Albaraka Türk Katılım Bankası A.Ş.

Transcription

1 Sovereign* National International Corporate Credit & Issue Rating New Update Sector: Banking Publishing Date: 9/5/218 Analyst(s) Sevket GÜLEÇ (Group Head) RATINGS Long Short Foreign Currency BBB- A-3 Local Currency BBB- A-3 Outlook FC Stable Stable LC Stable Stable Issue Rating - - Local Rating AA(Trk) A-1+(Trk) Outlook Stable Stable Issue Rating - - Sponsor Support 3 - Stand-Alone AB - Foreign Currency BBB- - Local Currency BBB- - Outlook FC Stable - LC Stable - *Affirmed by JCR on November 1, NIM (%) ROAA (%) Market Share (%) (Turkish Banking Sector) ROAE (%) CAR (%) Growth Rate (%) Albaraka Türk Katılım Bankası A.Ş. Company Overview F i n a n c i a l D a t a * * * * 213* Total Assets (, USD) 9,535 9,32 1,152 9,925 8,81 Total Assets (, TRY) 36,332 32,8 29,517 23,14 17,216 Total Deposit (, TRY) 25,244 23,151 2,341 16,643 12,529 Total Net Loans (, TRY) 25,193 22,722 19,55 16,184 12,6 Equity (, TRY) 2,645 2,273 2,96 1,786 1,497 Net Profit (, TRY) Market Share (%) ** ROAA (%) ROAE (%) Equity/Assets (%) CAR - Capital Adequacy Ratio (%) Asset Growth Rate (Annual) (%) * End of year ** On solo basis among the Participation Banking Sector Albaraka Türk Katılım Bankası A.Ş. (hereinafter referred to as Albaraka or the Bank ) operates in the fields of SME, corporate, commercial, investment and retail banking services strictly conformable to the principles of Islamic Shari'a. The first finance institution in the interest-free banking field in Turkey, the Bank was incorporated in 1984 and launched operations in the beginning of Albaraka Türk went public in 27 and is currently trading on the Borsa Istanbul A.Ş. (BIST) under the ticker ALBRK with a current free float rate of 25.16%. The qualified shareholder, the Bahrainbased Al Baraka Banking Group B.S.C., is listed on the Bahrain stock exchange and NASDAQ Dubai and is one of the leading groups in the Middle East with an asset size of USD 25,453mn. The group held 54.6% of shares at FYE and is engaged in banking activities strictly conformable to the principles of Islamic Shari'a in Algeria, Bahrain, Tunisia, Egypt, Lebanon, Jordan, Turkey, Africa, Sudan, Pakistan and Syria with a total network of 675 branches/offices. While all notes of Albaraka have been affirmed, its short and long term national ratings outlooks were revised to Stable from Negative considering; notable improvement in capital adequacy level, a slight improvement in NPLs though remaining above sector averages, a slight enhancement in profitability, net profit growth projection and provided perpetuity additional capital Tier 1 amounting to USD 25mn through Sukuk Issuance- listed on the Irish Stock Exchange, in accordance with Basel III criteria. Strengths Continuity of income generation power, Favorable loan to deposit ratio providing conformity to liquidity management Maintenance of access to international financial markets High level of compliance concerning corporate governance implementations Good track record and qualified management team High market influence in participation banking sector with an asset size-based market share of 22.62% Constraints High and above sector average non-performing loans ratio pressuring asset quality Lower net fee & commission income generation competence than the sector averages Continuity of weak profitability indicators, particularly those of ROAA and ROAE, which underperformed the sector averages Below sector average loan loss reserves coverage Sector-wide structural maturity mismatches and short maturity profile of deposits Dependence on tier 2 capital instruments despite the presence of satisfactory capitalization Persistence of high geopolitical risks in the nearby region and cross-border military operations pressuring the investor sentiment Steadiness of high credit risk concentration among the top 1 customers 213 Copyright 27 by JCR Eurasia Rating. 19 Mayıs Mah., 19 Mayıs Cad., Nova Baran Plaza No:4 Kat: 12 Şişli-İSTANBUL Telephone: +9(212) Fax: +9 (212) Reproduction is prohibited except by permission. All rights reserved. All information has been obtained from sources JCR Eurasia Rating believes to be reliable. However, JCR Eurasia Rating does not guarantee the truth, accuracy and adequacy of this information. JCR Eurasia Rating ratings are objective and independent opinions as to the creditworthiness of a security and issuer and not to be considered a recommendation to buy, hold or sell any security or to issue a loan. This rating report has been composed within the methodologies registered with and certified by the SPK (CMB-Capital Markets Board of Turkey), BDDK (BRSA-Banking Regulation and Supervision Agency) and internationally accepted rating principles and guidelines but is not covered by NRSRO regulations.

2 1. Rating Rationale The rating study is based on Albaraka s consolidated independent audit reports prepared in accordance with the BRSA s regulations. Furthermore, the banking sector comparison is based on unconsolidated financial statements compiled according to Banking Regulation and Supervision Agency (BRSA) regulations which have been independently audited. In addition to financial metrics such as income generation power & profitability, capitalization level, asset quality, funding profile and growth performance rates, qualitative indicators such as corporate governance compliance level, branch network, market influence and risk management practices were also taken into consideration in the assignment of the ratings. JCR-ER undertook the peer group analysis of Albaraka based on the principle indicators including ROAA (Return on Average Assets), ROAE (Return on Average Equity), NPL (Non-performing Loans) and CAR (Capital Adequacy Ratio) against Kuveyt Türk and Türkiye Finans, the results of which have been included on page 24. JCR Eurasia Rating has affirmed Albaraka Türk s National Local Rating Notes of AA (Trk) on the long term, which denotes a high investment grade, and A-1+ (Trk) in the short term along with an upward revision of outlook from Negative to Stable considering the notable improvement in capital adequacy level, a slight improvement in NPLs though maintained above sector averages, a slight enhancement in profitability, net profit growth projection and provided perpetuity additional capital Tier 1 amounting to USD 25mn through Sukuk Issuance in accordance with Basel III criteria. Fundamental rating drivers are as below; Weak Profitability Metrics At FYE, the Bank s solo based net profit was TRY 237.1mn and underwent a modest rise from the previous year s figure of TRY 217.6mn with an increase of 8.96% YoY. In the same period, the Turkish Banking and the Participation Banking Sectors net profit increases were robust with rates of 3.88% and 43.23% respectively. Regarding the net profit growth, the Bank underperformed the sector averages. Return on asset and equity ratios, fundamental profitability indicators, were.84% and 12.13% at FYE and remained below the sector averages. The principal reasons for the lower profitability indicators are higher OPEX and provision expenses. While the Bank s OPEX to total income and provision expenses to total income ratios were 52.24% and 27.54% respectively at FYE, the same figures for the Turkish Banking Sector were 35.21% and 19.6% respectively. Those figures require the management focus on the cost control and productivity fields. In addition, the net fee & commission income to total income (8.87% at FYE) was remarkably below the sector averages and exhibited a declining trend in recent years. Regarding the Bank and its peer group s ROAA and ROAE figures, the Bank underperformed its peer group banks with respect to return on assets in the last two consecutive years. Accordingly, as in the previous year, the Bank s profitability metrics were away from the desired level. Continued Modest Growth Performance in All Key Segments At FYE, the Bank s growth performance in assets, loans, deposits, equity and net profit attained rates of 1.28%, 1.88%, 9.4%, 8.86% and 2.9%, respectively. Those figures in the Participation Banking Sector were 2.52%, 26.62%, 29.14%,18.72% and 43.23% respectively and the Turkish Banking Sector s growth performances were also strong in those fields (19.29%, 2.83%, 17.7%, 19.63% and 3.88% respectively). Consequently, the Bank underperformed both the Participation Banking Sector and the Turkish Banking Sector as a whole. Above Sector Average NPLs Pressurizing Asset Quality At FYE, as per on solo financial statements, the Bank s gross non-performing loans book was TRY 1,213mn and increased by 9.64% on a YoY basis. In addition to enlargement in loans at 1.88% YoY along with sold & written off TRY 38.3mn of non-performing loans which were thought to be un-collectible underpinned a slight progress in NPLs ratio (4.68%), though remained above the sector averages in the last two consecutive years. It is also noted that sale/write-off of non-performing loans in the sector is a common practice. When including nonperforming loans, which were sold and written off from the assets, the Turkish Banking Sector s NPLs ratio would be nearly 5% at FYE, which is remarkably higher than the current stated level of 2.95%. Even if the sector s adjusted NPLs figure is taken into consideration, Albaraka s NPLs ALBARAKA TÜRK KATILIM BANKASI A.Ş. 2

