ANALYST & INVESTOR DAY 2017-2018 Operations and Budget 9 January 2018
MANAGEMENT MR. ADNAN BALi Director and Chief Executive Officer 32 years at İşbank MR. MAHMUT MAGEMiZOĞLU Senior 35 years at İşbank Subsidiaries MR. HAKAN ARAN MR. YALÇIN SEZEN 28 years at İşbank 31 years at İşbank Digital Banking Operations, Information Technologies, Data Management Consumer Loans, Digital Banking, Card Payment Systems, Retail Banking Marketing, Sales and Product Management, Retail Loan and Card Operations MR. ERGÜN YORULMAZ MR. MURAT BiLGiÇ MS. SENAR AKKUŞ MR. YILMAZ ERTÜRK 27 years at İşbank 31 years at İşbank Financial Management, Strategy and Corporate Performance Management, Managerial Reporting and Internal Accounting Private Banking Marketing and Sales Management, Capital Markets MR. N. BURAK SEYREK MR. MEHMET ŞENCAN MR. ÖMER KARAKUŞ 29 years at İşbank 29 years at İşbank Human Resources Management, Enterprise Architecture, Talent Management Corporate Banking Marketing and Sales, Free Zone Branches, Commercial Banking Sales, Overseas Banking Banking Operations and Payment Operations, Support Services and Purchasing, Foreign Trade and Commercial Loan Operations Internal Operations, Construction and Real Estate Management, Branch Network Development MS. EBRU ÖZŞUCA MS. GAMZE YALÇIN 24 years at İşbank 24 years at İşbank Treasury, Economic Research Investor Relations, International Financial Institutions 27 years at İşbank 35 years at İşbank Legal Counsellorship, Retail, Commercial and Corporate Loans Monitoring and Recovery Management 27 years at İşbank Consumer, SME, Commercial and Corporate Loans Underwriting, Financial Analysis, Credits Portfolio Management MR. ŞAHiSMAiL ŞiMŞEK 25 years at İşbank SME Banking Sales, Commercial Banking Marketing and Product Management 1
2017 STRATEGY IN ACTION TOWARDS TARGETS Continued Increase in Profitability Solid Asset Quality Performance Return on Equity Net NPL Formation Rate (3) 12.14% 10.40% 13.75% 16.59% 14.45% 17.46% 0.93% - 47 bps 0.46% Lower NPL formation & CoR compared to 2016 2015 2016 2017 Q3 RoAE RoATE (2) 2016 2017 9M Return on Assets NPL Ratio 1.17% 1.19% 1.63% 1.66% 1.68% 1.72% 2.4% 2.4% NPL ratio (4) below peers & sector average 2015 2016 2017 Q3 RoAA RoATA (2) 2016 2017 Q3 Calculations are based on trailing four quarters data. (2) Tangible Equity (TE) and Tangible Assets (TA) are calculated by the deduction of M-t-M valuation differences regarding AFS portfolio, listed participations and real estate portfolio from shareholders equity and total assets, respectively. (3) Net NPL Formation (annualized) / Average Performing Loans (4) Adjusted for NPL sales in 2017 9M 2
2017 ROBUST PERFORMANCE IN MAJOR PROFIT DRIVERS Net Fees & Commissions Growth (YoY) NII Growth (YoY) 19.2% 7.0% 18.9% 4.9% 19.2% 13.0% 20.6% 23.5% 23.7% 22.5% 2015 2016 2017 9M 2016 2017 9M İşbank Peer Average NII NII (incl. Net trading gains / losses) Superior fee generation performance continued Fee growth higher than peer average over the last 3 years 9 months growth performance well above the target Strong YoY growth in NII driven by decent IEA growth & higher NIM Highest adjusted NII growth among peers by 2017 9M NII growth well above the target Cost of Risk Operating Income & C/I (3) (4) 43.7% 41.4% 1.21% 1.18% 2016 2017 9M 0.92% 0.79% 2016 2017 9M 23.0% 18.5% 2016 9M 2017 9M 6.4% JAWS by the end of 2017 9M Gross CoR (2) Net CoR Operating Income Growth (YoY) C / I Gross CoR better than expected by the end of 2017 Q3 Strong operating income growth led to positive jaws and decreasing cost to income ratio Highest YoY operating income growth among peers C/I ratio in line with the target (Specific Loan Loss Provisions + General Loan Loss Provisions) / Average Performing Loans (2) (Specific Loan Loss Provisions + General Loan Loss Provisions - Provision Reversals) / Average Performing Loans (3) Adjusted for non-recurring and other items (4) Calculations are based on trailing four quarters data. 3
