TEB BUY TEBNK.IS. Aggressive expansionary policies have necessitated a change in the dividend policy

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1 TEB TEBNK.IS Aggressive expansionary policies have necessitated a change in the dividend policy Decision by the board implies a shift from the former policy of distributing solely cash dividends TEB has opened 31 new branches that are mainly SME/retail oriented, managing to expand the balance sheet by 32% so far in yet the bank still produces an ROE as high as 26%, which would be maintained above 20% in the foreseeable future. TEB announced on Friday that it will pay up to 40% of the net distributable profit to its shareholders as cash dividend or bonus share in relation with its Articles of Association. The bank declared that the distributable amount will be dependent on relevant market conditions, sustenance of a comfortable level of capital adequacy ratio and growth plans of the Bank. Important thing to be highlighted is that the decision by the Board implies a shift from the former policy of distributing cash dividend, due to the expansionary policies pursued over the last few years. It should be recalled that as early as September 2003, TEB management declared that it would distribute at least 30% of its distributable profit as cash dividend every year as long as the market conditions allow and a suitable capital adequacy ratio is sustained. Recent decision may therefore frustrated investors that are sensitive to the dividend payout. From another perspective, however, change in the dividend policy should improve the sentiment for those that are playing for the growth story of TEB with its partner BNPP. From a valuation perspective, TEB shares are trading at 2007 PER (adj.) of 5.78x and PBV (adj.) of 1.30x, against the sector average of 13.73x and 2.23x, respectively. We maintain our BUY rating on TEB. The restored macroeconomic stability in Turkish economy and the inclusion of BNPP into picture (BNPP s retail arm has acquired 50% stake in TEB Financial Services - parent company, owning 84.25% of TEB Bank - in February 2005, giving BNPP a 42.1% stake in TEB Bank) has put TEB into the transformation stage. BNPP sees Turkish market among the countries in the Middle East/Maghrep region that has strong growth potential supported by low but growing banking penetration. In parallel to the BNPP s strategy, TEB is now investing in its branch network, expanding its asset size, securing a growth platform through new product offerings and increasing revenues through cross selling, in contrast to its former banking perception of staying at the defensive edge of the business. Mcap (US$mn) BUY Price: TRY13.40 / USD8.95 Potential Upside Target Market Cap: US$ 1,100 mn Current Market Cap: US$ 685 mn Target Upside 61% Price Data Mcap Range since IPO $486 - $1,319 mn Relative Performance 1mnth: -1.5% 3mnth: 3.9% 12mnth: -15.8% Trading Data Avg. Daily Volume US$ 1.9 mn Weight in ISE % Beta (daily, 5 years) 0.62 Foreign Ownership Current 51.24% of free float 1mnth ago 51.60% of free float 3mnth ago 50.46% of free float Shareholder Structure TEB Financial Services 84.25% Other 0.58% Free Float 15.17% Share Performance 1, , , /09/ /10/ /11/ /12/ /12/ /01/ /02/ /02/ /03/ /04/ /04/ /05/ /06/ /06/ /07/ /08/ /08/ /09/ /10/2006 Relative to ISE-100 TEBNK Mcap Relative to ISE100 Key Financials (TRY 000) Bank-only e 2007e 2008e Net Income, bank-only 33,800 78, , , ,153 Net Interest Margin (adjusted) 6.3% 4.7% 2.1% 3.6% 3.4% Cost to Income 63.3% 58.5% 45.0% 49.1% 47.5% Stated ROE 9.4% 18.2% 27.4% 27.5% 24.3% EPS DPS PE (x) Unadjusted PBV (x) - Unadjusted Source: Company Data, FinansInvest estimates