3 ratio was still above the sector average when including the Bank s written off non-performing loans. The Bank s specific loan loss reserves coverage improved to 57.68% at FYE from 52.31% at FYE. Although compliant with the regulations, it remained below both the Turkish Banking and Participation Banking Sector averages of 79.88% and 7.75% respectively, as in the previous year. The lower coverage ratio also exerts pressure on asset quality. Dependence on Tier 2 Capital Instruments despite the Presence of an Adequate Capitalization Level Albaraka Türk s consolidated and non-consolidated Capital Adequacy Ratios (17.78% and 17.6% respectively) demonstrated a remarkable increase in FYE compared to the previous year s ratios of 13.45% and 13.46% thanks to USD 2mn Sukuk Murabaha subordinated loans-which was included as part of the CAR calculation in FY, amendments regarding the definition of SMEs in capital adequacy and provisions by BRSA, mandatory provisions held by Banks in the CBT in the form of foreign currency and gold reserves treated as zero weighted risk assets in line with BRSA regulations along with extended loans through Credit Guarantee Fund (CGF), which are also treated as zero risk weighted assets have supported the improvement in CAR for both the sector and the Bank. Supplementary capital accounted for 4.75% of the Bank s own funding structure at FYE and stayed well above the Turkish Banking Sector and the Participation Banking Sector s averages of 16.69% and 25.46% respectively. Supplementary capital classified as second-tier capital under the regulatory capital and contributed 7.25% to the Bank s consolidated CAR ratio as of FYE. Above figures indicate the Bank s higher reliance on Tier II capital, which is not considered to be loss absorbent. On the other hand, the Bank s Common Equity Tier 1 Capital Ratio and Total Tier 1 Capital Ratio were 1.11% and 1.9% respectively at FYE well above the required levels of 4.5% and 6%. Additionally, capital conservation buffer requirement of the Bank was 1.25% at FYE. Consequently, the Bank s consolidated Common Equity Tier 1 Capital Ratio (1.56%) was almost twice the required minimum level (5.63%). Accordingly, we, as JCR Eurasia Rating, have assessed that the current level of capitalization provides an adequate buffer against incidental loan loss. Satisfactory Liquidity As per to its Contingency Funding Plan", the Bank employs mechanisms to avoid increases in liquidity risk during normal and stressed conditions through continuously monitoring early warning indicators and counter measures to be taken. BRSA s recent regulations stipulate that Banks must maintain an adequate level of high quality liquid assets (HQLA) on consolidated and unconsolidated bases to meet the net cash outflows. The minimum average Liquidity Coverage Ratios for the deposit banks was 8% (Turkish Lira + Foreign Currency) and 6% (Foreign Currency) respectively for FY. The average Liquidity Coverage Ratios of the Bank on consolidated and unconsolidated bases for FY were above the requirement levels and remained compliant with BRSA parameters. At FYE, the Bank s leverage level (Tier 1 Capital to Total Risk Exposure) was measured on a consolidated basis as 5.2%, pursuant to the regulation regarding the measurement and evaluation of banks' leverage level. It was well above the required minimum level of 3%. In addition, the Bank s loans (including leasing receivals) to deposits ratio (LTD) was 99.8% at FYE and in line with, Participation Banking Sector average (97.99%) while below the Turkish Banking Sector average, providing conformity to the liquidity management. Accordingly, the Bank s liquidity levels are monitored closely and satisfy threshold levels. Short Maturity Profile of the Collected Funds as in the Sector Collected funds (profit sharing and demand deposits) are the foremost funding source of both the Turkish Banking Sector in general and Albaraka in particular. As per to the solo figures, the Bank s total deposits comprised 69.86% of total sources, notably higher than the Turkish Banking Sector s average of 52.52% at FYE. In addition, according to the remaining contractual maturities of total deposits, 89.81% fell in the up to one-month maturity bracket indicating the very short maturity profile of the deposits, which is also prevalent in the Turkish Banking Sector. To diversify funding resources and extend funds maturity, the Bank has accessed international financial markets and obtained funds in the form Murabaha Syndication, ALBARAKA TÜRK KATILIM BANKASI A.Ş. 3

4 Subordinated loans, Wakala borrowing and Sukuk Certificates. Together overseas and domestic borrowings accounted for 19.43% of the total resources and mostly their maturities extend from five years to ten years. Attachment of Importance to Digital Banking Infrastructure Fast developments in technology and massive growth in mobile device usage divert both individuals and banks to non-branch service channels. In this sense, a dynamic and adaptive long term corporate transformation program titled SIMURG and IT transformation program-principal banking system- known as ALBATROS were implemented in. Within the scope of its business development and innovation activities, the Bank has set up the "Digital Islamic Banking" project to provide individual digital banking services in Europe. For the upcoming periods, the Bank plans to invest in digitalization principally on robotic process automation, smart business processes, mobile compatible flows and digital signature usage. At FYE, the Bank s active internet banking customers were 74,27 and 3.8mn transactions were performed through the internet branch channels. Steadiness of High Credit Risk Concentration As per to the figures provided by the Bank, based on BRSA definition, the loans are disseminated among SMEs, corporates and retail lending with rates of 46.2%, 4.3% and 13.5%, respectively. 52.2% of loans are extended in TRY including FX indexed credits and the remainder in foreign currencies, with a balanced funding FX structure. The Bank s (i) largest 1 cash loan customers comprised 4% (FYE:41%) of the total cash loan portfolio as of FYE, (ii) the largest 1 non-cash loan customers composed 47% (FYE:44%) of the total non-cash loan portfolio as of FYE and (iii) the largest 1 cash and non-cash loan customers represented 37.% of the total on and off-balance sheet as of FYE (FYE: 36%). Those figures indicate steadiness of high credit risk concentration as in the previous year. High Level of Compliance with Corporate Governance Implementations Albaraka Türk is currently trading on the Borsa Istanbul A.Ş. (BIST) under the ticker ALBRK with a current free float of 25.16%. The Bank has attained high compliance level with the corporate governance principles. The Bank s Corporate Governance Rating Note, assigned by JCR Eurasia Rating, increased to 88.5 out of 1 in FY from in FY, denoting Distinctive Compliance in all categories regarding compliance with the CMB Corporate Governance Principles, calculated based on weightings determined for the 4 distinct categories of Shareholders, Public Disclosure and Transparency, Stakeholders and Board of Directors. Probable Volatility in Macroeconomic Indicators through Ongoing Regional Tensions and Developments in the International Arena Depreciation of the TRY against the hard currencies, continuity of the state of emergency in the country, ongoing tension in the nearby region and cross border military operations, turbulence in the Middle East, high inflation, international developments such as the increase in customs tariffs with the potential to trigger trade wars and rise in interest rates by the Federal Reserve deter decrease in the current level of cost of funding. Hence, the aforementioned risks harbor the potential to increase the cost of funding. Although the Bank and Turkish Banking Sector are robust enough to offset the effects of macroeconomic conditions, the profitability indicators may be pressured to a small extent. 2. Outlook JCR Eurasia Rating has revised the outlook to Stable from Negative on the short and long term national rating perspectives of Albaraka Türk regarding the (i)notable improvement in capital adequacy level, (ii) a slight improvement in NPLs though above sector averages, (iii) progress in profitability, (iv) net profit growth projection and (v) provided perpetuity additional capital Tier 1 amounting USD 25mn through Sukuk Issuance- listed on the Irish Stock Exchange, in accordance with Basel III criteria. In addition, its international rating outlooks have ALBARAKA TÜRK KATILIM BANKASI A.Ş. 4

5 been affirmed as Stable considering adequate capitalization level well above the legal and targeted boundaries, adequate liquidity, good access to international financial markets and diversified funding mix through Murabaha Syndication, subordinated loans, Wakala borrowing and Sukuk certificates and in the event that no further deterioration takes place in the operating environment of its utmost shareholders. Essential considerations which would impede the ratings and its outlooks are (i) deterioration in asset quality through increasing non-performing loans book and NPLs ratio, (ii) erosion in profitability and profitability metrics, (iii) downgrades in Turkey s sovereign rating level, (iv) adversities on debt-servicing capabilities of real sector companies, (v) probable adversities in accessing external financing sources deriving from the FED s monetary policies coupled with alterations in international financial market conditions, (vi) possible regulatory actions that would restrain the profitability & growth performance of the sector and (vii) developments in international politics particularly relating to Turkey s neighboring countries and in domestic politics. On the other hand, (i) remarkable progress in asset quality, (ii) notable improvements in profitability ratios, (iii) diversification of funding mix and extension of maturity profile and management of additional risks combined with the growth of the Bank are substantial factors that may be taken into consideration for any future positive changes in ratings and outlook status. 3. Sponsor Support and Stand-Alone Assessment Albaraka Türk s Sponsor Support Note has been determined by taking into account the financial strength and support willingness of the qualified shareholder, the Albaraka Banking Group. The group has a wide geographical presence through banking subsidiaries in Turkey, Algeria, Jordan, Lebanon, Syria, Egypt, Sudan, Tunisia and South Africa, in addition to its base in Bahrain. It is also noted that some countries in which the group operates have high political risks and harbor ongoing social unrest. Moreover, Albaraka Türk is the flagship firm of the Group. Accordingly, although financial support is expected from ABG if urgent need arises for short or long-term liquidity, the prospective financial support on offer will be limited due to the aforementioned reasons. Regarding the above mentioned factors, the Sponsor Support Note of the Bank has been affirmed as 3, denoting a moderate external support possibility bearing some uncertainties. Up to date, Albaraka Türk has not been exposed to any weaknesses to require assistance from the potential of firm shareholders. The Stand Alone Note of the Bank has been affirmed as AB regarding its adequate equity base and liquidity level, sustainable profit generation capacity, risk management practices and growth performance. This Stand-Alone note specifies that the Bank is expected to be able to manage its balance sheet risks successfully even if the shareholders or public authorities do not provide any assistance. 4. Company Profile a) History & Activities Albaraka Türk Katılım Bankası A.Ş., the largest subsidiary of the Bahrain based Al Baraka Banking Group, was incorporated in 1984 and inaugurated its operations in the beginning of The Bank, the first finance institution of interest-free banking in Turkey, offers services in the corporate, commercial, SME and retail banking fields as well as services in financial leasing and profit/loss sharing based projects. Albaraka Türk s shares (25.16% as of FYE) have been traded on the Borsa Istanbul (BIST) since 27. b) Organization & Employees As of 31 December,, Albaraka carried out its operations through a total of 22 branches, 219 of which are located domestically with 1 based overseas in Erbil- Iraq. In addition, the Bank received permission by BRSA to inaugurate a second branch in Baghdad Iraq. The total number of personnel employed across the Bank s operations was 3,899 at FYE (FYE: 3,796). In addition to the conventional services stream offered through the branch network, Albaraka facilitates the use of alternative delivery channels (ADC) including a call center, ATMs along with mobile and internet banking facilities. At FYE, the Bank manages its operations with 218 on site and 69 off site ATMs. In line with technological ALBARAKA TÜRK KATILIM BANKASI A.Ş. 5