ON TRACK TOWARDS 2017 TARGETS 2017 9M 2017 Expectations Loan Growth 12.5% 12-13% In line Deposit Growth 9.4% 14-15% In line NPL Ratio 2.4% <3.0% Outperform Gross Cost of Risk (2) 118 bps 125-130 bps Outperform Capital Adequacy Ratio 17.0% >14% Outperform Net Interest Margin (3) 4.37% 4.0-4.2% In line Net Interest Margin (Swap adj.) (3) 3.87% 3.7-3.9% In line Net Interest Income Growth 23.7% 18% Outperform Net Fees & Commissions Growth 19.2% >15% Outperform OPEX Growth 15.3% CPI+1-2% In line Cost to Income Ratio 43.4% (4) <44% In line Return on Average Assets 1.7% (4) 1.6-1.7% In line Return on Average Tangible Equity 17.5% (4) 16-17% In line Year-to-date (2) (Specific Loan Loss Provisions + General Loan Loss Provisions) / Average Performing Loans (3) Based on MIS data (4) Calculations are based on trailing four quarters data. 4
MACROECONOMIC OUTLOOK 2018 Real GDP Growth CPI Inflation 3.2% 6.7% 4.1% 8.5% 11.9% 10.2% 2016 2017F 2018F 2016 2017 2018F Fiscal Stance Annual Deposit & Loan Growth 28.3% 1.1% 28.5% 30.0% 2.0% 1.9% 16.7% 16.8% 16.9% 20.9% 12-13% 13-14% 2016 2017F 2018F 2016 2017 2018F Budget deficit/gdp Public debt stock/gdp Deposit Loan Economic growth close to potential rate Domestic demand and export driven growth Tight stance in monetary policy Inflation remaining at double digits Continued public support Source: Datastream, Turkstat, BRSA (F) Forecast 5
STRATEGIC APPROACH SUSTAINABLE & PROFITABLE GROWTH PROFITABILITY ASSET QUALITY WELL-BALANCED, SELECTIVE AND PRIORITISED GROWTH EFFECTIVE RISK MANAGEMENT PROACTIVE MANAGEMENT OF FUNDING 6
WELL-BALANCED, SELECTIVE AND PRIORITISED GROWTH FOCUS ON PROFITABLE SEGMENTS WITH A RISK - RETURN APPROACH CORE BANKING INCREASE IN REVENUE IMPROVED CUSTOMER EXPERIENCE FEE BUSINESS AND PROFITABLE CUSTOMER BASE MORE DIGITAL CUSTOMERS ROE 7
DIGITAL TRANSFORMATION CUSTOMERS CUSTOMER TOUCH POINTS BRANCH DIRECT SALES TEAM CALL CENTRE ATM POS INTERNET MOBILE PRODUCTS & SERVICES ORGANIZATION & BPM APPLICATIONS PORTFOLIO IT INFRASTRUCTURE 8
DIGITAL TRANSFORMATION: INNOVATIVE PRODUCTS AND SERVICES 238 Functions 40% Share in Monthly Transactions >2 Million Daily Login 1 out of 3 Mobile Investment Transactions in Turkey s Mobile Banking Sector Carried out via İşCep 9
ADAPTATION OF NEW AND EMERGING TECHNOLOGIES MAXIMUM MOBILE ECOSYSTEM CLOUD-BASED TRADING FACILITATING E-COMMERCE & API IoT APPLICATION PHYGITAL CUSTOMER EXPERIENCES CHATBOT WITH AI TECHNOLOGY 10
DIGITAL TRANSFORMATION WORKUP START-UP PROGRAMME 11
DIGITALISATION IMPACT More than 5 million mobile customers, ~ 6 million digital customers Better customer service, more satisfied customers, more personalized products and services Considerably shorter time to market in new products, sales initiatives, Flat # of customers served at branches shorter average waiting times 1,400 employees reallocated from non-sales to sales roles. Continuous and robust fee income growth Fee income generated through digital channels increased to 22% of total fee income 12
