences at fair value through other Profit Prior Period Period Profit/ controlling controlling Shareholder’s 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 (1,924,018) 790,265 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 (17,330) (63,214) 132,555 2,401,164 231,492 6,009,805 9,135,598 1,202,026 10,337,624 1,020,793 441,126 CHANGES IN SHAREHOLDERS’ EQUITY Footnotes V-V PRIOR 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 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 CURRENT PERIOD (31/12/2020) 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 39,250 1,087,620 3,466,783 (243,042) 1,566,614 1,461,737 477,022 1,021,753 36,844,887 8,413,254 58,635,878 7,065,589 65,701,467 4,500,000 39,250 1,087,620 3,466,783 (243,042) 1,566,614 1,021,753 36,844,887 8,413,254 58,635,878 7,065,589 65,701,467 (15,212) (59,386) (121,621) 6,655,442 8,130,749 1,161,417 9,292,166 1,461,737 608,621 477,022 799,041 263,864 IX. X. XI. 11.1 11.2 Subordinated Debt Increase/(Decrease) Through Other Changes (*) 85,299 4,138 56,622 (852) 3 (3,446) 9,708 (229) 200,680 315,510 Profit Distribution Dividend Paid Transfer to Reserves 11.3 Other (**) Ending Balance (III+IV+…...+X+XI) 4,500,000 124,549 - 1,091,758 3,508,193 (303,280) 1,444,996 2,066,912 1,285,771 1,285,388 44,064,828 1,723,445 6,655,442 67,448,002 7,413,718 74,861,720 7,019,261 (7,005,319) 7,005,319 (7,005,319) 13,942 667,433 13,942 - 13,942 (630,494) (182,794) (190,292) 7,498 36,939 (168,852) (190,292) - 21,440 (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. 256 Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report THOUSAND TL Accumulated Other Comprehensive Income That will not be Reclassified in Profit/(Loss) Share Tangible assets Accumulated accumulated gains/(losses) on Certificate Other revaluation remeasurements Paid-in Share Cancellation Capital reserve Increase/ of defined THOUSAND TL Accumulated Other Comprehensive Income That will be Reclassified in Profit/(Loss) 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 CHANGES IN SHAREHOLDERS’ EQUITY Footnotes Capital Premium Profits Reserves (Decrease) benefit plans Other (1) 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) 790,265 29,037,168 10,303,541 49,591,898 6,022,995 55,614,893 2,401,164 231,492 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 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 8,413,254 58,635,878 7,065,589 65,701,467 4,500,000 39,250 1,087,620 3,466,783 (243,042) 1,566,614 (15,212) (59,386) (121,621) 1,461,737 608,621 477,022 799,041 1,021,753 36,844,887 8,413,254 58,635,878 7,065,589 65,701,467 263,864 6,655,442 8,130,749 1,161,417 9,292,166 Increase/(Decrease) Through Other Changes (*) 85,299 4,138 56,622 (852) 3 (3,446) 9,708 (229) 200,680 315,510 7,019,261 (7,005,319) 7,005,319 (7,005,319) 13,942 667,433 13,942 - 13,942 (630,494) (182,794) (190,292) 7,498 36,939 (168,852) (190,292) - 21,440 Ending Balance (III+IV+…...+X+XI) 4,500,000 124,549 - 1,091,758 3,508,193 (303,280) 1,444,996 2,066,912 1,285,771 1,285,388 44,064,828 1,723,445 6,655,442 67,448,002 7,413,718 74,861,720 (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 (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 Income that will not be Reclassified to Profit or Loss. Amounts of Other Comprehensive Income that will be Reclassified to Profit or Loss (*) Includes changes in the Group Shares. within the scope of “TAS 19-Employee Benefits”, has been added to distributable profit. (**) 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 PRIOR PERIOD (31/12/2019) Beginning Balance V-V 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 (**) CURRENT PERIOD (31/12/2020) 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 (**) I. II. 2.1 2.2 III. IV. V. VI. IX. X. XI. 11.1 11.2 I. II. 2.1 2.2 III. IV. V. VI. IX. X. XI. 11.1 11.2 257 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Consolidated Statement of Profit Distribution Table 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) THOUSAND TL CURRENT PERIOD (31/12/2020) PRIOR PERIOD (31/12/2019) 8,855,552 2,044,635 3,788,280 35,506 (1,779,151) 6,874,451 806,864 1,662,347 30,257 (885,740) A. NET PROFIT FOR THE PERIOD (1.1-1.2) 6,810,917 6,067,587 1.3 1.4 1.5 PRIOR YEARS’ LOSSES (-) FIRST LEGAL RESERVES (-) OTHER STATUTORY RESERVES (-) - - - - 301,253 46,394 B. NET PROFIT ATTRIBUTABLE TO [(A-(1.3+1.4+1.5)] 6,810,917 5,719,940 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. 258 - - - - - - - - - - - - - - - - - - - - - - - - - - - 0.0605 151 - - - - - - - - - - - - - - - - - - - - - 5,719,940 - - - - - - - - - - - 0.0539 135 - - - - - - Türkiye İş Bankası A.Ş.İşbank 2020 Annual Report 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. COVID-19 outbreak, which started in China and spread globally in the first half of 2020, caused serious effects on both economic and social life. In addition to the social life effects of the cautions taken to ensure the control of outbreak in many countries, there are also consequences observed which is negatively affecting economic activity both on regional and global scale. As in other countries where the pandemic is effective, various cautions also have been taken in our country in social and economic terms in order to reduce that negativity and the cautions taken continue to be implemented with partial changes. The Bank sustains its activities for the period precisely by closely monitoring the processes related to outbreak, postponing retail and non-retail customers’ due debts, restructuring with grace period and existing or additional limit allocations in respect with customers’ needs. Assessments regarding to possible effects of the COVID-19 outbreak through the measurement of expected credit losses as of December 31, 2020 financial statements are explained in the Section Three “VIII. “Explanations on Impairment of Financial Assets”. “Interest Rate Benchmark Reform- Stage 2”, brought changes in various TAS/TFRSs effective from January 1, 2021, was released in December 2020 within the scope of the project of transition of the benchmark interest rates carried out by the International Accounting Standards Board (IASB). Although early implementation was permitted, it was concluded that early implementation is not required by evaluating the effects of these changes on the Bank’s financial statement. The Bank continues to perform required studies to comply with the Interest Rate Benchmark Reform. 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 applied in the current period are in line with the prior period financial statements. The accounting policies and the valuation principles used in the preparation of the consolidated financial statements are presented below in detail. II. Strategy for Use of Financial Instruments and 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 activity. As for the non-deposit liabilities, funds are collected through medium and long-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). As a result, the liquidity of the Group 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 closely monitoring the developments in the sector, both fixed and floating rate placements are made based on 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. 259 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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, there is no subsidiary or financial institution that is not included in the scope of consolidation as of the current period. Detailed information about the Bank’s subsidiaries related to credit and financial institution 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 consolidated subsidiaries are eliminated reciprocally. Non-controlling interests in the net period profit/loss and in the equity of consolidated subsidiaries are calculated separately from the Group’s net period profit/loss and the Group’s shareholders’ equity. Non-controlling interests are presented separately in the balance sheet and in the period profit/loss statement. In preparing its consolidated financial statements, the Bank performed necessary corrections to ensure consistency of accounting policies used by consolidated subsidiaries. On the other hand, insurance companies under consolidation are obliged to carry their activities in accordance with the regulations and other legislations issued by Republic of Turkey Ministry of Treasury and Finance and in the accompanying consolidated financial statements, financial reporting presentations of these companies are maintained in accordance with the insurance legislation.. 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. 260 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 IV. Forward, Option Contracts and Derivative Instruments Derivative transactions of the Group consist of foreign currency and interest rate swaps, forwards, foreign currency options and interest rate options. The Group 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 recorded in off-balance sheet accounts. Derivative transactions are measured 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 income statement. 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 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 As of January 1, 2018, the Bank and its companies 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. Financial asset is recognized in the statement of financial position when it becomes 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 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 financial asset is derecognized. 261 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 1. Financial Assets at Fair Value Through Profit or Loss Financial assets except financial assets 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 it is determined that there are significant changes between the new conditions of the revised financial asset and the first conditions in related agreements, 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 flows 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 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 financial asset is disposed, the related fair value differences accumulated in the shareholders’ equity are transferred to the profit/loss 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 Amortized 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, after eliminating any provision for impairment if there is any. Interest income measured by using the effective interest rate method are recognized in the income statement as an “interest income”. The Bank and subsidiaries evaluate their loans within the framework of current 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, 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 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 stage 1. Impairment for credit risk for the Stage 1 financial assets is equal to the 12-month expected credit losses. Based on the decisions taken by the BRSA regarding to the COVID-19 outbreak that being effective from the date 17.03.2020 until 30.06.2021, the 30-days past due period foreseen for loans, in order to be classified as Stage 2, has been started to be applied as 90 days past due for Stage 1 loans. In addition, the Bank provides provisions for customers in this group with a delay of more than 30 days, in accordance with its own risk policies and models, which also evaluate the borrower’s conditions. 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 is 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 262 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 In other respect, the 30-days past due period foreseen for loans to be classified as Stage 2, started to be applied as 90 days for Stage 1 loans until the date of 30.06.2021 in accordance with the decision, that being effective from the date 17.03.2020, taken by BRSA in regard to the COVID-19 outbreak. For the abovementioned group with a past due date more than 90 days, the Bank allocates provisions in accordance with its risk policies and applies grouping approach and models in which also evaluate the borrower’s conditions. In case of a significant deterioration in the probability of default, the credit risk is 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 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. 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 stage 3. - 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 In other respect, the 90-days past due period foreseen for loans to be classified as non-performing loan, started to be applied as 180 days until the date of 30.06.2021 in accordance with the decisions, that being effective from the date 17.03.2020, taken by BRSA in regard to the COVID-19 outbreak. 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 current and forecasts of future economic information into consideration, 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 other 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 the future risk mitigation processes into account 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, and 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: It is 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. On the other hand, the Bank has updated the macroeconomic data used in the scenarios again in the current year regarding to the effects of COVID-19 outbreak on Expected Credit Losses, and besides that, as mentioned above, the Bank allocated expected credit losses by reflecting additional provisions through individual assessments performed for the customers that operates in sectors where the impact might be high in accordance with the Bank’s risk policies. Expected credit loss is reflected in the income statement. Released provisions in the current year are accounted under “Expected Credit Loss Expenses” and released provision which is carried from the prior year are accounted under “Other Operating Income”. Receivables evidenced through the Legal Process that collection is not possible can be written-off by fulfilling the requirements of the Tax Procedure Law. Besides, loans for which specific provision is allocated and for which there is no reasonable expectation of recovery might be written-off. 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 Amortized Cost” in the 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. 263 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 within the scope of “TFRS 5 - Non-current Assets Held for Sale and Discontinued Operations” are measured at the lower one of their fair value and their carrying amount which from the costs to sell are deducted and presented separately within the financial statements. 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. 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 are 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 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 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 inactivation of tangible asset and the book value of the tangible assets recognized in the profit/ loss accounts. Regular maintenance and repair cost 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 recognized in “Other Operating Incomes” and “Other Operating Expenses” for the related period. 264 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 XV. Leasing Transactions Assets acquired through 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 consolidation 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. 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 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. XVI. Insurance Technical Income and Expense In insurance companies, premium income is obtained after diminishing the shares transferred from arranged policy income to reassurer. 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’ shares of outstanding and paid claims 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 on footnotes 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 of the Parent Bank and subsidiaries 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 notes 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, but if there is a possibility that an inflow of economic benefits of these assets may occur then it is explained in the footnotes of 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. 265 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 severance indemnity 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 shareholders’ 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. 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 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. 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 was 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 an actuarial valuation report prepared by an actuary registered in the actuaries register for the year ended December 31, 2020. In related period’s financial statements, Bank provided full provision for the total amount of technical and actual deficit stated in the actuarial report of the aforementioned period. The actuarial assumptions used in the related actuarial report are given in Section Five Note II-i-4-1. 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 December 31, 2020 for their pension funds. The provision amount of actuarial and technical deficit, which was measured according to actuarial report of Milli Reasürans T.A.Ş., is presented in the consolidated financial statements for the current period. According to actuarial report of Anadolu Anonim Türk Sigorta Şirketi and Türkiye Sınai Kalkınma Bankası, there is no actual or technical deficit that requires making provision. İşbank Members’ Supplementary Pension Fund has been founded by the Parent Bank to provide beneficiaries with additional social security and solidarity rights to compulsory social security benefits as per the provisions of the Turkish Commercial Code and Turkish Civil Code. 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 4th provisional tax for the year 2020 will be paid in February 2021 for to be deducted from the corporate tax of the current taxation period. Tax provision consists of current tax provision and deferred tax income/expense. The current tax liability is calculated over the portion of the period subject to taxation. The taxable profit differs from the profit in the profit/loss 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 is netted off with prepaid tax amounts and presented on the financial statements. 266 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 asset or debt is determined by calculating the tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts considered in the legal tax base account, by taking the legal tax rates into account. Deferred tax debts 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 debts, other than the goodwill and mergers. The carrying values of deferred tax asset 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 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 20% to be valid from 2021 (prior period 22%) considering the periods when deferred tax asset and debts 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 debt 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 asset and debt that come from the companies as offset are separately listed 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 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 and provisional tax paid every quarter during the year are deducted from corporate tax payable and the difference between withholding and provisional tax amounts and corporate tax payable is discounted from income tax provided that the withholding tax and paid provisional tax amounts are 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 rate in Iraq is 15%, and the corporate tax is paid on a consolidated basis to the tax office of the foreign bank’s central branch. The first branch established in Iraq is considered as the central branch. Foreign bank branches whose central branch is within the boundaries of the Central Government must present their consolidated financial statements and pay accrued tax to the relevant tax office by the end of May of the following year, and branches of foreign banks whose central branch is within the boundaries of the Northern Iraq Regional Government must present their financial statements and pay accrued tax by the end of June of the following year at the latest. Northern Iraq Regional Government tax offices can accrue fixed taxes other than the specified rate and can postpone the due date. 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 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. 267 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 the end of March of the following year, 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. The tax on government bond income is paid within the 10 weekdays from the end of the month following the day of the bond sale or coupon payment. Taxes arise from other financial instruments are paid on corporate tax payment day. 