6 development, ADC users exhibited an exceptional increase in recent years. c) Shareholders, Subsidiaries & Affiliates The shareholder structure of the Bank which had a paid-in capital of TRY 9mn and registered capital ceiling of TRY 2,5mn remained unchanged in comparison to the previous year. The qualified shareholder, Albaraka Banking Group, holds 54.6% of the Bank s shares. Shareholders Paid Capital - TRY Share % Foreign Partners 592,846, % Al Baraka Banking Group 486,523, % İslamic Development bank 7,573, % Other 35,749, % Local Partners 8,746, % Publicly Traded 226,46, % Total 9,, 1.% Al Baraka Banking Group B.S.C. was established in 22 in Bahrain and is listed on the Bahrain Stock Exchange and the NASDAQ Dubai. The group is engaged in banking activities strictly conformable to the principles of Islamic Shari'a in the Middle East, Europe and Africa. The group carries out its banking operations in Algeria, Bahrain, Tunisia, Egypt, Lebanon, Jordan, Turkey, Africa, Sudan, Pakistan and Syria with a total network of 675 branches/offices. At FYE, Al Baraka Banking Group B.S.C. s consolidated financial figures in asset size, equity and net income were approximately USD 25,453mn, 2,511mn and 27mn, respectively. Consolidated subsidiaries, associates and joint ventures have been listed in the table below. Countr y Sector Effective Interest Rates % Consolidated - Joint Venture, Subsidiaries and Structured Entity Katılım Emeklilik ve Hayat A.Ş. Voting Rights (%) Turkey Finance Bereket Varlık Kiralama A.Ş. Turkey Finance Albaraka Gayrimenkul Portföy Yönetimi A.Ş. * Albaraka Sukuk Limited ABT Sukuk Limited Turkey Finance Cayma n Finance Islands Cayma n Finance Islands Unconsolidated Affiliates Kredi Garanti Fonu A.Ş. Turkey Finance At FYE Interest Rates % Investment Amount Consolidated Real Estate Investment Funds Albaraka Gayrimenkul Portföy Yönetimi A.Ş. One Tower Gayrimenkul Yatırım Fonu Albaraka Gayrimenkul Portföy Yönetimi A.Ş. Dükkan Gayrimenkul Yatırım Fonu Albaraka Gayrimenkul Portföy Yönetimi A.Ş.Batışehir Gayrimenkul Yatırım Fonu Net Profit /Loss , 22, , 16, , 31,97 Kredi Garanti Fonu A.Ş. was not consolidated due to its insignificant influence on the Bank s financials. As JCR Eurasia Rating has not presently analyzed the independent risk level of those companies, no opinion regarding their creditworthiness has been formed. Brief explanation on the Company s consolidated subsidiaries and joint ventures is provided below. Bereket Varlık Kiralama A.Ş. The Company, headquartered in Istanbul, was established in October 211 to issue lease certificates. The Company had a paid-in capital of TRY 4mn along with assets and equity of TRY 1,781mn and TRY 421mn respectively at FYE. Albaraka holds 1% of the Company s shares. Albaraka Portföy Yönetimi A.Ş. Established in under the name of Albaraka Gayrimenkul Portföy Yönetim A.Ş., the trade name of the Company changed to Albaraka Portföy Yönetimi A.Ş. in December. Headquartered in Istanbul, the Company had a paid-in capital of TRY 5mn along with assets and equity of TRY 1.3mn and TRY 9.6mn and employed 11 personnel as of FYE. Katılım Emeklilik ve Hayat A.Ş. Established in 213 in cooperation with Kuveyt Türk Katılım Bankası A.Ş. to operate in the interest free private pension field. Headquartered in Istanbul, the Company had a paid-in capital of TRY 4mn as of FYE. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 6

7 d) Corporate Governance We, as JCR Eurasia Rating, have assessed Albaraka Türk in accordance with CMB corporate governance principles and assigned an overall rating of 8.81 (Convergence Level AAA) with a positive outlook on 11 July, and up from the previous year s score of The Bank s scores in the four principal segments are as follows; Shareholders: 8.83, Public Disclosure & Transparence: 9.4, Board of Directors: 8.58 and Stakeholders: 8.9. These rating scores reflect the Bank s high level of compliance with corporate governance principles. e) The Company & Its Group Strategies In line with its vision of Being the World s Best Participation Bank, the Bank placed sustainable growth at the core of its strategy. To achieve this strategy, the Bank prioritizes digital banking services to further advance and diversify activities as well as providing effective access to SMEs across all streams with higher volumes and a wider product range. In this scope, a dynamic and adaptive long term corporate transformation program titled SIMURG and IT transformation program-principal banking systemknown as ALBATROS were implemented. Within the scope of its business development and innovation activities, the Bank has set up the "Digital Islamic Banking" project to provide individual digital banking services in Europe following the decision of BoD dated October 26,. In addition, in the context of digital transformation, the Bank initiated the DijitAlbaraka project. 5. TURKISH BANKING SECTOR The banking sector is the largest component of the Turkish financial system. Any developments that may occur in the banking sector create real impact in terms of the corporate sector and the financial stability of Turkey's economy. The Turkish banking sector, regulated by the Banking Regulation and Supervision Agency (BRSA), is comprised of deposit banks, development and investment banks, and participation banks which operate on the basis of dividends in the frame of Islamic rules. The asset size of the banking sector, was 864 Billion Dollars (3.257 Billion TRY), the largest share in the Turkish financial system, by the end of. Summary of Key Indicators of the Turkish Banking Sector (,) Asset Size TL 3,257,819 2,731,16 2,357,387 1,994,263 Asset Size USD 863,78 799,15 87,85 857,47 Equity TL 359,91 3, , ,941 Profit TL 49,122 37,53 26,52 24,61 ROAE % ROAA % NPL % Capital Adequacy Ratio % Equity / T. Assets % The wealth/gdp ratio in Turkey is at a level close to the average for developing countries and lower than that of developed countries. Therefore, the growth potential of the Turkish banking sector is high. Although the Turkish banking sector achieved an increase of 3.89% in profitability in absolute terms in compared to the previous year, the profitability performance of the US dollar was 18.59% due to the depreciation of the TRY. Macro-prudential measures taken against credit cards and consumer loans aiming to curb the current account deficit forced changes in the business model and competition level of the banking sector. However, new regulations enacted in have relaxed. The financial strength of the banking sector in Turkey to support economic activity and growth has been partially hampered by the losses in value of the TRY in. However, access to foreign funding continues to be strong. International borrowing costs has increased in anticipation of monetary tightening measures taken by the Federal Reserve (the Fed). However, this trend is counterbalanced by expansionary monetary policies in the Eurozone and Far Eastern markets. In fact, the monetary policy of the European Central Bank will continue to contribute to the Turkish banking sector in terms of funding costs in 218. Despite ongoing geopolitical risks, banks in Turkey do not suffer from refinancing risks. In addition, the Turkish banking sector is able to sustain its long-term expansion and increase its credit volume owing to its high capital ALBARAKA TÜRK KATILIM BANKASI A.Ş. 7