2 Starting from 2006, TEB is implementing aggressive strategies in SME/retail banking, through new product offerings. We perceive period as the phase of transformation for TEB, which aims at accelerating growth, controlling risks and increasing revenues. Branch openings would continue to be a feature of TEB s expansion, although it is speculated that the bank may be one of the candidates for the state-owned Halkbank bid. It should be noted that the bank activated further 31 branches in 2006 until the end of September, focused mainly on retail and SMEs, and aims to extend the branch network to above 150 by the end of So far in 2006, TEB had impressive deposit growth, thanks to the ongoing branch openings that have injected fresh deposits into the bank. It should be noted that TEB s overall deposit base have expanded 46% since the beginning of the year (highest among the banks in our coverage universe), pushing the balance sheet growth up to as high as 32% within the same time frame. On the other hand, bulk of the funding provided mainly via deposits has been placed to lending, more specifically to retail and foreign trade loans. Accordingly, loan book of the bank increased by a significant 33% so far in TEB still has excess liquidity and a relatively large level of free capital to finance the aggressive growth in its loan book without competing aggressively to collect lira deposits at least in the first couple of years, and can therefore keep its deposit costs relatively low. On the other hand, a policy shift towards higher yielding assets should help TEB smooth out the contraction in its margins in a declining inflation environment. As of equal importance, stronger presence of SME/retail lending should give a boost to fee income going forward. Operating expenses will be another key component of the profitability for TEB, as branch openings will be the feature of the bank s expansion strategy. We foresee hefty investments mainly in period, which will ease towards It is also expected that problem loans would rise gradually, due to aggressive lending polices. Overall, we expect the bank to post a ROE of 27% in 2006 and 27.5% in 2007, against 18% in The ROE is then estimated to stabilise around 20% going forward.

3 Summary Financials Balance Sheet and Income Statement Bank-only BRSA Financials Assets - (TRY 000) e 2007e 2008e Liquid assets 1,162,690 1,186,472 1,121, , , , ,550 Marketable securities 81, , ,562 1,136,662 1,248,402 1,400,574 1,573,300 Loans (net) 801,872 1,167,830 1,584,721 2,938,644 4,937,866 6,221,711 8,088,224 Non-performing loans 20,212 24,415 20,881 33,679 54,317 74, ,147 Specific provisions (-) 15,250 15,944 11,244 16,849 35,306 52,262 73,603 Reserve deposits 131, , , , , , ,656 Investments, subs. and associates 106, , , , , , ,214 Property and equipments 37,234 36,351 40,312 54,015 62,032 74,203 89,265 Other assets 51,310 65,905 74, , , , ,948 Total assets 2,373,182 2,848,979 3,565,596 5,421,866 7,754,047 9,275,325 11,158,158 Liabilities and Shrs. Equity - (TRY 000) e 2007e 2008e Deposits 1,691,487 1,977,521 2,259,870 3,242,197 5,213,498 6,291,622 7,635,026 Customer deposits 1,631,543 1,854,102 2,164,372 3,140,794 5,062,970 6,118,023 7,420,015 Bank deposits 59, ,419 95, , , , ,010 Interbank money market 22,800 15, , , , , ,556 Funds borrowed 263, , , , ,406 1,073,287 1,287,944 Provisions 27,154 39,407 31,510 63,767 79,709 99, ,545 Other liabilities 112, , , , , , ,051 Shareholders equity 255, , , , , ,387 1,036,036 Total liabilities and Shrs. Equity 2,373,182 2,848,979 3,565,596 5,421,866 7,754,047 9,275,325 11,158,158 Income Statement - (TRY 000) e 2007e 2008e Interest Income 325, , , , , , ,465 Interest on loans 159, , , , , , ,342 Interest received from marketable sec. portfolio 58,010 24,142 81, , , , ,824 Other interest income 107, ,147 86,964 68,887 60,204 48,339 39,298 Interest Expense 170, , , , , , ,788 Interest on deposits 110, , , , , , ,086 Interest on funds borrowed 29,894 20,147 22,150 39,232 58,796 73,788 86,185 Other interest expense 30,129 28,915 16,693 50,525 53,446 37,738 35,518 Net interest income 154, , , , , , ,676 Net fee and commission income 16,625 18,521 29,931 40,567 75,049 90, ,573 Profit on trading account securities (net) 18,775 41,373 21,086 61,545 98,472 78,778 74,839 FX gains/(loss) 1,129 11,207 10,814-15, ,119 11,635 11,539 Other operating income 11,964 16,855 16,986 16, ,381 20,361 23,077 Total operating profit 203, , , , , , ,705 Provision for loan losses and other 15,773 6,498 24,624 17,629 25,486 29,458 34,487 Other operating expenses 113, , , , , , ,633 Net operating profit 74,381 93,466 77, , , , ,584 Income from associates and subsidiaries 6,864 12,433 7,266 7,942 18,664 19,224 19,608 Gains/(loss) on net monetary position -41,158-25,451-31, Profit before taxes 40,087 80,448 53, , , , ,192 Provision for taxes on income -21,573 29,546 20,002 36,525 37,115 49,127 56,038 Net operating profit after tax 18,514 50,902 33,676 78, , , ,153 Extraordinary income Net Profit 18,514 50,902 33,800 78, , , ,153 Source: Company data, FinansInvest estimates