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. XXII. Additional Information on Borrowings The Parent Bank and its consolidated 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 rate 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 profit/loss 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 profit/loss statement by using fair value model. In the balance sheet, these valuations are presented with the related liabilities. XXIII. Information on 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 Parent Bank’s earnings per share calculations taking place in the consolidated profit/loss 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 6,655,442 112,502,250 0.059158301 Prior Period 6,009,805 112,502,250 0.053419421 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 utilized by the Bank or the companies included in consolidation, during the current or prior accounting periods. 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 business segmentation and related information is explained in Section IV Footnote XII. XXVII. Other Disclosures None. 268 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 16.99%. (December 31, 2019: 16.37%). The capital adequacy standard ratio for the current period was calculated based on the Regulation on Measurement and Assessment of Capital Adequacy of Banks and other legal regulations and the BRSA temporary regulation dated 08.12.2020 and numbered 9312. Within the scope of this temporary regulation, the equity amount calculated without reflecting the negative net valuation differences of the securities included in the “Fair Value Through Other Comprehensive Income” portfolio acquired before 23.03.2020 was taken into consideration. In the calculation of the amount subject to credit risk in accordance with the same regulation, the simple arithmetic average of the last 252 business days in the foreign exchange buying rates of the Central Bank of the Republic of Turkey was used. Current Period Amount as per the Regulation before 1/1/2014 (1) 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 6,115,938 124,549 43,421,096 10,401,612 8,378,887 6,655,442 1,723,445 (1,120) 1,850,295 70,291,257 343,449 79,888 35,974 1,494,511 542,681 2,496,503 67,794,754 1,243,007 1,243,007 1,850,295 35,974 1,494,511 269 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 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 (%) 270 1,243,007 69,037,761 13,670,323 1,253,000 686,756 5,930,962 21,541,041 21,541,041 90,578,802 1,102 721 381 90,577,700 533,067,742 12.72 12.95 16.99 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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. 4.560 2.500 0.060 2.000 6.95 242,174 3,672,736 11,756,503 5,930,962 1,253,000 9,086,000 271 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Amount as per the Regulation before 1/1/2014 (1) 1,854,685 35,974 1,089,257 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 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 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 272 Prior Period 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 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 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 75,055,619 458,404,654 12.93 13.22 16.37 4.050 2.500 0.050 1.500 7.22 273 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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. 220,768 1,950,997 6,191,382 5,177,555 1,627,800 6,618,200 274 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 2. Information on instruments to be included in the consolidated capital calculation: Issuer Türkiye İş Bankası A.Ş. Unique identifier (CUSIP, ISIN etc.) US900151AB70 - XS0847042024 US900151AF84 - XS1003016018 US90016BAF58-XS1623796072 XS2106022754 Governing law(s) of the instrument It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. It is subject to English Law except for certain articles that will be subject to Turkish Law. Issued within the scope of BRSA Regulation on Banks’ Equity. Taking into account in equity calculation Subject to 10% deduction as of 01.01.2015 Eligible at unconsolidated/ consolidated Yes No No No Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Unconsolidated -Consolidated Instrument type (types to be specified by each jurisdiction) Bond Amount recognized in regulatory capital (Currency in mil. as of most recent reporting date) 71 Par value of instrument (Expressed in million TL) 7,385 Bond 1,182 2,954 Bond 3,692 3,692 Bond 5,539 5,539 Accounting classification Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities Original date of issuance Perpetual or dated Original maturity date 24.10.2012 Dated 10 Years Issuer call subject to prior supervisory approval Yes 10.12.2013 Dated 10 Years Yes 29.06.2017 Dated 11 Years Yes 22.01.2020 Dated 10 Years Yes Optional call date. contingent call dates and redemption amount 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. The Bank has the option to repay all of the related bonds on January 22, 2025 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 None Fixed 7.75% None None None Noncumulative or cumulative Noncumulative Convertible or non-convertible None Noncumulative 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. In accordance with Regulations on Equities of Banks. Article 8.2.ğ. bonds have deleted option from records. 275 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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) 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 Partially or completely Permanent Permanent Permanent 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. 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. 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. To vest conditions stated in clause of the Article 8 and Don’t vest the conditions stated in clause of the Article 7. 276 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 in 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 Subordinated Liabilities Subordinated Liabilities Subordinated Liabilities Accounting classification Original date of issuance Perpetual or dated Original maturity date 08.08.2017 Dated 10 Years Issuer call subject to prior supervisory approval Yes 19.06.2019 Dated 10 Years Yes 26.09.2019 Dated 10 Years Yes Optional call date, contingent call dates and redemption amount 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 months 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 If write-down, write-down trigger(s) 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. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. Due to the losses incurred, within the framework of Article 71 of the Banking Law, (1) the Bank’s operating license is to be revoked and 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) based on the decision of the BRSA. 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 Permanent Permanent 277 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 If temporary write-down, description of write- up mechanism Position 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. 278 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Subject to 10% deduction as of 1/1/2015 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 an 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) 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. 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) 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. 279 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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) 74,861,720 67,448,002 7,413,718 79,888 1,653,988 11,756,503 24,426,121 13,476 71,347,264 67,567,206 3,780,058 (79,888) (1,530,485) 5,930,962 14,923,323 (13,476) 90,577,700 (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. On the other hand, in the calculation, the equity amount calculated in accordance with the BRSA’s temporary regulation dated 08.12.2020 and numbered 9312, temporary regulation and the credit risk amount calculated in accordance with same regulation. 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. Bank and banks subject to consolidation and financial institutions, 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 limit 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 have 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. 280 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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. 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 190,379,626 169,560,824 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 454,665 555,328 356,697 49,424,308 312,479,599 140,725,927 10,450,092 23,964,218 8,475,290 350,684 2,745,702 28,759,506 13,790,256 387,635 504,868 136,755 50,139,143 280,595,428 125,782,727 11,750,387 23,533,037 8,339,290 438,835 2,626,120 25,742,914 12,602,243 (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 36% respectively (December 31, 2019: 27%, 37%). (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 46% and 59% respectively (December 31, 2019: 45%, 58%). (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, 2019: 16%, 22%). 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. 281 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 7. Total value of the Stage 1 and Stage 2 expected credit loss allocated for the credit risk carried by Parent Bank and consolidated companies is TL 11,659,777 (December 31, 2019: 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 48.71% 43.51% 7.78% 43.92% 47.42% 8.66% 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 Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) Non-collateralized Total Personal 690,237 37,128 1,469,688 Current Period Commercial and Corporate 11,237,404 381,335 219,531 586 Credit Cards Personal 1,006,352 31,021 1,201,815 Prior Period Commercial and Corporate 9,073,348 185,823 398,310 460 Credit Cards 236,678 25,738,738 243,422 23,253,292 1,433,351 6,138,224 1,067,462 1,195,702 2,790,307 1,138,507 3,867,082 43,715,818 1,067,462 3,678,312 35,701,540 1,138,507 (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 Current Period Prior Period Net Value of the Collateral Loan Balance Net Value of the Collateral Loan Balance 6,976,076 6,976,076 6,266,997 6,266,997 1,141 291,010 1,141 291,010 1,680 350,072 1,680 350,072 Other (Suretyship, commercial enterprise under pledge, commercial papers, etc.) 8,153,418 8,153,418 7,099,102 7,099,102 (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. 282 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 11. The aging analysis of the receivables past due but not impaired in terms of financial asset classes, is as follows: Current Period Loans (1) Corporate/Commercial Loans (4) Consumer Loans Credit Cards Lease Receivables (1) Insurance Receivables Total 31-60 Days (2) 61-90 Days (2) (3) 209,825 121,649 28,156 60,020 3 16,476 226,304 1,897,417 1,564,999 147,800 184,618 14,423 28,439 1,940,279 Total 2,107,242 1,686,648 175,956 244,638 14,426 44,915 2,166,583 (1) The loans classified under close monitoring that are not past due or past due for less than 31 days is TL 42,327,768. (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 2,884,661 and TL 1,316,265 respectively. (3) Consists of overdue amounts (TL 1,369,804) of the loans with more than 90 days past due date yet classified under close monitoring based on the decisions taken by the BRSA within the scope of COVID-19 outbreak, being effective since 17.03.2020, and mentioned loans’ undue balance is amounting to TL 2,097,786. (4) Includes factoring receivables. Prior 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. 283 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 12. Profile of Significant Risk Exposures in Major Regions 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 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 184,734,393 1,877,495 1,381,513 2,386,225 190,379,626 454,664 547,207 8,028 36,797 319,900 1 93 19,189,061 18,643,498 6,382,545 11,772 4,132,030 1,065,402 297,070,143 4,095,405 2,323,298 617,727 1,212,606 7,160,420 138,709,707 350,862 128,151 1,358 49,537 1,486,312 34,238,655 8,423,824 110,679 19,968 29,606 11,252 126 9,658 2,231 319,531 31,018 25,586 18,015 135 454,665 555,328 356,697 49,424,308 312,479,599 140,725,927 34,414,310 8,475,290 350,684 2,745,702 28,673,493 15,708 9,340 484 60,481 13,790,256 2,745,702 28,759,506 13,790,256 715,106,380 25,189,458 9,204,092 630,983 6,788,059 12,202,670 13,790,256 782,911,898 (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. 284 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 (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. 285 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 133 137,807 133 6 137,801 3,544 (3) 333 333 Current Period Consolidated Current Period Consolidated (4) (5) (6) (7) (8) (9) (10) (12) (13) (14) TL FC Total 2,129,556 3,236,316 1,142,363 3,186,163 13,159 974,034 16,746 33,407 144,878,573 6,574,605 5,881,195 168,172 81,210,149 6,251,203 57,787,229 155,230 34,484,782 3,155,493 6,318,641 2,722,719 120,034 11,650,212 54,901,724 120,562,567 175,464,291 376,885 344,901 904 31,080 150,976 5,905,376 262,289 3,597,774 14,724,777 6,661,833 2,555,131 1,461,214 32,964 3,066,930 248,066 274,001 424,638 46,987 40,307 540 6,140 10,248 733,989 1,978,482 2,114,050 2,843,000 1,191,784 586,970 202,044 2,100 796,959 31,630 10,284 21,229 (11) 980 969 4 7 5,606 112,255 2,173 31,200 59,950 43,425 840 4,740 136 815 9,029 257 708 11,650,212 82,420 43,567,893 98,942 4,424,579 4,342,870 32,486 49,223 1,121,845 43,377,901 10,401,978 3,988,978 13,190,519 5,304,387 1,350,222 1,262,552 2,195,171 1,490,122 488,449 704 1,000,969 5,914,701 4,831,319 33,190 1,050,192 5,170,881 6,292,726 65,416,611 108,794,512 49,975,075 60,377,053 23,501,459 8,307,294 21,824,286 67,069,352 12,296,272 35,014,805 6,297,347 11,601,734 862,219 760,076 4,317,013 2,212,441 2,022,628 6,512,184 15,413,717 29,035,764 44,449,481 365,061 356,697 49,016,076 101,258,712 27,984,826 1,976,983 41,736 1,579,049 100,188,294 171,953,497 272,141,791 514 62 561 39,921,798 15,542,518 7,106,376 1,759,528 26,366,596 6,389,574 317,889 356,697 49,016,076 13,841,588 1,322,939 1,976,983 41,736 1,397,687 29,328,572 106,083,803 135,412,375 1,931 37,740 6,158 206 48,583 555,328 6,538,508 1,090,022 1,018,707 1,334,201 5,130,938 802,145 287,804 790,296 356,697 49,424,308 312,479,599 140,725,927 408,232 29,727,976 99,774,687 9,396,233 748,534 34,414,310 8,475,290 138,520 350,684 768,719 28,717,770 560,995 229,957,677 54,983,957 284,941,634 2,745,702 28,759,506 13,790,256 404,885,991 378,025,907 782,911,898 123,644 116,283 1,837 5,524 3,061,567 76,529 2,931,322 53,716 1,062,638 71,934,924 3,625,060 287,365 491,134 67,105,580 106,569 65,124 109,923 144,169 114,196,853 190,379,626 454,532 454,665 (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. 286 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 13. Risk Profile by Sectors or Counterparties: Current Period Consolidated (1) (**) (2) (4) (5) (6) (7) (8) (9) (10) 376,885 344,901 904 31,080 46,987 40,307 540 6,140 Current Period Consolidated (12) (13) (14) TL FC Total 4,424,579 4,342,870 32,486 49,223 1,490,122 488,449 704 1,000,969 5,914,701 4,831,319 33,190 1,050,192 (11) 980 969 4 7 6,318,641 2,722,719 120,034 11,650,212 54,901,724 120,562,567 175,464,291 150,976 5,905,376 262,289 3,597,774 14,724,777 6,661,833 2,555,131 1,461,214 32,964 3,066,930 248,066 274,001 424,638 10,248 733,989 1,978,482 2,114,050 2,843,000 1,191,784 586,970 202,044 2,100 796,959 31,630 10,284 21,229 5,606 112,255 2,173 31,200 59,950 43,425 840 4,740 136 815 9,029 257 708 11,650,212 1,121,845 43,377,901 10,401,978 5,170,881 6,292,726 65,416,611 108,794,512 49,975,075 60,377,053 15,413,717 29,035,764 44,449,481 1,976,983 41,736 1,579,049 100,188,294 171,953,497 272,141,791 1,976,983 41,736 1,397,687 29,328,572 106,083,803 135,412,375 82,420 43,567,893 98,942 3,988,978 13,190,519 23,501,459 8,307,294 21,824,286 67,069,352 12,296,272 35,014,805 5,304,387 1,350,222 1,262,552 2,195,171 6,297,347 11,601,734 862,219 760,076 4,317,013 2,212,441 2,022,628 6,512,184 114,196,853 190,379,626 454,532 454,665 356,697 49,424,308 312,479,599 140,725,927 408,232 29,727,976 99,774,687 9,396,233 748,534 34,414,310 8,475,290 138,520 350,684 768,719 28,717,770 560,995 229,957,677 54,983,957 284,941,634 2,745,702 28,759,506 13,790,256 404,885,991 378,025,907 782,911,898 Sectors/Counterparty (*) Agriculture Farming and Stockbreeding 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 Other Total 123,644 116,283 1,837 5,524 3,061,567 76,529 2,931,322 53,716 1,062,638 71,934,924 3,625,060 287,365 491,134 67,105,580 106,569 65,124 109,923 144,169 133 137,807 133 (3) 333 333 6 137,801 3,544 514 62 561 1,931 37,740 6,158 206 48,583 555,328 365,061 356,697 49,016,076 101,258,712 27,984,826 317,889 356,697 49,016,076 13,841,588 1,322,939 2,129,556 3,236,316 1,142,363 3,186,163 13,159 974,034 16,746 33,407 144,878,573 6,574,605 5,881,195 168,172 81,210,149 6,251,203 57,787,229 155,230 34,484,782 3,155,493 39,921,798 15,542,518 7,106,376 1,759,528 26,366,596 6,389,574 6,538,508 1,090,022 1,018,707 1,334,201 5,130,938 802,145 287,804 790,296 (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. 287 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 Contingent and Non-Contingent Receivables from Banks and Intermediaries 8,231,621 5,297,561 8,964,769 8,778,779 94,434,509 125,707,239 2,184 10,243 36,797 197 3,211 401 8,176 3,957 440,151 454,665 341,065 235,715 36,305 143,472 83,784 534,296 356,697 21,398,257 3,344,253 2,594,885 6,770,172 8,245,719 42,353,286 Contingent and Non-Contingent Corporate Receivables 19,840,460 24,090,193 29,309,190 36,636,851 195,796,835 305,673,529 Contingent and Non-Contingent Retail Receivables 21,889,857 1,570,189 2,863,842 7,312,307 71,529,302 105,165,497 Contingent and Non-Contingent Collateralized Receivables with Real Estate Mortgages Receivables are identified as High Risk by the Board 660,455 157,173 818,109 7,254 1,133,860 2,592,233 27,778,121 32,982,778 19,489 6,204 160,564 350,684 Total 72,227,047 35,131,368 45,470,991 62,136,808 398,612,457 613,578,671 (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 0% 20% 35% 50% 75% 100% 150% 250% Amount Before Credit Risk Mitigation (1) 218,412,340 30,516,889 10,468,700 50,582,732 115,357,270 362,281,366 653,021 242,174 Amount After Credit Risk Mitigation 227,777,081 30,516,889 10,450,092 50,579,221 110,291,167 352,402,253 653,021 242,174 Mitigation in Shareholders’ Equity (2) 1,597,169 1,597,169 (1) The figures represent total risk amounts before credit risk mitigation and after credit conversion factor. (2) On the provisional calculations made in accordance with the BRSA legislation dated 08.12.2020 and numbered 9312, the simple arithmetic average of the last 252 business days the Central Bank of the Republic of Turkey foreign exchange buying rates of the reporting date is used. 288 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 4.2 Hotel, Food and Beverage Services 4.3 Transportation and Telecommunication 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) 289,813 270,523 3,146 16,144 23,450,713 173,564 9,654,005 13,623,144 4,794,536 14,331,333 3,841,718 204,153 184,562 3,964 15,627 6,969,160 119,387 2,889,850 3,959,923 5,128,524 7,967,696 3,661,465 192,159 170,873 3,988 17,298 9,043,741 102,554 3,822,387 5,118,800 3,936,066 7,238,886 3,064,011 3,140,451 1,361,705 1,252,272 3,254,856 13,084 1,792,303 289,597 197,000 1,802,324 5,783,967 48,650,362 643,237 12,542 2,007,396 156,272 53,689 71,390 2,875,313 23,144,846 1,045,473 11,631 1,359,076 148,211 70,681 287,531 2,525,964 22,936,816 17. Information on Value Adjustments and Change in Credit Provisions Stage 3 Provisions Stage 1 and Stage 2 Provisions 11,291,709 5,813,839 4,759,049 10,193,891 (1,678,869) (4,347,953) 14,371,889 11,659,777 Beginning Balance Provisions Reversal of Provisions Other Value Adjustments Ending Balance 18. Exposures Subject to Countercyclical Capital Buffer Explanations about exposures subject to consolidated private sector receivables: Country Turkey TRNC England Germany Albania USA Malta Georgia Russia Kosovo Other RWA Calculations for Private Sector Loans in Banking Book RWA calculations for Trading Book Total 348,026,672 3,217,730 351,244,402 40,328 2,475,177 1,879,051 1,863,651 1,243,123 1,213,830 879,846 700,811 652,586 600,611 1,825,724 2,475,177 1,879,051 1,903,979 1,243,123 1,213,830 879,846 700,811 652,586 600,611 1,825,724 289 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 III. Explanations on Currency Risk The exposed currency risk of the Group is result of the difference between the 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 of 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 the framework of the determined by the “Net Foreign Currency Overall Position/Shareholders’ Equity” ratio, which is a part of the legal limits requirement and the internal currency risk limits specified by the Board of Directors. Foreign exchange risk management decisions are strictly applied. In measuring the exposed currency risk of the Group, the Standard Method, the Value at Risk Model (VAR) and Expected Shortfall Model 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 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. Expected loss calculations are also carried out daily. 