8 Number of Staff Number of Branches Number Of banks adequacy due to the double buffer of banks in Turkey in terms of CAR. Therefore, we evaluate the outlook of the Turkish banking sector as stable. The sector continued to maintain its positive position in in terms of high profitability, high deposit share, high interest expenditures, high capital ratio, high inflation, and high real growth. However, the continuation of the growth rate in 218 depends on the stability of the local currency. Fifty-two banks operated in the Turkish banking sector as of. Internet, ATM, and POS investments continue to increase in order to facilitate access to banking services more effective. The concentration of assets, credits, and deposits in the sector is quite high. In all three areas, the share of the top five banks is close to 6%. The share of non-residents in the equity structure of the sector is also quite high. Key Numbers Turkish banking sector (*) Deposit Banks (*) Development % Investment Banks (*) Participation Banks (**) Total State Banks Private Banks SDIF Bank 1 1 Foreign Banks Foreign Banks Branches 5 5 Total State Banks Private Banks SDIF Bank 1 1 Foreign Banks Foreign Banks Branches 7 7 Total State Banks Private Banks SDIF Bank Foreign Banks Foreign Banks Branches Total (*) As of September 3,. (**) As of December, 31, The legal framework of the Turkish banking sector, which is in compliance with the main framework of EU legislation with the exception of provisions concerning foreign branches and deposit guarantees, has been shaped in accordance with the criteria of consolidation of integration with global economies, the Basel process, and the Capital Requirements Directive (CRD). In this context, in December the European Commission accepted that both the control and the regulatory framework of Turkish banking system were largely compatible and equivalent to the EU regime. This high equivalence was considered to have originated from the further implementation of Basel III in Turkish legislation. In terms of risk management, the Turkish banking sector is capable of managing its pricing and balance sheet balances according to international norms. The banking sector is affected notably by national and international regulations, constantly changing customer demands, developing technology, and social and political structure changes. With this open interaction, it is expected that the agenda of the banks will become more and more occupied with basic subjects such as capital, liquidity, profitability, cost management, and digitalization in internal processes. Particularly in 218, digitalization for efficiency in cost and competition management will remain essential. Formed with a flexible infrastructure in response to the continually changing demands of credit and deposit customers and investors, the Turkish banking sector has a highly dynamic structure in the formation of products and services. The deepening of capital markets along with the strong capital structure of the banking sector will continue in 218 as an advantage in deposit collection and domestic and international borrowing. The Turkish banking sector will intensify its structuring and growth strategies so as to push towards optimal levels. While innovative approaches to branching are commonplace, the importance of multi-branching in alternative channels is still prevalent in Turkey. The elasticity coefficients of the Turkish banking sector against lending capacity, interest volatility, and regulatory pressures are well above the global optimum levels. Legal regulations increase the resistance of banks to crises, simultaneously creating downward pressure on efficiency and profitability. However, financial innovations created at the national and global level can significantly eliminate the negative effects of regulatory constraints. While banks mainly provide deposit-based financing, the use of alternative sources is also increasing. In developed countries, banks foreign liabilities have increased in recent years due to the increasing funding opportunities parallel to ALBARAKA TÜRK KATILIM BANKASI A.Ş. 8

9 the expansion of the quantities. The external debt restructuring rate of the banking sector is above 1 percent and the fact that the funds provided from abroad are long-term contributes to the extension of the average maturity of the liabilities. Banks' securities issuances continue to grow with a growing momentum. The ratio of impaired loans to equity was 12.87% in 212, 15.27% in 213, 15.69% in, 18.13% in, 19.35% in, and 17.8% in. In, impaired loans rose by 1.5% in nominal terms & receivables and the NPL ratio compared to the previous year decreased mathematically due to the fact that the nominal rate of increase in total loans (2.8%) was higher than the increase in the NPL. As of, the impairment rate was 2.95%. However, there is no statistical data about the amount of firm-specific special applications in restructuring and payment difficulties. In any case, it is clear that such treatments help contain the sector s NPL ratio Impaired Loans/Total Loans Turkish Banking Sector (%) As of the end of 212, the capital adequacy ratio of the sector increased from 17.9% to 15.3% at the end of 213, 16.3% at the end of, 15.56% at the end of, 15.57% in, and 16.87% in. The fact that while 83.46% of equity is composed of core capital shows that the industry maintains a high-quality equity structure, this is a decrease from the past ratio of 9%. In and, as in, the banking sector fundamentally funded its asset growth from loans and required reserves through an increase in deposits, equity, issued securities, and borrowings. Market Share % 213 Participation Banks 5,55 5,23 5,1 4,87 4,92 Development & Investment Banks 4,5 4,24 4,52 5,23 5,37 Deposit Banks 9,41 9,53 9,37 89,91 89,71 Sector As of the end of, 89.71% of the banking sector assets were comprised of deposit banks, whereas 4.92% and 5.37% stemmed from participation banks development and investment banks, respectively. After the global crisis in 29, the Turkish banking sector started to continuously grow. In the last 5 years, the sector reached a very high cumulative rate of %. On the basis of the US dollars, the Turkish banking sector grew by 12.1% cumulatively, between 213 and. For the last two years, the Turkish banking sector shrank in dollar terms due to the depreciation of the TRY. In, development and investment banks sustained the most growth at 22.55%. The annual growth rate of participation banks was 2.52% and the growth rate of deposit banks was 19.3%, year on year. The sector s growth was 19.29% in, foreign currency resources by 22.21%, and TRY resources by 16.82%. On the asset side, foreign currency assets grew by 14.85% while TRY assets performed 22.26%. In terms of contributing to growth in resources, foreign currency deposits were ranked first, followed by TRY deposits and borrowing from banks, respectively. TRY loans contributed the most growth among assets, followed by foreign currency loans and statutory reserves. The share of deposits in total resources has decreased from 61.9% in 25, to 53.23% in, and 52.52% in, while the basic funding balance within banking resources is still deposits. In the sector as a whole the share of equity in the balance sheet declined from 13.17% in 212 to 11.19% in 213, 11.64% in, 11.12% in, and 1.99% in. As of, the ratio was 11.2%. Participation banks have the lowest equity / total resources ratio in the sector. On the ALBARAKA TÜRK KATILIM BANKASI A.Ş. 9

10 other hand, despite the fact that development and investment banking has lost its attractiveness in developed countries due to the worsening equity balance of assets, Turkey still maintains its high capital and high capital ratios and continues its attractiveness. In terms of assets, the weight of the securities in the Turkish banking sector decreased gradually to 11.85%. Loans increased from 38.93% in 25 to 64.4% at the end of. The highest increase among the assets due to the CBRT's reserve ratios within macroeconomic policies has been challenged in the item of statutory reserved items. Provisions constituting 3.68% of assets in 25 accounted for 6.96% of assets at the end of. While there was previously a desire to slow down credit growth as the basis for raising the allowance rates, in the main purpose was preserving the liquidity opportunities in the market. As can be seen in the composition of the sector s balance sheet, 64.95% of assets are composed of Loans and Leasing Receivables and 11.85% of government securities-weighted securities. While the share of the securities within the balance sheet has decreased, the share of the loans increased. Despite the fact that the Turkish banking sector has generally started to show a downward trend in its profitability indicators, the current relatively high levels continued in as well. The funding structure of the sector is dominated by deposits, necessitating more branching and operating expenses, which in turn causes downward reflection on the sector's profitability. On the other hand, the banks fully reflect the expected loss rates in the lending process to interest margins on prudential principles. This weakens the return on assets. The high level of non-interest expenses indicates that banks might still need to increase their operational efficiency. The sector achieved an asset return of 2.5% and an equity return of 18.61%. One of the reasons for the high profitability in is the increase in growth rate in loans. Profitability Indicators % 213 Interest Margin ROAA ROAE Net Profit Margin Provision Expenses / Revenues Funding costs have increased throughout the country, but the high level of interest margins generated by the banking sector has not yet been negatively affected. Moreover, the net interest margin, which was 3.85% in, rose to 3.91% in and 4.15% in. However, the provision for expenses continues to bear negative pressures on the balance sheet. Net interest income is the main income, and the sector cannot diversify its income sufficiently. Within the components of the net interest margin, the marginal impact of provisioning costs appears to be greater than in the EU countries. The main income of the Turkish banking sector is interest income, constituting 74.98% of the total income as of the end of. The ratio of primary expenditures to total incomes is lower than in EU countries. Moreover, the fact that the return on equity of the Turkish banking sector could be lower than that of public debt paper or interest paid to deposits in certain periods, accounting for the risk adjusted returns, is a basic indicator that the Turkish banking sector remains below the potential scale. The ratio of Total Foreign Currency Position / Assets to Total Foreign Currency Position / Equities, which are the main indicators of the net foreign exchange position risk of the sector, stood at.7% and.6% at the end of, respectively, and these figures are deemed low. Therefore, the effect of the foreign currency position risk on the income generation of the sector is quite narrow. However, the closing of off-balance sheet open positions by offbalance sheet hedging increased the risk of renewal and counterparties of the Turkish banking sector. There is no liquidity shortage in almost any maturity on balance sheet transactions. The highest liquidity surplus, due to the increase in the allowance rates, occurred in the ALBARAKA TÜRK KATILIM BANKASI A.Ş. 1