4 Summary Financials Ratios and Analysis Balance sheet analysis e 2007e 2008e Asset Structure Liquid assets/total assets 49.0% 41.6% 31.5% 15.0% 9.6% 7.6% 3.4% Gross loans/total assets 34.4% 41.6% 44.8% 54.5% 64.1% 67.6% 73.1% Marketable securites/total assets 3.4% 4.0% 11.4% 21.0% 16.1% 15.1% 14.1% Particip.& tangible assets/total assets 6.1% 5.9% 5.2% 3.6% 2.8% 2.5% 2.2% Earning assets/total assets 91.8% 91.8% 92.7% 94.0% 93.1% 93.4% 93.7% Earning assets/int. bearing liabilities (x) Asset quality NPL rate 2.5% 2.1% 1.3% 1.1% 1.1% 1.2% 1.3% Net past due loans/equity 1.9% 2.6% 2.4% 3.6% 3.1% 2.8% 3.0% Funding and Capital Ratios Deposits/Gross loans (x) Deposits/Total assets 71.3% 69.4% 63.4% 59.8% 67.2% 67.8% 68.4% Loans from Banks/Total assets 11.1% 12.7% 16.2% 12.0% 11.5% 11.6% 11.5% Cash equity/total assets 3.7% 4.3% 5.0% 4.1% 4.7% 5.8% 6.5% Equity/Assets 10.8% 11.5% 11.1% 8.6% 8.0% 8.8% 9.3% Income Statement Analysis e 2007e 2008e Net Interest Income NIM 8.5% 5.7% 6.1% 5.2% 3.9% 3.7% 3.4% Adjusted NIM 4.6% 4.3% 6.3% 4.7% 2.1% 3.6% 3.4% Net interest income/total assets 7.8% 5.2% 5.6% 4.9% 3.6% 3.4% 3.2% Net interest income/cash equity (x) Spreads Analysis Total balance sheet spread 4.2% 2.1% 3.0% 3.1% 1.7% 1.5% 1.4% Loan/deposit spread 8.5% 4.7% 2.9% 2.3% 2.2% 2.0% 1.9% Securities/deposit spread 59.9% 10.7% 7.7% 1.0% 3.0% 2.5% 1.0% Interest yield 17.9% 13.5% 13.8% 11.3% 10.5% 9.8% 9.2% Interest cost 13.7% 11.4% 10.8% 8.2% 8.7% 8.3% 7.8% Fee income Fee income/total income 8.2% 8.7% 12.0% 12.0% 14.1% 18.8% 20.8% Fee income/net interest income 10.7% 13.6% 16.5% 18.5% 31.5% 31.0% 34.1% Fee income coverage ratio 14.7% 14.9% 19.0% 20.5% 31.3% 38.2% 43.9% Fee income/total assets 0.8% 0.7% 0.9% 0.9% 1.1% 1.1% 1.1% Banking income Trading income/banking income 15.6% 25.6% 8.9% 20.6% 32.8% 17.2% 14.6% Banking income/total income (x) Banking income/total assets 6.0% 6.2% 7.4% 6.6% 4.6% 5.4% 5.0% Cost efficiency Cost/Income ratio 50.6% 52.7% 57.9% 54.5% 41.2% 44.1% 42.2% Cost/income incl. depreciation 56.0% 58.4% 63.3% 58.5% 45.0% 49.1% 47.5% Staff expenses/total income 21.9% 26.8% 31.1% 29.9% 22.1% 27.5% 26.1% Cost/Net interest income 73.1% 91.2% 87.1% 90.2% 100.6% 81.1% 77.8% Cost/Total assets 5.7% 4.8% 4.9% 4.4% 3.6% 2.8% 2.5% Profitability ROAE 8.5% 17.5% 9.4% 18.2% 27.4% 27.5% 24.3% ROAA 0.9% 1.9% 1.1% 1.8% 2.3% 2.3% 2.2% Source: Company data, FinansInvest estimates

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