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, 2020 December 30, 2020 December 29, 2020 December 28, 2020 December 25, 2020 December 24, 2020 USD 7.3850 7.3065 7.3140 7.3493 7.4901 7.5142 EUR 9.0298 8.9856 8.9567 8.9793 9.1327 9.1568 The Parent Bank’s last 30-days arithmetical average foreign currency purchase rates: USD: TL 7.6147 EUR: TL 9.2731 Sensitivity to currency risk: 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 GBP 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 Effects on Profit/Loss (1) Current Period USD EUR RUB GBP 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease 10% increase 10% decrease (1) Indicates the values before tax. 255,991 (255,991) 447,405 (447,405) 74,306 (74,306) 50,224 (50,224) Priod Period (74,040) 74,040 249,693 (249,693) 61,609 (61,609) 14,855 (14,855) 290 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 (2) 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 (2) Other Liabilities (2) (6) Total Liabilities Net 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 21,951,814 5,325,553 1,325,461 30,111,434 5,212,060 5,315,517 4,914,706 96,398,075 24,829,573 86,584,172 14,341,085 6,359,078 485,942 27,259 3,971 2,536,568 66,404,333 16,896,691 7,126,920 27,259 29,748,250 185,518,815 2,572,070 3,108,688 1,752,890 7,433,648 119,425 334,421 2,238 44,606 334,421 166,269 3,507,604 6,461,094 956,663 10,925,361 136,114,708 161,959,197 26,508,062 324,581,967 2,446,549 87,080,313 639,672 30,039,619 754,867 377,134 495,114 3,318,797 111,084,026 46,877,818 245,042,157 5,359,028 43,071,146 54,417,309 2,756,791 57,157 86,699 598,748 5,998,700 73,167,922 54,504,008 4,110,406 2,820,169 6,003,663 448,181 9,272,013 123,781,189 223,069,097 48,563,717 395,414,003 12,333,519 (61,109,900) (22,055,655) (70,832,036) (8,137,589) 63,964,318 23,340,880 18,521,848 26,659,437 37,692,915 95,161,394 31,197,076 40,551,047 27,083,201 3,742,321 4,514,070 79,167,609 140,766,443 61,598,834 82,758,032 111,516,061 98,683,494 132,114,888 175,966,277 14,511,211 258,142,160 19,396,588 294,046,359 12,832,567 (43,851,389) (4,885,377) (35,904,199) (10,674,646) 14,762,806 25,437,452 28,650,106 45,099,931 63,697,449 18,597,518 32,135,021 5,583,108 40,008,393 6,881,289 1,298,181 3,413,073 85,341,544 45,333,151 64,198,200 (1) Precious metals accounts amounting TL 13,700,154 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 2,011,954) Operating Lease Development Costs (TL 5,243), Deferred Tax Asset (TL 1,347,866), Prepaid Expenses and Taxes (TL 193,285), expected credit loss for stage 1 and stage 2 (TL (7,218,308)) Intangible Assets (TL 113,752) Assets Held for Sale and Related to Discontinued Operations(Net)(TL 15,143) in assets and Derivative Financial Instruments Foreign Currency Expense Accruals (TL 4,297,738), Shareholders’ Equity (TL 263,794) and expected credit loss for stage 1 and stage 2 for non-cash loans (TL 210,363) are not taken into consideration in the currency risk measurement. (3) Includes leasing and factoring receivables and foreign currency indexed loans which are recognized under TL account. Of the total amount of TL 2,231,787 of the aforementioned loans; TL 820,807 is USD indexed, TL 1,405,394 is EUR indexed, TL 1,144 is CHF indexed and TL 4,442 is GBP indexed. (4) The item includes TL 36,807,875 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. 291 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 IV. Explanations on Interest Rate Risk Interest rate risk is defined as the impairment in the value of the interest sensitive assets, liabilities and off-balance sheet items due to interest rate fluctuations. A method which takes into consideration the effect of standard interest shocks on the economic values of the Parent Bank’s on and off-balance sheet interest sensitive accounts 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. In addition, the effect of the change in interest rates on the Parent Bank’s net interest income is analyzed regularly. Within this scope, the ratio of the change expected to occur in net interest income under various scenarios to the limit on Tier I capital is monitored and regularly reported to the top 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 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 bps increase 100 bps decrease FC (3) 100 bps increase 100 bps decrease Current Period 541,645 (1,048,424) Prior Period 144,911 (119,204) Current Period (1,624,307) 1,804,250 Prior Period (1,095,881) 1,217,926 (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. 292 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 a. Interest 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 Financial Assets at Fair Value Through Other Comprehensive Income Loans (2) Financial Assets Measured at Cost 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 Total Position (1) Includes Derivative financial assets (2) Includes leasing and factoring receivables. Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 3,079,150 7,397,070 1,632,396 1,131,261 831,263 422,451 1,826,743 628,745 4,458,677 441,521 68,891,240 11,061,560 71,970,390 19,712,344 1,431,863 424,882 3,735,574 13,510,135 2,201,527 18,682,163 10,695,046 15,703,290 14,935,126 16,511,941 1,299,704 77,827,270 80,443,869 42,331,891 128,818,682 144,383,954 30,229,613 871,707 427,079,716 8,740,222 7,866,262 9,320,990 18,221,372 33,233 114,513 7,379,635 151,549 1,942,384 45,604,603 52,080,721 60,246,278 128,972,393 65,667,911 168,180,506 168,282,127 49,108,820 137,940,506 718,152,263 2,739,231 677,800 170,153 160,355,911 39,927,713 16,434,900 993,278 2,437,702 1,123,810 5,704,272 617,266 156,215,629 375,989,121 25,547,229 3,240,601 1,887,417 6,369,907 3,091,277 11,642 2,709 425,776 6,231 11,076 49,035,045 52,295,662 25,984,647 5,604,915 14,328,261 32,315,785 32,386,022 27,882,004 2,904,132 1,807,737 6,388,015 1,284,754 9,789,049 4,576,940 63,925,427 77,602,888 1,196,611 106,365,735 116,650,246 203,231,573 81,514,933 61,055,062 43,430,610 16,179,866 312,740,219 718,152,263 107,125,444 124,851,517 32,928,954 264,905,915 (74,259,180) (15,847,022) 1,403,506 7,809,464 1,050,344 (2,449,955) (7,196,233) (174,799,713) (264,905,915) 10,263,314 (9,646,188) (72,855,674) (8,037,558) 108,175,788 122,401,562 25,732,721 (174,799,713) 617,126 (3) The expected loss provisions are shown in Non-Interest 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. 293 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Interest rate sensitivity of assets, liabilities and off-balance sheet items (Based on time remaining to repricing date): 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 Financial Assets at Fair Value Through Other Comprehensive Income Loans (2) Financial Assets Measured at Cost 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 Total Position Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Non-interest Bearing Total 805,105 9,315,210 1,498,098 896,131 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 13,801,531 7,406,549 10,366,064 13,600,354 14,021,049 1,818,173 61,013,720 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 9,736,197 741,442 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 29,306,716 22,553,419 848,129 963,840 5,658,224 429,206 3,239,839 5,052,424 54,668,754 72,306,980 882,373 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) (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) Includes leasing receivables and factoring receivables. (3) The expected loss provisions are shown in Non-Interest 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. 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 (1) Financial Assets Measured at Cost Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (2) Funds Funds Provided from Other Financial Institutions (1) Includes leasing receivables and factoring receivables. (2) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. 294 EUR % 1.37 2.09 2.29 4.45 1.94 0.26 0.09 0.61 0.10 1.62 USD % 0.28 4.05 5.07 5.73 5.05 1.22 0.17 1.72 5.87 0.20 2.18 JPY % TL % 12.00 16.80 15.09 17.11 14.11 14.36 12.85 16.50 10.65 16.98 14.04 12.50 13.98 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 at Fair Value Through Other Comprehensive Income Loans (1) Financial Assets Measured at Amortized Cost Liabilities Bank Deposits Other Deposits Money Market Funds Miscellaneous Payables Debt Securities Issued (2) Funds Funds Provided from Other Financial Institutions (1) Includes leasing receivables and factoring receivables. (2) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. V. Explanations on Equity Shares Risk Arising from Banking Book EUR % 0.34 1.56 2.40 4.64 1.92 0.30 0.19 0.03 0.10 1.57 USD % 1.03 6.21 5.12 7.02 4.43 2.58 1.17 2.46 5.87 1.25 3.69 JPY % 0.04 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 a. Accounting policies related to equity investments in 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: Investment in Shares Quoted Investment in Shares 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 11,563,581 22,478,975 242,174 29,057 1,212,401 (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 unrealized gains/losses on equity securities and results included in Common Equity and Tier II Capital: Portfolio Private Equity Investments Shares Traded on a Stock Exchange Other Stocks Total Realized Gains/losses During the period Including into Tier I Capital (1) Total Including into Tier I Capital Total Total Revaluation Increases Unrealized Gains and Losses 10,217,857 109,996 10,217,857 109,996 10,327,853 10,327,853 (1) Represents the amounts reflected to equity according to the equity method. 295 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 11,563,581 1,483,632 13,047,213 11,563,581 1,846,893 13,410,474 925,086 147,751 1,072,837 VI. Explanations on Liquidity Risk Management 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-Liability Management 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. The reflections of conveniences provided for loan customers on repayments due to the COVID-19 outbreak and pressure in financial markets on the Bank’s liquidity adequacy are analyzed under various scenarios. 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, related 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. Current Period TL+FC 162.85 172.12 172.53 Prior Period TL+FC 168.96 178.92 200.82 FC 300.96 418.24 475.82 FC 275.51 328.70 338.46 October 31, 2020 November 30, 2020 December 31, 2020 October 31, 2019 November 30, 2019 December 31, 2019 296 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Total Unweighted Value (1) Total Weighted Value (1) TL+FC FC TL+FC FC 137,652,570 82,706,283 284,278,935 184,412,860 26,054,861 18,441,286 47,460,641 2,373,032 - 236,818,294 184,412,860 23,681,829 18,441,286 127,724,546 69,111,661 67,880,137 36,572,634 1,312,536 77,180 328,134 19,295 92,179,706 61,209,683 43,827,669 29,078,250 34,232,304 7,824,798 23,724,334 7,475,089 6,752,800 9,938,661 6,752,800 9,938,661 49,796 43,392 2,885,234 6,071,095 2,885,234 6,071,095 Commitments related to debts to financial markets and other off-balance sheet obligations Other revocable off-balance sheet commitments and contractual obligations 3,867,566 3,867,566 38,073,361 32,472,635 3,867,566 1,903,668 3,867,566 1,623,632 Other irrevocable or conditionally revocable off-balance sheet obligations 186,692,719 86,537,556 19,605,398 10,786,378 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 (%) (1) The simple arithmetic average calculated for the last three months of weekly simple arithmetic average. 122,246,660 77,405,983 270,305 46,427,450 5,169,196 203,045 26,630,710 46,416,513 12,887 35,145,249 5,169,196 12,887 22,537,576 46,416,513 51,866,951 73,250,268 40,327,332 68,966,976 Upper Limit Applied Values 137,652,570 82,706,283 81,919,328 21,893,173 169.17 398.34 297 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Prior Period High Quality Liquid Assets High Quality Liquid Assets Cash Outflows Retail and Small Business Customers, of which; Stable deposits Less stable deposits Unsecured 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 derivative 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 56,371,580 196,763,195 111,492,296 17,843,005 11,149,230 36,666,295 1,833,315 160,096,900 111,492,296 16,009,690 11,149,230 92,163,597 44,303,837 49,709,052 22,650,364 564,159 4,105 141,040 1,026 67,798,730 39,938,703 33,524,004 19,190,843 23,800,708 4,361,029 16,044,008 3,458,495 53,711,962 26,539,661 53,711,962 26,539,661 999,514 998,967 50,211,076 23,038,775 50,211,076 23,038,775 3,500,886 3,500,886 26,430,681 21,401,268 3,500,886 1,321,534 143,964,846 59,934,013 15,073,463 3,500,886 1,070,063 7,397,989 138,658,530 69,806,274 279,825 117,115 23,580 23,152 33,236,614 18,385,134 23,988,876 15,260,319 47,900,864 40,641,242 47,900,864 40,641,242 81,417,303 59,143,491 71,913,320 55,924,713 Upper Limit Applied Values 121,555,112 56,371,580 66,745,210 18,128,795 182.90 314.22 (1) The simple arithmetic average calculated for the last three months of the monthly simple arithmetic average. Compared to prior period, a decrease in the total liquidity coverage ratio and an increase in the foreign currency liquidity coverage ratio has been observed for the fourth quarter of 2020. While the foreign currency liquidity coverage ratio, increased due to the increase in the high-quality liquid asset stock, the total liquidity coverage ratio decreased due to the increase in net cash outflows. Total and Foreign Currency liquidity coverage ratios are continuing to hover far above the minimum level (respectively 100% and 80%) 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 Group’s assets, liabilities and off-balance sheet transactions. The Group’s high-quality liquid asset stock primarily consists of cash and 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 term 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. 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 Parent 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 included in consolidation 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 Parent Bank. 298 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 (1) Total Current Period Assets Cash (Cash in Vault, Foreign Currency Cash, Money in Transit, Cheques Purchased) and Balances with the Central Bank of Turkey 32,507,502 39,462,888 Banks 11,711,405 6,747,225 831,263 422,451 Financial Assets at Fair Value through Profit/Loss (2) 3,731,746 1,895,119 1,131,261 1,977,870 4,646,127 1,151,033 108,240 628,745 441,521 71,970,390 19,712,344 13,510,135 2,201,527 Money Market Placements Financial Assets at Fair Value Through Other Comprehensive Income Loans (3)(4) Financial Assets Measured at Amortized Cost Other Assets Total Assets Liabilities Bank Deposits Other Deposits Funds Provided from Other Financial Institutions Money Market Funds Marketable Securities Issued (5) Miscellaneous Payables Other Liabilities (6) Total Liabilities Liquidity Gap 1,193,255 3,443,997 2,719,249 8,781,171 33,771,331 27,811,818 106,449 77,827,270 14,473,892 40,872,322 38,776,258 108,623,042 159,584,414 41,453,536 23,296,252 427,079,716 3,867,984 2,721,161 6,685,798 23,540,267 8,789,393 45,604,603 7,264,632 10,885,937 86,280 351,417 493,306 41,164,706 60,246,278 70,882,432 108,306,733 47,740,826 129,951,527 218,540,351 78,162,987 64,567,407 718,152,263 1,123,809 2,739,232 677,800 170,153 993,278 156,215,628 160,355,520 39,926,094 16,431,322 2,443,291 617,266 2,794,932 4,776,565 26,865,985 29,290,928 13,874,478 25,547,229 11,642 425,776 2,245,825 2,343,961 14,565,165 32,694,917 12,075,559 34,507,788 17,159,750 212,608 6,741 408,775 5,704,272 375,989,121 77,602,888 25,984,647 63,925,427 52,295,662 57,800 6,942,308 5,022,373 2,178,403 1,309,095 223,138 100,917,129 116,650,246 191,905,025 217,784,796 52,971,043 60,643,545 67,140,284 26,790,441 100,917,129 718,152,263 (121,022,593) (109,478,063) (5,230,217) 69,307,982 151,400,067 51,372,546 (36,349,722) Net Off Balance Sheet Position (2,889) (2,546,299) (3,056,205) (152,308) 699,240 7,774 Derivative Financial Assets 1,253,008 73,124,894 48,885,862 29,307,917 41,828,035 48,022,635 Derivative Financial Liabilities 1,255,897 75,671,193 51,942,067 29,460,225 41,128,795 48,014,861 Non-cash Loans 67,981,107 2,833,862 6,189,109 25,982,187 14,953,815 4,946,327 (5,050,687) 242,422,351 247,473,038 122,886,407 Prior Period Total Assets Total Liabilities Liquidity Gap 62,996,897 76,652,905 32,407,366 88,603,015 185,504,633 63,458,450 55,428,572 565,051,838 114,634,981 194,788,029 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) Net Off Balance Sheet Position Derivative Financial Assets Derivative Financial Liabilities (1,314) 962,593 963,907 7,232 (369,404) 1,540,901 673,867 (1,208) 43,993,437 24,170,288 28,756,327 37,655,859 43,238,110 43,986,205 24,539,692 27,215,426 36,981,992 43,239,318 Non-cash Loans 54,722,663 2,082,801 5,729,978 18,729,423 10,541,533 4,786,934 1,850,074 178,776,614 176,926,540 96,593,332 (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) Includes leasing and factoring receivables. (4) Stage 3 Nonperforming loans are 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. 299 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 5 Years and Over Adjustments (-) Balance Sheet Value Total 157,339,437 163,515,468 40,912,349 16,801,854 3,500,350 735,236 382,804,694 1,111,301 381,693,393 3,136,352 5,045,193 27,715,328 32,071,745 14,548,478 82,517,096 4,914,208 77,602,888 Money Market Funds 25,611,420 11,687 428,338 26,051,445 66,798 25,984,647 Marketable Securities Issued (Net) (1) 2,274,376 2,511,577 17,477,662 40,245,888 16,003,969 78,513,472 14,588,045 63,925,427 Leasing Liabilities 26,713 56,965 205,568 675,895 417,762 1,382,903 464,163 918,740 (1) Includes Tier 2 subordinated bond which is classified on the balance sheet as subordinated loan. Prior Period Liabilities Deposits Funds Provided from Other Financial Institutions 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 Money Market Funds 2,976,782 45,681 10,149 3,032,612 2,277 3,030,335 Marketable Securities Issued (Net) (1) 2,904,052 2,544,694 12,382,030 40,345,165 7,535,365 65,711,306 11,042,552 54,668,754 Leasing Liabilities 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. The following table shows the remaining maturities of non-cash loans of the Group. Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 14,423,731 1,183,876 1,206,403 5,581,173 198,728 5 Years and Over Total 22,593,911 52,890,702 1,282,444 4,150,104 16,223,311 10,231,470 3,293,179 88,071,210 66,504 600,170 367,542 832,602 4,083,376 3,700,319 9,050,343 94,327 823,298 1,653,148 3,170,943 67,981,107 2,833,862 6,189,109 25,982,187 14,953,815 4,946,327 122,886,407 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 Current Period Letters of Credit Letters of Guarantee Acceptances Other Total Prior Period Letters of Credit Letters of Guarantee Acceptances Other Total 300 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Up to 1 Month 1-3 Months 3-12 Months 816,023 914,210 8,645,929 4,322,816 9,149,971 8,521,913 4,484,575 8,961,042 1-5 Years 2,553,562 2,546,661 5 Years and Over Total 25,488,301 25,428,401 50,595,003 34,514,507 16,909,423 38,527,288 46,181,823 186,728,044 62,209,114 44,558,222 17,162,503 37,834,949 46,174,049 207,938,837 306,435 330,779 2,883,278 2,882,495 1,888,709 1,408,440 628,963 626,246 778,672 12,421,141 8,395,451 960,069 1,056,468 2,033,885 2,030,192 504,589 747,185 747,185 1,840,812 1,840,812 3,155,213 2,795,687 8,134,123 8,126,930 22,099,853 2,508,905 148,796,087 100,827,929 58,768,142 82,956,830 96,037,496 489,895,389 Demand Up to 1 Month 1-3 Months 3-12 Months 1-5 Years 700,344 801,705 2,114,708 2,123,121 2,222,144 2,219,209 7,510,330 2,490,506 7,419,249 2,520,639 5 Years and Over 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 2,866,619 1,099,096 1,946,607 2,784,795 1,036,690 1,086,451 1,841,813 596,670 1,444,246 424,451 230 220 1,847,990 1,847,990 158,446 1,347,513 1,347,513 61,622 57,430 9,107,825 8,908,562 3,660,503 1,926,500 87,979,642 48,709,980 55,971,753 74,637,851 86,477,428 355,703,154 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 7.12% (December 31, 2019: 8.16%). According to Regulation the minimum leverage ratio is 3%. The changes in the leverage ratio are mostly due to the increase in the risk amounts. 