11 maturity zone up to 7 days and at the same time at the annual level. In off-balance sheet transactions, the liquidity is in the open for almost every maturity. However, there is a liquidity surplus of the Turkish banking system in net positive total as the sector is working with a high liquidity asset composition structure. As of, the banking sector financed 52.52% of its assets with deposits and/or participation funds. Although the long-term deposits are encouraged by creating tax differences starting from 213, the average deposit of 74 days in 212 was days in, 84.8 in, in, and 71.6 in. The sector s Loan Risks, Market Risks and Operational Risks are measured in parallel with internal methods and BRSA regulations. Independent external rating agencies have not yet been involved in the measurement of these risks, notably credit risks. According to the BRSA data, 9.23% of the total risks is comprised of credit risk while 7.41% corresponded to operational risks and 2.36% to market risk. The total amount of risk is 2,241,482 million TRY. The Turkish banking sector generally covers the on-balance sheet foreign currency short position with an off-balance sheet foreign currency long position. The net foreign currency net general position of the sector has stood at low levels for many years. The capital adequacy ratio is calculated according to Basel II rules. For many years, the CAR maintained its high level. As of, the CAR was 16.87%. Country ratings of Fitch, Moody's, S&P, JCR, DBRS, and IIRA rating institutions are used in determining the credit quality stages of foreign currency receivables due from central governments and central banks. Rating scales of Fitch, Moody's, S & P, JCR, DBRS, and IIRA rating agencies are used to determine the level of credit quality of receivables from the banks and intermediary institutions, regional or local administrations, administrative units and non-commercial enterprises, and multilateral development banks, if the institutions are resident abroad. JCR Eurasia Rating has been authorized to determine the risk weights of the collective receivable classes from banks, borrowing instruments issued by banks, financial institutions other than banks, borrowing instruments issued by financial institutions other than banks, corporate companies not included in Small and Medium Size Enterprises, and those by corporate companies not included in Small and Medium Enterprises, both for domestic and foreign residents. However, since the ratings issued by JCR Eurasia Rating have not yet been matched to appropriate risk weights, the CAR is calculated at 1% risk weight assuming that the bank receivables in this scope are not rated. Despite high profitability and capital adequacy ratios in the Turkish banking sector in and the high level of doubtful receivables transferred to restructuring and asset management companies, the increase in the conversion rate of the assets to impaired receivable class could not be prevented. The reason for this trend is the deterioration of the borrowers balance sheets in the wake of significant foreign currency rate increases. Considering the possible increases in interest expenses, high level of loan-to-deposit ratio and problems to generate extra resources may lead to a slowdown in loan growth and yield to a drawback in profitability in the future. Although the increase of the risk premium of Turkey led to an increase in the costs of syndication loans from abroad, we, as JCR Eurasia Rating, do not expect any distortion in debt conversion capacity of the sector. The sector has high agility level and financial and executional power of the sector is more than enough to absorb any external shock and sustain growth performance. The good structure of equity, profitability level, and asset quality facilitate the loan supply and financing of the real sector companies. Although we expect that the resource costs will continue to be high and interest margin of the banks will squeeze in 218, sector outlook has been determined as Stable. The weakness of national saving tendency and power, the high level of foreign debt and liabilities, the possible effects of political actions on short positions, the failure of the country to exit from the middle-income trap, the high share of commercial loans, high resource expenses, and the large underground economy are factors that weaken the Turkish banking sector. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 11

12 On the other hand, the continuation of the interest of reputable global investors, strong experienced managerial structure, high integration efficiency with world economies, high liquidity, good quality capital structure, and easy access to international funds are positive features defining the Turkish banking sector. saw a growth of approximately 21% principally based on Credit Guarantee Fund (CGF) loans. This growth on loans also affected the profit performance of the sector in a positive way. Deposit interest rates will also continue to rise in 218, supported by the CGF. The weak demand for loans towards construction sector and investment-purpose-mortgage-loans will result in diminished crediting for these loans. In 218, we expect that an incentive scheme will be put forward for these loans, such as the CGF. Due to increased loan volume, deposit rates have increased. Moreover, swap interest rates remain high due to the deterioration in risk perception in the market and volatility. Market rates, swap interest rates, and rising inflation are expected to push up deposit costs. On the other hand, despite the high dependence of Turkish banks on foreign borrowing, it is sufficient that foreign currency liquidity meets short-term foreign currency denominated debts. High sensitivity of FX rates by the exposure to political fluctuations, the country's long-lasting geopolitical risks, negative expectations and the decline of the EU accession process, the private sector's high foreign exchange borrowing and the depreciation of the Turkish Lira threatening asset quality of the sector and the fact that the credits of the construction sector are among the highrisk assets are also the factors that cause the Turkish banking sector to blink negative signals. 6. Financial Foundation a) Financial Indicators & Performance i. Indices relating to size At FYE, Albaraka s asset size growth was 1.28% YoY and in line with previous year s growth performance, whereas those of the Participation Banks and the Turkish Banking Sector as a whole were 2.52% and 19.29%, respectively, and as such it notably underperformed the sector averages. The graph below presents the growth of the Bank s asset base in comparison to the sector Turkish Banking Sector Turkish Participation Banking Sector Albaraka Türk Katılım Bankası A.Ş. Annual Asset Growth Rates % Despite the weak growth performance in the last two-year period, the Bank s cumulative asset-based growth performance over the last five years was % and remained above the sector averages At FYE, the Bank s market shares in terms of assets within the Turkish Banking Sector and among Participation banks were 1.11% and 22.62% respectively, and displayed a decrease compared to the previous year s figures Turkish Banking Sector Turkish Participation Banking Sector Albaraka Türk Katılım Bankası A.Ş. Cumulative Asset Growth Rates % Market Share in Turkish Banking Sector (%) Market Share in Participation Banking Sector (%) ALBARAKA TÜRK KATILIM BANKASI A.Ş. 12

13 As per to the consolidated year-end financial statements; the Bank s assets, deposits, equity and loans (including leasing and receivables) increased by 1.77%, 9.4%, 16.37% and 1.88% respectively. ii. Indices relating to profitability Banking Sector were 4.68% and 29.18% and improved from 45.9% and 32.29% at FYE respectively. Both the ROAA and ROAE indicators, fundamental profitability metrics, stayed on lower side and continued to underperform the sector averages at FYE. At FYE, the Bank s net profit was TRY 265.5mn and exhibited a growth of 2.9% compared to the previous year s net profit of TRY 219.6mn based on the consolidated financial statements. In line with the growth in profitability, the Bank s ROAA and ROAE ratios displayed an increase to.92% and 12.9% at FYE from.85% and 12.17% at FYE, respectively. Despite an increase, current level of return on assets and equity remained below both references values and its results before FYE ROAA Albaraka Türk Katılım Bankası A.Ş. ROAA Turkish Participation Banking Sector ROAA Turkish Banking Sector ROAA Comparison ROAA (%) ROAE (%) Consolidated Basis ROAE Albaraka Türk Katılım Bankası A.Ş. ROAE Turkish Participation Banking Sector ROAE Turkish Banking Sector ROAE Comparison The Bank s solo base net profit was TRY 237.1mn at FYE, indicating a modest increase from the previous year s figure of TRY 217.6mn. In the same period, the increase in the net profit of both the Turkish Banking and the Participation Banking Sectors were 3.88% and 43.23% respectively. Regarding the net profit growth, the Bank underperformed the sector averages as in the previous year. The principal underlying reasons for the lower profitability are higher OPEX and provision expenses. While the Bank s OPEX to total income and provision expenses to total income ratios were higher than sector averages and tended to increase, the sector s ratios demonstrated an improvement. At FYE, the aforementioned ratios of the Bank were 52.24% and 27.54% respectively whilst the Turkish Banking Sector s were 35.21% and 19.6% respectively. The same ratios across the Participation The share of Net Profit Share Income within the total income composition of the Bank was 77.14% at FYE and steadily increased over the reviewed period. Gained net fee and commission was almost flat compared to the previous year s figure and its share in total income decreased to 8.99% from 1.74% at FYE. The ratio of the Turkish Banking and Participation Banking Sectors were 17.57% and 14.3% respectively and well above the Bank s ratio. Together, the net profit share income with net fee & commission income accounted for 86.13% (FYE: 86.8%) of total income derived from sustainable streams. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 13

14 % 12.65% 17.48% 213 Net Profit Share Income / Total Income Net Fee and Commision Income / Total Income Total Operating Income / Total Income 71.83% 13.19% 14.98% 74.69% 11.46% 13.85% 75.34% 1.74% 13.93% 77.14% 8.99% 13.88% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% The Bank s total income to total expenses ratio was % at FYE and slightly up from the previous year s figure of %. Following FY213, the Bank differentiated negatively from the sector averages. In addition, the Bank s operating expenses to average total assets ratio increased to 2.53% at FYE from 2.37% at FYE and underperformed the Turkish Banking Sector average of 1.93% at FYE (FYE: 2.4%). Those figures indicate the Bank s weak efficiency Albaraka Türk Katılım Bankası A.Ş. Turkish Banking Sector Turkish Participation Banking Sector Total Income /Total Expense % Share Expense Rate for Costly Liabilities (avg.) % Share Income Rate for Earning Assets (avg.) % Margin % The Bank s net profit share income margin (NIM) reversed in. Despite the improvement, the margin remained somewhat below the Turkish Banking Sector averages in the last four-year period. b) Asset quality Extended loans constituted the largest share in the Bank s total assets dispersal with a rate of 69.54% at FYE and stayed above the Turkish and Participation Banking Sectors ratios of 64.95% and 64.25%, respectively. The loans-weighted asset structure displays the efficiency of the Bank s financial intermediary function. At FYE, the Bank s non-performing loans book, based on bank only figures, was TRY 1,213mn and increased by 9.64% on a YoY basis. In addition to enlargement in loans at 1.88% YoY along with sold & written off TRY 38.3mn non-performing loans which were thought to be un-collectible underpinned a slight progress in NPLs ratio at FYE, though remained above the sector averages in the last two consecutive years. It is also noted that sale/write-off of non-performing loans is a common practice across the sector. 213 Albaraka Türk Katılım Bankası A.Ş. Turkish Participation Banking Sector Turkish Banking Sector NPL % On the other hand, overdue but not impaired loans (up to 9 days) was TRY 2,64mn at FYE and almost flat compared to the FYE, which harbors a potential to increase NPLs portfolio in future. In FY, loans which amounted to TRY 686.7mn were transferred to the non-performing loans portfolio. However, net change (growth) in NPLs portfolio was TRY 17mn at FYE, due to recovery, collection and write off ALBARAKA TÜRK KATILIM BANKASI A.Ş. 14