STRONG TL LOAN GROWTH MAINLY DRIVEN BY CGF LOANS Total Retail 203,144 50,573 5.3% 10.6% 8.7% Composition of Total Loans (TL mn) 12.5% 9.4% 228,631 55,346 5.2% 10.0% 8.8% Credit Cards GPLs (inc. overdraft acc.) Auto Loans Housing Loans 2018 Growth Expectations Total Loans 13-14% TL Loans 14-15% FX Loans (USD) 5-6% Loans /Assets ~67% TL Non-Retail 71,773 20.4% 15.0% 21.0% 86,811 21.7% 16.3% TL SME TL Corp.&Comm. CGF Loans: By the end of 2017 Q3 TL 17.4 bn outstanding balance mostly in TL and extended to SMEs FX Non-Retail 80,798 1.5% 38.3% 6.1% (2) 86,473 1.3% 36.5% FX SME FX Corp.&Comm. 7.6% of total loans largest private CGF lender Supporting profitability, asset quality and capital management low NPL ratio - 0.3% 2016 2017 Q3 0% risk weighting for the guranteed portion ~75 bps contribution to CAR SME definition includes companies with number of employees <250 and turnover or total assets <= 40 mn. (2) On a USD basis 13
LOWEST NPL RATIO AMONG PEERS MAINTAINED NPL Ratios Well Below the Sector in All Loan Categories (2017 Q3) 2.9% 6.4% 4.7% 1.7% 3.0% Sector 5.1% Peer 1 2.1% 5.0% 3.6% 1.7% 2.8% 2.6% 2.4% Peer 2 Peer 3 İşbank 2018 NPL Ratio < 3% Share in Loans 19.1% 5.3% 23.0% 51.6% Total Loans Consumer Loans Credit Cards SME Loans (2) Corp. & Comm. Loans 118 20 98 Sustained Cost of Risk (bps) 2017 9M 2018 General 79 13 General 84 20 13 Specific 59 105 Specific 71 118 2018 Gross CoR 115-120 bps Gross CoR 39 Net CoR Gross CoR 34 Net CoR Collections Collections Adjusted for NPL sales in 2017 9M (2) SME definition includes companies with number of employees <250 and turnover or total assets <= 40 mn. 14
FUNDING MANAGEMENT - DEPOSITS Composition of TL Assets & Liabilities (2017 Q3, TL bn) Breakdown of Deposits (TL mn) 214.7 181.6 Loans Deposits Total 177,360 9.4% 193,966 142.1 21.1 Participations& Other Assets 93.2 Financial Assets 59.5 1.9 27.0 Equity & Other Funding MT/LT Funding ST Retail 117,479 35.2% 31.0% 9.6% 128,760 33.0% 33.4% TL FX 51.5 2018 Growth Expectations Total Deposits 13-14% TL Deposits 17-18% FX Deposits (USD) 3-4% TL Loans/TL Deposits: Decrease Non-retail 59,881 8.9% 65,207 14.8% 15.0% 18.9% 18.6% 2016 2017 Q3 TL FX Based on remaining maturities 15
FUNDING MANAGEMENT - FX NON-DEPOSIT Composition of FX Assets & Liabilities (2017 Q3, TL bn) Composition of FX Non-Deposit Funding (2017 Q3) 131.7 164.9 Loans Deposits Amount (USD mn) Syndication 2,593 Share 14.9% 86.5 Participations& Other Assets Financial Assets 100.8 Equity & Other Funding MT/LT Securitization Other Funds Borrowed 1,589 4,524 9.1% 26.0% 3.8 41.4 2.8 36.0 Funding ST Securities Issued Subordinated Debt Repo&Money Market 5,814 1,944 948 33.4% 11.2% 5.4% 25.3 Total 17,412 100.0% Maturity Profile FX Non-Deposit Funding (2017 Q3) 32.6% 26.4% 14.4% 8.3% 7.8% 10.4% 2017 Q4 2018 2019 2020 2021 >2022 Syndication Securitization Other Funds Borrowed Securities Issued Subordinated Debt Repo&Money Market Based on remaining maturities 16
NIM PROGRESSION (2) Net Interest Margin Net Interest Margin (Swap Adj.) (2) 4.27% 4.37% 4.2-4.4% 3.93% 3.87% 3.7-3.9% 2016 2017 9M 2018 2016 2017 9M 2018 High share of demand deposits provides resillience to interest rate hikes. Highest share of demand deposits in total deposits among peers By the end of 2017 Q3 İşbank: 26.4% Peer average: 21.1% Potential room for further upward pricing in assets Based on MIS data (2) Interest earning assets include Central Bank reserves. 17