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 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 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 648,032,467 (1) 559,624,998 (7,250,340) (1) (5,426,840) (3,351,515) (2,466,092) 18,116,176 12,865,465 (806,281) 963,934,710 1,565,916 7,911,768 (593,265) 721,302,308 (1) As the consolidated financial statements dated 31.12.2020 prepared per paragraph 6 of article 5 of the “Communiqué on the Preparation of Consolidated Financial Statements of Banks” have not yet been published as of the report date pursuant the legal regulations, the consolidated financial statement balances of 30.06.2020 are included. (2) The amounts in the table represents the average of three months. 301 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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) 730,977,764 (1,548,881) 729,428,883 10,703,858 3,351,515 14,055,373 545,377,636 (1,183,412) 544,194,224 4,902,196 2,466,092 7,368,288 The amount of risk investment securities or commodity collateral financing transactions (Excluding on balance sheet items) 5,669,548 2,938,119 Risk amount of exchange brokerage operations The total amount of risk investment securities or commodity collateral financial transactions 5,669,548 2,938,119 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 (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. 226,931,774 (12,150,868) 214,780,906 68,560,575 963,934,710 174,219,331 (7,417,654) 166,801,677 58,827,327 721,302,308 7.12 8.16 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 160,759 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 Book Value Fair Value Current Period Prior Period Current Period Prior Period 2,201,527 19,712,344 77,827,270 45,604,603 403,934,870 5,704,272 375,989,121 77,602,888 63,925,427 52,417,767 1,179,448 20,554,031 61,013,720 33,639,301 2,201,527 19,686,929 77,827,270 45,702,301 316,028,505 384,847,541 5,905,168 296,886,036 72,306,980 54,668,754 39,344,944 5,586,995 375,097,507 75,876,780 64,293,176 52,417,767 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 (1) Factoring and Leasing Receivables are included. (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. 302 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Level 2 290,342 1,345,669 360,628 51,030,195 82,962 657,092 527,505 261,922 6,710,129 1,763,563 24,638,435 428,254 89,168 8,854,434 Level 3 100,564 2,149,813 862,526 (1) Since they are not traded in an active market, the equity securities (TL 38,638) 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 1 408,556 156,052 131,615 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 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 2,771,586 356,360 (77,739) 62,696 3,112,903 Prior Period 2,595,148 476,387 (51,633) 277,913 (526,229) 2,771,586 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 classified 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-b.3 and footnote I.n. 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. 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 standardized approach for calculation of capital charge for credit risk, therefore explanations about internal ratings-based approach are not included. Reverse stress tests are regularly carried out by the Bank considering the increase in deteriorated loan portfolio and interest and exchange rate shocks which might cause the capital adequacy to fall within the legal limits. 303 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Unit, Operational Risk and Subsidiary Risk Unit, Model Risk and Validation Unit, Internal Capital Assessment Process and Economic Capital 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 analyze 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 summarized 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 the risk appetite framework and based on the components of the main risk types, - In addition to the assessment 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 risks and the risk indicators, - Testing the measurement results in terms of completeness and reliability, - Analyzing 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 holistic and individual stress test processes carried out by the Bank, the most advanced approaches used in risk measurement in the Bank are used as much as possible, together with the methods that are the basis of legal reporting (standard approaches for credit and market risk, basic indicator approach for operational risk). 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 reflections of developments related to the COVID-19 outbreak on the Bank’s risk profile and risk appetite framework are closely monitored. The negative effects of the COVID-19 outbreak are also taken into account in the calculation of expected credit loss. The levels at which the capital adequacy ratio of the Bank will reach are estimated and monitored with stress tests. In addition, reverse stress tests are carried out regularly, by determining the problematic loan growth rate and increase in exchange rates, which will cause the Bank’s capital adequacy to fall within the legal limits. 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-f.1 notes. No. “The Public Disclosure of Qualitative Information Related to the Market Risk “ mentioned in the section. 304 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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. In case of exceeding the limits, the excess and its reasons are immediately reported to the Risk Committee and Board of Directors. The actions to be taken to remedy the excess and the time to eliminate the excess are concluded under the authority of the Board of Directors. The results of the controls regarding the excess of the risk limits and the evaluations of these limits are presented by Internal Audit and Risk Management Group to Top 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. Model Risk Management and Validation Operations Model risk is the risk of financial losses and/or loss of reputation that the Bank may be exposed to due to errors and/or malfunctions that occur during the creation, implementation or use of models used in its activities. In order to address the model risk in a holistic manner, the model definition, model life cycle and triple line of defense structure and the duties and responsibilities of all functions of the Bank in this structure are defined in the model risk management policy. Model risk management and validation activities in the second line of defense of the triple line of defense structure; creating the model inventory, determining and approving the model class, validating the models, preparing periodic reports on the Bank’s model risk and presenting those reports to the Risk Committee, Audit Committee and Board of Directors. Risk measurement models are validated at least once a year according to international standards. Within the scope of validation, activities are carried out to test the performance and validity of models with statistical methods, to examine the quality of the data used in the model development phase and the conceptual soundness of the selected methods, and to evaluate the health of the processes created for the use of the models. The results of the validation activities are reported to the Risk Committee, Audit 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. 305 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 a.2. General Information on Risk Weighted Amounts Credit risk (excluding counterparty credit risk) (CCR) Of which standardized approach (SA) Of which internal rating-based (IRB) approach Counterparty credit risk Of which standardized 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 standardized approach (SA) Of which internal model approaches (IMM) Operational Risk Of which Basic Indicator Approach Of which Standardized approach (SA) Of which Advanced measurement approach Risk Weighted Amount Minimum Capital Requirements Current Period 460,542,007 460,542,007 10,583,780 10,583,780 Prior Period 401,894,678 401,894,678 8,582,423 8,582,423 Current Period 36,843,361 36,843,361 846,702 846,702 2,745,702 3,175,390 219,656 17,495,725 17,495,725 41,095,093 41,095,093 8,563,275 8,563,275 35,636,968 35,636,968 1,399,658 1,399,658 3,287,607 3,287,607 The amounts below the thresholds for deduction from capital (subject to a 250% risk weight) 605,435 551,920 48,435 Floor adjustment Total 533,067,742 458,404,654 42,645,419 306 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 b. Linkages Between Financial Statements and Risk Amounts b.1 Differences and linkage between scopes of accounting consolidation and regulated consolidation Differences and Linkage Between Accounting Consolidation and Legal Consolidation Scope: Carrying values of items in accordance with Turkish Accounting Standards (TAS) Carrying values in financial statements prepared as per TAS (1) 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 58,882,672 28,042,718 71,970,390 71,970,390 21,913,871 21,913,871 3,661,368 6,800,006 3,557,377 71,714,132 77,827,270 77,827,270 7,216,872 6,710,129 6,710,129 6,710,129 3,242,629 684,680 4,763,020 359,129 385,139,476 427,079,716 427,079,716 44,003,825 45,604,603 45,604,603 21,305,967 26,049,421 26,049,421 1,207,539 1,302,608 1,302,608 1,112,923 23,695,622 2,329,652 4,293,073 108,925 4,204,744 13,052,096 13,052,096 8,099,954 8,099,954 1,653,988 3,649,631 48,923 1,653,988 3,649,631 48,923 3,672,736 3,672,736 33,365,764 54,815,763 54,815,763 79,888 1,530,485 648,032,467 718,152,263 714,909,634 6,710,129 8,690,329 1,610,373 339,310,123 85,534,799 17,407,703 43,608,544 381,693,393 77,602,888 25,984,647 39,499,306 8,046,256 24,558,771 5,482,702 8,854,434 8,854,434 59,209 1,272,625 24,039,020 3,209,745 328,469 22,670,763 25,838,575 79,270,190 918,740 24,027,066 2,851,982 144,431 24,426,121 57,287,535 74,861,720 648,032,467 718,152,263 32,605,027 8,854,434 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 Measured at Amortized Cost - Loans (2) Financial Assets at Measured at Amortized Cost - Other Financial Assets Financial Assets at Measured at Amortized 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 Subordinated Debts Other Liabilities Shareholders’ Equity Total Liabilities (1) June 30, 2020 amounts are represented, as consolidated financial statements dated December 31, 2020 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) Leasing and Factoring Receivables are included. 307 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Carrying values of items in accordance with Turkish Accounting Standards (TAS) 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 53,898,390 22,027,221 54,076,128 54,076,128 21,733,479 21,733,479 2,666,162 4,801,495 1,074,673 61,023,546 61,013,720 61,013,720 5,369,818 5,111,267 5,111,267 5,111,267 3,726,822 484,050 2,473,546 335,520,809 337,131,235 337,131,235 35,650,782 33,639,301 33,639,301 17,144,869 17,117,296 17,117,296 1,218,276 1,190,220 1,190,220 981,049 23,172,273 1,920,650 4,314,742 90,429 3,075,980 25,839,740 11,190,991 11,190,991 7,994,765 7,994,765 1,196,724 1,196,724 3,444,979 3,444,979 23,646 23,646 1,950,997 1,950,997 37,670,187 37,670,187 91,213 1,125,231 559,624,998 565,051,838 561,325,016 5,111,267 6,684,418 1,216,444 294,647,350 302,791,204 79,295,160 3,030,335 44,266,745 72,306,980 3,030,335 39,291,778 8,040,905 2,863,882 3,013,572 2,731,824 2,731,824 280 1,245,427 20,633,777 1,862,833 287,030 15,365,226 21,738,305 74,238,958 956,884 17,860,585 1,586,552 76,292 15,376,976 43,340,961 65,701,467 559,624,998 565,051,838 10,904,787 2,731,824 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 Measured at Amortized Cost - Loans (1) Financial Assets at Measured at Amortized Cost - Other Financial Assets Financial Assets at Measured at Amortized 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 Subordinated Debts Other Liabilities Shareholders’ Equity Total Liabilities (1) Leasing and Factoring Receivables are included. 308 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 net amount under regulatory scope of consolidation 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 Differences due to risk mitigation (2) Risk Amounts 1 2 3 4 5 6 7 8 9 10 11 Total Credit Risk 718,152,263 714,909,634 718,152,263 477,657,792 714,909,634 90,428,221 Counterparty credit risk 6,710,129 (32,605,027) 39,315,156 9,869,395 5,494,929 Securitization Position Market risk 8,690,329 8,854,434 164,105 (30,300,466) (5,859,247) 769,178,142 15,364,324 164,105 (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 net amount under regulatory scope of consolidation 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 Differences due to risk mitigation (2) Risk Amounts 1 2 3 4 5 6 7 8 9 10 11 Total 565,051,838 Credit Risk 561,325,016 565,051,838 359,716,424 561,325,016 68,019,093 Counterparty credit risk 5,111,267 (10,904,787) 16,016,054 7,598,552 3,203,936 Securitization Position Market risk 6,684,418 2,731,824 3,952,594 (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. 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. 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. 309 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 23,144,846 913,737 24,058,583 Non-defaulted 403,934,870 119,172,863 208,255,293 731,363,026 Allowances/Amortization and Impairments 14,371,889 695,465 15,067,354 (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 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. 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 21,102,730 5,667,879 (145,197) (98,452) (3,382,114) 23,144,846 Net Values 412,707,827 119,172,863 208,473,565 740,354,255 Net Values 325,839,526 91,478,421 162,316,710 579,634,657 Prior Period 12,492,038 13,812,459 (109,537) (1,572,250) (3,519,980) 21,102,730 (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. 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 2020 is TL 98,452 and it includes the credit which detailed in the Section Five Note I.f.10.2 Domestic EU Countries OECD Countries (1) Off-Shore Banking Regions USA, Canada Other Countries Total Current Period Prior Period Non-Performing Loans Specific Provisions Non-Performing Loans Specific Provisions 22,625,959 277,753 3,552 8,756 228,826 23,144,846 13,938,685 244,154 3,326 6,405 179,319 14,371,889 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 (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. Collateral valuation and its management policy and primary features processes are given are given at Section Four note.II under “Information on Credit Risk” disclosure. 310 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 c.2.2. Credit Risk Mitigation Techniques - Standard Approach Current Period Loans (2) Debt securities Total 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 Exposures secured by credit derivatives Collateralized amount of exposures secured by credit derivatives 396,514,406 119,172,863 4,963,570 4,189,276 11,229,851 9,194,462 515,687,269 4,963,570 4,189,276 11,229,851 9,194,462 Of which defaulted 8,560,440 (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 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 Exposures secured by credit derivatives Collateralized amount of exposures secured by credit derivatives 306,053,674 91,478,421 6,102,217 4,994,669 13,683,635 11,463,742 397,532,095 6,102,217 4,994,669 13,683,635 11,463,742 Of which defaulted 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. c.3. Credit Risk Under Standardized Approach c.3.1. Qualitative Disclosures on Banks’ Use of External Credit Ratings Under the Standardized Approach for Credit Risk Aforementioned explanations are disclosed under Section Four note XI-a.1. c.3.2. Standard Approach: Credit risk exposure and credit risk mitigation effects: 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 banks and securities firms 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 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 2,344,669 227,333 1.23% 50.00% 555,328 100.00% 179,670,497 454,543 268,080 188,865,493 490 454,435 505,570 356,295 119,941 803 504,858 356,295 34,063,694 249,246,045 142,148,843 10,323,829 21,573,337 8,475,290 248,854 17,032,661 131,982,901 51,614,095 312,988 3,345,490 869,651 34,063,694 241,166,812 137,370,841 10,306,924 21,573,337 8,475,290 248,854 1,514,133 230 50,470 402 15,360,614 71,312,787 3,355,086 143,168 2,390,881 101,830 15,967,375 308,113,161 82,718,375 3,657,532 14,648,062 6,686,802 367,574 2,680,702 28,740,676 13,790,256 65,000 6,112,340 2,680,702 28,740,676 13,790,256 65,000 18,830 2,545,498 19,770,890 14,153,517 692,278,431 211,724,440 688,598,467 94,313,431 471,756,116 0.00% 0.00% 32.31% 98.60% 75.00% 35.00% 61.12% 78.90% 104.82% 0.00% 0.00% 92.71% 68.75% 102.63% 60.26% 311 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 Off-balance sheet amount On-balance sheet amount Off-balance sheet amount Risk- Weighted Amount Risk-Weighted Amount Density 142,701,140 144,716 386,112 1,183 30,687,284 203,125,776 103,231,779 14,121,459 20,946,268 9,583,511 485,929 223,299 154,164,883 464 144,717 158,109 661 385,230 1,183 12,411,405 103,818,304 44,406,370 373,541 3,653,998 1,032,838 30,687,284 193,031,579 97,683,478 14,098,417 20,435,990 9,583,511 485,929 345,824 206 50,703 331 12,675,358 57,063,498 3,410,759 160,815 2,637,072 245,486 22,389,428 72,465 435,933 19,876,641 248,281,705 58,635,428 4,990,731 15,488,980 8,681,632 881,041 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 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% 312 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 c.3.3 Standardized Approach: Receivables according to risk classes and risk weights: Risk Weights Consolidated Current Period Risk Groups 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Exposures to sovereigns and their central banks 187,997,008 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 356,697 75,899 454,664 2,306,719 1 555,328 29,950,134 566,755 19,009,555 7,826,073 448,715 15904 304,086,766 5 Retail exposures 30,434,760 110,291,167 10,450,092 18,632,312 4,063,230 5,331,906 3,925,807 486,253 117,080 82,745 150,859 190,379,626 454,665 555,328 356,697 49,424,308 312,479,599 140,725,927 10,450,092 23,964,218 8,475,290 350,684 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 8,988,616 400,408 2,345,294 13,548,082 19,770,890 2,745,702 242,174 13,790,256 28,759,506 227,777,081 30,516,889 10,450,092 50,579,221 110,291,167 352,402,253 653,021 242,174 782,911,898 313 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 Prior Period Risk Groups 0% 10% 20% 35% 50% 75% 100% 150% 200% 250% Total Risk Weights Consolidated Exposures to sovereigns and their central banks 132,049,286 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 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 5,700,433 138,873 3,036,517 11,552,734 16,901,658 3,175,390 220,768 11,773,502 22,602,091 160,664,899 23,657,788 14,259,232 30,882,509 78,180,571 325,941,695 1,035,774 220,768 634,843,236 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 mitigation 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” 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. 314 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 d.2. Counterparty Credit Risk (CCR) Approach Analysis: Current Period Replacement Cost Potential Future Exposure Exposure after Credit Risk Mitigation Risk Weighted Amounts Standardized Approach - CCR (for derivatives) (1) 6,235,166 2,178,487 8,413,653 5,750,009 Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) Total 6,235,166 2,178,487 (1) Transactions with central counterparties are not included. 5,304,371 13,718,024 2,097,232 7,847,241 Prior Period Replacement Cost Potential Future Exposure Exposure after Credit Risk Mitigation Risk Weighted Amounts Standardized Approach - CCR (for derivatives) (1) 5,111,267 2,153,387 7,264,654 4,931,689 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 (1) Transactions with central counterparties are not included. d.3. Capital obligation for credit valuation adjustment (CVA): Total portfolio value with standardized approach CVA capital change Total subject to the CVA capital change 8,413,653 8,413,653 2,718,719 2,718,719 7,264,654 7,264,654 2,357,342 2,357,342 Current Period Prior Period Risk Amounts Risk Weighted Amounts Risk Amounts Risk Weighted Amounts d.4 CCR Exposures by risk class and risk weights: Current Period Risk Groups 0% 10% 20% 50% 75% 100% 150% Risk Weights Total Credit Exposure 1,080,938 Conditional and unconditional exposures to sovereigns and their central banks 1,080,938 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 321 321 2,785,215 5,086,222 976 19,613 3 4,712,837 31,899 7,871,440 4,733,426 31,899 1,080,938 2,786,191 5,105,835 31,899 4,713,161 13,718,024 315 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 38,113 2,627,076 4,154,789 56,340 3,572,110 10,448,428 Collateral used in derivative transactions Received Collateral Given Collateral Segregated Not Segregated Segregated Not Segregated Collateral used in other transactions Received Collateral Given Collateral 19,973,100 11,632,214 137,736 28,713 31,771,763 Collateral used in derivative transactions Received Collateral Given Collateral Segregated Not Segregated Segregated Not Segregated Collateral used in other transactions Received Collateral Given Collateral 2,477,943 7,870,503 397,413 93,412 33,068 10,872,339 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 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 Government bills/bonds-FC Corporate bills/bonds-FC Total d.6. Credit derivatives exposures: None. 316 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Current Period Prior Period Post CRM risk exposure RWA Post CRM risk exposure 862,425 786,600 782,259 4,341 28,350 47,475 17,820 15,732 15,645 87 2,088 423,129 354,060 333,898 20,162 44,734 24,335 RWA 7,906 7,081 6678 403 825 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 securitizations: 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 Committee and to the Board via the Audit Committee by the Risk Management Department. 