15 The non-performing loans portfolio of the Bank as a proportion of its equity was 48.87% at FYE and exhibited a slight increase compared to the previous year s ratio of 48.52%. Those figures were significantly higher than both the Turkish Banking Sector and Turkish Participation Sector. The levels of non-performing loans to equity in the last two-year period were notably high compared to the sector averages. Those stages require management focus on credit quality, although far from reaching a distressing level. 213 Albaraka Türk Katılım Bankası A.Ş. Turkish Participation Banking Sector Turkish Banking Sector Impaired Loans / Equity % The Bank s specific loan loss reserves coverage increased to 57.68% at FYE from 52.31% at FYE. However, it remined below the sector averages in FY. 213 Loans Loss Reserves / Impaired Loans % In FY218, we, as JCR Eurasia Rating, assume that NPLs in the banking sector will stay almost flat in the event of continuity of political and economic stability in the remainder of the year. However, considering the recent debt restructuring demands of leading conglomerates of Turkey, acceleration of TRY depreciation against hard currencies, rising deterioration of debt service capabilities of the real sector, increasing geopolitical risks on a global basis as well as increasing tolerance to non-performing loans in the banking sector point out the possibility of degradation in the sector s asset quality in future. c) Funding & Adequacy of Capital Collected funds (deposits) are the principal and conventional funding sources of the banking system. At FYE, total deposits accounted for the largest share of the Bank s funding mix with a rate of 69.48%. TRY denominated deposits constituted 52.22% of the Bank s total deposit base, with the remaining 47.78% comprised of FC deposits at FYE. In addition, according to the remaining contractual maturities of total deposits, 89.81% fell in the up to one-month maturity bracket indicating the short maturity profile of the deposits, which is also prevalent in the Turkish Banking Sector. At FYE, 65.55% of total deposits (TRY 16,546mn) belonged to individuals and 4.78% of the saving deposits are covered by the Savings Deposit Insurance Fund (SDIF). The SDIF covers up to TRY 1K of deposit accounts held at each bank per investor. Equity Other Borrowing Albaraka Türk Katılım Bankası A.Ş. Turkish Participation Banking Sector Turkish Banking Sector Resource Distribution % Non-Costly Liabilities Collected Fund % 9% 8% 7% 6% 5% 4% 3% 2% 1% % As per to the solo based financials, the Bank s total deposits (funds collected) was TRY 25,31mn at FYE and increased by 9.4% YoY. In the same time, deposits growth in the Turkish Banking and Participation Banking Sectors were 18.62% and 29.14% respectively. Accordingly, the Bank s deposit-based market share in the Turkish Banking and Participation Banking Sectors contracted to 1.43% and 24.11% at FYE from 1.55% and 28.48% at FYE respectively. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 15

16 Turkish Banking Sector Turkish Participation Banking Sector Albaraka Türk Katılım Bankası A.Ş. Deposit Growth Rates % CAR (%) Albaraka Türk Katılım Bankası A.Ş. CAR (%) Turkish Participation Banking Sector CAR (%) Turkish Banking Sector Besides deposits, the Bank has diversified its funding sources principally through borrowing in the form of sukuk issuance, subordinated loans and borrowed funds. Issued Sukuk by the Bank through its subsidiary Bereket Varlık Kiralama A.Ş. are given in the below chart. Issue Date Amount Maturity June 35,, USD 5 Years September 15,, TRY 178 Days November 15,, TRY 92 Days December 15,, TRY 175 Days In addition to issued sukuk, the Bank provided subordinated loan amounting to USD 2mn in FY213 and USD 25mn in FY with ten-year maturity. The Bank also provided funds in the form of Murabaha Syndication (USD 314mn) and Wakala borrowing (USD197.6mn and Euro 232.2mn) from overseas financial markets. At FYE, the Bank s unconsolidated CAR was 17.6%, notably up from the previous year s ratio of 13.46% and remained well above the minimum CAR requirements set by the Basel Accord (8%) and recommended by the BRSA (12%). The ratio was slightly above the averages of both the Turkish Banking Sector and the Turkish Deposits Banks at FYE. Moreover, the Bank s consolidated CAR ratio was 17.78% at FYE, up from 13.45% at FYE. Inclusion of USD 2mn Sukuk Murabaha subordinated loans for CAR calculation, amendments regarding the definition of SMEs in capital adequacy and provisions by BRSA, mandatory provisions held by Banks in the CBT in the form of foreign currency and gold reserves treated as zero weighted risk assets in line with BRSA regulations along with extended loans through Credit Guarantee Fund (CGF), which are also treated as zero risk weighted assets have supported the improvement in CAR for both the sector and the Bank. The Bank has also remained compliant with the minimum requirements of Common Equity Tier 1 Capital Ratio (4.5%) and Total Tier 1 Capital Ratio (6%) set by the BRSA, with figures of 1.11% and 1.9%, respectively (FYE: 9.81% and 9.75% respectively). The Common Equity Tier 1 Ratio of the Turkish Banking and the Participation Banking Sectors were 14.11% and 13.1%, respectively, and remained well above Bank s ratio. Additionally, capital conservation buffer requirement of the Bank was 1.25% at FYE. Consequently, the Bank s consolidated Common Equity Tier 1 Capital Ratio (1.56%) was almost twice the required minimum level (5.63%). The Bank s consolidated own fund dispersion is represented in the graph below. The share of core capital, principally consisting of paid-up capital and retained earnings, comprised 59.27% of the Bank s total own fund structure, whilst the supplementary capital accounted for 4.75% of the Bank s own fund structure at FYE and stayed above the Turkish Banking Sector and the Participation Banking Sector s average of 16.69% and 25.46% respectively. Supplementary capital, classified as second-tier capital under the regulatory capital, contributed 7.25% to the Bank s consolidated CAR as of FY. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 16

17 Despite the reversion of the downward trend in the equity to assets ratio in, it stayed below the average ratios of the sectors. The ratio was 8.52% for the Participation Banking and 11.2% for the Turkish Banking Sectors in FYE Core Capital Supplementary Capital Assets Deducted From Capital 7.76 Own Fund Structure Equity / Total Assets % 7.1 Accordingly, we, as JCR Eurasia Rating, assume that the current CAR provides a reasonable buffer against potential incidental losses, regarding the Bank s higher reliance on Tier II capital which is not considered to be loss absorbent Risk Profile and Management a) Risk Management Organization & its Function General Information Albaraka Türk is mainly exposed to Credit, Liquidity, Operational and Market risks. The Board of Directors has the overall responsibility for the implementation and overseeing of an effective risk management mechanism and culture. In this sense, the Bank has set up Credit, Audit Corporate Governance, Remuneration, Sustainability & Social Responsibility and Executive Committees. The Bank has also formed several committees with the participation of senior executives to establish a thorough and comprehensive risk management system under its risk management framework. The Audit Committee, which is comprised of two nonexecutive Board Members, assists the audit and supervision activities of the BoD. The Audit Committee is also responsible for monitoring the operations of the Bank s internal systems, accounting and reporting systems. In line with BRSA regulations, the Bank has established Internal Systems to identify, measure, monitor and control risks which arise as a result of the Bank s strategies and activities. Within the scope of the Internal Systems; Inspection, Internal Control, Risk Management and Legislation and Compliance units operate under the supervision of the Audit Committee and the BoD. Overall, the Bank has formed the sufficient mechanisms and administrative units that are required by the Banking Law and supervisory bodies. b) Credit Risk Albaraka Türk executes its credit risk through the allocation of loan limits for each individual customer, firms and groups of firms, as well as the definition of limits for sectors and geographical regions within its credit risk policy and procedures. Credit limit assignment authority primarily belongs to the Board of Directors and is based on the authority given by the BoD, the credit risk limits are also determined by head office loan committee and loan committee. Head-office loan committee may exercise such authority partially through units of the Bank or branches. In accordance with the Bank s lending policies, satisfactory collaterals such as cash collateral, bank guarantees, mortgages, pledges, bills and personal or corporate guarantees are required in line with the financial position of the debtor and its creditworthiness. Credit limits on clients are revised periodically or when necessary due to changes in the economic environment and/or the creditworthiness of the debtors. According to the decision taken by the BoD, the loans above 15% of the Bank s equity cannot be granted to a real person or legal entity. Total credit risk exposure was TRY 32,442mn before credit risk mitigation at FYE and TRY 7,29mn of that amount derived from regulated markets such as central ALBARAKA TÜRK KATILIM BANKASI A.Ş. 17