INCREASE IN CAR: A COMFORTABLE LEVEL OF CAPITALIZATION Capital Adequacy Ratio Basel III Buffers 2016 15.17% (%) 2017 2018 2019 Capital Conservation Buffer 1.25 1.875 2.5 Net Income 1.43% Counter Cyclical Buffer SIFI Buffer (3) 0.022 1 (2) 1.875 1.5 2.5 2 Max Dividend Distribution -0.44% Min. Legal Requirement for CAR 8 8 8 Change in M-t-M Differences 0.78% CAR (Bank-only) CAR (Consolidated) 9.272 10.272 11.75 13.25 13.00 15.00 Max Growth in RWAs -0.87% Tier II Issued 1.00% Other -0.09% CAR 2018 >14% 2017 Q3 16.98% RWA impact includes: - TL depreciation impact: -34 bps. - Contribution of 0% risk weight of Credit Guarantee Fund loans: +74 bps - Fitch s downgrade: -99 bps - Decrease in risk weight of FX CB reserves from 100% to 0%: +138 bps (2) As of September 2017 (3) Taken into consideration only on a consolidated basis 18
2018 KEY PROFITABILITY INDICATORS Revenue & OPEX Growth (YoY) Return on Average Assets NII ~14-15% 23.7% 1.63% 1.68% 1.6-1.7% Net Fee Income >15% 19.2% 2016 2017 Q3 (2) 2018 Return on Average Tangible Equity Dividend Income 5.2% ~8-9% 16.59% 17.46% 16-17% Total Operating Income 16.6% ~14-15% 2016 2017 Q3 (2) 2018 Cost / Income OPEX 15.3% ~13-14% 43.8% 43.4% 43-45% 2017 9M 2018 2016 2017 Q3 (2) 2018 Tangible Equity (TE) is calculated by the deduction of M-t-M valuation differences regarding AFS portfolio, listed participations and real estate portfolio from shareholders equity. (2) Calculations are based on trailing four quarters data. 19
EQUITY PARTICIPATIONS Participation Mix (2017 Q3) Dividend Income/Participations at Cost Listed Financal 85.1% Non-Listed 45.3% Glass 8.4% 8.7% 10.6% 9.7% 11.9% 11.8% 49.4% Other 14.9% 5.3% 2012 2013 2014 2015 2016 2017 Q3 Value Creation Total value of participations is TL 12.2 bn, of which TL 6.3 bn consisted of M-t-M valuation gains from listed participations by the end 2017 Q3. Participation Share in Total BV (2017 Q3) Annual Rol (2012-2017 Q3) TL 718 mn dividend income from participations in 2017 Şişecam Anadolu Hayat 49.4% 18.1% 14.8% 22.3% Average Annual Return on Investment for listed participations: 16.4% for the last five years TSKB 11.1% 8.0% 2018 Dividend Income Growth 8-9% Annual return on investment calculated for the last 5 years, including cash dividend payments and M-t-M changes 20
2018 EXPECTATIONS İŞBANK Loan Growth 2016 2017 9M 2018 Expectations 14.7% 12.5% (2) 13-14% Deposit Growth 15.3% 9.4% (2) 13-14% NPL Ratio 2.4% 2.4% <3.0% Gross Cost of Risk (3) 121 bps 118 bps 115-120 bps Capital Adequacy Ratio 15.2% 17.0% >14% Net Interest Margin (4) 4.27% 4.37% 4.2-4.4% Net Interest Margin (Swap adj.) (4) 3.93% 3.87% 3.7-3.9% Net Fees & Commissions Growth 18.9% 19.2% >15% OPEX Growth 2.8% 15.3% 13-14% Return on Average Assets 1.6% 1.7% (5) 1.6-1.7% Return on Average Tangible Equity 16.6% 17.5% (5) 16-17% Growth rate expectations are given compared to 2017YE. (2) Year-to-date (3) (Specific Loan Losss Provisions + General Loan Loss Provisions) / Average Performing Loans (4) Based on MIS data (5) Calculations are based on trailing four quarters data. 21
KEY TAKEAWAYS Strong capital position to support further growth 2017 financial performance is in line or better than the budget Highest net fees and commissions growth among peers Asset quality maintained lowest NPL ratio in the peer group Sustained profitability and asset quality in 2018 Strong performance in net fees and commissions to continue SWAP adjusted NIM to be maintained NPL ratio less than 3% Ongoing progress on digital transformation 22