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. 317 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 f.2. Standardized 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 Securitizations Total g. Explanations on Operational Risk RWA Current Period Prior Period 17,364,027 3,902,163 3,844,363 9,416,413 201,088 131,698 131,698 8,175,301 3,021,050 965,063 3,825,625 363,563 387,974 387,974 17,495,725 8,563,275 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, 2020, the consolidated operational risk amount is TL 41,095,093 information about the calculation is given below (December 31, 2019: TL 35,636,968). 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 18,527,745 22,312,078 24,912,326 3 15 3,287,607 2PP Amount 1PP Amount CP Amount 41,095,093 Total/Positive Years of Gross Income Amount Rate (%) Total 16,179,326 18,527,745 22,312,078 3 15 2,850,957 35,636,968 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. In the calculations made within the framework of the said regulation, behavioral maturity modeling is performed for demand deposits with low sensitivity to interest changes and whose original maturity is longer than the contractual maturity. In these studies, which are defined as core deposit analysis, based on historical data, calculations are made for what amount of demand deposits will remain within the bank for what maturity, and these analyzes are used as an input in quantifying the interest rate risk arising from banking accounts in a way that does not contradict legal provisions. Applied Shock (+/- x basis point) (+) 500 (-) 400 (+) 200 (-) 200 (+) 200 (-) 200 Gains Loss (7,912,722) 7,425,467 (391,131) 379,998 521,609 (198,532) 7,606,933 (7,782,244) Revenue/Shareholders’ Equity - Loss/Shareholders’ Equity (9.36)% 8.77% (0.46)% 0.45% 0.62% (0.23)% 8.99% (9.20)% Currency TL TL EUR EUR USD USD Total (for Negative Shocks) Total (for Positive Shocks) 318 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 i. 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 6 times and made a total of 9 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 2020, the number of qualified employees working at the Bank is 27. 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 instruments within the scope 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 to the aforementioned customer segments. Retail banking services include deposits, consumer loans, overdraft accounts, credit cards, bill collections, remittances, foreign currency trading, safe-deposit boxes, insurance, tax collections, and investment accounts and other banking services for individuals. All kinds of financing and cash management services provided to individuals in the high-income level are recognized as Private Banking activities. 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. 319 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Information about The Group’s segments are presented below. Corporate/ Commercial Banking Individual/Private Banking 25,677,637 4,178,058 4,156,208 10,612 8,592,126 5,402,127 2,281,149 85 1,517,338 245,951 7,515,789 2,058,802 534,157 4,914,808 Treasury Transaction/ Investment Activities 12,424,000 7,836,465 716,455 71,502 31,057 (1,206,769) 350,854 74,924 564,288 1,455,956 Insurance and Reinsurance Activities 385 71,833 1,208,916 Other/ Unallocated 1,267,214 1,481,227 155,836 1,170,953 9,014,735 605,051 105,839 8,059,214 5,919,331 5,582,046 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 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 Group Profit/Loss Minority Interest Profit/Loss Total 47,960,977 18,898,262 7,381,481 2,462,068 31,057 (1,206,769) 11,733,929 14,150,040 21,179,158 1,455,956 10,667,103 2,915,351 7,751,752 6,655,442 1,096,310 Total Assets Total Liabilities 315,988,780 176,196,685 78,552,996 221,704,133 182,480,178 156,650,726 35,704,002 51,755,859 105,426,307 111,844,860 718,152,263 718,152,263 Corporate/ Commercial Banking Individual/Private Banking 27,687,607 6,433,501 4,646,334 9,146 7,793,667 9,286,642 1,915,386 489 838,536 245,000 5,982,645 1,850,790 560,736 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 2,014,736 74,057 6,658,170 2,598,823 4,592,586 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 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 Group Profit/Loss Minority Interest Profit/Loss 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 Total Assets Total Liabilities 252,901,903 146,599,366 57,143,269 167,353,047 144,938,347 114,223,366 27,117,194 40,146,062 82,951,125 96,729,997 565,051,838 565,051,838 320 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 SECTION FIVE: DISCLOSURES AND FOOTNOTES ON 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 2,486,752 3,079,305 FC 6,650,065 59,386,999 367,269 TL 2,091,656 3,171,506 FC 3,428,324 45,204,187 180,455 5,566,057 66,404,333 5,263,162 48,812,966 Current Period TL FC Prior Period TL FC 3,079,305 19,987,701 3,171,506 20,792,607 3,079,305 39,399,298 59,386,999 3,171,506 24,411,580 45,204,187 (1) The amount of reserve deposits held at the Central Bank of the Republic of Turkey. a.3. Explanations on reserve requirement application: 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% - 6% for TL deposits and other liabilities, between 13% - 22% 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 which are in TL 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 of 31 December 2020, amount to TL 772,176 (December 31, 2019: 44,061 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 of 31 December 2020, amount to TL 61,909 (December 31, 2019: TL 91,705). b.3. All creditors including the Group reached an agreement on restructuring the loans granted to a company. 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 prior 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 company share have 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. Related amount 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 (31.12.2019: TL 2,419,813) 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 1,133,758 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. Balance of related asset is followed in financial statements as Stage 3 within the scope of “TFRS 13 - Fair Value Measurement” standard. The Bank re-evaluated the fair value of the relevant financial asset as of the end of the period and did not make any changes to the current value monitored during the current period. If the growth rate and risk-free return rate on investment used in the discounted cash flow method used in valuation 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 63 million (full TL amount) or will decrease by TL 56 million (full TL amount). b.4. TL 1,113,993 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. 321 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 c. Positive differences on derivative financial assets held for trading: Derivative Financial Assets at Fair Value through Profit or Loss (1) Forward Transactions Swap Transactions Futures Options Other Total Current Period Prior Period TL 233,145 123,089 6,678 FC 463,125 5,445,588 85,245 90,560 TL 95,400 168,784 FC 320,138 4,403,159 1,511 54,391 362,912 6,084,518 265,695 4,777,688 (1) Includes information 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 I.1. 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. 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 Current Period TL FC Prior Period TL FC 2,618,265 197,388 1,613,288 15,283,403 1,767,681 220,993 5,338,759 13,226,598 2,815,653 16,896,691 1,988,674 18,565,357 Current Period Prior Period Unrestricted Amount 7,902,000 3,272,983 2,011,931 1,688,333 14,875,247 Restricted Amount Restricted Amount Unrestricted Amount 6,655,724 4,165,684 62,203 605,544 605,544 1,820,577 12,704,188 743,403 743,403 Current Period Prior Period Stage 2 Stage 3 Stage 1 51,910 42,828 (37,179) Stage 2 Stage 3 Stage 1 35,635 36,637 (20,601) 239 51,910 Currency Exchange Difference Provisions at the end of the period (7,083) 50,476 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 22,460,070 as of 31 December 2020 (December 31, 2019: TL 9,802,629). 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 19,425,159 as of 31 December 2020 (December 31, 2019: TL 2,423,549). 322 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 76,939,749 49,959,610 26,980,139 562,074 56,322 505,752 682,184 1,007,631 77,827,270 Prior Period 59,981,477 41,483,412 18,498,065 592,349 31,479 560,870 831,857 1,271,751 61,013,720 (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 footnotes 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 Cash Non-Cash Prior Period Cash Non-Cash 301,478 301,478 1,142 1,142 270,296 270,296 444 444 f.2. Information about the Standard Loans and Loans Under Close Monitoring and Loans Under Close Monitoring that have been restructured: 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 Standard Loans Loans Not Subject to Restructuring Loans with Revised Contract Terms 355,284,508 144,386,368 24,803,553 13,551,939 64,642,959 23,797,483 84,102,206 16,643,423 10,084,187 726,038 2,332 2,365,941 670,120 2,794,805 15,582,803 9,084,951 140,706 4,049 397,342 5,955,755 Refinanced 16,424,136 9,854,639 353,138 1,497,092 4,719,267 355,284,508 16,643,423 15,582,803 16,424,136 Current Period Standard Loans 3,094,850 Loans Under Close Monitoring Prior Period Standard Loans 1,710,047 Loans Under Close Monitoring 8,564,927 4,103,792 Changes observed in the expected credit loss for the Stage 1 and Stage 2 loans calculated in accordance with TFRS 9, is mainly due to fluctuation of probability of credit defaults, and also increase in provisions allocated to loans classified as Stage 2 due to effects of COVID-19 has a role in aforementioned increase. 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 96,459,288 258,825,220 Loans Not Subject to Restructuring 3,112,780 13,530,643 Refinanced 1,328,494 30,678,445 323 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 1,402,573 10,577 18,613 1,373,383 17,298 17,298 16,836,506 6,703,007 10,133,499 11,280 11,280 19,965 57 19,908 217 217 119,309 46,399 72,910 185 185 1,711,383 82,921 20,201,637 64,145,404 20,926,235 1,207,802 42,011,367 3,557 3,557 212,049 7,011 90 204,948 954,375 954,375 139,782 1,220 535 138,027 2,850 64 2,786 4,084 4,084 731,138 192,279 10,151 528,708 17,585 17,585 615 40 575 82,191 82,191 1,462 5 5 1,452 19 1 18 228 228 21,223 65,462,101 854,461 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 Installments Without Installments Retail Credit Cards-FC With Installments Without Installments 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 Installments Without Installments Personnel Credit Cards-FC With Installments Without Installments Overdraft Accounts - TL (real persons) Overdraft Accounts - FC (real persons) Total 324 Total 66,279,115 21,129,091 1,236,566 43,913,458 21,142 21,142 229,962 7,051 90 222,821 17,873,072 7,657,382 10,215,690 11,280 11,280 161,209 1,225 597 159,387 3,086 65 3,021 123,621 50,483 73,138 185 185 1,732,606 82,921 86,518,199 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 with Installments-FC Indexed Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other Commercial Loans with Installments-FC Real Estate Loans Vehicle Loans General Purpose Commercial Loans Other 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. Distribution of credits according to users: Public Private Total f.7. Domestic and foreign loans: Domestic Loans Foreign Loans Total Short-Term 7,228,878 1,085 170,712 7,057,081 Medium and Long Term Interest and Income Accruals 47,943,237 1,369,284 5,008,855 41,565,098 347,994 8,859 20,333 318,802 846,424 10,356 37,829 798,239 402,860 9,584 19,939 373,337 Total 56,018,539 1,380,725 5,217,396 49,420,418 750,854 18,443 40,272 692,139 291,216 6,530,944 128,478 6,950,638 6,247,677 283,267 187,429 187,429 84,462 206,754 6,648,846 2,921,807 3,727,039 1,007 1,007 1,270,469 263 124,225 4,253 19,505 19,505 28,681 6,456,364 494,274 6,855,780 3,109,236 3,746,544 1,007 1,007 1,299,150 263 15,440,679 55,009,604 1,425,948 71,876,231 Current Period 5,495,644 398,439,226 403,934,870 Current Period 388,029,854 15,905,016 403,934,870 Prior Period 4,747,562 311,280,943 316,028,505 Prior Period 304,151,714 11,876,791 316,028,505 325 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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): f.10.1. Information on non-performing loans, which are restructured by the Group: Current Period (Gross amounts before the provisions) Restructured Loans Prior Period (Gross amounts before the provisions) Restructured Loans Current Period 2,857,404 2,857,404 Current Period 436,240 1,609,932 12,325,717 14,371,889 Prior Period 218 218 Prior Period 815,278 3,246,343 7,230,088 11,291,709 Group III Group IV Group V Loans with Limited Collectability Loans with Doubtful Collectability Uncollectible Loans 132,313 132,313 66,918 66,918 878,142 878,142 1,041,075 1,041,075 1,698,715 1,698,715 878,136 878,136 326 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 f.10.2. Information on the movement of total non-performing loans: Group III Group IV Group V 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 (-) (1) 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 Net Balance on Balance Sheet Loans with Limited Collectability Loans with Doubtful Collectability 1,922,169 1,625,267 179,964 107,346 9,592 3,293,412 2,729,797 440,891 105,235 17,489 4,209,060 3,455,284 552,824 185,308 15,644 186,582 92,141 61,215 27,214 6,012 1,028 912 112 4 4,464 4,204 260 823,375 810,931 6,964 55 5,425 436,240 432,622 1,902 55 1,661 387,135 7,315,012 6,775,204 311,177 198,632 29,999 1,749,016 1,547,180 63,299 136,490 2,047 4,209,060 3,455,284 552,824 185,308 15,644 8,776,061 7,831,207 558,585 350,658 35,611 902,298 661,126 161,601 75,945 3,626 805 425 298 82 181,235 180,518 717 3,775,159 3,465,428 207,533 93,745 8,453 1,609,932 1,438,676 110,087 55,112 6,057 2,165,227 Uncollectible Loans 11,865,549 10,334,497 780,003 587,738 163,311 625,451 597,713 5,937 3,707 18,094 8,776,061 7,831,207 558,585 350,658 35,611 2,693,161 2,249,936 296,374 125,488 21,363 96,619 78,434 10,583 620 6,982 69,031 59,710 9,321 18,546,312 16,494,757 1,046,889 815,995 188,671 12,325,717 10,562,130 878,279 727,220 158,088 6,220,595 (1) The receivables of İş Finansal Kiralama A.Ş. which followed under nonperforming receivables account and calculated lifetime expected credit loss, have been written-off. After that, the Group’s non-performing loans ratio have been decreased from 5.43% to 5.42%. 327 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 Collectability Loans with Doubtful Collectability Uncollectible Loans 137,815 71,759 66,056 138,677 58,278 80,399 2,438,551 912,785 1,525,766 4,532,552 1,755,399 2,777,153 9,363,546 5,286,740 4,076,806 5,438,318 2,387,791 3,050,527 Group III Group IV Group V Loans with Limited Collectability Loans with Doubtful Collectability 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) 387,135 823,375 436,240 387,135 1,106,891 1,922,169 815,278 1,106,891 2,165,227 3,775,159 1,609,932 2,165,227 4,068,669 7,315,012 3,246,343 4,068,669 6,220,595 18,417,843 12,213,995 6,203,848 128,469 111,722 16,747 4,635,461 11,750,967 7,130,240 4,620,727 114,582 99,848 14,734 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 Collectability Loans with Doubtful Collectability Uncollectible Loans (877) (4,336) (3,459) 64,964 121,568 56,604 268,363 474,869 206,506 403,659 694,560 290,901 522,878 1,512,493 989,615 317,600 730,154 412,554 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. Primarily, administrative initiatives are taken to deal with the borrower. Collection through legal proceedings is applied if there is no possibility of collection, liquidation or structuring for receivables through negotiations. 328 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 f.10.7. Explanations on write-off policy: Receivables classified as non-performing loans are collected primarily within the framework of administrative contacts with the debtors, and if no result is obtained, legal proceedings are applied. In case of deletion of NPLs from assets, one of the methods of destruction, receivable sale and write-off can be applied. In the Bank’s write-off policy within the framework following the amendment made in Article 53 of the Banking Law with the Law on Income Tax and amending Certain Laws No. 19.07.2019/7186, along with the “Classification of Loans and the Procedures and Principles for the Reserves to be Allocated” published in the Official Gazette No. 27.11.2019/30961, the following statements are issued: - The portion of the receivables, which are monitored under the Fifth Group-Uncollectible Loans and allocated for lifetime expected credit loss due to the default of the debtor, can be write-off to the extent of the maximum provision amount, - write-off is an accounting practice and does not result in the remission of the receivable, - the receivables to be write-off must be monitored as non-performing loans for at least 1 year. There are no receivables that have been write-off in the current period. Receivables that are proven to be uncollectible in legal follow-up process can be write-off within the instructions of Tax Procedure Law. Information on non-performing loans deducted from records in the current period is given in Section Five Note I.f.10.2. 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 Stage 1 1,710,047 3,206,632 Current Period Stage 2 4,103,792 6,435,669 (1,910,463) (1,586,260) 85,965 (141,136) (8,658) 152,463 (77,813) 151,472 (623,623) 161,690 Stage 3 11,291,709 4,017,116 (1,570,849) (89,532) (8,152) (10,336) 632,281 109,652 Stage 1 2,054,722 1,264,618 Prior Period Stage 2 3,115,431 3,290,871 (1,388,955) (1,566,481) 121,867) (340,375) (46,968) 45,138 (115,287) 346,359 (1,019,624) 52,523 4,103,792 Stage 3 7,060,841 5,591,903 (990,900) (1,463,249) (6,580) (5,984) 1,066,592 39,086 11,291,709 Provisions at the end of the period 3,094,850 8,564,927 14,371,889 1,710,047 g. Financial Assets Measured at Amortized Cost: g.1. Financial Assets Measured at Amortized Cost given as collateral or blocked: Financial assets measured at Amortized cost given as collateral or blocked amount to TL 9,741,594 as of December 31, 2020 (December 31, 2019: TL 2,580,545). g.2. Financial Assets Measured at Amortized Cost subject to repurchase agreements: Financial assets measured at Amortized cost, which are subject to repurchase agreements amount to TL 7,024,998 as of December 31, 2020 (December 31, 2019: TL 465,212). g.3. Information on government securities measured at Amortized 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 43,854,204 Prior Period 32,736,600 43,854,204 32,736,600 Current Period Prior Period 45,604,603 43,828,009 1,776,594 33,639,301 32,779,106 860,195 45,604,603 33,639,301 Current Period 33,639,301 1,477,592 16,459,781 (7,309,408) 1,337,337 45,604,603 Prior Period 29,013,507 375,173 11,617,638 (8,515,412) 1,148,395 33,639,301 329 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Expected credit loss for financial assets measured at amortized cost: Current Period Prior Period 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 h. Information on Associates (Net): Stage 1 11,748 12,654 (6,822) 175 17,755 Stage 2 Stage 3 Stage 2 Stage 3 Stage 1 8,564 7,476 (4,539) 247 11,748 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 Arap Türk Bankası A.Ş. Address (City/Country) 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 5,861,336 Shareholders’ Equity Total Tangible Assets Interest Income (1) Securities Income Current Period Profit/Loss Prior Period Profit/ Loss Fair Value 1,176,982 158,816 292,839 33 100,781 164,509 (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 220,768 181,741 21,406 39,027 242,174 220,768 330 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 242,174 Prior Period 220,768 242,174 220,768 Due to the change in the partnership structure of Bankalararası Kart Merkezi A.