18 bank, banks and brokerage houses. TRY 3,284mn of total credit risk exposure was collateralized with mortgages. The Bank s total risk weighted assets was TRY 23,165mn and required minimum capital was TRY1,853mn and 1,669mn for credit risk at FYE. At FYE, 13.57% of the total cash loans were secured by mortgages on property. Although, the Bank uses the standard approach for the calculation of capital adequacy ratio, internal rating-based outcomes are used for credit allocation and authorization limits at the approval stage. In this sense, the Bank utilizes an in-house developed internal risk rating model and calculates the default probability for each customer classified from A to D. Outputs from internal risk rating models are incorporated into the relevant lending policies and procedures by rating customers using objective criteria with respect to loans portfolio. At FYE, 67.5% of Bank assets were extended as customer loans (receivables from lease assets are not included), up from the previous year s allocation of 66.49%. As per to the figures provided by the Bank, based on BRSA definition, the loans are distributed as SMEs, corporates and retail lending with rates of 46.2%, 4.3% and 13.5%, respectively. 52.2% of loans are extended in TRY including FX indexed credits and the remainder in foreign currencies, with a balanced funding FX profile. The Bank s (i) largest 1 cash loan customers comprised 4% (FYE:41%) of the total cash loan portfolio as of FYE, (ii) the largest 1 non-cash loan customers composed 47% (FYE:44%) of the total non-cash loan portfolio as of FYE and (iii) the largest 1 cash and non-cash loan customers represented 37.% of the total on and off-balance sheet as of FYE (FYE: 36%). Although those figures indicate high credit concentration risk among the largest 1 customers, the Bank monitors the risk concentration of its clients and efforts to take necessary measures to lessen the potential negative effects of risk concentration. In addition, compared to the previous year s figures, loan concentration risk was almost flat in FYE. c) Market Risk In the context of market risk, the Bank is exposed to exchange rate, equity position, profit rate and commodity risks. Albaraka executes and monitors its market risks and takes appropriate measurements in accordance with the Regulation on Measurement and Evaluation of Capital Adequacy of Banks. The Bank calculates and reports market risk using the Standard Method, in line with the methodology outlined in BRSA regulations. In addition to the Standard Method, the Bank measures and monitors its market risk through its Internal Models with testing purposes. The Bank does not have any interest sensitive assets or liabilities and consequently does not face any interest-based risk owing to interest free banking operations. Therefore, the Bank is mostly exposed to the fluctuations in currency exchanges, although risks arising from this field is quite restricted. At FYE, the Bank was short in USD (equivalent to TRY 329mn) while long in EUR (equivalent to TRY 255mn) as well as long in other FX (equivalent to TRY 288mn) through on balance sheet items. Thus, overall, the Bank has a net long position equivalent to TRY 214mn on balance sheet position. On the other hand, through off balance sheet items (derivative instruments) the Bank almost offset its FX position. At FYE, the Bank s net FX position to assets and equity ratios were.29% and 3.96%, respectively, and were compatible with the regulations and the Bank s FX strategy based on holding square FX position. d) Liquidity Risk The liquidity risk is managed by ALCO in line with risk management policies and risk appetite approved by the BoD in order to take appropriate and timely measures against possible liquidity shortages that may arise from market conditions and balance sheet profile of the Bank. Within the framework of its Contingency Funding Plan" the Bank employs mechanisms to avoid increases in liquidity risk during normal and liquidity crisis scenarios for different conditions and risk levels. The Bank meets its liquidity requirements through domestic in particular and foreign markets. Collected funds are consistently foremost funding sources. While the short-term liquidity needs are met through deposits, internal sources and money markets, the long-term liquidity needs are provided generally through customer deposits and borrowing from overseas financial markets. Within the framework of the Basel III harmonization process, the BRSA published an initial Communiqué (the ALBARAKA TÜRK KATILIM BANKASI A.Ş. 18

19 Regulation on Liquidity Coverage Ratios) dated March 21, published in the Official Gazette no and amendment Communiqués dated 2 August, 2 January, 28 February, 13 July and 15 August stipulating that Banks must maintain an adequate level of high quality liquid assets (HQLA) on consolidated and unconsolidated bases to meet the net cash outflows. The ratios of the HQLA stock to the net cash outflows have been kept to a minimum of 1% in respect of total consolidated and unconsolidated liquidity and 8% in respect of total consolidated and unconsolidated foreign currency liquidity. On the other hand, for the period between January 5, and December 31,, those ratios would be applied by deposit banks as 6% and 4%, respectively, as per the BRSA decision. Additionally, each figure above will be increased by ten percent each year up to 1 January 219. Those ratios for 218 are 9% and 7%. Recent regulations on August 15, stipulated that reserves held by the banks in the Central Bank is considered 1% "high quality liquid assets" for the calculation of the liquidity coverage rate. (It was considered 5% before the amendment). The average Liquidity Coverage Ratios of the Bank on consolidated and unconsolidated bases for the last quarter of FY are given below. The liquidity ratios were above the required levels and remained compliant with BRSA parameters in. Average LCRs FY of Albaraka Turkish Lira + Foreign Currency Foreign Currency Consolidated LCR % % Unconsolidated LCR 13.7% % e) Operational, Legal Regulatory & Other Risks Albaraka Türk calculates operational risk by using the basic indicator approach according to the Communiqué on Measurement and Evaluation of Capital Adequacy of Banks. The Bank categorizes operational risks under five groups according to occurring sources; employee, technologic, organization, legal & compliance and external risks. In order to minimize operational and other risks, the Bank implements human resources, network security and backup recovery policies. The risk management, internal audit, internal control and compliance departments measure, monitor and take timely precautions in line with its risk management applications frame. The Bank also insures its premises and equipment, as well liability insurance. In, the Bank was charged with a tax penalty for a total amount of TRY 868,222 (included penal interest) regarding Resource Utilization Support Fund related with consumer loans transactions in FY211-. In addition, the Bank incurred losses of TRY 2,179k due to personnel dishonesty faults and system errors. The Bank was also charged with penalties amounting to TRY 194.5k from regulatory and supervisory authorities in. Regarding the Bank s size and scale of operations, the charged fines are immaterial and are not expected to have a serious negative impact on the continuity of operations. The Bank makes a point of compliance with laws and follows the regulations set by the authorities and changes to the legal framework. 8. Budget & Projections Within the framework of projections and budgeting activities in FY218; the Bank targets more effective risk and cost management and concentrates on retail and commercial-sme segments in order to broaden its customer base as well as strengthening its digital banking infrastructure within its new generation banking approach. Furthermore, a total of 1 branches are planned to be opened, 9 of which are domestic along with 1 overseas branch. The Bank management s expectations at FYE218 are given in the chart below. Growth % YoY Total Loans 16 Total Deposits 18 Equity 15.6 Total Assets 15 The management expects to reach a net profit of TRY 4mn year-end 218. Taking into account the performance of the Bank in recent years, JCR Eurasia Rating is of the opinion that the net profit projection is quite optimistic, however it is not unachievable. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 19

20 FYE FYE FYE FYE FYE FYE FYE FYE As % of As % of As % of FYE FYE FYE Albaraka Türk Katılım Bankası A.Ş. BALANCE SHEET - ASSET USD TRY TRY TRY TRY TRY TRY TRY Assets Assets Assets Growth Growth Growth () (Converted) (Original) (Average) (Original) (Average) (Original) (Average) (Original) (Original) (Original) (Original) Rate % Rate % Rate % A- TOTAL EARNING ASSETS ( I+II+III ) 8,686,964 33,1,87 32,196,616 31,292,424 29,578,76 27,863,727 25,25,626 22,187, I- LOANS AND LEASING RECEIVABLES (net) 6,611,763 25,193,463 23,957,759 22,722,54 21,113,723 19,55,392 17,844,542 16,183, a) Short Term Loans 6,283,647 23,943,29 22,629,418 21,315,626 19,843,13 18,37,399 16,92,366 15,434, b) Lease Assets 193, ,81 88,3 878, ,23 947, ,537 79, c) Medium & Long-Term Loans n.a n.a n.a n.a n.a n.a d) Over Due Loans 318,237 1,212,61 1,159,282 1,15, , , , , e) Others n.a n.a n.a n.a n.a n.a f) Receivable from Customer due to Brokerage Activities n.a n.a n.a n.a n.a n.a g) Allowance for Loan and Receivables Losses (-) -183,56-699, , ,55-429,676-28, ,54-287, II- OTHER EARNING ASSETS 1,577,891 6,12,396 6,252,614 6,492,831 6,522,683 6,552,535 5,567,248 4,581, a) Balance with Banks -Time Deposits 396,653 1,511,47 1,834,792 2,158,177 2,32,396 2,482,614 2,65,425 1,648, b) Money Market Placements n.a n.a n.a n.a n.a n.a c) Reserve Deposits at CB 978,491 3,728,443 3,43,77 3,77,71 3,37,538 2,997,366 2,694,52 2,391, d) Balance With CB- Demand Deposits 22, ,546 1,14,745 1,256,944 1,164,75 1,72,555 87, , III- SECURITIES AT FAIR VALUE THROUGH P/L 497,39 1,894,948 1,986,244 2,77,539 1,941,67 1,85,8 1,613,836 1,421, a) Treasury Bills and Government Bonds 139, ,83 6, , , ,89 773,1 783, b) Other Investment 357,481 1,362,145 1,385,551 1,48,957 1,225,934 1,42,91 84, , c) Repurchase Agreement n.a n.a n.a n.a n.a n.a B- INVESTMENTS IN ASSOCIATES (NET) + EQUITY SHARE 6,86 23,189 21,114 19,38 15,459 11,88 1,851 9, a) Investments in Associates (Net) 1,238 4,719 4,719 4,719 4,719 4,719 4,465 4, b) Equity Share 4,847 18,47 16,395 14,319 1,74 7,161 6,386 5, C- NON-EARNING ASSETS 841,831 3,27,711 2,348,51 1,488,391 1,565,116 1,641,84 1,229,49 817, a) Cash and Cash Equivalents 329,626 1,256,6 96,22 664, , , , , b) Balance with Banks - Current Accounts n.a n.a n.a n.a n.a n.a c) Financial Assets at Fair Value through P/L n.a n.a n.a n.a n.a n.a d) Accrued Interest from Loans and Lease n.a n.a n.a n.a n.a n.a e) Other 512,25 1,951,75 1,387, , ,478 86, , , Intangible Assets 7,474 28,479 31,975 35,47 39,877 44,283 35,589 26, Property and Equipment 154, , ,41 517,134 59,137 51, , , Deferred Tax 14,567 55,56 4,287 25,67 22,746 2,424 11,99 3, Other 335,412 1,278,52 762, , ,72 241, ,63 14, TOTAL ASSETS 9,534,88 36,331,77 34,565,78 32,799,853 31,158,65 29,517,447 26,265,966 23,14, ALBARAKA TÜRK KATILIM BANKASI A.Ş. 2