Ş., which is a non-financial subsidiary of the Bank, and the loss of the significant influence within the scope of TAS 28 “Investments in Subsidiaries and Joint Ventures”, the company has been classified from the Subsidiaries account to Financial Assets at Fair Value Through Other Comprehensive Income account in the current period. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş., who has a 20% share of the capital of Tatilbudur Seyehat Acentalığı ve Turizm A.Ş. and is one of the companies included in the consolidation, has signed a Share Transfer Agreement with Çetin Yılmaz, who is one of the partners of Tatilbudur Seyahat Acentalığı ve Turizm A.Ş., regarding the transfer of Çetin Yılmaz’s 20% share in the company capital to İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. free of charge. The transaction took place on 14.08.2020 and İş Girişim Sermayesi Yatırım Ortaklığı A.Ş.’s share in the Tatilbudur Seyahat Acenteliği ve Turizm A.Ş. has reached 40%. 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 these changes are given in Section Three III.2 numbered footnotes in detail. 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 the equity 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 Türkiye Sınai Kalkınma Bankası A.Ş. Insurance/ Reinsurance Companies İş Gayrimenkul Yatırım Ortaklığı A.Ş. İş Finansal Kiralama A.Ş. İş Yatırım Menkul Değerler A.Ş. 6,179,047 78,986 6,100,061 7,066,707 227,682 6,839,025 4,131,257 1,243 4,130,014 1,614,122 5,688 1,608,434 1,915,503 77,088 1,838,415 6,100,061 6,839,025 4,130,014 1,608,434 1,838,415 2,717,143 2,717,143 8,817,204 6,839,025 4,130,014 1,608,434 1,838,415 Deductions from Total Capital and Additional Tier I Capital (-) CAPITAL 8,817,204 6,839,025 4,130,014 1,608,434 1,838,415 i.2. Information on unconsolidated subsidiaries: None. 331 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Address (City/Country) Bank’s Share Percentage-If Different. Voting Rights (%) (1) Bank’s Risk Group Share Percentage (%) i.3. Information on consolidated subsidiaries: No Title 1- Anadolu Anonim Türk Sigorta Şirketi 2- Anadolu Hayat Emeklilik A.Ş. 3- Efes Varlık Yönetim A.Ş. 4- 5- 6- 7- 8- 9- 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. 10- İş Yatırım Ortaklığı A.Ş. 11- İşbank AG 12- JSC İşbank 13- JSC Isbank Georgia 14- Maxis Girişim Sermayesi Portföy Yönetimi A.Ş. 15- Maxis Investments Ltd. 16- Milli Reasürans T.A.Ş. 17- TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. 18- Türkiye Sınai Kalkınma Bankası A.Ş. 19- Yatırım Finansman Menkul Değerler A.Ş. 20- Yatırım Varlık Kiralama A.Ş. 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 İstanbul/Turkey London/England İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey İstanbul/Turkey 50.21 74.81 66.26 46.23 45.19 59.24 35.63 67.42 67.97 24.93 100.00 100.00 100.00 67.97 67.97 87.60 44.90 50.02 48.48 48.48 49.79 25.19 33.74 53.77 54.81 40.76 64.37 32.58 32.03 75.07 0.00 0.00 0.00 32.03 32.03 12.40 55.10 49.98 51.52 51.52 Additional Shareholders’ Equity Required Fair Value (2) 3,719,500 3,697,570 2,710,290 2,346,061 1,425,116 Securities Income Current Period Profit/Loss Prior Period Profit/Loss 175,485 56,441 93 3,538 6,943 7,669 11,961 15,423 799,894 28,201 5,989 11,400 128,523 19,968 9,572 510,026 526,939 10,431 55,292 197,586 266,502 2,050 59,256 977,305 27,975 59,514 2,647 20,760 (326) 7,585 348,599 (45,781) 709,473 44,209 17 449,201 360,692 (5,796) (23,348) 84,292 297,390 1,736 37,145 420,975 6,265,040 569,806 2,844,000 4,989,600 64,271 77,784 16,796 11,640 (782) (235) 312,511 52,113 736,141 16,588 23 (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 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- 15- 16- 17- 18- 19- 20- 11,651,496 36,087,753 223,054 4,645,186 12,760,612 5,225,405 267,841 187,315 8,775,444 250,107 16,619,872 1,162,816 761,827 2,950 583,260 5,506,298 603,050 52,430,920 1,494,905 432,728 2,385,997 1,601,893 42,707 476,570 1,717,698 4,130,954 263,814 166,864 2,184,415 248,110 1,940,155 424,924 212,555 2,131 33,944 2,638,634 464,639 6,130,769 175,496 190 (1) Includes interest income on securities. (2) Fair value is the companies’ market value. 307,031 283,990 9,592 3,004 24,902 4,303,529 1,412 8,953 132,850 581 205,860 40,219 10,780 515 182 673,646 590,502 729,654 12,627 6 Interest Income (1) 438,844 326,451 83,285 337,177 873,785 7,940 4,024 9,388 276,611 26,316 373,213 86,512 42,569 205 3,329 185,985 493 3,336,674 71,037 332 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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/Deficit (3) Impairment Balance at the End of the Period Capital Commitments Contribution in equity at the end of the period (%) Current Period 9,915,702 Prior Period 8,255,742 482,999 8,500 2,606,220 1,651,460 13,004,921 9,915,702 (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 Türkiye Sınai Kalkınma Bankası A.Ş., İş Gayrimenkul Yatırım Ortaklığı A.Ş and Milli Reasürans T.A.Ş. by cash and the amount in the previous period is due to the purchasing shares of Milli Reasürans T.A.Ş. by cash. (3) Includes accounting differences by equity method. 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 5,580,606 3,659,077 Prior Period 4,183,845 2,836,609 442,361 331,262 3,322,877 13,004,921 2,563,986 9,915,702 Current Period 7,867,084 Prior Period 6,065,370 The Bank’s non-financial subsidiary Türkiye Şişe ve Cam Fabrikaları A.Ş.’s merger transaction with the companies, Anadolu Cam Sanayii A.Ş., Denizli Cam Sanayi ve Tic. A.Ş., Paşabahçe Cam San. ve Tic. A.Ş., Soda Sanayii A.Ş. and Trakya Cam Sanayii A.Ş., by taking over was completed as of September 30, 2020. After the merger, The Bank’s shares in the capital of Türkiye Şişe ve Cam Fabrikaları A.Ş. have reached 50.93%. Assets of Numnum Yiyecek ve İçeçek A.Ş. which is the subsidiary of İş Girişim Sermayesi Yatırım Ortaklığı A.Ş, one of the companies included in the consolidation, transferred to three new companies which are established by full division method. All of the shares in two newly established companies are sold for a total price of TL 24,025. Mikla Yiyecek ve İçecek A.Ş. is another new company, which was established by division, to operate remaining business operations and the share of İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. in this company is 83.57% as in the divided company Numnum Yiyecek ve İçecek A.Ş. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. has purchased shares in its subsidiary Ortopro Tıp Aletler San. ve Tic. A.Ş. by paying in cash for TL 3,500 and its share ratio has increased from 90.63% to 97.22%. In the current period, Toksöz Spor Malzemeleri Tic. A.Ş. which is a subsidiary of İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. has increased the capital by TL 37,500 paid all in cash. TL 30,000 of the cash capital increase was afforded by İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. whose share ratio in the company increased from 88.27% to 90.63%. As explained in Note III.2 of Section Three, non-financial subsidiaries, associates and jointly controlled associates are accounted by using the equity method defined in TAS 28 “Investments in Subsidiaries and Associates” within the scope of TAS 27 “Individual Financial Statements”. 333 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 j. Information on jointly controlled entities (Net): As per the “Communiqué on Preparation of Consolidated Financial Statements of Banks”, jointly controlled entities as credit institutions or financial institutions are included in the scope of consolidated financial statements. There are no jointly controlled entities which are excluded in the scope of the consolidation. On the other hand, as explained in Note III.2 of Section Three, non-financial subsidiaries, associates and jointly controlled associates are accounted by using the equity method defined in TAS 28 “Investments in Subsidiaries and Associates” within the scope of TAS 27 “Individual Financial Statements”. k. Information regarding finance lease receivables (Net): k.1. Presentation of finance lease receivables according to their remaining maturities: 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 Current Period Prior Period Gross 2,439,094 3,132,209 281,364 5,852,667 Gross 3,477,055 4,512,253 481,846 8,471,154 Net 2,916,349 3,984,049 437,920 7,338,318 Current Period 8,471,154 1,132,836 7,338,318 k.3. Presentation of operating lease receivables according to their remaining maturities: As of December 31, 2020, the remaining maturities of the Group’s operating lease receivable is less than 1 year the total amount is TL 12,824 (December 31, 2019: TL 15,278). i. Positive differences table for hedging derivative financial assets: Part of Derivative Financial Assets at Fair Value Through Profit Loss (1) Hedging Derivative Financial Assets Hedging Cash Flow Protection from Net Investment Risk Abroad Total (1) Includes information on derivative financial assets for hedging purposes classified under derivative financial assets. Current Period Net Gross 262,699 262,699 Prior Period Net Net 2,075,844 2,775,490 266,556 5,117,890 Prior Period 5,852,667 734,777 5,117,890 Gross 67,884 67,884 Explanations on hedging derivative financial assets: Derivative Financial Liabilities at Fair Value through Profit/Loss Interest Rate Swap Transactions FC TL Currency Swap Transactions FC TL Contract Sum 15,214,012 15,214,012 4,626,754 4,626,754 Current Period Prior Period Assets 262,699 262,699 Liability Contract Sum 16,520,430 16,520,430 Assets 67,884 67,884 Liability 16,545 16,545 154,049 154,049 334 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Information on fair value hedge accounting is given below. Current Period: Hedging Instrument Hedging Item Interest Rate Swap Transactions Interest Rate Swap Transactions Fixed Interest rate Eurobond and Greenbond Fixed Rate Loans Used Interest Risk Cross Currency Swap Transactions Fixed Interest Rate Eurobond Interest Risk Fair Value Difference of Hedging Assets (1) Net fair value of hedging instrument (1) Assets Liabilities Income statement effect (profit/loss from derivative financial transactions) Risk Exposure Interest Risk (184,285) 181,026 (41,043) 40,450 (54,959) 54,947 (3,259) (593) (12) (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: Hedging Instrument Hedging Item Interest Rate Swap Transactions Interest Rate Swap Transactions Fixed Interest rate Eurobonds and Greenbonds Fair Value Difference of Hedging Assets (1) Net fair value of hedging instrument (1) Assets Liabilities Income statement effect (profit/loss from derivative financial transactions) Risk Exposure Interest rate risk Fixed Rate Loans Used Interest rate risk 16,960 (5,481) 69,500 13,577 4,597 72,883 (884) (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. j. Information on Tangible Assets: Current Period Previous Period Cost Accumulated Depreciation Net Book Value Current Period Net Book Value at the Beginning of Period Current Period Changes (Net) (1) Depreciation Fee Provision for Impairment (Net) Foreign Exchange Differences (Net) (1) End of Term Cost Accumulated Depreciation at the End of the Period Net Book Value at the End of the Period Real Estate Right-to-Use Assets Buildings Under Construction Vehicles Other MDV Total 6,145,347 (64,159) 6,081,188 6,081,188 (77,636) (51,078) 2,420 1,130 6,070,841 (114,817) 5,956,024 1,512,690 (583,856) 928,834 928,834 213,003 (321,471) 27,211 1,804,042 (956,465) 847,577 224,348 224,348 224,348 23,881 248,229 248,229 36,221 (20,239) 15,982 15,982 8,718 (6,267) 605 42,938 (23,900) 19,038 2,938,507 (2,194,094) 744,413 744,413 589,058 (307,769) 3,384 3,483,315 (2,454,229) 1,029,086 10,857,113 (2,862,348) 7,994,765 7,994,765 757,024 (686,585) 2,420 32,330 11,649,365 (3,549,411) 8,099,954 (1) Includes the movements in cost value and accumulated depreciation items. k. Information on Intangible Assets: 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 . Current Period Prior Period 1,160,750 752,848 (324,296) 28,712 4,183,145 (2,565,131) 1,618,014 847.567 656.215 (352.303) 9.271 3,372,579 (2,211,829) 1,160,750 335 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 l. Information on investment property: 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 124,724 (December 31, 2019: TL 177,081). 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 3,444,979 17,297 187,355 3,649,631 Prior Period 3,704,581 (501,456) 241,854 3,444,979 (1) In the prior period, investment property amounting to TL 264,260 has sold to the Bank’s non-financial associate Türkiye Şişe ve Cam Fabrikaları A.Ş. which is included in the risk group at a price of TL 310,000. m. Information on deferred tax asset: As of December 31, 2020, the Parent Bank and the other consolidated Group companies has deferred tax asset amounting to TL 3,672,736. 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 478,240 (3,489,533) 16,384 (598,113) (79,714) (3,672,736) Prior Period 438,369 (2,521,953) 11,924 180,161 (59,498) (1,950,997) (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. Movement of the deferred tax asset is as follows: Beginning Value Deferred Tax Income/(Expense) (Net) Deferred Tax Accounted Under Equity Deferred Tax Accounted Under Previous Year K/Z Exchange rate differences Other Deferred Tax Asset (1) Current Period 1,874,705 1,863,243 (196,818) (13,786) 961 Prior Period 1,463,804 1,051,344 (644,322) 3,879 3,528,305 1,874,705 (1) In the consolidated financial statements, there are deferred tax assets of TL 1,347,866 and deferred tax liabilities of TL 144,431 in the current period. Explanations on deferred tax liability are given in Section Five, Note II.j.2. n. 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 1,190,220 111,914 (7) 481 1,302,608 Prior Period 283,138 900,446 (119) 6,755 1,190,220 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”. As stated in the same footnote, in prior period the Bank’s and Türkiye Sınai Kalkınma Bankası A.Ş.’s shares’ nominal values in company’s capital increased from TL 6 to TL 461,833 and TL 1 to TL 64,403 respectively and this amount is located in the line “Change during the periods (Net)”. On the other hand, an international investment bank is authorized as a sales advisor in the prior 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 has been initiated. The other assets classified as “Fixed Assets Held for Sale” mostly consist of real estates. Announcements about the real estates subject to sale are made by using 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. o. Information on other assets of the group: Other assets item does not exceed 10% of the balance sheet total. 336 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 21,210,745 88,486,220 77,521,647 10,964,573 941,849 12,882,574 541,979 32,152,261 1,123,809 510 115,744 998,457 9,098 7 Days Notice Up to 1 Month 1-3 Months 3-6 Months 6,277,095 59,511,073 2,134,712 6 Months to 1 Year 449,790 1 Year and Over Accumulated Deposits Total 751,497 8,557 90,343,469 14,003,962 84,111,032 5,525,404 3,250,065 12,856,336 1,263 208,234,282 12,178,923 72,291,088 3,506,840 1,114,563 3,613,468 1,825,039 11,819,944 2,018,564 2,135,502 9,242,868 878 385 170,227,407 38,006,875 1,272 70,444 7,734,268 13,182,655 565,554 2,396,713 390,882 1,803,160 1,002,743 754,461 1,048,699 192,488 810,255 7,829 191,959 123,706 87,716 65,260 65,260 329 1,924,058 2,265 195 9,691 26,155 4,013,730 163,286 255,227 1,454,073 180,729 74,498 1,454,073 1,021,918 35,925,205 3,656,372 36,807,875 5,704,272 510 1,243,422 4,451,242 9,098 157,339,437 30,385,311 160,665,542 8,136,586 9,895,464 15,261,233 9,820 381,693,393 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 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 5,038,638 54,412,656 17,469,285 75,753,321 3-6 Months 2,914,178 5,327,074 6 Months to 1 Year 918,450 1 Year and Over Accumulated Deposits Total 876,065 10,875 81,562,708 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.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 47,354,070 42,668,430 17,580,279 Prior Period 44,102,037 34,185,261 5,898,896 Current Period 41,824,890 88,281,588 17,357,298 Prior Period 36,391,606 66,511,898 4,305,318 16,641,572 11,930,319 1,800,626 1,266,511 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 Current Period 1,683,372 Prior Period 1,170,490 28,274 22,831 337 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 b. Negative Differences on Derivative Financial Liabilities Held for Trading: Derivative Financial Liabilities at Fair Value through Profit/Loss (1) Forward Transactions Swap Transactions Futures Options Other Total Current Period Prior Period TL 212,130 1,301,626 480 FC 265,801 6,432,114 37,234 451,000 TL 162,530 518,102 FC 196,592 1,780,176 559 57,320 1,514,236 7,186,149 681,191 2,034,088 (1) Includes information related to derivative financial liabilities held for trading and classified 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: Funds borrowed from the CBRT Domestic banks and institutions Foreign banks, institutions and funds Total c.2. Maturity analysis of funds borrowed: Short-term Medium and Long-term Total c.3. Information on funds borrowed: Current Period TL 2,594,453 1,840,513 4,434,966 FC 12,010 4,927,294 68,228,618 73,167,922 Prior Period TL 3,246,629 1,495,409 4,742,038 FC 925,967 4,768,303 61,870,672 67,564,942 Current Period Prior Period TL 2,844,336 1,590,630 4,434,966 FC 2,622,591 70,545,331 73,167,922 TL 2,701,261 2,040,777 4,742,038 FC 4,933,433 62,631,509 67,564,942 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 May 2020 July 2020 November 2020 November 2020 Securitization deals: Funds Borrowed USD 207,500,000 + EUR 539,000,000 USD 35,000,000 + EUR 102,500,000 USD 238,000,000 + EUR 448,000,000 USD 5,000,000 + EUR 15,000,000 Maturity 1 Year 1 Year 1 Year 1 Year The Parent Bank obtained funds by 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 (TIB) which was established in abroad. 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 EUR 125,000,000 EUR 50,000,000 USD 220,000,000 USD 75,000,000 USD 221,200,000 USD 240,000,000 USD 158,800,000 USD 265,000,000 EUR 125,000,000 USD 125,000,000 Final Maturity 12 year 12 year 14 year 7-15 year 10 year 5-12 year 10-13 year 5-7 year 5 year 9 year Remaining Debt Amount as at December 31, 2020 EUR 46,875,000 EUR 25,000,000 USD 160,000,000 USD 30,000,000 USD 131,337,500 USD 99,849,913 USD 135,780,000 USD 184,000,000 EUR 83,333,333 USD 125,000,000 The financing transaction amounting to USD 500 million, with a maturity of 10 years, obtained within the scope of the Diversified Payment Rights (DPR) securitization programme, which had been disclosed on August 2014, has been increased to USD 600 million by an additional funding of USD 100 million with the identical maturity profile on September 2017. 338 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 d. Information on Debt Securities Issued (Net): Bills Asset backed security Bonds Total e. Concentration of the liabilities of the Group: Current Period Prior Period TL 5,095,133 377,032 1,662,744 7,134,909 FC 32,364,397 32,364,397 TL 7,506,622 138,244 1,469,342 9,114,208 FC 30,177,570 30,177,570 Group’s liabilities 53% are comprised of deposits, 11% are comprised of funds borrowed, 9% are comprised subordinated debt and marketable securities issued and 4% 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. g. Information on Lease Payables (Net): Less than 1 year 1-4 years More than 4 years Total h. Negative differences related to derivative financial instruments for hedging purposes: Part of Derivative Financial Liabilities at Fair Value Through Profit Loss (1) Fair Value Hedge Purpose Cash Flow Hedges Net Investment Hedge Abroad Total Current Period Prior Period Gross 47,802 153,914 1,181,187 1,382,903 Current Period Gross Net 29,110 110,680 778,950 918,740 Net 154,049 154,049 Gross 29,821 267,671 1,196,153 1,493,645 Prior Period Gross Net 12,608 200,625 743,651 956,884 Net 16,545 16,545 (1) Includes the negative differences related to derivative financial assets for hedging purposes classified under derivative financial assets. The transactional details for the hedging derivative financial instruments are disclosed in Note I.l of Section Five. 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 7,117.17 (exact TL amount as of December 31, 2020), which is one-month salary for each service year and cannot exceed the base salary ceiling for employee termination benefits. A provision for severance pays to allocate that employees need to be paid upon retirement is calculated by estimating the present value of probable amount. A provision for severance pays to allocate that employees need to be paid upon retirement is TL 1,501,616 as of December 31, 2020 (December 31, 2019: TL 1,260,666). Main actuarial assumptions used in calculation of severance pay liability are as follows: - - In the calculation, the discount rate is 12.40%, the inflation rate is 8%, and the real wage increase rate is 2%. In the calculation, the ceiling of 7,117.17 TL (full TL amount) valid as of 31.12.2020 was taken as basis. - Retirement age is taken into account as the earliest age at which individuals can retire. - CSO 1980 mortality table is used for probability of death for women and men. 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) Current Period 1,260,666 Prior Period 1,024,853 96,112 144,591 (79,882) 6,372 3 73,754 79,108 157,671 (83,745) 823 5 81,951 Defined benefit obligation at the end of the period 1,501,616 1,260,666 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, 2020 the unused vacation provision amount is TL 119,315 (December 31, 2019: TL 95,365). 339 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 of December 31, 2020, and December 31, 2019 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 of December 31, 2020, TL 695,465 provision (December 31, 2019: TL 538,085) 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 XX.2, in the actuarial report which was prepared as of December 31, 2020 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 4,236,111 (31.12.2019: TL 3,494,026). According to the actuarial report as at December 31, 2020 of Milli Reasürans T.A.Ş. besides the Parent Bank, the amount of actuarial and technical deficit was determined to be TL 69,561 (31.12.2019: TL 53,217). There is a provision on financial statements to compensate the deficit in mentioned period, the mentioned provision is preserved on current year financial statements as well. In the financial statements of the aforementioned period, the provision amount is as much as the amount of the aforementioned provisions and the amount of the provision is kept in the financial statements in the current period. 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, 2020, 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, 2020, 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 December 31, 2020 December 31, 2019 (12,863,517) 5,185,068 (7,678,449) (1,564,560) 3,759,175 2,194,615 1,247,723 (4,236,111) (11,295,446) 4,695,781 (6,599,665) (1,347,791) 3,404,441 2,056,650 1,048,989 (3,494,026) December 31, 2020 December 31, 2019 752,948 439,787 54,988 301,165 696,788 51,036 1,247,723 1,048,989 Health benefits that are still being paid will be determined within the framework of the Social Security Institution legislation and related regulations with the transfer. i.4.2. Provision of credit cards and promotion of banking services applications: The Bank has recognized provisions amounting to TL 72,709 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, 2020. (December 31, 2019: TL 89,062) 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. 340 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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. 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. In this process, the Group companies are acting together with the Parent Bank and in this regard TL 128,837 (December 31, 2019: TL 74,017) have been transferred to the provision expense accounts in the current period. 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 the mentioned amount 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 favor 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 at prior periods 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 still ongoing within the framework of the ongoing lawsuits and other available legal options. i.4.6. Except the other provisions indicated above, the Group Management allocated free provision within conservatism principle, for negative circumstances which may arise from the possible changes that may arise in the economy and market conditions, amounting to TL 2,875,000 of which TL 1,125,000 provided in prior years and TL 1,750,000 was provided in the current period. 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, 2020, as a result of the net off of the Group’s corporate tax liability and temporary taxes paid, the remaining corporate tax liability amounts to TL 2,184,343 and as a result of the separate net off process of each partnership and tax authority, current tax asset amounting to TL 48,923 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 i.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 Current Period 2,184,343 233,897 2,448 261,320 18,192 16,091 114,029 2,830,320 Prior Period 952,085 253,643 5,120 234,527 7,439 12,671 102,588 1,568,073 Current Period Prior Period 3,520 4,172 6,473 7 2,490 4,987 13 21,662 3,120 3,675 5,038 2 2,210 4,426 8 18,479 341 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 j.2. Information on deferred tax liabilities: The Parent Bank and the consolidated Group companies have TL 144,431 deferred tax liability as of December 31, 2020. The related deferred tax debt 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 Current Period Prior Period 105,528 (9,776) 47,757 922 144,431 76,520 (3,432) 3,690 (486) 76,292 Bank has issued subordinated debt securities, to be included in the contribution capital calculation, with the following nominal values; - 10 year-term in the amount of USD 1,000,000 with interest rate of 6% on October 24, 2012, 10 year-term in the amount of USD 400,000,000 with interest rate of 7.85% on December 10, 2013, 11 year-term having a call option on 6th year in the amount of USD 500,000,000 with interest rate of 7% on June 29, 2017 and 10 year-term having a call option on 5th year in the amount of USD 750,000,000 with interest rate of 7.75% on January 22, 2020 for the purpose of making available to the individuals and legal persons who are resident abroad, - TL 1,100,000,000 on August 8, 2017, TL 800,000,000 June 19, 2019 and TL 350,000,000 September 26, 2019 (Full TL amount) each with a 10-year maturity and floating interest rates for qualified investors without being offered to the public in Turkey. The total of the aforementioned debt securities is TL 22,138,559 as of December 31, 2020 (December 31, 2019: TL 13,546,931). 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 2,287,562. (December 31, 2019: 1,830,045) Current Period Prior Period TL FC 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 2,286,510 22,139,611 2,281,084 13,095,892 Subordinated Loans Subordinated Debt Instrument Total m. Information on consolidated shareholders’ equity: m.1. Presentation of paid-in capital: Common shares Preferred shares Total 2,286,510 22,139,611 2,281,084 13,095,892 2,286,510 22,139,611 2,281,084 13,095,892 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 bank, if so, the amount of registered share capital: Capital System Registered Capital System Paid-in Capital 4,500,000 Ceiling 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; 342 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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: Financial Assets at Fair Value Through Other Comprehensive Income Valuation Difference Deferred Tax Effect on Valuation Foreign Exchange Differences Total n. Information on minority interest Balance at the beginning of the period 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 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: Current Period Prior Period TL 1,348,303 1,664,000 (335,623) 19,926 FC (62,532) (93,702) 31,170 TL 859,773 1,078,795 (228,123) 9,101 FC (382,751) (510,696) 127,945 1,348,303 (62,532) 859,773 (382,751) Current Period 7,065,589 (190,292) 1,096,310 57,354 (615,243) 7,413,718 Prior Period 6,022,995 (130,003) 1,021,826 180,200 (29,429) 7,065,589 Commitment for customer credit card limits amounts to TL 37,915,127 and commitment to pay for cheque leaves amounts to TL 2,641,068. The amount of commitment for the forward purchase of assets is TL 3,277,288 and for the forward sale of assets is TL 3,295,419. 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 695,465 as of December 31, 2020 (December 31, 2019: TL 538,085) 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 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 Current Period 9,050,343 22,593,911 3,170,943 34,815,197 Current Period 1,546,664 49,123,966 9,454,770 6,556,617 21,389,193 88,071,210 Current Period 22,889,316 3,590,697 19,298,619 99,997,091 122,886,407 Prior Period 6,040,332 16,316,834 2,688,827 25,045,993 Prior Period 914,451 42,252,919 9,011,022 3,236,625 16,132,322 71,547,339 Prior Period 18,989,874 4,831,681 14,158,193 77,603,458 96,593,332 343 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 a.6. Sectoral risk concentration of non-cash loans: Agriculture Farming and Livestock Forestry Fishery Industry Mining and Quarrying Manufacturing Industry Electricity, Gas, Water Construction Services Wholesale and Retail Trade Hotel and Restaurant Services Transport and Communications Financial Institutions Real Estate and Rental Services. Self-Employment Services Education Services Health and Social Services Other Total Current Period Prior Period TL 189,630 155,107 27,935 6,588 11,570,309 182,761 7,177,334 4,210,214 4,445,354 23,731,693 15,100,474 329,800 2,391,187 3,999,311 1,286,329 383,396 57,331 183,865 191,389 (%) 0.47 0.39 0.07 0.01 28.83 0.46 17.89 10.48 11.08 59.14 37.63 0.82 5.96 9.97 3.21 0.96 0.14 0.45 0.48 FC 331,934 68,163 9 263,762 49,646,367 638,665 42,317,411 6,690,291 11,176,868 21,466,661 10,399,723 1,025,193 4,047,046 3,902,525 1,539,488 102,698 1,426 448,562 136,202 (%) 0.40 0.08 0.00 0.32 TL 165,814 141,388 17,966 6,460 59.99 10,047,167 0.77 51.13 8.09 13.51 25.94 12.57 1.24 4.89 4.72 1.86 0.12 0.00 0.54 0.16 222,368 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 (%) 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 40,128,375 100.00 82,758,032 100.00 32,395,132 100.00 64,198,200 100.00 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 b. Information on derivative financial instruments: Group I TL FC Group II TL FC 38,533,065 80,454,231 1,595,310 2,303,801 37,967,717 46,315,150 1,595,310 2,193,033 84,800 8,946,640 454,945 22,047,101 18,903 91,865 9,355 16,248 3,145,340 The derivative transactions of the Group mainly consist of money and interest swaps and forward foreign exchange purchase and sale transactions. In addition to these, money, interest and security options and futures transactions are also performed. Although the Group’s derivative transactions accounted for trading purposes, there are derivative transactions that are accounted for trading purposes, as all the conditions required to be defined as an item suitable for financial risk hedge accounting are not fulfilled, although they provide economic hedging. On the other hand, derivative transactions, which are carried out to protect against changes in the fair values of financial instruments and have all the necessary conditions for their evaluation within the scope of hedge accounting, are classified as hedging 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 13,123,558. The cheques given to customers is presented under off balance sheet commitments, as per the related regulations is amounting to TL 2,641,068 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 1,345 (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 2,225 (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. 344 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 5,585,757 18,118,672 718,313 1,010,925 9,229,416 104,940 7,331,060 17,423,428 948,843 FC 1,154,921 8,724,143 94,031 Total 24,422,742 10,345,281 25,703,331 9,973,095 (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 Received from Affiliates and Subsidiaries 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 Current Period TL 372,578 12,265 FC 3,006 31,273 69,700 Prior Period TL 232,872 218,028 FC 65,338 193,967 384,843 103,979 450,900 259,305 Current Period Current Period TL 41,768 5,731,532 4,314,904 10,088,204 FC 16,589 1,277,397 183,466 1,477,452 Current Period 292,070 FC 66,658 5,211,180 3,944,090 9,221,928 Current Period Prior Period TL 652,615 401,149 251,466 3,811 656,426 TL 459,129 263,899 195,230 1,757 460,886 FC 1,163,241 1,667 126,911 1,034,663 720,852 1,884,093 Current Period 36,112 FC 6,627 904,274 126,966 1,037,867 Prior Period FC 1,347,680 2,738 129,501 1,215,441 903,869 2,251,549 Prior Period 65,199 Current Period Prior Period TL FC 1,284,341 3,449,048 TL 2,152,510 FC 2,642,579 345 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 b.4. Information on Interest Expense on Deposits According to Maturity Structure: 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 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 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 74 1 24 1 114,903 516,129 571 875,858 33,334 67,871 5,217,171 4,704 1,224,253 239,748 4,170 212,256 363 35,415 31,626 772 50,900 9 138,972 7,996 95,003 11 5,388 385 817 Total 187,790 6,092,277 5,658 2,279,910 313,090 100 1,540,795 6,753,747 283,830 198,649 100,787 817 8,878,725 838 5,902 6,740 6,840 38,181 1,743 39,924 318,262 2,065 2,332 322,659 25,402 1,940 453 27,795 15,603 2,553 12,719 30,875 1,580,719 7,076,406 311,625 229,524 160,392 15,237 1,105 176,734 277,521 12 12 829 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 558,690 29,440 16,609 604,739 9,483,464 Total 303,684 178,126 313,781 450 951,617 71,575 123,118 8,356,242 8,621 2,055,076 589,640 81 849,297 35 222,323 448,182 1,449 118,412 89,649 9,440 910 125,482 12 163,793 248 1,330 9,764,544 9,118 3,482,475 1,119,085 1,515,549 11,132,697 1,519,918 218,950 290,445 1,330 14,678,906 163,875 3,935 1,233,022 8,993 104,168 4,577 858 1,865 98 168,668 1,243,880 108,843 65,241 7,396 10,728 83,365 1,684,217 12,376,577 1,628,761 302,315 209,726 10,531 789 221,046 511,491 22 1,776,781 39,667 14,338 22 1,830,786 1,352 16,509,692 17 17 727 4,235 4,962 4,979 c. Explanations on dividend income: Financial Assets with Fair Value Differences Recognized in Profit/Loss Financial Assets with Fair Value Differences Recognized in Comprehensive Income Other Total d. Information on trading profit/losses (Net): Profit 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 7,507 23,381 169 31,057 Current Period 694,246,386 42,701,725 29,789,564 621,755,097 695,453,155 41,473,540 39,928,485 614,051,130 (1,206,769) 9,749 9,721 1,349 20,819 Prior Period 529,061,005 17,579,583 35,365,769 476,115,653 533,694,925 17,149,515 40,336,567 476,208,843 (4,633,920) (1) Income arising from foreign currency changes related to derivative transactions amounting TL 10,143,156 and the losses amounting TL 19,824,032 and the amount of net loss is TL 9,680,876 (December 31, 2019: profit TL 30,910,020 loss TL 35,780,431 and net loss amount TL 4,870,411) 346 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 d. Information on other operating income: As at reporting period, TL 8,835,512 of other operating income sources from inclusion and classification of operations of insurance and reinsurance companies; 91% of which is from insurance premiums. (December 31, 2019: TL 7,186,461 ,93%). The remaining amount mainly consists of expected credit loss reversals or collections from Stage 3 loans, and income from fees received from customers in return for various banking services and sales of fixed assets. e. Information on expected credit loss and other provision expense: 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 Associates, Subsidiaries and Joint-Ventures Associates Subsidiaries Jointly Controlled Entities Other (1) Total (1) Includes provision expense for impairment of financial assets at fair value through profit or loss and free provision expense amounting to TL 1,750,000. f. 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 TFRS 16 Repair and Maintenance Expenses Advertisement Expenses Other Expenses Loss on Sale of Assets Other Total Current Period Prior Period 11,379,112 1,631,142 4,648,360 5,099,610 20,047 2,129 17,918 8,570,651 602,233 1,151,702 6,816,716 1,485 1,485 2,750,881 14,150,040 664,147 9,236,283 Current Period Prior Period 168,124 758,429 154,623 627,201 686,592 650,956 324,296 352,303 5,320 1,306 3,739,903 132,158 265,704 249,311 3,092,730 1,854 9,192,141 435 3,030,987 122,386 248,109 251,738 2,408,754 46,345 7,397,662 14,877,965 12,260,512 (1) The Group’s expenditure within the scope of donation, aid and social responsibility projects in the current period is TL 104,006 (31.12.2019: TL 65,742). In the table above, TL 7,247,084 of the operating expenses in the “Other” group arises from the insurance and reinsurance companies because of the classification of their activities in the “Other” group, and significant portion of the related expenses is compensation expenses paid (December 31, 2019: TL 5,831,689). The Group’s fees, taxes, duties and fund expenses amounting to TL 560,848 are other expense items in the current period “Other” group. g. Information on provision for taxes from continuing and discounted operations The Group’s profit before tax arises from continuing operations. As of 31.12.2020, the profit before tax consists of TL 29,062,715 of net interest income, TL 4,919,413 of net fees and commission income, and the total of personnel expenses and other operating expenses is TL 21,179,158. g1. Explanations on net profit/loss of continued and discontinued operations: As of 31.12.2020, the Group’s tax provision amounting to TL 2,915,351 consists of current tax provision of TL 4,778,594 and deferred tax income of TL 1,863,243. The Group does not have any discontinued operations. g2. Explanations on net profit/loss of continued and discontinued operations: The net profit of the Group from its ongoing operations as of 31.12.2020 is TL 7,751,752. 347 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 h. Information on net period profit/loss: h.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, 2020-December 31, 2020. h.2. Effects of changes in accounting estimates on the current and future periods’ profit/loss: There is no issue to be disclosed. h.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. h.4. Net profit/loss of Minority Interest: Net Profit/Loss of Non-controlling Interest i. Explanation on other items in income statement Current Period 1,096,310 Prior Period 1,021,826 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 5,336,963 the balance of extraordinary reserves is TL 178,599 and the balance of statuary reserves is TL 38,549,266. The details of revaluation surplus account of securities are shared in the Note Section V-II-l-9. TL (304,453) of this amount is the deferred tax effect on marketable securities at fair value through other comprehensive income (December 31, 2019: TL (100,178)). VI. DISCLOSURES AND FOOTNOTES ON THE CONSOLIDATED STATEMENS OF CASH-FLOWS The consolidated operating profit of TL 34,258,222 before the changes in operating assets and liabilities mostly comprised of TL 41,826,344 of interest received from loans and securities, and TL 18,786,386 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 (8,265,460) (December 31, 2019: TL (5,916,139)). 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 33,362,942 (December 31, 2019: TL 890,902 decrease). The Net Cash Provided from Other Investing Activities account includes net cash flows from the sale of intangible assets and declined by TL 752,504 (December 31, 2019: TL 656,217 decrease). The effect of changes in foreign exchange rates on cash and cash equivalents is on the positive side TL (1,239,044) (31.12.2019: TL 909,669) as of December 31, 2020. 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, 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 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 348 December 31, 2020 December 31, 2019 32,519,831 9,136,817 23,383,014 19,801,714 2,179,919 17,621,795 52,321,545 29,663,454 5,519,980 24,143,474 18,075,154 1,166,865 16,908,289 47,738,608 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 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: Current Period: Group’s Risk Group Deposits Balance at the beginning of the period Balance at the end of the period Interest expense on deposits Prior Period: 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 218 2,857,404 292,070 5,999,538 9,877,588 1,638 2,963,240 1,232,269 103,258 884,605 495,030 2,309 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 Current Period Current Period Current Period 932,049 7,520,649 36,073 8,896 157,226 4,833 7,802,825 1,153,201 76,599 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 581,002 932,049 64,882 178,624 8,896 10,004 2,597,067 7,802,825 199,317 a.3. Information on forward and option and other similar agreements made with the Group’s risk group: None 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.b.3 and I.o. b.1. The relations of the Group with corporations in its risk group and under its control 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 loans is 1.04%, while the ratio to the overall assets is 0.57% the ratio of deposits of the risk group corporations to the overall deposits is 2.31%, while the ratio to overall liabilities is 1.23%, The comparable pricing method is used for the transactions. 349 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 of Anadolu Anonim Türk Sigorta Şirketi and Anadolu Hayat Emeklilik A.