21 FYE FYE FYE FYE FYE FYE FYE FYE As % of As % of As % of FYE FYE FYE Albaraka Türk Katılım Bankası A.Ş. BALANCE SHEET LIABILITIES & SHAREHOLDERS' EQUITY USD TRY TRY TRY TRY TRY TRY TRY Assets Assets Assets Growth Growth Growth () (Converted) (Original) (Average) (Original) (Average) (Original) (Average) (Original) (Original) (Original) (Original) Rate % Rate % Rate % A- COST BEARING RESOURCES ( I+II ) 8,548,79 32,574,2 31,56,337 29,538,671 27,981,913 26,425,155 23,423,255 2,421, I- DEPOSIT 6,624,985 25,243,844 24,197,346 23,15,848 21,746,72 2,341,295 18,492,175 16,643, a) TRY Deposit 3,459,46 13,181,719 12,867,288 12,552,857 11,942,75 11,331,293 1,556,646 9,781, b) FC Deposit 3,165,58 12,62,125 11,33,58 1,597,991 9,83,997 9,1,2 7,935,529 6,861, c) FC & LC Banks Deposits n.a n.a n.a n.a n.a n.a II- BORROWING FUNDING LOANS & OTHER 1,923,724 7,33,158 6,858,991 6,387,823 6,235,842 6,83,86 4,931,8 3,778, a) Borrowing from Domestic Market 22, , , , , ,93 18,534 67, b) Borrowing from Overseas Markets 1,24,641 4,59,164 4,397,317 4,24,47 4,63,956 3,923,441 3,522,75 3,121, c) Borrowing from Interbank 89,229 34, 416, , ,872 77, ,85 116, d) Securities Sold Under Repurchase Agreements n.a n.a n.a n.a n.a n.a e) Subordinated Loans & Others 427,32 1,627,163 1,569,5 1,51,937 1,375,247 1,239, , , B- NON-COST BEARING RESOURCES 291,961 1,112,49 1,5, ,11 992, ,264 91,695 87, a) Provisions 69, , ,37 233, ,87 251, , , b) Current & Deferred Tax Liabilities 24,673 94,15 72,927 51,838 54,924 58,1 61,7 64, c) Trading Liabilities (Derivatives) n.a n.a n.a n.a n.a n.a d) Other Liabilities 197, ,61 727,955 72, , , ,281 51, C- TOTAL LIABILITIES 8,84,671 33,686,492 32,16,587 3,526,682 28,974,51 27,421,419 24,324,95 21,228, E- EQUITY 694,29 2,645,215 2,459,193 2,273,171 2,184,6 2,96,28 1,941,17 1,786, a) Prior Year's Equity 596,57 2,273,171 2,184,6 2,96,28 1,941,17 1,786,5 1,641,419 1,496, b) Equity (Added from Internal & External Resources ,962 16,547 32,42-42,464-16,642 9,18 25,13 41, at This Year) c) Profit & Loss 69, , , ,67 26,225 3, , , d) Minority Interest n.a n.a n.a n.a n.a n.a TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 9,534,88 36,331,77 34,565,78 32,799,853 31,158,65 29,517,447 26,265,966 23,14, USD Rates 1=TRY ALBARAKA TÜRK KATILIM BANKASI A.Ş. 21

22 Albaraka Türk Katılım Bankası A.Ş. FY FY FY INCOME STATEMENT () TRY Net Profit Share Income 1,274,182. 1,24, ,936. a) Profit Share Income 2,654,45. 2,216,811. 1,932,833. b) Profit Share Expense 1,379,863. 1,192,767. 1,46,897. Net Fee and Commission Income 148, , ,997. a) Fee and Commission Income 216,74. 28, ,627. b) Fee and Commission Expense 68, , ,63. Total Operating Income 229, , ,27. Net trading income (+/-) -21,19. 12, ,93. Foreign Exchange Gain or Loss (net) (+/-) 13, , ,746. Gross Profit from Retail Business... Premium income from insurance business... Income on Sale of Equity Participations and Consolidated Affiliates 8, ,223. Gains from Investment Securities (Net)... Other Operating Income 224,6. 141, ,181. Taxes other than Income... Dividend 4,274. 2, Provisions 46, , ,143. Provision for Impairment of Loan and Trade Receivables 46, , ,143. Other Provision... Total Operating Expense 873, , ,87. Salaries and Employee Benefits 444, , ,537. Depreciation and Amortization 64,88. 66,41. 57,849. Other Expenses 364, , ,421. Profit from Operating Activities before Income Tax 317, , ,253. Income Tax Current 76, , ,661. Income Tax Deferred -24, , ,251. Net Profit for the Period 265, ,67. 3,843. Total Income 1,672,866. 1,417,353. 1,23,949. Total Expense 894, , ,553. Provision 46, , ,143. Pre-tax Profit 317, , ,253. ALBARAKA TÜRK KATILIM BANKASI A.Ş. 22

23 Albaraka Türk Katılım Bankası A.Ş. FY FY FY FINANCIAL RATIOS % I. PROFITABILITY & PERFORMANCE 1. ROAA - Pre-tax Profit / Total Assets (avg.) ROAE - Pre-tax Profit / Equity (avg.) Total Income / Equity (avg.) Total income / Total Assets (avg.) Provisions / Total Income Total Expense / Total Liabilities (avg.) Net Profit for the Period / Total Assets (avg.) Total Income / Total Expenses Non-Cost Bearing Liabilities + Equity- Non-Earning Assets / Total Assets Non-Cost Bearing Liabilities - Non-Earning Assets / Total Assets Total Operating Expenses / Total Income Net Interest Margin Operating ROAA (avg.) Operating ROAE (avg.) Interest Coverage EBIT / Interest Expenses Net Profit Margin Gross Profit Margin Market Share in Turkish Participation Banking Sector Market Share in Entire Banking System Growth Rate II. CAPITAL ADEQUACY (year-end) 1. Equity Generation / Prior Year s Equity Internal Equity Generation / Previous Year s Equity Equity / Total Assets Core Capital / Total Assets Supplementary Capital / Total Assets Tier 1 Capital Ratio Own Fund / Total Assets Standard Capital Adequacy Ratio Surplus Own Fund Free Equity / Total Assets Equity / Total Guarantees and Commitments + Equity III. LIQUIDITY (year-end) 1. Liquidity Management Success (On Demand) Liquidity Management Success (Up to 1 Month) Liquidity Management Success (1 to 3 Months) Liquidity Management Success (3 to 6 Months) Liquidity Management Success (6 to 12 Months) Liquidity Management Success (Over 1 Year & Unallocated) IV. ASSET QUALITY 1. Loan and Receivable s Loss Provisions / Total Loans and Receivables Total Provisions / Profit Before Provision and Tax Impaired Loans / Gross Loans Impaired Loans / Equity Loss Reserves for Loans / Impaired Loans Total FX Position / Total Assets Total FX Position / Equity Assets / Total Guarantees and Commitments + Assets ALBARAKA TÜRK KATILIM BANKASI A.Ş. 23

24 OMPER COMPARATIVE FINANCIAL FIGURES Albaraka Türk Katılım Bankası A.Ş. Kuveyt Türk Katılım Bankası A.Ş. Türkiye Finans Katılım Bankası A.Ş. FYE FYE FYE FYE FYE FYE ROAA (%).84%.85% 1.61% 1.47% 1.18%.95% ROAE (%) 12.13% 12.6% 19.97% 18.13% 11.85% 1.52% Equity to Total Assets (%) 6.85% 6.94% 8.4% 8.7% 1.39% 9.44% NPLs Ratio (%) 4.68% 4.75% 1.85% 2.45% 5.15% 5.% Assets Size Market Share (%) 1.11% 1.2% 1.75% 1.78% 1.2% 1.42% Capital Adequacy Ratio (%) 17.6% 13.46% 17.66% 18.16% 18.22% 15.58% Loans to Deposits (%) 96.63% 94.33% 9.43% 89.6% 115.1% % Reserves to NPLs (%) 57.68% 52.31% 93.39% 78.3% 7.88% 61.48% Total Assets (TRY ) 36,229,77 32,85,738 57,123,95 48,476,955 39,8,897 38,87,717 Total Deposits (TRY ) 25,39,84 23,155,134 39,857,4 31,91,763 22,3,496 21,64,781 Total Loans (TRY ) 24,456,382 21,843,75 36,41,299 28,412,441 25,337,819 25,599,23 Total Equity (TRY ) 2,481,56 2,279,593 4,591,151 3,912,64 4,6,598 3,663,14 Net Profit 237,93 217,69 673, , ,36 296,243 2.% 1.5% 1.%.5%.% ATIVE FINANCIAL FIGURES Albaraka Türk Kuveyt Türk Türkiye Finans ROAA Albaraka Türk Kuveyt Türk Türkiye Finans 2.% ROAE 1.%.% 5.5% 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% Albaraka Türk Kuveyt Türk Türkiye Finans NPL Albaraka Türk Kuveyt Türk Türkiye Finans CAR 2.% 15.% 1.% 5.%.% ALBARAKA TÜRK KATILIM BANKASI A.Ş. 24