Ş. Furthermore, through its branches, the Bank mediates the order transmission for İş Yatırım Menkul Değerler A.Ş. and carries out agency activities of İş Portföy Yönetimi A.Ş. 30 mutual funds which are founded by the Anadolu Hayat Emeklilik A.Ş. are managed by İş Portföy Yönetimi A.Ş. Securities purchases, when required, are made by İş Finansal Kiralama A.Ş., a subsidiary of the Bank, through leasing. 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 top management of Group amounts TL 135,024 (December 31, 2019: TL 116,469). 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 1,205 Employees 23,193 Country of Incorporation 1 1 2 15 2 2 1 2 2 44 204 37 30 6 China Egypt England TRNC Iraq Kosovo Bahrain Total Assets 20,577,621 8,776,308 2,159,548 1,270,258 3,483,661 Legal Capital 1,009 80,000 332,077 90,298 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 Foreign Branches Off-Shore Branches Number 9 1 Employees 157 Country of Incorporation 7 Netherlands Total Assets 1,144,794 Legal Capital (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 JSC İşbank Domestic Branches (1) Foreign Representative Offices Foreign Branches Off-Shore Branches Number 1 1 Employees 193 Country of Incorporation Total Assets Legal Capital 12 Singapore 331,410 220,215 Number 3 Employees 103 Country of Incorporation Total Assets Legal Capital (1) The branches of the company, which is headquartered in Moscow, in Russia are shown as domestic branches. 350 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 JSC İşbank Georgia Domestic Branches (1) Foreign Representative Offices Foreign Branches Off-Shore Branches Number 2 Employees 64 Country of Incorporation Total Assets Legal Capital (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. Employees 1,361 1,066 139 112 138 69 10 66 375 6 3 9 11 389 115 (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 The General Directorate was authorized by the Board of Directors of the Bank on 27.07.2020 to purchase 100% share of Moka Ödeme Kuruluşu A.Ş. for USD 3.8 million and to carry out all transactions related to the process. The process regarding the issue was completed and the 100% share of MOKA Ödeme Kuruluşu A.Ş. was transferred to the Bank in January 2021. Within the scope of the decision of the Board of Directors dated 08.10.2020 regarding the issuance of debt instruments, the Bank has issued a commercial paper with a nominal value of TL 336,533 after December 31, 2020. Türkiye Sınai Kalkınma Bankası A.Ş., issued bond abroad in the amount of USD 350 million with fixed rate (5.875%) and 5-year term on January 14, 2021. 351 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 Rating Outlook (*) B3 B3 B3 Not-Prime Not-Prime B+ B+ B B A+ (tur) b+ 5 B+ B trA+ trA-1 Rating B+ B+ B B A+(tur) 4 Negative Negative Negative - - Negative Negative - - Stable - - Negative - - - Outlook Negative Negative - - Stable - SECTION SIX: OTHER EXPLANATIONS I. EXPLANATIONS ON THE GROUP’S CREDIT RATINGS: Türkiye İş Bankası A.Ş. 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 The dates below given are on which the credit ratings were last updated: Moody’s: 10.12.2020, Fitch Ratings: 01.09.2020, Standard & Poor’s: 17.08.2018 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 352 İşbank 2020 Annual ReportTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 The date below given is on which the credit rating was last updated for İş Finansal Kiralama A.Ş.: Fitch Ratings: 02.09.2020 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 Rating Outlook(*) caa1 B3 Not-Prime B3 Not-Prime B3 (P)B3 B+ BB- B B AA(tur) 4 B B- b+ - Negative - Negative - Negative - Negative Negative - - Stable - - - - The dates below given are on which the credit ratings were last updated for TSKB: Moody’s: 11.09.2020, Fitch Ratings: 01.09.2020 (*) 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 consolidated financial statements and disclosures for the year ended December 31, 2020 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’sreport dated February 8, 2021, is presented preceding 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. 353 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk ManagementTürkiye İş Bankası A.Ş.(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.)Notes to the Consolidated Financial Statements For the Year Ended December 31, 2020 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 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 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 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 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 2020/12 9,463,666 74,974,753 109,485,041 345,150,130 26,002,383 9,161,214 19,665,245 593,902,432 2020/12 368,876,491 116,407,089 10,224,590 30,612,810 67,781,452 313,074,234 362,243,533 416,387,604 468,059,471 593,902,432 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* 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 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 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% 2020/12 42,516,332 17,274,293 25,242,039 -3,341,357 5,617,613 21,487 2,436,205 29,975,987 11,796,986 18,179,001 12,729,920 3,406,471 8,855,552 2,044,635 6,810,917 2020/12 89.4% 109.4% 18.4% 58.1% 93.6% 25.0% 5.6% 63.7% 41.7% 11.4% 18.7% 1.3% 10.9% 35.3% 2019/12 69,198,849 57,971,231 30,903,681 84,040,178 2020/12 84,540,460 66,666,192 38,469,439 153,998,446 (*) 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 and 2020/12 balances do 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 and 2020/12 periods. (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) 354 İşbank 2020 Annual Report 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 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 97.304.703 316.028.505 11.190.991 13.826.688 50.891.344 565.051.838 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% 17,2% 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 31.093.535 86.043.036 2020/12 9.504.086 84.380.175 128.082.066 403.934.870 13.052.096 14.706.181 64.492.789 718.152.263 2020/12 381.693.393 167.635.067 24.027.066 69.935.017 74.861.720 718.152.263 2020/12 47.960.977 18.898.262 29.062.715 -1.206.769 4.919.413 31.057 11.733.929 44.540.345 21.179.158 23.361.187 14.150.040 1.455.956 10.667.103 2.915.351 7.751.752 2020/12 85,8% 112,2% 17,8% 54,6% 102,7% 22,1% 5,6% 62,1% 41,2% 10,4% 17,0% 1,2% 11,2% 36,0% 2020/12 90.577.700 69.037.761 38.572.660 157.339.437 (*) 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 and 2020/12 balances do 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 and 2020/12 periods. (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 2017/12 period, and Return on Average Equity for 2016/12 and 2017/12 periods. (13) Cost and income are netted aganist “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) 355 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Direct and Indirect Subsidiaries (*) DIRECT SUBSIDIARIES Name Anadolu Hayat Emeklilik A.Ş. Arap Türk Bankası 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 Isbank Georgia JSC İşbank Kredi Kayıt Bürosu A.Ş. Kültür Yayınları İş Türk A.Ş. Milli Reasürans T.A.Ş. Trakya Yatırım Holding A.Ş. Türkiye Sınai Kalkınma Bankası A.Ş. Türkiye Şişe ve Cam Fabrikaları A.Ş. 31/12/20 Direct Share 62.00% 20.58% 27.79% 50.51% 86.33% 100.00% 65.65% 100.00% 100.00% 100.00% 9.09% 99.17% 87.60% 100.00% 47.23% 50.93% Bank’s Risk Group Share Percentage 83.00% 20.58% 58.24% 63.89% 100.00% 100.00% 70.69% 100.00% 100.00% 100.00% 9.09% 100.00% 87.60% 100.00% 50.92% 57.02% 356 İşbank 2020 Annual Report INDIRECT SUBSIDIARIES 31/12/20 Name Anadolu Anonim Türk Sigorta Şirketi Anavarza Otelcilik A.Ş. Automotive Glass Alliance Rus AO Automotive Glass Alliance Rus Trading OOO 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 Limited Covision Medical Technologies San. Tic. A.Ş. Cromital SPA Çayırova Cam Sanayii A.Ş. Efes Varlık Yönetim A.Ş. Erişim Müşteri Hizmetleri A.Ş. Glasscorp S.A. Gullseye Lojistik Teknolojileri 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 Kasaba Gayrimenkul İnşaat Taahhüt ve Ticaret A.Ş. Kanyon Yönetim İşletim ve Pazarlama A.Ş. Koridor Incorporated Livewell Giyilebilir Sağlık Ürün Hizm. A.Ş. 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. Direct Share 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% Bank’s Risk Group Share Percentage 64.31% 50.00% 100.00% 100.00% 65.00% 99.80% 100.00% 100.00% 99.70% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 57.52% 100.00% 38.66% 100.00% 100.00% 50.00% 74.66% 100.00% 40.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 357 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Direct and Indirect Subsidiaries (*) INDIRECT SUBSIDIARIES 31/12/20 Direct Share 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% Bank’s Risk Group Share Percentage 83.57% 88.00% 95.37% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 97.22% 100.00% 50.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 25.50% 25.50% 100.00% 100.00% 100.00% 100.00% 50.00% 100.00% 100.00% 100.00% 100.00% Name Mikla Yiyecek ve İçecek A.Ş. 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 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. Pacific Soda LLC Pasabahce Bulgaria EAD Pasabahce Egypt Glass Manufacturing SAE Paşabahçe (Shanghai) Trading Co. Ltd Paşabahçe Glass Gmbh Paşabahçe Investment BV Paşabahçe Mağazaları A.Ş. Paşabahçe Spain SL Paşabahçe SRL 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 Sisecam Chemicals USA Inc Softtech (Shanghai) Technology Co. Ltd. Softtech Ventures Teknoloji A.Ş. 358 İşbank 2020 Annual Report INDIRECT SUBSIDIARIES 31/12/20 Name Softtech Yazılım Teknolojileri Araştırma Gel. ve Paz. Tic. A.Ş. Şişecam Automotive Bulgaria EAD 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 India Private Limited Şişecam Flat Glass Italy S.r.l. Şişecam Flat Glass South Italy SRL Şişecam Glass Packaging B.V. Şişecam Otomotiv A.Ş. Şişecam Sigorta Aracılık Hizmetleri A.Ş. Şişecam Soda Lukavac DOO Şişecam Trading co. Tatilbudur Kurumsal Hizmetler Turizm ve Ticaret A.Ş. Tatilbudur Seyahat Acenteliği ve Turizm A.Ş. Toksöz Spor Malzemeleri Tic. A.Ş. Topkapı Danışmanlık Elektronik Hizmetler Pazarlama ve Ticaret 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. Direct Share 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% Bank’s Risk Group Share Percentage 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% 100.00% 100.00% 40.00% 40.00% 90.63% 100.00% 100.00% 100.00% 100.00% 100.00% 70.00% 100.00% 89.53% 99.85% 98.42% 100.00% 359 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Changes in Share Percentages in Subsidiaries DIRECT AND INDIRECT SUBSIDIARIES COMPANIES Firms that entered to Bank’s Risk Group in 2020 Gullseye Lojistik Teknolojileri A.Ş. Livewell Giyilebilir Sağlık A.Ş. Mikla Yiyecek ve İçecek A.Ş. Softtech Ventures Teknoloji A.Ş. Direct Share of İşbank December 2019 Direct Share of İşbank December 2020 Bank’s Risk Group Share Percentage December 2019 Bank’s Risk Group Share Percentage December 2020 Reason - - - - 0.00% 0.00% 0.00% 0.00% - - - - 100.00% 100.00% 83.57% 100.00% Acquisition Acquisition New company establishment through division New company establishment Firms whose share ratio changed in Bank’s Risk Group in 2020 İş Finansal Kiralama A.Ş. 27.79% 27.79% 58.29% 58.24% İş Gayrimenkul Yatırım Ortaklığı A.Ş. 47.90% 50.51% 63.70% 63.89% İş Net Elektronik Bilgi Üret. Dağ. Tic. ve İlet. Hizm. A.Ş. 94.65% 100.00% 100.00% 100.00% Milli Reasürans T.A.Ş. 77.06% 87.60% 77.06% 87.60% Türkiye Sınai Kalkınma Bankası A.Ş. 41.44% 47.23% 50.92% 50.92% Türkiye Şişe ve Cam Fabrikaları A.Ş. 67.54% 50.93% 75.81% 57.02% Casaba Yönetim İşl.İmal.İth.İhr.Paz.Sağ. Tem.Güv.Ulş.Tic.ve San.A.Ş. 0.00% 0.00% 50.00% 100.00% Sale of Shares in Borsa İstanbul Purchasing shares from our bank's group company and transferring the shares from Borsa İstanbul to the subsidiary portfolio Purchasing shares from our bank's group companies Purchasing non-group shares of our bank Purchasing a share from our bank's group company Our direct share ratio decreased to 49.61% after the Şişecam merger, and our direct share ratio increased to 50.93% due to the transfer of the shares from Borsa Istanbul to the subsidiary portfolio. Our group share increased to 100% due to the acquisition of the non-group shares, which are in the capital of the parent company Kasaba Gayrimenkul İnşaat Taahhüt ve Ticaret A.Ş., by one of our group companies. Sale of shares of our bank's group company in Borsa Istanbul Our bank's group company purchases non-group shares Share purchase from a partner Share purchase from a partner 0.00% 57.67% 57.52% 0.00% 0.00% 0.00% 0.00% 50.00% 20.00% 90.63% 20.00% 100.00% 40.00% 97.22% 40.00% Share purchase from a partner 0.00% 20.00% 40.00% Share purchase from a partner 0.00% 88.27% 90.63% Share increase through cash capital increase İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. Kasaba Gayrimenkul İnşaat Taahhüt ve Ticaret A.Ş. M4 Otelcilik ve Turizm A.Ş. Ortopro Tıbbi Aletler San. Tic. A.Ş. Tatilbudur Kurumsal Hizmetler Turizm ve Ticaret A.Ş. Tatilbudur Seyahat Acenteliği ve Turizm A.Ş. Toksöz Spor Malzemeleri Tic. A.Ş. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 360 İşbank 2020 Annual Report TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. 0.00% 0.00% 86.23% 89.53% COMPANIES Firms that were removed from Bank’s Risk Group in 2020 Direct Share of İşbank December 2019 Direct Share of İşbank December 2020 Bank’s Risk Group Share Percentage December 2019 Bank’s Risk Group Share Percentage December 2020 Bankalararası Kart Merkezi A.Ş. AC Glass Holding BV Anadolu Cam Investment BV Anadolu Cam Sanayii A.Ş. Denizli Cam Sanayii ve Ticaret A.Ş. Istanbul Investment BV Nude Design Investment BV Nude Glass Investment BV Num Num Yiyecek ve İçecek A.Ş. Paşabahçe Cam Sanayii ve Ticaret A.Ş. Soda Sanayii A.Ş. Trakya Cam Sanayii A.Ş. 9.98% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 4.89% 9.98% 4.89% - - - - - - - - - - - 100.00% 100.00% 77.27% 51.00% 100.00% 100.00% 100.00% 83.57% 99.47% 62.02% 70.35% - - - - - - - - - - - The use of pre-emptive rights not used in the purchase of shares from Borsa Istanbul and cash capital increase by our Bank's group company Reason Removed from the list due to losing its subsidiary qualification Merger Merger Merger Merger Merger Merger Merger Merger Merger Merger Merger Firms whose title changed in Bank’s Risk Group in 2020 Old Title İş Altınhas İnşaat Taahhüt ve Tic. A.Ş. Topkapı Yatırım Holding A.Ş. New Title Kasaba Gayrimenkul İnşaat Taahhüt ve Ticaret A.Ş. Topkapı Danışmanlık Elektronik Hizmetler Pazarlama ve Ticaret A.Ş. Title Change Title Change 361 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management Additional Information Regarding the Related Legislation Duties İşbank Board of Directors’ members perform outside the Bank Name-Surname Position in Bank Duties outside the bank Füsun Tümsavaş Chairperson Vice Chairperson of the Board of Türkiye İş Bankası A.Ş. Members Supplementary Pension Fund, Chairperson of Anadolu Anonim Türk Sigorta Şirketi Yusuf Ziya Toprak Vice Chairperson None Adnan Bali Member of the Board Chairperson of the Board of Türkiye İş Bankası A.Ş. Members Supplementary Pension Fund, Chairperson of the Board of Softtech Ventures Teknoloji A.Ş., 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 Feray Demir Member of the Board Member of the Board of Türkiye İş Bankası A.Ş. Members Supplementary Pension Fund Ersin Önder Çiftçioğlu Member of the Board Fazlı Bulut Durmuş Öztek Member of the Board Member of the Board None None None Recep Hakan Özyıldız Member of the Board Atatürk University Faculty of Political Sciences Part-Time Instructor Mustafa Rıdvan Selçuk Member of the Board Independent Auditor of BDD Bağımsız Denetim ve Danışmanlık A.Ş., Partner of Girişim YMM Ltd. Şti. Ahmet Gökhan Sungur Member of the Board Sadrettin Yurtsever Member of the Board None None Independence declaration of Mr. Ahmet Gökhan Sungur who is an Independent Member of the Board Mr. Ahmet Gökhan Sungur 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 29.01.2020 was submitted to the Board on 30.01.2020. Independence declaration of Mr. Ahmet Gökhan Sungur who was elected as an Independent Member of the Board at the Ordinary General Meeting dated 31.03.2020 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 2020 amount to TL 33,722 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 6,288 thousands. Other Issues • The actions required with respect to the decisions made at Ordinary General Shareholders’ Meeting of 2020 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. 362 İşbank 2020 Annual Report Amendments in the Articles of Incorporation in 2020 (*) ARTICLE 5 OLD Capital NEW Capital The Corporation has accepted the registered capital system pursuant to the provisions of the Capital Market Law, and adopted the registered capital system as per the Capital Market Board permission dated 6.3.1997 and Nr.2683. The maximum level of registered capital of the Corporation is TRY 10,000,000,000 (ten billion). The issued and fully paid capital of the Corporation is TL 4,500,000,000 (four billion five hundred million) and TL 1,000 of it is composed of Group (A) shares each of which worth 1 Kurus, TL 29,000 of it is composed of Group (B) shares each of which worth 1 Kurus and TL 4,499,970,000 of it is composed of Group (C) shares each of which worth 4 Kurus. The registered capital maximum level permission granted by the Capital Market Board is valid between 2016 and 2020 (5 years). Even if the registered capital maximum level is not reached by the end of 2020; the Board of Directors, in order to be able to resolve for another capital increase after 2020, is obliged to obtain permission from the Capital Markets Board for the previously permitted or a new maximum level amount and then obtain authorization from the General Assembly for a new time period which shall not be more than five years. Unless such authorization is received, a capital increase cannot be made by a resolution of the Board of Directors. The Board of Directors is authorized to increase the issued capital by issuing registered shares up to the maximum level of the registered capital in accordance with the provisions of the Capital Market Law and the relevant legislation, whenever it deems necessary. However, no new shares can be issued unless all the issued shares are sold and their values are collected. All the shares of the Corporation are strictly required to be issued in return for cash; all of them must be registered. The Corporation has accepted the registered capital system pursuant to the provisions of the Capital Market Law, and adopted the registered capital system as per the Capital Market Board permission dated 6.3.1997 and Nr.2683. The maximum level of registered capital of the Corporation is TRY 10,000,000,000 (ten billion). The issued and fully paid capital of the Corporation is TL 4,500,000,000 (four billion five hundred million) and TL 1,000 of it is composed of Group (A) shares each of which worth 1 Kurus, TL 29,000 of it is composed of Group (B) shares each of which worth 1 Kurus and TL 4,499,970,000 of it is composed of Group (C) shares each of which worth 4 Kurus. The registered capital maximum level permission granted by the Capital Market Board is valid between 2020 and 2024 (5 years). Even if the registered capital maximum level is not reached by the end of 2024; the Board of Directors, in order to be able to resolve for another capital increase after 2024, is obliged to obtain permission from the Capital Markets Board for the previously permitted or a new maximum level amount and then obtain authorization from the General Assembly for a new time period which shall not be more than five years. Unless such authorization is received, a capital increase cannot be made by a resolution of the Board of Directors. The Board of Directors is authorized to increase the issued capital by issuing registered shares up to the maximum level of the registered capital in accordance with the provisions of the Capital Market Law and the relevant legislation, whenever it deems necessary. However, no new shares can be issued unless all the issued shares are sold and their values are collected. All the shares of the Corporation are strictly required to be issued in return for cash; all of them must be registered. (*)At the Annual General Meeting convened on 31 March 2020, Article 5 of the Articles of Incorporation was amended to reflect the modified duration of the Bank’s authorized capital ceiling. 363 IntroductionActivitiesCorporate GovernanceFinancial Informationand Risk Management 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 2021, Wednesday 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 and Sustainability Division: Neşe Gülden Sözdinler, 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”. 364 İşbank 2020 Annual Report 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